Saturday, March 28, 2009

Weekly recap - 85 cents

The stock increased 16 cents or 23% to 85 cents this week. The stock is now down only $1/share or 54% year to date. It has a market cap of $107m. For me, these are numbers that would warrant major sense of urgency from a company that maybe missed earnings for a quarter or two. But for a company that has not posted an operating profit in about 4 years, its business as usual. The company did have this enlightening response to shareholder emails:

Like you we are very unsatisfied with the current stock price and feel that it does not fairly represent the value of the company.

Value? The company has tangible book value of about $3.7/share but will rapidly dwindle as the company continues to post ridiculous operating losses while hoping markets turn around. This is bad enough but does the company realize what being valued at 1/4 of tangible book mean? The street is telling them that they have zero confidence in their prospects or ability to manage the company. That after years and years of failure, the street will not even look 6 months ahead in discounting the company but maybe a full two years of continued business as usual. The UT train wreck would not be so disappointing if not for shareholders watching a "slow motion" disaster for the last 4 years that is projected to last at least two more years. For current shareholders, the only choice is to sell, hold and hope or press for action.

Salary Cuts - "On March 23, 2009, in connection with the Company's overall cost reduction initiative, the Company entered into letter agreements with Hong Liang Lu, Chairman of the Board, and Peter Blackmore, Chief Executive Officer and President, providing for voluntary and temporary base salary reductions of twenty percent (20%) for a one year period."

This would be a good start in most normal situations but this is so long overdue that it again shows they are 3 steps behind. Also, why is Lu still making $700k/year in salary as Chairman of the Board ($560k after the cuts)? If Lu is still running the company, then why is Blackmore drawing CEO pay/compensation? If he is just the operations guy, then he should be the COO. Also, if Lu is managing the China operations, then why have another China CEO?

Looking at it another way, a Chinese company would have one CEO based most likely in China and most likely a Chinese. No interpreters, no flying back and forth from China to the US, positioned closer to customers and in touch with regulators in China and aware of the business climate. It all starts from the top and the current situation at the top with UT is cloudy, disorganized, and wasteful (expensive) at best.

ZTE - A couple of weeks ago, we saw the news about ZTE getting a $15Billion line of credit. They already have $1.6b in cash so they have all the funds to expand overseas and compete against any multinational firm. There are a couple of points with this. Whether or not UT spends $45m or $60m/quarter is not going to make a difference on whether they can compete or not. The second point is why doesn't ZTE just take out UT for the market share? In any "normal" situation, the UT board has to look at the situation and see if there is a realistic chance of UT increasing shareholder value above tangible book and more in the next few years or whether its balance sheet/competitive position will erode even more.

Short Interest - Short interest as of March 10 has increased by over a million to close to 15m shares. This was around the time the company announced Q4 results/Q1 projections. Company insiders also sold shares under $1 for tax purposes. So, even with the market surge the last few weeks, is it any wonder UT shares are still under $1? Its time for the company to get their heads out of their #@%3 and stop wondering why the current stock price not fairly represent the value of the company.

IPTV worldwide subscribers -

“During 2008, IPTV operators showed that TV over IP could be deployed on a large scale," said John Bonsell, a Senior Analyst with Point Topic, who prepared the stats for the Broadband Forum. "Western Europe remains the largest single region for IPTV. As expected, due to the global economic situation, broadband growth slowed, however all countries experienced overall growth during the last year."

IPTV subscribers per region from Q4 2007 to Q4 2008

Western Europe 7,045,860 10,388,000
North America 1,777,671 3,835,544
South/East Asia 1,840,000 3,615,000
Asia Pacific 2,199,828 3,082,182
Eastern Europe 465,223 884,466
Latin America 8991 21,495
Middle East/Africa 10k 10k
Total 13.3m 21.8m

UT grew its iptv subscribers from 600k to about 1.3m. While the numbers show very good growth in this segment, it shows that UT should not rely on hypergrowth from iptv to generate any significant revenue in the next year or two. Its time to get the cost basis right and it should start from the top.

Hong Lu - I'll end the week's post discussing Hong Lu. He is the founder of the company and only Chinese on the board and had been the CEO for years. With all the disadvantages to being a "non-Chinese" company, it would make sense to have a Chinese overall CEO based in China. However, Lu is definitely NOT that person. Between Blackmore and Lu, Blackmore has atleast shown more concern for shareholder value with his bonus conversion to shares, reduction of pay (when his contract called for no reduction ever), and divesting of non-core assets. It hasn't led to shareholder value but he is more in-tune with shareholders than Lu will ever be. His current age, non-attachment as a founder, and operations background make him the best hope for shareholders to salvage tangible value from this failed investment.

