Saturday, September 27, 2008

Weekly recap - Awaiting the market bailout

The stock closed at $3.29, down 12 cents or 3.5% for the week. The DOW lost 2.1% while the Nasdaq dropped 4%. The major news of course is the anticipated Paulson bailout plan. While this will move UT stock, UTs faith will come during the next earnings call in about a month, where we will hear about Q4/2008, bookings, and 2009 forecasts. Stock volume for UT was low all week failing to reach even 1m shares in any day after trading over 5m shares the previous Thursday/Friday. Here are some topics/news discussed last week that have some UT relevance.

Short interest - Number of short shares fell to 22.177m from 22.6m at the Sept 15 settlement date. With the stock trading under $3 and a jump in volume/price (week ending 9/19), its probable the short interest has fallen even lower. Its unfortunate to see some longs giving up and the shorts able to cover at under $3/low $3s but thats where the company performance/macro environment has put the market price at. I'm still waiting for the "hold to maturity valuation." As one shareholder I talked with mentions, if the hold to maturity value isn't what we expect it to be, we'll all have to move to China and set up tents in the Hangzhou building.

Sri Lanka IPTV- Scheduled previously for an August launch, it has now lifted off! Woo hoo. "Officials said UTStarcom, Inc. has entered into a multi-million dollar contract recently with Sri Lanka’s Just In Time Holdings Pvt Ltd. to supply its industry-leading RollingStream(R) end-to-end IPTV solution to SLT." Just like Aksh in India, UT is partnering with a local distributor (in this case Just In Time Holdings). In Israel, we saw UT could also go direct. "SLT, a provider of international and domestic voice, Internet, and data services, will use the RollingStream platform to bring IPTV services to its growing customer base throughout Sri Lanka. SLT, with more than 87 percent market share and a wireline subscriber base of more than 1,300,000 customers, expects to grow its residential and commercial business through its increased triple play capabilities now available with this IPTV deployment. It is designed to support approximately 100,000 subscribers in the next two years and will enable the company to provide video services to future subscribers over copper lines in the next three to four years." "SLT engineers have rectified the defect and they also upgraded its ADSL system to ADSL 2+, to facilitate the launch of the IPTV service." These types of news show UTs strategic position but the challenges that are an inherent in providing a complex product such as IPTV. After over a year of UT reporting iptv subscriber numbers, it is still very difficult to project numbers going forward. In China, growth is "controlled" so it could explode or stop on a dime. In India, Taiwan, Brazil, and Sri Lanka, it seems the launch has occured literally the last few weeks. The broadband requirements seem to be more intense as well offering negatives of unsuitable speeds and positives of UT doing more broadband/ngn business.

ZTE not interested in Motorola handset - Chinese telecoms equipment maker ZTE “isn’t interested” in Motorola’s handset operations, and will focus instead on organic growth, Chairman Hou Weigui told Dow Jones Newswires. Chou said that acquiring Moto’s struggling handset business didn’t “make sense” as the “synergies won’t be big enough to cover the costs.” Plus, ZTE doesn’t actually have the money to buy out a large company like Motorola (NYSE: MOT). In February, Samsung, LG (SEO: 066570), and Sony (NYSE: SNE) Ericsson (NSDQ: ERIC) have all said they wouldn’t make a bid for Motorola either.

ZTE recently sold its 100 millionth handset and is hoping to crack the “big five” mobile handset makers. It’s not an unrealistic goal, especially as ZTE is currently in sixth position, and number three Motorola and fifth placed Sony Ericsson are struggling. The company, which started selling handsets in 2002 in its domestic market of China, made its name in low-end phones for emerging markets, but recently said it intended to enter the smartphone market.

The handset/smartphone business is simply very competitive (seem RIMM expectations as well) and while growing would not make sense for UT to compete in (atleast not heavily with the limited resources they have). While I know some shareholders were disappointed with the sale and profitability push back, it was simply the right thing to do.

