Sunday, May 22, 2011

Q1 2011 Report Recap/commentary

The numbers from Q1 were not good. Revenue came it at only $61.3m and that included the PAS deferred revenue (about $23m/quarter for 2011). Expenses came in at $30.2m, and that led to a loss of $10.3m. Cash was also down by about $40m to $310.4m. Another negative was bookings came in at less than $40m, down from $52m in Q4. China revenue (not including PAS deferred) came in at just $10m for the quarter.

The company explained that the quarter had poor collections but it had resolved this already. It predicted Q2 would be around breakeven while also re-stating its committment/confidence for the full year 2011. However, the stock had "rallied" from the low $2s to the high $2s and was in the mid $2s going into the quarter call so obviously, there was some momentum/anticipation built in and the numbers were just too poor to hold the stock, not to mention the explanations were not clear during the call either. All in all, it was a very poorly run conference call by Jack Lu and the CFO Edmond Cheng. The two simply sounded like high school kids that were auditioning to be PR people (forget being executives) and for parts of the call, seem to be mumbling (hard to understand their english) and talking about useless numbers in the industry when more pertinent company information HAD to be discussed and explained. My advice on the English part is to just speak in Chinese and have an interpreter there to translate. It would atleast hide part of the amateurish sounding/lifeless words/feel from the call.

Ok, since everyone knows the bad numbers, lets look at some details closer and any positives going forward.

1. CASH- Even during the previous quarters, cash doesn't track closely with the operating numbers. The last quarters sudden increase of $14m came out of the blue and was a pleasant suprise so now that it suddenly drops is not fun but at the end of the day, will even out and still a major buffer for them to implement their turnaround plan.

2. Expenses - This quarter's expenses (w/out restructuring charges) gets it closer to the runrate below $100m/year and the revised lease terms provides a substantial yearly savings from the $10-15m range to just $2-3m.

3. Bookings - Q4 2010 yielded bookings of $52m, which was the highest in 2010. That was encouraging but Q1 2011 bookings of less than $40m was a let down. Is this just a "seasonal" drop where Q4 is normally stronger and Q1 is normally the weakest? Its possible but we'll have to see what Q2 brings. While Japan is encouraging, China is discouraging and their main focus is supposed to be in China.

4. ITV.CN - They gave some time line for trials (Q2) and revenue generation (Q3/Q4) and we now see the beta of the website so this is on target per their Stagesmart acquisition and filings for 2010 that this will launch in the 2nd half of 2011. Just a quick overview of the site, I like the TV channels with CCTV and the timeshift component. I don't particularly care for the movies as I think it will be the broadcast/news/local Chinese programming that will be the main features that will have overseas Chinese subscribe. The internet platform is good in that they won't have to negotiate with local cable/satellite providers in the US or other countries. It will just be able to offer it to anyone with a broadband/internet connection. Its too early to see the adoption of this but if successful, it will provide the company with a new identity, stable, and growing revenues that will have sustainability and more robust/scalable business.

5. Internet (cable) platform - The recent PR of the new internet platform and initial win with a cable company was encouraging but no discussion on contract size. Potentially, it could be large with all the cable companies there but again, like the, too early to see how successful it can become.

6. TN in Japan - Looks like the most positive but at the same time the lack of wins in China is a negative. We understand that the equipment business is competitive (and thus the platforms are the way to go) but we do expect a major uptick in sales in China as oppose to regressing with the "move" and emphasis in China.

The new products/businesses will add to the company's valuation but because it is a small part of it right now, there has to be substantial progress through the rest of the year in China. If not, then why still have close to 2k employees, most of it is in China?

The PR says they are still "committed" to breakeven in 2011. Even with PAS deferred revenue, there needs to be significant pickup in Q2-Q4 plus a material contribution from OSS. The credibility of the company is not good to begin with and now the poor Q1 call doesn't help. There are a lot more questions now AFTER the call than before it. The CEO/CFO officially have done only 2 calls and already their credibility and performance is in question.

I'll end with a positive comment that I like the new products ( platforms), the still substantial large cash position, the lower expense (revised building lease), improvement in Japan, potential India partner and overall large Chinese (and overseas Chinese market) but unless more positives come in and in a timely manner (and this is where credibility/execution comes in), the stock will remain in this $2 range and essentially the street will not care (volume low).

