I've written about UTs PCD and its potential sale before. This division has been designated as none-core so its natural to speculate how much UT can take in. Here is an initial background post in December 2007 where I discuss the PCD and Motorola's own handset division.
http://utstarcom-stocknews.blogspot.com/2007/12/motorola-palm-and-uts-pcd.html
Overall, worldwide handsets are set to grow again in 2008 but not everyone is doing well. The industry is fragmented and consolidation is ripe with Nokia leading the market and approaching 40% market share. In addition to Motorola seeking to sell its division, the following developments have taken place.
Lenovo - "PC maker Lenovo Group said yesterday (Feb 2008) it will offload its handset business for $100 million to a group of private equity firms to boost profitability."
http://english.peopledaily.com.cn/90001/90776/90884/6349259.html
"Lenovo's handsets were sold primarily in China, accounting for $108 million in revenue during the quarter ended on Dec. 31, 2007. That figure represented 2.4 percent of the company's total sales during that period. During the quarter, the company reported that handset shipments declined by 31 percent compared to the previous year."
The company eventually unloaded the division on March 31. I don't have a yearly revenue but extrapolating the quarterly revenue of $108m, it was probably around $400m/year but revenue was declining substantially and most if not all of the sales were in China. I also doubt if it was profitable.
http://www.pacificepoch.com/newsredirect/120576_0_1_0_C/
Huawei - "China's Huawei is reported to be considering selling a stake in its mobile phones division to foreign investors in exchange for access to the US market." "The company doesn't publicly release breakdowns of the revenues or profits of different divisions, but the sources told the newspaper that the division up for sale is profitable and that the sale isn't meant as an exit from the business. The company was recently reports as aiming to increase its handset production to 50 million units per year. Huawei currently outsources its handset manufacturing to Thailand based Cal-Comp Electronics and Singapore headquartered Flextronics."
http://www.cellular-news.com/story/31057.php
ZTE - "ZTE USA, the United States subsidiary to Chinese company ZTE, today announced that MetroPCS has signed an agreement to purchase ZTE’s CDMA PCS and AWS handsets. The agreement marks the company’s first handset customer in the United States."
ZTE and Huawei both want to get into the North American market and have often been mentioned as potential bidders for Motorola's handset division although the size of Motorola may preclude that.
http://telephonyonline.com/wireless/news/zte_handsets_USA_121907/
UTStarcom - 2007 sales of the PCD was at $1.664 billion, up from $1.34 billion in 2006 and $1.37 billion in 2005. The company shipped 2.8 million units and had record quarterly revenues in Q4 2007 of $560m and 6.2% GMs. Profit margins in 2005 and 2006 had been 4 and 3% respectively while it improved to 6% in 2007. For 2008, revenue is expected to be 1.74 billion and bring in gross profits of about $104m (up from $94m). The margins doubled from 2006 to 2007 due to higher average selling prices and large inventory write downs in 2006. Overall, the company shipped 1.5m units more in 2007 compared to 2006.
Impact of PCD to UTs bottom line - In 2007, the PCD made up 67% of the company's overall revenue and 30% of gross profits so even though it is "none-core", it has become a vital part of the company. About 35% of the revenue come from internally designed hand sets, up from 10% just a few years ago. At the same ratio, revenue from internal designed handsets will be 608m and 1130m for the resale component. If the company was to keep the internally designed portion and sell the "resale" portion, revenues will still be about $1.5 billion. We don't know what the exact margins for each division but assuming 12% GMs for the internal handset portion, the resale part will have GMs of 2.8%. Profit breakdown will be $73m and $31m.