Q3 quarter end - As September comes to a close, UT closes the books on its Q3. I was hoping for the sale of the customs solutions business unit (CSBU) prior to Q3 ending. This business unit was projected to double sales this year and be profitable. Not sure if this is still the case but its gross margins was fairly high and Blackmore was upbeat on. In this tough market environment, not sure if they could get a good price but unlike the MSBU, I hope they just as well keep it than sell it for a song (nothing). The sale of PCD happened in July so it will be included in the quarter's report and I recall Blackmore wanting to wrap up all the none-core business issues by end of the year so its something to watch for. The employee option pricing is coming next week as well so I'm hoping for a higher price and maybe something the management will strive to build on going forward.

Tough market environment - UT shareholders have been in a bear market for so long that this current environment is nothing new to them. Some have even been satisfied with the $3 stock price range. However, I see it as the time for UT to excel in this environment. During the past years, they have always talked about the value they give to customers with building great business models for their products (for the clients that is) and how much it will save them. The Tiscali NGN project was a good example of the provider getting cost advantages and maybe forcing the leader Telecom Italia to pour more money into NGN to improve efficiencies. The declining revenue for fixed line carriers has always been UTs main charge for improving sales of iptv and new technologies (transport network product?). This is the time for a smaller company like UT to use its advantages to be more nimble, flexible, focus and penetrate/expand their markets. We'll see........

Blackmore - As a shareholder, I have pinned my hopes on management. That didn't work out too well with Barton as he is a major poster child of excessive pay for disastrous performance. I think he made a great move in retiring before there were laws that actually mandated pay for performance (actual and good performance). We know the board didn't have the intelligence or the concern about the Barton situation and we shareholders got a train wreck. Anyway, as a shareholder, I support good compensation for good performance (imagine that). These aren't just "salaried" employees but executives of a public corporation. Back to Blackmore. He came in at an opportune time when the company was in a free fall but still had enough resources to turn it around. He obviously got a great pay package (I remember his salary can never go down). He did convert his bonus to stock and has focused the company like we've not seen the previous four years. Over the last year, there have been a tremendous amount of strategic wins, sale of none-core assets, no further filings/investigations, and definitely better shareholder communication. The major black mark was the 2008 revenue shortfall and his expense metrics not being reached yet. Going forward, Blackmore's grade is yet incomplete but there is atleast credible hope of achieving profitability due to the lowered expenses and strategic wins. I had posted on expenses and that needs more work as well. In terms of "experience", I hope Blackmore has had the time to hear shareholder views as well as digest all the issues/opportunities the company has. Just like the current bailout, the strategy/plan going forward has to be done right and will determine whether the market/UT stock start a new bull run or continue to deteriorate.

PS. I am disappointed to hear of some shareholders giving up but obviously do not blame them. I wish they got out at higher prices but more than anything wish this blog/group could have done more to enhance/unlock shareholder value. We'll keep plugging along to see what that hold to maturity value turns out to be.

Have a good weekend everyone.

Thursday, September 25, 2008


From the Q1 earnings call early this year,

Robert Galtman - Jeffries & Co.
Looking at the targets a little bit, I know with the OpEx target in particular, you mentioned that would look to bring OpEx down to $110 during the second half. I think last quarter you had maybe mentioned below $110 each quarter in the second half. Can you just give us some clarification around that? Is that $110 maybe later in Q4? Or would that be both in Q3, Q4 as well?

Fran Barton
Well, we’ll target it for Q3. I think Q4 we should certainly be there. We’re not stopping at $110, and so the language we may have used was at $110 or just under $110 or whatever, so it’s not intended to be over $110. Its $110 or under. But we will hold the expectation for now at $110. As we get a couple of these one-timers behind us, we can start operating at that level shortly. So we will try for Q3, but we will certainly be there for Q4.

The sale of PCD/MSBU added savings of $15m/quarter so that by Q4, expenses should be around $95m/quarter. Management has been saying that they will get to profitability with revenue growth with slight decrease in expenses. A fellow shareholder Tigre brought up a good point that expenses should go up as revenue ramp. Because the company is protecting R&D at around $40m/quarter, most of the expense discussion will center on SG&A. Lets look at some factors that indicate it should continue to go down even with the revenue ramp.

