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.

1 comment:

Anonymous said...

Plan D : explain to ol` CEO Blackmore, that ordinary companies sell products...

Plan E: hunt down Hong Lu

Plan F: same procedure for UTStarcom management as for Bernie (Madoff)

Plan G: stop dreaming - utsi, the blablah company is toast anyway