Sunday, March 30, 2008

IPTV (cable), NGN, Strategic Study, and Current Share Price

Why doesn’t UT cut expenses significantly more? Why is Blackmore resisting the temptation to cut quicker and get to profitability? Why are they spending most of their R&D in IPTV and NGN? Why is Tim negative in one post and more positive/downright bullish on another (like this one)? Why do I have a $10 year-end target when the stock started the year at $2.75 and why do I and other longs think it will go much higher in the future when it seems so bleak right now?

Let me go back to 2006 again when the company decided to go into a strategic alternative study and was considering to sell itself. Director Thomas Toy mentioned that the board thought the company ($6-7 in early 2006) was undervalued and that PAS decline was a concern and that was why they decided to seek strategic alternatives. I am still confused about the entire strategic alternative study. What valuation where they looking for and did they really believe they could get a good offer then? In late 2006, they were not filing financials and had an ongoing options investigation and nine material weaknesses. They were about to lose $1/share for the year AND instead of being profitable in 2007 as guided (a year plus before that), they were going to lose almost $200m. The convertible bond was not resolved. There were no Gemdale or Infinera stock gains and obviously no IPTV/NGN wins like they do now. According to Toy, they also saw signs of the sub-prime mess that may make any deals hard to close. That was also the time they were writing down $32 million in India and PCD had not improved as it has now. With that situation, why did they feel that $6-7 was undervalued and how much more can they expect to receive? Now, if they felt the situation was really that bad then and had to sell, then why didn’t they sell even if it was a less than an ideal offer or even sell separate parts and get what they can. Why would they then continue spending and ending up losing $200m in 2007? Anyway, this post will show why maybe the management is much more confident than the street is and what the future is in store for UT shareholders. Maybe the problem is a lack of communication or maybe there is just no one listening anymore.

The major hope for UT has always been IPTV with telecom carriers. There were always timing issues because of broadband penetration, regulatory, content and other issues. Slowly but surely, we have seen tangible expansion in China (up to 500k UT subscribers), multiple (3) wins in India (update: ), Brazil, and Sri-Lanka. The other potential customer segment in IPTV for UT is cable. We saw the Taiwan win and now are hearing about Hong Kong. Those wins show that UT has a system capable of working for cable companies and can take advantage of this major market. In Korea for example, telcos are waiting for an enforcement ordnance that will allow them to broadcast TV services. Currently, Korean Telecom (KT) has 150k iptv subscribers, Hanaro Telecom has 800k+ subscribers, and LG Dacom has over 200k subscribers. These are currently VOD services only. But these numbers pale in comparison to the 14m on the cable TV platform. This is true in most cases where cable dwarfs iptv from telcos.

From BWS financial last March 20 discussing Sigma designs, “There was news overnight from Taiwanese cable company Vastar Cable intending to begin trials of a HD IPTV service, Vee TV. The demand for top quality high definition service would translate in Sigma Designs (SIGM- Hold Rating) having an edge in receiving this contract. The significance of the news is not who the customer, but the kind of customer Vastar is. Vastar would be the second cable company in Taiwan who has elected to go with an IPTV platform. The first was Markwell Industrial, which chose SIGM. We believe cable companies on a worldwide basis would slowly start to transition to an IPTV platform. We have stated before how Comcast (CMCSA- No Rating) could begin trials in early 2009. The inclusion of cable companies into the IPTV market would create a market opportunity several times larger than telecom carriers alone. Investors should not underestimate the growth of IPTV. The technology remains in its infancy..”

Blackmore added on the last earnings call..” And interestingly Markwell is also our first win with a cable TV operator and we see additional opportunities with that class of carrier.”

While IPTV grabs the headlines, UTs NGN is making tremendous progress. From the last earnings call, Blackmore mentions, “Focusing on our NGN solution, this is designed to support the growing number of advanced voice and data services as we see tremendous growth in Internet traffic and the end of life of traditional TDM switches. We’ve designed our mSwitch to allow the provision of next generation services but also significantly reducing operating expenses of current products. mSwitch supports multiple call types over all access technologies and currently supports over 60 million NGN customers globally. While PLDT is our largest network transformation project to date, our success there is winning us new customers worldwide. For example, last year a major European carrier, Tiscali in Italy asked us to supply them with our MSAN equipment. And just prior to year end, the carrier asked us to replace their entire TDM switching network with our softswitch. This is obviously a very key strategic decision for Tiscali and a very strategic win for us. We are currently implementing this project with them. In quarter four, we also won our first NGN softswitch in Taiwan. Other recent notable contracts include Brasil Telecom, where our softswitch is supporting applications for fixed mobile convergence and IPTV, with TOT in Thailand, and also recently Nextel in Argentina. It is clear that this technology is gaining momentum and we believe we have the best performing softswitch on the market.”

From the latest IPTV news magazine ( ), FastWeb of Italy is spending 2 Billion Euros over the next 4 years to complete its NGN to deliver voice, data, and video over IP. We don’t know the size of the contract win with Tiscali (smaller than FastWeb and Telecom Italia) but the multiple wins (Philippines, Italy, Taiwan, Brasil, Thailand, and Argentina) does show significant activity in a very short time frame.

Blackmore adds, “Our view is that these two product areas, NGN and IPTV are at the beginning of their life cycles and bookings can ramp fast. We are very pleased with the momentum they are gaining in their respective markets and believe the revenue for each of these product lines can grow in excess of 80% in 2008.”

There was also the hiring of former Alcatel-Lucent executive Diego Martinez. "Based in UTStarcom's regional headquarters in Sunrise, Florida, Martinez will lead the company's sales efforts in Central America, Latin America (CALA) and North America while overseeing an extensive team of sales, engineering and support professionals in more than 30 countries."

Wait a minute. Is this a company that is going BK or have liquidity problems? I see Krispy Kreme closing up some shops and Borders having certain liquidity problems but UT....unless it is a misprint, they just hired a person from Alcatel-Lucent to oversee professionals in 30 countries!

With all the activity in iptv (telcoms and cable providers) and NGN, improvements in PCD/broadband revs/margins, all the financials filed, the accounting system about to be fixed, material weaknesses down to 3, gains in Gemdale/Infinera appeared and actually booked, CB paid off in full, expenses to be further cut, profitability at the end of the year, isn’t it in much better shape than in 2006 when the price traded from $6-7 (even before any ramp up to a possible sale $8-11 high in Oct 2006)?

The lack of communication or maybe no one is listening is also a problem. During our meeting with them, they mentioned going on investment road shows to tell their side of the story. The markets seem very large and they have plenty of strategic wins to showcase their products. It is apparent the street is discounting the company’s previous mis-steps, don’t think management can execute and expenses are still way too high that any positive developments (contract wins) are not signficant at this stage. Shareholders are giving up and the stock continues to languish. The strategic study back in 2006 was really questionable at best. With the current positives, doesn’t management/board think the share price is so much more undervalued than it was then? That’s why I’m both more frustrated and more optimistic at the same time. Lets hope for better communication from management and that they get out and talk about what THEY are seeing in the markets and the major opportunities (size) going forward.

Just some thoughts I had to post before going to bed......good night or is it morning already?

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