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.

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