Tuesday, June 16, 2009


Here are some articles that relate to UT in India I quickly pulled from a couple of websites:

No cuts in India - Company’s India MD, Vijay Yadav confirmed to TelecomTiger that India operations will remain largely unaffected by the move. “ We continue to report strong growth in the broadband and IPTV market in India. It means that the India operations will remain unaffected by the announced job cuts,” said the MD.

UTStarcom’s India headcount totals around 125-150. Though the employee strength might appear to be small, the company is consistently consolidating its position in the broadband market including IPTV infrastructure in India with regular contracts from state-run PSUs BSNL and MTNL.


BSNL Extension Contract - "In the first phase, UTStarcom deployed 1.3mn broadband subscriber lines for BSNL with an additional 1.1mn broadband subscriber lines during the second phase. With the new expansion phase, UTStarcom will deploy its B1000 multi-service access node (MSAN) solution throughout India to add approximately 475,000 ports of capacity to BSNL's existing broadband network."


Aksh-BSNL - Commenting on the launch, Dr. K.S. Choudhari, MD, Aksh Optifibre Ltd, said, “This launch is a testament of the spread and growing popularity of icontrol IPTV in India. Aksh believes in expanding mediums of entertainment at competitive pricing through this breakthrough technology of IPTV service. This expansion of the service to multiple cities highlights the growing popularity of the real power of interactivity. With the launch in Agra we have reached a footprint of 15 cities in the country already and plan to increase it to 22 in the next 30 days”

BSNL - Chennai - BSNL’s Chennai circle subsidiary, Chennai Telephones and Smart Digivsion Pvt. Ltd. announced the launch of Myway BSNL IPTV services.

http://www.telecomtiger.com/fullstory.aspx?storyid=5962 (UT mentioned in the Q1 call about BSNL deployment in Chennai).

Bharti-Airtel -While one agrees that broadband sector is still at an infancy stage in India and the market dynamics will certainly change post introduction of wireless broadband services in the country, Bharti Airtel is expected to continue to be among the top performers in the field complimented by its position as an integrated telecom player which will help it to offer wireline as well as wireless broadband services.

http://www.telecomtiger.com/fullstory.aspx?pagenum=2&storyid=6378 (Bharti Airtel is the leader in mobile in India...UT could introduce their mobile iptv solutions in India in the future)


During the Initiatives call, Blackmore commented on the bookings outside China and that it was above expectations (whatever that means). UTs strategic position in India has generated some costly sales in the past (low margins/losses). The iptv subscriber numbers have been very low. However, broadband seems to show a lot of promise while iptv deployments are now taking place. The lowered cost base in 2010 plus the early cycle nature of UTs products in high growth tech space/countries should get them to profitability. The company credibility is non-existant and shareholder confidence is very low. The company has to prove they can execute and deliver bookings but the ramp in core bookings in India (low compared to all the other revenues before) should start making a bigger impact and lead to some enthusiasm in the coming months and set the stage for 2010.

Its easy to get discouraged with the disappointments but the main question is can UT ramp the core revenues in light of the targetted cost base in 2010. The company obviously had to cut costs in light of the slow ramp of "core products", divestitures/wind-downs of handsets (mostly), and almost complete loss of PAS. Some people may not understand why I and other shareholders are positive (or even say I'm always positive) but after years of worrying about the loss of PAS, the high expenses, and slow ramp of "core" products (or maybe unrealistic growth expectations), its really good to know the company can realistically "outperform" going forward and the focus would be on the core products.

Monday, June 15, 2009

Q1 Bookings

I talked with Barry Hutton, UTStarcom Senior Director of Investor Relations, today and discussed details of the Q1 bookings.

The total dollar amount for Q1 bookings was $140m (compared to Q1 revenue of $119m). Here is the breakdown:

1. Korean-designed handsets - $40m
2. China handsets - $30m ($10m PAS & $20m CDMA)
3. "Core" infrastructure (including) service - $70m (This amount includes around $5m in PAS infra).