BTW, another shareholder/longtime poster Shadow had a good write up as well. He does make a more positive case from a business standpoint but a stock needs positive catalysts and some wow factor to get demand. Getting to breakeven is not exciting enough for the street. We need for example to have some buzz....need major growth (since its a low base) from China either from the equipment side or new products. Otherwise, there will be no demand/respect from the street.

Saturday, April 2, 2011

Development of triple play and UT valuation going forward

To continue last week's post on triple play, here is another article providing China's development goals for the next 5-yr plan. It is a comprehensive look at how China is planning to develop different parts of their industry. I'll provide the excerpts on the triple play part. "Triple play, things, wireless cities are included in the information technology construction of major projects. Triple play pilot project: Completion of two-way access to meet the requirements of triple play integrated business management platform and IPTV, mobile TV broadcast control platform. The implementation of triple play digital home pilot demonstration project. Promote the application of triple play model in the Universiade." "Hangzhou will twenty billion investment in the development of "triple play" "Triple play" one of ten projects include infrastructure, plans to invest 22.0 billion construction of telecommunications, mobile, Unicom transmission network ( base station ) project, the implementation of FTTH projects and build cloud computing, Internet of things base. Promote the "triple play" development. Explore the "triple play" of management models and mechanisms, and actively promote radio and television, two-way access to telecommunications services, to enhance the "triple play" infrastructure to build the most advanced network infrastructure. Promote the intelligent network , soft switch , a new generation of mobile communication, next generation Internet technologies such as research and development and applications. Full high-definition TV services for broadcast, interactive. Comprehensively promote the "triple play" industry, focus on supporting the new formats, new applications industry." ------------------------------------------------------ There are a lot of moving parts to triple play/network convergence and it is at the very early stage right now. In the short term, UT is still in the process of right sizing their expense structure and still relying primarily on "older" revenue streams predicated on selling direct equipment in support of iptv and broadband. That model has struggled to even break even as the huge expense base coupled with declining PAS sales could not be offset with sales of iptv primarily (as a non-Chinese company to boot). While that has showed significant improvement from an expense standpoint and their move to China will help in iptv/broadband sales in China, the long term major opportunity will come from using their existing technology to build new platforms inline with the triple play network convergence opportunity. As shareholders, we have been focused on the company getting to a profitable model. The company has not had that since 2004 so it is understandable that is a major priority. However, how much value will the market place on just breaking even with low margins and a fluctuating sales base. The business will have some value then (and the company will finaly trade above cash) but it is not the growing business that will attract shareholder interest. I also don't think that is the intent of the new investors buying in at $2. No, the real opportunity is building new platforms that will yield much higher gross margins, growth rates, and sustainable customers. Some ,and I emphasize some, value will be unlocked via getting to a profitable business model but as we've seen with others, the value lies in how scalable and differentiable a model they build (through unique products that the customers will be dependent on for years on out). UT targetting the cable industry, radio industry, triple play/network convergence is how the company will go from an "old" struggling to get to breakeven company to a "new" company the investment community will value. I think any new shareholders getting in or existing shareholders have to have that mindset or else there are many other companies which are already profitable but their business model is capped. We'll see how the company progress on the breakeven side but the value creation from that is limited. The progress by UT and the industry on the new platforms will be the key to major gains. Unlike some new companies which get the benefit of the doubt or are pure plays on a major theme, UT is (rightly so) perceived as a struggling to breakeven has been company but it could get real interesting to see where the shares will be priced as they make progress on the new platforms. Have a good weekend.

Saturday, March 26, 2011

IPTV and development of Triple Play

On Friday, a UT short seller posted the article stating "Wei Leping, the direct of China Telecom Science and Technology Commission, attended the 2011 China Triple Play Summit and said that the triple play is facing mortality risk, and in the past year, triple play has achieved no real progress and the pilot progress has obviously lagged behind the deployment of the State Council."

How does this impact UTStarcom? UTStarcom has primarily invested in its IPTV system over the years and is targetting to use its iptv system as the base to create other networking/broadcasting distribution platforms in support of triple play/network convergence. So, the article has to be addressed.

