Sunday, August 10, 2008

Weekly recap - 27% stock decline!

The stock closed the week at $3.48, down $1.3 or 27%. To make matters worse for UT shareholders, the market was solidly in the black with the DOW up 3.5%. Earnings related news dominated the headlines this week but there were also plenty of UT related news provided by fellow shareholders (Bamboozled and Techbroker....yes, we shareholders got bamboozled this week, thats for sure). I had discussed the earnings recap and post earnings recap in the last two posts but here are other UT related news this week.

BSNL iptv contract for UT - This was a huge win for UTStarcom in India solidifying their already dominant position in the India region IPTV (previous wins with MTNL, Bharti Airtel, Goa, and Sri Lanka). Back in the shareholder meeting, the company mentioned that they were pushing their system through their partner Aksh Optifibre to other carriers and this was confirmed in the earnings call when Peter Blackmore alluded to the expansion of iptv in India with BSNL (through Aksh) in 20 Indian cities. Earlier in the week, here was a link posted by Bamboozled, "With this partnership, BSNL would help increase the reach of IPTV to six million homes,” said G.K Aggarwal, CGM (Rajasthan Circle) BSNL, while addressing a press conference here." "icontrol is a television connection that allows viewers to watch the programs at their convenience with more than 120 channels, and an extensive movie library with Hollywood and Bollywood titles at no extra cost" I had some discussion with fellow shareholders Tigre and Shadow regarding expansion of UTs iptv and one of the concerns in poorer countries was affordability and penetration of iptv due to its benefits. It really looks like that UT has worked out an ad based/multi-use model that works well in China, India, and Brazil. I cannot emphasize enough how huge this win with BSNL, the leading provider of broadband/fixed lines in India.

Brazil iptv expansion - From UTs 2000 subscriber trial back in August 2005 to last December's initial 10k subscriber capacity contract in Brazil, it has been a very slow process. This last week or so, we heard about UTs fixed mobile convergence (FMC) solution being launched formally and now expansion of iptv. UT did not provide an update in Latin America (Blackmore will provide more updates in Q3) but we did get this link this week on Brazil iptv expansion. "Brasil Telecom (BrT) is preparing to expand the availability of its "Videon" IPTV service beyond the capital of Brasilia shortly, according to BrT's Network Engineering Director SebastiĆ£o Nacimento" The slow progress in iptv has been frustrating but it also shows the investments and "moat" that UT is building as it wins strategic contracts in key monster markets.

Impact of Beijing olympics on UTs iptv - When I talked with Peter Blackmore on Friday, he was much more upbeat than the earnings call (not surprising due to the revenue shortfall). Peter discussed the impact of the olympics would have on UTs iptv uptake in China. I myself watched the openning ceremony and today's tape delay of the US-China basketball game. It would be awesome if I could replay swimmer Michael Phelps 1st gold medal or a particular gymnastics event. That is what the over 1 million Chinese (mostly in Shanghai) are experiencing now! Here is a link that shows the record increase in iptv in China right now.

August 4, 2008 - Chinese telcos are receiving a record number of new subscribers to their IPTV services each day ahead of the Beijing Olympic Games next week, say reports in the Shanghai Morning Post. China Telecom is estimated to be receiving around 3,000 applications for IPTV services each day, thanks in part to a replay function that allows users to revisit programmes aired within the past 48 hours. Shanghai Telecom has also said that it will promote a new service during the Olympics that will enable viewers to watch different sporting events on different windows in the same screen. "To receive HDTV channels, broadband Internet users should meet specific conditions," said Shanghai Telecom official Feng Yaozhou. "So far about 300,000 Shanghai broadband Internet users are qualified to apply for the service." Shanghai Telecom reports that it currently has 510,000 IPTV subscribers, and expected to reach 800,000 by the end of the year.

In addition to iptv programming, here is a link of The Nine's game channel that will help promote iptv even more. "The Shanghai Branch of China Telecom ( CHA.NYSE; 0728.HK) announced that it would cooperate with The9 (NCTY. Nasdaq) to build a game channel on Interactive Personal TV (IPTV) in Shanghai." "The9 has provided four tailored games for this game channel in June this year. " Do not underestimate gaming in China....its huge.

More on the impact of the PCD sale - It seems that a lot of shareholders discussed this with Peter Blackmore after the price drop this week. So much so that Peter started our discussion by discussing this with me as well. I am a major proponent for getting to profitability as other shareholders but I was really happy to have the PCD sold so no explanation was really needed for me. This is not why shareholders bought into UTStarcom and for most of the time, it yielded gross margins of 2 to 4%. The company was able to get a reasonable price, keep its internal PCD contracts, and bring liquidity and focus to the company so I was happy. Obviously, there would be impact to the quarterly cash flows as the PCD was profitable but you have to love the fact the company is focused on their core business, which should be the main priority. As the company mentioned as well, the margins were hitting all-time highs of 7-8%, which would not be sustainable. Even their internal handsets already had a revenue shortfall. Peter also noted that this business which will be folded into the handset division (the one that makes PAS handsets and CDMA/GSM handsets to China) may also be divested or its design center be moved from Korea to China. The singular focus of divesting/reorganizing the business units show that management is executing and that business is not as usual (hard to say when the shareprice is near all-time lows but they have been performing).

Transport network product - I'm not a techy but Peter brought this up again during our discussion and said they had undergone more testing and is being used by Softbank and will be used in China. When Peter mentions certain things such as this product or potential monetization of the CSBU, I listen closely as it seems it will impact the company very soon.

Pricing of employee stock option and cash flow for 2009 - I forgot to touch on these subjects but hope they could give more color on this as soon as possible.

Summary - It was a very tough week for shareholders as the stock was hammered like the company was about to write down some auction rate securities (ARS) or collateral debt obligations (CDOs) or announced they are diluting their stock (heck even Merrill Lynch diluted their stock 38% and it went up!). I had been wary of the technicals the last couple of weeks and mentioned the possibility of going down to the 200 day MA. It was still hard to actually see it and even closed the gap from mid $3s. Someone wanted this to fall back hard and it did. However, in the longer term, I remain as bullish (probably more) due to the company's execution, focus, strong balance sheet and strategic position of their technology and markets.

Thanks for the shareholders who shared information this week. Unfortunately, there are much more discussions when the stock goes down. Have a good rest of the weekend and hoping for a MUCH better week for the stock :-)

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