Sunday, April 26, 2009

Shareholder hopes & dreams - Sad realities

Why did I and other longs invest in this company and some have continued to hold on to shares? I was banking on the growth in China. UTStarcom was one of the few growing telecommunications provider 5-6 years ago and their rapid growth, US listing, and potential for becoming the Chinese version of Cisco was very tempting at the time. The monumental collapse can be attributed to some major strategic mistakes such as investing in WCDMA instead of the home grown TDSCDMA, spending massively on R&D/marketting in overseas markets that had well-placed local providers and/or had regulations that would prevent adoption of the technology at the time. The company's main revenue/profit source in China and Japan (Softbank) also deteriorated significantly in the last 4 years while all the other ventures/revenue source could not come close to addressing the PAS/Japan losses despite the company's efforts to reduced overall spending.

The "growth" that investors hope to see can actually be seen in Huawei and ZTE!

Peter Blackmore, who came in 20 months ago mentioned being impressed by the combination of Western management/US listing/markets as well as the low cost base of operations in China. The problem is that UTStarcom is competing against ZTE/Huawei in China where UT is disadvantaged (previously by not being a true Chinese company and now also by scale due to years of losses). Outside of China, it is competing against well-entrenched global providers with huge scale and credibility of having revenues 20-100x UT has.

I listened to the Analyst Day meeting held in June 2008 and was reinforced again that it is not the technology that is the issue but management/other external factors that may prevent UT from ever becoming profitable and eventually sold/go down. Brian Caskey mentioned some of these technologies have been developed since 2000-2001. Peter Blackmore mentioned that they had too many technology and had a cost problem.

While Peter can articulate the problems and fix certain operational issues in the company, he has to deal with a company headed by now Chairman Hong Lu and lead independent director Thomas Toy, both with UT performance history that would have them removed already. They are not even well liked as Ying Wu was by the employees/customers. Being non-Chinese, Peter is also disadvantaged when the company's base of operation and main market is China! So, the current leadership situation at UT is tremendously bad for shareholders.

Peter understands that high gross margins and profits are the key to turning the valuation of the company around. He has focused the company on broadband, iptv, and ngn. Lets discuss whether the company's products/deployments are commoditized or not. The company focuses on all IP type products, which in turns brings customer protection on their investments. That is good for the customers BUT not good for shareholders/UT. There are "few" true non-commoditized platforms/products that will do well for a long period of time such as Apple's iphone or Mircrosoft's operating software. The one high margin product/business that UT has is IPTV. When UT wins a contract for a certain region, it has a hold for that period. The company makes the correct argument that bundling ngn/broadband can reap added savings and make the systems work more efficiently and thus a better value proposition. However, there are other major factors such as vendor financing or worse State-backed financing that UT cannot compete. It cannot compete on scale and therefore we see the results of no large wins in any of their technology segments that they offer. Even the key strategic wins have not taken off.

While the initial mis-steps by the company is understandable to an extent (dellusions of grandeur after hitting $2.5b in revenues in a short time gives the company some slack), not cutting costs more rapidly and the overseas expansion was not acceptable (the last 3-4 years). As far back as 2003, PAS was expected to peak in 2004. Failed ventures from WCDMA, Softbank, India, PCD, and other expansions are examples of the mis-steps. The company has not even settled their "identity" as of now.

Blackmore mentioned early in his tenure that UT was like a start up company. I commented that the company's huge cost base, lack of growth, internal issues made this statement false. The company had $40-50m in R&D that normal startups do not have. They still had $26m in the last quarter. The company has a LOT of resources to turn this around but unless they make fundmental changes in the leadership and their identity as a Chinese company, the street doesn't buy it (hence the weak rise in the stock price even during the latest rally). As an example of a "startup" doing all the right things is Starent. However, just like in Sigma Designs case, the larger competitors look at the growth/margins that they have and come swarming in. Eventually, Starent will go bust or be bought out.

