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.

1 comment:

Anonymous said...


just my 2 cents...