Saturday, May 31, 2008

Weekly recap - May Closing

The stock closed at $4.8, up .17 or 3.7% for the week. More significantly, the stock is up $1.55 or about 48% for the month. The stock is up $2.05 or about 75% year to date. Those are staggering numbers but you have to remember that UT was one of (if not) the worse performing stocks in 2007, losing $6 or 68.5% (ouch). Here is an interesting fact, the stock has been up every month this year! Unfortunately for long time suffering longs, its still about $4 off from the 2006 closing price.

Here are some of the UT related news for the week.

Tiscali Italia NGN expansion contract win - "Tiscali will serve its ambitious growth plans using UTStarcom's complete next generation solution architecture including multi-service access, soft switching, integrated network management and a multitude of advanced services and applications.""We believe the NGN market will grow at double digit CAGR from 2007 - 2011," noted Stephane Teral, Principal Analyst, Service Provider VoIP, IMS, and Mobile Infrastructure, Infonetics Research." Tiscali Italia is not as big as Telecom Italia but does show UTs momentum in NGN, one of UTs core businesses. As usual, there was no contract amounts but does show the company executed the contract cleanly and is getting expansion contracts. I wish the growth rate was further clarified. Double digit could be 10% or 50%.
http://biz.yahoo.com/prnews/080527/aqtu013.html?.v=59

Blackmore speaks at Economist's Asia CEO Agenda 2008 Conference - http://biz.yahoo.com/prnews/080528/aqw010.html?.v=52 The conference was held in Hong Kong on May 29, 2008.

Sigma Designs 1st quarter report - Sigma is maintaining their estimated worldwide iptv set top box market of14 million units. North America will have 4.2m, Europe 5m, and Asia 4.8m. For me personally, I sold out my sigma position at a loss due to their terrible quarterly performance and lack of visibility going forward. I may revisit this again in the future due to valuation and their iptv/blue ray markets but this brings back nightmare management credibility issues, which i cannot tolerate at this time (a person can only have so many project turnarounds and I don't plan on starting a sigma designs blog or group :-).

Looking ahead - There is another analyst meeting in New York that the company is planning to participate in (June 11) and the shareholder meeting (June 27). I also received the proxy hard copies and will take a look again. I'll have a posting on that for sure.

Compared to some of my trading friends, I worked also this Saturday on my real job so this posting is a bit late. We demolished a 60 ft. steel building in the San Francisco Bay Area this morning, one of dozens that we need to take down. Anyway, it was like one of those Myth Busters show as we had a cutter that just sliced through heavy steel, pretty neat! Have a good rest of the weekend to everyone. I just don't know why UT had a sluggish month :-) It really needs to pick the pace up to reach my year end targets (he he).

Sunday, May 25, 2008

China 3G and Telecom Consolidation

Thanks to "Curious_Tigre" for posting about China 3G and the upcoming telecom consolidation in China.

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=152594&mid=152594&tof=1&rt=2&frt=1&off=1

Over the years, there has been a lot of debate about UT not being a local Chinese company and that it has not benefited like ZTE or Huawei. While I agree that it did not get benefits these other companies did, its downfall was not because it was a foreign company. It was they bet on 3G heavily and that has been delayed even now. The company had a very niche product (PAS) that basically had one market (China). Even that was not the full cause of the downfall as it was expected and actually holding up better than expected because of the delay in 3G. Another major reason for UTs sharp decline was that the iptv market also has not openned up but that again is not due to UT being a foreign company. Another reason for UTs decline is Softbank's focus on wireless. Again, this is not due to UT being a "foreign" company (in China). Finally, the mis-management of international contracts (such as the one large Indian contract) set UT back even more and that obviously was not because they were not a Chinese company. Add to that the accounting/corporate governance issues and management/board wishy washy strategic plans (which were again not because they were not a Chinese company) and you get to where the stock collapsed.

Lets look at the competition and their R&D budgets. Those are so much more than UT. However, I don't believe UT lacked the resources to develop their technologies. In fact, UT gained from PAS, from China investments, and even China real estate. So, to say others can catch up is not correct either.

The benefits of having the China government bankrole huge projects overseas is a clear benefit to ZTE and Huawei (until corruption charges or anti-China sentiment get brought up). That is definitely a major advantage that UT doesn't have. However, UT doesn't have to win $2b projects or be a $20b revenue company. They just have to build sensible business plans going forward and assess which ones they can compete in (which I believe they are now doing a much better job). After all, UT does have the "advantage" of all the years in R&D, patents, large scale deployments, and even now PAS/PCD cash flows to support the core growth businesses. I don't see startups with that type of advantage.

For others to compete against UT on technology (iptv/ngn), it will take them a lot of time/money that they really have to just consider whether its wiser to just buy UT outright.
Anyway, the point is UT did not go down from $40 to $2 just because they were not a "Chinese" company. Also, investors now should focus on where the company can morph into. If management executes, it really should have years of growth and profits ahead. The stock price is basically a steal regardless of bad economy, technicals, or what not.

Saturday, May 24, 2008

Weekly recap - Market Swoon

The week was a downer for the markets. The DOW was down over 500 points or 3.9% for the week. Nasdaq was down 3.3% and the S&P down 3.5%. UT closed the week at $4.63, down .34 or 7.4%. UT was down to a low of $4.35 on Tuesday but recovered and closed the week higher on Friday at $4.63.

There was no PRs from the company this week but a couple of post-earnings analyst comments/actions.

S&P- Reiterated their hold rating but raised the 12-month price target to $5 (1x book value) from $3.5. They noted further restructuring is needed to get to operating profitability. They view 2008 as a transition year and looking for divestitures of none-core assets so that the company can focus on the broadband access industry. Their low valuation still reflects the "numerous accounting and corporate governance issues hovering over utsi." Back in 2006, S&P had an $11 12-month target/sum of the parts valuation. Maybe when the stock gets back to $10, S&P, can raise their 12-month target to $10 and then to $15 when the price gets to $15, and then to....well you get the idea.

BWS- Yahoo poster "llll121" posted comments from BWS. http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=152471&mid=152471&tof=-1&rt=2&frt=2&off=1
"The first quarter was progress for UTSI, but there needs to be more quarters of operating express compression before a trend is created." The report (part of it anyway) focuses on the PCD and this highlights the good (very profitable and shining business unit) but also the bad (did anyone buy UT before based on the PCD?).

Preview of June 11 Analyst Meeting- One of the bright spots during the turnaround is the company's communication during the cc, the shareholder meeting they had with the group, the iptv webinar, the filings themselves, and now an analyst meeting. With some of the issues behind the company, its good to see the management believe that there is something worth talking about. While some may think it is a waste of time (a couple of comments before), it is clearly a positive that the company communicate with the street their turnaround plans and more importantly their "growth" plans. You obviously cannot get earnings growth without being profitable so that is first in the agenda. However, its hard to get the street excited with the company (specially one that views itself as somewhat of a startup) when the main message is we will get to profitability sometime in 2009 or that they will finally balance the budget by 2009.

Therefore, during the analyst meeting, I hope management sets some "growth goals" such as:

1. How much they can grow "core revenues". With PAS being lumped in the mix, growth in non-PCD business units for 2008 will only be in the 4% range. The company needs to continously highlight the iptv, NGN, and broadband business expectations going forward. Non-PAS MCBU is set to grow 80% for this year and broadband about 15-20%. What about in the next 5 years? What are their long term targets? Many companies even with the size of Cisco expect to generate mid-teens growth. UT should be able to do so much better with their size and at the stage of their business lines.

2. Market leader - Which businesses/markets/countries are they #1 and #2 in? Which ones are they targetting to reach that stage?

3. Revenue goals in particular areas - Last year, India was set to become the company's #3 market behind China and the US, eclipsing Japan. How much revenue do they expect in India in 3 to 5 years? What about Brazil, Russia, and other CALA countries? At the company I work for, our marketing/business development people have put up areas and business opportunities that are in the $10m, $50m, $100m and upwards stages. UT should have goals for various countries/markets. Can India reach $300m/year in 3-5 years? Can Brazil hit $50m in a couple of years? Can Japan get back over $100m?