Going back to their current strategies. There is the "wireless" backdoor plays such as FMC, PDSN, IPTV, handsets and their broadband/ngn technologies such as GEPON/transport network products. The problem again is that individually, it may not be a commoditized product and have certain differentiations but by the time there is any large scale implementation, it IS commoditized.

Because of the lost in scale and diminished resources, the company has a much higher hill to climb than even when Peter came on board. Yes, another growth wave can lift all boats and UT will benefit. The lower cost base will take some of the pressure off. The question for the board/shareholders is the missed opportunities of getting a much higher valuation just a couple of years ago. (

I realize the above items have been mentioned many times but it does reinforce the issues preventing the higher valuation of the company and that shareholders should continue to hold management/board to performance and structural change. Peter must produce results/changes and get to the core of the problems. If he can't, I have mentioned to him and the board to sell the company. I wonder if the company will have a 2009 Analyst Day meeting ?

BTW, Ford Motor has gone from $1 to $5 because it now increased sales estimates by 10k for the quarter and may be profitable in 2011. The street has no confidence in UT and whether or not UT management/board does something/anything will be telling.

Have a good rest of the weekend.

Saturday, April 18, 2009

Conference Call with Peter Blackmore

I had a conference call with Barry Hutton and CEO Peter Blackmore this last Wednesday, April 15 at 12 noon (Pacific time). I appreciate them accomodating me at that time since I do have a day job. There was initial hesitancy on Barry's part to schedule the conference call since the quarter has closed and they were on the quiet period. I assured Barry that my intent was not to discuss the current quarter but just to go through topics related in 2008 and general issues. During these calls, its hard to stick to one topic (since they are all inter-related), get information that is not material, and yet useful. The call lasted 45 minutes. Here are the questions/comments that I had and Peter's response.

During previous meetings that we've had (March 2008, June 2008 Shareholder meeting) and conference calls, the company has constantly reiterated that their core business was doing well (bookings doing well), developing countries which were their target markets were either not affected or less affected, PAS declines and eventual shutdown were built in, and they were looking to ramp revenues by several hundred million, so what prompted the cutbacks at the end of the year and the revenue shortfall? Entering 2008, the estimate was for non-PCD revenues of $1.1 billion and it came in at $700m.

The perceived revenue shortfall in core revenues (not including PCD/internal) was around $100m (from the $700m+ to $600m). Bookings are doing well but certain revenue such as the India broadband contracts were not recognized in 2008 and won't even be recognized until end of 2009 at the earliest. Over two hundred million of revenue from Phase I & II have not been recognized. The cutbacks were part of the overall plan of getting more focus on the core IP businesses, general world recession at the end of 2008, and a new model of moving back to China.

Cash from those projects are being collected, right? Why not move earlier and move entirely to China? Also, why go into 2009 with a budget of losing $150m? (note: some of the questions might not be in order and Q&A is ongoing for 45 minutes and I didn't want to get bogged down on any single topic)

Cash is being collected from the India contract. It is "debatable" on whether to move entirely back to China but it was prudent to do so at this time for better cost control. Towards the end of the year, they were trying also to wind down some Chicago assets and it was a tough environment so decisions had to be made to consolidate or move stuff to China. The losses in 2009 are street estimates and they have only given estimates for Q1. (note: Cash flow could also be better than street P&L estimates would indicate due to the unrecognized revenue from the India broadband and another $10m in July from PCD - I forgot to ask more information on the potentially $50m more in payment due at the end of 2010).

Peter had mentioned he was on the job for 20 months, so I asked how he felt the turnaround plan was going and at what stage was he in that plan?

Peter mentioned he felt he had made the right moves towards the overall goal of streamlining the business into the core IP technologies and he reiterated the goal of getting to profitability. With hindsight, he says they could have done some things differently but gave examples such as selling the PCD and indicated they were fortunate at completing the deal when they did. They had cut a lot of costs out, sold non-core assets, improved the supply chain/sales/marketing, etc.

I commented it seems like for the last 4 years or so, the company has had one plan. Wait for non-PAS revenues to ramp and when it doesn't, the company does its annual cut backs.

