Monday, December 28, 2009

Building Sale

After selling their property, UTStarcom will lease back part of the facility.

"The Company will lease back 70,000 sqm gross floor area ("GFA") aboveground and 12,000 sqm GFA belowground of the property for a period of 6 years at a rate of RMB 2.5, 3.0 and 3.2 (approximately US $0.37, $0.44, $0.47, respectively) per sqm per day for years 1-2, 3-4 and 5-6, respectively, of the leaseback period for the aboveground space; and for RMB 25 (approximately US $3.66) per sqm per month for the underground space for the full leaseback period.

The Company may terminate the Agreement for any reason prior to the transfer of the title to the property upon repayment of all amounts paid to the Company by the Buyer and payment by the Company to the Buyer of an additional RMB 50 million (approximately US $7.3 million)."

One poster wrote that this is a very bad deal for UTStarcom.

My response is in italics.....

Tim, I admire you willingness to look for positives in this situation, but I totally disagree about your assessment of the deal. I believe it is very bad. Here are my reasons:

Johnny, Nothing to admire really. Your points are very easy to disagree with and management is just going by a very rational playbook (not going to give them genius status either).

First, the property was sold below book value. I did not expect them to get $760M – after all the local government was not likely to allow a US company to profit from speculation in Chinese land. However, given the property value, I expected they will get the full book value. It turns out that we have to take an impairment charge.

1. Book Value? You can talk all about what something is worth but if you cannot sell it or make use of it effectively, then its not worth what it says on some book. A lot of bashers looked at the property as zero since they could not monetize it. Now you and others think this is much more. As I've mentioned, anyone can step up and pay $7.3m and take over the deal if it was such a great deal. I say its a fair deal for both sides (win/win as both got what they needed out of the deal).

Second, the leaseback price is much higher than it should be. I expected it to be about $3M/year. A typical amount of yearly rent in undistorted markets is about 1/15th of the purchase price. In case of this transaction, that would be $9.3M for the entire building. Since UT leases only about a third of the building, I consider $3.1M to be reasonable. Selling the property some 80% below market value, the seller should be able to negotiate reasonable (as defined above) leaseback terms, because he has the option of walking away from the deal and denying the buyer the arbitrage profit (unless it is a sale of desperation as please_buy_while_I_sell suggested). The buyer still has 2/3 of the building to be leased out at the market rate and gets to profit from arbitrage when he eventually sells the property. Very generous terms for the buyer, with much lower leaseback payments.

2. Do you really think anybody would spend $140m and only expect to get back $3m/year in lease. We're not talking about liquid US treasuries here either (and those yield higher than 3/140). Again, the only reason UT was even able to monetize it is because they were willing to lease it back and give the buyers cash flow for a certain number of years.

Third, and most important, it adds $11.4M to yearly expenses (average over 6 years). At gross margin in upper 20s, UT will need approximately $40M in extra sales just to pay the rent. I just don’t see them bringing in those sales.

3. For UT, spending $11m/year is not too much considering how much they were spending in the US in rents (that they have cancelled already and shifted operations to China). The amount is probably less if they tried to borrow the money outright. How many people would lend at close to "book value" anyway and there is no comparable building for sale/lease there. UT gets $131m in cash during a very difficult credit environment. Most endowments or funds can make 7-10% with no problem.

Feel free to disagree.

Can the property go up? Sure. Can UT borrow against it? Sure. Can UT lease the other parts of the building? Sure. However, none of those are a certainty. Cash is a certainty. Flexibility/liquidity is a certainty. With the additional cash/working capital, they have also increased the ceiling for amount of contracts they can go after. Without the sale, they had a much lower ability to win additional contracts simply because of their working capital. UT is reducing their overall risk profile (lowering expense structure, selecting better contracts, building up cash) in very uncertain times. The liquidity/monetization is really a no brainer excellent move for UT at this stage.

Ultimately, UT core business has to show growth and profits. This sale (as part of a series of moves over the last couple of years) puts the focus on the business/operation side where they will have simplified/resolved the following metrics:

1. $350m revenue (high 20s GMs) breakeven point.
2. Less than $100m in OPEX.
3. More than $300m in cash.
4. Operations back in China.
5. Targetted markets/clients in China, Japan, and India.

They have really put themselves in a highly flexible/liquid position as compared to just a year ago when they were dependent on PAS/PCD.

Have a good rest of the holidays everyone!

Saturday, December 5, 2009

UT's India Opportunity

While the primary focus is the overall company restructuring and "refocus" in China and Japan, the Indian market provides a lot of opportunity for UT in the coming years. The main revenue driver for UT has been the BSNL multi-play contracts (Phase I, II, and II extension). Here is a summary of the contract:

"The expansion will see UTStarcom deploying its B1000 multi-service access node (MSAN) solution across India to add approximately 475,000 ports of capacity to BSNL’s existing broadband network, enabling additional subscribers to experience triple-play services."

Earlier in its first phase, UTStarcom deployed 1.3 million broadband subscriber lines for BSNL, with an additional 1.1 million broadband subscriber lines during the second phase.

UTs MSAN product was highlighted in the recent investor presentation as having MSAN services to over 27 million subscribers.

Here is a recent article on UTs perspective on the India market reaching 100 million broadband users:

"At a recently held event, UTStarcom MD for South Asia, Mr. Vijay Yadav said that with the use of television as an end user device, the broadband subscriber base can be reached to 100 million subscribers by 2012. He also called for opening of the last mile to private players. According to him in next few years communication over video will take precedence to communication over voice and hence television offered the ideal mode for delivery of broadband services."

Aside from the broadband opportunities (nearterm Phase III contract from BSNL), the ultimate payoff is when iptv can ramp.

Here is an article from Aksh raising $20m:

"Aksh OptiFibre said that it has receive approval from its board to raise $ 20 million in funds through the preferential route.
The company intends to utilize these funds towards the expansion of its IPTV and VoIP business verticals."

India is a place where UT has relationships with the major state-owned and private carriers
(MTNL, Reliance, Bharti, BSNL and Tata). There is also a current trend towards favoring non-Chinese suppliers.

"Chinese companies not allowed in BSNL’s Rs 10,000 cr ($2 Billion) project for Defence, says report"

The company has been particulary positive in India sparing it any cuts during this massive restructuring and Peter has mentioned the level playing field in India (or even advantageous to UT). The upcoming 3G license in India should also clear up spending plans.

"Union Communications Minister A Raja said on Thursday on the sidelines of the Indian Telecom event that the 3G auctions will happen on time as scheduled on January 14, 2010."

Side note: The win in Tiscali for UTs MSAN products give us shareholders some insights to the pricing as it was a $29.8m contract to be shared by UT and Infinera (interestingly a stock I had recently bought, which led me to finding out UT won a part of it). For Infinera, an 8 figure contract is a big deal. For UT, there isn't even a PR. Anyway, this contract should be completed by Q1 2010 per the article and UTs equipment goes ahead of Infinera.

The near term company goal is to get to profitability in the 1st half of 2010. The much reduced cost base provides them a better position to select contracts and execute better while waiting for the iptv market to ramp. While the TN product is something new, opens doors and the initial wins will improve broadband revenue and margins, the major growth driver going forward will still be centered with iptv.

Have a good weekend everyone.

Sunday, November 22, 2009

Q3 2009 CC Recap

The transcript from the Q3 2009 call can be found in the following link:

The live broadcast and SEC filings can be found in the company website. I have talked to some institutional investors that communicated with management and will add some "color" to the information provided in the call.

Q3 Results - Revenue came in at $71m with 34% gross margins. The GMs included a $6.5m benefit from reversing some handset writeoffs for PCD. Factoring that, GMs were in the mid 20s. The expenses were $58m (with $8.9 restructuring charge and $1.7m non-cash charge for divestiture of Korea based handset operations). I'll have much more on the expenses and restructuring later.

Business Units - MMCBU had revenue of $22m and 46% GMs; Broadband BU had $16m revenue and 22% GMs. Services had $17m in rev and 44% GMs; Handsets had $16m revenue and 21% GMs. The overall revenues ($71m) is still lighter than the $85m needed for breakeven but the margins are close to their target of high 20s. The margins for the MMCBU was lower than last year(with PAS) but seems higher than what I expect with iptv STB. The mix this quarter probably had more software/infra component than subscribers, which support the lowered expansion in subscriber count for 2009. The highlight of the quarter was the 22% GMs for the broadband unit as they managed the BSNL phase II contract well and gives added confidence that the Phase III contract will have decent margins (as long as they execute well). The services actually increased revenue (from $14m to $17m) and had very good margins. Handsets were down significantly from last year (that included much more PAS/PCD). The GMs of 21% benefitted from the $6.5m reverse of writeoff. The company is de-emphasizing this lower margin business unit except for handsets specifically sold with their mobile iptv system.