4. IPTV users- How many users does UT expect to have by the end of 2008? by the end of 2009, and by 2012? Sigma Designs reported on their last earnings cc: "As of June, 2007 China Telecom had approximately 310,000 IPTV subscribers and has yet to release their numbers for the second half. China Telecom has the potential to continue ramping its IPTV business as it has more than 35 million broadband subscribers and Best TV is also set to have 2 million total viewers by the end of this year. Currently Sigma powered UT Starcom set top boxes are a large portion of their IPTV deployments. China Netcom the second largest telco carrier in China also remains active in deploying IPTV services, moving along towards a long term target of 6 million IPTV users in five to seven years." Back in 2006, Merrill Lynch predicted a "base" subsrciber number of 8 million iptv users in a 5 year span in China but it could be 2 to 4x more. Ultimately, they forecasted about 32 million iptv users in China.

Recalling back to the $4 billion in revenue and $2/share in earnings (not stock price by the way....) forecast back in 2004, people may say whats the point of estimates? For the street to treat the company seriously and for it to gain back the streets good graces, it needs to set benchmarks to measure progress and to guide the company. There are a lot of examples such as apple's 10 million iphones for calendar year 2008. AT&T has a 40k iptv/week subscriber target by the end of the year. Nokia has a 40% market share target. General Electric for years had to be #1 or #2 in their respective business units/markets or they would get out.

Like everyone else, UT has limited resources and they have to focus on the best opportunities and where they can differentiate from other companies. Getting back to profitability and bringing down expenses is a good start but those are really the minimum you can ask from a company. The June analyst meeting is a good opportunity to play some "offense" and discuss their market opportunities and where the company is focusing their growth efforts going forward. Fran Barton supposedely has his global plan tucked in his folder. Hopefully, he is constantly updating it and discussing it with all his marketing/BD guys in the "field". No more excuses.... Fran. Lets hear some growth metrics that are actually worth being proud of if/when accomplished and that employees/company/shareholders can rally behind on. Slashing costs, fixing the books, being conservative are survival plans and not growth plans. If its survival, lets sell the company. If its growth and you feel you have the technology/business plans to execute it, then this is the time to show leadership/accountability and VISION.

Have a great Memorial Day weekend to everyone.

Sunday, May 18, 2008

Weekly recap - Reverse stock split

What idiot called for a reverse stock split in 2007? Oops, that would be me. It just shows we all go into a state of insanity once in a while and make stupid postings. Anyway, it looks like the stock did do a reverse split and my share count still remains the same :-)

The stock closed at $4.97, a level last seen briefly in October 2007 in anticipation of the filings. Previous to that, you have to go back to July at the onset of the stock breakdown from the $5 level. The stock moved up $1.06 this week or 27%. Aside from the stock rising, the real good news is that the company's turnaround plans are materializing, management is conservative but confident, and the estimates going forward are simply too low. Here are the news/highlights from the week.

Ying Wu - Focus Media Holding Ltd. named former founder and China head Ying Wu to its board of directors. http://biz.yahoo.com/ap/080515/focus_media_personnel.html?.v=1 With Hong Lu set to hand over his CEO title to Peter Blackmore and move to the executive director position, it will be interesting who the company hires to head the China operations.

Earthquake relief - The company donates money, equipment, and service engineer time to assist in the earthquake relief efforts. http://biz.yahoo.com/prnews/080516/aqth097.html?.v=46

Post of the week - I personally vote for Tomc368 who writes under the heading "Tim, we owe you" "I have been a long for 3 years and have been a contributor on this board for about a year. I have been out of commission for a while with medical issues, but noticed we have done very well while I have been gone. I am happy and excited for UTSI, and would like to take this time to thank Tim; not only for his blog, but for providing an identity to us common shareholders and a unified voice that management had to contend with. Tim, you kept us informed and focused. I truly believe that we, thru Tim, had an influence on management, and that some of the improvements we have seen may have been as a result of that impact. Tim, on behalf of the rest of us suffering longs, I thank you and feel we owe you a debt of gratitude for your untiring efforts and unselfish representation of all of us. Whether the rest of the board agrees or not, I would like to thank on behalf of all of us for keeping us focused and committed instead of deteriorating into a bickering, bitter board. Thank you , Tim." ok, so that one was a little biased. he he. Thanks for the kind words Tom. The real post of the week should go to Tigre, who posted about selling all his shares at around $4.4. This post generated the most replies. http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=152085&mid=152085&tof=65&frt=1 Some people attacked Tigre. Some felt sorry that he did not get to participate more on the upside. But, the value of the post was really the discussion on the prospects of UT, trading in general, the markets, and others. Believe me, Tigre will be OK and knows what he is doing :-) A close second in the posting is Techbroker for posting about PAS' role in the earthquake and hoping UT had a hand in it. http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=152065&mid=152065&tof=97&frt=1 Obviously, the earthquake situation is life and death but since this is a blog about UT, I'll put it as a very close second. I would like to commend Techbroker for consistently scouring the China news to bring us the latest and greatest items that impact UT. Tigre and Shadow and others add so much to the discussion as well so please keep it up everyone.

Earnings recap - See previous post.

Q2 guidance - Overall revenue between $580-610m (Non-PCD $120-130m; PCD $460-480m) and gross margins of 14% (Non-PCD 36%; PCD 6.5%). Expenses of $118-123m. That would imply a loss of $37m or 30 cents per share. Cash flow gains for Q1 will also be reversed so Q2 will definitely be the low point for operational performance.

Looking ahead past Q2 - Based on 2008 guidance/targets that the company gave back at the end of February and using midpoint of the range, the company will have Non-PCD revenues of $838m (4.3% gain) and gross margins of 33.3% for the year. For the 1st half of the year, the company will have $155m + $130m (top end) = 285m of non-PCD revenue. That means the 2nd half will have $553m or $277m/quarter of non-PCD revenue. On average, that means an additional $147m ($277m-130m) of non-PCD revenue on top of Q2 numbers. At a conservative GM of 30% (taking into account this quarters 39% GM and the 36% GM for Q2), that is an additional $44m in gross profits. Add in the estimated $11-12m in opex reduction and you get a delta of $55m for the Q3 and Q4 quarters or 45 cents. Q2 will probably exceed the current estimates but I am also using mid-point of guidance for 2008. Non-PCD/Non-PAS handset revs take more time to get recognized but the bookings for both PCD and PAS handsets are good I'm not worried about those holding up for the rest of 2008. The non-PCD bookings are set to increase in Q2 by 25% from $150m to $187.5m (or a book to bill above 1.4 for Q2) so that bodes well for 2009. So, to summarize, either Q2 will blow away current estimates or Q3 and Q4 should be profitable. There is obviously execution risk that could delay revenue recognition for non-PCD even past 2008 but the revenues for non-PCD in the first half are already so low. The margins I used for non-PCD at 30% is low as well. Compared with 2006 when we were expecting 2007 profitability, there was hardly news about contract wins and amounts in iptv, ngn, broadband. This time, the company is updating iptv surbscriber growth, contract amounts ($46m in India alone) and NGN wins. They are even having analyst meetings, road shows, and filing their quarterly reports. There are still a lot of work to be done and Q2 is not going to be pretty but even the quarter is half over. I just see too much upside at this stage and think the institutions see the same thing and thats why the stock is going up. I'm sticking with my year end targets and am fairly confident in year end profitability.

Have a great rest of the weekend everyone.

Saturday, May 17, 2008

Q1 2008 results/cc

The call started with Hong Lu discussing the CEO transition to Peter Blackmore is as scheduled on July 1, 2008. The transition has been going well with the China sales and marketing unit yet to be handed over.

