Saturday, March 22, 2008

Recap of Exploratory group meeting with management/BOD (2)

Sale of Non-Core Assets - During the last earnings call, management mentioned they were in active discussions to sell none-core assets. Merrill Lynch is assisting in the asset sales. Peter mentioned he was spending signficant time on the divestitures. The potential business units to be sold are the PCD, customs solutions BU, and the mobile solutions BU. Indications are that two of the business units will be sold. At UTs current valuation ANY sale would really jump start the stock price. A share buyback would almost be guaranteed. This is definitely something to look for in the near term.

PCD - How much can the company get for the PCD? This division is set to have revenues of $1.7b in 2008. During the meeting, management indicated that 35% of the revenues will be from internally made designs and that quarterly expenses are about $10m (or $40m/year). Based on 6% gross margins, the expected gross profits will be around $104m for 2008. So, net profit will be around $64m. Motorola's handset division has revenues of $19b but lost $1.2b last year. There is no way they will get 1x revenues for it at this time as Icahn would like. Motorola's entire market cap right now is around $21b. So, how much is UTs PCD worth? Based on the revenue growth, the profit margins, and the steady improvements in UTs own internally made handsets, I would value it much higher than the $200-250m that has previously been discussed. At 7x multiple of earnings, it would be over $400m. At 5x earnings, it would be $320m. The internally designed phones make up about $600m of revenue already. My best guestimate would be $350-400m and it could be conservative. If this were to be sold, then obviously, 2009 profitability will not happen but I think we can all live with having that kind of cash/liquidity right now. There was a recent article (link posted by kr_khous about Dell and handsets ( It seems like other companies may be able to extract more value from the PCD than UT can and drive valuations even higher. The sale of assets specially the PCD would make the stock explode.

Communication - Management mentioned that since their products are relatively new (iptv/ngn for example), customers are hesitant to put out PRs and thus the company cannot disclose contracts until much later or at all. In some cases, just getting the release paper work is a chore and takes a long time. They did feel that things can be improved. Contract amounts could also be added in the future. Some items that could be disclosed simply happen at the last minute. For example, the cash used to repay the CB fully literally came in the last week so a PR could not be issued. Even the intent of paying the CB in full could not be made earlier or last year because they simply did not have the cash in the US at the time and would have had to say they did not have the cash at the time. I think the information provided in the earnings call have been generally good. However, there may simply be not enough time to address each item in extensive detail in the call. For example, the ongoing concern statement. Barton could have tried to work on removing the statement (5% chance of success according to Barton) but they would have had to file the report 30 days late or just take the hit (have the ongoing concern statement) and get it filed. So, they just got it filed, which everyone agreed was better. There are other items that could be tied to communication. Guidances can be refined so its not too conservative and lead to confusion on business perormance or suspicion of lack of control. I guess with the stock at this level, it is very fragile and the company has to be careful in what they say and don't say. That also became an issue with filing the 10K a day late (or even a couple of weeks late). A shareholder even commented on the announcement when earnings will be released. It seems that other companies can announce the date of earnings much earlier than UT can. Barton replied to the effect that they did not want to close the books to early or too late. This may still be part of the accounting switch to the new system but I got the indication that the earnings date announcement will continue to be last minute. There was also no announcement of the OEM that they have already signed and the ones they are still working on. Communication is very important since it is tied to confidence. If communication is poor, confidence is poor and also reflected in the stock price. Management also mentioned that they have spent most of the time in running the company rather than doing roadshows with the investment community.

Overall CEO position and China CEO situation - Peter is set to assume the CEO post on July 1 and will be more active with the investment community (Peter mentioned that hopefully, there would be more good news to announce as well). I had thought that this (CEO spot) was not assured and that if not offered the CEO title, his contract would stipulate some other arrangement. But, it seemed it was already "known". I think this is clearly another communication issue and it would have been great to have a PR on this. There was no update on the China CEO position. Many new managers were hired in China and they are rebuilding since Wu left.

IPTV Strategy in US and around the world - If UT's iptv system is one of the best, then they should be able to penetrate different markets around the world. Blackmore mentioned that they hired Mckinsey a while back to determine which areas they should focus on. Mckinsey mentioned to "double down" in Asia, stay away first from the US/Western Europe, and try to penetrate the peripheral of Eastern Europe and other areas. A shareholder asked about Mexico and iptv. Management also mentioned Mexico as a possibility. Peter also mentioned that they carefully weigh the risk/rewards (expenses/potential profits) on each area as we would hope for. There is also a lengthy qualification period for a lot of the providers so it is not as easy to break in to new customers.

IPTV competition in China/optical/gepon/broadband situation - The recent news in Shanghai of Huawei giving their iptv equipment basically for free and UT having to share the rest with ZTE drew some concerns. Management clarified that Huawei system is so bad they have to give it away and they know UT's system is excellent and there is no need for major price cuts. Huawei and ZTE are very good in other products but they know customers know UT has the best product in iptv. So, those were normal discounts not expected to impact margins. Even if UTs customer gives away the iptv system for free for promotion, they obviously still get paid. The Shanghai news of expansion to 800k users should have been VERY good news but instead got twisted into a concern. As far as the other news of UT being shut out or not in the top suppliers for a recent gepon contract in China, management mentioned UT working to be a 3rd or 4th supplier. These are not big contracts and are usually divided among about four suppliers.

IPTV regulatory issue in India (MTNL) - No problems according to Blackmore.

It should only take one more post to wrap up the meeting recap.

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