Valuation - For the entire PCD, I am estimating it could be worth about $500m (higher revenue multiple from the Lenovo sale) due to its North American customers, increasing revenue and average unit selling prices. The division is very profitable and would be an attractive acquisition. From previous discussions, it is very difficult to get into the North American market and establish good relationship with the Verizons etc. The company has also mentioned it is on its 3rd generation of handsets and see continued growth. Based on gross profit breakdown, the separate portions could be worth $350m and $150m (5x gross profit) respectively. If the company keeps the internal design portion and hit their target of 25% of revenue for SG&A and R&D, that would be about $400m in yearly expenses (based on $1.6b of revenue in 2009 without the resale portion of PCD). That would average out to $100m/quarter. The company is targetting to get under $110m by Q4 of 2008.
Impact on 2009 earnings - Using some rough numbers at this point, the company could have $2.8b in sales and overall GMs of 16% (using Q1 GM). That would yield $450m in gross profits and yield to about breakeven if the company reduces expenses to under $110m per quarter (add in stockbased expenses/taxes). The company could sell other none-core assets to raise cash or take in massive cash from a sale of PCD but it would impact earnings in 2009 as the other business units will not be close to making up for the loss gross profits (obviously). Either way, expenses need to go down and a sale of none-core assets is expected. We'll keep up with the news with Huawei and Motorola (and other handset news) but in general the PCD is a valuable asset that can be sold to raise significant amount of cash or maintain their enormous quarterly expenses until the core business units can become profitable on their own.
Saturday, May 10, 2008
Weekly recap - Stock traded above $4
The stock closed the week at $3.91, up around 18% for the week on the back of positive preannouncement from the company. The stock is still off about 60+ percent from the 2007 highs but up from the 2008 lows of $2.23.
Company preannounces positive Q1 results - See previous posting. The following describes the current situation properly,
"Since announcing our new corporate strategy in September 2007, we have made a good deal of progress," said Peter Blackmore, UTStarcom's president and chief operating officer. "These preliminary results reflect that progress, plus we benefited from some positive one time factors. There is still a lot of work to do in our turnaround, but we are on track with where we expected to be."
Before this week's announcement, there has been a lot of progress in settling lingering issues such as the delayed financials, options/China investigations, strategic direction of the company, control of the company, convertible bond overhang, internal control issues, communication with the investment community. However, there has been little signs of operational improvements with the company losing 40-50 cents/quarter and burning a lot of cash. As Blackmore mentioned in the PR, there is now tangible effects of the improvements showing up. Again, it is hard to get overly excited about certain contract wins when we investors don't know the value. Everthing up to this point has been "strategic" and "have faith". Remember, the company expenses have not gone down materially at over $120m so it is "expected" that they will win contracts. This weeks announcement do show their cash generation steps are working improving cash to $305m and lowering debt to $36m. Gross margins were guided up from 13% to 15-16%. This is significant because revenues also were guided up to $580-590m from $500-520m. Its not easy to move GMs up 300 basis points when the bulk of revenue comes from the low margin PCD.
I am definitely upbeat due to the stock price gains but this is off all-time low base. It is encouraging that management is more cautious and see this turnaround in the proper context. Just last week, Brian Caskey mentioned the 3 million iptv capacity as not very large and this week Blackmore citing progress but saying much more work needs to be done. Obviously, there has to be progress in expense reduction, sale of none-core assets, and maximizing their return on investment. The last item I touched upon on the last post regarding a share buy back. The company is not in the real-estate or investement banking/trading business so it should buy back shares at the current low prices.
Triple Play contract in GOA, India - "The end-to-end network will provide more than 100,000 subscribers in Goa with high-speed access to several new services including broadcast-quality IPTV and e-Governance applications." http://biz.yahoo.com/prnews/080508/aqth036.html?.v=57
Post of week - This one goes to Tigre for his recap of the significance of the GOA win. "Today's triple-play contract in Goa, following previously announced GEPON contract in that Indian state, billed today as "first deployment of IPTV, GEPON and NGN solutions on a single network," is a great illustration of the new sales approach adopted by UTSI to bundle broadband, NGN softswitch, and IPTV in one potent package to enhance the appeal of its products to potential customers, and thus gain more revenue and overall corporate margin as a result."