The call then continued with Peter Blackmore discussing the current state of the turnaround and the individual business unit performance. This was followed by Hong Lu discussing China activities and then Fran Barton talking about the quarter's numbers, liquidity, and Q2 guidance. The call ends with Q&A.

The quarter was highlighted by strong upside in revenue and gross margins with an increase in expenses. Net cash improvements of $90m was primarily through one-time gains (investment sales of Gemdale/infinera, favorable tax provision, delayed payments to vendors, and supply chain improvements). The supply chain improvements amounted to $6.4m, ahead of company's internal projections. Headcount was further reduced from the previous announced restructuring of 11% by another 125 people to total 16% or 946 people.

The company has been adamant about protecting R&D and so this stayed consistent but SG&A stayed particularly high this quarter. Blackmore highlighted a few items why this was the case. First, sales efforts were increased to drive sales/bookings and finance/accounting are still way too high. Continued implementation of their ERP system will extend to the 2nd half and other "legacy" legal costs continue. In reading the 10Q, there are still 3 material weaknesses and many items they may implement to resolve these weaknesses. There was an SEC settlement but the DOJ investigation still continues. Costs will come down as these issues are resolved. There were also "external professional fees" that boosted expenses this quarter and next by $5m each. Some people have speculated these fees are for the divestiture of none-core assets, which the company has said is in active discussions. Peter in the beginning reiterated again the focus is on the core operations. Since the 9-week strategic study and categorizing business units to core/none-core, it is clear they intend to sell these units. Its been 3 cc but no definitive sale as of now but do believe it will happen (or else, what is the point?)

Peter discussed the macro economic environment. He mentioned that UT operates in markets with huge populations and high growth rates, which works towards UTs advantage. Really? I wonder if this is why most investors bought shares in the company in the first place :-)

The next item was India. Peter wanted to discuss India as this supposedely had a lot of investor concerns. There has been a lot of writedowns but Peter wanted to point out this was due to one large contract in 2006 that has to be recognized over a number of years. The company is doing much better now and is reflected in higher GMs (24% this quarter in the broadband unit) without the impact of this initial contract, which did lead to UT being the largest broadband provider in India. The company has 5 different Tier 1 customers in India and a few Tier 2/3 customers. From the four iptv contracts signed in India, bookings totaled $46m. The company was selected as most respected BB provider in India for the 2nd year in a row.

Overall iptv in UT networks worldwide reached 850k by the end of April, up 100k in 3 months. Other new iptv related businesses emerging are ip surveilance and digital advertising. The company is also competitve and Peter noted the Jersey NGN contract win over Sonus and Huawei. The services division will gain traction in the future due to the iptv, ngn, and broadband wins. Peter highlighted PCD's huge quarter ($431m) and reiterated guidance for 2009 profitability. He ended by saying that he and management are very aware that there is still a lot to do, are actively engaged (I hope so) and there is a lot of upside.

Hong Lu was up next and started with the impact of the earthquake to UT and UTs role. There was no impact on UT operations or employees that were hurt. GSM/CDMA networks went down during the earthquake but PAS networks stayed up. The company donated 1m RMB, 2000 PAS handsets, and had service engineers on call. UT employees dontaed another 250k RMB. Overall, good work by the company in this regard and even a good PR for PAS.

Hong discussed UTs 3 strategies in China. The first was growing iptv. Currently, there are 583k users in China, up from about 500k in 3 months. Therefore, most iptv users added were in China as expected. The company maintained 60% market share. As an example of progress in iptv, Lu cited a $7m contract signed in Shanghai and another soon to be signed $3.7m contract also in Shanghai. They also had their first win in Hunan province and are in negotiations in 4 other provinces. They also signed a contract for interactive advertising in Guangdong. There was also a growing ip surveilance business opportunity with 250k retailers in China (must be a lot of theft there :-)

The second China initiative is jump starting the broadband business. Lu talked about breakthrough in GEPON working with CT/CN on 3 to 4 different province each. There was also a key win with SARFT.

The third China initiative is managing PAS decline. Aside from the good PCD numbers, PAS news was surprisingly good. PAS handsets declined from 1.3m to 1.1m but market share moved back above 30%. There was also higher bookings in Q1 and expected in Q2. They had a 50k handset order for Beijing in advance of the olympics. Lu talked extensively about Packet data saying UT was working in several cities and had 100k data cards on order. During the Q&A, Lu mentioned how the PAS packet mode delivered the best current solution over edge/cdma 1x with data rates from 80-110 kbps compared to 65 kbps. The company is having good success in Beijing and are trying to get wins in Shanghai as well where they are still in the slower circuit mode. From an infrastructure standpoint, revenues in the MCBU declined from $73m to $67m but this had very little iptv revenue, mostly PAS and NGN. From a regulatory standpoint, the reorganization of companies are also delayed and not expected until Q4 at the earliest. As we've seen with earlier regulatory issues in China, this takes time. This definitely helps out PAS infra/handset sales as the company tries to slow down the decline and eliminate a lot of talk about PAS going to zero.

Fran Barton discussed the raw numbers for the quarter. Gross margins in MCBU shot up to 49% from 31%. From the 10Q, this was due to the low GMs in 2007 where the company exited 3G but the 49% was still very good. There was hardly any iptv revenues so this bodes well for revenue recognition in the 2nd half of 2008 and beyond. The BBBU was flat from $27m to $26m. Here, the discussion was primarily base on the India contract in 2006. Without this, margins would have been 24% (instead of the 9% reported). Services rev were $11m instead of $13m but gross margins improved to 21% from 5%. TBU was $44m from $70m due to PAS handset decline and lower prices. Gross margins was up 1% to 37%. The "others" division had revs of $7m from $6m and margins declining from 93% to 75%.

Book to Bill - This came in at 1.2, which was the same as last year but revs were particularly strong in Q1 so this was a good sign. Non-PCD business had a book to bill of 1 while the PCD had a 1.3 book to bill (that division is really doing well). Non-PCD bookings totaled $150m and expected to increase 25% next quarter.

I discussed OPEX earlier but basically the focus was on the 2nd half of the year, where the company is still targeting below $110m for each of the 2nd half quarters.

Cash flow- This was particulary strong at $97m, but will be given back in Q2. The company raised a lot of cash through 1-time gains and even chose not to pay some payables and receive discounts. I think the company was really concern about having enough liquidity for the convertible bond payment and hence all the cash generated. Overall, the company is still sticking with overall neutral cash flow for the year.

Cash - Out of the $305m in cash, $174m is in China. From the 10Q, the company has credit facilities of about $150m in China of which $140m or so is still available (and there are no material covenants). Interest on these credit lines are from 6.3% to 7%. The company's cash is making around 1.7 to 1.8%. While not great, most is in China and the Yuan will probably appreciate. As Peter mentioned at the beginning of the call, even without any divestitures, the company can fund their operations. The balance sheet does look fairly good at this time.

DSO and inventory has been going down as well showing some progress in that regard.

Q2 guidance - $580m-$610m in revenue and 14% GMs (36% non-PCD; 6.5% PCD). OPEX will be $118m-123m, which includes more external professional service expenses. Non-PCD revs will be $120-130m. In the first quarter, non-PCD revs were ($586m-431m) $155m. So, the first half will have non-PCD revs in the $285m range. Based on initial guidance for full year 2008, I calculated $833m in non-PCD revenue so the second half of the year is setting up to be huge.

IP Assets/patents - The company anticipates $2m in revenue for licensing/sale of their ip assets/patents. We will need to get clarification if this is projected to be ongoing or one-time events (or probably mixed) but its something to look for.

There will be an analyst day on June 10, 2008 ahead of the shareholder meeting and other road shows planned. Barton mentioned the big distractions (SEC settlement, CB payment) are out of the way and can focus on operations. He re-emphasized profitability in 2009.

