Sunday, August 17, 2008

Weekly recap - No rebound

The stock closed at $3.46, down 2 cents or .57% for the week. This was disappointing in light of the strength in the Nasdaq (up over 1.5%) and the failure to bounce from a 27% decline last week. There were no announcements from the company but here are some discussion topics.

2008 Revenue shortfall quantified- Fellow shareholder shadowdoc99 refined his estimates and writes:

"Okay, Tim, thanks for your reply. Basically, I made the following mistakes in my estimate. First of all, I forgot to subtract the previously expected operating profit from the sold PCD division for H2 which would be about $16.5M ($63M for entire PCD division in 2007 minus $30M for UTSI supplied cell phones to PCD divided by 2 for H2 only). Secondly, I used gross margin of 36% for handsets instead of 22% or less and 15% for UTSI manufactured handsets instead of 10.7%. Not sure where I got the 15% figure from but the 10.7% figure was from 2007 and I couldn't find a number for 2008.

So, of the $40M in unexpected cash burn, $23.5M still needs to be explained ($40M - $16.5M = $23.5M) from a loss of $135M in sales. Using $31M in lost sales for PAS handsets at 22% margin gives gross loss of $6.82M; $15M sales loss of PAS infra at 45% margin gives gross loss of $6.75M; $89M lost sales of UTSI manufactured PCD handsets at 10.7% margin gives gross loss of $9.71M.

So, adding these all up we get total sales loss of $135M with gross operating loss of $23.1M which is close enough to the $23.5M. So, all in all not so bad. The PCD handset sales are down due to recession in the US and PAS handset sales are down due to recession in China plus the restructuring. These are short term events and will resolve as we go into 2009. The PAS infrastructure sale loss still bothers me. If it is simply postponed into 2009 because of revenue recognition due to the carrier reorganization, that is no problem. If it is a cancelled contract, why was it cancelled and can other long-term PAS contracts be cancelled? If this is a one-time event, it is a small amount and of minimal consequence. Judging by company's guidance that PAS declines in H2 of this year are not going to continue into 2009, I would guess this is either delayed revenue recognition or a singular problem that will not be repeated. "

I think this latest quantification is right on and shows that the "legacy" and handset part of the company are still a significant portion of the overall revenue stream of the company. While it seems these are short term issues, we need to pay as much attention to this as well as the growing core businesses.

PCD Sale, some final words- There has been some continued discussions on whether UT did the right thing by selling PCD when it was doing well and when the company's other businesses are still unprofitable. I had replied in favor of the sale to another shareholder this week, "The overall PCD was only netting 3 to 4% gross margins a couple of years ago and that figure included the higher margin UT design phones. Now, it has spiked to 6-8% with the higher priced/higher margin smart phones. I don't think it can be maintained though. Look at Palm ordering 5 million smart phones a few days ago from their Chinese supplier for 2009. Rimm is coming out with 3 or 4 smartphones in the sub $100 category. Apple's iphone is $199 (although with high monthlys). Average selling price is going down industry wise as these are commodity products. Even UTs own internal handset business is questionable since the margins are still low and volumes are not comparable to others (scale is definitely important). So, overall, I don't think it would have continued like that but I do hope it performs well enough for UT to collect as much of the $50m due end of 2010. If UT doesn't get a decent piece of the CDMA/GSM market in China as part of the restructuring, they might as well sell that one too and save on the expenses. As for inventory, that is definitely questionable as UT also had to take in a lot of invetory from Pantech-curitel before for the exclusive agreement. That burned up a lot of cash and led to low margins for what seems like forever."

Shanghai/Harbin iptv- Tigre writes, "Given the low monthly ARPU and the necessary cost of acquiring programmings and the need to share revenue with local broadcast and media partners, it is not easy to make a profit for CT/N on IPTV at this stage. As illustratged in the Harbin article, the lack of local contents has also limited the growth of IPTV in Harbin, despite content partnership with SMG which is based in Shanghai. Also, having an IPTV operating license hasn't prevented local SARFT from prohibiting Netcom's 20 yuan/month IPTV promotion, citing that the price is too low. This is not an issue in Shanghai as SMG is the local partner of CT there. So Shanghai has its unique characteristics (including higher income of residents and being an Olympics city) and we can not generalize the success in Shanghai and expect simple replication elsewhere in China."