1. Fixed costs? - The company's $130m or so revenue shortfall for 2008 announced a few weeks ago didn't result in opex reductions. So, the correlation is more with bookings and not revenue. Blackmore had indicated keeping expenses up in the 2nd half to ramp bookings for 2009.

2. PAS/handset slowdown - Shouldn't expenses for PAS go down as revenue go down? Same with internal handsets, specially if they move design operations from Korea to China?

3. Marketing costs/Trials costs- Back in early 2007 when the company was promoting itself, it mentioned 40 or so iptv field trials. I'm sure there were a lot of NGN trials as well. After all of these trials and now commercial wins (with showcase projects), shouldn't this be going down as well? By partnering with local distributors, shouldn't expenses go down as well?

4. Ramp of iptv/ngn with existing networks- With the bugs of the iptv system being configured and other content/regulatory issue being worked out, we are now tracking the number of subscribers for each country/region. As the subscribers ramp/acceptance granted, UT is able to generate revenue with the existing costs in place. I posted early today regarding the small $1m revenue by Sri Lanka Telecom for the initial network. As subscribers get on board, UT will get bench mark payments for the network, and then the STB to follow. Additional capacity/services/maintenance revenue will then follow. In some respects, the ngn and broadband revenues also come after a period of acceptance.

My conclussion is that opex should and could drop significantly more from $95m/quarter even as revenue ramp. Cultivating a smaller number of larger clients that will buy multiple products would also focus expenses more efficiently. This is what we heard in the shareholder meeting as well but have yet to see the synergies and impact of outsouring/partnering and focusing on smaller base of clients as of yet. The bulk of the expense savings have been with the divestitures, elimination of legacy costs, the initial headcount reduction.

Blackmore's target expense metrics are nowhere close to being achieved. The revenue potential is there but there is also questions with timing. I do see potential to cut more of the $55m SG&A costs. Cutting expense is really the way to protect against the uncertainties in this market and NOT by inefficiently relying on cash at hand.

Cash generation was a big theme earlier this year. Gross margins have yet to improve. Asset sales have helped but expenses are just too high. A restructuring would burn more cash and save "only" $5m/quarter. Why are they still spending $55m/quarter for SG&A anyway?

One final thought - on their building that was appraised at $180m. Now that they have all of this cash, there doesn't seem to be any progress/urgency on the building except some small tennants.

I continue to hope for the revenue and bookings ramp but there seems to be too much expenses and inefficiencies in resource use. They did save on Barton retiring (forgot about that savings :-) but Blackmore needs to address the expenses well during the next call. Each dollar saved is $4 in revenue it doesn't have to account for. What kinds of returns are they looking for their $324m in net cash??? They also seem to have a ton of advisors that have not yielded overall shareholder value or good returns on their resources.

I'd like to end in a nicer note that atleast its not like AIG or Washington Mutual and that atleast the company is in good shape balance sheet wise (I have to give them credit that as fast as they can spend the money the last 3+ money losing years, they also find a way to generate cash). If they just improve operational performance, they would stand out in this market specially going into 2009. Can you imagine if this thing actually works out.

Have a good night.

Sunday, September 21, 2008

Weekly recap - Stock bounce

After nine straight weeks of stock price decline, UT stock closed at $3.41, up 54 cents or 18.8% for the week. In a very volatile week of trading where the DOW was down as much as 8% late in the week, UT recoverd all loses for the last 6 weeks. It is still down around 27% previous to earnings in early August. The DOW ended the week with a monster two day rally but still closed slightly down for the week.

BWS upgrade - From my Schwab alerts: BWS Financial upgraded UTStarcom (Nasdaq: UTSI) from Hold to Buy and maintains their $4.50 price target, citing valuation. The firm notes UTStarcom "shares have been battered since the Company announced second quarter results to a point where the stock is trading under projected cash value at the end of 2008. UTSI had $2.20 per share in cash at the end of the second quarter. The sale of the PCD business and the cash burn for the second half of 2008 should translate into UTSI having approximately $2.65 per share in cash at the end of the year."

