Sunday, December 30, 2007

2008 Catalysts for UTStarcom

With only 1 trading day left in 2007, I look back to the summer of 2004, the first time I bought stock in UTStarcom. The reasons I bought into the stock at the time included the lure of the China market (UT was a pure play on China growth), other emerging markets (possibility of expanding PAS), incredibly profitable/good valuation during a time when the other telecom providers were still languishing (yes, they actually made profits before to the tune of $2 earnings for a $20 something stock with incredible growth), the Beijing olympics in a few years, US-based company/China manufacturing, disruptive technologies, and on and on. After the last 3+ years of poor performance and stock price collapse, those times and the potential for becoming a cornerstone tech company has vanished. All we shareholders are left with is "hope" that they still have enough resources to turn it around and get to profitability.

For me, the investment thesis has been reduced to a short term (1-2 year) turnaround, get to profitability and hope they are acquired. Over the last few years, I've found the competitive landscape has been increasing exponentially and come to the conclussion that you have to have revenues in the $10-15b minimum in order to support R&D, be competitive and keep the cycle going. Because of UTs success in PAS, they have been able to continue their expenses at a level of much larger companies. However, the massive losses and shareprice collapse has shown this cannot continue. China competitors such as ZTE and Huawei have grown immensely just over the last 3 years. Most analysts also believe that UT will have a hard time going it alone with the constant sell rumors that finally culminated with last years failed strategic study. Over the last year, I have accepted this scenario and even viewed the increase spending/new markets as one last push to get to profitability and a more sound exit strategy. Things can always change a year or two from now and others can probably lay out a longer term sustainable model but looking at the history of the company and the competitive landscape today, the best way to increase shareholder value is to shrink the company, focus on profitable markets sooner, and get bought out. With that being said, lets look at catalysts for the company going forward.

On the macro level, UT is actually in much better shape than other telecom equipment makers. UTs main core markets are still in emerging countries. UT customers are some of the strongest and faster growing carriers in the world. China is expected to grow 10% next year on top of 12% this year. India is expected to grow another 8-9% next year. Brazil, Russia, Korea, the Philippines, Taiwan, Pakistan, and others are expected to grow much more than in the US. Local consumer demands in those emerging countries are the drivers for growth. Broadband/networking growth according to companies like Cisco have never been better. Therefore, it comes down to UT execution going forward. For the stock price, it has been on a multi-year downtrend and needs "catalysts" to reverse the trend and sustain an uptrend that we shareholders have been waiting for. Here are the upcoming company specific catalysts (some are expected and some we hope for, a fellow shareholder Nawar started this off):

- Debt issue: for UTSI to pay a portion of the debt, and refinance the rest in a none-dilutive manner, or not overly dilutive. A quick summary of liquidity...
- For UTSI to sign multiple IPTV contracts in China, signaling further relaxing of SARFT control on IPTV in China.
- Upgrade of the PAS network, for UTSI to gain a contract to upgrade CN and CT PAS network to allow for fast data.
- Asset divestures: for UTSI to divest some of its none-core assets.
- Q4 results/better outlook: for UTSI to announce decent Q4, and provide better outlook for 2008 then the market expect today.
- New NGN contracts, for UTSI to announce similar contracts to the PLDT contract, showing traction for their other product lines.
As for speculative potential developments:
- A modest buyback of stock..
- Action by Wu or an external party to acquire the company.
- Strategic partnership/joint venture with a key player for any of UTSI product lines.
- An investment in UTSI by a strategic player.

I added the following:

Signing of OEM partners.
Additional IPTV wins outside China (BSNL in India in early 2008?)
Completion of Gemdale/Infinera sale.
Developments in Russia specifically (got to have some developments in the last leg of BRIC countries)
Non-pas/iptv wins in China showing progress from Lu
Positive developments in Starent lawsuit (long shot)
Additional iptv licenses issued in China
Additional GEPON contracts (First phase in Pakistan and GOA in India are done-more expected)
Wimax initial win?
Cash flow outlook for 2008 needs to be good.
Announcement of "material" sale/licensing of UT patents (current 1 or 2 that they sold are not material)
Expansion broadband contracts with BSNL with higher margins.
Positive news out of Japan (which has been a while).
-Book to Bill (improvements in core markets).

And, the major catalysts.........PROFITS. The last profitable quarter was Q1 2005 when UT booked the large $290m Japan Telecom contract and earned 29cents for the quarter. Management has once again come out with their getting to sustainable profitability forecasts. This time with a sense of urgency and "committment" to boot. I say this with some sarcasm but with genuine hope after meeting management during the shareholder meeting. The above "catalysts" were mostly laid out by management in their ccs and PRs. There has definitely been major new revenue sources (iptv, broadband, ngn, gepon, ip surveilance), iprovments in PCD (their largest rev source) and cost cuts, but also continued decline in PAS/Japan (highest/most profitable segments).

There are definitely catalysts going forward both at the macro/micro level. Management supposedely is focused with the operations now that the China/options investigations/financials are finished/upto date. Blackmore, the COO, has to sign OEM deals, reduce expenses, and improve overall cash flows. Barton has to finish the Gemdale/Infinera asset sales, extract cash from their patent portfolios, resolve the CB, and better refine the cash flow/profitability expectations going forward (better communications with the street). Lu has to stabilize China PAS revenues and gain new revenue streams in China.

For shareholders and the street, its about seeing RESULTS from the company after years of massive poor performance. I would hope there is sense of urgency. I think it should even be beyond this (panick comes to mind although panick is not a word you want to portray to the street). At $2.7 per share, I encourage ALL shareholders to have management and BOD be accountable for increasing shareholder value. The company still has time and resources. The macro environment has never been better. They have major initial wins already but the stock has not reflected it currently at all time lows. Management has to be passionate and hungry- they have a tremendous opportunity to turn this around. I for one am sick of the potential and seeing the stock price languish here. If management executes, there is no reason that the turnaround will not happen. Then, we can change the conversation to being hugely profitable in the future.

1 comment:

drew spartan said...

The IPTV contracts have all looked positive. The hope is that the company didn't have to bid these at ridiculous levels to win the business....if so, hopefully follow on orders come quick, and at high margins.