Q&A - There were discussions on divestitures and exceeding overall 2008 "guidance" but the company could not give out information at this juncture. The second analyst subbing for Bill Choi asked some relatively poor questions that didn't really add anything. My favorite part of the conference call is the Q&A from Himanshu and Fran Barton. When Himanshu asked about plans for the cash when divestitures were made, Barton answered they didn't have any sale as of yet but were thinking about "clever" ways to use the excess cash (something about checking with the investment bankers and lawyers - maybe thats why it costs so much to do anything! Anyway, Barton did add some informative numbers on opex for the none-core businesses such as PCD, mostly SG&A of $10m/quarter, ipcdma $6m/quarter, Customs solutions business unit $10m/quarter). So, for you home gamers, you can start estimating numbers without those units :-)

I'll add my overall thoughts on the quarter/earnings call on the weekly recap tomorrow.

UTStarcom, Softbank, and Alibaba

Before I do the weekly recap and a more detailed look at the Q1 earnings/call, there was a WSJ article regarding Softbank and Alibaba that I just read that brings to light another reason why "tangible book value" is not a good measure of UTs "value". Interestingly, a fellow shareholder Tigre had a good discussion on tangible book value and a good discussion on the history between UTStarcom, Softbank, and Alibaba.

On Friday, Tigre notes that UTs book value remains close to $4.8 and that the "discount" has been erased and proceeds to outline the future catalysts in order for the shareprice to move higher.

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=152286&mid=152286&tof=23&frt=1

I've actually gotten quite a few comments on why Tigre would sell out at $4.4. I am surprised as well due to his knowledge in the company and belief that things are turning around. Add to that his current view now that the stock can hit $10 by the end of 2009. Selling trading shares when the stock has had a good run and you believe technically it might pullback or the markets might pull back is one thing but selling all your core holdings after almost 2 years is a bit surprising.

Anyway, on Thursday, May 15, 2008, there was news that Softbank will purchase a 65% stake in Alibaba Japan for around $20m. Here is a link to a previous post I devoted to UT investments and Tigre's very detailed summary of the history between Softbank, UT, and Alibaba.

http://www.paidcontent.org/entry/419-softbank-and-alibabacom-create-20-million-joint-venture-in-japan/

http://utstarcom-stocknews.blogspot.com/2008/01/ut-investments-and-roi.html

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=146053&mid=146053&tof=-1&rt=2&frt=2&off=1

A quick summary shows UTs investments in Softbank China could have been worth over $570m to over a billion!

UT has benefited from the Softbank relationship and investments in Softbank China, gemdale, and others but nowhere near what it could be. It is interesting to note that Tigre cited Barton as pushing for the sale of Softbank China. Its amazing in one respect how conservative Barton has been and yet the expenses have been maintained very high. Up to this day, I consider Barton a very likable person but in terms of performance have not been impressed. In terms of management situation, Lu has had difficulties managing the PAS decline the last few years and the international expansion but he is the founder so I give him a lot of respect for that. Also, the current situation with Blackmore taking over and Lu staying on as Chairman and maintaining client relationships is ideal.

From the Q4 earnings call regarding a question on future Japan contracts, Lu responded

Well, we are talking about many, many different projects with our customers predominantly in Japan is SoftBank and they have many different projects.
And if you are saying that it is a continuation with our first order, if there is any opportunity we are extremely pleased because they are very happy with our performance so far. And predominantly we are the only bidder, so not only bidder we are the only supplier in the past. So, and so I think if they have any order out there we are in a very good position.

Softbank and Japan will continue to be key markets for UT and that is another major potential market if it ramps up again. These kind of relationships are not reflected in tangible book value as Tigre himself knows so in effect paying tangible book value when the company is turning around and their core businesses at the very beginning of the cycle is a gift right now. When I invested back in 2004, it was for these reasons (market potential in emerging/mass markets and the companies unique technology/position as a US company/China manufacturing). For a few years, the $5 level provide a "low" for the shareprice. Market turmoil and perceptions of liquidity issues drove the stock to very low levels and have only started to recoup the losses. It is not even at the $5 level and the turnaround or opening up of markets are at very early stages. This is actually the time to be building positions and not selling.

I'll have a couple more posts regarding the Q1 earnings and the weekly recap but it should be no surprise to see the stock rebound signficantly when it is clear the company is back to operational growth and fine tuning the different business units/opportunities rather than dealing with quarterly financials, investigations, and debt.

One final note on the shareprice before I go for lunch. UT is a stock that the street will not give fluff valuation. It is simply hated for its previous performance, Its not going to go up on some questionable PR like a lot of other "China or solar plays". When you see long term shareholders selling out at $2.8 or $4.4, you know how pessimistic the attitude towards the stock is. While the stock won't go straight up, it should steadily move higher as the market reorients their thinking (whoever is left out there that is).

Thursday, May 15, 2008

Preliminary thoughts on the Earnings CC

I've been talking to a few shareholders and taking my notes from the earnings call but don't think I'll have time to do a full recap tonight so here are some initial thoughts.

One of the highlights of the call was Hong Lu's discussion on UTs role in the relief efforts in China. I was actually proud to be a UT shareholder because of the company's role in providing PAS equipment/24-hour tech support during this catastrophe.

The other highlight of the call for me was simply the consistent nature of the earnings call. There is "certainty" in the earnings call and an overall feeling that things are turning around. The management is also showing a lot of confidence that the turn around is working (they actually have a analyst meeting planned in June) but yet know there is a lot of work ahead. Here are some detailed items to be positive about:

1. Management reaffirmed 2008 cash flow (breakeven), GMs, revenues for each of the business units. Upside to guidance was discussed by one of the analysts but management would like to get through Q2 first before making any calls.
2. PCD is doing exceptional with a record 7.6% gross margins. The book to bill for PCD is also at 1.3 and overall margins of 6-6.5% should be met for the year.
3. Still in active discussions to divest none-core assets. Analysts did a good job in trying to get information from management about divestitures and Peter reiterated their focus is on the "core" businesses. There are also those external professional service expenses that may be due to all the "active discussions" :-)
4. Patents brought in $2m.
5. Second half expenses will be $110m or lower per quarter. Headcount reduced by 16% (up from initial 11%).
6. Hardly any iptv revenues were recognized, setting the stage for the 2nd half of the year.
7. IPTV at 850k (100k or 13% increase sequentially). Margins are healthy. China subs increased to 583k
8. Strategic contract with SARAFT.
9. PAS, packet data doing well. There was even a 50k handset order from Beijing for the olympics and packet data being implemented in Beijing (100k+ users).
10. Book to bill of 1.2.

The one major negative is Q2 will still be "bad" as expected but Q3 & Q4 will definitely be closer to breakeven as OPEX significantly goes down.

I don't have a crystal ball for tomorrow and its close to the $5 max pain on options expirations day so thats probably where it will settle in. I do believe the stock should continue to trend up for the rest of the year as the company continues its progress. Have a good Friday to everyone.

Wednesday, May 14, 2008

Night before earnings

Twas the night before earnings, when all through the market
Not a creature was stirring, not even a short;

The preannouncement was delivered by the company with care,
In hopes that the bull will be there;

The longs were nestled all snug in their beds;
While visions of large gains danced in their heads........

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Most of the shareholders are focused on the recent stock run and tomorrow's earnings (as they should). However, I want to discuss valuation to remind people how "cheap" the stock is. The company went into a strategic alternative study in 2006 because it decided it was undervalued. The stock went form $6-7 to $10-11. Is the company better off now? Definitely. Significantly better. The market cap of $550m doesn't reflect a company that is the leader in iptv in multiple major countries. It doesn't reflect a company with net cash that is half the market cap. It doesn't reflect a company that has been investing heavily in their core technologies and competing and winning against companies 10, 20, 50x larger than they are.

