Tuesday, January 1, 2008

Worse performing $5 stock in 2007

There is really no way to sugarcoat the fact that UT stock collapsed in 2007.


With vonage's 15% rise on the final day and ocean networks (whatever that is) last day move, it may have just given the crown to UT as worse performing $5 stock (at the start of the year). The stock started the year at $8.75 and closed at $2.75 wiping out $720m in market cap. There is only one metric that really counts for management/BOD performance and that is the stock price. There really is no reason for management/BOD to be getting any bonuses or raises based on the stock performance so you can see the company's compensation committee is a farce and the company's internal controls are still very weak. That alone should merit some discount to the companys book value. It is one thing for management to look at each other in the eye but I am wondering how the workers (specially those that got laid off) look at management.

I have been saying for a while that UT is just "trying to survive the current bull market" and that 2007 is atleast over. One final look at the 2007 stock price performance. Does it really deserve to be the worse stock of 2007? Well, sadly it does have a strong case. The company started the year with the expectation that it could be sold with road shows for the investment bankers in China early in the year and positive news clippings about the business and their core iptv products. However, by May, the company announced that there would be no sale and that Wu (the China head and cofounder) was leaving. In July, a NEW China investigations on top of the options investigations was announced. In addition, net cash that was hovering around $250m in 2006 was down to $150m. With the new investigations, "obviously" the filings that were already a year delayed would be delayed even more. With that comes additional interest payments on the convertible bond because they would potentially be in default. It was so bad that it was a milestone that the bondholders "accepted" the terms of the additional interest payments. This is with all their China funds earning less than 2% interest rates and the question of being able to even transfer funds out of China. With all of this backdrop, the stock which peaked in February at over $10 sank to under $3 in August. For most of this time, the only communication we shareholders got from management was a few scant PRs with no real detailed explanations.

The second half of 2008 (after July) was much better. The company had its first cc in over a year to discuss liquidity and performance of the various business units. I guess the 70% drop from February and 40% in 2 weeks was enough to actually make them "concern" about the stock price. Anyway, this started a series of cc (5 total) that culiminated in the filing of 5 quarters and made the company current. The stock rallied to over $5 in October in anticipation of the filing and the better news flow/communications from management. The problem was the results were REALLY bad with cash burns in the $40-50m/quarter. Add to that the subprime woes in the market and you had long funds in trouble and bailing on the stock. The stock has sinced gone back under $3 that resulted in its distinction as one of the worse (if not the worse) performing stock in 2007.

Despite all the mismanagement, the soap operas, the CB overhang, the short position, the current stock price, the company did have some positives that make me question if this should have been really the worse stock in 2007. Of course, I am long and want to throw in some positives but here they are anyway.

The company restated earnings for the last 7 years and filed the last 5 quarters and is now current with the SEC. This has "freed up" management to do their job and get the company turned around. Lu has been in China since July stabilizing the void caused by Wu's departure. Blackmore was hired in late June to be the COO and future CEO. Blackmore has gone on a traveling tour of the various operations in the company, held a strategic 9-week study of all the business units, organized the company into core/none-core business units, signed one OEM, cut headcount, laid out target financial metrics, and committed to profitability in 2009 (or late 2008). Obviously, some other management helped out in the processes. Barton has given updates on liquidity, transferred $150m from China, is in the process of selling Gemdale/Infinera (which both appreciated nicely this year and could still bring in almost $100m together).

Shareholder equity which stood at $770m at the end of 2006 is down to $700m at the end of Q3 2007. Not great but not catastrophic as the shareprice would indicate either. At the start of the year, UT probably had 200k iptv live users on their systems. It is now up to 600k last month. Major iptv wins/deployments in India, Brazil, Taiwan, and expansions in China (380k last mentioned) show the company's iptv system is cost/technologically superior. Regulatory improvements for iptv around the world will drive the growth even further in 2008. Broadband wins in India ($120m BSNL deal), and other wins in Gepon/ip survilance/optical show that there are new markets being entered and a more sustainable revenue base is starting to form.

So, as we enter 2008 (the upcoming China olympics year), there are tremendous hopes that the shareprice will rebound after the collapse in 2007. There are major milestones to look for as the CB needs to be resolved and cash burn/pas slowdown needs to be addressed. The stock is being discounted rightly or wrongly depending on your point of view but it is being discounted heavily. Whether we "believe" in management or not is a personal position view and the street will only respond to results going forward anyway. Overall, I am optimistic based on the data after July that the negatives are mostly in the past and the positives are mostly in the future. Obviously, we need to temper our enthusiasm based on managements previous performance, the multiyear stock technical downtrend, and the competition going forward.

Happy New Year to everyone in 2008. Here is hoping management gets their act together and brings a MAJOR turnaround to the stock price. Expectations are at all time lows (as with the stock price) so this is their chance to outperform significantly. Good luck to everyone with their trading/investing in 2008.


Anonymous said...

you`re doing a good job;

don`t forget to mention, that finally on dec. 28 valueline dumped these bozos in their quarterly utsi update. (price target 3-5years once again cut +50% from 20 to 8$/share if ever achievable...basically not trusting them...regarding their "pink" iptv-scenario and anything else...)

but fraud barton awards himself up to 15 million dollars for.........filing after oneandahalfyears with the sec - a success s6tory...unbelievable. I only do hope, these guys end up in jail and not on a chinese golf course (like hong lu)

Anonymous said...

amen to that. barton is a joke. hopefully the new CEO (blackmore?) will see this quickly and jettison barton's butt on the street. oplink's former cfo is available; utsi would be far better off with someone half-way competent.