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.

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