Sunday, November 30, 2008

Weekly Update - Rally?

The stock closed the week at $1.90, up 43 cents of 29%. The markets were significantly higher with the DOW, S&P, and Nasdaq rising 9.7%, 12%, and 11% respectively. Other telecom/equipment providers rose as well. Sonus was up to $1.55 from $1.46. Alcatel-Lucent up to $2.14 from $1.86. Ericsson up to $7.12 from $5.82. 3com up to $2.01 from $1.53 (nice move) and Nortel up to 0.57 from 0.42. While the market is up nicely from late last week's bottoms, the situation has just gone from really ugly to slightly ugly :-) As a side note, my 401k peaked at about $150k early this year and now is not even six figures. Of course, I'll probably be working another 30 years so it has some time to recover :-) At the current price of $1.9, UT is down 85 cents or 31% for the year. While that is not too unusual in this market, UT had been up over 100% as late as July this year and down about 80% from early last year.

Asia IPTV - From eganameten, here is an article on iptv in Asia. Even at this juncture, there are signs of a "slowdown" in worldwide iptv as Europe and places like Hong Kong have had a few years of very good growth. Sigma designs recently warned of slowing in iptv but in general, there should be very good growth for UT markets.

"In numerical terms, China is already a major IPTV player, with 2.2 million subscribers at the end of Q3 (China Telecom had 1.51 million, China Netcom 690,000), but content and licensing requirements so far prevent it becoming mass market. (So too, does the political capital previously expended on building major cable networks.)

IPTV licenses are not issued directly to telecom operators, which control the infrastructure, but rather to joint operations between telecom carriers and IPTV broadcasters. Further, they require three separate licenses from the Ministry of Industry and Information Technology and a fourth, an Internet culture business license, from the Ministry of Culture. And local telecom operators are only allowed to offer IPTV in cooperation with national IPTV license holders -- a China Telecom branch in Hubei Province was recently fined for breaching this rule."

China Telecom completes iptv upgrade in Shanghai - I got the text from an institutional holder....China Telecom completes upgrade to support 900,000 IPTV users in Shanghai Shanghai. November 26. INTERFAX-CHINA - China Telecom recently finished upgrading its IPTV (Internet Protocol Television) network in Shanghai to support up to 900,000 simultaneous users, domestic media reported onNov. 26. ZTE Corp., UTStarcom Inc. and Huawei Technologies won the tender to upgrade the network in different districts of Shanghai, Chinese IPTV industry portal reported. The three companies were also selected to supply IPTV set-top boxes, along with two other domestic set-top box suppliers, namely Shenzhen Coship Electronics Co. Ltd. and Chengdu USEE Digital Technology Co. Ltd., the report said. "It is very likely that China Telecom will kick off a new round of IPTV network upgrades next year because the IPTV user base is expanding much faster than expected," Zhang Yanhong, an industry analyst and founder, told Interfax. The IPTV user base in Shanghai is expanding more rapidly than in any other Chinese city. As of Nov. 25, Shanghai had more than 700,000 IPTVusers, more than triple that recorded at the end of 2007. IPTV in Shanghai is jointly operated by China Telecom and Shanghai Media Group, the largest media group in the region.

Upcoming Conference Call - The cc to discuss OPEX reduction in December should help UT stock back to the $2+ level. At the current market cap of $240m, it assumes UT will lose an additional $60m in cash flow, the building/property are not worth anything, and technology which they have invested hundreds of millions + all client relationships are worth nothing. If nothing else, the rally we have shows there are tremendous values at the appropriate times.

Again, the rally was significant but looking at equity prices, it sure didn't feel "significant" after all the losses. One thing is certain. The equity markets will continue to be volatile and economic recovery projections (the ones I've read over the weekend) are still about a year away at the earliest. After over 4 years in this stock, it is depressing to see the current state of the stock even in this market. UT just failed to participate in the bull markets the last few years despite operating in the highest growth markets, having visionary CEOs/founders, and the contacts/relationships in Japan/China (Softbank/Son, Alibaba/Ma, etc). I continue to hold out hope that someone in that management/BOD can salvage/utilize the remaining resources to create a profitable/growing company that will yield good results for shareholders still remaining. If it doesn't happen, then hopefully, some shareholders will find the share price low enough to force management/BOD to act.

