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.

No comments: