Saturday, March 1, 2008

Q4 2007 results and 2008 outlook

This latest earnings call will be remembered as the time the company paid down their entire convertible bond debt + interest, a whopping $289 million using existing funds from the US and those transferred from China.

While I am happy that they chose to pay it off completely, it does raise the question, why they didn't do this LAST year? Why pay the additional $22 million in interest payments on top of the $14 million in regular interest. I know they got lucky with the gemdale/infenera ($90+ million take) but was it worth having the CB cloud hang over shareholders who were peppered with endless PRs regarding defaults and uncertainties. I know market conditions change but paying $36 Million in interest payments last year is ridiculous and shows a lack of planning to resolve this. They could have easily saved half the interest payments and transferred China funds years ago.

After listening to the conference call twice and jotting my notes, there were some negatives but overall one of the most positive calls over the last 3 years and basically solidifies the longterm case for buying UTStarcom.

Peter Blackmore discussed the various business units, Hong Lu talked about China progress, and Fran Barton recapped Q4 numbers and outlook for 2008.

As you many know, there are six business units. The multi-media communications business unit (MCBU) includes IP-based technology and soft-switch related items such as IPTV, Next Generation Networks (NGN) and PAS.

Late in Q4, Tiscali of Italy decided to replace all of their TDM switching network with UTs MSAN equipment. This is a huge strategic win and being implemented already. Blackmore also mentioned recent wins in Taiwan, Brazil (Brazil Telecom), Thailand (TOT), and Argentina (Nextel) and feels that UT has the best soft-switch technology in the market.

IPTV- Currently over 750k subscribers, up from 600k late last year. That is huge growth of 25% in a little over 2 months. Aside from wins/expansions in China, they won in Taiwan (Markwell cable), Sri Lanka Telecom (SLT) and a new customer in India. Rollouts will predominantly start in Q2 and there is the usual 6-9 month revenue lag so these are nice strategic wins. Market share in IPTV in China is greater than 65% and well over 80% in India. More info from Lu in China but momentum is growing and there are lots of "activity" in this area. IP Surveilance (2 wins in China, more from Lu later on).

For this division (IPTV/NGN), Peter mentions "Booking can ramp up fast" and revenue growth will in greater than 80% for 2008. The MCBU will have flat revenues due to the decline in PAS. Gross margins will be 35-40% (including STB). Overall, the revenue bookings have caught up to PAS decline, which is good news. Seventy percent of the revenues planned are already supported by existing bookings which give them greater certainty for 2008.

Broadband Business Unit (BBU)- This includes IP-DSLAM, IAN8000, GEPON, and Netring. This will have 15-20% revenue growth in 2008 and support triple/quadruple play buildouts using both copper/fiber. UT is one of top 5 vendors in GEPON worldwide. Netring is the optical product that is already in 3rd generation. Gross margins are going to be above 20% for every quarter in 2008. This is key because GMs are sometimes negative in 2007 with writedowns for poor performance previously. Thirty percent of the revenue planned has alreadyy been booked.

Services Unit- Flat revenues are expected for 2008 with 30% GMs. This is expectated to ramp in the following years due to the new equipment being installed with new customers in 2008 and beyond.

Terminals Business Unit (TBU) - Supports handset business (CDMA and PAS). Overall growth of 15% in 2008. Looking for additional growth in WCDMA and in area in telematics (won some initial contracts in automobile industry). GMs in low 20s range.

Customs Solutions Business Unit (CSBU) - Mostly includes technogy acquired from 3coms Commworks unit. This includes IP-based messaging and transaction products. Revenue is expected to double to $40m with GMs above 50%. This unit is also expected to be profitable in 2008. Blackmore mentioned some of the "none-core" assets are becoming very attractive and this along with the PCD definitely fits the bill. What is this business unit worth alone? The company paid $100m to 3com a few years ago and has finally gotten this to profitability this year and growing very fast. This alone could be worth close to $80m-$100m if sold (based on 2-2.5x revenue for this type of business - check Starent/Infinera for valuations).

Mobile Solutions Business Unit (MSBU) - This includes the moving media 9000 and supports IPCDMA, GSM solutions. Growth is in the 30% and gross margins in the 40s in 2008.

Note that the CSBU and MSBU are consolidated in the "other category".

PCD - "Continues to exceed expectations." Three new smart phones released including a touch screen phone in Sprint, ultra slim phone (1450 model metro pcs), and refresh of the Gzone phone (verizon). Shipped 2.8 million units and had record quarterly revenue of $560m with 6.2% GMs, (wow). Twenty five percent of units are internally made UT handsets.

Supply Chain comment - outsourcing of terminals business and improved inventory turns (improve by 35%). Overall margin improvement of 3%.