Have a good weekend.

Tuesday, March 24, 2009


"Fran and I will work closely toward disciplined execution of UTStarcom's strategy and timely attainment of the company's goals, including a return to sustainable revenue growth and profitability."

- Mike Sophie on the hiring of Fran Barton, Aug. 2, 2005

"We have cut the cost base in the functions against a benchmark goal measured by best in class in our industry and we did this against revenue reflecting our core technologies only. Not all the functions get to benchmark immediately as we do have internal controls to improve, new IT systems to implement and some legal costs as we close out this years investigations. They will all get to benchmark by end of 2008.

Although both our Research and Development, and SG&A percentages are currently too high, we believe we can do much better. The model for our R&D is between 10-11% of our revenue, excluding PCD. We believe this is a reasonable ratio for an infrastructure business. The SG&A model is between 13-14%, excluding PCD. Excluding PCD revenues is the right way of looking at our cost base, as PCD is a stand alone business. The SG&A is still too high, but there are a number of costs driving that, including, improving financial controls and implementing a new ERP system. We can get to the ratio as I stated by late 2008 and 2009. The revenues of the early part of 2008 are still ramping."

- Peter Blackmore, Q3 2007 earnings call."

"We have been aggressive on cost by taking actions to reduce our coststructure by 50% between Sept 2007 and Sept 2009. Most of the actions are complete. We also recognize we need to take additional action given the tough market, and as we said on the recent earnings call we will lower our quarterly operating expenses to $60M or less by Q4 of this year. We are moving a number of functions from our Alameda headquarters to China to further simplify the company and reduce cost."

"In summary, our objective is to reduce costs further to minimize our cash usage and also accelerate our return to profitability. As we mentioned on the last earnings call - we are positioning the company to exit 2009 with a business model that achieves profitability in 2010."

- Barry Hutton, Official response from the company to shareholder emails, March 17, 2009.

"They have a decent amount of cash and no debt. Cutting OPEX in places like R&D, which many people here are demanding, can be VERY bad for the company, long term. Obviously, they have about another 18 months of cash, and if current products cannot generate enough revenue in the next year, they might have to consider drastic action, but now is not that time."

"Personally, I think they are MUCH more qualified to decide how and where to spend their R&D than anyone here is."

"I think we would all be better served if we bombarded the company with e-mails requesting information rather than trying to tell management how to run the company."

- Statements from two shareholders posting on yahoo board today.

As an individual shareholder trying to enhance shareholder value, it has been painful to see UT try and fail to get back to profitability. Am I qualified to manage the company? No. My background is in Civil Engineering and not in business (I am the Asst. VP of California Engineering for a Tetra Tech company). I AM a long term shareholder that can see that expenses have been too high.

Blackmore has targetted reasonable expense metrics. If the company has 25-30% GMs, then expenses have to be around that area. Coming into 2008, the non-PCD revenue estimated revenue was $1.08B. Coming into 2009, it is down to around $600m. I and others have often mentioned the company being one-step behind on their cost cutting. I have been bullish on the stock as the company's products/markets made it seem realistic the company could achieve revenue growth to get to profitability.

However, at a certain point, the company has to err on the conservative side and get their cost base right without hoping for revenue growth that has been elusive and specially in this uncertain market. With the planned cuts announced in December, it seemed the company was finally catching up. However, as we learned, the company was actually 3 steps behind and the last cost cutting plans were not anywhere close. Are shareholders (already facing a sub-$1 stock) suppose to trust management that $60m/quarter OPEX is sufficient to get the company back to profitability?

For years, the company line has been needing to maintain their R&D for longterm success. This is hard to argue against but the $800m in losses in the books show that continued spending doesn't guarantee profitability. (Check out the expense ratios table on the left hand side of the blog that I created last year showing the last time they achieved the expense metrics was in 2004).

"But now that only the core business will be left by the end of this year, I can sense there wouldn't be much more room to cut before it cause significant adverse impact to core revenue growth and long term competitiveness."

-Shareholder Tigre commenting on the $60m/quarter opex target.

It seems interesting to me that Barry Hutton's email mentioned,

"We continue to see bookings growth in our core business - particularly in China and India."

Why does it always have to be clarified with "core". Isn't everything by now or by the end of the year "core"?

Anyway, $600m revenues at say 30% GMs yields $180m in gross profits. So, in order to get close to profitability, the company needs to cut opex to $40-$45m/quarter (including other expenses).