First, lets be clear that IPTVs business over the last 5 years has not relied on network convergence because there simply was no network convergence to begin with until the recent 5 year plan started by the Chinese government last June 2010. So, UTs IPTV business/system has primarily been sold to telecom operators as a standalone. This fact is highlighted by the recent interview with Bestv CEO..

"Could you explain the government's plans for convergence of the country's telecoms and broadcasting networks?

The SARFT agency of the central government is responsible for overseeing the broadcasting networks in China. The State Council has recently issued a three-networks convergence policy, which explicitly allows for and promotes the adoption of IPTV in China.

What impact will these have on BesTV?

The impact is quite positive. BesTV will continue to follow these new regulations from the State Council and SARFT in developing our IPTV business, and we will continue to expand in our markets in China."

One side note is that BesTV has been doing very well with their iptv business and mentions iptv at its infancy.

"We strongly believe that we are still at the beginning of the growth stage for the IPTV market in China. Having surpassed 4mn IPTV subscribers recently, we are only at less than 5% penetration of the current 110+ million Chinese households with broadband internet service. We think that over the next few years, we would be able to quickly add many million more IPTV subscribers."

In fact, business is so good that SMG chief Li Ruigang is building his media empire via the iptv platform and building up BesTV

BesTV is profitable and they have been rolling (increased momentum) with the acquisition of Rupert Murdoch's Chinese assets last Aug. 2010 and SMG recently picking up the 3G mobile phone TV license.

Back to the article regarding triple play states

"In the past year, triple play has achieved no substantial progress, and we have not held a conference of triple play for a year and half, I feel triple play will face the mortality risk." Wei Leping said"

Now, I don't know what conference of triple play has not been held for a year and a half but the pilot for network convergence was just started in June 2010 and all indications are that there IS "substantial progress"

At the same time, the State Administration of Radio, attaches great importance to triple play, triple play by the State Council on promoting the overall programs and pilot programs, and actively promote and seriously implemented. According to Zhang Haitao introduced triple play key SARFT made for the following work:

"First, pay close attention to building a unified national planning, unified standards, unified organization, unified management of IPTV and mobile TV platform for the integration of broadcast control and monitoring platform; the second is to accelerate the cable TV network's integration and digital two-way, and the transformation of the next generation of wide power grid construction; third is to actively build the Chinese Radio and Television Network Company. "

Lets look at these 3 items with relation to UTStarcom. The triple play buildout would help its exsiting IPTV business with the unifcation of IPTV and mobile IPTV (and in fact Jack Lu mentioned the potential for devloping IPTV handsets). The 2nd point is a focus area for UT as well as they are targetting the cable TV industry and its 2000 operators. And the third is building platforms to link Radio and TV.

UT has participated in the trials but in essense the triple play part of it just described is still not a tangible part of the company, which includes IPTV, PTN, EPON, etc.

With respect to the progress of triple play....again, that article points to substantial progress

Zhang Haitao, said, "now the smooth progress of the work, especially in 12 pilot cities and regions have basically completed the integrated IPTV platform for the construction of broadcast control, and the total platform with the central docking. Also in the domestic Internet audio-visual program services sector, SARFT has been vetted and approved 594. To carry out the triple play of the experimental work laid a good foundation. "

so does that mean when that conference that Wei Leping is referring to happens, then there would be a spike in triple play progress?

Going back to the third aspect of triple is an article that came out late Friday as well...

A Clear Direction of National Radio And Television Networks Company

"In early 2010, China decided to speed up triple play of telecommunications network, broadcast network and Internet, and considered the overall program to promote the triple play.

With the program, China will set up a national cable network company in 2012. It is learned that the company will be listed this year, and the registered capital may be over 100 billion yuan.

In this regard, Shen Xiangjun said that the demands from state and central is to completed the integration of networks within two years and achieve one network in one province."


Does any of this guarantee the success of IPTV and/or triple play? And if it does, does this benefit UT, a perenial underperformer that can't hits it target even if its in front of it?

UT CEO Jack LU gave a recent interview stating....

Lu Ying: So I think the construction of triple play this year, including related to us a business opportunity should be much larger than last year, despite a quarter of the year just past, we clearly see that the various needs of the rapidly increased.

