Wednesday, April 23, 2008

BWS Financial thoughts on UTStarcom

This morning, I had the opportunity to talk with Hamed Khorsand, a financial analyst with BWS Financial, one of the remaining analysts covering UTStarcom. Hamed has followed/covered UTStarcom since 2003 and started this type of work in 2000. The following are paraphrased questions/answers from our conversation.

Why continue to follow UT? - Hamed mentioned that there are different reasons for maintaining his coverage on various companies. For UT, he likes their technology and is waiting to see how the turnaround plays out.

How did he arrive at his $6 target and $10 valuation? - Basically, the sum of the parts is more valuable than the current company. He believes that there is a good chance of divestitures due to the separation of none-core/core businesses.

Does he believe the company is better off now/worth more compared to back in 2006? - Hamed mentioned he did not favor selling the company now and would prefer them to go through the turnaround before trying to sell the company (if at all). I have written that with all the issues in 2006, the company is actually more focused and closer to profitability now so I was not advocating a sale now (neither does the board/management when we met with them) but just wanted to see his thoughts on a comparison. He did say they are better off now.

Valuation metrics? - I asked if UT becomes profitable, will he not consider cash flow/growth as oppose to sum of the parts. Yes, he concurs.

Management/board - Interestingly, Hamed is more positive on the management/board of UT than he does Sigma Designs. I asked about Sigma Designs because Hamed has been very positive on Sigma (with a $100 price target) all the way until the day of the earnings report and then management unleashed the guidance shortfall due to Motorola over-ordering. This may be a case where the expectations on Sigma was much higher and UT has very little expectations. I reminded Hamed that UT has been in the red for 12 consecutive quarters while Sigma has been positive/growing for the last couple of years. Hamed is definitely not happy with Sigma management (I don't blame him because his clients probably lost a lot of money with his call). As for UT, he is waiting to see if the metrics/targets UT management has laid out can be met. Any pushout will disappoint investors (obviously).

Earnings/breakeven - Hamed predicts earnings/breakeven will not occur until mid 2009. His earnings estimate for 2009 is for a loss of 12 cents/share. This will be better than the $1.62/share loss in 2007 and almost $1 loss/share projected for 2008. Obviously, even the company does not know whether they can get to breakeven earlier but it shows the low expectations out there.

Major catalysts in 2008 - In terms of catalysts such as divestitures, stock buyback, opening of China iptv markets etc., what is the single most important catalyst? Hamed mentioned the opening up of China iptv markets. The iptv webinar on Monday, April 28 should be very positive. I'll write a preview post this weekend.

Lack of major tier 1 clients - Hamed mentioned that the company still lacks major tier 1 clients. Because UT supplies not only an end-to-end iptv system but also a full suite of networking/telecommunications gear, Hamed mentioned UT has not been able to get tier1 clients that uses them primarily. Most carriers want to use multiple suppliers to diversify and not rely on one single provider.

Expenses - Hamed mentioned that UT has to realize it is not making 40% GMs anymore and need to lower expenses (although he is not too suprised by the pace of expense cuts) and improve GMs (which he predicts to be in the 14.5 to 15% range).

PCD - Hamed was upbeat about the PCD (internal/resale). He thinks the resale part can be sold for/worth about $250m.

Debt free - Hamed interestingly portrayed UT as "debt free". From the last update, Barton mentioned UT having $228m in cash with $48m in debt with half the cash in China and half in the US. In today's environment, resolution of the CB and having the net cash make UT virtually debt free. Hopefully, divestitures, leasing the China building, and other cash generating measures mentioned by management will start to kick in. Until, the company gets their cost base right or atleast good progress towards it, it will be tough to get decent valuations.

I did not expect to hear any surprises or anything really new but it was good to talk with Hamed and get his take on various things just to confirm if we have all the general view points. The trading volume and generally flat stock price for the last 6-8 months reflects the wait and see attitude of most shareholders. The upcoming news (such as the webinar, earnings cc/guidance, shareholder meeting) may provide some catalysts for the stock but we'll just have to wait and see....

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