Sunday, October 26, 2008

Weekly Recap - All time closing low

The stock closed at $1.92, down 52 cents or 21% for the week. It was another brutal week for the markets with the DOW down 5.35%, Nasdaq down 9.3%, and S&P down 6.8%.

Phase II Multiplay BSNL contract - "During this second phase, UTStarcom will deploy its industry-leading iAN-8000 multiservice access node (MSAN) solution in 962 cities throughout India to enable the addition of 1.1 million new broadband subscriber lines.""UTStarcom also has deployed its NetRing(TM) 10000 optical transport solution in support of this multiplay service for the aggregation of DSL traffic in BSNL's network. UTStarcom's NetRing product suite provides service providers with a high level of network resilience and carrier-grade quality of service for subscribers to help ensure trouble-free delivery of real-time mission critical data and video applications." Announced previously in the Q2 earnings call, this is a $80+ million dollar contract and UT is spending $60m this quarter to prepare for the execution of the contract. This contract doesn't have the 30+% GMs that other Indian contracts they have signed this year but hopefully will be better than the Phase I, which had a lot of issues. I'm also hoping that they execute this quickly and open the doors for improved broadband contracts and iptv contracts with BSNL.

China infrastructure spending - Tigre posted regarding China's intention to spend on railroads and other infrastructure in the coming years. With around $2 Trillion in reserves, China has the capacity to navigate its economy through this world wide financial crisis. The U.S. will also have to focus their spending on infrastructure, health care, etc rather than pure consumption.

Lu Interview - Maybe someone can translate.

Status of PAS - High margin PAS infra and lower margin PAS handsets still account for $350m of UTs revenue so the status of PAS is always a concern. There were discussion of PAS spectrum being turned over for TDSCDMA. It should not happen overnight but will happen over a few years.

Ericsson's Earnings - On the positive side, Ericsson increased revenue, slashed costs and made more money this quarter than last but there are definitely concerns...."CEO Svanberg hardly inspired confidence when he said that while Ericsson's business in the quarter had not been impacted by the financial turmoil, it remains "hard to predict" how operators will act and to what extent consumer telecom spending will be affected. Things are likely to get worse before they get better."

"Of course, if Ericsson can't grow organically, it could keep an eye on acquisitions. Ericsson sits atop a net cash pile of about $4 billion. But investors would be happier if Ericsson coughed up some of that cash in the form in dividends or share buybacks."

General comments - The various topics above gives a glimpse of UT challenges/opportunity in the current environment. UTStarcom's market cap is down to around $241m. This compares with the company projecting a net cash position at the end of the year of $324m. This discrepancy can be attributed to the bear market, uncertainties in PAS and UT revenues going forward. However, the markets that UT targets like China, India, Brazil, Russia (BRIC countries) should all continue to spend on infrastructure and on things like broadband, iptv, and NGN. UTs PAS softswitch/technology is intertwined with iptv so its not easily separated. Lu has spent some time in China during the Wu transition and focused on stabilizing the China operations and pursuing opportunities in IPTV/PAS and more importanly broadband (GEPON/transport network). While PAS is declining, I have to believe/hope that other technologies/contracts will make up for this revenue which has dropped from $2b to $350m. As for Ericsson, there was speculation they could acquire UT. During this tough stock market conditions, one thing that could help is consolidation. The problem is the significant drop that potential targets have sustained and the stubborness of boards/management to look after shareholder value (look at Yahoo and recently Sandisk - $27 offer too about the current $9 stock price!).

UT options and outlook - With the Q3 earnings report around the corner (no date yet...what a surprise), anyone still following the company will key in on strategic wins, impact of current world economy, iptv developments and cash flow for 2009. Rather than just projecting 2009 cash flow which would be difficult, I would suggest to Peter Blackmore to commit to a certain cash flow level and that they will aggresively cut costs (more than they are planning if needed) if revenues don't come in. As for buybacks, people don't expect it to help the share price anymore (in general for most companies) because companies tend to buy "high". Interestingly, I just read that this time, it might actually be effective because it now shows that the company doesn't have a liquidity problem! (even GE needed to raise billions because short term loans for this triple A rated firm became questionable recently). Anyway, with the stock under $2, the company may even just take it private - why leave the retail shareholders with anything.