In the Initiatives call last week, Blackmore mentioned focusing on the higher-end CDMA handsets that take advantage/compatible with their other products such as mobile iptv. I was trying to nail Barry down on a good number to use going forward for Chinese handsets and $15m seems to be reasonable (use whatever number you are comfortable with, The $15m is less than $20m because the $20m is more "lower end" right now but when they sell the higher end, then thats more money per unit). It is interesting that the $20m that they booked is equivalent if not more than what they sold for the entire last year in China. Again, they are going to focus on higher end units.

If you take $65m in core bookings (without PAS) and add in CDMA handsets ($15m), then that is only $80m or $320m annualized. The core itself is only $260m, still short of the $350m breakeven point that Blackmore discussed.

There are a few items that could/should boost this figure such as:

1. Core bookings are expected to increase double digits. (I remember them mentioning core bookings last year to grow 50% in 2009 so again there are issues with the rosy projections and credibility of the management).
2. Q1 bookings are normally/seasonally lower.
3. IPTV subscriber growth was only 50k from Q4 to Q1. China alone is projected to add 2m subscribers so the last 3 quarters for UT should be much better. Also, new wins in China, expansion in India and Taiwan going live (I know weird that it just went live in April 1) should help.
4. Potential Phase III contract from BSNL not included.
5. Transport Network product has been highlighted for a year now and is in trial with among others Softbank/China mobile. (I tried to get info on the size of tenders but no info. there. Maybe others can comment).
6. GEPON. On the Initiatives call, Blackmore mentioned one win from the CTC procurement bid, ranked first in 3 of 4 categories leading to being on the short list in 15 provinces.
7. IPTV in cable/digital tv solution, first mobile iptv win, now 8 wins in iptv adverstising show the early cycle of UTs products.

Tradeoffs/Credibility Commentary - Last year at the Analyst Day meeting, the company projected it would lose $130m without PCD. In order to close that gap, Blackmore framed that situation as needing to ramp revenue several hundred million. Is that possible? Yes. Again, there is a credibility issue.

Last March when shareholders met with management, we questioned how they would get to profitability and did they account for PAS in 2009. Barton proudly said yes and he had the game plan in his folder. Again, major credibility problems.

Even the last Q1 earnings call and initiatives call, they again mention that the negatives were known, built in, or expected. Now, bookings and cost cuts are going as planned/according to company projections. But, they never really say what those numbers/metrics are. There ARE major credibility problems that I have highlighted over the postings but been optimistic because of their technology, markets, valuation, and on and on. This might seem contradictory but things are not always black and white and why UT can rally from the $2s to almost $6 last year and then plunge to 63 cents and then rally to $2.43 this year.

In order to get to profitability last year, without PCD, the company would have to raise revenue by several hundred million (about $400m) and NOW have to make up for most of the $350m in PAS sales generated in 2008. That is without the opex cuts announced. So, now that the total breakeven revenue is $350m, I WAS positive in my posts. Is it because I suddenly think management is credible. Of course not. Without the cost cuts at the end of last year and the ones announced last week, where would the company get the additional $700m or so in additional revenues?

Peter was confident in the call in getting to the $350m in revenues for 2010. Based on the above, I can see how he can reach it. Lets say none of the points I mention happen and they miss by $30m on revenue, then they lose $10m for the YEAR (2010). That is a far cry from the $50m or so quarterly losses that investors have been accustomed to. The downside risk for a loss in 2010 is so much lower now. Any breakthrough in contracts or subscriber ramps, or more efficiencies go to the bottom line.

BTW, any point I make above that you feel is positive or too positve, just think how biased I am. Any point that you feel is a negative, then that must be unbiased.

Have a good evening.

Saturday, June 13, 2009

A Viable Business Model

The announcement this week by the company to cut yearly operating expenses to less than $100m was stunning and radically different from previous behind the curve/half baked restructuring actions. Lets look at the outlook/ramifications of the cuts going forward.