Peter mentioned he can only comment on his 20 month term that they are working and executing (see above) to get to profitability and it takes a lot of work to do what they have done. He reiterated understanding the share price is so low ("its not even trading at cash") and the need to get to profitability. He says he is not waiting around for the next few quarters but actively taking more steps and will discuss it in a few weeks (I took that to mean in the next earnings call).

Leadership - Who is really in charge of the company? Is this turnaround plan your plan? Hong Lu is still very active in China and drawing CEO type pay.

Peter mentioned he knows where I am going with this since he read the blog or that people mentioned it to him. He understands having two "high priced executives". He mentioned that he is in control. The China executives all report to him. He is there once a month. Hong Lu is involved with PAS and is consulting because he was there during the transition from Wu and can speak Mandarin to the executives/customers. Ultimately, he (Peter) is in charge and lays out the plan but of course subject to board approval.

How is his relation to the board? I mentioned to him that I have followed a lot of other companies and whenever you have company and share price performance like in UTs case, there are major changes made. It also seems like the board is non-existant. How can they decide on a strategic option when they felt the stock was underpriced at $7 and not at $1.

Peter mentioned the board is very active and meets often. Again, he's been there for 20 months and can't comment previously but they are implementing his plan. He mentioned the stock is very low and that strategic options are discussed and they are open to it. He brought up the buyback and again reiterated they are not for a buyback because that is short term and they are trying to get to profitability, which is the best way to increase the stock price.

I mentioned that a buyback would show confidence and gave the underperformance of their stock even in the recent market rally. I forgot to mention that buying back stock at prices less than tangible book value is a very good investment in itself. Anyway, I think everyone agrees they need to improve operational performance and that the stock price at these levels is unacceptable.

I brought up Ying Wu asking is the difference between Wu and Lu too great that Wu could not be placed on the board?

Blackmore mentioned he did not think that would work out due to the falling out that happened years ago.

Switching gears, I mentioned that IPTV is the company's future. How is their competitive situation? ZTE recently got $15b in financing and both ZTE/Huawei seems to be catching up to them.

Huawei doesn't really have a competitive product and is trying to give it away. UT has spent significant R&D money and has continued to improve its system architecture. It has the most scalable and best system even when compared to Alcatel-Lucent/Microsoft, ZTE, others. Peter mentioned that ZTEs system actually failed during the Beijing olympics but was not publicized. In India, it is a "clean sweep" even though others are trying to get in. "Its not like UT has favored nation status or anything like that". UT still has the most market share in China. Peter mentioned that there will be a PR on mobile iptv tomorrow (Thursday) and that Markwell is about to go live (Seems that should have gone live way back since the initial Markwell PR in December 2007). Peter emphasized their penetration into cable, mobile iptv, digital signage/advertising, etc. Later in the conversation, Peter is still waiting for that "tipping point" and characterized that as "gold" when it happens. (damn, I hate when they get you excited :-)

I also asked if ZTE/Huawei were trying to copy their system (edge router, etc) and regarding their patents in iptv.

Peter mentioned that ZTE/Huawei could reverse engineer their system if they wanted to but are not so its a different system. They have good patent protection.

Even though I am not a techy, I asked about PDSN, GEPON, and overall markets in China (note: The Packet Data Serving Node, or PDSN, is a component of a CDMA2000 mobile network . It acts as the connection point between the Radio Access and IP networks. This component is responsible for managing PPP sessions between the mobile provider's core IP network and the mobile station).

Peter mentioned UT got 40% of the recent PDSN tender (as was already mentioned in the Q4 call). Competition came from Starent and Cisco. The market is not in the hundreds of millions but good wins for UT. Nothing new in GEPON but said they are behind in GEPON in China because Wu did not want to sell broadband in China before (publicly, this is one of reasons we've heard before about the disagreements between the founders). Peter mentioned that in other places like India, UT is ahead but did not do well initially with the Phase I broadband contract but doing better now.

I asked ,besides shareholders call them constantly, what keeps him up at night? After a brief laughter, I followed up what are his major concerns going forward?