Tough market even for seems you can only make money by shorting or buying after the market goes down and hope for a bounce. Sadly even in this environment, trading is still much better than watching UT disintegrate. Have a good week everyone..........stay liquid and live to fight another day!

Saturday, October 18, 2008

Weekly recap - above $2

The stock closed at $2.44, up 48 cents or about 25% for the week. The markets started the week strong up about 11% but gave about 2/3 back by the end of the week. The optimists will point to the successful retest on Thursday (probing Oct. 10 lows) and the bears can point to the negative reversal on Friday. In any case, the markets will continue to be volatile and opportunity to make or lose a lot of money abound (traders market). UT itself traded on a wide range from $1.85 - $2.5. Here are some discussion points for the week.

Results of options exchange plan - Originally, there were about 7.25m underwater options. If exercised in the future at strike prices from $6-25, it would dilute existing shareholders by the 7.25m shares. The exchanged program gave employees the option to receive few options but at a lower strike price (closing price on Oct. 1, which happened to be $3.24). The results of the option exchange program was filed this week.

Basically, the original number of options had current value of $4.4m based on a modified Black-Scholes option pricing model. Of the 7.25m shares, about 6.1m were tendered for exchange to about 2m options at $3.24 strike. Its interesting to note that even at Friday's close of $2.44, 2m shares would be worth only about $4.9m. In terms of potential future dilution, it was not as good for shareholders as I thought. Of the original 7.25m shares that could potentially dilute the existing share base, 1.1m was not exchanged, 2m was exchanged, 900k was cancelled BUT 3.2m will be returned to the "treasury" as I call it and available for future grants. It was interesting that about 1m was not exchanged (did they just forget the deadline :-). Back when this was initially discussed in a previous blog posting, I had commented that I hoped the company would not provide negative information that would drop the stock price (mid to high $4s at the time) so that the strike would be lower. Now, with the price in the mid $2s, $3.24 looks high. Thats how bad the stock has fallen. On the bright side, employees (at $3.24 strike), Blackmore (bonus converted at $3.2), board members (got compensation/shares converted at $3.37) may feel just a little remorse with the shareholders who had to buy their shares outright. Just very little......

Nokia earnings report - Earnings drop about 30% and average selling price dropped a bit. Their market share went down from 40 to 38% but expect it to be back above the following quarters. Global handset sales growth forecasts are still in the high single digit range compared to a sold 10-10.5% (per one analyst). I bring this up to keep track of UTs PCD sale (which they still own 2%, have their own handsets unit, and potentially could get up to $50m by end of 2010).

Vendor financing - Nokia/Alcatel Lucent reiterated that tough times does not mean a return to vendor financing.
"Times might be tough, but there's no way that Nokia Corp. (NYSE: NOK - message board) would contemplate reintroducing any vendor financing practices to help out cash-strapped customers, noted the vendor's CFO Rick Simonson during today's third-quarter earnings conference call. (See Nokia Reports Q3 and Nokia Siemens Shrinks in Q3.)
"I am not a bank," he stated, with some pride, in response to analyst questions about potential aid to carrier customers and channel partners."
Based on the last few years, he added that most operators are in pretty good shape (better than the equipment providers).

I bring this up to discuss UT fronting $60m for the BSNL India phase II contract. Its amazing that UT has to front this money but then again, its part of the price to get in the competitive Indian market. I hope it will pay big dividends. UTs cash horde of net $320m by year end should be a powerful resource to gain market share and generate significant revenue growth during these tough conditions.

India still booming - As for India telecom industry slowing down? The entire point of investing in India is due to its future growth. Despite the financial turmoil, investments will continue to happen.

UT 2nd iptv AD network in China - UTStarcom, Inc. (Nasdaq: UTSI - News) today announced it has signed an agreement with Best Tone Information Service Corporation Ltd., a wholly-owned subsidiary of China Telecom Corporation Ltd. (NYSE: CHA; HKG: 0728), with the intent to deploy a video information distribution network in the Hunan province of China. This is the second large-scale interactive advertising system that UTStarcom's end-to-end RollingStream® Internet Protocol TV (IPTV) platform will power in China, both of which are expected to change the way subscribers view advertisements. UTStarcom previously announced the launch of the first interactive advertising network with Guangxi Telecom Company Limited, also a wholly-owned subsidiary of China Telecom Corporation Limited, in July 2008.