Divided BOD? - On Friday, various institutional investors had the opportunity to talk with Peter Blackmore/Viraj Patel and came away feeling that there could be major divisions among the board between the strategic steps the company have and would take. Peter Blackmore came in 20+ months ago with an operations background and very early on focused on streamlining the company. After about 9 weeks, they came up with a plan to divest non-core assets as well as improving sales, marketing, and operating management of the company. While those were significant moves by itself, the model was also predicated on a revenue ramp (despite ongoing PAS declines) to achieve Peter's targetted expense metrics goal of around 25% for both SG&A & R&D. Peter discussed the company as a "startup" and asked people to measure their progress by the bookings. The company executed on the divestitures part but not on the revenue ramp and the rapid deterioration of PAS sales and the very slow ramp (in some cases) of iptv and other core products forced the company to slash costs by $100m late in 2008. The global meltdown late in 2008 did not help but the primary reasons were company specific (such as PAS closedown, regulatory issues, etc). This is evident by the continued growth by companies such as Huawei and ZTE.

Anyway, I digress. Despite the public statements by the company of good core bookings, I believe Peter knew that the restructuring/divestitures were not enough, the core revenue ramp was not enough, and that the company needed to do something more drastic. This is a credibility issue that Blackmore has but it doesn't mean he doesn't know what needed to be done. As an investor, I also rely on projections based on the company's public statements. This definitely hurt a lot of investors as the stock went from $5-6 to under $1. A major turning point or peak of my frustration was the time of the Q4 2008 earnings call. The company projected $125m in Q1 revenues which was way below expectations and then left investor's with the company trying to cut quarter opex to under/around $60m/quarter by the end of 2009. What??? Even for this company, this was ridiculous. The stock plummeted from $1.1 to under $1 despite the company having cash/book value that was 4 to 5 times the market cap. The street basically said it looks like the company will continue their business as usual ways well into 2010. Obviously, this is NOT acceptable for shareholders and we organized as best as we can. I increased my postings to highlight the fact that the stock was pricing in this scenario and shareholders needed to be as vocal as possible because there is tremendous value wasted (as if the previous years were not bad enough).

The stock dropping to $1 I believe also made it ridiculous enough that the people in the company that favored more cuts finally had a platform. It took months and there were rumors of more cash injection, selling out the company, and more job cuts. It all culminated yesterday in the massive restructuring. I initially listed the benefits of a handset investor but then wondered what price could they have paid if the deal was negotiated when the stock was under $1 or in the low $1s? This would be inconsitent with the company not diluting the existing share base as they did not last year when paying the CB.

Anyway, I believe the rumors of an investor was still valid and obviously, there are always major resistance to any cuts, let alone this magnitude. Again, I probably gave the history of the world but it is important to go through to understand the weaknesses of the company and where do we go from here. I believe Peter is fully in control and sets the tone of the company. There is resistance in the board but obviously supporters as well. I believe Peter got the cuts he wanted and now is comfortable with the metrics and revenue expectations going forward. I don't believe that management/board gets a pass for their credibility issues and believe that Lu should not be re-elected. I also believe that if Lu gets voted down and submits his resignation that the board will accept.

For people that have been waiting for this announcement before voting, there is no real other option now but to vote against the re-election of Lu. I also voted against Jeff Clarke because he is part of the board but will not campaign on that. I voted against the accounting firm because for the last 2 years, they have been paid $11.5m and think that is just outrageous for a company the size of UT.

Dream being dead? - Some people will say this is a sad day for UT? Why? The dream of UT being the Cisco of China was long over and Huawei/ZTE were the ones who benefitted from the China boom. UT was not going to "compete" with Huawei whether it had $180m/quarter in opex or $25m/quarter. Most investors "dreams" are to get to profitability as quickly as possible and potentially sell itself. Even this dream for me was gone because the company, even with Blackmore's yapping about revenue growth/cost cuts, just didn't seem to "get it" and continued with its yearly end of the year cuts and projections for better days with a lot of very hopeful assumptions. Thats why I changed course and just hoped for the company to sell itself. The announcement yesterday was very significant. Does this bring the hope back that it will be the next Cisco or Huawei (ironic)? No. It does bring the realistic probability the company will be profitable in the near term and then can have better options to sell itself or organically grow its profits/earnings from there.

