Saturday, January 24, 2009

Weekly Recap - Retesting lows?

The stock closed at $1.5, losing 9 cents or 5.7%. The markets were also down with the DOW, S&P, and Nasdaq losing 2.5, 2, and 3.4% respectively. The stock volume was down to the 200k level last week and the stock down another 19% this year alone. There has been no news from the company since the restructuring announcement. I did a quick scan of some websites/message board for related news.

Lu interview - Sharholder Techbroker posted the link to Lu's interview.

My initial comment: The success of PAS gave UT so much funds that they invested in various MAJOR projects from end to end iptv solution to 3G (total package - see above components) and even to the convergence of mobile, broadband, and fixed line, etc, etc. They have abandoned the WCDMA specific 3G products but have retained core parts to build new products/components for TDSCDMA such as softswitch (thats what I read into the Lu interview). Currently, they are focused on the terminals and iptv/broadband/ngn but not necessarily the mobile/wireless segment. But now that licenses have been issued, they can better focus their tech advantages to build new products aside from just terminals/handsets.

In the interview, it looks like Just in Time is using UT's Rolling Stream iptv solution.

Inida Mobile/broadband growth - India's mobile operators activated a staggering 10.81 million new lines during December 2008, taking the total number of wireless connections in the country to 346.89 million at the end of last year, according to new figures from the Telecom Regulatory Authority of India (TRAI) .

The country's fixed line base continues to shrink, though: The number of fixed line connections in India fell by 150,000 during December 2008, finishing the year at 37.9 million. The number of fixed broadband connections grew, though, by 170,000 to 5.45 million.

Aksh Interview - Good interview regarding iptv developments.

China IPTV policy breakthroughs - The Chinese IPTV market will see a number of further policy breakthroughs in 2009, according to Chinese consultancy firm CCID Consulting, following a rapid growth in the number of IPTV subscribers during 2008, when the number shot up 100% year-one-year.

The promotion of free and bundling marketing by operators has meant that IPTV subscribers have appeared in Shanghai, Zhejiang, Fujian and Guangdong, according to CCID Consulting, with around 700,000 subscribers in Shanghai alone at the end of last year. The consulting firm adds that the rapid subscriber growth has driven the development of the IPTV equipment market, although many telecom operators have found it difficult to make a profit from IPTV, with many promotions remaining at the free and low price promotion stage.

Microsoft IPTV in China Cable - Microsoft recorded three IPTV firsts today: the first cable operator customer for its Mediaroom platform; the breakthrough into the TV-over-broadband market in China; and the first deployment of the new Anytime capabilities that were announced last week at 2009 International CES in Las Vegas. (See Microsoft's Promise: TV Anytime You Want It.)

While UT disclosed it won a cable customer in China for their iptv system, this Microsoft news shows the technology lead that UT has built over the last few years has eroded.

From the above links/information, there are obvious positives to the markets for UT products but also heavy competition for the few growth areas in today's recessionary environment. The heavy investments that UT was able to make due to their success in PAS in iptv, 3G, broadband/ngn, etc has not brought signficiant revenue and has led to losses the last 4 years. There is no doubt that they still retain good technology, maintained/grown tier 1/2 operators, and positioned themselves for growth. The balance sheet is good enough to weather this recession but expenses that have been significantly reduced are still high compared to expected revenues. At a certain point, they cannot cut more without having their competition over-run them and that will be the end game. At a certain point, they have to show significant growth that will get them to profitability. Judging from Lu's inteview and management's "optimism" over the last year or two, they still believe they are a major player and can be competitive/successful. The stock/markets don't reflect that confidence.

For me personally, at this stage, there is little to lose ($1.5 shareprice/market cap under net cash) and am rolling the dice that the valuation is ridiculous for what the company has invested, their current cash/technology/assets/markets/contracts/position. I guess thats better than investing in some of these banks :-) BTW, it looks like the markets are hanging near the November lows but holding so far (Dow was in the high 7k range all last week). With the negative headline news regarding layoffs, bank failures, etc, it seems only a matter of time that the lows will have to be tested.

Have a good weekend everyone.

Saturday, January 17, 2009

Weekly recap - Slow start to the new year

The markets and UT stock initially exploded out the gate in the new year but has made a complete reversal with the DOW, Nasdaq, and S&P now down 5.6, 3, and 5.8% respectively. UT had been up as much as 18% at $2.18 but now down 26 cents or 14%. UTs Q4 has closed so there is not much news as shareholders await for the results in Feb. Here are a few highlights (lowlights) from other company news.