Daily: You are very optimistic about this year's market?

Lu Ying: Yes.

UTStarcom has moved back to China, solidified cash position, added on 4 Chinese board members with substantial industry/China background, and picked up investment from the Beijing government. It has increased bookings from $36m to $52m from Q3 to Q4 of 2010.

Now, does any of this guarantee success and a higher stock price? NO, the company has to compete against huge competitors and prove themselves quarter to quarter. The market doesn't believe it either as it is valued at around cash and there really is no huge institutional interest but if you are long shreholder, isn't the picture getting better?

The short sellers and bashers are betting on past history and UT not getting any business. UT has also partnered with China Merchant Bank on Strategic Cooperation Agreement on Triple Network Convergence

One last thoughts from the short seller:

"Tim, you are really screwed. I warned you!"
"When those Chinese investors such as Tiger and Tech all got out of this stock, it means something."
"posting something from the third party, please."

The above is basically what I have come up with and why I'm staying with the stock at these ridiculous valuations :-)....not sure what the "Chinese" investors think but I welcome the discussion and more importantly wait to see the progress quarter to quarter.

Have a good weekend.

Thursday, March 17, 2011

Increased CAPEX spending in China

There was a bunch of news today regarding increased spending in China.

1. China Mobile surprised analysts by increasing a level that was 35% higher.

"Soh said she was surprised by the company’s projection, which was 35 percent more than the 98 billion yuan she estimated."

2. "It is reported that for the network upgrade, China Unicom will choose several cities to deploy PTN packet transport network to solve the high-bandwidth needs of 3G wireless backhaul."

Blackmore discussed this last year (or was it at the end of 2009!) that Unicom was behind China Mobile in their PTN deployments. This is a good potential for UT.

3. "China will coordinate the layout of the new generation mobile communication network, next generation Internet, digital radio and television networks, satellite communications and other facilities to form the ultra-high speed, large capacity, highly intelligent national trunk transmission network."

4. "China Telecom has announced its plans to increase its fiber optic broadband service subscriber base to three fold to reach 30 million in fiscal 2011."

"Wang Xiaochu, Chairman of China Telecom commented that China offers a huge market potential for broadband services, as only 23% of Chinese families are using Internet. This plan will offer rich media, 3D and HD IPTV services that need 10 Mb and more bandwidth."

There is a huge amount of buildout going on in China whether its iptv or broadband, or mobile backhaul or new platforms for network convergence. UT has ramped and developed products over the last couple of quarters that they can now sell (as well as being a Chinese company now). It is now very hard to see how UT cannot ramp bookings significantly through this year and stake their position whether its with the 2000 cable operators or the major telecom players or even the enterprise (state grid, transportation, energy customers, etc).

Tuesday, March 15, 2011

UT ipad multi-media terminal and other products

HD player
Two set top box models
and an extensive article on their IPTV interface...and discussion of one deployment in Anhui province.

UT is also participating in CCBN (China Content Broadcasting Network) conference + interview with a UT VP....regarding various products/platforms they have.

Sunday, March 13, 2011

Q4 2010 Recap

The Q4 2010 Conference call had an interesting format with a powerpoint presentation slide to go along with the recap of the quarterly/yearly performance as well as some historical improvements, and guidance for the year.

The company's PR touted the exceedence of guidance on the top line for Q4 (which had been reduced) and the operating positive cash flow in the quarter. As a long time suffering shareholder, my main focus is on the turnaround and numbers going forward and to see this new CEO (management) performance to gauge whether there is tangible progress. I did not particularly care for all the slides touting the potential at this stage (since that has been provided before and the important thing is whether UT can actually participate in it). I also didn't care for all the comparissons with improving losses, margins, etc that were simply well below normal/industry performance. No, I was looking for data points that would indicate (1) stabilization of the business (are the revenues/bookings still going down for ex.) and (2) whether there is improvements/growth opportunities to the business. The first point is critical in keeping the current shareholder base and determining if the business is still spiraling down and out of control. The second point is there a reason for new shareholders to look at this company as a real turnaround (in the near future) and what value it can get to in the coming years.