Tonight, there is an article about Ericsson earmarking $25 Billion in R&D over the next 5 years. http://www.unstrung.com/document.asp?doc_id=153872

"Speaking at Ericsson’s Capital Markets Day event today, executive vice president and CFO Hans Vestberg said that in the first quarter of this year Ericsson focused R&D efforts on LTE, IPTV, and Ericsson mobile platforms. Ericsson’s R&D spend for the first quarter was $1.4 billion, which is up 30 percent from the company’s first quarter 2007 R&D expense of $1.07 billion."

UT spends about $40m/quarter compared to Ericsson's $1.4 billion. And UTStarcom has an end to end iptv system. That compares to other iptv system that require 5 or 6 companies scrapping together different components. In the long term, UT will get bought in my opinion. The company can compete due to spending a good chunk of their PAS profits over the years and will do well as the iptv, broadband, ngn, and pcd units ramp.

With literally billions in revenue up for grabs, UT will become more and more an ideal target for other companies. Countries that do not have home grown infrastructure companies like Brazil, India, etc could even "buy" the company just for the technology.

Anyway, just some thoughts on valuation before tomorrow's call. Good night everyone and pleasant dreams :-)

Tuesday, May 13, 2008

Q1 2008 Earnings Call Preview

Credibility. Once lost, its hard to get back. Its been 12 consecutive quarters in the red and even with the upside preannouncement, it will be another quarter of operational losses. However, there are clear, steady, and material progress that the street can no longer ignore and thus the rally in the stock lately. I re-read the Q3 and Q4 earnings call transcripts to review the progress on the turnaround and to preview the upcoming Q1 call. Unlike the earnings call in 2005 and 2006, management seems to have a unified turnaround plan, communicating it with the investment community, and more importantly benchmarking their progress. Credibility will only be gained through better performance and will take several good quarters but I could not be happier with the share price and progress at this stage of the turnaround. There is a lot of work still to be done but I give management and the employees much credit for the recent turnaround.

Overall, Peter Blackmore, Fran Barton, and Hong Lu have communicated well during the last couple of conference calls and I'm sure they will provide a wealth of information this coming Thursday. I've come up with a list of items that hopefully they will address in the coming call.

OEM Agreement - Peter talked about using both local and worldwide OEM partners and having signed 1 global Asian partner. Improvements in supply chain and inventory control were to be implemented by Q1. This is essential in improving cash flow, lowering expenses and increasing margins.

FMC - Brazil Telecom was mentioned as starting to use UTs fixed mobile convergence product for their 3.7m GSM subs. We have not seen much progress/contracts for FMC for the last few years.

Russia - Russia was briefly mentioned in the Q3 call but no details/contracts have been mentioned. Russia is part of the BRIC countries that major institutional investors are focused on and progress in Russia would be very attractive to round out the successes in Brazil, India, and China.

BSNL IPTV - UT has had a lot of success in India and have BSNL as a major customer for broadband equipment. We know they have been trialing iptv for over a year.

Progress in China - Hong Lu has been in China for almost a year and aside from stabilizing the situation when Ying Wu left, his goal was to increase revenue from sources outside of PAS and iptv. However, aside from a couple of ip surveilance contracts, there have not been concrete news. Broadband/gepon/optical etc were supposed to be getting traction. Also, Hong mentioned extending PAS via the 128k packet data and selling associated equipment with it. However, there has been no concrete details.

Patent Program - Fran Barton mentioned this in the Q3 earnings cc and part of the cash generation plan.

Building Lease - Management has talked about leasing extra space in the Hangzhou building to generate some income from this asset.

Sale of None-core Assets - From the time the business units were separated to core and none-core, expectations of divestitures have been high and mentioned several times during the last earnings call, where the management mentioned it was in "active" discussions.

Stock Buyback - Have I talked about this before?? :-)
------------------------------------------------------------------

On a side "trading" note, the stock has had a good run and you all know how I feel about the valuation but certain traders have bought $5 calls for this Friday. Seems like a stretch but good luck to them :-) If Google can go from $450 to $545 in a day, why not UT?

Sunday, May 11, 2008

UT capital expenditures and working capital requirements

Recently, I have been posting about a stock buyback and have gotten some comments on the working capital needs of the company. From the company proxy statement discussing the repricing of employee stock options and why the stock has gone down,

"Prior to 2005, over 90% of the Company's revenues and profits were derived from sales in China of a second generation (" 2G ") wireless technology system. In the latter half of 2004, it was widely believed by companies engaged in the Chinese telecommunications market that the Chinese government would begin issuing licenses for the sale of third generation (" 3G ") wireless technologies in early 2005. In anticipation of such action by the Chinese government, our operator customers dramatically reduced their 2G capital expenditures. At the same time, with the intention of replacing our 2G revenues, we developed a full suite of 3G products to sell in China and also initiated a capital intensive strategy of global diversification. The Chinese government, however, never issued the expected 3G licenses, thus preventing us from selling any of our 3G products, and our global diversification has yet to yield results sizeable enough to offset the decline in China. We believe our stock price, which has fallen significantly over the past few years, reflects, among other things, the dramatic reduction in our China sales."

Due to the unforseen windfall in gemdale (mostly) and infinera and the initial progress in the company's "cash generation plans", the company has a net cash position of $269m by the end of Q1, 2008. Aside from the net cash position at the end of 2006 where it hit $300m, it has not been that high since the initial ipo. The difference between the end of 2006 and now is that the company faced another 5 quarters or so of burning $40-50 million of their cash while the company now is close to breaking even by the end of the year and getting their cost basis right (we hope). I always have some doubts due to the history but most people will look at the last 8 months and say this time, its more conceivable that the company is conservative and will reach breakeven/profitability at their forecasted timeframe. Peter Blackmore's statement on the state of the turnaround and preliminary Q1 numbers are very encouraging.

Now, lets get back to the capital expenditure and capital requirements. Quarterly expenditures previously had been as high as $185m+ and the company took the steps to write down their 3G businesses. The other major "reason" for their massive cash expenditures is the global expansion, specifically in India. The difference now is that gross margins are not 3% (in 2007) but over 20% in India and multiple wins in triple play business in India show the company is on the uptrend and actually setting the pace there.

During the March 17 meeting, one major focus was capital expenditures and most of the R&D now is focused towards NGN/iptv (some broadband/pcd). The company is forecasting expenses to go from the $120m level to under $110m by the end of the year. This should coincide with PAS slowdown. As PAS slows down, the SG&A portion should decline at similar rates.

Over the years, the company spent $100m for the Commworks division of 3com and $165m (plus debt) for the PCD of Audiovoxx. The commworks division will be profitable and is designated as none-core so it could actually be sold and bring in substantial cash (and reduce expenses to boot). We've talked about the PCD doing well. Other initiatives such as wimax, fixed mobile convergence, etc are on close watch where Blackmore is being careful on weighing the benefits/risk/rewards to continuing or pursuing deals.

In short, I don't see any major capital expenditures on the horizon and see gradual decline of OPEX. Cash generation from leasing the buildings, using OEMs (inventory reduction/efficiencies), licening of patents, AND the lack of massive costs for interest payments, options/China investigations, quarterly filings (as Barton mentioned, how many times have they redone the 2002 quarterly reports?). Add the fact that their accounting systems may be close to being completely installed/functional (thus providing more savings in head count) and you see that OPEX should be declining, cash should be building.

Rather than expecting an "acquisition", we have been anxiously waiting for divestitures. The company can only invest so much in iptv/NGN that is prudent and at a certain point the markets have to open up for them to consider putting MORE money (they are already putting in a lot for their "mature" systems).

Anyway, unless they are planning on a massive expense cycle in the upcoming year (which is unknown to us that follow the company closely), I don't see "liquidity" issues or even need to build massively on working capital. Shareholders are not asking to buy 50% of the float here but enough to make a material statement and reduction in the current float.

In summary, a stock buyback should be announced and implemented while the stock is "low".