Peter summarizes (like a CEO) that they are focusing on building their core businesses and manage/divest none-core to benefit shareholder value.

Hong Lu followed with a China update. Recently, China regulatory change - Both telecom/broadcom operators can compete in each others field. CT/CN may be able to offer iptv freely throughout China. This is big news if indeed interpreted this way. Lu gave an update on iptv demand. STB shipments signficantly jumped in January to a 60k/month run rate from 20k/month late last year. Currently, it is at 40k/month. While the regulatory issue is not clearly resolved, CT/CN is ramping up iptv and has made it a priority for 2008. Hong stated that China iptv subscribers are about 500k at the end of January so China is the main growth driver for the company (as we know). China bookings is also expected to ramp up this year and will translate into major revenue streams in 2009 and beyond (as we have hoped for a long time).

Here is Tigre's posting regarding this topic this morning.

A second major change is the long talked about reorganization in the China telecom industry (probably as long awaited as 3G licenses). Anyway, the reorganization will probably have 3 major carriers with China Mobile, China Telecom, and China Unicom. Impact to UT is downward pressure on PAS. On the bright side, it will allow UT to sell CDMA handsets and broaden their customer base (since they can all compete in fix and mobile markets). Hong also mentioned packet mode technology is compelling since it has faster data rates than current CDMA/GSM data rates.

PAS gained market share in Q4 and early 2008 by switching to distribution model from direct sales model.

IPTV will take time to mature. I believe LU is being cautious to mention that it has not openned up completely and obviously it is just at the beginning. 70% market share (slightly higher than what Peter said).

IP survielance wins and Tunchin and Hangchou. Additional opportunities in government and health departments.

Using iptv to get into enterprise and advertising markets.

Upgrading PAS soft switch to release 5 and improving opportunities broadband access. and optical networks. Increased employee morale and higher business activity in China even with the Q4 restructuring. Government representatives/customer visited UT to show support.

Fran Barton discussed liquidity and financial results. Convertible notes due on March 1 was paid completely ("successfully"....hmmmm, not sure about that).

Going concern modification seemed very negative but is really based on historical actions. The company drained a ton of cash by paying the CB ($289m) and $92m for other short term debt.

The company is taking steps such as (1) Q4 restructuring, (2) refocu direct sales efforts to productive areas, (3) using OEM, (4) reducing inventory via improved supply chain/outsourcing, (5) potential sales of non-core assets (active ongoing discussions), (6) license/sale of patents, (7) additional lines of credits (public/private financing), and additional reductions.

At year end 2007, Cash/short term securities was $503m and $320m in debt. This is net $180m in cash. Currently, they have $228m in cash and only $48m in debt. Comment: Debt to equity ratio is down to less than 0.1. If they can sell additional assets or drive to profitability soon, the valuations start becoming very apparent.

Here is a summary of revenue in the business units in Q4, Q3 revenue comparison.

MCBU - $118m , 57m
BBU - $51m, 41m
TBU - $43m, $59m
CSBU - $6m, $2m
MSU - $1m, $10m
Service - $18m, $19m
PCD - $560m, $458m

Book to Bill was 0.8 - not bad considering the 25% increase in revenue from Q3 and traditionally strong revenue recognition in Q4.

GMs for business units (see filing)

Bad news - OPEX was $155m due to restructuring, non-cash impairments, and New taxes in China for Gemdale sale and other income taxes. The GMs for BBU was also negative with an $8m loss provision in India. I think the reason Barton did not preannounce was also because of these "hidden" negatives. While there is a lot of positives, its these kinds of things that make the market think twice. Heman Chou, one of the analysts asking a question asked Barton last quarter if there was any more write downs and Barton said no (my recollection). Barton NOW says he hopes he did not say anything foolish like that, but he did say no more writedowns last quarter and now this again.

2008 preliminary guidance - 3 to 6% revenue growth. This is above any estimates that I have seen specially on top of the $160m higher Q4 2007 revenue reported. GMs of 14 to 16% is what I expected. It is good in that BBU GMs are going to be above 20% every quarter (if there is no more surprises). Expenses for the first couple of quarters are still $115-120m (this is disappointing). For the back half of 2008, expenses will be under $110m (Barton mentioned the company would like it to be lower and KNOWS it has to be lower).

I will post again later regarding GMs of BUs and more anlaysis on 2008 and some of the Q&A, which had a lot of info.

Overall, very good call for 2008, and potentailly GREAT 2009. For the next 3 months, I would say neutral because Q1 is going to be worse and then things will start to improve dramatically. Based on the report and new items, I have much more questions and data to discuss with management in two weeks. I'll definitely circulate those thoughts to the group and we may have another shareholder cc before meeting with management.

1 comment:

tim_94305 said...

The analysts name is Himanshu H. Shah. Sorry for the butchering of the spelling Himanshu.