NGN trials in Israel - Sep. 14--Taldor Group (TASE: TALD) has decided not to delay the trial of Bezeq The Israeli Telecommunication Co. Ltd.'s (TASE: BEZQ) next-generation network (NGN) at this time. Taldor is the representative of UT Starcom Inc. (Nasdaq: UTSI), whose equipment Bezeq will use for its NGN.
Hopefully, this will result in actual contract(s) and revenue and not just wasted expenses.

India broadband/iptv - The discussions mainly between Shadow & Tigre regarding iptv in India continued this week with Shadow defending his 400k iptv subscriber target for UT in India in 2009 and Tigre saying its impossible. UT has basically said it has won 5 of 6 commercial contracts in India and has over 80% market share. It has 75% of wireline broadband and 34% of the broadband market (whatever that means). Anyway, India is critical for UT to showcase their core products much like Japan was a few years ago. If you have time to read this interesting back and forth, here is the link

ZTE iptv market share in Shanghai - The article cited by Tigre indicates ZTE has a higher market share than UT. UT has indicated it has 62% of the iptv market in China, twice the number of any competitor. Market share will remain a hot issue during the next few years but the question is really when China iptv will ramp quickly. Recent iptv set top box orders indicate the market growth continues at a steady/slightly increasing pace. The Sigma Design earnings call also show iptv worldwide growth remains robust.

Nortel - I wrote a little bit about Nortel's 2008 revenue shortfall in my mid-week blog posting. There are no less than 4 articles in lightreading discussing the shortfall, asset sales, restructuring, and other outlook for Nortel. Nortel is trying to sell its growing carrier ethernet and optical networking division, part of its core businesses. Here is an excerpt: "Hubbard estimates that Nortel had a 3 percent share of a $533 million Carrier Ethernet Switch and Router (CESR) market for the quarter ending in June. The CESR market is likely to be about $2.1 billion in 2008, compared to $1.9 billion in 2007. So it's a growing area, but also very competitive, with 21 equipment vendors in the space, he notes. " I just wanted to highlight its market share and the heavy competition. Nortel overall company gross margins are in the 42-43% while UT is in the 25-27%. Without internal handsets, UT gross margins are in the 30s with some businesses in the 40s. While UT has to compete with ZTE and Huawei, it does maintain some good market share (see above) in certain areas and can stay competitive with their lower gross margins. They just have to pick their spots and control expenses.

Stock price, relative views - During the week when the stock was near its lows, I posted "its the stock price, stupid." I wrote, "Each member of management and the board has to ask themselves if they are even aware that a sub $5 stock for this company is unacceptable. You then have shareholders so beaten down that they are second guessing themselves if they should sell a $5 bill for $2.5. Unbelievable! Then, you have management/board PAY their consultants to decide whethere it is better to put the cash under the mattress or buy the stock at half book. I know they are "constantly" evaluating the market and the situation but this is just stupid."

First, I understand we are in a bear market but each individual/entity looks at the stock price differently. Some people will look at their cost basis like the world revolves around them and measure company performance base on that basis. The board back in 2006 decided to do a strategic study because they felt the stock (at $6/7) was undervalued. Some people need the cash and no matter what the price will sell. When Peter Blackmore joined the company, the stock was in the mid $5s, but his bonus/shares were granted at $3.2. Some shareholders bought in $30s-40s and think the performance has been terrible every since. The shareholder equity/book value is around $600m or $5/share but the company continues to lose money. The company has been spending more than $40m/quarter in R&D the last 5+ years so that must be worth something? In any case, what is the threshold for UT management/board? I had mentioned the $5/share price in the post just based on book value/shareholder equity as a starting point where there has to be a sense of major urgency. Some will talk about profitability. Period. The problem is the stock/underperformance by the company has been going on for so long that some people start to think its acceptable. The company's investor relations rep Barry Hutton joined the company when the stock was at its all-time lows $2.2-2.3 so how in the world is he going to feel what shareholders "feel". He probably thinks the stock is a star performer. Has he paid $30, 20, 10, or even $4 for the stock with his hard earned money and based on company projections and talk? Its gotten so bad this week that people were jumping from UT to AIG or maybe Lehman the previous week as a "chance"/lottery ticket to get their money back quickly.