Jiangsu Province IPTV - Fellow shareholder Batjack (formerly Bamboozled) has been working overtime since he started posting when the stock was cheap at $4.5 :-) Unfortunately, that was the technical breakdown point for the stock! I do appreciate that there are still some shareholders sticking with the stock. Anyway, back to the news.

October 15, 2008 - The number of IPTV subscribers in China's Jiangsu Province, located on the east coast of the country, rose by 471% in the first nine months of this year, according to Interfax China quoting domestic media, making this the biggest rise in IPTV adoption in the country during the period.
Jiangsu Province had an IPTV subscriber base of over 200,000 by the end of September 2008, compared to 35,000 at the end of last year, according to Chinese website Lmtw. "Jiangsu has overtaken even Shanghai in IPTV use growth this year," said Zhang Yanhong, chief executive officer and industry analyst at Lmtw. "Its speed in IPTV development is incredible."

There is definitely competition between ZTE and UTStarcom on the IPTV front. I had posted previously.

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."

From a previous earnings call, Lu commented: "Moving on to broadband, we’re very pleased to be beating and are breaking through in our GEPON business in China. For example, we’re working with the China Telecom for GEPON contracts in the Jiangsu, Zhejiang, and Fujian provinces. We’re also looking at the expansion contract with the China Telecom for gigabit EPON in Ningxia Province and are planning the trial with the Hunan Province and Jiangxi Province.

Guangdong Province IPTV -
October 17, 2008 - Southern Media Corp. (SMC), the largest media group in China's Guangdong Province, plans to launch a new interactive TV and IPTV platform in the province in 2009, according to Interfax China, quoting an anonymous source.
The source added that SMC is now consulting with equipment suppliers on the deployment of the platform, of which first-phase construction is expected to be completed by the end of the year. The platform is expected to be put into operation at the beginning of next year, covering 50,000 trial users, and at full capacity is is expected to be able to support 700,000 users simultaneously.
There are currently an estimated 130,000 IPTV users in Guangdong Province.

I had summarized a previous earnings call segment: The company maintained 60% market share. As an example of progress in iptv, Lu cited a $7m contract signed in Shanghai and another soon to be signed $3.7m contract also in Shanghai. They also had their first win in Hunan province and are in negotiations in 4 other provinces. They also signed a contract for interactive advertising in Guangdong. There was also a growing ip surveilance business opportunity with 250k retailers in China (must be a lot of theft there :-)

UT is definitely in the thick of things with iptv/broadband in China and India. The major question is when the market will truly ramp. The developments we keep hearing are definitely encouraging.

Mobile IPTV - Thanks to News to Use for this find.

Soon, you could be getting Internet Protocol Television (IPTV) on your mobile phones. UTStarcom, a global provider of IPTV infrastructure, is working on technology at the moment, which will enable its clients to offer IPTV on mobiles.

Speaking to, Vijay Yadav, managing director, UTStarcom - South Asia, says, "This technology will enable IPTV to be used on any of the three platforms - WiFi, Wimax and 3G. We are agnostic to the underlying pipe. For us, IPTV is the future. A large focus of our R&D spend is on IPTV."

Share price - I'd like to end by discussing the share price AGAIN. Despite this brutal bear market, there are companies that will fall apart and there are others that will come out strong. UT technology, capital resource, strategic wins, and focus may actually be at its peak contrary to the current stock price. The current revenue base is still tilted to the PAS/internal handset portion and revenue for the core growth business has not compensated for the existing expense base. Most shareholders and the company itself see more expense cuts but the road to profitability is less clear with the current environment. However, valuation is very cheap as we've noted for the past year. The stock is down 59% from the 52 wk high set as recently in June. While the financial markets have deteriorated in that period, UT should fare much better due to its capital resources and target markets. As the equity market finds its footing, I believe UT should rocket back up the rest of the year. The valuation (50% book) is too compelling at this stage. Take advantage of fund forced selling and gains (percentage wise) should be incredible from this level.

Have a good week everyone. Its time to be aggressively greedy.