Saturday, May 10, 2008

Value of UTStarcom's PCD

I've written about UTs PCD and its potential sale before. This division has been designated as none-core so its natural to speculate how much UT can take in. Here is an initial background post in December 2007 where I discuss the PCD and Motorola's own handset division.

http://utstarcom-stocknews.blogspot.com/2007/12/motorola-palm-and-uts-pcd.html

Overall, worldwide handsets are set to grow again in 2008 but not everyone is doing well. The industry is fragmented and consolidation is ripe with Nokia leading the market and approaching 40% market share. In addition to Motorola seeking to sell its division, the following developments have taken place.

Lenovo - "PC maker Lenovo Group said yesterday (Feb 2008) it will offload its handset business for $100 million to a group of private equity firms to boost profitability."
http://english.peopledaily.com.cn/90001/90776/90884/6349259.html

"Lenovo's handsets were sold primarily in China, accounting for $108 million in revenue during the quarter ended on Dec. 31, 2007. That figure represented 2.4 percent of the company's total sales during that period. During the quarter, the company reported that handset shipments declined by 31 percent compared to the previous year."

The company eventually unloaded the division on March 31. I don't have a yearly revenue but extrapolating the quarterly revenue of $108m, it was probably around $400m/year but revenue was declining substantially and most if not all of the sales were in China. I also doubt if it was profitable.
http://www.pacificepoch.com/newsredirect/120576_0_1_0_C/

Huawei - "China's Huawei is reported to be considering selling a stake in its mobile phones division to foreign investors in exchange for access to the US market." "The company doesn't publicly release breakdowns of the revenues or profits of different divisions, but the sources told the newspaper that the division up for sale is profitable and that the sale isn't meant as an exit from the business. The company was recently reports as aiming to increase its handset production to 50 million units per year. Huawei currently outsources its handset manufacturing to Thailand based Cal-Comp Electronics and Singapore headquartered Flextronics."
http://www.cellular-news.com/story/31057.php

ZTE - "ZTE USA, the United States subsidiary to Chinese company ZTE, today announced that MetroPCS has signed an agreement to purchase ZTE’s CDMA PCS and AWS handsets. The agreement marks the company’s first handset customer in the United States."

ZTE and Huawei both want to get into the North American market and have often been mentioned as potential bidders for Motorola's handset division although the size of Motorola may preclude that.
http://telephonyonline.com/wireless/news/zte_handsets_USA_121907/

UTStarcom - 2007 sales of the PCD was at $1.664 billion, up from $1.34 billion in 2006 and $1.37 billion in 2005. The company shipped 2.8 million units and had record quarterly revenues in Q4 2007 of $560m and 6.2% GMs. Profit margins in 2005 and 2006 had been 4 and 3% respectively while it improved to 6% in 2007. For 2008, revenue is expected to be 1.74 billion and bring in gross profits of about $104m (up from $94m). The margins doubled from 2006 to 2007 due to higher average selling prices and large inventory write downs in 2006. Overall, the company shipped 1.5m units more in 2007 compared to 2006.

Impact of PCD to UTs bottom line - In 2007, the PCD made up 67% of the company's overall revenue and 30% of gross profits so even though it is "none-core", it has become a vital part of the company. About 35% of the revenue come from internally designed hand sets, up from 10% just a few years ago. At the same ratio, revenue from internal designed handsets will be 608m and 1130m for the resale component. If the company was to keep the internally designed portion and sell the "resale" portion, revenues will still be about $1.5 billion. We don't know what the exact margins for each division but assuming 12% GMs for the internal handset portion, the resale part will have GMs of 2.8%. Profit breakdown will be $73m and $31m.

Valuation - For the entire PCD, I am estimating it could be worth about $500m (higher revenue multiple from the Lenovo sale) due to its North American customers, increasing revenue and average unit selling prices. The division is very profitable and would be an attractive acquisition. From previous discussions, it is very difficult to get into the North American market and establish good relationship with the Verizons etc. The company has also mentioned it is on its 3rd generation of handsets and see continued growth. Based on gross profit breakdown, the separate portions could be worth $350m and $150m (5x gross profit) respectively. If the company keeps the internal design portion and hit their target of 25% of revenue for SG&A and R&D, that would be about $400m in yearly expenses (based on $1.6b of revenue in 2009 without the resale portion of PCD). That would average out to $100m/quarter. The company is targetting to get under $110m by Q4 of 2008.

Impact on 2009 earnings - Using some rough numbers at this point, the company could have $2.8b in sales and overall GMs of 16% (using Q1 GM). That would yield $450m in gross profits and yield to about breakeven if the company reduces expenses to under $110m per quarter (add in stockbased expenses/taxes). The company could sell other none-core assets to raise cash or take in massive cash from a sale of PCD but it would impact earnings in 2009 as the other business units will not be close to making up for the loss gross profits (obviously). Either way, expenses need to go down and a sale of none-core assets is expected. We'll keep up with the news with Huawei and Motorola (and other handset news) but in general the PCD is a valuable asset that can be sold to raise significant amount of cash or maintain their enormous quarterly expenses until the core business units can become profitable on their own.

Weekly recap - Stock traded above $4

The stock closed the week at $3.91, up around 18% for the week on the back of positive preannouncement from the company. The stock is still off about 60+ percent from the 2007 highs but up from the 2008 lows of $2.23.

Company preannounces positive Q1 results - See previous posting. The following describes the current situation properly,

"Since announcing our new corporate strategy in September 2007, we have made a good deal of progress," said Peter Blackmore, UTStarcom's president and chief operating officer. "These preliminary results reflect that progress, plus we benefited from some positive one time factors. There is still a lot of work to do in our turnaround, but we are on track with where we expected to be."

Before this week's announcement, there has been a lot of progress in settling lingering issues such as the delayed financials, options/China investigations, strategic direction of the company, control of the company, convertible bond overhang, internal control issues, communication with the investment community. However, there has been little signs of operational improvements with the company losing 40-50 cents/quarter and burning a lot of cash. As Blackmore mentioned in the PR, there is now tangible effects of the improvements showing up. Again, it is hard to get overly excited about certain contract wins when we investors don't know the value. Everthing up to this point has been "strategic" and "have faith". Remember, the company expenses have not gone down materially at over $120m so it is "expected" that they will win contracts. This weeks announcement do show their cash generation steps are working improving cash to $305m and lowering debt to $36m. Gross margins were guided up from 13% to 15-16%. This is significant because revenues also were guided up to $580-590m from $500-520m. Its not easy to move GMs up 300 basis points when the bulk of revenue comes from the low margin PCD.

I am definitely upbeat due to the stock price gains but this is off all-time low base. It is encouraging that management is more cautious and see this turnaround in the proper context. Just last week, Brian Caskey mentioned the 3 million iptv capacity as not very large and this week Blackmore citing progress but saying much more work needs to be done. Obviously, there has to be progress in expense reduction, sale of none-core assets, and maximizing their return on investment. The last item I touched upon on the last post regarding a share buy back. The company is not in the real-estate or investement banking/trading business so it should buy back shares at the current low prices.

Triple Play contract in GOA, India - "The end-to-end network will provide more than 100,000 subscribers in Goa with high-speed access to several new services including broadcast-quality IPTV and e-Governance applications." http://biz.yahoo.com/prnews/080508/aqth036.html?.v=57

Post of week - This one goes to Tigre for his recap of the significance of the GOA win. "Today's triple-play contract in Goa, following previously announced GEPON contract in that Indian state, billed today as "first deployment of IPTV, GEPON and NGN solutions on a single network," is a great illustration of the new sales approach adopted by UTSI to bundle broadband, NGN softswitch, and IPTV in one potent package to enhance the appeal of its products to potential customers, and thus gain more revenue and overall corporate margin as a result."