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151975&mid=151975&tof=9&frt=1
Price targets and analyst/institutional actions - Tigre adds, "Who knows, I might even have to raise my target stock price for end of this year, but I'd wait a bit for more signs that Blackmore can execute the strategy that he has put in place. " For the record, Tigre has a $5 target at the end of the year or early next year and I have a $10 target. At the end of the year, we'll see who can sell their crystal ball :-)
"So, my current end of the year target assuming they get to profitability is $8-9. I'll round up the target to $10 with the shorts giving it a $1 premium :-) Most of the analysts agree that the downside is limited (as also shown above) but are wary of the profitability/timing (hence the discount). As an investor/trader, we have to look at risk/rewards and it is looking like the biggest risk is opportunity cost. Of course, in this current market, the opportunity cost is not too great (unless you are shorting). The above is why I and most longs are sticking with this company. Because if management can get their act together, the stock should move significantly higher from here." http://utstarcom-stocknews.blogspot.com/2008/01/current-liquidity-and-2008-year-end.html
Except for BWS, most price targets are in the $3-3.5 range. S&P had a $11 price target early in 2007 and now has a $3.5 price target. As the stock goes up and the quarterly results start to show tangible progress, the stock price targets will start to go up.
Earnings report and cc on May 15 - It is nice to see the company back in a somewhat regular reporting cycle and investors can gauge their progress in the turnaround. The upcoming call will be close to the 1-yr anniversary (end of May 2007) when the company made the announcement to do nothing from the strategic study they started in 2006 (and once again implied they can do better by changing course - lets hope they stay committed/focused on the current track and get the stock price up). It will also be the last major opportunity for the company to communicate prior to the shareholder meeting in June (and Blackmore's transition to CEO). In a future post, I'll put out some topics that hopefully management will go over. Sometimes, management talks about certain items in one CC and then there are no more updates (such as the one signed OEM, selling/licening of patents, selling of none-core assets, stock buy back, etc).
Shareholder meeting - This is still at the end of June but people should plan to go. During Ford Motor's meeting only 56 people attended! For UT, it was 3 people in 2006 and about 11 in 2007. You will get a chance to ask some questions and meet management. I encourage people to go to have more confidence in the company. Those people that went on March 17 during the market lows probably got more confidence in holding their shares or even adding. So, there are "benefits" to going (yes, venting is a good benefit as well :-). Otherwise, you'll have to rely on my reporting and crystal ball, which hasn't been the best the last few years but my technicians say they have fixed the bugs for the last 3 years and should work fine now :-)
Have a great rest of the weekend and Happy Mothers Day to all mothers out there.
Company preannounces positive Q1 results - See previous posting. The following describes the current situation properly,
"Since announcing our new corporate strategy in September 2007, we have made a good deal of progress," said Peter Blackmore, UTStarcom's president and chief operating officer. "These preliminary results reflect that progress, plus we benefited from some positive one time factors. There is still a lot of work to do in our turnaround, but we are on track with where we expected to be."
Before this week's announcement, there has been a lot of progress in settling lingering issues such as the delayed financials, options/China investigations, strategic direction of the company, control of the company, convertible bond overhang, internal control issues, communication with the investment community. However, there has been little signs of operational improvements with the company losing 40-50 cents/quarter and burning a lot of cash. As Blackmore mentioned in the PR, there is now tangible effects of the improvements showing up. Again, it is hard to get overly excited about certain contract wins when we investors don't know the value. Everthing up to this point has been "strategic" and "have faith". Remember, the company expenses have not gone down materially at over $120m so it is "expected" that they will win contracts. This weeks announcement do show their cash generation steps are working improving cash to $305m and lowering debt to $36m. Gross margins were guided up from 13% to 15-16%. This is significant because revenues also were guided up to $580-590m from $500-520m. Its not easy to move GMs up 300 basis points when the bulk of revenue comes from the low margin PCD.