A target of $60m (or under) just doesn't cut it and the street was all over the stock as the company continues business as usual. So, looking at historic performance and even the CEO's targets, is it any wonder even the most bullish long term shareholders want to cut costs? Do we shareholders know how to manage the company? No. Do we shareholders know more about the operations than the company? No. But does it take a genius to see that something needs to be done on expenses now that revenue has fallen off the clip? No. Has the company finally gotten close or still behind the curve? Hmmmmm?

Now, IF all the "discussions" between shareholders and management, and the low share price can actually prompt some action/cost cuts, then maybe there will be actual performance that lead to higher valuation (imagine that idea).

IF the company is serious on getting the cost base right, they can. IF they can get the cost base right with a "lowered" revenue base and iptv markets not openning up yet, then can you imagine how much more profitable they can become when it finally moves. If that happens, then we can start discussing how 2010 to 2015 will be much better than 2005 to 2009.

Until the company acts, its business as usual for the company and shareholders continue to suffer.

Have a good night.

Sunday, March 22, 2009

Palm, ZTE, Cisco, Starent, Blackmore

Just some random thoughts on misc. topics.

Palm - Lets look at some numbers from Palm compared to UT. Palm is projected to lose $2.02/share and 71 cents/share compared to UTs $1.25 and 0.52/share losses. Tangible assets for Palm is negative $631m compared to a postive $466m. Palm market cap is $873m compared to $87m for UT. Palm just raised another $103m to make up for their 90m loss last quarter. It looks like their Pre phone will be a hit but will not result in a profitable company. UT competes with Huawei and ZTE while Palm competes with RIMM and Apple.

Palm stock hit a low of $1.14/share but has recovered to the the $8-9 level. Palm has about 38% of their shares short so there is no shortage of people betting they are overvalued. The main difference the last few months is the street's perception that Palm is on the mend while UT continues with business as usual. This has resulted with Palm getting a couple of hundred million more from an investor while UT institutional investors are mostly selling the stock even at these "low" prices.

ZTE - says it has secured a $15 billion line of credit from China Development Bank.

ZTE (Shenzhen: 000063; Hong Kong: 0763) defied the economic downturn in 2008 with a 27.4 percent increase in annual revenues to 44.3 billion Yuan Renminbi ($6.5 billion) and a near 33 percent rise in net profit to RMB1.66 billion ($243 million). (See ZTE Reports 2008.)

"Competitive and pricing pressure hit ZTE's infrastructure margins, though. In 2008, the gross margin on carrier network equipment sales was 35.8 percent, down from 39.6 percent in 2007.

But the gross margin for handset sales improved slightly, to 23.7 percent from 21.7 percent a year earlier, while the margin from software and services jumped to 30.3 percent from 16.7 percent in 2007. ZTE's overall gross margin for 2008 was 32.5 percent, down slightly from 2007's 32.7 percent.

ZTE ended 2008 with cash and cash equivalents of RMB11.3 billion ($1.66 billion)."

The last couple of articles shows the resources ZTE has and their progress the last couple of years. Its interesting to note the high margins from handsets that they get. One has to wonder if this is due to efficient operations and/or advantages to the large volumes. This is a "none-core" area for UT that management has to decide whether to compete in or choose to back away from. This is another tempting market specially with their "experience" in PAS/PCD but if its going to take years and years to generate any decent revenue, then why bother?

It also looks like ZTE actually makes money and has decent companywide gross margins. If they are giving away their equipment as some have suggested, how do they achieve their positive operating margins? This is another data point suggesting how inefficient UT is and how the management/operations are nowhere near their competitor's.

Cisco/SUN/IBM - Cisco buys Pure Digital for $590m and IBM is looking into SUN for about $8.5b or so. The large tech companies have a lot of cash and face the same stagnant world economy. It is natural that M&A will pick up. Shareholders in UT have speculated for years why it has not been bought out. It could be their products are not really that good or that Lu/board are not really serious in any M&A and just want the status quo. At these levels, shareholders do have the added "hope" it may really be too low for the competitors to ignore (such as in SUNs case).

Starent - Starent is growing and has a $1.2b market cap. Its revenues are in the $300m+ level and is being sued by UT. Back in 2003-2004, there was already talk of PAS peaking and the move by the company to diversify into other products. UT bought 3com's comworks division, which eventually yielded workers to form Starent. With all of UTs resources and products that it has developed, why could UT not produce "something" as successful as Starent did? All of the hundreds of millions the company has spent in R&D over the years have yielded little.

