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.
"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.

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