Broadband - Peter Blackmore expects the company to take in a significant order for the Phase III BSNL multi-play project this quarter. Part of the order will be this quarter and the 2nd part around April 2010. Peter mentioned on the call that execution of this contract is a key focus and this will affect the outsourcing transition and result in significant shipments in Q1 2010. Additional shipments in Q1 2010 will be driven by the Transport Network (TN) win with Softbank. Together with better execution of the BSNL project, the higher margins with the TN product will drive the margins for the broadband unit going forward. Peter mentioned the TN product as having good growth opportunity and a leadership product (also "exciting"). There was mention that they are actively bidding this product on a number of RFPs, notably China Mobile, where they are partnering with Nokia Siemens (NSN). The margins with Nokia Siemens will be lower but give them a better chance of winning part of the China Mobile tender and break in with China Mobile. NSN has been a major supplier to China Mobile but they don't have the TN product. Other partners of NSN such as Juniper do not have a competitive product as well.

Additional specifications/marketting materials on the TN product can be found in the UT website (this is additional items from what I linked to previously).

Aside from the TN 703, 705, and 725 products, there is a 735 product with 240GB/s switching capacity not formally announced yet. IR has mentioned providing access to UT engineers for technical questions from the industry on the TN product.

In South America, Peter discussed the recently announced Logicalis sales agreement leading to projects in Argentina, Paraguay, Peru, and Chile for their IPDSLAM, MSAN, and GEPON products.

IPTV - Due to spending focus by Chinese carriers on 3G, iptv momentum in 2008 did not carry forward to 2009 although Peter believes there will be a return to significant iptv investment in 2010. There was a recent win with the Beijing SARFT and chosen as solution provider in 4 cities with (CCTV/Hunan). They were selected as a preferred vendor by China Telecom to deploy the new STB Standard 2.0 (this would allow them to compete for STB business with other iptv systems). Also, "And in Guangzhou, the capital of Guangzhou province recently launched the IDTV service, SMIC, the Southern Media Group and this is the revenue sharing model, we share in the advertising revenues, and we are expected to expand the service to other cities throughout the province."

Restructuring - The employee count is down to below 2700 by the end of October from around 4300 in June. The company will continue to reduce headcount in Q4 and Q1 2010 (probably 500 in Q4 and another 300 in Q1). SG&A for Q3 stood at $33m and R&D at $14m. The target model is around $11m SG&A and $14m R&D. Based on the 10Q, $35.143m of the announced "2009 restructuring" has been recorded but there is still $19.8m balance (cash to be paid out). For the 2008 restructuring, there is still a balance as well. So, for modeling cash and book value going forward, there is still $24m in cash to be spent on restructuring that have been charged to book value and another $5m to 10m in charges/cash to be added (to get to the $40-45m they announced back in June). The company is down to 1 building from 3 in Alameda and will probably maintain 30-40 employees in Alameda. The company "formally" announced in the call that they are looking into moving the HQ to China.

As a side comment, Barry Hutton, UT IR left the company (last day was Friday). They still have offices in Rolling Meadows and in Miami for the Latin America/International sales force team.

An outsourcing vendor has been selected and a PR on it is coming.

Other items - Peter talked about adding new board members and the potential sale of their building in China but no new information on that front.

Company Credibility/always LATE - For years, I have been against the poor BOD and management. Unfortunately, this has continued during Peter Blackmore's tenure. Lets look at just some items that have been executed poorly or "late".

Divestitures of holdings such as Infinera, Gemdale, and even PCD.
Filings and accounting issues that added tens of millions in interest costs.
Last minute transfer of funds from China.
Restructuring and expense cuts time and again.

There is just a corporate culture of being behind the curve and acceptance of poor performance and no accountability. Up to now, I still cannot believe that Lu/Toy and the rest of the BOD are still there with no major changes.

Peter has done things that shareholders want such as the restructuring/focus on core products but he has been late again. I believe he is on the right track and will eventually get there but in the meantime, the company has racked up over $1B in negative retained earnings and the book value has plummeted from the $700m+ level to less than $300m in 3 years (despite the investment gains).

Book Value/Cash flows - Despite the above issues with the BOD/management, the company is incredibly cheap. As of Q3, the company had cash/short term investments of $241m and $296m in stockholder equity. For the next two quarters where losses are still projected and the restructuring is to be completed, lets evaluate the book value/cash. Cash usage for the restructuring will be $24m + $5-10m (for 2008/2009 restructuring). Cash usage for the losses in Q4 and Q1 (say $30m - just a guess). They will bring in $3.5m for the Starent settlement. So, by end of Q1 2010, cash can be down to the $180m level. Because $35m of the $40-45m has already been charged, shareholder equity will decrease by only $10m (upper range of restructuring remaining) - $3.5m (Starent gain) + $30m (Q4/Q1 loss). That will leave shareholder equity at $260m. For 2010, there will be over $100m deferred revenue to be recognized + cash generated from BSNL Phase III so both tangible book value and cash should not be reduced and may start turning upward. Again, this is just my evaluation of where the bottom in cash and shareholder equity will be ($180m and $260m). That compares to the $245m market cap the shares are trading at. So, they are trading above cash based on Q4/Q1 losses and restructuring cash expenditures. But the shares are trading lower than book value even incorporating the Q1/Q4 losses/restructuring charges.

The negatives offsetting the valuation is the BOD/management and their culture of underperforming. Have they done "good things"? Absolutely, such as selling investments, non-core businesses, cutting expenses massively, refocusing on China but they have ALWAYS been late and lateness comes with a price that shareholders have taken the bulk of the brunt.

Company status - There is a powerpoint presentation on the company website on a Sept 30 2009 roadshow.

95% of the material is what has been posted/discussed in the past. However, it does show major operational differences from the years past and the current situation. The customer list is still broad and targetted at the high growth markets. The product line-up is sensible and there is a renewed focus in China (broadband and overall company basis). The company is emphasizing China, India, AND Japan again so there is a renewed traction in Japan with the TN product (margins emphasized). There are still major questions on whether the upside can justify the expenses of the last few years or even now (given their company culture). It is easy in the past to cite a lot of links to technology or worldwide growth in related sectors/products but for UT, it comes to are they in position with their current customers and products (and can they execute). I am not in this investment for the current management/BOD but for traction in their products with their current customers/geographic markets. I am also not for a quick sale based on declining cash/book value because as the above indicates, this is near the bottom (for now). In the next year or two, the company has to either show progress in adding to the tangible book value or there is no turnaround hope anymore.

A lot of the sentiments (above) are what shareholders have discussed but hopefully, it has been quantified a little bit more and provide some metrics to track for the next few quarters.

Have a good rest of the weekend.

Tuesday, November 17, 2009

Institutional Holdings/Activity

The following link shows institutional activity as of the end of the 3rd quarter (9/30/09).

Shah Capital, the #1 UT holder, increased their position by over 1m to around 7.5m shares. It is interesting to note that they are concentrated on China and their #1 holding is a major winner this year, China Yucha, Intl LTD (CYD). That holding alone is worth around $36m! For each $1 that CYD goes up, thats a $2m gain, enough to fund buying a million shares of UT every quarter.

I don't know what Shah's intentions are but I hope they use it to motivate the board/management to think about shareholder value for once. In addition, with the low volume, low share price, and their major wins this year, Shah could literally have a ball with UT stock. I would not bet against these guys.

Friday, November 6, 2009

NSN partnership

UT announced on yesterday's Q3 2009 earnings call a partnership with Nokia-Siemens.

"We are bidding this product actively in a number of current RFPs. Most notably, we are pursuing the China Mobile tender, which is already gone out to RFP stage, and we are doing this through a joint partnership with a new partner we have in China, Nokia-Siemens."

There will be some institutional calls today with management and I've fed some of my questions to them and one of them is the NSN relationship. Why do they need them for the China mobile TN bid when they won the other contracts without anyone else? Is this a case where the RFP stipulates some added requirements that UT cannot fulfill and highlights UTs weakness or lack of experience.

How is the partnership with NSN structured? Does it mean NSN/UT will team up in NSN's backyard in the future, thereby giving UT another outlet to sell their products. NSN is a huge entity with 64000 people and they are planning to cut 6-7k to save $700m/year. They are looking to partners/acquisitions to drive their strategy going forward.

So, UT is partially adressing the "scale" issues by partnering/signing sales agreements (DESCA/Logicalis). Ultimately, if this NSN partnership works out well, NSN could just acquire UT seeing UT's cheaper labor workforce in China and the technology/client base they have is more cost efficient.

I was out during yesterday's call and will post a summary of the Q3 2009 call this weekend. That will include some information/clarifications from institutional calls today.

BTW, there was NO one asking questions yesterday. UT has become irrelevant and something the management/BOD is responsible for.

Sunday, November 1, 2009

Discussion on sale of UT, its prospects and GM situation

This is my response to some message board chatter:

"Must have been the board exams working on your mind."

I dont doubt that Flip. I'm still recovering after the 160 questions in 8 hrs. I just don't get why it takes them 13 weeks to get us the results....O'well alteast it won't ruin the holidays if the results are bad.