Blackmore - UT CEO has been with the company almost 2 years now. His contract (signed a few months before the stock markets peaked) was a hefty $750k/year with huge incentives and bonuses. Peter did convert the bonus into shares at $3.2 showing he too was intrigued by the US listing/management and China manufacturing combination like most shareholders. Peter was brought in to make the company a first class operating company (his words basically). Peter used the traditional outsourcing, more efficient supply chains, cuts, and others to reduce costs while waiting for revenues to ramp. His presence gave investors "hope" that he can turn around the company, make it focus and profitable. I really like Peter because he brought an operational background that shareholders felt was needed at the time (since the technology/revenues were not the main issues at the time).

At this juncture however, I have to bring up the question of whether Peter is still the right person for the job just as the company pondered whether Barton was really the right person for his job (don't really want to discuss Barton as it I could go on and on...again and makes my blood boil). There has always been the issue of who is in control with the founder Hong Lu still around. Why should shareholders pay two people CEO salaries/compensation fit for successful companies/much larger companies in a totally different era? At the very least, both Lu and Blackmore have to significantly reduce their compensations. Frankly, I don't care Blackmore has his contract (we can see what those contracts that AIG bonuses are based on). There should be a renegotiation on his contract. Period.

There is also the fundamental issues of Peter being a CEO. A CEO realizes the importance of the share price and growing the business. I'm not sure how many CEOs survive the job presiding over massive operating losses and share price losses of this magnitude. Also, if the company is done with the major cost cuts/operational issues, what is Peter's role? We know he has not been able to generate any meaningful revenue growth. He is a non-Chinese leading mainly Chinese executives and still their main/core market is China. He is not a marketing person either. I'm not advocating removing Peter because I don't think it could afford to pay him to leave either. Again, as a start, his salary/compensation have to be re-evaluated.

Executive search firm/compensation advisors - Do these firms have a clue on what they are doing? When an individual shareholder can see things are getting ridiculous and the board still continues with ridiculous behavior, one has to question the competency and/or agenda of the board. Why does this company have a heavily compensated non-Chinese CEO? Why is the board made up of non-Chinese (except for the founder who is bent on keeping control of the company at all costs) that have basically no "skin" in the game. Put a board with actual stakeholders and you'll see a difference in stock performance. Period.

I've talked with institutional holders over the last year and all are not "activists". Most are now waiting for some other institution to lead the way even though everyone is disappointed in the performance of the company/share price (what a shock). Anyway, I hear that there seems to be more serious discussions on actions from the company now that the stock is well below $1 (Really?).

At this stage, after watching the company for the last 4 years, I am indifferent from inaction or any appeasement actions from the company. We've seen that the company is not only one step behind but 3 or 4. Thats why every "positive" step they have taken has not yielded higher shareholder value or led the company closer to breakeven.

My biggest hope now is that there is action from institutional holders that all disappointed shareholders can rally behind and finally rid this company of people that don't produce any value for shareholders.

Have a good week everyone.

Wednesday, March 18, 2009

Failure of the BOD

Why is the current board still in control of this company? If there was a "stress test" for determining competency of the board, how do you think the UT board would score?

Lets forget for a moment the $800m+ of losses retained on the books, the 4 years of continued operating losses, the musical chairs of management, showering management with mega salaries, bonuses, retention/exit compensations, and the sub $1 stock price (down 90+%), etc etc.

Coming into the worse recession since the 1930s depression, what budget plan did they sign off on for 2009. Continued losses of $10m, 50m, 100m.....NO, They "approved" losses of $150m or more. Are you kidding me? Some investors (sorry Shadow) say the company knows much more than the shareholders. Again, are you kidding me?

Here is part of the reply of the company for the all the emails sent last week: "We would remind you that we have been very active in the last 18 months.We defined the core products and have divested or initiated the wind down of all the non core businesses - a process that we expect to complete by July 2009; we have improved our net cash position from $180mat Dec 2007 to $314m at Dec 2008 and we currently have no debt."

Every year, the company trumpets their "accomplishments" rather than face the tremendous destruction of shareholder value. Last year, they mentioned the payment of the convertible bond, the sale of Gemdale/infinera, the completion of all the filings, the opex cuts, the resolution of certain material weakness, the repatriation of funds from China. The result of all of these accomplishments - further declines in the shareholder value (both tangible book value and actual share price) and going farther from breakeven.

So, excuse me for taking any of their "accomplishments" and efforts with a grain of salt. The bottom line is shareholders are faced with a stock that is about 1/5th of the tangible book value and about 1/3 of the cash.

The current opex target of $60m at the end of the year is simply undefensible. How much should they spend in Brazil, Taiwan, India, Russia, Latin America, and on and on if the returns are so minimal. They have the technology (as they have mentioned) but the markets are not ready. Why put in more money until you see some developments?

