Wednesday, September 17, 2008

Discussions with shareholders

I normally wait until the weekend to post but there were a lot of discussion points today from the market being down 5%, Nortel down 50%, short selling rules, conversations with shareholders, and UT down another 11.3%. Under this backdrop, I will give highlights on my conversations with shareholders and the Nortel shortfall.

Discussions with shareholders - I talked to 4 institutional shareholders today, with one giving me a recap with his discussions with Peter Blackmore yesterday. I had received an email reply from Barry Hutton discussing the company's stance on a buyback and he mentioned most shareholders are against it at this time (huh?). The institutions I talked with had shares from 500k, 700k+, 3.7m+, and over 15m+ (foreign investor that owns a few million and in touch with others). All have supported a share buyback and still do. I had heard from another shareholder that one institution that has around 4m that was in favor of a share buyback may be hesitant now due to the global financial instability (although they were in favor of it very recently-maybe they were talked out of it). In any case, this is in addition to the retail shareholders that probably number 15-17m that I believe support a share buyback as well. I feel like a politician doing a poll but I do want to see what shareholders think of a share buyback. I want to reiterate I am not for doing a buyback of such a size that would jeopardize the long term plans for the business but as tangible confidence boosting action that would be a good return for their "excess" cash.

Based on the presentation slides on the company's presentation in New York last week, the company will end the year with $324m in net cash after seeding an Indian contract and further losses in Q3/Q4. Amazingly, this is more than the current market cap as of closing today. The question becomes how much will the company spend again in 2009 in order to facilitate the growth they are targetting and accomodate their current cost structure (no further major restructuring or head count reduction is plan based on the presentation).

The company's credibility in projections have been terrible but here is my stab in the dark. $1.1b in revenue, 27% gross margins, and $380m in expenses. The higher revenue from this year is based on the "high" revenue target for 2009 in the slide. +2% gross margin is based on better mix of revenues from the core business (less from handsets), and expense based on $95m/quarter as legacy costs and more efficiencies are rung out. It should be $95m by Q4 already but the slides had it at $100m. Anyway, those numbers above still would result in $80m in losses. There are other items that could hurt cash flow such as taxes/options that will/can be offset by interest income, Yuan appreciation, proceeds from a CSBU sale, further outsourcing of handset business, lease of building, patent proceeds, etc.

Lets add $20m more in cash flow losses for contingencies for a total cash loss of $100m in 2009. I will not reduce this by $60m that was used for the India contract (assuming they carry this over quarter to quarter). The company will then end 2009 with net $224m with these assumptions. There is no more convertible bond, or options/China investigations, etc to worry about. Because of this, I think it is reasonable for the company to do a buyback. One institutional holder mentioned a buyback of up to $50m, spread over 6 to 12 months. In any case, I believe there is a lot of support for the buyback and shareholders should continue to bring this up with management. Shareholders discussed a lot of issues today such as India iptv subscribers, China iptv market share, naked short selling but as T. Boone Pickens mentiions, that misses the point. I say buyback, buyback, buyback!!! (ok wanted to say something like that since I keep seeing those commercials :-).

Discussion with Peter Blackmore - From the briefing I had, here were some highlights.

Impact of world economy slowdown - Aside from the shortfall in 2008, there is no other pushouts or further weakness seen. This may change and the company has yet to finalize 2009 guidance but the markets/tech areas they are targetting must be ok for Peter to be confident. Again, its "guidance" and take management's word at your risk but it was a good question to ask in light of the Nortel shortfall and the worldwide slowdown.

Insider buys/Share buybacks - Ongoing discussions and nothing until Q3 earnings call at the earliest. The word I am getting is Peter wants to buy some shares but prevented from doing so due to his tax sale earlier. Again, hearsay...and nothing tangible.

There were numerous other topics such as Japan, Fran Barton's compensation, CFO replacements as well as D.King's replacement, etc and nothing surprising. In general, people feel good after talking with Peter. Credibility over the last few years have been bad and it seems Peter realizes this shortfall was brutal.

Nortel - Read the announcement for Nortel and its a nightmare for their shareholders. They are planning restructuring, their CDMA business has not bottomed, their future 4G business will be divested, they need to raise cash, they borrowed at over 11% previously, they need to overhaul company expenses/decide with are core/none-core. Basically, UT in this light, is way ahead!

I'll end this post by saying shareholders have to stay united and not stand for poor stock/company performance. I want to reiterate again and again that we cannot stand for performance like what we went through under Fran Barton's tenure (Lu was the CEO but I'll use that period for benchmark). As I replied to Peter, he needs to reverse the following:

1. No profitable quarters.
2. Numerous failed guidance for profitability
3. Declining share price
4. Increased compensation
5. Little or no credibility

I will continue to discuss issues with retail/institutional holders such as candidates for the board of directors, faith of current directors and their performance over the years (from the collapse of the shareprice, failed strategic study, and the latest being F. Barton's tenure/compensation). If there are shareholders (retail/institution) that have ideas or just want to join the "group", email them to me at

Have a good night everyone.