Sunday, October 12, 2008

Weekly recap - Under $2

The stock closed at $1.96, down 92 cents or 32%. Yes, thats a $1 handle on the stock and that was even off the low of $1.65. The DOW & S&P lost 18% and the Nasdaq was down 15% for the week. It could have been worse as the market made a dramatic surge late Friday "limiting" losses. Despite the significant declines in the market, UTs decline was particulary severe because of their clean balance sheet and already reduced share price (valuation). Nevertheless, the lack of liquidity and institutional support shows what can happen when certain institutions need to get out of a $2 stock that has an average volume of less than 1 million shares recently. As of this posting, the futures are skyrocketting and will atleast get the market off to a good start.

For the week, here are some discussion points.

Viraj Patel filing - No other PRs from the company except some updates on compensation (what a surprise on the PR front) for the interim CEO Viraj Patel. Basically, Mr. Patel gets a $100k bonus for his added responsibilities and a waive of previous performance clauses tied to 60k RSUs. He also gets another $46k for a turnaround "retentions" bonus contract set in late 2007. Its easy and tempting to make additional smug comments on compensation for management but in this case atleast they are going to save on Barton's future compensation.

Huawei cancels handset sale - "Given the current global market conditions and prevailing economic uncertainty the interests of the company are best served by postponing the sale process," Huawei said in a statement. Morgan Stanley had been advising the firm on the sale, which was expected to raise around US$2 billion for a majority stake in the handset division. According to people who had seen the information memorandum produced by Morgan Stanley, the unit is this year expected to report revenues of $3.5 billion and produce net profits of about $400 million.

Nortel MEN - Nortel's metro ethernet networking division is on the blocks with lukewarm interest. According to a story in the Financial Times, Nortel’s efforts to sell its metro Ethernet network business isn’t going well.
Citing two investment bankers not involved in deal, the sale has “stalled” or it’s “lukewarm”.
Given the volatile capital markets environment, this should not come as a major surprise. As well, you have to believe Nortel is looking to get an attractive price - let’s say $1-billion to $2-billion - for MEN, which will be a challenge.
The FT quoted one of the investment bankers as saying MEN is worth $700-million in a “good” market, and it has attracted 10 bidders with “lukewarm” interest.

The news above regarding Huawei and Nortel shows the difficult environment in selling even profitable business units. There has been consistent discussions with the low share price of UT that it could be on the block but that is very unlikely in this environment. At the very least, it will not get a decent price. UTs board had a chance to sell it back in 2006/early 2007 (atleast some parts of it) but chose not to and the company is hopefully further along in its turnaround than most companies that are just feeling their slowdown. We'll see.

A final note taken from a Nortel blog ( Paul Kedrosky, a venture capitalist and well-known business pundit, believes the telecom equipment market is heading for even more difficult times because many of its customers (e.g. carriers) are going to badly hampered by the credit crisis.
Carriers “can’t afford to build out because the availability of credit isn’t what it once was,” he said during an interview on Yahoo Finance’s TechTicker.
When asked about consolidation within the industry, Kedrosky said it has to happen given the market’s dynamic and that “Nortel doesn’t make it out of this cycle alive”.

So, in terms of speculative play on a sale, Nortel would probably be a higher probability than UT. It seems management/board will always wait until the VERY LAST minute before selling out ensuring maximum pain for shareholders, unfortunately. Lets hope (again) that UT can be an exception. BTW, Yahoo is trading in the $12/share range. Does anyone believe (including the yahoo board/management) that Microsoft's $33/share (or even the $31/share) was not a gift from God at that time? Its unbelievable that it took yahoo's board/management to bail out Steve Balmer and company. Lets "hope" there is someone left to bail out UT shareholders.......

Have a good "trading" week everyone. Keep the powder dry and those fingers quick ;-)

PS... There are a lot of stocks trading that have daily charts that mirror 5 year charts in terms of price range. So, if you really want to "go for it", this is your market :-)

Thursday, October 9, 2008

Shareholder retention program

The shares closed at $2.15, another all-time low closing price after the market fell off the cliff again today. I've talked about a share buyback the last few weeks and have gotten various opinions. Some companies that have done share buybacks have seen their stock tank with the market anyway. Some people mentioned it would only provide a short term boost (if that) and shorts would just use the price uplift to attack the shares more. Some have mentioned that its better to have the cash as a buffer for the uncertain environment. "Cash is king" Really?