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151975&mid=151975&tof=9&frt=1

Price targets and analyst/institutional actions - Tigre adds, "Who knows, I might even have to raise my target stock price for end of this year, but I'd wait a bit for more signs that Blackmore can execute the strategy that he has put in place. " For the record, Tigre has a $5 target at the end of the year or early next year and I have a $10 target. At the end of the year, we'll see who can sell their crystal ball :-)

"So, my current end of the year target assuming they get to profitability is $8-9. I'll round up the target to $10 with the shorts giving it a $1 premium :-) Most of the analysts agree that the downside is limited (as also shown above) but are wary of the profitability/timing (hence the discount). As an investor/trader, we have to look at risk/rewards and it is looking like the biggest risk is opportunity cost. Of course, in this current market, the opportunity cost is not too great (unless you are shorting). The above is why I and most longs are sticking with this company. Because if management can get their act together, the stock should move significantly higher from here." http://utstarcom-stocknews.blogspot.com/2008/01/current-liquidity-and-2008-year-end.html

Except for BWS, most price targets are in the $3-3.5 range. S&P had a $11 price target early in 2007 and now has a $3.5 price target. As the stock goes up and the quarterly results start to show tangible progress, the stock price targets will start to go up.

Earnings report and cc on May 15 - It is nice to see the company back in a somewhat regular reporting cycle and investors can gauge their progress in the turnaround. The upcoming call will be close to the 1-yr anniversary (end of May 2007) when the company made the announcement to do nothing from the strategic study they started in 2006 (and once again implied they can do better by changing course - lets hope they stay committed/focused on the current track and get the stock price up). It will also be the last major opportunity for the company to communicate prior to the shareholder meeting in June (and Blackmore's transition to CEO). In a future post, I'll put out some topics that hopefully management will go over. Sometimes, management talks about certain items in one CC and then there are no more updates (such as the one signed OEM, selling/licening of patents, selling of none-core assets, stock buy back, etc).

Shareholder meeting - This is still at the end of June but people should plan to go. During Ford Motor's meeting only 56 people attended! For UT, it was 3 people in 2006 and about 11 in 2007. You will get a chance to ask some questions and meet management. I encourage people to go to have more confidence in the company. Those people that went on March 17 during the market lows probably got more confidence in holding their shares or even adding. So, there are "benefits" to going (yes, venting is a good benefit as well :-). Otherwise, you'll have to rely on my reporting and crystal ball, which hasn't been the best the last few years but my technicians say they have fixed the bugs for the last 3 years and should work fine now :-)

Have a great rest of the weekend and Happy Mothers Day to all mothers out there.

Thursday, May 8, 2008

Valuation and speculation regarding UTs cash

$305m in cash/securities and $36m in debt. That is a net cash of $269m for a company with a market cap of $476m. Thats 57% of the market cap in cash. Their real estate assets have been in the $200-220m all these years despite the significant rise in China real estate and the fact that commodities have significantly gone up (that translates to significantly higher building costs if one was to build the same building today!). Anyway, just the real estate and net cash/securities make up the market cap. The PCD (resale & internal designs) will generate over $100m in gross profits and about $60m in net profits. That may be worth close to half a billion (I still have to get on that post but there are a lot of examples that I am reading that indicate UTs PCD is worth around that amount). That doesn't even include iptv, broadband, PAS and NGN business units that form the core and are the future of the company (and how much R&D have they pumped in over the years?).

For this post however, I'd like to focus on the cash. With $305m in cash and little debt (and no more CB in the horizon), my speculation is that the company will announce a buyback and/or sell some none-core assets in the next earnings call. This is the perfect opportunity to make best use of the funds. The stock is still way undervalued. According to Thomas Toy, the company went into the ML strategic alternative study to unlock shareholder value when the board perceived the shares were undervalued (at $6-7 at the time). What more now that a lot of the issues have been dealt with and the company is in full turnaround mode and showing good progress in winning contracts (not so much on the expense side yet). Coupled with Barton's 6-7 point plan of cash generation (selling none-core assets, leasing the building, using OEMs, cutting head count, licensing/selling patents, improving efficiencies/GMs, etc), the company should be very comfortable using some of their cash horde to buy back shares.

In the past, the interest burden on the CB, uncertainties in their markets, and other issues have prevented them from buying back stock. Their cash mostly sat in Chinese banks making 2%. Nowadays, cash is king and they have signficant amount of it. With their guidance of getting their expenses in line within the next few quarters and getting back to breakeven, a stock buyback will also pave the way to supercharge earnings when there are earnings to talk about.
While other companies have to raise cash and reach out to some foreign states, paying 12-15% and getting discounted shareprice/convertibles to boot, you would think that UT can do something with their cash to get a decent return - and a stock buyback is a good start.

Tuesday, May 6, 2008

UTStarcom preannounces - stock up 19% AH

I checked my yahoo email this afternoon and saw there was another email alert from UTStarcom. More option grants? More details on management/board compensation? Delayed quarterly filings? Someone else being investigated by the SEC or justice department? Nope, it was a preannouncement that the company exceeded their previous guidance for Q1. Instead of revenues of $500m to $520m, it will come in between $580m to $590m. Gross margins are going to be 15-16% instead of the 13% estimated previously.

I then proceeded to read through the PR for the REAL negative news. There has to be negative news. Almost every quarter that the company has exceeded (since 2004) has come with very poor guidance. In May 2005, the company reported 29 cents/share due to the Japan contract being recognized and then poor guidance followed. They exceeded in Q1 2006 but again guidance was not good. Is there more China investigations? Well, they did have higher than estimated expenses due to "unanticipated professional services expenses". Its actually pretty bad when you give guidance 1 month before the quarter ends (end of Feb) and then say its unanticipated.

The upside in revenue was partially expected as Fran Barton has been very conservative but the 300 basis point upside in GMs is significant showing the non-PCD businesses are also doing well. Another big positive surprise is the liquidity position. Back in the end of February, Barton updated the cash position at $228m with $48m in debt. At the end of the quarter (one month later), the cash/short term investments has become $305m and the debt down to $36m. The company attributed the "strong cash flow from operations generated primarily by management of working capital." So, the "cash" went from a net $180m to $269m in one month! We'll still need to see the balance sheet (payables/inventory) but this is clearly good news and that their cash generation plan is working.

The company is still implementing a new ERP system and had to delay the filings. Looking at the glass half empty, I still wonder why they would release preliminary numbers now and they didn't in late 2006 to most of 2007. Maybe their legal department has no issues with releasing good news :-) Anyway, looking at the glass half full, its good to know that they actually listened to some of the items we talked about during the shareholder meeting (communication, preannounce when you have good news, etc).

PS. Its funny how the yahoo board/management is now under the gun because they DIDN'T listen to their shareholders. It may be a good idea to actually listen to shareholders once in a while :-) Again, I am not a braniac like some people on the boards (specially those that bash me) but I think the stock is on an uptrend.

Sunday, May 4, 2008

Weekly recap - 6 month high

The stock closed at $3.32 for the week, up almost 11%. Although there were some "fundamental" news during the week, the highlight was the stock price action. During the previous week (on Monday), we saw the lowest volume ever (April 21, 2008 - 317k shares). I am not a stock technician but the price action was really bullish this week. On Monday morning, the stock took a "dip" to $2.96 at the open where the market (or MM) tried to fake off the bullish sentiment growing in anticipation of the iptv webinar. The stock then closed the month at $3.25, a nice 14% increase that I'm sure fund managers (long & short) had to take note of. The stock broke through the $3.19 (triple top price action of the last couple of months) and then proceeded to take out 6 month high of $3.42 and then having succesive day highs of $3.43 and $3.44 before some profit taking late Friday. Overall, I'm not a braniac like a lot of people on the message boards but I think the stock is going higher :-)

I could end the weekly recap with the stock price but there were some interesting developments that I'd like to touch upon for recrod keeping purposes.

