Sunday, December 23, 2007

UTStarcom - Year 2008 Outlook

Another year has passed and the stock price has not only languished this year but has outright collapsed, falling 70%. Its gotten so bad that I even started a blog and went to the shareholder meeting. In the coming year, I plan to have some "fire side" conference calls with shareholders to discuss the companies prospects and progress in their key markets and financial metrics. I would like to invite fellow shareholders to drop me an email if they want to discuss UT in the coming year.

On to the 2008 outlook. Management has been proactive lately in communicating their turnaround plans, financial targets, and key markets. In short, management does not expect a quick turnaround but have outlined some realistic goals going forward. Management does not anticipate turning a profit until 2009 but are trying to make that happen in late 2008 as the best case scenario.

Expenses. The target quarterly operating expense is $115m/quarter. From the CCs and analysts estimates, this is probably conservative and will be in the $100-110m range by the end of the year. Most investors would like it to be further reduced to the $90-100m range. Management has said it is well-aware of investor sentiment and operating under a high sense of urgency so the cuts that they have made after undergoing a 9-week evaluation of all business units suggest that they see revenues ramping up and that the cuts are adequate to get them to profitability. Management has focused attention on bookings (book-to-bill ratios). Up to a few months ago, management has not done this and gives me some confidence it is on the upturn with ratios above 1. Management has indicated expense ratios about 23-25% of revenues (not including PCD). There has been some confusion about this because UT produces their own handsets with R&D expenses and a seperate distribution portion. From the last earnings call transcript and the shareholder meeting, the expense ratios will be based on all revenues not including the distribution portion of the PCD.

PCD. The PCD unit (atleast the distribution part) has been classified as non-core and we hope to see this unit sold. It is not part of the expense ratio metrics described by Blackmore and can bring in substantial cash to the company.

PAS. Unfortunately, the most profitable revenue generator for the company continues to go down. The company has indicated that margins will actually improve and that backlog is still signficant but there is no question this will go down more in 2008. The hope is their improvements and other features (128k packet data) will slow down booking losses. I believe further developments in PAS (good or bad) will impact the shareprice more than some of the iptv announcements in the near term.

Broadband. While the revenues are increasing in India with the coming highlighting their BSNL contracts, it is in the single to mid teens in GMs as of now. Going forward, Blackmore highlighted GMs above 20% so this will contribute much needed margin improvement in 2008. Additional contracts can be expected.

IPTV. This is definitely the company's brightest spot but it can also be the most frustrating because of the timing of revenues due to regulatory issues and content/usage/functionality situations in various countries. Currently, the company has over 600k subscribers and system capacity of over 1 million. Contracts are multi-year and all iptv projections (for both equipment and total revenues) are staggering to say the least. Here is where I believe the best opportunity for the company and more importantly the shareholders are right now. Because of all the previous past disappointments, lack of internal controls, lack of profits, declining PAS, etc, the market is so focused on the timing of these contracts and not the potential markets and UTs own position. Take the solar industry for example, companies are being valued for potential revenues in 2009, 2010 and beyond. Those companies are being given ALL the benefits of a declining dollar, higher oil prices, very high margins, unlimited demand, no supply etc. Bascially, stock valuations have gone up 10-20 fold in some cases. On the other hand, UT plugs along having won in MTNL and Bharti in India (with BSNL soon to follow), 18 deployments in China (60% market share), wins in Brazil, and Taiwan. In the latest Taiwan contract for example, the stock price actually dropped 3 cents. Why? During the last earnings call, Lu detailed the steps to recognize iptv revenue. The company gets a down payment but a majority of the revenues don't get recognized until full deployment or a year from signing. Of the $240m they have booked, only $80m have been signed. So, from this standpoint, you can see why the stock doesn't move a lot. However, these are the opportunities I am talking about. A year ago, there was no India, Brazil, Taiwan, and most China deployments were very early. The fact that industry is starting to open up and UT is winning are very important. The Taiwan contract for example is with one out of the three CABLE companies they are talking to. I don't think this model working with cable companies to augment their offering was discussed previously. In Taiwan alone, they are projecting having 1 million customers in 2009. With Markwell, they are anticipating shipping 500k STB in 2 years! That means UT is going to have huge market share in the country.
In Shanghai alone, they are projecting to have 500k subscribers by 2008. That is in Shanghai alone while winning another 200k contract to be the SOLE iptv provider in Fujian province. By next year, we will have to break down iptv deployments in China to the different cities/provinces. But the key take away is that with most revenue recognition so backended, it is good news that profitability may be expected in late 2008.

In summary, the stock price is reflecting the CB, the continued losses, PAS declines, and a lot of timing issues without regard for their assets, sale of non-core assets, explosive gains in worldwide iptv growth (specifically with UTs now confirmed position), growth in all the "startup" technologies they are still spending $160m in R&D (for years). So, you can look at the shareprice and relate to the negatives which are being dealt with or focus on the positives which are happening and will only get realized as we go forward. The same way with the highflyers of today. You can pay for their "expected" growth for the next 10 years or you can pay for almost $0 for UTs growth with significiant inital contracts already signed and the street not giving any credit for. I know where my money is on.

I'll be travelling to Southeast Asia tonight for vacation so have a wonderful holiday to everyone (ok.. inlcuding the shorts).

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