Have a good rest of the Thanksgiving weekend.

Sunday, November 23, 2008

Weekly Recap - Really Ugly

The stock closed at $1.47, down from $1.98 the last two weeks. I didn't post a weekly recap last week so this I'll reflect the last two week's declines. The stock was down 51 cents or 26%. The markets were significantly lower as well with declines of 16%, 10%, and 14% for the Nasdaq, DOW, and S&P respectively. Those numbers even reflected the last minute rebound late Friday of 5 to 6% for the markets. It is really ugly. UT stock hit an all-time low of $1.35 on Thursday and Friday and at the current price of $1.47 has a market cap less than $180m. So, what do I do this week.....Yup, buy more UT at $1.65, $1.51, $1.46, and $1.35 (about 15k shares total). Obviously, I consider this a good bargain but in this market, it can go down some more.

NGN webinar - Nothing significantly new that I could tell but they did mention some overall numbers. Bookings growth for the core was 25% in 2008. Thats definitely good growth but off a low base from 2007. As we've seen, the declines in PAS and handsets in 2008 were too much for core revenue to absorb. Revenues from a geographical standpoint is as follows 50% China, 20% India, 15% US (handsets), and 15% others. As my last post indicated, I was really surprised/disappointed about the non-PAS handset sales declining by about half in revenue from early 2007. Again in the last earnings call, Peter did mention introducing a bunch of new CDMA handsets into the China markets. That could really help revenue going forward. The handset margins are not great but better than some broadband margins. With the telecom consolidation in China, UT handset sales (non-PAS) might finally do well. I reviewed the transcript from last quarter and they did mention 10%+ bookings growth in 2009. On top of the growth in bookings for the core in 2008, the drastically reduced PAS bookings in 2008 and declines/or lack of PAS bookings in 2009, this number may be very good. One last note on NGN, Blackmore/Casky did a good job in explaining the benefits of NGN to the carriers in terms of the savings and competitive positions the customers would have. In this environment, I think this will encourage more carriers to implement UT systems for Class 5 replacements. Again, nothing really new but the recent wins/progress in NGN is encouraging.

OPEX cuts/cash flow - The 15 to 20% target for opex cuts for "early 2009" is definitely needed and welcome news. There is serious concern about UT's cash burn so I hope this can be implemented ASAP. There will be a December call to update us on this issue. Cash flow for 2008 was also impacted significantly by the Phase 2 broadband contract. In order for India to come anywhere close to their 2010 broadband target of 20m users, there should be more contracts coming in 2009 and based on lessons learn from Phase I, it should be much better for UT in terms of GMs and cash flow.

Inida IPTV update - Looks like Aksh is accelerating roll out to additional cities in the next few weeks. They are targetting 70k users by the end of the financial year (not sure when that is). Also, they are going to target the 4m broadband users of MTNL and the 6m broadband users for BSNL in 20 cities.

IPTV estimates - Updated estimates for worldwide iptv users. China iptv users are projected to reach over 10m by 2013, which is lower than earlier projections. Growth for 2008 worldwide is about 100% which bodes well for lagging regions/areas (most of UTs target markets such as India, China, Latin America, etc). Also, UT has ancillary revenue from iptv advertising unit, surveilance etc. I'm not sure if they are including cable/iptv in the estimates.

Market valuations - Just some stock price of companies in the sector....Sonus $1.46, Alcatel-Lucent $1.86, Ericsson $5.82, 3com $1.53, and Nortel $0.42. Transmetta was recently bought for around $300m (slightly above their cash value). Some shareholders are suing due to the low share price. In this market, I would think there would be more consolidation but it hasn't happened so far. This could really help in pricing, market valuations, etc.

Have a good rest of the weekend and new week to everyone. It doesn't look like the market has found the bottom yet and year-end tax selling may just be starting. Did I mention...really ugly.

Saturday, November 15, 2008

2009 Outlook

The company will discuss additional OPEX cuts later this quarter (in about a month) but I looked into the non-GAAP revenue provided by the company that separated out the PCD division sold and included the revenue sale into the PCD (basically the Korean designed CDMA handsets sold outside of China). I also noted the book to bill ratios provided during the last 4 quarters to generate some preliminary estimates for 2009.

