Saturday, August 2, 2008

Weekly recap - Deteriorating technicals

The stock closed the week at $4.78, down 31 cents or 6%. The overall market was volatile as the DOW started the week down 200+, then ramped up 400+ and then ended the week overall slightly lower. The Nasdaq did a little better ending up for the week. Here are the UT related news from the past week and a preview of the upcoming week.

Settlement with Ying Wu - The final seperation agreement with Wu included an additional $100k payment and resolution on Wu's company car in China (he will pay $65k and keep the car-wonder what car he is driving?).

Nortel, Motorola and Sun Microsystems earnings - Some larger technology companies on the 5+ year or more turnaround plan had their earnings last week. While each company is different, I wanted to get an idea of the market environment (both business wise and the street reactions). As you can imagine, even the turnaround takes a long time and all three companies are still struggling to get their costs in line and their revenues/margins to grow. Investor/street reaction was as expected swift, rewarding Motorola and punishing Nortel and Sun.

UT Earnings Date - The date was finally announced last Thursday and the earnings call will be Wednesday, next week after hours. The time is actually early compared to previous quarters where they would wait until mid to end of the month the month after the quarter closes.

Earnings Preview - Guidance to Q2 was given but as I mentioned that was confusing. In a previous post, I write..."Revenue of $580-610m and overall GMs of 14% were provided for a gross profit of $83.3m. PCD revenue of $460-480m and PCD GMs of 6.5% were provided for a gross profit of $30.5m. Non-PCD revenue of $120-130m and GMs of 36% were provided for a gross profit of $45m. Does $30.5m + 45m add up to $83.3m? I don't know about UT's accounting systems but it sure does not look encouraging." Expenses were also projected to be in the $120m+ range. Worse, cash flow will be negative $100m or so reversing last quarter's $90m+ in take. With the sale of the PCD and the previous guidance, I think the the street will focus more on the Q3 guidance and second half performance. Cash flows should be neutral as guided by Barton at the start of the year and reiterated throughout this year. By my calculation in a previous post (see July 4th weekend posts for all t he numbers/posts), the company should end the year with close to $386m in cash. Here is what I wrote previously for Q3 & Q4.

Q3 & Q4 2008 - Q1 Non-PCD booked was $155.3m ($586m total rev - $430.7m PCD rev). Q2 projection is for $120-130m (say $125m). So, the first half will have Non-PCD rev of only $280.3m. Nothing wrong with that and Barton could be very low balling Q2. IF 2008 Non-PCD rev is $755m, then the 2nd half should still have $474.7m of Non-PCD rev (I really need to have an accronym like NP for Non-PCD :-). Anyway, at 33% GMs, that would yield $156.6 in gross profits for the 2nd half or $78m/quarter. Of course, I still need to back out MSBU but say quarterly OPEX was still $100m/quarter for comparisson. Then, you still have to add the gross profits from the internal part of the PCD. This gets a little complicated because if it is only $280m of the $1.825b, then its 15.5% of the total but 25% of the PCD revenue in Q1 was internal UT made. So, if 25% of the $430.7m (or $107m) is gone, there is only $172m ($280m-$107m) left or $57m/quarter. At 12% GMs, that is still $7m in quarterly gross profits.Ok, back to the 2nd half quarters, IF NP was only $755m for the year (still including MSBU here), Q3 & Q4 would have gross profits of $78m+7m = $85m with a $100m expense or loss of $15m.

So, Q3 and Q4 performance should be decent with the backended core revenues. However, the more important thing will be bookings and revenue growth for 2009. Compared to the three companies I mentioned above, UT has signficant growth potentials and that drives my investment thesis on it (of course, its been that way for years :-)

Technicals - Unfortunately, the stock has broken down in the last week+. The 50 day moving average is $5.31. While there may be some support in the mid $4s (see July 4th week where it quickly bounced back), the next major support is the 200 day moving average, which is about $3.84 (from yahoo). While I am very bullish on the company/stock long term, I am cognizant of the technicals and what this market can do. There is still a huge short position and for the most part shorts have been right on with this market and UT.

Have a good weekend to everyone and good luck to UT and all shareholders on earnings week!

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