Saturday, July 26, 2008

Weekly recap - Break down or break out?

The stock closed lower for the week at $5.09, losing 9 cents or 1.7%. Oil continued lower this week ending at $123. However, the markets remained volatile and ended mixed with the DOW falling 1.09%, S&P losing 0.23% and the Nasdaq rallying 1.22%. While trading in Ut was limited to a narrow band and low volumes, the focus was on the symmetrical triangle converging to a vertex. I'll discuss this a little more at the end of the post but here are UT related news for the week.

UT debuts first iptv-based video advertising network in China - "UTStarcom will provide Guangxi Telecom with 3,600 concurrent IPTV streams for the initial deployment of the interactive advertising system in 14 Guangxi cities. In the first phase, set-top boxes will be deployed in supermarkets, department stores, office buildings and in Guangxi Telecom's facilities in Nanning, Liuzhou, Guiling, Qinzhou, Guigang, Wuzhou, Beihai and Baise." While revenues from the advertising systems and previously announced video surveilance wins will be small, it demonstrates the extent of iptv's functionality and potential usage/markets away from the home. Cisco, Nortel, and others have targetted markets such as tele-presence (setting up massive video conferencing rooms/networks). I see UTs expansion of iptv into different markets as similarly promoting iptv, broadband, and its ngn capabilities. The markets are small right now but the wins show that demand is there. The difference is UTs surveilance and advertising systems can easily explode as various cities in China implement it.

China internet users surpass the U.S. - "China said the number of Internet users in the country reached about 253 million last month, putting it ahead of the United States as the world’s biggest Internet market." "The new estimate represents only about 19 percent of China’s population, underscoring the potential for growth." The US and other countries have a 70% penetration rates. There were also discussions on the growth of internet advertising that should help UT in iptv/broadband areas. "With Internet use booming, so is Web advertising. The investment firm Morgan Stanley says online advertising in China is growing by 60 to 70 percent a year, and forecasts that by the end of this year, it could be a $1.7 billion market." It will be the Baidus that will benefit directly with UT benefitting indirectly with equipment/service sales. I like the following statement, "“The Internet market is the fastest-growing consumer market sector in China,” said Richard Ji, an Internet analyst at Morgan Stanley. “We are still far from saturation. So the next three to five years, we’re still going to see hyper-growth in this market.”

China operators statistics- From curious_tigre posting on the yahoo board, Thanks to Tigre for a very nice summary!

Brocade buys Foundry for $2.9b - Foundry makes hardward that competes with Cisco (routers, networking equipment, etc) with primary markets in North America. Foundry had about a billion in cash/investments so Brocade paid about $2b for the business. Lets look at the valuation that they paid. Foundry had revenue of $607m in 2007 (about 3x revenue), gross margins of 61%, expenses of about $282m and operating profits of about $100m (20x operating profits). Its not an apples to apples comparison between UT but it shows the market will pay for high gross margin businesses and operating profits. With UTs shares around $5, the UT business (about $1b in revenue) alone is being valued at 0 or negative at this stage. It would really surprise me with the current management focus on the core business and continued R&D/expenses that it cannot get the valuation higher than $0 or negative. The market will give UT time to execute their current focus (which they have done so) but at a certain point, shareholders will get frustrated and thats when pressure will build again for a full sale of the company. Lets hope that will be at much higher share prices and better positions than back in late 2006, their last venture of selling the company.

Worldwide IPTV and broadband growth- Aside from Tigre (which usually posts good information), Yahoo poster "Bamboozled" gets this week's contributor of the week for his various posts. It is interesting to note that Latin America, Middle East, and Africa are just starting and are UT targetted markets.

Iptv subscribers in various regions:

Region Q1 2007 Q1 2008
Europe 3,875,266 8,425,370
Asia Pacific 1,129,355 2,619,035
North America 850,601 2,258,601
South and East Asia 1,353,000 2,086,000
Latin America 2,300 11,183
Middle East & Africa 10,000 10,000
Total 7,220,522 15,410,189

Broadband growth for each region:

Region Q1 2007 Q1 2008 % growth
Western Europe 81,937,250 97,610,797 16.06%
North America 70,972,699 84,601,988 16.11%
South and East Asia 61,253,850 78,390,614 21.86%
Asia Pacific 53,310,214 59,017,122 9.67%
Latin America 14,867,952 20,154,134 29.3%
Eastern Europe 11,867,952 17,627,532 32.67%
Middle East & Africa 7,068,699 10,284,381 31.27%
Other 9,842 18,509 46.83%

"UTStarcom eyes growing iptv market in China"- "The prediction that IPTV in China is facing an opportunity, made three years ago, appears to be coming true.

According to one report of statistics from researchers Frost & Sulivan, the number of IPTV subscribers in the region is predicted to grow from the current 1.5 million to 27.4 million by 2013. Deployment will be strengthened by the explosion of broadband in various high-growth markets across the region, as well as through advancements in transmission, compression and watermarking technologies that have enabled more service providers to move toward IPTV delivery.

Short position and Naked short list - Short position increased again to 27.5m and there was a report of about 1.5m shares that have been failed to deliver.

Technical Analysis - While the stock has basically stayed in the $5 area for most of the last 7 weeks, the stock price is converging to the vertex of a symmetrical triangle. Traders have mentioned potential major break down or breakout of the stock price in the very near term. Something has to give. For the longer term, the stock should do well as the company has streamlined operations and are more focused. The technology and markets seem to be well positioned as well. However, there are always short term forces that could derail the stock such as continued losses, market weakness, etc. There is also the upcoming earnings announcement and pricing of employee options that may influence the stock price. I hope management stays positive and not purposely derail the stock for better options pricing. That would be sick but I've seen a lot of weird things in the market just this year alone so who knows. On the positive (optimistic) side, I am hoping management finally institute the long discussed stock buyback. As Barton mentioned, they would have to do something creative if they have excess cash :-) This is the time to do it guys............

Have a great weekend to everyone!