Cash Flow- Blackmore emphasizes the cash because they will need it to get to the profitable business model. The company has $301m in cash at the end of Q1. They will go through another 3 quarters of losses at the minimum. They will incur restructuring charges of $40-45m. On the positive cash flow ledger, the company will take in $100m as part of the Phase I & II India contract throughout this year. This is not part of the "revenue" estimates due to the accounting rules. As I was informed, Phase I will be completely paid of by Q2 and even some of the Phase II contract will not be paid until 2010. There are the Korean designed handset inventories to still wind down. There is also $10m left over from PCD escrow to be paid in July. Will the company burn through all the $300m in cash this year? No. Lets do a little math. Lets assume that core revenues for the rest of the year at $90, 100, and 110m for a total of $300m. Thats $75m in gross profits. Lets say opex is $65, 60, and 55m for $180m in opex. Thats an operating loss of $105m. So, lets add it up.

$301m - $105m + $20m (Handset inventory wind-down) - $45m (restructuring) + $10m (PCD) + $75m (India Phase I/II for last 3 quarters) -$15m (other expenses, taxes/options) + 0 for interest earnings/currency fluctuation/etc) = $241m. Lets "round this off" to $200m just for any other contingencies. Does this seem like the cash is going to zero?

The company is in dicussion with the Phase III BSNL contract but that is towards the later part of the year. Even if they have to spend ahead for inventory, it will be $60m or so. The larger it is, the better for UT since it means the contract is higher.

Breakeven point for 2010 - Blackmore laid out the business model needing $350m in revenues as the breakeven point. Thats an assumption of about 27 to 28% GMs with an under $100m opex. The GM assumption is debatable but it will not include significant handsets (and they are only targetting "strategic handsets" for their mobile iptv, etc). An analyst even commented how come the GMs is way below the industry standard (around 35 to 40+%). Blackmore mentioned the set top boxes had low GMs but that could be outsourced as well. Anyway, the driver now will be core revenue and those can be tracked by bookings. Another point I want to make. FINALLY, we are not talking about revenues without PCD, without internal PCD, without PAS infra, without PAS handsets, without Korean design handsets, without China handsets.. There may be very little handsets but basically 2010 revenues will finally be core products. Geeez...And any revenues book now will be products that are not "legacy" types. These will be hard earned revenues in this environment.

2009 Bookings - Q1 revenues was $119m but about $40m in Korean-handset design inventory being closed off. That leaves about $80m. There may be some other non-core sales there but one institutional investor clarified the 1.2 (book to bill ratio) bookings for the core and was it $96m and the company said that is a good number. (Who knows if this is true but that is the best we have for now). Q2 bookings will be announced when Q2 cc rolls around but Blackmore indicated that China bookings are on track and international bookings are ahead of projections. An Analyst asked during the call if the international bookings are primarily in India but Blackmore mentioned its in other places as well such as Korea, Taiwan, and the Philippines. Blackmore mentioning Taiwan is very interesting as the iptv contract for Taiwan was press released in December of 2007. Blackmore also mentioned that iptv just went live in Taiwan a month or so ago (I gave a sarcastic comment in my blog posting at the time but that may be going well enough that they are booking material revenues now). During the initiatives call, Blackmore talked about iptv/softswitch as being more mature technologies and GEPON/TN as products they will require more investments. It is a very positive sign that bookings for Q1 is around the $90-100m range without GEPON/TN products having any or very little impact. That Q1 number also didn't include potentially the Phase III BSNL contract and shouldn't the 2nd half of the year bookings be better than Q1?

Working Capital - The company has no debt, has short term credit lines in the $100m+ range, and cash. Looking at 2010, the business model could be a $350m revenue company, under $100m in OPEX, $200m in cash, and the credit lines supported with a $170m building that they own. Is that not a sustainable business model?

