Saturday, August 23, 2008

Update on Stock Buyback

In response to shareholder's emails to management, a generic reply was sent back to shareholders.

Thank you for your recent e-mail to UTStarcom's management.

We have had a number of recent conversations with many investors during which we've heard a range of investor concerns and suggestions along with a great deal of excitement about our future. We appreciate this feedback and want to remind our investors that UTStarcom's management and board of directors regularly evaluate the company's priorities, including, but not limited to, possible uses of its existing cash balances.

We continue to be excited about the strategic plan we outlined in late 2007, the progress we've made thus far and the opportunities that are in front of us.

Thank you for your continued interest in and support of UTStarcom.

Mr. Barry Hutton
Senior Director, Investor Relations
UTStarcom, Inc.(510) 769-2807

Let me be clear from the very start that the "progress made thus far" has been significant but only when compared to the hole the company dug for itself. In terms of operating a company for profitability, it has been a disaster. The company's stance has been to focus on the long term turnaround and opportunities the company has (again, in the reply above, "excitement" was used"). I can't believe ANY shareholder is excited unless they sold out and rebought at these levels. The problem with management discussing the recent progress (last year) is to ignore the previous four years! Who is being short term? Shareholders or management. It is clear that shareholders have stuck with this company while management takes its time and "reacting" rather than being "proactive". All their consultants and executives have not made a dent or even get close to sustainable profitability.

The share price being up for the year is more an indication of the value the company had and NOT due to company performance. People that say they are doing well since the shares are up are simply idiots. Anyone looking at the company assets last year knows it is worth significantly more. The fact that the stock can move up close to the $6 level shows how little they have to do on the operational side of things to move the stock up.

The "hope" with "new" management rests with Peter Blackmore as the new CEO. This being Peter's first CEO role and with the low expectations, low share price, heavy assets/resources of the company showed that there was significant shareholder value that can be unlocked. Peter has discussed the company being a large startup and of course that was not the case. This shareholder group has consistently brought the history of underperformance in all the discussions we've had all the way back four years ago! Peter had a fresh start and another year to 18 months to perform and get to sustainable profitability. That time is running out and Peter should take responsibility for this.

Going back to the share buyback. People that say they need to think longer term and save cash either don't have a significant position or don't care about the company's performance. Even with the buildup for the $80m+ India Phase II contract and losses for the rest of the year, the company will have over $300m+ in net cash at the end of the year. That is about 70% of the current market cap! The CFO Fran Barton mentioned that he would not like to be involved in a company that just down sizes and not growing. Lets consider two cases. One, they do not grow (book business) the several hundred million they need to get to profitability. Are they then going to lose $300m+ next year in cash flow? Definitely not. So, they should cut costs and return funds to shareholders.

Case 2 is supposedely the one management is on, growing the company's core business significantly and ramping bookings and revenue. There was a good discussion on this by shareholders Tigre and Shadow (and I threw my two cents in). EVEN if they grow bookings by $100m/quarter next year and beyond, could they do a share buyback? Looking at the India Phase II contract for $80m+, that is probably at the extreme in terms of lower margins, longer DSOs and they only spent $60m in cash flows while funding all the material/hardware for this. How many building contractors can fund an entire buildings materials/equipment before the ink dries on the contract? Besides, most of their contracts will be much smaller, have higher GMs, quicker turnaround (lower DSOs), etc. This is a company with over $300m in net cash and probably more if they sell the CSBU and further reduce expenses. BTW, how long will they have "legacy" accounting, legal, and other expenses. They have been talking about this for 2 years. The company fights for a few million in gross profits and throw away so much in their "legacy" expenses. Anyway, back to funding the "growth". Don't forget the this is a company that owns their China building, worth about $180m. What is the problem in getting a $50m line of credit if they really need it? I am not a financial expert by any means but it is getting ridiculous when a company that has so many consultants and supposedely top-notch executives (not to mention a decade+ of operating in China) cannot find lines of credits when they have virtually no debt, huge NET cash, owns their properties, and planning to grow bookings 25 to 50% overall.

So, what is it gentlemen? Case 1 or 2 or if its even worse than any of those, then go to a strategic alternative to sell the company. Judging by the conversations I have heard, it is Case 2 and the shareprice is too low and supposedely progress has been made to make selling out now ridiculous. So, either way you look at, a share buyback should be implemented or confidence in your basic competence or charge for looking after shareholder value is gone. Going to roadshows and making promises after years (let alone the 2nd half shortfall) of underdelivering is not a productive use of time/effort. Don't be idiots and be pro-active for once. I personally like the management team but you need to do the share buyback and look competent for once. Its hard for me to defend the company/stock when time after time, the company has not produced. There is still so much value and potential with the company but that cannot be the only fighting charge we hold on. Tangible actions on the shareprice has to occur. It should not be at these levels.

Have a good weekend.