"I see no reason why the company could not be sold now for more than the current trading range. If I wanted a company with cash, no debt, technology, a global footprint and a US listing, I would be willing to pay over the current price.....if the company was for sale. The point is, the company is becoming worth less every day given the cash burn and lack of revenue."

Again, this is flawed thinking. The company was burning $50m/quarter for quite some time so we knew their book value was going down. However, did you buy the company for their "value" or for the potential turnaround and increase in profits? For any tech company, I would argue that people don't buy it for their book value but more for upturn in their business. Actually, for most tech companies, its the "cycle" in their businesses. The memory companies for example do really well as memory prices stabilize and move up. You can't even touch those companies at ANY price if the prices are falling but they are like gold when it is increasing (look at SandDisk, WDC, and STX for ex.).

The question with UT is not about management/BOD at this point but whether you believe there will be an up cycle in the next 2-3 years. Have they atleast put themselves in position to take advantage of the boom in 3G, iptv, broadband, etc. I continue to be negative on the board and sometimes Blackmore (for not acting quick enough and no defense of the stock) BUT, I didn't really invest in those things 4-5 years ago and definitely didn't invest in those the last 2 years.

I could and have been wrong on the ramp of the business but that doesn't mean it will never happen. There is a significantly higher chance of success after this current restructuring, move back to China, focus on certain markets/products than at anytime before. I'm sorry if you don't like my optimism but I am more focused on the business than whether they can be sold for $5 (we talk about it but thats not the main focus).

You and others can focus if the cuts were too much or too little but does it do the company any good in producing products that were way ahead than before? I am more interested in quality of contracts with higher margins than just getting contracts. I am more interested that their breakeven point is $350m rather than $750m or over $1B in revenues.

As I've said before, the company has already lost its chance to become the next Cisco, Huawei, etc a LONG time ago. The question is whether they can be profitable and have a nice niche position/business model that could potentially accelerate as markets/products ramp. I would not have a problem bringing up the potential sale when it actually is meaningful (when the stock is much higher and business has turned around). Even earlier this year before the restructuring, there was a potential sale but definitely not now. Anything is possible but it would really be idiotic at this stage.

I end this posting with some excerpts on a very good article recapping the GM bankruptcy/restructuring by Steven Rattner (in the latest Fortune magazine). Steven Rattner led the government takeover/bailout of GM/Chrysler. In it he talks about the GM board:

"It seemed completely obvioius to us that any management team that had burned through $21 billion of cash in a year and another $13 billion in the first quarter of 2009 could not be allowed to continue. Equally important, GM's February viability plan was more "business as usual" and not the aggressive new approach that we felt was essential."

He ends the article by saying, "Like any patient that undergoes major surgery, a successful recovery is far from assured. .....In the case of GM, the overacrching question is whether, without infusion of new blood, its management team can implement the massive cultural change that is essential. But by dramatically lowering the break-even point for both companies, we believed we were creating a healthy margin of error."

This is really the question for investors right now.

Have a good rest of the weekend.

Wednesday, October 28, 2009

MPLS-TP Based Packet Transport Network (PTN)

For the techy's out there, the specs for UTs PTN product is available on their website.

A recent article on China mobile and plans for PTN in China.

From Lightreading,

Trebnick thinks Juniper needs to get a mobile packet core product, specifically. If it's developing one on its own, that's going to take $250 million to $300 million in R&D costs, she writes.

The other option would be an acquisition. Cisco and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) have put claims on Starent Networks Corp. (Nasdaq: STAR) and WiChorus, respectively, in the past two weeks. Assuming Juniper doesn't want to start a bidding war for those two, it could try acquiring Stoke Inc. or the mobile core assets of Harris Stratex Networks Inc. (Nasdaq: HSTX), Trebnick writes. (See Cisco to Buy Starent for $2.9B and Cisco/Starent Deal Hurts Juniper.)

While the market has surged this year, it has been another frustrating year for UT shareholders. I do choose to look forward and stick with the company. With their balance sheet, controlled expenses, product line, target markets and renewed focus in China, thats a recipe for success. Have I mentioned how incredibly cheap this company is? :-)

Saturday, October 3, 2009

Conference Call with Peter Blackmore

Earlier in the week, I had a conference call with Peter Blackmore, UTStarcom CEO and Barry Hutton, Senior IR for the company. Peter had just come back from a three week trip from China (and also recently in Japan). I had some concerns with the management situation of the company (among other things) and Peter allocated some time for a call this week before going back to China again. Here are the items that were discussed.

Management Team - With Hong Lu stepping down from his executive position, the departures of Robert Wu (China CEO) and Craig Samuel (UTStarcom CTO), the vacant COO and Viraj Patel’s Interim position, the management ranks seemed disorganized, light and was not positioned for the long term. Peter responded by highlighting Luis Dominguez (SVP) of International Sales, Marketing, and Services and the heads in India and Japan. He specially alluded to the company’s “move” to China and the executives based there, namely Charles Mah (SVP, China Sales, Marketing, and Services) and the business unit heads (Yanya Sheng/BBU, Dr. Baijun Zhao/MCBU, and K.P. Lim/VP Chief Quality Officer). Peter seemed very happy with the current transition/restructuring in China and discussed potentially rounding up the team with a COO.

I specifically wanted to discuss his hire of Craig Samuel. Peter mentioned that Craig Samuel was the #2 CTO guy at HP and would have liked to have kept him but due to the restructuring, parted ways.

I asked Peter if he was personally involved in any of the hiring in China and he mentioned not at the BU (business unit) level but just under. The BU heads have been with the company a while. Peter also mentioned hiring new sales people, some from Huawei and commented that he liked them because of their aggressiveness.

Bookings – I asked Peter why he did not discuss bookings (book to bill) in detail the last quarter like they do in previous years. Peter mentioned that book to bill was “positive” (I take that to mean >1) but they do not give breakdowns of the bookings. Barry commented that it is not simple to come up with a definitive number due to the way various contracts are set up. Peter added that international was “positive”. I definitely wanted to get a number and breakdown by BUs but the best I could do was a reassurance that they are not trying to hide anything and that business was tracking well. I asked about new contracts. It seems that some of the contracts we hear are very similar to previous ones and Peter said they definitely take a good amount of time to select which ones to discuss on the CC and that they are all new wins. This led to the next topic.

PRs – Why don’t we see more of these? Once every six months is hardly representative of the business. Barry mentioned they are working to improve on this end but even putting out PRs takes a tremendous amount of time (talking to various people/legal/sales/contracts in preparing the PRs) specially during the move back to China where resources are more constrained now. Again, I mentioned there has to be a middle ground where investors can get a more representative view of the business end. Peter mentioned an upcoming PR on an enterprise TN win coming up (more on TN later).

Taiwan IPTV – I wanted to get more information on the progress with Markwell since the original PR was in late 2007 and it only went “live” in May (which they announced in one of the CC this year). Peter mentioned that Taiwan iptv is not going to be anywhere as large as India/China. They do also have some broadband contracts with CHT in Taiwan that’s doing well, selling their MSTP product. (Got into a quick back/forth and said whats well? $2-3m? Peter mentioned more than that…). I also talked about DESCA and tried to get a ballpark revenue target but didn’t get a figure. Peter did mention DESCA’s main supplier was Cisco and I guess it was a good arrangement that they are also now a supplier.

Mobile IPTV- I asked about the competition with CMMB, the China mobile iptv standard that others are using for video. How competitive will UTs mobile iptv be against that when 30 other suppliers may go with the CMMB. Peter mentioned that they are also talking to other handset suppliers to license/use their mobile iptv software/system. How much is their handsets for mobile iptv. Peter mentioned it doesn’t take a major smart phone like the I-phone so the cost right now per handset is $150-200 (mid-tier pricing).

India BSNL Phase III – On track for Q4 – I didn’t bring this up but Peter talked about this as part of another discussion.

GPON – I mentioned to Peter about hearing they had presented GPON as part of their product lineup in a recent conference/marketing event. Peter mentioned that this must have been the China Telecom event where they were a major sponsor and he got to talk with many government officials. He said they are modifying their GEPON product to develop GPON as well but that the GPON product is not ready as of yet.

Transport Network (TN) Product –As part of the product discussions, we got to TN and Peter brought up Bill Huang, UT’s former CTO now with China Mobile. Peter mentioned that Bill Huang was quite impressed (not sure if that was the exact word) with UTs current product lineup/R&D and will be in discussions for the TN product in Q4. I asked do they have ANY contracts with China mobile now. Peter said no and that is due to their backing off the broadband market previously. Regarding TN, Peter mentioned that as usual, this market will be shared with ZTE, Huawei, and possibly another vendor. Peter mentioned that Softbank also had positive words for their TN product and its performing well. He added that China Telecom, which is their main customer for years is late in the TN area and is just in the pilot testing stage.

US Partner – I wanted to check with Peter if DESCA is the partner that he talked about in previous cc. He said no and that the technology partner he was talking about wants to sell UT products in the US. Peter mentioned the TN product in particular.