Tangible Book Value - I think Tigre, another shareholder, brought this metric a while ago and it was deteriorating. I argued that who buys the company based on the tangible book value. I was wrong to ignore this metric and have used it often to gauge the stock price as it has fallen way below the book value. As a company losing money, using cash/book value is useful but as I originally mentioned, its less correlated for those that are profitable. A tech company trading below tangible value is a major sign that it has problems (as if the stock price declines was not warning enough). Anyway, I expect the stock to trade above the book value as it loses cash to get closer to breakeven/profitability. Eventually, it should trade much higher than book value as the focus becomes earnings power/growth of the business.

Startup/Chinese company/Credibility - There are obvious risks and the issue with UT board and not being "Chinese". Institutional investors have been discussing this with management on an ongoing basis for a long time but just like the Starent lawsuit, takes time to play out. This in no way ignores this very important issue. There is also the credibility of not getting ahead of the curve for so long. Peter has talked about the company being a startup and at the same time mentioned that UT is unlike other companies because of their background. While it is not a pure Chinese company, at this stage, we can look at things from a half glass full point of view. Unlike a Starent for ex trying to break into the PSDN market in China, UT being a semi-Chinese company with years of operations has advantages. UT, having worked on their technologies for a decade, does have advantages in having a wider product line using less resources than someone just starting out. The company having no debt is a tremendous advantage and owning their building has tremendous advantage. While a few years ago, we may have given too much credit for these intangible assets, the extreme case of looking at the glass half empty or empty is now wrong.

Share Price - Do I have a crystal ball? Well, yes, but it doesn't work sometimes. Technically, there was resistance in the $2.5-2.6 levels. Short term, you always have to look at technicals as it incorporates money flow and other factors that we don't forsee. I do think that the stock will generally trend higher as 2010 (only 6 months from now) approaches. While a sale would have been great from a short term pay off, this restructuring is significant and will pay shareholders in the longer term. The institutions probably know all of the above metrics, etc but my main audience has been those retail shareholders just like myself that have been "stuck" with a higher cost basis. There are always opportunities (specially in this market) elsewhere but I believe the opportunities (risk/reward) in UT at these levels are as good if not better than other investments. That of course is up for debate but this is a UT blog so I focus on the UT investment. I don't get in diversification or commodity speculation or shorting or whatever. There are plenty of other sites and analysts for that.

Have a good weekend.

Thursday, June 11, 2009

Company Initiatives

Peter started the call discussing some background information:

1. Positive momentum in bookings growth
2. Improvements to their CRM, sales, and operations management
3. Moving back office operations to China
4. $301m in cash @ the end of Q1
5. Focus on accelerated profits and having the same basic strategy
6. Highlighted IPTV leadership in China/India and broadband leadership in India
7. Anticipates double digit growth in 2009 bookings for infrastructure products

The call was mainly about the opex cuts to less than $100m/year and a reduction in work force by 2300. Some of the cuts have already started with the majority being done in Q3 and completed by Q4. The company will maintain essential capabilities in sales/R&D and outsource manufacturing. The focus will be on the higher revenue growth/margin products.

Handsets - The company will target the higher end China handset market focusing on specialized handsets that incorporate their iptv system (for ex) as oppose to the entire CDMA market. This will reduce inventory risk, reduce working capital, and improve handset margins.

The opex reductions have various components:
1. Having a direct sales model in China/India and an account based approach for the rest of Asia.
2. Working with OEMs
3. Reduce SG&A (consolidate back office operations into China)

The company will take a $40-45m charge in Q2 with the cash loss in Q3/Q4.

Targetted Business Model to profitability - With a yearly opex of less than $100m, and GMs in the high 20s, the company will need $350m in revenues to break even. Peter mentioned he was confident that they can achieve and exceed this level. He expanded later during the Q&A regarding bookings turning into revenue about 9 months later. Bookings for Q2 in China is as projected and bookings for outside China is above expectations.

Cash - No further information but by the end of the year, the company should have more than sufficient cash to support the business and its improved financial model.

Handset windown - The Korean designed handset business is almost wound down and the China handset operations is also reduced.

Hangzhou building - The company hired a realtor to sell the building but the size and amount will make this a difficult sale.

