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!

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