Sigma Designs has quarterly R&D of $3m+. UT had been maintaining an R&D of over $40m for quarter after quarter. When asked last year if they would develop their chip to be compatible to the China standard media processor, they responded that they will not spend the money until there is a clear standard developed. Sigma competes with Broadcom so its not impossible to be profitable competing against larger companies.

Sonus has revenues that are 1/3 to 1/2 UT and they are cutting costs to break even. Their valuation is atleast tangible book value.

So, even after years and years of losses, the plan for 2009 is even MORE losses and degradation of the stock price.

I hate to be so negative but every shareholder I have talked with can see that their cost is extremely high and that the board is non-existent. Again, why even have a board if this is the kind of shareholder destruction they have presided over?

It amazes me when I see other shareholders campaign against the board (like Bill Ackman going for 5 board seats in Target). I don't follow Target but I'm sure there are not many other companies that are not basically nationalized run worse or governed as poor as UT. The board simply has not done their duty to look after shareholder's interest and its time for them to go. I encourage shareholders to write the company expressing their opinions. Yes, we don't know the inside information but to believe the board can enhance shareholder value better than shareholders is ridiculous to say the least.

Saturday, March 14, 2009

Late stage collapse or Early stage recovery?

The monumental collapse of the stock price to 70 cents indicates the company is reaching its final days. It was hard to imagine going lower from the $2 range early last year but a drop to 70 cents is still another significant leg down.

Fellow shareholder Techbroker has been following the company's operations in China closely and posted the culture that led to the company's success and eventual downfall. He writes today:

"Although it was written in 2006, the article possibly gives the best answers in regarding why UT is a failed company, and why Huawei does otherwise. The author did an excellent job in providing objective analysis of UT's culture, management, and history.

In short, UT is the worst managed company (if these is a word 'management' in the company in author's words) in the industry. On the other hand, Huawei spent TWO critical, difficult, and painful years working on its management during the late 1990s. UT realized the problem around the same time (around 2000), but the issue has never got improved, if not worse.

At the end, the author says that it might be a little early to claim that UT is a failed company, although many people in the industry think so then. It might be true that it was a little too early to claim UT is a dead company in 2006. However, it might be a little over due to announce that this company is doom to fail in 2009."

Here is the translation of the article.

My posting last night regarding the balance sheet was a reflection of the street's valuation on the company as it continues to lose money. While it is an explanation of the current valuation of the company, it doesn't paint an accurate picture of the potential valuation of the company to an acquirer. It also doesn't represent an accurate picture of the potential valuation of the company if it can execute like all long term investors had hoped. As a balance to the negative 2006 article, I will repost a October 2008 article documenting an interview with Manish Matta, senior director of marketing at UTStarcom.

"Also, the issue in India is not technology, but lack of consumer awareness of the benefits and applications enabled by broadband. Consumers are increasingly becoming aware of the applications that can be enabled by broadband. At UTStarcom, we are providing leading edge applications via broadband. For instance, UTStarcom was the first to launch IPTV in India and today we have deployed 4 out of the 5 commercial IPTV contracts in India. IPTV is being enabled over broadband network and UTStarcom remains agnostic to the type of access technology that the operator may have deployed. However, we strongly believe that applications like IPTV, which enable personalization, interactive services and social networking for consumers, will drive the demand for broadband. Broadband users in India will exceed 300 million users in the next decade and we are currently at the tipping point of the growth phase."

MM: Our customers work with us primarily for three reasons: our focus on technology innovation, our solution vision and our culture. Let me elaborate a bit on each.

UTStarcom’s DNA is “technology innovation” - our customers, which include various Tier 1 and Tier 2 service providers globally, look upon us to provide cost-effective multimedia solutions and applications that will continually improve how people interact and communicate. Living up to our motto of providing “A World of Better Communication,” UTStarcom has led the market with technology innovations that have revolutionized customer experience. UTStarcom has been the first to market with technologies like IPDSLAM, GEPON and most recently IPTV which have all changed the way people communicate and interact. The focus has been on providing applications that are adapting to the changing needs of the consumers. IPTV has potential to completely change India’s communication landscape as it provides a host of new IP-based value add applications like video calling, digital signage, distance learning, social networking and IP surveillance, amongst others, besides broadcast TV, time-shift TV, VOD (video on demand), etc. UTStarcom was the first to market with IPTV in India and currently provides IPTV solutions to customers like Aksh, MTNL, BSNL (News - Alert), Bharti and UTL in India.