Q1 2007 to Q3 2007 - Just for historical perspective, the non-PCD/non-Korean handset revenue for those 3 quarters were $188, 180, and 188m. The Korean handset division had revenues of $77, 70, and 60m. For this posting, I will designate the non-PCD/non-Korean handset as "core" and the Korean handset division as "handset".

Q4 2007 - This was a huge revenue quarter for PCD having generated revenue of $560m from Q3 of $458m. Overall book to bill only came in at 0.8. The core did have revenue of $246m while the handset continued to decline to $53m.

Q1 2008 - While book to bill came in at 1.2, PCD book to bill was 1.3 while non-PCD was only 1.0. Core revenue was down significantly to $155m and the handset revenue declined again to $35m.

Q2 2008 - Excluding PCD, book to bill was again 1.0. Core revenue did jump back to $184m and handsets back to $56m. Note however that some Q3 revenue was able to be recognized in Q2.

Q3 2008 - Core revenue came in at $146m while handsets at $35m. Note also that PAS (and other handsets in China) was $37m. That means infrastructure sales (iptv, ngn, broadband, PAS infra) was only $109m. Book to bill did increase to 1.2.

So, lets list the overall trends (some were apparent/some not so): The internal design handset division has been declining as well as PAS infra/handsets by around 50% from Q1 2007. So, the PCD performance was carried by the resale part. The current Korean handset portion is currently not cash flow positive and all the improvements we keep hearing about (they are in the 3rd or 4th generation of developing their internal handsets, etc) have not hit the bottom line and is basically pie in the sky. The "hope" is this will improve as they can penetrate the China markets and make up some PAS sales. However, the numbers don't give me confidence.

Core revenue (despite some improvements in iptv/ngn) has not quite closed the gap to the $180m+ range.

Bookings have not really grown yet. This quarter's 1.2 was a start but this was the lowest revenue of the core+handset group.

Next quarter's expected revenue of $225m was way off the analysts already lowered estimates of around $250m and investor expectations in the high $200m/low $300m during the seasonally strong Q4.

OPEX cuts of 15 to 20% is not only mandatory but is insufficient to get the company to profitability. During the Q2 earnings call, Blackmore mentioning divesting or merging the CSBU in 3 to 4 months (definitely by the end of the year). This will probably done prior to the update call discussing OPEX cuts. Fifteen to twenty percent would still yield expenses in the $77-83m range (say $320m yearly runrate IF implemented by Q1).

2009 projections - It will be imprecise to estimate 2009 revenues based on bookings because of the timing issues but that is all we can go on at this stage. I will use the book to bill ratios for the core portion and estimate around $140m for the handset division. That yields (0.8*246m + 155m + 184m + 1.2*146m) + $140m = $711m in core bookings + $140m in handsets for around $850m. Again, each quarter could yield new contracts and ramping of iptv but this is my best guestimate for now. 2008 revenues (using the midpt of Q4 2008 guidance) will come in around $836m so 2009 will see little if any revenue growth. At 25% GMs, gross profits will only be $213m. This quarter's GMs of 32% was due to NGN performance and projections for Q4 are down to low 20s. The revenue for 2009 could be higher if internal handsets does better but then GMs will be lower so for now, I will go with $213m in gross profits and OPEX of $320m. That scenario could be highly optimistic if OPEX is higher or revenue lower due to CSBU divestiture. So, that is an loss of $107m. Add in $20m for taxes/options and another $23m for contingencies (higher opex/lower revenue/margins) and it can add up quickly to a $150m cash burn for 2009 (ouch!).

The company will end 2008 with about $291m + $24m in escrow in cash/short term securities. At the end of 2009, that could easily be down to $165m in net cash heading into 2010 (or about $1.32/share).

Optimistically, I have to say that there are a lot of things that can happen in the next 5 quarters such as bookings growth, even lowered expenses, higher margins, better market environment going into 2010. However, the above shows profitability not only being pushed out (once again after 4 years already) but that management is still behind the curve in their estimates/execution. Back in August 2007, they only had net $150m in cash. The 6 quarters of operational losses (+ 2009 operational losses) will be subsidized by the one time gains in investment sales and sale of the PCD.

