Saturday, September 27, 2008

Weekly recap - Awaiting the market bailout

The stock closed at $3.29, down 12 cents or 3.5% for the week. The DOW lost 2.1% while the Nasdaq dropped 4%. The major news of course is the anticipated Paulson bailout plan. While this will move UT stock, UTs faith will come during the next earnings call in about a month, where we will hear about Q4/2008, bookings, and 2009 forecasts. Stock volume for UT was low all week failing to reach even 1m shares in any day after trading over 5m shares the previous Thursday/Friday. Here are some topics/news discussed last week that have some UT relevance.

Short interest - Number of short shares fell to 22.177m from 22.6m at the Sept 15 settlement date. With the stock trading under $3 and a jump in volume/price (week ending 9/19), its probable the short interest has fallen even lower. Its unfortunate to see some longs giving up and the shorts able to cover at under $3/low $3s but thats where the company performance/macro environment has put the market price at. I'm still waiting for the "hold to maturity valuation." As one shareholder I talked with mentions, if the hold to maturity value isn't what we expect it to be, we'll all have to move to China and set up tents in the Hangzhou building.

Sri Lanka IPTV- Scheduled previously for an August launch, it has now lifted off! Woo hoo. "Officials said UTStarcom, Inc. has entered into a multi-million dollar contract recently with Sri Lanka’s Just In Time Holdings Pvt Ltd. to supply its industry-leading RollingStream(R) end-to-end IPTV solution to SLT." Just like Aksh in India, UT is partnering with a local distributor (in this case Just In Time Holdings). In Israel, we saw UT could also go direct. "SLT, a provider of international and domestic voice, Internet, and data services, will use the RollingStream platform to bring IPTV services to its growing customer base throughout Sri Lanka. SLT, with more than 87 percent market share and a wireline subscriber base of more than 1,300,000 customers, expects to grow its residential and commercial business through its increased triple play capabilities now available with this IPTV deployment. It is designed to support approximately 100,000 subscribers in the next two years and will enable the company to provide video services to future subscribers over copper lines in the next three to four years." "SLT engineers have rectified the defect and they also upgraded its ADSL system to ADSL 2+, to facilitate the launch of the IPTV service." These types of news show UTs strategic position but the challenges that are an inherent in providing a complex product such as IPTV. After over a year of UT reporting iptv subscriber numbers, it is still very difficult to project numbers going forward. In China, growth is "controlled" so it could explode or stop on a dime. In India, Taiwan, Brazil, and Sri Lanka, it seems the launch has occured literally the last few weeks. The broadband requirements seem to be more intense as well offering negatives of unsuitable speeds and positives of UT doing more broadband/ngn business.

ZTE not interested in Motorola handset - Chinese telecoms equipment maker ZTE “isn’t interested” in Motorola’s handset operations, and will focus instead on organic growth, Chairman Hou Weigui told Dow Jones Newswires. Chou said that acquiring Moto’s struggling handset business didn’t “make sense” as the “synergies won’t be big enough to cover the costs.” Plus, ZTE doesn’t actually have the money to buy out a large company like Motorola (NYSE: MOT). In February, Samsung, LG (SEO: 066570), and Sony (NYSE: SNE) Ericsson (NSDQ: ERIC) have all said they wouldn’t make a bid for Motorola either.

ZTE recently sold its 100 millionth handset and is hoping to crack the “big five” mobile handset makers. It’s not an unrealistic goal, especially as ZTE is currently in sixth position, and number three Motorola and fifth placed Sony Ericsson are struggling. The company, which started selling handsets in 2002 in its domestic market of China, made its name in low-end phones for emerging markets, but recently said it intended to enter the smartphone market.

The handset/smartphone business is simply very competitive (seem RIMM expectations as well) and while growing would not make sense for UT to compete in (atleast not heavily with the limited resources they have). While I know some shareholders were disappointed with the sale and profitability push back, it was simply the right thing to do.

Q3 quarter end - As September comes to a close, UT closes the books on its Q3. I was hoping for the sale of the customs solutions business unit (CSBU) prior to Q3 ending. This business unit was projected to double sales this year and be profitable. Not sure if this is still the case but its gross margins was fairly high and Blackmore was upbeat on. In this tough market environment, not sure if they could get a good price but unlike the MSBU, I hope they just as well keep it than sell it for a song (nothing). The sale of PCD happened in July so it will be included in the quarter's report and I recall Blackmore wanting to wrap up all the none-core business issues by end of the year so its something to watch for. The employee option pricing is coming next week as well so I'm hoping for a higher price and maybe something the management will strive to build on going forward.

Tough market environment - UT shareholders have been in a bear market for so long that this current environment is nothing new to them. Some have even been satisfied with the $3 stock price range. However, I see it as the time for UT to excel in this environment. During the past years, they have always talked about the value they give to customers with building great business models for their products (for the clients that is) and how much it will save them. The Tiscali NGN project was a good example of the provider getting cost advantages and maybe forcing the leader Telecom Italia to pour more money into NGN to improve efficiencies. The declining revenue for fixed line carriers has always been UTs main charge for improving sales of iptv and new technologies (transport network product?). This is the time for a smaller company like UT to use its advantages to be more nimble, flexible, focus and penetrate/expand their markets. We'll see........

Blackmore - As a shareholder, I have pinned my hopes on management. That didn't work out too well with Barton as he is a major poster child of excessive pay for disastrous performance. I think he made a great move in retiring before there were laws that actually mandated pay for performance (actual and good performance). We know the board didn't have the intelligence or the concern about the Barton situation and we shareholders got a train wreck. Anyway, as a shareholder, I support good compensation for good performance (imagine that). These aren't just "salaried" employees but executives of a public corporation. Back to Blackmore. He came in at an opportune time when the company was in a free fall but still had enough resources to turn it around. He obviously got a great pay package (I remember his salary can never go down). He did convert his bonus to stock and has focused the company like we've not seen the previous four years. Over the last year, there have been a tremendous amount of strategic wins, sale of none-core assets, no further filings/investigations, and definitely better shareholder communication. The major black mark was the 2008 revenue shortfall and his expense metrics not being reached yet. Going forward, Blackmore's grade is yet incomplete but there is atleast credible hope of achieving profitability due to the lowered expenses and strategic wins. I had posted on expenses and that needs more work as well. In terms of "experience", I hope Blackmore has had the time to hear shareholder views as well as digest all the issues/opportunities the company has. Just like the current bailout, the strategy/plan going forward has to be done right and will determine whether the market/UT stock start a new bull run or continue to deteriorate.

PS. I am disappointed to hear of some shareholders giving up but obviously do not blame them. I wish they got out at higher prices but more than anything wish this blog/group could have done more to enhance/unlock shareholder value. We'll keep plugging along to see what that hold to maturity value turns out to be.

Have a good weekend everyone.