The second reason stated is our solution vision and focus. As a company, we focus on three key areas – Broadband, Next Generation Networks (News - Alert) (NGN) and IPTV. Each of these can be highly complicated and cost intensive for our customers, the service providers. To ease the burden, we have focused our development efforts on ensuring a seamless interworking of all our solutions in Broadband, NGN and IPTV. The network management system (NMS), back end systems (BES) and the operations support systems (OSS) are designed to work together such that we can enable services like remote configuration, integrated billing, etc. for all our customers for all our solutions. So our customers who deploy and provision multiple solutions from UTStarcom inherently benefit from a significant operating cost (OPEX) reduction which is a recurring saving.

The third reason is our culture. “Customer Focus” is one of the integral core values for UTStarcom. Our success inherently lies in the success of our customers. We do not vie for every opportunity in the markets we address – we have a cross functional evaluation team that scrutinizes every opportunity to ensure some key metrics are met before taking on new customers and/or opportunities. Our stated objective is to work with a limited number of significant opportunities in each region so that we are able to satisfy the demands of each of our customers. Once the project is accepted, we work with our customer to deliver the applications and services that can help them differentiate their services in a cost effective manner. This sets us apart from others.

MM: UTStarcom has been a leader in broadband for two years running, and we are now clear leaders in IPTV as well. As industry leaders in BB and IPTV, not only do we have the largest market share, but we consider it our responsibility to help the market grow, and act as a catalyst for growth of both BB and IPTV. We hope to maintain this leadership position, and will work closely with different service providers to drive adoption of both BB and IPTV in the country. Our aim would be to deliver the benefits of IPTV to the country and help bridge the digital divide by making TV as an information and product tool apart from providing superior form of entertainment. We hope to leverage on our global leadership in SoftSwitch and NGN to establish similar position of leadership in India for SoftSwitch.

We are also working to increase India’s contribution to the global operations of UTStarcom. For example we already have extension of our Global R&D team of BB based in Gurgaon, India, and the Escalation Centre for Asia Pacific is also based out of Gurgaon. This year we have established Centre of Excellence for IPTV in Gurgaon, India, and over the coming years we hope to contribute more to the global IPTV product line of UTStarcom from India.

Techbroker's article shows the disarray and inefficiencies that the company has had up to 2006. The company has continued losses the following years and the balance sheet has deteriorated further. PAS sales is down to $19m/quarter and losses in India (despite the market share gains and leadership position) have further reduced confidence in the company. The Indian article does show a small (and I emphasize small) glimmer of hope. The market will eventually decide if this is the late stage of collapse or the early stage of recovery. I am only an individual investor that see substantially more value at this stage seeing the company broken up or sold. I could also see the potential for an even higher valuation if there is a full turnaround. However, at the present time, the company has not defended the stock or provided any tangible reason to think that the current valuation is incorrect.

Friday, March 13, 2009

Balance Sheet - Plan C?

The latest company summary balance sheet can be seen from this yahoo link:

Net tangible assets/shareholder equity has gone down to $466.8m, down from about $539m due to the restructuring costs/operating losses in the fourth quarter. Based on 124.8m shares, this works out to $3.74/share.

Year after year, the company's stated goal has been to return to sustainable profitability. The latest earnings report and projections for continued losses throughout this year, coupled with the major revenue shortfall has led to revised earnings projections from the street to $1.25/share and .52/share losses in 2009/2010 respectively. If we simply subtract this from the $3.74/share, we get $1.97/share.

Property/plant/equipment is on the books for $175m or $1.4/share. Lets say this is worthless at this stage. Subtracting this leads to 57 cents/share.

Without looking at other assets and liabilities, if the company stays at present course, the tangible book value (without property/plant/equipment) will be 57 cents/share. This quick evaluation is simplistic but nevertheless not very appealing to shareholders hoping for much higher prices.

The problem with our "hope" last year was the company's estimates to break even by early 2009 (via Blackmore's famous expense metrics target delivered in 2007) and the "hope" that the company can indeed ramp up several hundred million in revenue to bridge the profitability gap. Now, we know this is way off and not possible until sometime in 2010.

The above quick evaluation is the operating scenario. Here are the alternatives that could lead to a higher tangible valuation and hence share price.

Monetization of the real estate - How much is that asset really worth? Its not generating rental/lease income and there are upkeep costs so if the company can monetize this, that will lead to higher valuation, potentially say $100-150m, or $0.8/share to $1.25/share. This would be huge to say the least.

Retained "earnings" - $841.5m and counting in losses caried forward. To a profitable company that can offset those losses, it could be worth as much as 1/3 of that or $280.5m. I don't know the tax laws but its been mentioned this could be valuable to some other company.