The company also has around $200m in real estate, no debt and will generate some interest income. They have time that other companies do not but eventually, they will have to become profitable or sell out and get whatever they can for shareholders. As I said, a lot can change in the next 5 quarters and I will take a company with no debt, net cash of $165m, and profitable for 2010 (if that was the case) but thats a long ways off from here. The share price, current market environment, and years of underperformance should motivate management to have a sense of urgency but the numbers above show that even with the current opex cuts planned, it is not enough. The additional hundreds of millions in bookings/revenue that Peter was projecting that can ramp is nowhere in sight.

Have a good weekend everyone. Its really ugly in the markets and in UT stock but it could easily get worse. So, prepare for the worse and hope for the best.

Sunday, November 9, 2008

Q3 2008 Earnings Recap

Q3 revenues came in at $181m, within the range of guidance provided last quarter. Gross margins were much higer at 32% while OPEX was lower than guided at $92m. Because of the "upside", operating loss was $35m. However, including one time charges, overall loss was a mind boggling $56m.

Q4 guidance is for revenue of $215m-235m, lower than analyst estimate and much lower than what I calculated even with the shortfall announced last quarter. For a perspective of how much revenue (excluding PCD) has missed estimates, lets go back to the preliminary "guidance" for 2008. Initially, overall revenue growth was set to come in at 3 to 6% from 2007. Based on mid range of each business unit projected guidance, I came up with around $833m in "core" revenues (excluding the entire PCD). If you add in the $280m in internal handset revenue (Korean designed/sale to PCD part) that was disclused in the Analyst day meeting in June, that would be overall revenues of $1.113B. But by the June Analyst day meeting, the expected revenue was down to $1.03B, which yielded non-PCD revenues of about $755m. By the August call that discussed Q3 and Q4 cash flows, that overall revenue number (including Korean handsets) was down to around $900m, which led me to calculate around $300m still for Q4. With this latest guidance, it is obviously even lower at around $225m. Adding it all up, 2008 revenues will be around $836m ($190m+$240m+$181m+$225m). This compared to the initial $1.113B figure. While the PCD outperformed, the remaining businesses have clearly been impacted by the world downturn.

The above numbers are ugly and on top of the previous 4 years is enough for investors to pull their hair (if they still have some). In light of those numbers and the current stock market environment, its not surprising to see the stock languish at this range. If you were utterly frustrated at a $3+ shareprice after the last earnings call, at $1 and change.........well... I could end the recap but as usual there are positives to keep the hope going.

Balance Sheet - Mentioned atleast a minumum of 4 to 5 times, the current cash/short term securities balance is at $331m. There is also no debt so amazingly, this is the highest net cash position the company has had (since maybe the ipo days). Operating cash flow through the first 9 months of the year is a negative 32m + another $35 to 45m in negative cash flow in Q4. That would yield an end of the year target of about $291m, which is close to the company's projected net cash position of $300m during the Analyst meeting in New York. There is also an additional $24m in escrow from the PCD sale ($14m closing costs that is likely to be received by end of the year and $10m in one year). So, more than likely, the company will have over $300m by the end of the year. Did I mention that the company will have over $300m by the end of the year? :-) I shouldn't laugh at this since back in the June Analyst Day meeting recap, I said who would be impressed to buy a company losing $130m without PCD? and to just highlight how cheap the company is. Anyway, the company will end the year with around $300m in cash and no debt. Potentially, they could receive another $10m in 2009 and up to $50m in 2010.

Executive hires - Four new hires were announced, one for business strategy/innovation, one for intl. sales/marketing, one for sales executive in China, and one for supply chain management. It is clear that Blackmore is putting his imprint on the company but he is also fully responsible for performance.

Misc buisness unit performance - IPTV subscribers increase from 950k at the end of June to 1.1m at the end of September (15% quarter growth and 57% year growth). The company received a major win in another province similar to the win in Shanghai. The company got an ad win in Hunan province and has 40% of the PDSN market in China (don't know the value or the market potential of these though). Phase II BSNL contract should have atleast positive GMs (compared to negative for the Phase I - I hope so!). This is due to better pricing, reduced shipping costs, and better project management. There were a couple of Tier 1 wins in the Middle East in broadband (Israel and in Yemen, beating out Alcatel Lucent, Huawei among others). This sets the stage for UT to cross sell their other products.