Being more “Chinese” – Towards the end, I discussed with Peter the situation with him being non-Chinese and the Western BOD meant that they are still perceived as handicapped and what they are doing. Peter mentioned (again) about looking into Chinese board members and looking potentially for a Chinese COO. Are there investors, partners, etc? No other comment on that front (not that I expected an answer but I’m sure other investors have discussed this with Peter). Peter mentioned he is working 15-16 hr days and has an apartment in China.

One of my last comments to Peter (and there were probably a lot of “last” comments) was that bottom line, the company’s business is being valued at zero (or less) so there is a lot of disappointed shareholders. Peter mentioned there is a lot of work still ahead. I thanked him for his time.

As I write this post, I think of other items such as IPTV discussions, the sale of the building, OPEX, PDSN, cash positions and other usual points of discussion but there is always just a limited amount of time and some topics just flow in certain directions.

Have a good weekend.

Monday, September 14, 2009

Bull Flag

While the message boards is full of the usual negativity (understandable by the way), UTs stock chart has formed a "bull flag".

Vital Signs

Bull flag formations involve two distinct parts, a near vertical, high volume flag pole and a parallel, low volume consolidation comprised of four points and an upside breakout.

The actual flag formation of a bull flag pattern must be less than 20 trading sessions in duration.
Most flag patterns occur at the middle of the larger move higher for a stock.

Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level.

If the stock closes below this level (now support) for any reason the pattern becomes invalid


The pole measured a hefty 84 cents ($2.36-$1.52), give or take a few cents. This consolidation (symmetrical triangle or pennant) breakout is at $2.05-2.1 range. That would put UT close to $3 within a month IF this played out.

As with TA, "timing" may be a little off (head fakes) and you should look for volume confirmation.

Have a good evening.

Thursday, September 10, 2009

DESCA, IPTV, Trading Range, Profitability, and Partner

Reseller Agreement with DESCA -

ALAMEDA, Calif., Sept. 9 /PRNewswire-FirstCall/ -- UTStarcom, Inc. (Nasdaq: UTSI - News) today announced a Reseller Agreement with DESCA, a Miami-based infrastructure and telecommunications networking company and wholly-owned subsidiary of eLandia (OTC Bulletin Board: ELAN - News). The Agreement will help accelerate UTStarcom's expansion into 14 markets in Central and South America with the support from DESCA's team of more than 700 sales, service delivery professionals and customer service agents.

These are a couple of comments from the message boards,

"TTM of revenue for the holdin g company is $211MM. The 3rd and 4th Q are their strongest quarters so don't go by the first 6 months. Also, DESCA is just 1 of 3 or 4 operations of theirs so the total reveue is higher for the entire holding company (ELAN)They have $30mm in cash with no real long-term debt other than a $17MM capital infrastructure project that makes them $$. The receivables are $50MM and CSCO capital is the reason why they have short term debt. CSCO demands payment very quickly. So they have short term debt like any other company would to pay the vendor. The receivables take care of that. Why don't you call the company and ask then about the DESCA deal? It looks like DESCA has a lot of stock coming to them based on performance and that's why they sold the 30% for little cash. They want the stock at low prices where there is far more upside. They stand to make a lot of money by taking future stock considerations. "

"ELAN is the holding company. revenue for TTM is $211MM. DESCA accounts for 80% of the revenue. DESCA's revenue is at least $170MM. It could be more. I had heard that the company was planning on $300MM in revenue in the coming year 2010 and 2011. Also, remember, most companies in the world saw declines in revenue throughout the recession so that is not something to look at. The CEO over there came from Telefonica USA which is a subsidiary of the largest telecom company in the world- telefonica Espana. he went there b/c they have an amazing growth platform ahead of them. UTSI WILL do well with this partnership. Actually, both companies stand to do very well with this partnership. Hope this helps you. DESCA also has very high achievements and is a top CSCO vendor in may categories."

I'd like to add that this agreement does a few things:

1. The company gets to work with a local partner to market their products in 14 countries.
2. They get added revenue while introducing products into small to mid-size projects. Those DESCA clients exposed to UT products (may be better or cheaper) will start building confidence in UT products.
3. They can cut costs/scale back employees in these areas while still maintaining a foothold.
4. They continue to sell their IP besed products (rather than handsets for ex.) and generate revenue from their core products. UT has spent significant money on R&D for their core products over the years so they just need new markets without having to spend a lot for marketing/trials.
5. The company can get a set margin for their products (with agreed pricing) as DESCA orders them and get paid earlier.

IPTV market share - From the same DESCA PR, "UTStarcom is the IPTV market share leader in both China and India. UTStarcom is also the market share leader in India's broadband market."

Blackmore has mentioned that there was a slowdown in IPTV in China due to the carriers focus on 3G this year. While UT will lose some contracts as per the last blog posting shows, UT should still be well positioned (if not better now) for the boom projected for the next few years.

New stock trading range - The stock had traded in the $1.4-1.8 range for the last few months and finally broke out last week. Its interesting to note the $1.88 "high" on the last trading range and the same price it hit this week after coming down from $2.36 last week. While not important for long time holders, traders need to pay attention to these things so they are buying and not selling at the lower end.

Profitability - The sale of non-core assets, the move back to China, the massive cost cuts, outsourcing manufacturing, partnering all point to a focused and aggressive plan by Blackmore and the company to get to profitability despite the world recession, slow ramp of core products, and collapse of PAS and Japanese revenues. While shareholders have still suffered a lot, I like the moves and believe Blackmore can unlock significant shareholder value as they drive towards profitability.

Partner - Blackmore mentioned the US partner in one of the previous conference call and discussed the partner (with investors) as filling in product lines that UT did not have and vice versa (for example GPON). While the DESCA partnership is good, this did not look like the "partner" that Peter was talking about. I asked one institutional investor to check and confirm if there was another partner Peter was talking about and got confirmation that this was not the partner that Peter was talking about. They are also working with multiple potential partners.

Closing comments - I'd like to reiterate that a sale is probably not in the works for various reasons but this is actually a very good thing as the stock is (I believe) tremendously undervalued. My discussions with management with the stock in the $3-$5+ range and more suggest they believe the best way to get to higher share prices is to get to profitability. Of course, shareholders could not have agreed more but it looks like this new path (see above) to profitability has more chances of success (rather than just hoping hundreds of millions in revenue would come in).

Tuesday, September 1, 2009

ZTE win in Anhui, China

"Reportedly, this award is for 300,000 IPTV lines, to be deployed over 17 cities and counties in the province. It will provide comprehensive Internet TV services including direct cast, video-on-demand, time-shift, and value-add. Huawei, ZTE, and UTStarcom bidded on the contract. Eventually, ZTE won."

There hasn't been a lot of news regarding UT but the above win by ZTE over UT is a concern prompting cries of selling out the company.

Chinese shareholder Techbroker stated last year in a note to management:

"....Ironically, IPTV's boom day in China is likely UTStarcom's doom day -- We have two too aggressive, too successful and competitive, and too big competitors waiting out there for the same day too. They will offer zero or negative bet price to get you out of the business if they see the booming day is coming...."

Today, Tech states: "This latest serves a wake-up call to Blackmore and the Board: UT's last and only hope is finally gone now."

Is it???

Here is what Blackmore mentioned in the last CC:

"Our IP TV wins during the quarter include expansion contracts with China Telecom across a broad range of provinces, which include Fujian, Hainan, Shenzhen, and Shanghai. A partnership with CCTV also enabled China Telecom's first IPTV deployment in Hunan."

So, it is not cut and dry that ZTE can just muscle them and win all the contracts in iptv.
UT did $80m in core revenue in Q2 and bookings were tracking well. The Q2 bookings was the same as Q1 revenues if you subtract the Korean handset but since Q1 had some more PAS, the core part is improving.

I'm surprised with the 300k line deployment contract in Anhui since that shows even with the focus on 3G, iptv is picking up. IPTV is something the comapany will fight to defend. If they have to tweak their pricing a little bit, this would be worth it.

After all, their OPEX/quarter is not $130m or $60m but going to be under $25m.

Blackmore adds:

"Let me now turn to bookings. In the second quarter we continued to see good demand for our IP systems business in our target markets, and I'll discuss some wins in a moment. Based on our sales pipeline for the balance of 2009, we continued to expect to have good booking levels in the second half of the year."

I'll end this post with an earlier post on yahoo today,

On an earlier post this year, I brushed aside Shadow's and Coach's call for "more information" saying they needed to slash and burn. They have done the slash and burn. They also say they are focusing now on earnings and higher margins (hence letting go of handsets and not going after every broadband tender out there).

However, this loss to ZTE on iptv is critical and we definitely need information regarding this. IPTV is UTs higher margin product that they have put their hopes on. Is ZTE going for the kill and severely underpricing UT, in which case the board has to do a major about face regarding operating the company and looking for an exit point. Or did they just lose this by a few % points and the market reinforces the potential of IPTV in China. Only the company knows this.

As for having no choice but to sell out, thats not true. They have 2000 employees still after the restructuring. Others have much less (look at a Sonus for ex. at under 1000) I'm not making a case that this is a good thing (for them to keep restructuring if the revenue doesn't come in). Just that if you are playing this for a buyout, it might not happen soon. It does tip the balance more on the sell out option rather than the operational route (which some institutions are already grumbling for.....)

