PAS - Management indicated there was an increase in PAS handset demand this quarter but this is just a blip. As I mentioned in another section, most of the R&D is in iptv/ngn and very little in PAS. PAS is still very profitable and Lu had mentioned in a previous cc that they will be able to maintain PAS profitability. As PAS declines, SG&A associated with PAS should decline as well. During the last CC, they had mentioned the new sales model was working well and margins would be maintained (and actually improve slightly) for 2008. A few months ago, I checked the capex spending of CT/CN and PAS was now down to about 5% for 2008 so this is very low on their priority list. The flip side is they should be increasing their spending on IPTV. During the November shareholder meeting, management had put up a chart on PAS bookings and revenues expected for 2008 and it was on a steady decline. This is still what they expect and Barton mentioned he was conservative on his PAS revenue model for 2009.
Softbank/Japan - Since the Japan Telecom contract that was booked in 2005, little or no news has come out of Japan. Revenues from Japan has dropped to $70m in 2007 from $137m and $479m in 2006 and 2005 respectively. Softbank's purchase of Vodaphone's wireless division has refocused their strategy. Coupled with the iptv regulations, this has hurt UT in Japan. I asked management if 2007 rev was the bottom and how their Japan book to bill looked. Management mentioned that book to bill was above 1 (although it was not a quick answer so maybe they were not very sure). The encouraging thing was that the older equipment now has to be replaced so new contracts are up coming. Management also mentioned that the relationship with Softbank is very good and doesn't prevent them from getting new customers. However, it is just difficult to do so because of long term relationships that already exist with other potential customers and their vendors. They did indicate they were looking into a second customer to smooth out the revenue stream in Japan (again, nothing really concrete).
OEMs/tie ups - Nothing new to report.
Building in China/Sale of Gemdale/Infinera - Management mentioned that China regulations are consistently changing and they are just learning what they can and cannot do. I have reported in the blog previously what Chesha mentioned regarding subleasing some extra space and the special hitech tax status that prevents them from selling the building. Mortgaging the building is also possible but I think they are more focused on leasing at this stage. There is no question that the building is very valuable and even at the last appraisal was worth $180m (thats just for the Hangzhou building). The sale of Gemdale holdings came up in the discussion as well and Barton mentioned they sold this as fast as they could. They sold about 10% in November, about 50% in December and the remaining 40% in January (approximately). I didn't go into the sale of infinera but Chesha had mentioned they sold that as fast as they could as well. I'm a bit confused about the infinera because they only got a little over $11/share. During the first day after the lockout period, they could have sold this on Dec 20, 4 million shares traded above $20 (Infinera trades less than a million shares before that) so there were people unloading already. The stock declined steadily but slowly for the next few weeks until hitting $10 and even $9. I'm not a great trader but it was just very disappointing to only get $11/share (close to the ipo price) when I thought they could get closer to $20. They had over 700k shares of Infinera so that was about $6m more that they may have gotten.
Just a general comment. I do not know all the details obviously regarding the building, gemdale/infinera sales, CB interest payments/additional payments (no call option to pay it off so they had to pay the special interest rates and wait until March). The company says they did the best that they could under the circumstances and certain regulations in China were not known or changing or just coming in but it seems "bad luck" or "bad results" consistently surround the company. They also mentioned they hire the top accounting firms, the top planning firms, etc but the end result is all-time share low prices. I hope our luck changes :-)
Strategy in US/cable companies - I've touched upon this in other sections but basically they are not focusing on the US now and it takes time for trials/qualifications. For some reason, we didn't discuss the cable companies but I believe this is gaining steam with Markwell and other cable companies are looking into iptv (not necessarily UT systems however). Check the sigma designs board for a ton of iptv news, some applicable to UT and their part of the woods.
Writedowns - There was nothing to report (good)
Wimax - They won a $600m 2-year contract with BSNL in India !!!!!.....oops just kidding (getting close to April fools day). They did say they won one in Taiwan. (maybe I was just dreaming about that one too).
Profitability - There was a LOT of discussion on expenses because it ties into profitability. Based on the meeting, somehow I feel they are more confident about getting to profitability in Q4 2008. Now, Q1 2009 may be back to losses due to seasonality but overall, I think they were fairly comfortable with Q4 2008 and overall 2009 profitability (after being questioned on expenses, different business units, cost cutting everywhere, etc for 3 hours, they seemed to hold their ground). ALL previous guidance by Barton for profitability has been way off but his recent quarterly estimates (not for profitability of course) turned out to be very conservative so under all the roundabout information and hunches and psycho-analysis and checking the magic 8-ball, it does seem they WILL get to profitability by Q4 2008.
There are probably things that I missed (I didn't take notes down) and would add an addendum if other shareholders that were there point out something. But thats basically, the various things we discussed and got responses for. I once again would like to thank Chesha, Fran, Peter, and Thomas Toy for accomodating the group for 3 hours. I hope the information presented helps out all shareholders out there. Obviously, management cannot release a PR and write like I can but again some of the info I put are my own opinions and not FACT.
Summary - A lot of people had been waiting for the recap post and were asking for my first impressions. As you can see with the amount of information (some positive/some negative), it would not have been good to jump in and post right away. After the meeting, I was drained and did not feel particulary upbeat. Maybe it was the all-time low stock price. Maybe it was rehashing all the past mis-steps and hearing the reasons for some of the mis-steps. Maybe it was the helpless feeling of hoping that this time they CAN turn it around. The meeting was no doubt productive and the stock looks incredibly cheap here (as it has for a while now). I will let people just read the recap and decide for themselves. I personally will keep my shares for a long time. Here is something I posted earlier today which sums up my optimistic view on why it can turn around now.
EVERY move costs time, effort, money, and management focus. Thats why it is essential to FOCUS on the turnaround and not be wishy washy. Identify the key CORE (higher margin/growth opportunities) and monetize the rest. While we are not seeing it in the stock price, there has been significant milestones reached since Peter has arrived. Obviously, it is not one person but that one person can bring the necessary change that others can rally behind and then everyone has a purpose and unified goal. With that, great things can happen.
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