Q3 BU numbers - MMCBU was unchanged year over year at $58m in revenue. PAS infra declined about 15%. GMs was strong at 53% vs 29% that included strong GMs from NGN and a $4m reduction in 3rd party commisions. PAS margins was also better this year. Broadband declined from $31m from $41m last year due to CPE decline associated with an ADSL expansion by Softbank last year. Most of the CC focus is on China and India so there was some let down from Japan as revenues there continue to fall. GMs in the broadband division was 10% compared to negative 12% last year (due to Phase I India contract last year). The handset division now includes the PAS handset and CDMA sales in China as well as the Korean handset sales primarily through PCD. PAS handsets declined "an expected" 40%. I'm not sure I heard or expected 40% decline but that is not good. Blackmore specifically mentioned a couple of CDMA handsets to make up some of the revenue. During the Q&A, we learned that the Korean handset division supplying PCD is not cash flow positive but the China one is .

Share repurchase - Viraj Patel mentioned there will be no share repurchase to maintain strong cash positions. At the current market (both operational markets and the stock markets) this is probably the right move. Even if the stock got a boost from a share buyback, it is still not making money and the move would be temporary. I would like to see insider buys however.

Expense reductions - It was a positive last year when Peter set target expense metrics for the company but the revenue gains never came in the 2nd half of 2008. It is hard as a shareholder to keep hearing the growth in the company's markets and yet it never hits the company. It is good to finally get over the hump of discussing whether revenue growth is going to come soon or further significant cuts will need to be taken. I still believe (or would like to anyway) that Peter's statements of ramping up revenue several hundred million is doable but at least the company has a strong balance sheet and now has faced up to the expense cuts. Peter mentioned the company will have a call later this quarter (in about a month from talking with Barry Hutton) to discuss how they will achieve 15 to 20% in OPEX reductions. Peter mentioned that process is starting already and that Barry reminded me of the sensitive nature whenever cuts are made. (I just wonder how come there is not as significant a sensitivity to shareholders all these years!) Anyway, this is probably the best news. While the cash position is great, it is just a facilitator to a growing/profitable company. On the other hand, these reductions always come with costs such as severance, lost revenue, etc. Timing is not bad as Peter noted that UT is in much better position than other companies (see Nortel for ex., ugly). Peter also noted bookings growth of 10+% in 2009. While this sounds good, it is even down from 25 to 50% mentioned 3 months ago. Bottom line, there are strategic wins and the balance sheet is great. However, visibility even a quarter out is difficult. The multi-year wins and new customers will help and margins are decent for their software offerings but pricing is still competitive.

Misc. comments/info. - This call was definitely better than last quarter, specially the Q&A portion. Paul Wehner from DSL capital (which owns a chunk of UT) did a good job in highlighting the $24m in escrow and the status of the Korean handset division. To achieve 15 to 20% in OPEX reduction (which Peter called very doable), this division plus the CSBU will probably be divested, merged or major cuts will be made in these areas. There was also a strategic iptv cable win in China. This is a small (under $5m) contract but the cable market is 160m in China. The comapny is also bidding on other similar deals.

Overall, the expectations with a sub $2 stock price is quite different than last quarter with the stock at $4.6+. On one side, the company projections for 2008 were off by quite a bit but they have strengthen the balance sheet and secured a bunch of strategic wins. The valuations is even better now than at any time previously but in this market, we've seen the stock can even go lower (although it is quite ridiculous now). There is always the risk that the company keeps burning cash but the net cash position is at the highest in years and expenses are going down. The company continues to provide good information/communication as management has reached out to investors. The management/board have a huge stake in seeing this work out and has many more options than other companies. I expected (hoped) the company would have bottomed out in early/mid 2008 and would start its rise but this was not to be. Further cost cutting is needed and it looks like management is on top of the ball. I am surprisingly upbeat despite the sub $2 stock price (maybe because I'm alreayd numb to the price and relative to other companies/markets, think it has its growth potential intact). In any case, its a wait and see but believe investors will still be rewarded in the following years. Prior to starting my post, I just caught glimpse of China's stimulus package. That should be good news for UT and hope that China "boom 2" won't miss UT.