So, instead of the usual point by point recap of the call, I will group the overall discussion based on those two general points. As a shareholder point one is important for holding on to shares at the current valuation and point two is important as the stakes are higher after all of these years to see if there is value creation and point one is not enough to keep shares. You can categorize point one as the "downside risk" and point two as "potential for appreciation". Ok, lets dive into the tangible information provided in the report and the call.

CASH - The major holding point for longs is the CASH. Downside investment protection for a small/Chinese company is the net cash it holds. The company reported a loss of 15 cents/share but generated $14m (or around 10 cents/share) in cash. The company now has $352m in cash/short term securities/investments (or about $2.35/share). The cash was a main theme in the Q/A portion as three analysts (yes, there were actually three that asked a lot of good questions) discussed how cash flow was going to be like for the rest of the year, how it relates to the revenue reported, what potential acquisitions it may make). Jack Lu mentioned that they picked low hanging fruit in the quarter and that cash flow won't be positive in Q1/Q2 but will be back in the black by Q3. In their business cash flow is slightly ahead of the revenue recognition. An interesting thing about UTs balance sheet is that while other newly minted Chinese companies performing "very well" are questioned, its been amazing how bad UTs balance sheet with all the writedowns have decimated its book value down to $1.68 at the end of Q3. At the end of Q4, it is down to about $1.66 even after the 15 cent loss and the cash actually going up by 10 cents. The tone of management has been clearly protecting/managing the cash very well.

OPEX - SG&A was $19.3m and R&D was $9m so w/out other one time items, its down to $28.3m. The target OPEX of under $25m/quarter has not been reached but the CFO mentioned it was solidly on track for it to be. The Q4 PR regarding management alignment (to be concluded in Q4) showed that they were still working hard to pare bloated expenses, which is obviously still high for the current revenues/bookings and even for longterm sustainability. I'll discuss OPEX more a little bit later.

Potential Acquisitions - Because of the poor operating performance year after year, the street mainly looks at the cash in valuing the company so the analysts wanted to ask what is their mindset on acquisitions. The management gave good generic response to what they would like to acquire.....(1) something aligned with their current goals/businesses, (2) top line growth and, (3) add to earnings. The analyst fired back that those would be very expensive specially when UT itself is trading UNDER cash. Mangement's response was atleast realistic.....that they are not looking at anything significant and only for the growth of the new Operational Support Services group and would focus more on internral growth via vendor financing.

So, to conclude this first part, I believe the cash is going to be managed very well going forward and provides substantial downward protection to the stock price (even more so before this call). Going on to the second part. The most important part looking ahead for small tech companies are the growth prospects. The street will reward growth (and not the cash or the book value). Q3 2010 could be the most dismal point in the company's history in terms of revenue/bookings as it was down to $60m (with the deferred PAS revenue) and only $36m in new bookings. This was just a continuation of a company losing revenue and could not get new business.

Bookings - Q4 had bookings of around $52m (0.68 book to bill x $76m reported revenues). This is a good size increase from $36m in Q3. Just on a percentage basis, this was very good but more of a relief as even this number is nowhere near enough to make up for the PAS deferred revenue that will be gone by 2012. I look at this as fairly positive due to the nature of the bookings. These are not low margin broadband revenues from India (BSNL phase III is still in limbo but don't think anyone is looking at that at this stage) or handsets or due to a major contract (we didn't really get much PRs in Q4). So, this was a grind it out $52m revenue that was the highest for 2010 (as they reported) but really didn't include much of the growth drivers that I will list.

Growth Drivers -

1. Softbank - Management mentioned a couple of times that the trials for the TN product was completed last year and they expect to generate significant orders early this year. Now, the Japan earthquake may slow that down but essentially this is on track.

2. IPTV growth - New win in Thaliand with TOT (Thailand's leading provider) was encouraging as this is a new country. Additional win/expansion with Bharti was also reported. The macro growth in China has also been very good to further UTs internal growth. As we've seen over a year ago, software upgrades could be nice revenue/profit generators and will increase as their # of users grow. Then, there is the potential in the mobile handset space (whether they make their own iptv handsets or license their software).