IPTV has done well in Shanghai with expectations that iptv subscribers will reach 800k by year's end. Shanghai with 19m in population shows the potential growth of iptv in China but the different regulatory/content issues elsewhere prevent a full openning up of the China market that makes estimates/projections difficult.

UT IPTV growth- My last posting gave some projections of growth for UTs iptv business in 2009 based on growth in the last year, looking at global growth, projections, and strategic wins/uptake in UT markets. Obviously, this is just an estimate and there are many factors that can significantly increase/decrease this number and various events that can occur over the 2nd half of 2008 that could impact the market. I'll be interested to see what sigma designs says at the end of the month during the earnings call. There will also be another UT roadshow sometime in September and the impact of the olympics. Obviously, the bookings will be scrutinized during Q3 and the overall outlook from the company for 2009. Here is another recent article that discusses growth in iptv, specially in China.

August 12, 2008 - The number of IPTV subscriber worldwide will reach 53mn in 2009, according to new estimates from a report from UK research firm Companies and Markets, with the APAC region leading growth in terms of subscribers, service revenue, infrastructure and other metrics, thanks to high broadband penetration and a supportive regulatory framework.
Worldwide IPTV service revenue is predicted to reach US$38bn in 2009, with the Americas and Western Europe forecast to be the biggest markets in terms of revenue per user, according to the report, entitled "Global IPTV Market Analysis (2006-2010)". China is expected to be the future "IPTV dragon", thanks to its rapid urbanisation, fast-growing economy and expanding middle class, while the US is expected to be a more difficult market for IPTV due to high existing pay-TV penetration, and stiff price and service competition likely to come from "entrenched" operators of cable and satellite services.

Potential restructuring? - With continued losses projected for the next several quarters, uncertain PAS market, uncertain revenue growth from the core businesses, one analyst and some shareholders are speculating that the company will need to further restructure. UT 2008 revenues of $900m include only about $350m or so in core revenues (iptv, ngn, and broadband). A bulk is still in PAS infra/handsets, and GSM/CDMA handsets. Expenses are still around $380m yearly run rate with $160m or so in R&D. Parts of the R&D are linked to PAS/handsets but the bulk is in the core business. However, obviously, that is still way too high no matter how you look at it. So, is it time to cut further? At this time, I have to say no. The company will continue to cut expenses by selling/merging the CSBU into other business units, will reap further cost savings after all the "legacy" expenses are done (some additional IT, accounting, legal expenses to wrap up). The company has raised substantial cash (I don't agree with all the particulars in the stock sales, interest spending, etc) the past year and will end the year with a strong net cash position. The company's focus is on growth and have earned some time (not a lot) to show that bookings are strong and return to cash flow positive is near. Management stands by its goal of increasing revenue several hundred million and I can see how that can happen but timing is as usual tricky (its already missed Blackmore's initial sustainable expense ratio targets for late 2008/early 2009).

Stock buyback- When the company had over $600-700m in cash, it also had a lot of debt and net cash was lower than where it will end up the year. In fact, most companies with similar market caps don't have anywhere near the net cash the company has. The problem is the cash at hand is still "lower" and do we really want them to borrow at 10.9% or dilute the stock if they require more working capital? I want them to buy the stock at these lower prices but not to the point the company will get in trouble (obviously). I still think a limited buyback may not be bad and show confidence. The flip side is do they have good visibility in and when the iptv markets/core markets will open up? This is where management (Barton in particular) has to start earning their pay. If all you do is be very conservative and sell everything and raise huge cash and use uncertainty as an excuse for everything, then what are you there for. That is too extreme on one side. Management has to get a handle on the business to be more balance in addressing shareholder needs while positioning the company for growth. Creativity? I haven't seen it. Estimates? Way off on the downside and upside. I remain a shareholder because of the huge potential, valuation of the assets (technology/resources/cash/connections/customers etc.).

As a summary for the week, I am simply frustrated with the shareprice but think the company is close to realizing the growth in their core businesses soon (after years and years) and the stock is back to being an incredible value. It always seems darkest when the ...... Have a good weekend everybody. BTW, the olympics have been very exciting so far! Phelps...amazing skill, execution and luck.