One thing on the building.. I am FOR selling it of course but that may be more of an indication that the company continues to operate the business than selling out completely.

Have a good day.

Wednesday, August 12, 2009


In the June restructuring call, Peter mentioned hiring a real estate company to sell their Hangzhou property. It is interesting but probably not surprising that this company is Gemdale. Here is a chart of Gemdale the past 3 years (split adjusted).

UT sold their Gemdale shares between 15-20Y back in late 2007 netting about $90m. The stock actually got to a low of 3+Y and now trades at about 17Y.

The property is on the books for around $160m and another shareholder (Techbroker) talked about the rising property values in China and an estimated $300m for the land alone.

The company is projected to end the year with net cash of over $200m and to break even next year. Working capital needs (credit lines) are much lower than before but so is their available credit. The building could be use for collateral (and it will be if certain threshold amounts are used up per the last quarterly filing) so I'm not sure what they would need a major cash influx for. Peter did mention the upcoming Phase III BSNL contract so that they may use the funds for that contract. Anyway, that sale will take some time as Peter mentioned but its interesting that he mentioned it again this last call.

Saturday, August 8, 2009


Here is a 6 month chart with the 20 and 50 day overlay.,m20&a=&c=

The initial cross back at 90 cents was a prelude to a nice run to $2.43, close to the November 2008 highs.

Now, the stock sits right at the 50 day with the 20 day trending up and coming up fast. I had commented in the past about the 20 day moving average. The stock was comfortably above the 20 day on its run up but broke down around the $2 area, subsequently reaching $1.35, which interestingly enough was the launch from the low $1 range. For trading, the 20 day is a farily good indicator and you should be long as it is above that. The bears had a nice attack early Friday but failed to bring it down. A few weeks ago, the 50 day was around $1.8 and $1.83/1.84 was the high just after the shareholder meeting. Now, that it has gone down slightly, the breakout point is here. Next week could be the long overdue breakout as the stock is incredibly cheap.

Just some gibberish technicals for traders out there. I'd like to see more volume for more confirmation from a technical standpoint. I'll post more on the earnings call later this weekend.

Thursday, August 6, 2009

Q2 2009 Report

Here are notes I took from the conference call.

The company highlighted the cash balance at the end of the quarter at $276m. Cash usage in the first half of $38m. "Good" progress in the restructuring with 1100 cuts in June and July. Further cuts in Q3 and completed in Q4. In Q4, manufacturing will be outsourced.

Bookings - No book to bill or numbers given. Peter had mentioned to detail this and instead not even book to bill was given. Peter mentioned good demand in iptv and expected to have good bookings in 2nd half based on sales channels. Again, no hard numbers, which is disappointing.

Q2 Revenue was $80m, which consisted of no Korea based handset revenue so mostly "core" revenue. I am confused why there was no handset revenue and yet some final inventory sales in Q3. Margins were negative due to several charges highlighted in the PR. Stripping out these charges, the GMs were about 20% (breakdown later).

Wins in the Quarter - IPTV expansion contract with China Telecom in provinces including Fujian, Hainan, Shanghai and Zhejiang. IPTV win with CCTV in Hunan. PDSN expansion contract in 10 provinces (35% market leader ahead of Cisco/Starent and the Chinese competitors). Some milestones included the mobile IPTV win, start of upgrade of STB from version 1.0 to 2.0 (software upgrade), "Dual SP" upgrade for CT (not sure what that is), IP Signage/advertising, Pilot project for SMIC for intertactive TV/"ITV" cable solution. Some new entertainment features implemented in IPTV for India. No subscriber update count for

Broadband - MSAN win with PLDT, BSNL/Bharti, continued product evaluations with Softbank with initial pilot orders for their TN product. Commercially deployed GEPON in 25 cities in 11 provinces in China. Advance negotiations in Q4 for BSNL Phase III contract to be awarded in late Q3, probably in Q4. Got professional service contracts with CT and China Unicom (multi-year contracts that can further relationships).

Recap restructuring progress and summaring focus on IP products.

The Q2 charge of $28m was for the 1850 people already let go (1100 people) and the ones identified. A smaller charge in Q3 for the rest. While the charge is taken, cash will be used in Q3/Q4 as mentioned previously.

Mentioned monetizing the Hangzhou building (nothing new).

Viraj talked about the business unit breakdown.

MCBU (IPTV/NGN) - $39m revenue and 31% gross margin. Later learned first India iptv revenue finally realized this quarter.

Broadband - $14m and 5% GMs. Lower revenue due to exit of lower margin business (note: Revenue from Phase I/II not recognized although cash is collected).

Services - $14m and 39% GMs.

Handsets - $13m (negative GMS - Most in China/no Korea designed handsets).

Peter talked about rest of 2009... talked about Hong Lu's contribution and wishes him luck in his new role (not sure if anything really changed there). Board is seeking to add people with expertise in the local markets (thats been discussed so often before and very late in this regard).

Blackmore spends more than 50% in China (and another 20% travelling is my guess)

NO 3rd quarter guidance due to the restructuring.

Reiterated 2010 business model of $350m in revenue, high 20s GMs and under $100m in opex. This will be added to by deferred revenue from the India contracts.

Q&A - Broadband GMs of 5% this quarter (whats up with that anyway when they talked about 20% last year). How can they achieve the higher company GMs with such a low broadband GM. This was an excellent question and Peter had a reasonable answer. Peter is expecting their TN product with Softbank to have much higher margins and contribute more revenue. The margins from BSNL is the low one but others in India (Bharti, Tata, Reliance) have larger GMs. Other Asian broadband contracts are much higher. GEPON contracts will be selected so that margins can be optimized (they will not go after every tender out there). Peter talked about India iptv mostly starting this year and still at the very early stages.

Peter discussed iptv pricing and said their infrastructure products are made of mostly 3rd party equipment and their software (which gives them higher margins). STB has GMs in the teens and cost $50. The upgrade coming up will be mostly software upgrades.

Not a lot of questions but Peter mentioned having discussions with Shareholders tomorrow. I should get additional feedback tomorrow after those talks.

Commentary - It wasn't a pretty quarter. The negatives included no detailed info on bookings, no iptv subscriber count, no announcement of the partner, no Q3 guidance. The positives included the company has ample cash with $276m. Subtract $45m for restructuring and you have $231m. OPEX for this quarter without restructuring was about $43m ($16m in R&D and $27m in SG&A). Weren't they targetting to get OPEX under $60m by Q4 when they talked with investors at the end of Feb. Core revenue of $80m was not bad with half in MCBU. Without PAS, it shows IPTV is doing well with the business unit having 31% GMs. So, OPEX for Q3/Q4 should rapidly going down as well. Any more writedowns in Q3/Q4? Handsets are mostly gone so...There are still those Phase I/II payments at about $25m/quarter so cash balance by the end of the year should be well over $200m. By early 2010, OPEX will be down to under $25m/quarter. Peter talked AGAIN about exceeding the breakeven revenue and bookings expected to do well in the 2nd half. The book value is down to about $2.55/share and projected to go lower. I anticipate the stock to edge closer and fill the gap to the book value and ultimately exceed it as it gets closer to 2010 and bookings are clarified. For now, the negative quarterly reports dominate the headlines and the company doesn't use any funds in defense of the stock price. Peter has done a good job in the expense cuts (which we have been asking for a LONG time) and there is progress in the "core business". The credibility is low as again they chose NOT to give color to bookings, guidance, etc.

Saturday, August 1, 2009

Product Lineup

While the company has addressed one side of the business equation to profitability by targetting a lowered expense rate under $100m/year, the bookings/revenue side doesn't show clarity even after years of churning out products. The most reliable/consistent revenue source came from PAS infra/handsets and their PCD handsets. Both of those areas are winding down to almost zero. PAS peaked around 2004 and the search for new revenue streams started way before that. Big investments and hope in 3G (WCDMA), Wimax, Softbank, and handsets failed/disappointed badly. A $2.5B revenue company at one point, UT has scaled back drastically and positioned itself to break even with $350m in yearly revenues. How doable is this? What products do they have? Over the last few years, there are various products thrown out that gave hope. The size of the markets were large but consistency of revenue and wins were lacking. Here is a smattering of products that the company is relying on to generate revenue in the future.

IPTV Infra (Basic) - By all accounts, this business has done well ramping to a subscriber base of 1.32m mostly in China. The problem is that UT has invested so much in their end-to-end system that the revenue generated so far has not justified the cost. Blackmore mentioned last year, “Our view is that these two product areas, NGN and IPTV are at the beginning of their life cycles and bookings can ramp fast. We are very pleased with the momentum they are gaining in their respective markets and believe the revenue for each of these product lines can grow in excess of 80% in 2008.” Its interesting that now, Blackmore makes the point that IPTV/NGN softswitch are mature in terms of their investments.