Nortel bankruptcy - With deteriorating performance and huge debt loads, Nortel "rewarded" long time shareholders/employees with a New year's present by filing for bankruptcy. Six months ago, I lost money in Nortel buying in the $7 range and quickly unloading in the $6 range right after their earnings call. A couple of months before that, their management team was very upbeat in their analyst meeting projecting 4% operating margins and low single digit revenue growth. Their highly paid CEO Mike Z (from GE six sigma or whatever management crap the business people are learning) has even one upped UT performance by now filing for bankruptcy. My main frustration however was not shorting the crap out of Nortel after the earnings call six months ago. Their CEO seriosuly sounded like a football jock that has his head cut off. Talk about a true cave man. While UT balance sheet is very good compared to Nortel, the company continues to lose a lot of money and shareholders should continue to be concerned about management's actions/inactions. Nortel has $2.4 Billion in cash and around $10b in revenue. And they filed for bankruptcy and won't even pay employees that recently signed termination contracts. It is sad when management continues to get hefty salaries while shareholders get nada.........BTW, there seems to be existing employees that have started a Facebook site for Nortel called, "I still believe".......sheesh.

Sonus Networks - Another outstanding telecom equipment provider that has shareholders interests at heart - NOT. Their stock is down to $1.38, down from $4-5 range this year and $8s just last year. They have recently cut more costs but have actually given 25% shareholder Legatum a couple of board seats. Really nice of them. Good luck to Legatum and other shareholders. Atleast, they will have a say on trying to turn around another "great" management team.

Citigroup/Bank of America - These companies traded in the $50 range in 2007 and now at $3.5 (C) and $7 (BAC) showing how great managers US companies really do have. Does it take all these business degrees and "experience" to run these companies to the ground? And how about the management/BOD at Sandisk, Yahoo, Take Two and other companies that have amazingly received mega buyout premiums the last year and walked away! Really amazing....

Palm - On a brighter note, Palm's turnaround has had significant traction. They had hired former Apple Podfather John Rubinstein and he has managed to introduce a new operating system and new products. Previous rumors of Apple buying Palm is resurfacing as well with Jobs health and synergies of the two companies. Palm stock has gone from $9 to $1 back to $8 in less than six months! I tip my hat to Mr. Rubinstein for achieving their turnaround since he was hired in 2007. Wasn't that the year UT failed to sell itself and hired Blackmore. Yup, UTs turnaround from 2004 continues as the stock languishes in the $1s and management continues to promise a near term goal of returning the company to profitability.

With no good options, I'm still a believer (at $1.59) just like Nortel shareholders believed to the very end. Hope this one ends up better. Sad.

Have a good weekend everyone.

Tuesday, January 6, 2009

Revised 2009 Estimates

I talked with Barry Hutton today and got some clarification on the bookings for 2008 with regards to the PAS infra. Book to bill for PAS infra was around 0.2 for 2008. PAS handsets were around 1.0. This shows the rapid decline in PAS infra orders but does highlight the bookings in other areas finally replacing PAS in a material way.

Previously, I had estimated around $711m in core bookings (without CDMA handsets) based on the previous 4 quarters in bookings and PCD information provided by the company. If we assume that PAS infra had sales of around $180m in 2008, bookings would be around $36m. Subtracting this from $711m would result in $675m in bookings that I will use to estimate 2009 revenues. I will use a 25% reduction in PAS infra revenue to be recognized in 2009 but this has to be added to the $675m. So, $675m+0.75*$180m = $810m. CDMA hanset sales of $35m/quarter could continue until mid June and I will assume will be replaced with China CDMA sales. That will add $140m in revenues resulting in around $950m. I will use 27% GMs for the non-CDMA handset/non infra PAS GMs, 45% for PAS infra, 5 and 10% GMs for the CDMA handset sales outside/inside China. Gross profit estimates are now $675m*.27 + $135m*.45 + $70m*.05 + $70m*.1 = $254m in gross profits.

I had previously estimated $295m in opex for 2009 so the operating loss could be around $40m for the year, much less than my previous worse case scenarios. There are a lot of variables above so take the estimate with a grain of salt and you can do your own model with different GMs, different revenues for handsets, factor in some revenue may be multi-year, etc.

What the above shows is the company NOT being profitable in 2009. While "everyone" already assumes this, it shows the miscalculations that even "new" management has to face up to now. On the positive side, cash burn will probably be limited and give the company additional time to build up bookings in non-PAS areas.