The company's "long standing" position is that their "near term" goals are to get back to growth and profitability. Re-read that 10 times and see if it makes sense :-) According to them, this is the major driver of the share price. Really? :-) The problem is that their growth businesses (iptv, ngn, and broadband) only make up 1/3 of their current revenue base and PAS/handsets are not growing/declining. Their expenses are still way too high and they refuse to make substantial cuts. So, despite Peter's repeated expense targets and growing revenues by several hundred million, it doesn't seem probable in the "near term".

As a long-time suffering shareholder, it just hasn't paid to be in the stock. A lot of other shareholders are jumping ship as well. Therefore, it is imperative to have a shareholder retention program that could actually work to stabilize the shareholder base. My proposal is as follows:

1. Announce a special dividend payment of 50 cents/share to shareholders to be paid out one year from now.
2. Announce another special dividend payment equal to the amount to be received from the PCD sale (remaining performance payment up to $50m depending on PCD performance). This will be paid end of 2010, 2 years from now.

Here are the benefits/details of the program:

1. The company will have $325m in net cash by the end of the year. Spending $60m by end of 2009 will not impact cash flows until late 2009, where profitability "should" be closer.
2. Shareholders will have a reason to stick around for dividend payments the next two years and actually get a guaranteed payment equal to about 50% of the current price (unbelievable).
3. Shorts can continue to short or keep their positions but they will have to bring out cash giving them incentive to get out of their positions in the next few months.
4. Insiders who own shares will benefit from the dividend payment. Previously, to benefit, they would have to rely on the shares appreciating and selling shares. They will also be motivated to keep their shares.
5. Employees who had options repriced at $3.24 might have a chance to benefit from a stronger stock price by then and may have incentive to keep the shares.
6. The payment in 2010 will not come from existing cash but from the PCD remaining money (up to $50m).
7. A share buyback doesn't help earnings/share because there is NO earnings. As some have mentioned, the shorts can just keep shorting what the company buys back as well.

I believe the above has real incentives for shareholders and shorts. The company can do something tangible by being creative without impacting short term liquidity. It will highlight their massive cash position, which at this stage is the company's strongest point. Shareholders will have confidence the board/management actually "cares" about shareholder value and will benefit themselves. Imagine some executives getting a nice $500k to $2m bonus dividend!

Anyway, just a thought on an otherwise horrible week for shareholders (on top of the last 4 years).

Wednesday, October 8, 2008

Liquidity, frozen asset, lack of confidence, bailout

Am I talking about the US banks, economy, or the fed actions? No, its the sorry situation with UT stock. The stock closed at an all-time low of $2.25 after hitting an even lower intra-day low of $2.15. I could talk about all the "assets" and value the company has but this situation is all about liquidity. The company understands liquidity (see last year) but here is an example of shareholder liquidity problems TODAY. I was talking with an institutional investor as this was unfolding and we muttered something like, there is definitely a determined seller today that was dumping a lot of shares, dropping the price 10 cents at a time. I then get a call from another institutional investor mentioning one of their clients on margin had to dump 700k shares! With trading volume averaging less than one million, it doesn't take a genius to realize it was going down hard. At some time this morning, at about 800k share volume, I was amazed to see the market cap get clipped by $47m on about $2m worth of trading. Brutal. This is the flip side of the 700k share buy that gapped the stock up to $3.37 a couple of Fridays ago.

The company has touted their $324m net cash position, their growth potential, their great technology, their "near term goal" of getting to proftiability, their goal of enhancing share holder value, and yet the stock makes another all-time low. Its unfortunate that shareholders have no recourse but to unload at these levels while management tinkers around their profitability timing and holds on to shareholder cash. While there is no guarantee the share price will go up with a buyback, it will provide confidence that is as beneficial as the return on cash. Seriously, what is the company waiting for? A $1 handle? You have got to be kidding me....That 2009 forecast coming up better be a good one or else......