I could never get a price from the board that they were thinking of back in 2006. They had offers for the core business but obviously it was not good enough for them. However, now that they have cash and they are "excited" in the future outlook, they also don't seem to want to defend the stock. A few years ago, they posted the great revenue growth year after year. Now, they are proud of the head count reductions and expenses going down. Revenue growth/profitability? Those are "near term" goals. What is near term?

I "believe" the stock is a bargain under $5 but am warry the company/board has gotten used to subperformance of the company/stock. Fixing legacy problems have become "accomplishments". Lowering costs and reduced losses have become good performance. This week, Merrill Lynch sold itself to Bank Of America. Fellow shareholder techbroker wrote, is UT going to be a ML or a Lehman. I cling to the hope its going to be much much more but if the board let go in late 2006/early 2007, it would have been much better for shareholders. Instead, we continue to wait for profitability and dealing with the management/board who have set such a low performance bar for themselves (and they still can't clear it!).

Have a good rest of the week and hope the stock can make it two in a row this week.

Wednesday, September 17, 2008

Discussions with shareholders

I normally wait until the weekend to post but there were a lot of discussion points today from the market being down 5%, Nortel down 50%, short selling rules, conversations with shareholders, and UT down another 11.3%. Under this backdrop, I will give highlights on my conversations with shareholders and the Nortel shortfall.

Discussions with shareholders - I talked to 4 institutional shareholders today, with one giving me a recap with his discussions with Peter Blackmore yesterday. I had received an email reply from Barry Hutton discussing the company's stance on a buyback and he mentioned most shareholders are against it at this time (huh?). The institutions I talked with had shares from 500k, 700k+, 3.7m+, and over 15m+ (foreign investor that owns a few million and in touch with others). All have supported a share buyback and still do. I had heard from another shareholder that one institution that has around 4m that was in favor of a share buyback may be hesitant now due to the global financial instability (although they were in favor of it very recently-maybe they were talked out of it). In any case, this is in addition to the retail shareholders that probably number 15-17m that I believe support a share buyback as well. I feel like a politician doing a poll but I do want to see what shareholders think of a share buyback. I want to reiterate I am not for doing a buyback of such a size that would jeopardize the long term plans for the business but as tangible confidence boosting action that would be a good return for their "excess" cash.

Based on the presentation slides on the company's presentation in New York last week, the company will end the year with $324m in net cash after seeding an Indian contract and further losses in Q3/Q4. Amazingly, this is more than the current market cap as of closing today. The question becomes how much will the company spend again in 2009 in order to facilitate the growth they are targetting and accomodate their current cost structure (no further major restructuring or head count reduction is plan based on the presentation).

The company's credibility in projections have been terrible but here is my stab in the dark. $1.1b in revenue, 27% gross margins, and $380m in expenses. The higher revenue from this year is based on the "high" revenue target for 2009 in the slide. +2% gross margin is based on better mix of revenues from the core business (less from handsets), and expense based on $95m/quarter as legacy costs and more efficiencies are rung out. It should be $95m by Q4 already but the slides had it at $100m. Anyway, those numbers above still would result in $80m in losses. There are other items that could hurt cash flow such as taxes/options that will/can be offset by interest income, Yuan appreciation, proceeds from a CSBU sale, further outsourcing of handset business, lease of building, patent proceeds, etc.

Lets add $20m more in cash flow losses for contingencies for a total cash loss of $100m in 2009. I will not reduce this by $60m that was used for the India contract (assuming they carry this over quarter to quarter). The company will then end 2009 with net $224m with these assumptions. There is no more convertible bond, or options/China investigations, etc to worry about. Because of this, I think it is reasonable for the company to do a buyback. One institutional holder mentioned a buyback of up to $50m, spread over 6 to 12 months. In any case, I believe there is a lot of support for the buyback and shareholders should continue to bring this up with management. Shareholders discussed a lot of issues today such as India iptv subscribers, China iptv market share, naked short selling but as T. Boone Pickens mentiions, that misses the point. I say buyback, buyback, buyback!!! (ok wanted to say something like that since I keep seeing those commercials :-).