Peter mentioned that as the company gets more focused, leaner, and smaller, he is worried about scale. That is why they are working with the NECs of the world to take on part of the load.

I ended the Q&A by saying I have been a believer since meeting him in November 2007 and for the most part his strategic moves have been what shareholders want. Revenue ramp has not come in and wished him and all of us the best.

Peter mentioned he truly appreciates the support and understands the share price is very low and they are working diligently to get to profitability.

Peter is very articulate, humble, and has a quiet confidence. I have often commented to other shareholders that say they are going to talk to him that they WILL feel good after talking to him. At the end of the day, its about performance but we shareholders do have to feel confident about the CEO leading the company. We still have to roll the dice but if I'm wrong about Peter and the company's prospects, atleast I feel that I've done what I can to get the best possible information for myself and other shareholders.

I want to thank all shareholders that have sent letters/emails to the management/board. Even when the stock was at $3 or $5, it is an uphill battle. I do feel that management spending 45 minutes with "us" is overall positive.

Saturday, April 11, 2009

Shareholder Proposals

During the last several years of following the company, there have been many suggestions/comments by shareholders on how to turn around the company and enhance shareholder value.

The positive actions from the company such as resolving their investigations/filing their quarterly/yearly reports, selling non-core operations (such as PCD), selling investments (Gemdale, Infinera), cutting expenses, settling the convertible bond, controlling executive compensation (Barton's compensation) have been touted by the company as examples of their progress and sense of urgency. All of the above actions, however, were recommended by shareholders long before the actions were initiated or completed. These "common sense" actions that shareholders (with much less information than the company) have proposed shows the company has been several steps behind and really have no sense of urgency.

The current stock price shows that the market feels the company is still very much behind in terms of their cost basis, corporate governance and having a viable business plan to enhance shareholder value.

Here is a list of items to discuss with management and/or file as formal proposals (yes, its that time of the year where the management/board actually have to consider that they are a public company and at least pretend to address shareholder concerns and run through the obligatory procedures to be compliant with the minimum requirements).

Leadership position - Blackmore is the official CEO but has the former CEO/chairman of the board/founder Hong Lu drawing CEO compensation and leading the efforts in China, the company's main market. This is on top of the new China CEO that they hired and other new executives. I have discussed this issue in previous postings in painstaking detail but is a very important point that have major implications in the performance of the company in China and who is really in charge?

Corporate governance - When the company performance/stock has been so bad for so long, you might expect a signficant change to the board or an outright clean up. Nope, instead insiders have continuously been promoted. Ying Wu, the one significant person let go, was probably the best hope for the company in solidifying their China position. Letting Wu go sent a bad signal on UTs committment to the China market. Having a board/leadership team made up of non-Chinese is also illogical. Having no major outside shareholder (someone that actually paid for their stock positions) is also a terrible situation. The company has to include members of the board with significant share holdings for it to have credibility. At the same time, they need to allow the board to come up for re-election EVERY year.

Compensation - Executives are still reaping bonuses like it was 1999. I think it is clear to everyone that compensation packages developed during the bull market days are outdated and again illogical. Any bonus should be tied to real accomplishments above and beyond their normal already compensated duties. Barton was a single example of how ridiculous the compensation had gotten at UTStarcom. Today's situation with Lu is another. Shouldn't compensation that was tied to revenue metrics when UT still had the PCD (that was stupid to begin with) be scaled back. Shouldn't compensation be tied to profitability at the very least? Why should bonuses be tied to normally compensated job functions? Ridiculous. Some have mentioned this has been criminal and clawbacks have to be pursued. I don't disagree but at the bare minumum, the compensation system at UT has to revamped completely.

Expenses - The company has to further cut costs based on their expected realistic revenue/margin stream. At the same time the company talks about their leadership position in technology areas, they cannot justify all the future expenses when their customers are simply not purchasing or regulatory issues are clouded at best. As I said in many recent postings after their last cc, how can the company come into 2009 (with all the uncertainty and environment that goes with 2008/2009) with a budget of losing $150m?