IPTV Webinar - I still want to do a seperate posting but my initial impression was positive due to the 3 million overall subscriber capacity already booked (compared to very little 3 years ago when Bill Huang held a similar iptv webinar). I like the fact that Brian Caskey mentioned the 3 million as not a lot yet, offering an insight that they have only scratched the surface. For comparison, Merrill Lynch estimated that UT could have a "base" subscriber number of 4 million in China over 5 years (with an upside of 2 to 4x). The number of wins that have been announced (specially in India) show that the potential of iptv is real and UT has material traction. I was happy with the 1 million number with MTNL (it was only 500k on the November call) but had questions with the 800k live users since it was already 750k two months ago (and supposedely had 40k STBs being shipped/month in China alone). Also, why wasn't the India/Sri Lanka contracts discussed in more detail. Also, what "new developments" were discussed in the webinar. I was hoping for information on Hong Kong or other new wins but the company is probably saving this for the earnings call. Anyway, I posed those questions to Barry Hutton, UTs director of IR and he gave the following response.

"Hi Tim,

Thanks for the question. I see where you are pulling certain numbers from the February 28th earnings call and then trying to approximate future results and metrics. However, estimating these future results may not be as straight forward of a process as it might appear. So doing that simple math might lead to some misleading estimates.

Unfortunately, Reg FD somewhat limits my ability to give you adefinitive updated number or a detailed explanation in a closed forum such as this e-mail or even a phone call. But we want to be sensitive to your question. So on the upcoming earnings call we will not only give you updated subscriber numbers but also try to provide clarity on how best to think about the growth of the business going forward. In regards to our not mentioning certain customer or geographic wins, I remind you of the conversation you had with management in mid March. Recall that our ability to discuss certain wins is often limited by certain factors like customer approval requirements etc. Even if thedeal is discussed by other parties or in other forums we are sometimes limited in our ability to issue a release. Again, on our upcoming earnings call we hope to provide a more complete update as to our progress. I hope this helps and you will hear more shortly"

Here was my response to his response.

"Barry, Thanks for your response. If you have other ways toclarify the growth in the business, that would be welcome as well but STB shipped and live users were provided previously, and only live users were provided yesterday. It would help to have some clarification specially since the only conclusion from the live numbers is STB are not being shipped/ordered at the same rate or that adoption/subscriber uptake has slowed down.

As for the PR, I was NOT asking for a PR on Hong Kong but information/confirmation on the contract. This is not similar to Motorolas wimax announcement because the HK iptv info came directly from a UTStarcom executive (not other parties).

As for the "forum",Y esterday's iptv webinar was suppose to discuss thedevelopments in iptv, wasn't it? Let me make it more clear. Why can a UTStarcom executive in Hong Kong announce they have won a signficant contract in iptv and Peter and Brian Caskey not even mention HK during the "iptv" webinar? BTW, I think these are not "material" disclosures but simply clarification on news that was already provided."

Anyway, I think we will hear much more in the earnings call but I really should have asked those questions during the webinar.

Post of the week - This one goes to a relative unknown rrbassplayer who posted on the "unsurmountable problems UTSI faces". http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151764&mid=151764&tof=10&frt=1

The poster brings up valid issues in India regarding broadband users and the pace of iptv adoption there. However, it is good that UT has a broadband group in India to help push the countries broadband development (what a coincidence :-) Some shareholders also point to the negative posts at a time when the stock is making new 6 month highs as bullish and somehow this is some short attack (nah, can't be....:-)

SEC Settlement - See my previous post.

Yahoo-Microsoft - Most people have probably heard that Microsoft made a last gasp offer of $33/share but Yahoo rejected it and wanted $37-38. This is very relevant for UT because of what happened as recent as last year. Ultimately we shareholders hope that the board/management think of shareholder value (I know that seems like a hard concept to grasp the last few years). Anyway, when the group met with management on March 17, I wanted to start the discussion with a simple question. Does the management believe it can turn itself around or is it better to go into a strategic option now rather than wasting years again (and hurting its balance sheet even more). Even during my last meeting with Thomas Toy, I mentioned the opportunity costs for shareholders that the board/management has bascially decided on when they went into the strategic option, rejected some offers (for atleast part of the company) and decided it was better to go it alone and do a turnaround (when the stock was even at $7). Back to Yahoo, they rejected a $40 offer for Microsoft over a year ago, and now a $33 offer when the stock was at $19 (before this latest overture by Microsoft). The company is holding out for $3 to $4 more. However, what are the chances it can recover from the beating it will take (probably drop to the low $20s if not the teens) and then recover to $37 to $38 in the next yea? Shareholders did not even get the right to "vote" on the offer.
Back to UT, this is precisely why the board/management took a major responsibilty/risk in this turnaround and investors should keep in mind the opportunity loss by the boards' decisions.

Have a good rest of the weekend to everyone.

Thursday, May 1, 2008

SEC Settlement and stock "technicals"

"UTStarcom, Inc. (Nasdaq: UTSI - News), today announced a final settlement with the Securities and Exchange Commission (the "SEC") regarding the previously-disclosed SEC investigation of the Company's financial disclosures during prior reporting periods, historic option grant awards practices, certain historical sales contracts in China and other matters."

http://biz.yahoo.com/prnews/080501/aqth551.html?.v=1

"UTStarcom Chief Executive Hong Liang Lu and former Chief Financial Officer Michael Sophie paid penalties of $100,000 and $75,000 respectively, but did not admit or deny the allegations, the SEC said in a statement."

"The executives "did little to ensure that the company's internal controls were adequate and effective" after they were warned of accounting weaknesses by outside auditors, said Marc Fagel of the SEC's San Francisco office."

http://www.reuters.com/article/marketsNews/idINN0147203920080501?rpc=44

The biggest winners in another one of the sad episodes with this company have been the shorts, accountants, Barton, and to a certain extent Blackmore. The company has been using the "growing too fast" excuse for just about all their accounting problems but can someone for once take some responsibility? I atleast hope Peter or some of the other senior executives can step up and overcome the "all excuses/poor performing" environment/mentality they have been in.

Being an engineer, I am biased towards the technical people in the company against the management/finance people. How long does it take to fix all the finances and accounting systems? Even up to now, their internal controls/accounting systems are not fully functional yet (let alone "world class").

I work for a company called Tetra Tech with close to 10k people that was put together with over 40 acquisitions through the years. Do things go wrong? Yes. Does it take 3 years to fix something? No Way. Can it go for 12 or 16 quarters without being profitable? No Way. Does it waste tens of millions in interest payments? No Way. Can it take its time addressing cost cuts when it is severely needed? No Way. And on and on.......

Instead of trumpeting the settlement today, the company should release how much the REAL cost to shareholders have been, offer an apology, and what restitutions the responsible parties will do with their compensations. Will it happen? I guess when pigs fly :-)

On a side note, the stock hit a 6 month high ($3.43) and up about 14% just this week. Did anything fundamentally change this week? Not really. Is it fundamentally different from when it hit $2.23 on March 17? Not really. The opportunities and roadblocks that we have been discussing in the blog, with management/board, and in the message boards continue whether the stock is at $3 or $10 (right now).

As a side note, see this set of posts from March 17, 2008:

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=150760&mid=150780&tof=269&rt=2&frt=1&off=1

and this one yesterday.

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151750&mid=151750&tof=19&frt=1

I selected the posts from Tigre as he is a well known poster and well informed regarding the company/technology/industry. Nothing has changed "fundamentally" but he went from looking at the glass half empty (or cracking) to buying the stock and even discussing broadband uptake in India (of all places). http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151807&mid=151807&tof=6&frt=1

Ultimately, the stock will be driven by fundamentals as Tigre mentioned but the technicals (stock) have improved and incorporates a whole slew of items and is the primary driver at this stage. This blog/group will continue to discuss fundamental issues and oversee the company performance every step of the way (and hopefully have given shareholders confidence to hold/buy under $3 which we have discussed constantly) but as we've seen in the past, people have to watch the technicals closely because it incorporates things we are not aware of.

If the stock goes back down or it pulls back as the stock moves higher, you can always come back to the blog/group. We will be here as a "put" on the price (in some respect). Otherwise, good luck on the way up and pay particular attention to Hangman's posts. He seems to know what he is talking about :-)