Discussion with Peter Blackmore - From the briefing I had, here were some highlights.

Impact of world economy slowdown - Aside from the shortfall in 2008, there is no other pushouts or further weakness seen. This may change and the company has yet to finalize 2009 guidance but the markets/tech areas they are targetting must be ok for Peter to be confident. Again, its "guidance" and take management's word at your risk but it was a good question to ask in light of the Nortel shortfall and the worldwide slowdown.

Insider buys/Share buybacks - Ongoing discussions and nothing until Q3 earnings call at the earliest. The word I am getting is Peter wants to buy some shares but prevented from doing so due to his tax sale earlier. Again, hearsay...and nothing tangible.

There were numerous other topics such as Japan, Fran Barton's compensation, CFO replacements as well as D.King's replacement, etc and nothing surprising. In general, people feel good after talking with Peter. Credibility over the last few years have been bad and it seems Peter realizes this shortfall was brutal.

Nortel - Read the announcement for Nortel and its a nightmare for their shareholders. They are planning restructuring, their CDMA business has not bottomed, their future 4G business will be divested, they need to raise cash, they borrowed at over 11% previously, they need to overhaul company expenses/decide with are core/none-core. Basically, UT in this light, is way ahead!

I'll end this post by saying shareholders have to stay united and not stand for poor stock/company performance. I want to reiterate again and again that we cannot stand for performance like what we went through under Fran Barton's tenure (Lu was the CEO but I'll use that period for benchmark). As I replied to Peter, he needs to reverse the following:

1. No profitable quarters.
2. Numerous failed guidance for profitability
3. Declining share price
4. Increased compensation
5. Little or no credibility

I will continue to discuss issues with retail/institutional holders such as candidates for the board of directors, faith of current directors and their performance over the years (from the collapse of the shareprice, failed strategic study, and the latest being F. Barton's tenure/compensation). If there are shareholders (retail/institution) that have ideas or just want to join the "group", email them to me at

Have a good night everyone.

Saturday, September 13, 2008

Weekly recap - Under $3

The stock closed at $2.87, down 26 cents or 8.3%. Early in the week, the markets were focused mainly on the government bailout of Fannie Mae and Freddie Mac. Late in the week, the markets shifted the attention to Lehman, Washington Mutual, and Merrill Lynch. The markets did manage to close the week slightly up.

Brasil Telecom contract - "Brasil Telecom, one of Brazil's leading wireless and fixed-line communications providers and incumbent telecom operators, will utilize UTStarcom's mSwitch solution to enable fixed-line connectivity with GSM platforms for call continuity between the two networks using a single wireless device. The FMC solution enables Brasil Telecom to extend its current cellular coverage area indoors using the new Voice Continuity Call (VCC) handover between cellular and WiFi networks." This seems like a huge technological win with a major carrier that UT has been working on for years. It would have been nice to know the contract amount and what the market potentials are. It does show UT continues to be at the leading edge technologically and the strategic wins continue.

India IPTV market - Shareholders Tigre and Shadow discussed the iptv developments in India. The size of the iptv market in India was projected to be 2 to 3m in 5 years. On the recent presentation slide, UT noted that Aksh alone was targetting 1m in 3 years.

Short interest - The short interest went down by about 1m from 23.6m to 22.6m at the end of August. Average daily volume is down to 832k shares, with the days to cover increasing to 27 days (highest in a year, maybe ever).

September road show presentation - Shareholder Shadow provided a link to the presentation and discussed some of the highlights.

Stock price - The stock has pulled back for 9 straight weeks bringing down the market cap to about $360m, which is around the cash position for the company. I wrote an email to Peter Blackmore and copied the shareholders in the group. It basically outlines more frustration from shareholders and questions the role of the CEO. While the company has resolved previous legacy issues, improved liquidity and won some strategic contracts, shareholders are still faced with all-time low share prices. Management continues to have major credibility issues with failed profitability forecasts year after year. The frustration is even larger when you consider the disproportionate share of the sacrifice shareholders bear. Management continues to get outsized compensation/bonuses (are there any salary cuts or no bonuses?), employees get to reprice their options, executives get more shares and performance is not every tied to the share price or basic profitability.

