Wednesday, August 6, 2008

Q2 2008 Earnings Recap

The company reported Q2 2008 "Earnings" today and provided guidance/information on Q3 and Q4. Only Peter Blackmore and Fran Barton hosted the call. In summary, Q2 provided upside on revenue, opex, and cash flow. However, this will impact Q3 pretty hard. Q4 should have very strong revenue and will probably show a profit (per my calculation) but negative cash flows will also impact Q4 hard as the company pours money into their growth plans.

Q2 revenue came in at $633m with $449m in PCD sales. OPEX was down to $113m. Cash usage was expected to be negative $97m came in at $37m. Cash at the end of Q2 was $255m with only $29m in debt for a net cash position of $226m. This does not include the $240m from the PCD sale ($216m received immediately and $24m in escrow). The company could also receive up to $50m more at the end of 2010 depending on the performance of the PCD.

CSBU - While the PCD and MSBU were divested, Blackmore mentioned that parts of the CSBU will be monetized and part will be rolled into the broadband and MMCBU. This will result in further opex savings.

BSNL IPTV - The company continued their stanglehold in the India market by winning BSNL (through Aksh) that will result in deployments in 20 Indian cities almost immediately. This is not a huge revenue generator now but a very key strategic win.

China Telecom restructuring - This continues to impact UT as PAS handset revenue/GMs go down. In the mid to longer term, Blackmore commented the restructuring will definitely help the company.

IPTV update - Total live subscribers as of June 30 has reached 956k with 62% of the China market (twice the nearest competitor).

Tiscali - Acceptance was received.

Brasil Telecom - UT finalizing arranements for one of the first fixed mobile convergence (FMC) solutions in the world.

Interactive advertising - As mentioned previously in a PR, UT system will be deployed in 14 cities with 3600 concurrent streams.

Broadband - Phase 1 of the large Indian broadband contract has gone through 100% validation and in now in acceptance phase. Advance purchase order for phase 2 of the contract will result in a greater than $80m contract for UT that will be booked in Q3.

GEPON - Wins in 5 cities with CT/CN shows some traction with GEPON.

Transport (Packet) Network Product - Discussed in the analyst day meeting, this product has achieved some milestone testing with various carriers.

Barton discussed the numbers for each business units.

Broadband - $36m from $38m. GMs were only 5% due to a $7m charge from foreign currency fluctuations in India. Without this, GMs would be 25%. Barton added that he is confident all other India contracts booked are profitable with margins in the 30%.

MMCBU - 17% growth from $63m to $74m. Growth in China iptv and NGN softswich more than made up for PAS infra. GMs fell to 39% from 44% due to higher mix of STB.

PCD - Revenue went from $358m to $449m with a 8.1% GM! That should help in the cummulative performance in the 3 years that will determine how much more of the $50m the company can get.

Handset business - Declined from $62m to $50m with GMs going from 36% to 14%. In the future, the internal design PCD part of the PCD (designed in Korea) will be lumped into this business unit.

Services - Increased from $11m to $16m with GMs increasing from 1% to 30%.

Other BU - This includes CSBU and MSBU. This increase from $6m to $9m.

Book to Bill - The book to bill excluding PCD was 1.0. This was projected to be around 1.5 but based on a much lower projected non-PCD revenue. Previously, the projected non-PCD revenue was $125m (mid pt) so it would be around $180m in bookings. The bookings actually came in at around $211m.

Q3 guidance - Guidance for Q3 is $170-190m in revenue with 25% GMs. OPEX will be above $100m (still includes some divestiture expenses).

Q4 remaining revenue - I had previously signficantly overestimated the internal handset division revenue, which actually works out better since more revenue is left for the remaining quarters. The company provided a breakdown of the internal PCD revenues as follows. Q1 had $586m in total revenue with $431m in PCD revs. There was only $35m in internal PCD revenue (not the over $100m I assumed). That makes the core + internal PCD revenue at $190m. For Q2, core revenue came in at $184m ($633m total - $449m PCD). Adding back the $56m in internal PCD revenue yields a revenue of $240m for Q2. For Q3, the company is projecting $180m (mid pt). So, Q4 should still have about $405m in revenue ($1.035b 2008 revenue in the analyst day meeting - $190m - $240m - $180m - $20m less revenue in internal PCD that was guided). At a 25% GMs and OPEX of say $95m, that would leave Q4 with a sligh profit.

Negative cash flows - The company started the year guiding for neutral cash flows. With aggresive collections in Q1 to prepare for the repayment of the CB and money from Gemdale/infinera (partially in Q1), the company had positive cash flow of $97m after Q1 despite the operating loss. Add Q2 loss of $37m in cash flow and the company still had $60m in positive cash flow. Q3 will see a huge $110m cash flow loss due to Q3 losses, prepartion for India contract, and Q4/2009 revenue ramp. Q4 which will be slightly profitable (by my calc) will also have negative $50m in cash flow that will result in the company having a negative $100m in cash flow for the year. Part of the additional cash flow loss was expected due to the sale of the PCD which generated $80m in operating profit, with a good part of it in the 2nd half. I would expect negative cash flows as well due to the huge operating losses but the neutral guidance for cash flow led me to believe that would come mostly from the Gemdale/infinera gains and inventory reduction. Barton explained Q3 cash flow losses fairly well and is reasonable if they are buying raw materials/etc for the big Q4 revenue. I am a surprised with the Q4 cash flow losses because the quarter should be slightly profitable. I will try to get more information on this as soon as possible.

Overall, I was happy with the Q2 bookings, strategic wins (specially the phase 2 $80m+ contract), and huge cash base. However, the huge cash drain in the second half is a disappointment specially since those are particularly strong quarters for the remaining business units. I was also disappointed by the Q&A portion, which didn't touch on the important aspects of the cash drain. One of the analysts from Baird was more concerned about iptv STB (probably with their coverage of Sigma Designs and not UT). Blackmore did mention he will provide more guidance in Q3 regarding 2009. Bookings in Q3 and Q4 have to be really strong to validate their growth strategy. The company will still end the year with over $300m+ in cash and I would hope that spending all the cash in Q3 and Q4 will set up for a strong 2009. We will see......

1 comment:

Anonymous said...

...the same fraudulent utsi blabla as every quarter! when will those pathetic ut bullshit crooks end up in jail on their knees grasping for the soap?! barton most likely got his multimillion dollar bonuses for his weired haircut/ toupet and blackmore fits in well as he just sold +100000 shares for $4.5 each according to sec and got stuffed with the next bunch of hundreds of thousands of shares for $0 at the same time. ya forgot to mention this as well as the fact, that +15 million europeans are already using timeshift iptv - and not a single unit comprises of ut`s "best (what a joke-company)" system....