Saturday, February 21, 2009

Weekly Recap - Another All-time Low Closing

The stock closed at $1.17, down 68 cents or 37% for the year. The stock is down about 90% from the highs the last couple of years and about 97% over the last 5-years.

Here are the related news over the last few weeks. Thanks to Tigre, Shadow, Techbroker and others that have continued to post.

PAS end of the road? - "According to Sina, the government in recent days have also ordered operators of services using the 1900-1920 MHz frequency band (that's PAS) to stop network expansion and adding new subscribers."

Gepon in China - "Chinese telecom equipment manufacturers Huawei and ZTE (763.HK, 000063.SZ) have won first-round equipment bidding for China Telecom's (NYSE:CHA, 728.HK) gigabit passive optical network (GPON) 2300, reports Communications Weekly. Fiberhome Telecommunication Technologies (600498.SH) and Alcatel Shanghai Bell also shared the bidding. The manufacturers will provide the equipment to China Telecom for free, said an unnamed source. China Telecom plans to trial GPON 2300 in Beijing, Shanghai, Wuhan and Hangzhou."

Good discussion on the boards regarding this news.

This is a relatively small trial (hence the free equipment) but nevertheless would like to see UT involved in trials/deployments. UT has previously mentioned winning small contracts in Gepon in China but at this stage it is still small.

Broadband/IPTV in Russia - Fixed-line growth, driven by demand for broadband and IPTV services, will help fuel Russia's telecom services market expansion from $37.2 billion in 2008 to $48.5 billion in 2013, according to a new Pyramid Research report, "Communications Markets in Russia."

Still waiting for UT developments in Russia.

UT iptv win - (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.

Tigre's commentary: As Techbroker commented, this is a good strategic win for UTSI but probably not financially very rewarding. It's great that UTSI carve out a share of a tier-one city that was thought to be Huawei's, and likely defeated ZTE in the bidding. It's just as significant to gain an important partner in Southern Media, to expand beyond existing partnership with SMG. And it wins a chance to showcase the relevance of its IPTV technology as applied to cable, going beyond its traditional application in telecom. Even though it is 2-3 years behind the CT/Huawei team in network construction and trials in Guangzhou, and its cable experience is not as rich as in telecom, it can compensate with more expertise in IPTV network itself and home turf advantage of its powerful media and cable partners. Done right, and UTSI will likely be able to count on more future collaborative projects with Southern Media and other cable companies around the country, which is pretty exciting long-term opportunity. However, to win the bidding war for such a choice set of partners in such a major city, UTSI probably had to fight fiercely against local rival ZTE. So it might not make any money to win this deal. Probably even lose money, knowing how competitive ZTE can be in lowballing its rivals. So this win has not been rewarded by a higher stock price for financial reasons. UTSI needs to cut expense elsewhere in order to keep up the battle in IPTV.

Recognition for UT China IPTV Leadership - UTStarcom, Inc. (Nasdaq: UTSI - News) was presented with two awards at the 2008 EXPOCOMM China, October 21-25, 2008, for its long-standing Internet Protocol Television (IPTV) market leadership in China and direct contributions to the country's IPTV commercialization progress. China Electronics News named UTStarcom the "Best Commercial IPTV Vendor" in the country, and China Telecommunication Network gave the company its top "IPTV Industry Contribution Award."

Over the last couple of years, UT has received numerious recognition in China/India which has worked out well for the customers but has not benefited shareholders.

UT executive pay - "Hong Liang Lu, Chairman, $700,000 per year; Peter Blackmore, President and Chief Executive Officer, $800,000 per year; Mark Green, Senior Vice President, Worldwide Human Resources and Real Estate, $367,500 per year; Susan Marsch, Senior Vice President, General Counsel, Secretary and Chief Ethics Officer, $330,000 per year and Viraj Patel, Interim Chief Financial Officer, Vice President, Corporate Controller, and Chief Accounting Officer, $288,750 per year. Susan Marsch was designated an Executive Officer by the Company on February 18, 2009."