IPTV (cable) - The initial win was with Markwell in Taiwan. That was announced back in December of 2007 and just went "live" this year. Other cable wins in China were recent as well.

(translated) The tender was finalized before the Spring Festival, UT Starcom to become the project's platform and terminal equipment provider, and the South together with the media for the city of Canton 800,000 cable provides the platform and equipment. 其互动电视业务将与广东的省网现有单向数字电视业务紧密关联。 Its interactive television business will be with the Guangdong provincial network of existing one-way digital TV business closely related. 互动电视业务建立在单向数字电视业务基础上,依托同一HFC网络进行传输。 Interactive TV business set up in a one-way digital television business, based on relying on the same HFC networks. 而双向机顶盒需同时承载互动电视业务和单向数字电视业务。 And two-way set-top box is required to carry a one-way interactive television services and digital television business.

IPTV (digital signage, security) - There has been about 8 wins in digital signage and a couple in surveilance. Again, new revenue sources but size is small.

IPTV (mobile/iptv phones) - UTStarcom, Inc. (Nasdaq: UTSI) has been selected as the only technology supplier for the first Mobile Television (TV) system across Hainan province, driven by China Telecom's (NYSE: CHA) Hainan branch. This is the first large-scale Mobile TV system in China to adopt UTStarcom's end-to-end RollingStream(R) platform. The deployment is scheduled to go live on May 17, 2009, as an extension of the existing Internet Protocol Television (IPTV) service that Hainan Telecom and UTStarcom have been delivering since 2006.

UT is now focusing handset efforts towards iptv. Given the general CDMA market's low margins, high working capital/inventory risks, charges even just recently, this is probably a good switch.

NGN/FMC - Blackmore mentions on one of last year's earnings call, “Focusing on our NGN solution, this is designed to support the growing number of advanced voice and data services as we see tremendous growth in Internet traffic and the end of life of traditional TDM switches. We’ve designed our mSwitch to allow the provision of next generation services but also significantly reducing operating expenses of current products. mSwitch supports multiple call types over all access technologies and currently supports over 60 million NGN customers globally. While PLDT is our largest network transformation project to date, our success there is winning us new customers worldwide. For example, last year a major European carrier, Tiscali in Italy asked us to supply them with our MSAN equipment. And just prior to year end, the carrier asked us to replace their entire TDM switching network with our softswitch. This is obviously a very key strategic decision for Tiscali and a very strategic win for us. We are currently implementing this project with them. In quarter four, we also won our first NGN softswitch in Taiwan. Other recent notable contracts include Brasil Telecom, where our softswitch is supporting applications for fixed mobile convergence and IPTV, with TOT in Thailand, and also recently Nextel in Argentina. It is clear that this technology is gaining momentum and we believe we have the best performing softswitch on the market.”

Broadband (India) - The main revenue(cash) source lately has been from the BSNL contract in India (Phase I/II). We've heard about the recent extension of Phase II and possibly Phase III by year's end. From all accounts, India broadband is a consistent revenue source (although margins are low).

GEPON- "UTStarcom Deploys Largest GEPON Network in the World for Japan's Softbank" That was in 2004!

Over the years, there were wins in Pakistan (Sept 2007)
, Goa in India (May 2007),

China (July 2008)...The latest update in the last earnings call from Lu: "Moving on to broadband, we’re very pleased to be beating and are breaking through in our GEPON business in China. For example, we’re working with the China Telecom for GEPON contracts in the Jiangsu, Zhejiang, and Fujian provinces. We’re also looking at the expansion contract with the China Telecom for gigabit EPON in Ningxia Province and are planning the trial with the Hunan Province and Jiangxi Province. With China Netcom, we are expanding our GEPON business in the Heilongjiang, Shandong and Hunan provinces. We are pursuing enterprise opportunity for gigabit EPON and have won a small, but important contract with China’s State Administration of Radio, Film and TV in the Vinan Province."

Recently, Blackmore announced they were on the short list for 15 more provinces as they topped testing in 3 of 4 categories. Here is a recent article (June 12, 2009) on EPON in China..."World's larget EPON tender?"

8:55 AM -- China Unicom Ltd. (NYSE: CHU) is believed to have issued a tender for EPON equipment to support the rollout of 11 million high-speed fiber access broadband lines, according to a report from Interfax China.
If true, this is further evidence that China's EPON market is hotting up fast, and that Asia/Pacific's preference for EPON is ongoing, though China Telecom Corp. Ltd. (NYSE: CHA) is also checking out GPON's potential. (See China Telecom Uses AlcaLu's GPON.)
China Unicom is believed to have built out around 100,000 EPON lines so far, substantially less than China Telecom's 4 million lines at the close of 2008, according to Chinese vendor ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763). (See ZTE Secures $15B, Highlights R&D.)

PSDN - UT got 40% of the latest tender beating out Cisco/Starent. (The Packet Data Serving Node, or PDSN, is a component of a CDMA2000 mobile network . It acts as the connection point between the Radio Access and IP networks. This component is responsible for managing PPP sessions between the mobile provider's core IP network and the mobile station).

Transport Network (TN) - There has been build up of this product since last year on the analyst meeting. Recently, the company disclosed trials with Softbank and China Mobile to name a few. However, there has been no wins yet.


The company's investments in the above products have gone as far back as early this decade. As mentioned, PAS peaked back in 2004 so the company has thrown a lot of resources into various products and only now seeing some payoff. For years, investors have been telling the company to CUT costs because the revenues were not coming even though they had products (WCDMA trials went very well for example but 3G licenses were not issued until recently). So, now that the company has cut costs, there is concern about developing future products and maintaining customers. While management credibility is low and their performance is reflected in their stock (even today, it ranks as one of the worse performing US listed "China" stocks), I cannot argue with the cost cuts as I see their product line as being adequate. The timing of bookings and revenue are still questionable but initial wins and positions indicate there are enough products to support the new expense base. The company currently generates 80% of their revenue from 20 customers (compared to Starent having two customers make up 85% of revenue for example). The company's product line and depth of development over the years cannot be replicated with the current market cap. (I wonder what valuation they would get if they just become public with say $200m in cash, own their own building, have the above product line/customer wins, and projected to breakeven/become profitable in the near term).

It is a very unusual situation but the question remains can they convert the previous years investments/positions into bookings/revenues to become profitable and grow the business. One of the biggest negatives is their credibility/past performance and that is NOT easy to overcome after so many years so we will have to see.....

Have a good weekend.

Thursday, July 23, 2009

Chinese 3G Investment, IPTV phone, and Ericsson

China's 3G investment - "China's top three telecommunication operators, China Telecom, China Mobile and China Unicom, invested 80 billion yuan to boost the third-generation (3G) network so far this year, the Ministry of Industry and Information Technology said Wednesday." "The ministry expected the three operators would invest 170 billion yuan (24.87 billion U.S dollars) in 3G network construction this year. "

So far, subscriber numbers for 3G has been low. "According to the article, China's 3 mobile operators have targeted 50 million 3G subscribers by the end of this year. But since the issuance of 3G licenses in Jan 7 this year, subscribers of all kinds have not reached 3 m under the most optimistic estimate. Of that total, more than a million use 3G cards or 3G laptops. Among the handset users, .74m are on China Mobile's TD-SCDMA network by the end of May, including users acquired during early trials and during the Olympics last year when free give-aways and other promotions were in place. There are only .1+ m users on China Telecom's 3G service. China Unicom now aims for .2m users for its WCDMA service by the end of Oct. In stark contrast, the total population of mobile subs in China is 600m right now. Average monthly uptake in mobile subs in Q1 this year is 9.6m in China. Clearly, the initial growth of 3G has not lived up to market potential and expectation. "

The 3G handsets cost $300-450 so they are not cheap.

UT's mobile iptv- UTStarcom, Inc. (Nasdaq: UTSI) has been selected as the only technology supplier for the first Mobile Television (TV) system across Hainan province, driven by China Telecom's (NYSE: CHA) Hainan branch. This is the first large-scale Mobile TV system in China to adopt UTStarcom's end-to-end RollingStream(R) platform. The deployment is scheduled to go live on May 17, 2009, as an extension of the existing Internet Protocol Television (IPTV) service that Hainan Telecom and UTStarcom have been delivering since 2006.

CMMB- Shanghai. May 20. INTERFAX-CHINA - China's three telecom operators are accelerating their plans to roll out mobile TV services in order to gain ground in the forthcoming 3G era, with China Mobile the favorite to win among both analysts and consumers.

Although the 3G networks deployed by operators have the potential to provide streaming TV services, all three operators plan to rely mainly on the China-developed China Multimedia Mobile Broadcasting (CMMB) mobile TV standard to deliver their mobile TV services to both their 2G and 3G customers.

On May 19, China Mobile became the first telecom operator to sign a deal with China Satellite Mobile Broadcasting Co. Ltd. (CSMB), the national operator of CMMB, allowing China Mobile's CMMB-enabled handsets to access the CMMB network, according to Shen Hongbin, general manager of TiMi Technology Co. Ltd., a chip manufacturer and the developer of CMMB.