The company has a "margin improvement" plan regarding the Indian broadband (outsourcing manufacturing). They see continued significant growth in India broadband. They will be leaner/more flexible with less than 2000 employees and confident in returning to profitability.

Info. from the Q&A

1. Virtually no PAS infra in Q1, very little PAS handsets.
2. They have the confidence even with reduced R&D due to looking at the growth with their primary customers. They have 20 major customers making up 80% of the revenue.
3. They are focusing their R&D in the newer products (Transport Network and GEPON). Other products (iptv/softswitch) are more mature and need less development. Most of the huge work has been completed in those two areas as iptv customers don't need more functionality and with their stable product. Regarding their softswitch, most of the code has been written for the Class 5 legacy switches. Peter talked with their leading product managers and were cutting costs because they were spending too much money for the return.
4. A lot of savings on SG&A because of their move back to China. SG&A will be about 10% and R&D in the "teens". If I interpret this correctly, R&D may be about $65m and SG&A at $35m for a target of $100m. They are keeping the infra sales and reducing significantly the handset sales team.
5. Bookings for outside China ahead of projections and not only in India but also in Taiwan, Korea, and the Philippines.
6. Rupee strength - Will help some in the current quarter
7. Transport Network product being trialed with China Mobile and Softbank as the two most notable (any bookings will be revenue in 2010).
8. New Partners - Will be announced in the Q2 call but they picked up one in the US.
9. Workforce in U.S @ the end of the year will consist of a small support staff, legal, and some due to its corporate office.

Let me comment on various issues.

1. Cost cuts - Ever since the end of Feb Q4 earnings call, the management has been baraged by investors and the company has mentioned taking significant actions to accelerate profitability. The $60m target opex for Q4 2009 was clearly too high specially in light of the Q1 company estimates and little ramp through the year. There have been some investors that mentioned it can't be reduced much more without hurting their competitive positions. That the company knew more than investors. Well, it turns out that the majority of the shareholders/the market that have been pushing for much lower expenses were right and finally the company has deviated from their usual year end announcements for cuts and waiting another year. It says a lot about the management and their projections that it has taken them so long to even project a realistic business model. Its not easy to cut 2300 people but if the realistic revenues cannot support more, then that is what has to be done.

2. Rumored Investor - No one knows if there was even an investor and a deal could not be hashed out but this would be inconsistent with the company diluting the shareholders at these levels. They didn't do it when paying the CB when the stock was higher and now with more cash, it didn't make sense (as I thought about it). I still think a local Chinese handset maker could partner and make use of UTs technology/equipment/license/building space.

3. Future Revenues - Q1 revenue was $119m with about $40m in handsets. PAS was very little so the core revenues was about $80m. Book to bill was above 1 (and didn't include BSNL Phase 2 revs) so a little growth and some handset sales in the future could lead to the breakeven revenue and above.

4. Expectations - Some shareholders were expecting an outright sale or an investor. The stock price movement did not support an outright sale. The investor scenario was plausible but the shareholders would have been diluted at these stock levels. Some were expecting a huge contract. That would be odd when they are reducing 2300 people. Can you imagine Peter announcing a major contract and then saying by the way, we are letting half the people go?

5. Valuations - We have discussed cash/tangible book value. The stock was discounting these levels due to the continued losses. More losses this year plust the restructuring costs will lower the cash/tangible book value levels. However, if the company is at breakeven or profitable in 2010, then instead of a discount to book value (let alone cash), it will be greater than those levels. This is not scientific but an approach could be estimating the end of the year book value and then looking at other small cap/technology comanies with around breakeven P/L and what their market cap to tangible book value is. Then, discount or add a premium based on what you feel the growth rates/bookings/margins/technology of UT compared to the other company.

6. Board member re-election - There is no question the company has been way behind their cost cuts and have not developed a profitable business model. While it is more probable now with the additional cuts, shareholder value has been lost. For this reason alone (do you need more?), shareholders must vote out Lu/Clarke and send a message that the performance over the last 5 years have been disastrous. The announcements today just re-affirms the failure of the board and their lack of urgency the last 5 years.