There were also the usual stock grants based on "performance" metrics. hmmmmmmmm. Hong's salary should be reduced in the Chairman role. Overall, I think the salary is not excessive but most shareholders would like some commitment to company profitability and the share price.

Q4 2008 Results? - This was posted last week: Here's what Barry Hutton, UTSTARCOM Senior Director for Investor Relations, wrote in response to a similar question: "Our year end call is very likely to occur during the week of Feb. 23rd. That timing is consistent with both the year end reporting and the quarterly reporting during 2008. As always, 1 – 2 weeks in advance of the call we will issue a press release that provides the exact details for the conference call."

Shareprice and shareholder value - Back to the shareprice. According to book value and other metrics, UT is undervalued. The problem is it has been that way for the last few years. The current environment has not helped either. Some shareholders are calling for a sale but at this point, why? The stock was near $6 about 8 months ago and while there has been "permanent" value destruction/businesses in other companies such as the financials (Citigroup at $1.6 !), UT "should" be able to rebound stock wise IF they finally get closer to profitability.

Small caps in the tech sector have shown they can rebound much quicker as long as they have the technology, markets, and management. Palm went from $1 to $9. Starent is still a $1B company. Thats right $1 billion for a company UTStarcom is suing for basically stealing the technology for their main line of products. UT market cap of $150m is a joke. Are institutional holders selling in the $1-2 range. Yes. Look at the holdings of Brandes, State Street, Barclays, etc. Some of these institutions lost hundreds of millions and sometimes Billions in other companies they hold shares in. Their loss in other holdings can buy the entire UT 10x over! So, if they decide the company has turned a corner, the rebound can just be as swift. In the meantime, we small shareholders watch as the share price head to the low $1s and potentially under.

Advice to management during the next CC - While I hope for good 2009 guidance and signs for the timing when the company will break even and be profitable, I hope they take the opporutinity to let all the bad news out. Then address once and for all, what they will do to get back in the black. With the shareprice at this level, they might as well drop whatever bomb they are going to. The street is expecting the worse and if the stock should go lower, so what. For long-time shareholders, looking at a 95% or 96.5% loss is not much different and maybe, we can find the illusive inflection point and start moving up for good.

Have a good weekend.

Sunday, February 15, 2009

Management/BOD roles & responsibilities

For this posting, I will respond to fellow shareholder Shadow. Shadow writes:

"I suppose the fact that sales have declined from $2.7 billion to $850 million per year is the fault of the BOD and has little to do with the stock price being where it is now? UTSI tried to buy revenue streams but that strategy failed for lots of reasons. So basically, the company became a startup again. Strip away PAS, PCD and purchased technology revenue for the past 5 years and what would you have for sales? Not much. Big sales in Japan for a year or two but not nearly enough to compensate for the huge PAS loss which continues. Japan sales were just a temporary blip anyhow and have not been sustained."

Sales of PAS peaking and declining have been well projected so this should not be a surprise to management/BOD. I would actually argue the other way and say PAS sales which are still in the hundreds of millions have given the company a huge advantage compared to normal startups the last 4 years. Shadow mentions the "failed strategy", reliance on PAS, PCD and other purchased technology, Japan. This is precisely why management/BOD have to take the full brunt of the blame.

"So this company is truly a start-up in many ways, a baby company severely impacted by the present economic decline while it is still in its infancy."

Again, how many startups have this amount of resource? Infancy? Tech companies don't survive this long unless they are successful or have huge resources.

"What is even worse is that the vision for this company by Hong Lu, right or wrong, is to build an international telecom equipment supplier. Company has the technology to accomplish this and that is why it is so interesting to me. Unfortunately, it had almost no accounting department or backoffice, little marketing and sales outside of China, only PAS marketing and sales experience in China, currency problems that blocked fair competition (with Chinese companies) and faced widespread regulatory and legal issues that blocked deployment of one of its main technologies, IPTV."