3. New platforms/Operational Service Support (OSS)- The deal with StageSmart will yield additional internet TV platforms to drive growth. The new OSS is expected to deliver 10% or around $30m in revenues. This will be reported as a new segment starting Q1 and be a high margin/growth for the rest of 2011 and beyond.

4. India- BSNL Phase III is still in limbo and could add tens of millions (if not more) in revenue but lower margin. The company did mention it was still working on getting local partnerships/JVs to help them maintain/extend their positions in India. The growth in OSS (new platforms developed for the network convergence in China will also carry over in India in the future). We still have not heard anything in the use of TN for India but their mobile/fix line customers there makes it a potential growth driver.

5. Broadband in China -Company mentioned partiicipating in trials for GEPON/EPON (fiber) but did not highlight this as a main priority although revenue wise, it would be a driver (just for the higher equipment sales).

6. Vendor Financing - In terms of cash usage, this is where the company mentions it will spend. Jack Lu, the CEO, made it a point about being stingy with the cash but this is where they will spend some money to driver growth, which makes definite sense and is a highlight of their growth strategy in higher margin/sustainable revenues.

7. Internal growth of the $52m base - These bookings are made up of small value trials/deployments/existing maintenance etc. that should increase as trends in broadband/network convergence continues.

As a side note, lets look at discussion on margins/opex. The company margins w/out PAS/one time items was around 28.6-28.8 (quarter/year). The guidance of 2011 for 300-320m and under 100m (say 100m) would imply 32.2% margins but in the Q/A, Lu mentioned high 20s. So, backing out OPEX at 29% GMs and 310m in revs would yield about 22.5m in quarterly opex at break even, which they seem fairly confident they can achieve.

So, going forward, we need to look at the growth drivers to determine how they can replace the PAS deferred revenue. There are still a lot of work but having $52m in bookings was a nice start in Q4 (basically the first full quarter of the new management/board and the 2nd quarter of network convergence trials).

The ultimate goal is still to get to a profiable/growing company that adds value more than the current cash position. As they solidify/stabilize the company from point (1), we can now focus on point (2). As we've seen with companies that are in the process/turning around, the payoff can be huge. There is still hope for this old dog :-)

Have a good weekend.

Wednesday, March 2, 2011

Stakes are high

The stakes have always been high for the company getting to profiability and raising revenue. Unfortunately, the management/company has not been able to do it after 7 years.

Another company Sonus just reported a blowout quarter beating analyst estimates by 27% on the top line. Sonus did $227.5m in revenue in 2009 and just did $249m for 2010. It then gave guidance for revenue in the $265m-285m for 2011. Sonus has 60% GM so its not comparable to UT but it did have to get to profitability and increase revenue. By doing so in the last year, the company has now been rewarded with an enterprise value of around $800m compared to negative for UT.

UT's "core revenue" dipped to about $36m in the 3rd quarter and projected to do no better than that in the 4th quarter. OPEX is still in the $30m range and GMs are still in the 20s (I think its even lower than that when taking out the deferred PAS revenue margins and additional writeoffs).

Jack Lu has been with the company almost a year now and officially the CEO for over 6 months so he's had time to evaluate the company and laydown a pathforward. With still around 2k employees and $30m in quarterly expenses, that is way too much for this company. As a longtime shareholder, it is quite baffling to see how incompetent and poorly managed this company is. The stakes are still high and the market will reward performance but it has to start at some point.

I am looking for material booking increases way above $36m, GMs to be in the mid 30s, expenses to come down closer to $20m. Jack Lu doesn't have to be a genuis. He doesn't have to be very knowledgable in business or even in the technology. He just has to look at the bottom line and make the most fundamental changes in running a company (or any budget for that matter). I don't expect the company to reach 60% GMs but revenue growth of 10% like Sonus in China is laughable.

Here's an article on China Telecom on their fiber buildout...

"China Telecom plans to cover every city in China with the fiber broadband service in three years and convert all copper lines to fiber, China Daily reported. Under the Five-Year Plan, the Chinese government will focus on developing the telecommunications infrastructure, with total investments reaching 2 trillion yuan. Broadband development would account for 80 percent.

This plan will provide broadband access, high-definition IPTV, 3D and rich media services that require bandwidth of about 10 megabytes and above."

Like I said, the stakes are high.......does this management have any sense of urgency?