7. Blackmore's credibility/company projections - Blackmore discussed ramping revenue during last year's shareholder and Analyst Day's meetings by hundreds of millions. In March last year, Barton talked about his 2009 business plan that incorporated PAS. Last September, Peter said the company did not feel the recession yet. The cost cuts at the end of last year that would chop $100m/year were clearly not enough. Is it any wonder why investors don't have any confidence/trust with the company/management.

I have been waiting for a long time for profitability and for revenue to ramp. The additional cost cuts and the corresponding revenue breakeven point of around $350m are finally realistic and doesn't require a tremendous revenue ramp. Today was a good start and obviously the company has to execute. The management/board should cut some more of their compensation and consider buying some shares. The news is out so there are no excuses. Overall, Peter went into a lot of details during the call and address a lot of investor concerns regarding the cuts/revenues going forward. I think this was a very good call that addressed a lot of investor concerns. Some may have higher expectations but again I have to remind people this is a $2 stock and the main goal was to operationally break even first and stop the bleeding. The moves today signify their seriousness to get to a profitable business model and made them more attractive to a potential buyer going forward. We'll continue to debate whether the cost cuts will impact them in the future but when you don't have the existing revenue and the returns are not justifiable for the expenses, then you have to cut. I'm positive on the current valuation but I'm biased and always like the valuation :-)

Tuesday, June 9, 2009


In typical company fashion, the anticipated end of May conference call is happening this Thursday, June 11, 2009. After following the company closely for the last 5 years, I can speak for longterm shareholders in expressing concern and doubt that the company can actually execute or release shareholder value. The Chinese articles discussing the potential new Chinese investor and additional significant cost cuts are intriguing and seems very promising. Lets discuss the different components.

Investor Point of View - Some shareholders ask "Why does the company need cash and dilute existing shareholders? The more optimistic take is "Why would an investor take a stake in UT? Will someone invest $50m or $100m because they want to lose money? I'm sure they have done their due diligence and decided the shares are undervalued and see significant upside potential.

Price - During the phone conversation I had with Peter Blackmore, he mentioned the stock is not even trading at cash levels. Cash is at $2.35/share. Tangible book value is around $3.15. Normally, technology companies don't trade under cash/book but then again UT has been unprofitable for so long.

Working Capital - UT's cash position is strong but their working capital is not. While competitors have access to lenders, UTs credit lines are small and most of the cash is in China. An influx of cash will provide more working capital and help in the restructuring.

Chinese handset maker - The benefits go beyond the cash that it will bring in. UT has made CDMA handsets for the China market but so far has limited success. Co-marketing, technology sharing, etc will help both companies. UT may lease out their equipment/building. UT still has a small ownership in PCD and that relationship could be monetized or made more profitable.

Board representation/Local Chinese representation - As the number one UT shareholder, this new investor will have significant input to the success/failure of the company. The company move to bring in a shareholder that will hold them accountable for performance is long over due.

Cost cuts/Profitability - After 5 years of waiting till next year, this latest round of cuts maybe the one that gets the company to profitability. After the company projected quarterly OPEX of around $60m for Q4 and the lowered revenue projections for Q2 (after the Q4 report), shareholders were all over management. Not only were they far from profitability as before but their projections showed they were not serious in getting to profitability.

Core Business - It would be impossible for the company to continue and enhance shareholder value without making significant structural change. With the above steps, the company still maintains its core business. Investors did not invest due to PCD or PAS but on IPTV and the growth in China. The above steps will hopefully get the business right sized and positioned to participate in that growth and be profitable.

Friday, June 5, 2009

Potential Partial Sale/New Investor

After the poor Q1 earnings call, lack of Q2/2009 guidance, and the announcement that more information regarding "additional steps" will be announced, it was a signal that a sale or something more than the usual cost cuts was going on. After talking to some shareholders right after the call, it made sense that a sale might be in the works and posted about it. My choice/hope was for a direct competitor to scoop up UT at north of $5/share to take advantage of the tangible and intangible assets UT has and spare shareholders the continuous hope for profitability that doesn't seem to get any closer. With things looking bleak, that is often the time that management/board is forced to do something significant.