Have a good rest of the weekend everyone.

Wednesday, November 5, 2008

Q3 Earnings preview

Here are a few thoughts for tomorrow's earnings results/cc.

Q3 earnings estimates are for revenue of $182.5m. Management has guided between $180-190m. Loss estimate is for 54c/share. However, the stock will be driven more with Q4 estimates and outlook for 2009.

Q4 estimates are for revenue of $246m. There are only a couple of analysts providing estimates but the company should be able to beat this number. 2008 revenue (excluding PCD and including the shortfall discussed last quarter) should still be around $900m. That would put Q4 numbers in the high $200m/low $300m range. Book to bill should easily be over 1 due to the India Phase II contract and the fact that Q3 revenue is low due to the shortfall and some revenue recognized earlier in Q2.

The sale of PCD/MSBU also occured in early Q3 so net cash will increase substantially. The company's forecast is to end the year with net $324m in cash. They will still burn about $50m in Q4 so by the end of Q3, they should have about $375m in net cash or a little over $3/share. Enterprise value will be negative but that is not uncommon in this bear market. Aside from the cash, the company has around $200m in real estate/building and other investments/securities that yield a book value significantly higher than the current price. The key to unlocking this value is to get to profitability or atleast maintain neutral cash flows going forward.

Other things to look for are iptv subscriber numbers and new contract wins in Russia, Japan, Brazil, and other Eastern European countries, Latin American countries, etc. Its counter intiuitive to think a company can grow revenues in this environment but then again, a lot of UT traction in iptv, ngn, and broadband has happened recently.

Target expense metrics discussed all year long may also get some input. UT expenses are still way too high and revenue growth has not happened. It seems there is no major cuts in the horizon, which could mean that management is confident that revenues/bookings growth will be robust or that management is out of touch with the concept of profitability. I am not sure what "near term" means to management as well since we have been hearing about their near term revenue growth and profitability goals for the last 4 years.

Anyway, the company has been operationally in the red for the last 12 quarters but amazingly the balance sheet is fairly good. In the last year, there have been strategic wins that give hope that the company is in the right track. Whether the market will assign a large discount or ridiculously large discount to book value remains to be seen the next couple of days.

Some shareholders have become even more pessimistic on the share price predicting $1.5 or lower prices. I guess that is human nature but if it happens, its time to close your eyes, press the buy botton and hang on :-)

Sunday, November 2, 2008

Weekly Recap - Markets rally

The stock closed at $2.38, up 46 cents or about 24% for the week. The markets were up double digits recouping the previous week's loss. Normally, these type of numbers would be huge news but the wild moves (up and down) are more the norm than the exception. The Fed rate was cut by half a point to 1%. In the near term, the governments all around the world are trying to will the market to go up.

UT joins iptv forum - UTStarcom, Inc. (Nasdaq: UTSI - News) was recently accepted into the Open IPTV Forum, a telecommunications industry organization charged with publishing standards-based specifications intended to expedite deployment of Internet Protocol Television (IPTV) services to telecom operators, consumer electronics manufacturers and network infrastructure providers around the world.

UT earnings on Nov. 6 - Q3 earnings to be reported this coming Thursday.

Interview discussing UT strategy/growth in Indian broadband/iptv- Manish Matta, senior director of marketing at UTStarcom (News - Alert), explained that the issue in India is not due to a lack of technology, but a lack of consumer awareness regarding the benefits and applications enabled by broadband. There were some good comments on the article as well from fellow shareholders. We learned from the article that there is about 800k live iptv users in China on UT equipment. Thats up from 538k in April. While the growth rate is good, it actually seems low since it included the additions from the olympics.

Alcatel-Lucent earnings - Restructuring, selling assets, focusing on the client/new technologies, trying to return to profitability...........sound familiar. IF ALU can go up, UT can as well :-)

Comment on stock price - What are the chances that UT will see $3 soon? As long as the markets don't make new lows and nothing seriously bad in the earnings, that should be reasonable. Thats still a 26% gain. What are the chances that UT will get to $5 in the next year? UT has always hit $5/share so thats atleast a decent bet as well. Thats 110% from here.

Have a good week everyone and hope UT's earnings call will be much better and shareholders can recoup the 50% loss since the last earnings call.