On the recent presentation slides, shareholders hear the improved performance, financial positions, and guidance for the future. That is all great but year after year, there are more excuses for the missed guidance. The "recent" tenure of Fran Barton showed the company's poor operational performance, outsize compensation, board's failed decision making abilities, and the waste of resources and destruction of shareholder wealth. Unbelievably, the company will have its highest net cash position (around $324m at the end of the year) even after seeding a future contract $60m and burning more cash through the end of the year. All of this with the stock at all time lows. I am by no means a financial guru (I did invest in this company after all) and do not know all the interal forecasts and company operation. However, I believe a stock buyback or other tangible direct actions by the company should be done at this stage (aside from just more guidance). Management/board compensation reduction etc should be implemented. Management relies on consultants and has had plenty of discussions with the board. Could a share buyback or compensation reduction be any worse than years and years of failed strategy/execution that has landed shareholders at this state. I could go on and on but I'll end it here for now. Rather than pour over the recent presentation slides or hope for good "guidance", I believe investors should switch their thinking to planning for significant management scrutiny and board accountability. Final thought on the strength and experience of the management team. Are you kidding me? I have PhD from Stanford but if I don't produce or show results, what good is that?

This recent missed estimates, stock crash, and lack of management intervention can be summed up in one shareholder's (Flipocrat) word: Disgraceful.

Have a good weekend.

Sunday, September 7, 2008

Weekly recap - Stock slide continues

The stock closed at $3.13, down 13 cents or 4% for the week, the eight consecutive week UT stock has declined. The markets were also significantly lower from 3 to 4.7% this week as the markets return to bear market levels. Here are the UT related news for the week.

UT & Aksh power BSNL iptv for 20 Indian cities - This was already widely reported previously but the official PR came out this week.

UT issues documents for employee options exchange - A 159 page document (no I didn't read it all) indicates that the option price will be at the closing on Oct, 1, 2008. There are 7.25m options with strike prices from $6-25+ that can be exchanged. Here is the exchange ratio for various options prices.

$6-10; 1.9 for 1
$10.01-15; 3.8 for 1
$15.01-20; 5.2 for 1
$20.01-25; 8.2 for 1
$25.01+; 9.2 for 1

If all options get exchanged, the number of options will drop to the 2.5-3m range. The options will vest 50% after 1 year and the rest 2 years from Oct. 1, 2008. If each option cost 50 cents for example, that would be worth $1.25-1.5m. I don't believe this is significant considering Barton's retention agreement alone was $2m/year.

Dell selling factories/Nokia revenue shortfall - Not too related but Dell is also trying to outsource their manufacturing to be more efficient while Nokia's shortfall show the competitive nature in the handset/smartphone market. UT's sale of the PCD at the height of their profitability was good timing/management. The sale brought liquidity, lowered working capital requirement, preserved internal handset contracts, and reduces operational risk for that business unit.

Russia conference - Shadow posted that UT was a major sponsor of an iptv conference in Russia. We have heard back in the shareholder meeting that UT was working on a couple of contracts in Russia and Brian Caskey made a trip there so there is some progress for potential contracts.

UT stock non-marginable - Last week, Etrade made UT stock non-marginable and that is before the stock even dropped below $3. If UT goes below $3, then other brokers will enforce margin requirements for UT putting more pressure on the stock. I knew we should have had a reverse stock split (just nasty emails/postings please :-)

Philippine NGN contracts - Top Philippine carrier PLDT plans to spend substantially on a next generation network (NGN) technology for its telephone service nationwide as it expects revenue to reach hundreds million of pesos in five years.
The company will spend 4.3 billion pesos ($93 million), which includes an incremental investment of 3.9 billion pesos ($84.2 million) for over five years, according to documents it filed with the National Telecommunications. Its existing investment in the proposed areas amounted to 464.01 million pesos ($10 million).
The company will finance its fresh investment through internally generated funds.
There is no official PR from UT but this should be their contract (at about 17m/year for 5 years). So far, that first contract was for $10m (if this article is correct). It seems these NGN contracts are in the $10-20m range and have good expansion potential. Almost all UT competitors are also focusing on NGN but UT seems to have a bunch of wins in this area (Argentina, Taiwan, Brazil, Jersey, Philippines, etc).