R&D and SG&A expenditures - The company spent $26m on R&D and $46m on SG&A. This is down from the previous year of $40m & $76m. For the next two years (the time period with the expected losses), lets say they will spend atleast $180m on R&D and $160m on SG&A. Part of these expenditures could be eliminated by a much larger company that has overlapping business. Ericsson is spending $5b/year on R&D for the next 5 years and targets the same broadband, NGN, iptv markets. Huawei has revenues in the $15b range (Techbroker mentioned up to $30b but I can't confirm). Anyway, there should be substantial savings in terms of R&D and SG&A in a consolidation.

PCD retained performance money - The company could earn an additional $50m by the end of 2010. I am not sure how/if the company has reflected this under assets.

Competitors higher margins - Aside from the cost side, an even more appealing reason to acquire UT is to eliminate competition, gain market share and increase margins. Maybe, if the company was to sell itself, their customers who value them as a standalone company to keep prices low, might actually give them some profitable contracts....maybe)

Accounts payable - There is still $432.8m in accounts payable on the books. If UTs plan is to sell the company, it could use part of its $300m+ cash to pay part of this off early for a substantial discount, thereby increasing the tangible book value.

There are possibly other items that would boost UTs value to an acquirer rather than continue being an ongoing concern.

Of course, I would have rather had the company get to break even/be profitable and then look for a suitor but the continued losses and current stock price makes that possibility very much less likely.

A few years ago, Siebel sold out to Oracle for $5.85b. At the time, Siebel had a ton of cash as well and profitable but it was probably the best decision for the shareholders. Oracle also bought People Soft to get the customer base (although it paid a much higher premium).

The street obviously does not believe UT can turn around, be profitable and increase shareholder value via the operational route. Therefore, shareholders should engage management/board to really look at shareholder value. While the company has no debt, it has massive losses ahead of it and does not have the scale that their competitors have. What it has are tangible assets/benefits that could be unlocked at this stage that are multiples of what the current share price show.

Plan C - I have had plenty of discussions with other shareholders on cost cuts and every alternative out there but I think we may need to put incentives for the company to seek strategic alternatives at this stage. Hong Lu still has over 3m shares that were worth $18m just 8 months ago. Now, its barely above $2m. That should be incentive enough for him to seek a sale. For others, the employee stock option is at $3.26 so they will not get anything much if the sale price is not significantly higher than that. I don't have a specific incentive plan but at this stage and looking at continued losses and deterioration of the balance sheet, why not atleast work on incentive clauses for a sale of the company at certain price points.

This is another case where the company is worth more dead than alive. That is what the market is telling shareholders and the company. If you have not done so, please send a note to management reiterating your concern with shareholder value and the viability of the company going forward. This sense of urgency must come from shareholders at this stage.

Have a good weekend.

Wednesday, March 11, 2009

Sense of Urgency

The markets have regained most of the losses last week and UT stock is down 2 cents so far this week after surffering a 31% decline last week. It seems that almost everyday, there is a company coming out and defending their stock. The only thing we've seen from UT are the insider (tax) sales at 70-93 cents! This is sickening for shareholders and a total lack of a sense of urgency from the company/management.

An updated "earnings" estimate for 2009 and 2010 (from yahoo) are for losses of $1.25/share and 52 cents/share respectively. Revenue is at $556m and $668m. And as we've seen, the company hasn't exactly been meeting expectations, no matter how low they are. In any case, is a company operating at a loss EVERY quarter since 2004 and projected to continue to at least 2010 even a viable business?

With still around $270m in cash after this current quarter's massive $50m loss (does this even bother the company anymore?) and a book value in the $4 range, it really is time for shareholders to demand action from the management/board now before the asset base is eroded further. Companies such as Ericsson have $5 Billion/year R&D budget and their competitors such as Huawei have revenues in the $15-20 Billion. How can UT compete at this stage? The board has not or cannot come up with ways to enhance or even preserve shareholder value. Is this not the time to demand an explanation from the board on why they are not doing their fudiciary duty to shareholders?

Today, I participated in a productive conference call with other shareholders and there will be action taken. However, I am writing tonight to ask all shareholders to send an email to management/board to demand action to address the stock price, their still enormous cost base, and lack of plans to get to profitability. A quick survey of the probable revenues and gross margins show at the minimum, they would have to cut expenses to $40m/quarter or lower, which is way below the company's target of $60m by Q4 this year. Shareholders need to demand a significant change in the way the company operates its business. If the company cannot or will not do it, then it means the business is really not viable and we need to face the sad reality of salvaging the remaining shareholder value.

If you are a current shareholder, I ask that you send an email to Peter Blackmore, Barry Hutton, and the board of directors indicating your frustrations and support/demand for change. Add the number of shares that you own and please copy me on the email.

