Saturday, November 15, 2008

2009 Outlook

The company will discuss additional OPEX cuts later this quarter (in about a month) but I looked into the non-GAAP revenue provided by the company that separated out the PCD division sold and included the revenue sale into the PCD (basically the Korean designed CDMA handsets sold outside of China). I also noted the book to bill ratios provided during the last 4 quarters to generate some preliminary estimates for 2009.

Q1 2007 to Q3 2007 - Just for historical perspective, the non-PCD/non-Korean handset revenue for those 3 quarters were $188, 180, and 188m. The Korean handset division had revenues of $77, 70, and 60m. For this posting, I will designate the non-PCD/non-Korean handset as "core" and the Korean handset division as "handset".

Q4 2007 - This was a huge revenue quarter for PCD having generated revenue of $560m from Q3 of $458m. Overall book to bill only came in at 0.8. The core did have revenue of $246m while the handset continued to decline to $53m.

Q1 2008 - While book to bill came in at 1.2, PCD book to bill was 1.3 while non-PCD was only 1.0. Core revenue was down significantly to $155m and the handset revenue declined again to $35m.

Q2 2008 - Excluding PCD, book to bill was again 1.0. Core revenue did jump back to $184m and handsets back to $56m. Note however that some Q3 revenue was able to be recognized in Q2.

Q3 2008 - Core revenue came in at $146m while handsets at $35m. Note also that PAS (and other handsets in China) was $37m. That means infrastructure sales (iptv, ngn, broadband, PAS infra) was only $109m. Book to bill did increase to 1.2.

So, lets list the overall trends (some were apparent/some not so): The internal design handset division has been declining as well as PAS infra/handsets by around 50% from Q1 2007. So, the PCD performance was carried by the resale part. The current Korean handset portion is currently not cash flow positive and all the improvements we keep hearing about (they are in the 3rd or 4th generation of developing their internal handsets, etc) have not hit the bottom line and is basically pie in the sky. The "hope" is this will improve as they can penetrate the China markets and make up some PAS sales. However, the numbers don't give me confidence.

Core revenue (despite some improvements in iptv/ngn) has not quite closed the gap to the $180m+ range.

Bookings have not really grown yet. This quarter's 1.2 was a start but this was the lowest revenue of the core+handset group.

Next quarter's expected revenue of $225m was way off the analysts already lowered estimates of around $250m and investor expectations in the high $200m/low $300m during the seasonally strong Q4.

OPEX cuts of 15 to 20% is not only mandatory but is insufficient to get the company to profitability. During the Q2 earnings call, Blackmore mentioning divesting or merging the CSBU in 3 to 4 months (definitely by the end of the year). This will probably done prior to the update call discussing OPEX cuts. Fifteen to twenty percent would still yield expenses in the $77-83m range (say $320m yearly runrate IF implemented by Q1).

2009 projections - It will be imprecise to estimate 2009 revenues based on bookings because of the timing issues but that is all we can go on at this stage. I will use the book to bill ratios for the core portion and estimate around $140m for the handset division. That yields (0.8*246m + 155m + 184m + 1.2*146m) + $140m = $711m in core bookings + $140m in handsets for around $850m. Again, each quarter could yield new contracts and ramping of iptv but this is my best guestimate for now. 2008 revenues (using the midpt of Q4 2008 guidance) will come in around $836m so 2009 will see little if any revenue growth. At 25% GMs, gross profits will only be $213m. This quarter's GMs of 32% was due to NGN performance and projections for Q4 are down to low 20s. The revenue for 2009 could be higher if internal handsets does better but then GMs will be lower so for now, I will go with $213m in gross profits and OPEX of $320m. That scenario could be highly optimistic if OPEX is higher or revenue lower due to CSBU divestiture. So, that is an loss of $107m. Add in $20m for taxes/options and another $23m for contingencies (higher opex/lower revenue/margins) and it can add up quickly to a $150m cash burn for 2009 (ouch!).

The company will end 2008 with about $291m + $24m in escrow in cash/short term securities. At the end of 2009, that could easily be down to $165m in net cash heading into 2010 (or about $1.32/share).

Optimistically, I have to say that there are a lot of things that can happen in the next 5 quarters such as bookings growth, even lowered expenses, higher margins, better market environment going into 2010. However, the above shows profitability not only being pushed out (once again after 4 years already) but that management is still behind the curve in their estimates/execution. Back in August 2007, they only had net $150m in cash. The 6 quarters of operational losses (+ 2009 operational losses) will be subsidized by the one time gains in investment sales and sale of the PCD.

The company also has around $200m in real estate, no debt and will generate some interest income. They have time that other companies do not but eventually, they will have to become profitable or sell out and get whatever they can for shareholders. As I said, a lot can change in the next 5 quarters and I will take a company with no debt, net cash of $165m, and profitable for 2010 (if that was the case) but thats a long ways off from here. The share price, current market environment, and years of underperformance should motivate management to have a sense of urgency but the numbers above show that even with the current opex cuts planned, it is not enough. The additional hundreds of millions in bookings/revenue that Peter was projecting that can ramp is nowhere in sight.

Have a good weekend everyone. Its really ugly in the markets and in UT stock but it could easily get worse. So, prepare for the worse and hope for the best.