India Broadband - Just a side note to last week's PR on India broadband. UT indicated it was the top broadband provider in India with 75% market share. Currently, there are only 4.5m broadband lines and the country is targetting 20m by 2010. Even with the Phase II contract with BSNL (around $80m+), there should be signficant contracts ahead in India if the country will come anywhere close to the 20m target. During my last 2 emails with Blackmore the last few weeks, he had just come back from Japan and Brazil respectively. Unless he was there on vacation, there might be some good developments in those two countries.

David King - Joins Acision as COO. David was at the shareholder meeting in June and discussed the Russia/India developments and the company's better focus on efficiencies and drive in new markets. I had a positive impression of David and liked the way he described the iptv markets in India and their better operational practices (cutting excess personnel/partnering, etc) so i didn't see his departure as a firing. However, he did have valid personal reasons for leaving and thats that. The company will find replacements and move on.

China Telecom earnings - Last week, I had notes some information regarding China Netcom's earnings pertaining to UT. This week, here are some notes from China Telecom.

In the first half of 2008, access lines in service decreased by 5.44 million to 214.9 million. PAS subscribers were 51.99 million with a net decrease of 6.06 million.

In the first half of ‘08, broadband subscribers increased 4.3 million to 39.95 million, an increase of 12.1% from the end of last year.

Fourth, to improve cost effectiveness, we implement stringent control on PAS handset subsidies and tilt investment towards profitable business and customer segments.

Fifth, maintenance CapEx on PAS to ensure normal operation declined by 88.4% from last year, accounting for a decrease of 3.4 percentage points of total investment to 0.5%.

Broadband growth in China continues to be impressive and will fuel iptv demand in the future but PAS has fallen off significantly, which is good in a way because its impact will be lessen on UT going forward.

China iptv - Last week, I noted the continued, steady growth in China (about 30% sequential growth). This one is about a week old as well. The headline is "China Telecom has shortlisted 11 companies to supply 574,000 IPTV set-top boxes, comprising 536,000 standard-definition and 38,000 high-definition units." It has ZTE benefitting the most and that "ZTE is thought to currently hold the largest market share of China's IPTV system and terminal market, and has supplied systems and terminals in a number of regions, including the provinces of Shaanxi, Jiangsu and Guangdong, as well as Beijing and Shanghai." At the very least, the iptv deployments remain healthy. UT should get its share.

BSNL iptv over 100 cities - Before the ink on UT's PR for 20 BSNL cities, they are already talking about 100 cities :-) Subscriber target when the 20 BSNL cities was discussed was only about 10k in 9 months. Now, it is up to 100k by March 2009. The website also has a lot of postings on MTNL, Bharti, and other iptv news. It seems like there are a lot of iptv issues that have just been resolved very recently (the last few weeks) and has led to increased deployments. In that article, they talked about bringing iptv to 1/4 of the 82 million cable homes. The cost of iptv is about $4.5/month. Thats less than the cost of a DVR in the U.S. with plenty of added features. Another article in the website talks about 1m India iptv subscribers by 2011 (see section on Bharti iptv). With wins with Bharti, BSNL, MTNL, Goa, and Sri Lanka, the future for UT iptv in India is shaping up. The breakout could be in cable systems and in China but steady growth, which we anticipated since last year, is only beginning right now. Shadow's prediction of 400k in India doesn't look too ridiculous to me. I was looking for 50-100k in India but it might be closer to 200-300k.

IPTV, NGN, Broadband, Russia, India, China, Brazil, etc, etc, etc. - For the last few years, it has been mostly promises, trials, and strategic contract wins. The revenue has yet to come close to their expenses. The company has put in hundreds of millions in R&D the last few years to seed their technology and position. There is still some ways to go but the news I am reading indicate massive adoption/potential is teasingly close. I hate this company!!!!!!!! :-)

Have a good weekend everyone and lets hope UT breaks the 8 week losing streak.