One last note: One good thing about the credit crisis and all the failed strategic plans of companies all around. Executives nowadays have so many examples right in front of them on what NOT to do. Maybe the SEC/Fed should "force" UT to sell itself and/or find a merger partner. It can't be much worse than this.

Good luck everyone.

Saturday, October 4, 2008

Weekly recap - deterioration in stock markets

The stock closed at $2.88, down 41 cents or 12.5% this week. The markets hit new lows despite the passing of the "rescue"/"invest in America" plan. The DOW, Nasdaq, and S&P500 were down 7.3%, 10.8%, and 9.4% respectively. I can't remember a worse week for the markets since maybe 2002. I read an article that mentioned 1/3 of the people think its a tremendous buying opportunity, 1/3 think its just the start to further losses, and 1/3 that don't know! I personally think its going to be higher in a few weeks even if its just a bounce from an oversold condition. However, the 10k level on the DOW is very close that its like the $3 "magnet" in UT stock. As for UT, I'm hoping it starts moving up in anticipation of the next earnings report. Here are some discussion points.

Commentary on bailout/more needed - I got this link while checking the Sigma Designs board, "Realizing it is not enough, by Monday morning expect some additional Federal Reserve action, perhaps a rate cut, maybe even a coordinated move between the Fed and European and Asian central banks. Even so, the market is too big, the debt crisis too large, for central banks to control."

Other stocks down - Each company has its own issues but here is a sampling of the losses suffered by other technology companies (with some relation to UT) this year.

Alcatel-Lucent -52%
Nortel -86%
Cisco -21.5%
Ericsson -31%
Motorola -58%
Nokia -54%
UTStarcom +4.7%

This obviously is not meant to soften the blow but it does show that UT had been beaten so bad in 2007 that valuation alone (asset sales) propelled it to over 100% gains by June. The lack of operation follow through and overall bear market has brought the stock down to very attractive levels again. For deep value investors, there are plenty of stocks to pick up that will yield significant gains from this level. This is good and bad for UT as investors have a lot of choices now.

Options pricing/director compensations - The directors received both stock/options for their yearly compensation. Former lead director Thomas Toy got the most with about $200k worth of shares and another 150k options at $3.37. I was somewhat surprise that Toy "only" had around 25k shares previously so this latest batch increased it to around 100k shares. The newest director received $40k worth of stock and around 25k options. I think these are not excessive. The employee options I believe were priced at $3.24. IF this leads to more movitated employees/board/management, then it will be a bargain. Up to now, shareholders have taken a beating.

India developments- "October 1, 2008 - Indian IPTV operator Aksh Optifibre has signed a three-year content deal with Sony Pictures Entertainment under which the latter will provide Hollywood content for Aksh's IPTV service, called 'iControl'."

While BSNL & MTNL have launched their iptv services officially, it looks like Bharti and Reliance have not yet. Hopefully, the regulations passed last month as well as the commercial launch for BSNL will move Bharti to start as well. I haven't seen an update with the GOA project that will use UTs iptv/ngn/broadband products.

BSNL's target is around 150k by March. However, they also have 5 franchisees (one being Aksh) so UT will not get the full pie. Aside from BSNL, UT does have MTNL, Bharti, UTL, and Sri Lanka in the India region to build subrscribers. We've heard how UT has won 5 of 6 commercial iptv contracts in the India region and has 80% market share. It would be helpful if management can discuss the franchise model a little bit more and what the competition really is. Are other franchisee using UT equipment as well?

Awaiting contract announcements - Based on the links provided by other shareholders and what we've been reading, it seems there are going to be "new" contracts in Russia, Israel, Philippines, Hong Kong, Brazil, and Japan. UT has also been in a Latin America countries as well as Mexico that could yield more contracts. Its imperative that we start hearing these wins as some take time for revenue to be booked. Of course, China will have the largest impact on revenues and signs of openning up will be great news.

Low volume/low interest- The trading volume has been low in UT indicating lack of retail interest. Another fact is that blog viewership which normally averages about 2500 views/month was down to around 1500 in September. I guess thats what the consequence of the decline in stock price. The volatility in other stocks have focused attention away from UT as well. All in all, it could be a contrarian indicator that the stock is ready to launch :-)

Have a good weekend. Next week is going to be volatile again for the markets. Get some rest!