The stock closed at $1.55 before the earnings call and held its ground the next few days and started climbing. However, the amount of increase and volume did not support a sale north of $5/share which is a level that long time shareholders, the board, and management (I think) would have to get at a minimum to justify the existing tangible book value, failed sale of a couple of years ago, and potential growth of the core business. Also, the board will not let go for peanuts so a substantial increase would be needed for an outright sale. Contrary to the hopes of the more bullish investors, the market is too efficient to allow the stock to trade up for a significant amount of time (with the rumors already) and still get a huge premium.

Articles the last few days indicate a potential new investor will take a major position in UT. An outright sale to a direct competitor would bring in a quicker/higher price so the news that an investor will take a non-controlling (although large) stake actually supports the price action. While I would like a much higher price, it now looks like the price will most likely be much less than $5 and probably lower than $3 and could even be lower than the close today ($2.43).

Why? The negotiations started before the earnings call so the stock would have been below $1.5. A 50% premium would take it to $2.25 and a 100% premium to $3 (and thats considering that it rallied into earnings). Secondary's announced have almost always come with the stock already pricing in the event and often running past the agreed price (lots of examples).

Is this bad? Not necessarily. Actually, it should be very positive. A major Chinese investor paying $2, 3 or higher obviously think that its worth more than what they are paying for. Also, not being one of the direct competitors that could take advantage of the intangibles (tax savings, consolidation, saving of R&D, strategic contracts, technology, etc) means that it believes that the company can execute and operationally move higher as a standalone company (look at Palm for ex.).

It would seem unusual for the company to sell below tangible book or even cash but then again, UT is operationally losing money for the last 4-5 years. Also, even with the high cash position, future contracts/working capital needs may become higher (which is a good sign for future revenues). Also, it didn't trade below $1 if not for those same concerns.

Again, the overly bullish should look at WHY its not trading much higher (if you expect $8, is that reasonable the stock is still trading at $2.43 when everybody and their brother knows about the rumors). Those that sold much lower also have to ask why it moved higher after a bad Q1. Those that sold at $1.1-1.15 after buying at $1.25 thinking it was a good value buy should question their entire investment philosophy (just kidding Tigre :-)
Those hoping for the stock to go higher just because shorts are going to panick as if the offer will go higher are not making sense either. A deal has been worked out and just needs formalization.

Another issue about the cost cuts. A lot of people have been calling for cost cuts and I have posted a ton about the need for drastic cost cuts. Some have wanted more information as if the company's performance over the last 4-5 years, their guidance, and their behind the curve moves are now suddenly going to be justified by a humongous contract that we just don't know of are also misguided. And now they are "surprised" that there will be enormous cost cuts...Duh...Face it...the company has been behind the last 4-5 years! (But, this could be the turnaround sign that they finally get it and are taking drastic actions BEFORE another year passes).

Anyway, obviously the new investor will benefit UT in many ways from market confidence, Chinese/local involvement/contacts, potential strategic involvement, pushing the board/company for more accountability, etc. The stock will be much higher than the current price but it will get there unexpectedly as it has to this stage. I expected a bounce from the 60-80 but did not expect it to quadruple (although I still have the bulk of those shares and would gladly take more positive surprises).

Just be realistic out there and as I am constantly reminded, the market knows more than you (well this time, I'll pat my back and take the good fortune that it played out the way it did :-). By the way, the fact that it won't be sold entirely gives long time shareholders an opportunity to beneift in the short term as well as the opportunity to move forward with a drastically different UT and benefit if the revenue ramp finally comes. And thats a win-win (would be another win if Lu/Clarke are voted out as well and management/directors left buy shares after all the announcements are out of the way).

PS. As I mentioned during my trading discussions with Tigre, there is no chance for me to make doubles or even 30-40% in any other stock besides UT just because of the way I trade this market. On the other hand, I'm diehard enough to hold onto UT and this fortunately happened (or maybe I should take full credit and say I called it all the way...:-)

Have a good weekend.