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.

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