The vision, technology, and opportunities are what drew most shareholders into the company. I am not arguing that but blaming the current state to accounting, marketing, currency, and even the competition/regulatory AND not to the management/BOD misses the point. You can have quarterly or even yearly slip ups but the monumental collapse in the share price was multi-year and continuous. The management and BOD's role is to management/oversee a company through good AND bad times/situations. If the mangement/BOD decided to invest in an end-to-end iptv systement and bet the farm and it doesn't work, who do you blame?

"I believe Ying Wu's plan called for focusing the company entirely on IPTV in China and it is not clear his strategy would have worked. Speculation that company could have been sold for $10 a share at one point, is simply just that, speculation. If anyone has a link that proves this was an actual offer that was made, please post it."

The company went into a strategic study to potentially sell the company because it thought the shares were underpriced. This came from the Chairman at the time Thomas Toy. They had offers for atleast parts of the company. This was in late 2006. Toy also mentioned they were worried that some of the offers would not be able to close because of the subprime conditions. Again, this was in late 2006. The stock traded in the $7 range and went to $11. If they wanted to do a deal at $10 or somewhere at that range, they could have done it.

"I think Barton and the members of the BOD did the job they were brought in to do. That was to create a global business infrastructure without which you just couldn't go to large carriers and do contracts. They resolved all the SOX issues, back options issues, SEC filing issues and almost all legal issues that have been pending."

I have documented my frustrations with Barton for years (before the blog). I recall even being very frustrated with the lack of financials when the stock was at $8! so that tells you how long it took them to resolve those issues. The company was at the brink but got lucky in their gemdale/infinera investments and not to mention a final surge in their PCD operations, which was mostly due to the resale side (not even their own design units). As for the BOD, their job is to safeguard shareholder value, which they have not done.

"I agree with you that bookings did not materialize as projected. Why didn't they? If you know, then I would like to hear about it. Without knowing the "why", I find it inappropriate to blame management. Blackmore was awfully shore Q4 2008 sales were going to ramp much more than they actually did. Why didn't they? If it was because of the economic tsunami sweeping the world, is it inappropriate to blame management? The problem is that this failure occurred on top of all the other poor guidance issues from Mike Sophie and Fran Barton."

As I've said many times, the company has many many good reasons for poor performance.......When was the last good year...2004.

"The key to this company right now is Peter Blackmore and I just don't have enough information right now to judge him. My instinct is that he is a straight shooter and will fire employees who don't deliver what is expected of them and get new people who can do the job better. Seems to me that is what has happened in the past 6 months. Maybe not fast enough for some, but you have to be careful how you size a company like UTSI, that is striving to become an international telecom equipment supplier. Success hangs in the balance so the stock price is undervalued."

Peter gave shareholders a lot of hope at the beginning but more recently, is losing the confidence of shareholders and the street. He himself is not as confident and doesn't take responsibility for the failed guidances/expectations. What happened to profitability? What happend to achieving his target expense metrics? What happened to the revenue ramp of a few hundred million? What happened to the street/investor interaction?

"Fran Barton's compensation was appropriate when compared to prevailing Wall Street valuations. Ridiculous compensation is what the guys at Merrill Lynch got for bonuses last year after helping to destroy the banking system in this country and driving the economy into the deepest and longest recession since the Great Depression."

Comparing Barton to the financial CEOs is like comparing UT to Nortel. Check with Blackmore on what he thinks of Barton's compensation and performance.

Every chance I've had with management/BOD (and thats only a handful of times), I've brought up two things. Shareprice and compensation. In November of 2007 and March of 2008, I've frankly said, if the company can't turn it around, you better go back to a strategic alternative of selling the company before resources dwindle.

As a shareholder, the choices we have during the last 4 years have mostly been bad (sell at a price you think is ridiculously undervalued or stick it out and hope). While I always have hope, its clear that management/BOD have not shown the ability to manage/oversee and create any shareholder value. If they cannot step up now, I hope they start stepping down and let others take over (whether their positions personally or to sell to another company).