Strategic Options - Share buybacks, M&A, viability, future revenues, expenses, and others are all tied to the strategic options the company has. With the low stock price (compared to current tangible book value/cash, and future expectations), the company should at the very least explore strategic options to enhance shareholder value. It makes absolutely no sense for the company to explore strategic options in 2006 and not do one now (for a ton of reasons). The 2006 strategic options study in 2006 was a joke because of all the issues the company had at the time and was primarily used to set up Wu for failure and buy the current leadership more time.

There are probably a lot more other items that can be proposed but the above are issues the company should address or shareholders should pursue at a minimum.

I will send an email to Peter Blackmore to get more background and his thoughts on the above topics. I'd also like to get shareholder feedback on what other proposals and/or how to go about this current proxy season.

Have a good weekend everyone.

Sunday, April 5, 2009

Failure of Lu & Toy

ALAMEDA, Calif., May 10, 2006 — UTStarcom, Inc. (Nasdaq: UTSI), today announced that its Chairman and Chief Executive Officer, Hong Lu, notified the Board of Directors of his resignation. Mr. Lu will remain as Chairman and CEO of the company until December 31, 2006, focusing on the Company's strategic opportunities and assisting during the transition. Mr. Lu will remain as a strategic advisor to the company after his formal departure in December. Tom Toy, currently an independent director of UTStarcom, will assume the position of chairman of the board as of January 1, 2007.

"Our Board of Directors and management team believe that the inherent value of the company and its opportunities are not reflected in our current share price," said Hong Lu, chairman and CEO of UTStarcom, in a prepared statement. "We believe the engagement of Merrill Lynch will help us to carefully examine a range of short and long-term alternatives," he said.

- October 12, 2006

"After careful consideration of a number of short- and long-term alternatives, we have determined that our best course of action is to move forward with the company as it exists today," said Thomas Toy, chairman of UTStarcom's board of directors. "Our stated goal when we commenced the strategic alternatives process in October 2006 was to explore potential options to maximize the company's value for UTStarcom's shareholders. In exploring those alternatives, we concluded that the optimal means of enhancing shareholder value is to focus our efforts on returning the company to profitability by building on the opportunities we have developed in key markets around the world."

In addition, the company today announced the departure of Ying Wu, executive vice president and chief executive officer of UTStarcom China.

June 1, 2007

Soon after, Peter Blackmore was brought in to be the COO and promised the CEO position.

While there has been changes from management with Sophie, Barton, Huang, and Wu leaving, the constant presence has been Hong Lu and the BODs, led by Thomas Toy. In a monumental collapse such as in the case of UTStarcom, the leadership has to be accountable and from the very beginning, Lu/Toy have been in charge.

I do not know the exact details of the events and decisions made by the company privately but there can be no question that shareholder value has been destroyed and any other company would have asked both Lu/Toy to step down by now.

The current situation between the CEO Blackmore in the US, BOD chairman Lu in China and a new Chinese CEO (and the other Chinese executives in China) show that at best, the leadership question is cloudy and more likely a bad joke to the existing suffering shareholders. The company should immediately clear up the leadership situation as it shows waste at the best and lack of control by the current CEO (Blackmore). Again, I ask why should Lu/Toy having driven the company/share price to the ground still even be involved with the company.

The rest of the board is equally useless as the handling of the strategic study, leadership situation, compensation and the collapsed stock price show ($2m retention bonuses for Barton, etc..; 50% salary increase from $500k to $750k for a job well done when the company continued to bleed and the stock sliding).

Its time (way late actually) for shareholders to demand that Lu/Toy step down. Only then can the company truly enhance shareholder value. Lu/Toy have done way too much damage already and are not fit to run/lead this company.

Shareholders can ask for more information on this and that, hope for profitability at this or that date, dream of the potential returns and other scenarios but until Lu/Toy are removed, nothing will really change for the prospects of the company.

One final a country with the growth prospects and entrepreneurial skills in China, Lu/Toy are the barriers to getting people that can actually increase shareholder value. Long suffering shareholders can still hope and fight for real transformation of this company and it starts with getting rid of Lu/Toy.

Have a good weekend.