Commentary: It is interesting that UTStarcom, known for its low cost PAS handsets, has now switched gears targetting the higher end handset market and focusing on iptv. While the market is not large compared to the overall 600m mobile/handset market in China, investments by operators in 3G, iptv, and their goal to increase overall revenue could make UTs startegy pay off. The number of handset suppliers number in the 30s but UT can leverage their advantage in iptv to carve a nice market share in iptv enabled handsets. Handsets using CMMB (see above) will be competition but UT can offer more from their iptv system. Also, note that May starting dates are very close. This is a nice consumer product that UT can build on (and they have 1.32m iptv subscribers to market the handsets to already).

Ericsson- Back in 2006 (and maybe earlier), Ericsson was discussed as a potential buyer of UTStarcom. Ericsson has been a major acquirer and has targetted IPTV as one of its important areas of growth. Ericsson has acquired other companies since such as Redback Networks but its expansion hunger continues. The company is projected to spend $25B in R&D over 5 years and recently made inroads in China (I've discussed their India business previously).

"Recently, L.M. Ericsson (ERIC) (Analyst Report) received fiber-to-the home (FTTH) equipment contracts from all of China Mobile, China Unicom, and China Telecom. Ericsson’s GPON (Gigabit Passive Optical Network) technology will be used for high-speed internet access and high-definition IPTV services in 9 Chinese provinces."

Here is a note on Ericsson's IPTV strategy: "Ericsson characterized the existing IPTV systems as First Generation and stated that its conversations with IPTV operators indicate that they have strong concerns about the ability of these systems to scale. Ericsson told me that it thinks that many of these systems will top out at 500 thousand IPTV subscribers. It expects that moving to a second genreation of IPTV systems will create major opportunities for it."

The author commented: "There is no question that Ericsson is late to the IPTV party. Its acquisition of Tandberg clearly gives it a strong presence in the market but not as a full service provider.It will be interesting to see if its view of the market will pan out. Personally, I think it will be much more difficult for Ericsson, or any other large full service system supplier, to break into the market at this time. "

Today, Ericsson threw its hat in the bidding for Nortel's CDMA/LTE assets. "The Swedish giant confirmed Thursday morning that it is "going to participate in the auction for Nortel's CDMA and LTE access" assets, and confirmed it had submitted an initial pre-auction bid by the end-of-Tuesday deadline, but did not disclose any further details."

Ericsson+UT still makes sense.

IPTV and its related revenue streams (handsets, mobile/fixed infra, advertising/digital signage/commerce/education, etc) are still in the very early stage. UTs wins in India, Taiwan, and China have barely scratched the surface and some are just going live now. Thats both frustrating and shows the potential growth in the future.......

Saturday, July 11, 2009

Focus on Blackmore and China

The biggest news for UT during the first half of the year was the restructuring that took place taking their employee count from the mid-4000 level to under 2000. This will result in an OPEX run-rate of less than $100m going into 2010.

Let me highlight a few metrics from the Q1 report:

IPTV slowdown - Total subscriber for UT only increased by 50k in Q1.
China revenue - Total revenue of $50m and this included some handsets/PAS.
Softbank/Japan revenue - $6m.
India/others - $20m

About a year ago, UTs quarterly OPEX still hovered around $120-130m. The company sold "non-core" businesses and closed/merged others but basically the revenue lost was mainly from handsets/PAS and show that the previous year's "investments" and the company's projections of the ramp in growth of non-PAS/non-handset businesses was way off.

Here are a couple of articles showing the growth in ZTE/Huawei over the years as well as expected growth in the China telecom market in the next few years.

"Huawei and ZTE benefit from the fact that the Chinese government holds stakes in dozens of local phone companies. It is not surprising that these telcos increasingly buy much of their infrastructure from homegrown companies. Financially, China's telecom suppliers also benefit (like some struggling U.S. companies today) from tax rebates and R&D grants. But what really irks rivals are the government's low- to no-interest "loans" that needn't be repaid, and the deep discounts local companies get on the energy and raw materials they purchase from other Chinese companies. According to public filings, this year ZTE received a credit line from the government of nearly $15 billion. Beijing bestowed $10 billion on Huawei in 2004."

"If the Pyramid team's projections are accurate, China Mobile is on course for annual revenues of more than $110 billion in 2014, up from nearly $70 billion in 2009.

China Mobile's position will be underpinned by a 7.4 percent compound annual growth rate (CAGR) in mobile subscriptions that, Pyramid's analysts estimate, will see the Chinese mobile market hitting the 1 billion subscriber milestone in 2012, and reaching 1.1 billion in 2014, when the mobile penetration rate will hit 80 percent, compared with 52 percent at the end of 2008."

Ericsson Scores GPON Wins in China -


I talked with shareholders this week, some of whom had conversations with Peter Blackmore. The discussions centered on similar long time issues but also on how well position UT is to compete in the China market. Blackmore's tenure started when the stock was in the mid $5s and while he has simplified the company and reduced OPEX, there are major issues on credibility and ability to ramp up "core" revenues (or even bookings at this stage). This is an important issue because the center of growth in the telecom world will still be China/India. Does UT have a viable wireless strategy? It gave up on 3G/WCDMA, wimax, and now most of its handset plans. Its main strength from a technological point of view is iptv and broadband (GEPON/TN).

From the same article above,

"Both operators have already been offering packages using various combinations of voice, data, and IPTV services, and now with the new line of services acquired, they can offer quadruple plays at an attractive price point to high-end users," notes Yu.

Indeed, both telcos have been rolling out fiber aggressively since 2007 and continue to do so. Pyramid predicts that FTTH will increase at a CAGR of 104 percent between 2009 and 2014, taking the number of users from 1.5 million to 50.8 million.

The number of UT employees even after the restructuring will still be around 2000. This is still much more than other companies such as Sonus, Infinera, Starent, Sigma Designs, etc.

I had campaigned recently to remove Lu because of the performance of the company over the last few years and if Blackmore was on the ballot, I would have campaigned to remove him as well. Its all about performance after all.

Despite the bad performance over the last few years, I actually feel more optimistic now because the cost base (whether it was by choice or forced on the company) has been reset to realistic revenue projections without hoping for a major ramp. Investors are correct to bash management and point to focusing on their own compensation/job security. The flip side is they took a major hit by doing the last restructuring. They are maintaining a net cash balance larger than anytime during the last 4-5 years and the OPEX will be down to the lowest level.

Like most shareholders, I am frustrated with the stock price and the indifference the company seems to have on it. However, I have to look at the base assets/numbers/growth projections of their markets. I believe that Softbank will increase their orders materially in the coming years. I believe that the iptv/fiber market in China (alone) should be able to grow materially and produce sustained profits. I believe there will be significant demand-driven growth in the coming years that will reward the company that has reset their cost base to 1/5th the expenses it had in 2008. Ultimately, this will power the stock price much higher.

Will this happen overnight.......No. The company has to show by bookings and growth of their core business that even this current target expense is realistic/optimal. One last note. The volume the last couple of days has been the lowest ever showing a wait and see attitude from investors. The price has also declined as the market has gone down 4 weeks in a row. Without news from the company, it doesn't seem the stock can gain traction but I do like the way the first half has played out for UT.

Have a good weekend.

Friday, July 3, 2009

2009 Shareholder Meeting Recap

I attended the shareholder meeting on June 25 at UTs Alameda office. Aside from myself, there was only one other shareholder that attended (last year there were about 10 shareholders). Peter Blackmore, Viraj Patel, Thomas Toy, Luis Dominguez, Susan Marsch, and Hong Lu were present (among others).

The meeting had three main components: Voting results, Prepared remarks from the CEO, and Q&A.

Voting results – Both directors and PricewaterhourseCoopers were re-elected/ratified. No details were given.

Prepared Remarks from the CEO – Peter Blackmore gave a brief overview of the company discussing the divestiture/closing of PCD and other non-core businesses, significant cash position, and fundamental change to the company simplifying its operations. He discussed the company’s market leadership in the China iptv market, specifically iptv signage. He talked about leveraging the company’s R&D to specific markets. Peter highlighted the India broadband market talking about the potential 200m broadband users, adding even if it was just half of that, it will be a huge market and UT is in good position. He mentioned the limited broadband market in China (position in China is not strong). There are also good opportunities with Softbank. As a recap, they had outsourced manufacturing and consolidated back office functions in China and targeting less than $100m in yearly operating expenses.

Q&A (Since there were only the two of us and the other shareholder had only one question, I had an opportunity to ask multiple questions as time permitted)

1. I first commented that for the last 4-5 years the company has not had an operating profit. Even when Barton was hired in 2005, the company’s near term goals then was to return the company to sustainable profitability. However, every year, the company falls short and does a restructuring. My question was directed to the board and asked if there is a point (limitation) to this cycle (especially in light of the latest significant cuts) that the company is better off sold or partner with other companies. I mentioned that the street is obviously concerned with the magnitude of the cuts and the company’s ability to operate.