My email is

Have a good evening.

PS. Last year, I had a list of about 75-80 people in the exploratory group. If you were not part of the group and want to be included in the email list, let me know as well.

Saturday, March 7, 2009

Viability of the company - Plan B

The stock closed at 70 cents this week, and hit a low of 64 cents on Friday. Down another 62% this year to a market cap of less than $90m, the street is telling us this is not a viable business going forward. Lets look at some of the ugly numbers/facts.

1. The company is projecting revenues in the $120-130m for Q1 and a loss of $50m. For a company with a market cap less than $100m, that is staggering.

2. The company is projecting continued losses for atleast the next 4 quarters and is not projecting breakeven/profitability until 2010 at the earliest. Since 2004, they have been predicting profitability a year out.

3. S&P has a $1/share target price and Jefferies has an even lower $.75 target. S&P notes the company will probably lose $200m more in cash in 2009 bringing cash levels to the $125m at the end of the year, and hence their $1 price target.

4. Company head count is still over 4300 after this recent headcount reduction and opex at best will be down to the $60m by Q4 of 2009.

With the stock in the 60-70 cent range, the company has not come out and discussed the stock price or shown any sense of urgency. The cycle of cutting cost and being behind the curve doesn't seem to end. This is even more disturbing because of the current state of the world economy and their competitive position.

How can the company get to breakeven when they so far could not when they had much higher PAS sales, China markets were booming (stock market went from 1k to 6k), and competitors ZTE/Huawei were much smaller?

Management and the board could not turn the ship around and unfortunately for shareholders, it is up to us to salvage what is left. Should we continue to "hope" that they can turn it around and risk looking at a situation where their cash is below $100m, revenues even lower, and options much worse? At the current stock price, the street has already made up its mind. The company is not viable and we shareholders need to act now.

I first talked with Peter during the 2007 November shareholder meeting and discussed with the management/board the background of the failed strategic alternatives. Basically, the company could not find a buyer that would offer an acceptable amount for the entire company and have it close, citing the bad economic environment/real estate problems. It was bizarre because this was in late 2006/early 2007. But then again, who would buy it when they had all the filing/investigation issues ongoing and yet to be announced. The only viable revenue stream was PAS so essentially they were asking somebody to pay atleast $1.2b (lets say $10) for PCD and the technology. In any case, if they broke it apart even then, shareholders would have been better off with $10 or even $8 or $6.

Throughout 2008, the stock was already in the $2+ range so the issue was still can the company be competitive and get back to profitability. Management was very confident in achieving their expense metrics and increasing the revenue base despite repeated questions on the PAS decline. Barton had a "plan" for 2009 and beyond that supposedely took into account PAS declines and expenses would only be cut incrementally. It was always two steps forward and one step back for them. Barton was so important that his yearly compensation was around $3m! The board vehemently defended his salary to shareholders last March and a few months later he was gone.

The above is just a sample of events (and as I summarized for Blackmore last March), it goes way back to 2004 and Barton in 2005 with all the failed projections. Barton always insisted they "met" his projections quarterly. Yes, they did because after they met expectations for one quarter, they projected such a massive shortfall the next! Sound familiar?

Anyway, when I formed the "exploratory" group to enhance shareholder value, we had good traction at the beginning and the company was able to sell PCD, improve performance for a quarter (they actually announced exceeding estimates ahead), and the stock shot up to almost $6. While many called for "Plan B" at the time, we were operating under "Plan A" because that was most logical at that stage and most institutions were happy to see if the company can still turn around (some had just bought in the $2s and were obviously happy with the price increases). I myself was hoping that UT can atleast get to breakeven and negotiate a sale when the stock was much north of $5.

With the turn of events last year and material changes to the markets/world economy, and obviously with the stock price, those hopes are gone and we shareholders must now transition to "Plan B". I again reiterate my tremendous disappointment that we must do this. It ends my hopes that the company can turn it around but in order to maximize shareholder value at this stage....

With the help of other institutional holders, we are gathering the shareholders for discussions on how to proceed. We definitely want to meet with Peter and the board when he gets back from China (he has a two week trip plan).

To all the shareholders out there, I understand your pain and the institutions that are on board share your pain and we will try to do whats best for shareholder value, something unfortunately the management and board have failed all of us.

I end this post by asking for all of your support in the group. The retail shareholders make up a significant amount of the outstanding shares and your voice must be heard.

I can be reached at if you want to send a private message. Currently we are contacting institutions in the top 15 holdings but welcome any institutional holder that share our frustration.

Have a good weekend.