I am definitely upbeat due to the stock price gains but this is off all-time low base. It is encouraging that management is more cautious and see this turnaround in the proper context. Just last week, Brian Caskey mentioned the 3 million iptv capacity as not very large and this week Blackmore citing progress but saying much more work needs to be done. Obviously, there has to be progress in expense reduction, sale of none-core assets, and maximizing their return on investment. The last item I touched upon on the last post regarding a share buy back. The company is not in the real-estate or investement banking/trading business so it should buy back shares at the current low prices.
Triple Play contract in GOA, India - "The end-to-end network will provide more than 100,000 subscribers in Goa with high-speed access to several new services including broadcast-quality IPTV and e-Governance applications." http://biz.yahoo.com/prnews/080508/aqth036.html?.v=57
Post of week - This one goes to Tigre for his recap of the significance of the GOA win. "Today's triple-play contract in Goa, following previously announced GEPON contract in that Indian state, billed today as "first deployment of IPTV, GEPON and NGN solutions on a single network," is a great illustration of the new sales approach adopted by UTSI to bundle broadband, NGN softswitch, and IPTV in one potent package to enhance the appeal of its products to potential customers, and thus gain more revenue and overall corporate margin as a result."
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151975&mid=151975&tof=9&frt=1
Price targets and analyst/institutional actions - Tigre adds, "Who knows, I might even have to raise my target stock price for end of this year, but I'd wait a bit for more signs that Blackmore can execute the strategy that he has put in place. " For the record, Tigre has a $5 target at the end of the year or early next year and I have a $10 target. At the end of the year, we'll see who can sell their crystal ball :-)
"So, my current end of the year target assuming they get to profitability is $8-9. I'll round up the target to $10 with the shorts giving it a $1 premium :-) Most of the analysts agree that the downside is limited (as also shown above) but are wary of the profitability/timing (hence the discount). As an investor/trader, we have to look at risk/rewards and it is looking like the biggest risk is opportunity cost. Of course, in this current market, the opportunity cost is not too great (unless you are shorting). The above is why I and most longs are sticking with this company. Because if management can get their act together, the stock should move significantly higher from here." http://utstarcom-stocknews.blogspot.com/2008/01/current-liquidity-and-2008-year-end.html
Except for BWS, most price targets are in the $3-3.5 range. S&P had a $11 price target early in 2007 and now has a $3.5 price target. As the stock goes up and the quarterly results start to show tangible progress, the stock price targets will start to go up.
Earnings report and cc on May 15 - It is nice to see the company back in a somewhat regular reporting cycle and investors can gauge their progress in the turnaround. The upcoming call will be close to the 1-yr anniversary (end of May 2007) when the company made the announcement to do nothing from the strategic study they started in 2006 (and once again implied they can do better by changing course - lets hope they stay committed/focused on the current track and get the stock price up). It will also be the last major opportunity for the company to communicate prior to the shareholder meeting in June (and Blackmore's transition to CEO). In a future post, I'll put out some topics that hopefully management will go over. Sometimes, management talks about certain items in one CC and then there are no more updates (such as the one signed OEM, selling/licening of patents, selling of none-core assets, stock buy back, etc).
Shareholder meeting - This is still at the end of June but people should plan to go. During Ford Motor's meeting only 56 people attended! For UT, it was 3 people in 2006 and about 11 in 2007. You will get a chance to ask some questions and meet management. I encourage people to go to have more confidence in the company. Those people that went on March 17 during the market lows probably got more confidence in holding their shares or even adding. So, there are "benefits" to going (yes, venting is a good benefit as well :-). Otherwise, you'll have to rely on my reporting and crystal ball, which hasn't been the best the last few years but my technicians say they have fixed the bugs for the last 3 years and should work fine now :-)
Have a great rest of the weekend and Happy Mothers Day to all mothers out there.
Subscribe to:
Posts (Atom)