Here's to waiting another year for sustainable profitability. BTW, thanks to Tigre/Shadow (I just caught up reading their gazillion postings) for discussing the technical issues and potential markets for UT. Talking to another investor the last couple of days, there is no question its been frustrating seeing the losses year after year (not to mention the stock price) but with a negative enterprise value, growing core businesses, little market cap, there still seems a lot of potential for this old dog.....Transport network product, Russia, iptv, China handset market, worldwide iptv growth, etc etc.......Have a good evening.

Sunday, January 4, 2009

Weekly Recap - 33% loss for 2008

The stock closed 2008 at $1.85, off 90 cents or 33% for the year. While the number was in line with the markets, this was disappointing since the stock has been on a downtrend for years and had been in the $5s as late as July, when it was up over 100% for the year. For those investors left in UT, the hope is that the recent round of opex cuts will finally bring the company to profitability and that its overall revenue has hit an inflection point.

India IPTV - There were some IPTV news from BSNL but related to Smart Digivision. UT management has been upbeat on India iptv hypint their market share but it seems there is also other options out there.

ZTE/Huawei Growth in 2009 - Both ZTE and Huawei are still positive on growth for 2009. Based on 3G licenses being finally issued and continue expansion overseas, it looks like both will acheive revenue growth even in a tough 2009. "The Chinese government estimates that the country's mobile carriers will spend around $29 billion on 3G-related capex next year. " UT will try to make up lost PAS handset sales with some CDMA handset sales in China.

2009 Estimates for UT - Fellow shareholder Shadow puts forth his estimates for 2009, He writes:

So, let's take a look at possible overall sales increase for 2009. Using data from 10Q's and transcribed quarterly conference calls, bookings for non-PCD obtained were $150 million in Q1, $188 million in Q2, $175 million in Q3 and $189 million in Q4 (estimated using book to bill of 1.1 and sales of $172 million obtained by subtracting Korea PCD sales of $53 million from total sales estimate of $225 million given by company). So, total bookings in 2008 should be about $702 million and I assume all of these bookings will be taken as sales in 2008. Many of these bookings represent initial sales for multiyear contracts and that is why Peter Blackmore is confident bookings in 2009 will be an additional 10+%. I assume none of the bookings are for PAS infrastructure which had sales of approximately $210 million in 2008. Assuming a drop of 33% in these sales for 2009 still leaves an additional $140 million of sales for 2009. So total sales estimate for 2009 now would be $702 million + $140 million = $842 million which represents a 28% gain ($185 million) over 2008 core sales. With gross margins of 31% these added sales will result in another $57 million of gross profit, putting the company in a position of becoming profitable depending on taxes and other one time losses, write-offs, etc. I have assumed PAS handset sales for 2009 were included in the booking contracts and they are presumed to decline in 2009 but those sales would be replaced by sales of other core products. Non-PAS handset sales in China are not included in the above data and could be significant. UTSI was one of many companies that was awarded a contract for the recent CMMB handsets bought by SARFT for the initial launch of those mobile TV networks in China.

The core assumptions in Shadow's estimates are the following:

1. Core PAS infra bookings were logged years ago. Only PAS handsets are included in new bookings in 2008.
2. Most bookings in 2008 will result in 2009 revenues.
3. PAS infra sales will drop 1/3 in 2009.
4. Non-PAS handsets not included in his estimates.
5. Gross margins of 31%.

I've already given my "guestimates" so will just comment on Shadow's main assumptions. I generally agree (or atleast hope) that #1 is correct and that most bookings in 2008 does not include PAS infra. However, I don't think most bookings in 2008 will convert to 2009 sales as management has consistently stated the multi-year nature of some of the contracts. I think PAS infra will drop less than 1/3 in 2009. Overall, from #1-3, my estimates are in the $700m+ range rather then Shadow's $840m. I did add non-PAS handset (outside China) to bring revenue in the $800m range but don't know the size of non-PAS handset sales in China (a big wildcard). Also, 31% GMs seems very high to assume. Overall, the two main questions are the PAS infra backlog (and if it is included in 2008 bookings) and how well CDMA sales in China will perform (enough only to make up PAS handset sales loss or much more?).

I have yet to break down 2008 company performance line item by line item (from expectations in 2007) but the stock declined 33% and the company did not reach revenue/expense metrics targetted so obviously it was a disappointment. The question (or hope) is will the divestitures, opex cuts, focus/wins on iptv/ngn/broadband result in the long awaited sustainable profitability/business model or just too little too late (as fellow shareholder Tigre writes below).

Have a good week/year everyone.