Peter, being on the BOD, answered that their goal was to return to profitability as fast as possible and they had sufficient resources still. They could always ramp up in the future if needed and their R&D was targeted (as mentioned in the presentation). Thomas Toy added that the company is always willing to consider outside offers and mentioned there are not many companies in Silicon Valley that has 2000 employees.

As a follow-up, I asked if they were confident that they have more than enough resources and can operate with 2000 people, then why didn’t they make the cuts to 2000 people last year? (After all, we did meet with them last year talking about cost cuts). Peter mentioned the revenue projections for 2009 was off and we proceeded to the next question.

2. The second question came from the other shareholder and dealt with the company’s material weaknesses and ongoing concern from their auditors. Blackmore mentioned that they will end the year with a strong cash position and a pointed to the business model to get to profitability as addressing (hopefully) the ongoing concern. Regarding the material weakness, he mentioned there were still two that Viraj Patel is in charge of resolving.

3. My second question was addressed to Hong Lu. Since Peter was the CEO and the company had hired a China CEO as well, what, IF ANY, was Hong Lu’s day to day role? Hong mentioned that he was Executive chairman so he was still part of the management team. He is based in China, meets with customers, and continues to plan the company’s strategy. He added that he gets up early everyday and works with Peter very well. I followed up by saying that other shareholders I’ve talked to want him to be around since he is the founder and probably knows the company better than anyone BUT the issue here is there are two high priced executives acting as CEOs. I added that I would love to have 10 more people but this company simply cannot afford the cost. Hong responded by saying they are constantly looking into executive pay and that if shareholders were not happy, they obviously have a vote.

4. The next question was about the lack of revenue growth last year that led to the cuts at the end of the year and this year. Peter had talked about needing to ramp several hundred million to get to breakeven/profitability (without PCD and before PAS collapsed). I asked what those revenues he was expecting (what areas) and if those revenues are lost or just delayed. Peter answered that a major shortfall was the Korean designed handsets and that led to the winding down/shutdown. Peter also noted all areas in and outside China experienced a slowdown. I asked how the handset shortfall could be the main contributor since they kept on saying recently it had low margins anyway. How would that shortfall be the reason for closing a $130m profit gap anyway. Peter mentioned the lack of profit and loss was substantial if added up and again there was general slowdown in the world markets and hit all areas of operation.

5. Moving on to this year’s bookings. After the restructuring announcements, Peter had announced a breakeven point of $350m and that bookings in Q1 were good and Q2 was on track in China and ahead outside of China. I asked Peter that this doesn’t mean anything to investors as they don’t know what it means when the company says it has good bookings or tracking ahead? For all we know I said, your target is to lose $20m in 2010. Peter re-iterated their intention to get to profitability and that bookings were good in Q1 and Q2 but obviously they will have to wait for Q3/Q4. This is where it gets a little interesting. I said how can bookings in Q1 be good when core bookings were only about $65m. Annualized, this is only $260m, well below the $350m to breakeven. Peter was surprised and said that must be revenue and not bookings in Q1. I kind of looked at Barry to see if the numbers he gave was not correct. “I” tried to explain that the bookings in Q1 was $140m but half of that was in handsets so not part of the core (it was really weird since Peter was looking at Barry and there was some confusion). A day later, I was still trying to follow up with Barry and the resolution is they will try to give clearer information on Q2. I really hope so since it is the company directing investors to be patient and look at bookings and then still expect investors to guess and make assumptions on what a book to bill number applies to. Very confusing and unnecessary.

6. Next question was about the recent rumors about a Chinese handset maker/investor and that Merrill Lynch was hired. Peter mentioned that he doesn’t comment on rumors. I asked then if Merrill Lynch was recently hired. Again, they can’t comment only to say that Merrill Lynch is their ongoing advisor.

I could have asked a lot more questions but time was “up” and Peter mentioned if there were other questions, we could always schedule another call.

After the formal Q&A, I still had a chance to discuss certain topics as Blackmore, Lu, Toy, Dominguez, Barry, Viraj exchanged some small talk/greetings.

Share buy back – they are still against this. They commented the best thing for the stock is to get to profitability. I think most would agree BUT its hard when they haven’t been profitable in 5 years. I threw in a comment that they need to do some insider buying.

Peter mentioned that they can now (based on the restructured operations) get to profitability with just a little bit of core ramp. Isn’t this what shareholders had been asking for the last few years since the major ramp has not occurred.

IPTV- I mentioned that in Q1, China added 250k subscribers but UT added only 50k total (mostly in China but still low). Peter re-iterated they still had over 50% of the China iptv markets.

I asked Viraj Patel when the interim title goes away and he mentioned that we’ll see and they had a lot of work ahead of them first.

I missed asking Luis Dominguez anything.

The conversation with Toy was about a sale of the company but they can probably get a higher price if they get this thing turned around first.

In the parking lot, I even got to talk with Lu’s assistant and she was describing the sadness in seeing the company this way after the last few years. She mentioned how she understood shareholders losses as she bought stock in her employee account at $14 or higher as well. After I told her what I and other shareholders have lost, I think that ended that conversation. I reiterated my point that Lu has benefited from the company for years and needs to show leadership by sharing in some of the pain by cutting his salary significantly. Lu also has the most to gain from a higher share price.

BTW, this year’s food was also a disappointment. Just some cookies and drinks as compared to last year’s appetizers (budget cut?).

The above Q&A is obviously paraphrased but should capture the essence of the meeting. There really wasn’t anything materially new in terms of the operations of the company. I didn’t really expect anything new but wanted to share some of the investor’s concerns/questions with the board and other executives that are new or not aware of investor’s day to day issues. I’ll limit my comments to the above rather than make a big positive or negative statement. I won’t play psychologist and try to interpret various items/comments. It really comes down to performance and what they report anyway.

Have a great 4th of July weekend to everyone.

Tuesday, June 16, 2009


Here are some articles that relate to UT in India I quickly pulled from a couple of websites:

No cuts in India - Company’s India MD, Vijay Yadav confirmed to TelecomTiger that India operations will remain largely unaffected by the move. “ We continue to report strong growth in the broadband and IPTV market in India. It means that the India operations will remain unaffected by the announced job cuts,” said the MD.

UTStarcom’s India headcount totals around 125-150. Though the employee strength might appear to be small, the company is consistently consolidating its position in the broadband market including IPTV infrastructure in India with regular contracts from state-run PSUs BSNL and MTNL.

BSNL Extension Contract - "In the first phase, UTStarcom deployed 1.3mn broadband subscriber lines for BSNL with an additional 1.1mn broadband subscriber lines during the second phase. With the new expansion phase, UTStarcom will deploy its B1000 multi-service access node (MSAN) solution throughout India to add approximately 475,000 ports of capacity to BSNL's existing broadband network."

Aksh-BSNL - Commenting on the launch, Dr. K.S. Choudhari, MD, Aksh Optifibre Ltd, said, “This launch is a testament of the spread and growing popularity of icontrol IPTV in India. Aksh believes in expanding mediums of entertainment at competitive pricing through this breakthrough technology of IPTV service. This expansion of the service to multiple cities highlights the growing popularity of the real power of interactivity. With the launch in Agra we have reached a footprint of 15 cities in the country already and plan to increase it to 22 in the next 30 days”

BSNL - Chennai - BSNL’s Chennai circle subsidiary, Chennai Telephones and Smart Digivsion Pvt. Ltd. announced the launch of Myway BSNL IPTV services. (UT mentioned in the Q1 call about BSNL deployment in Chennai).

Bharti-Airtel -While one agrees that broadband sector is still at an infancy stage in India and the market dynamics will certainly change post introduction of wireless broadband services in the country, Bharti Airtel is expected to continue to be among the top performers in the field complimented by its position as an integrated telecom player which will help it to offer wireline as well as wireless broadband services. (Bharti Airtel is the leader in mobile in India...UT could introduce their mobile iptv solutions in India in the future)


During the Initiatives call, Blackmore commented on the bookings outside China and that it was above expectations (whatever that means). UTs strategic position in India has generated some costly sales in the past (low margins/losses). The iptv subscriber numbers have been very low. However, broadband seems to show a lot of promise while iptv deployments are now taking place. The lowered cost base in 2010 plus the early cycle nature of UTs products in high growth tech space/countries should get them to profitability. The company credibility is non-existant and shareholder confidence is very low. The company has to prove they can execute and deliver bookings but the ramp in core bookings in India (low compared to all the other revenues before) should start making a bigger impact and lead to some enthusiasm in the coming months and set the stage for 2010.

Its easy to get discouraged with the disappointments but the main question is can UT ramp the core revenues in light of the targetted cost base in 2010. The company obviously had to cut costs in light of the slow ramp of "core products", divestitures/wind-downs of handsets (mostly), and almost complete loss of PAS. Some people may not understand why I and other shareholders are positive (or even say I'm always positive) but after years of worrying about the loss of PAS, the high expenses, and slow ramp of "core" products (or maybe unrealistic growth expectations), its really good to know the company can realistically "outperform" going forward and the focus would be on the core products.