Monday, June 9, 2008

Sale of Mobile Solutions Business Unit (MSBU)

The company divested its MSBU to private equity firm OpenGate Capital for an undisclosed amount.

The MSBU had been lumped with the Customs Solutions Business Unit (CSBU) into the "others" category and designated as none-core by the company. Here are some background information that I had written on previous postings.

Customs Solutions Business Unit (CSBU) - Mostly includes technogy acquired from 3coms Commworks unit. This includes IP-based messaging and transaction products. Revenue is expected to double to $40m with GMs above 50%. This unit is also expected to be profitable in 2008. Blackmore mentioned some of the "none-core" assets are becoming very attractive and this along with the PCD definitely fits the bill. What is this business unit worth alone? The company paid $100m to 3com a few years ago and has finally gotten this to profitability this year and growing very fast. This alone could be worth close to $80m-$100m if sold (based on 2-2.5x revenue for this type of business - check Starent/Infinera for valuations).

Mobile Solutions Business Unit (MSBU) - This includes the moving media 9000 and supports IPCDMA, GSM solutions. Growth is in the 30% and gross margins in the 40s in 2008. UTs wimax gear is formally the Moving Media 9000 and its part of the Mobile Solutions Business Unit (MSBU).

Revenue for MSBU - On the Q4 call, Barton gave preliminary 2008 guidance breaking down CSBU to have about $40m in revenue. However, Barton forgot to give guidance for the MSBU. Thats why there was a discrepancy on the individual business units revenue (at the midrange of each business units, it added to 2.544 B) versus the 2.577 B overall revenue (at 4.5% revenue growth, mid range of 3-6% over 2007 revenue). The "others" had $42m in revenue for 2007. If CSBU had $20m, then MSBU had $22m. At 30% growth, MSBU would have about 30m in revenue for 2008 (which would also account for the discrepancy between adding the individual business units estimate and the overall estimates for 2008).

Commentary - The MSBU was not expected to be profitable compared to the CSBU but as management mentioned, it would be good to be able to divest this without shutting it down (to maintain support for customers who buy other UT products). It is disappointing that they could not get more traction with wimax but it does show management's committment to focusing on their best/most profitable opportunities.

"UTStarcom will retain the PDSN operations and will work with Star Solutions as an OEM provider" I am not sure how much the opex will go down (Barton did mentioned $6m/quarter) but because it was not profitable, it should help the drive to overall profitability.

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