Saturday, August 1, 2009

Product Lineup

While the company has addressed one side of the business equation to profitability by targetting a lowered expense rate under $100m/year, the bookings/revenue side doesn't show clarity even after years of churning out products. The most reliable/consistent revenue source came from PAS infra/handsets and their PCD handsets. Both of those areas are winding down to almost zero. PAS peaked around 2004 and the search for new revenue streams started way before that. Big investments and hope in 3G (WCDMA), Wimax, Softbank, and handsets failed/disappointed badly. A $2.5B revenue company at one point, UT has scaled back drastically and positioned itself to break even with $350m in yearly revenues. How doable is this? What products do they have? Over the last few years, there are various products thrown out that gave hope. The size of the markets were large but consistency of revenue and wins were lacking. Here is a smattering of products that the company is relying on to generate revenue in the future.

IPTV Infra (Basic) - By all accounts, this business has done well ramping to a subscriber base of 1.32m mostly in China. The problem is that UT has invested so much in their end-to-end system that the revenue generated so far has not justified the cost. Blackmore mentioned last year, “Our view is that these two product areas, NGN and IPTV are at the beginning of their life cycles and bookings can ramp fast. We are very pleased with the momentum they are gaining in their respective markets and believe the revenue for each of these product lines can grow in excess of 80% in 2008.” Its interesting that now, Blackmore makes the point that IPTV/NGN softswitch are mature in terms of their investments.

IPTV (cable) - The initial win was with Markwell in Taiwan. That was announced back in December of 2007 and just went "live" this year. Other cable wins in China were recent as well.

(translated) The tender was finalized before the Spring Festival, UT Starcom to become the project's platform and terminal equipment provider, and the South together with the media for the city of Canton 800,000 cable provides the platform and equipment. 其互动电视业务将与广东的省网现有单向数字电视业务紧密关联。 Its interactive television business will be with the Guangdong provincial network of existing one-way digital TV business closely related. 互动电视业务建立在单向数字电视业务基础上,依托同一HFC网络进行传输。 Interactive TV business set up in a one-way digital television business, based on relying on the same HFC networks. 而双向机顶盒需同时承载互动电视业务和单向数字电视业务。 And two-way set-top box is required to carry a one-way interactive television services and digital television business.

IPTV (digital signage, security) - There has been about 8 wins in digital signage and a couple in surveilance. Again, new revenue sources but size is small.

IPTV (mobile/iptv phones) - UTStarcom, Inc. (Nasdaq: UTSI) has been selected as the only technology supplier for the first Mobile Television (TV) system across Hainan province, driven by China Telecom's (NYSE: CHA) Hainan branch. This is the first large-scale Mobile TV system in China to adopt UTStarcom's end-to-end RollingStream(R) platform. The deployment is scheduled to go live on May 17, 2009, as an extension of the existing Internet Protocol Television (IPTV) service that Hainan Telecom and UTStarcom have been delivering since 2006.

UT is now focusing handset efforts towards iptv. Given the general CDMA market's low margins, high working capital/inventory risks, charges even just recently, this is probably a good switch.

NGN/FMC - Blackmore mentions on one of last year's earnings call, “Focusing on our NGN solution, this is designed to support the growing number of advanced voice and data services as we see tremendous growth in Internet traffic and the end of life of traditional TDM switches. We’ve designed our mSwitch to allow the provision of next generation services but also significantly reducing operating expenses of current products. mSwitch supports multiple call types over all access technologies and currently supports over 60 million NGN customers globally. While PLDT is our largest network transformation project to date, our success there is winning us new customers worldwide. For example, last year a major European carrier, Tiscali in Italy asked us to supply them with our MSAN equipment. And just prior to year end, the carrier asked us to replace their entire TDM switching network with our softswitch. This is obviously a very key strategic decision for Tiscali and a very strategic win for us. We are currently implementing this project with them. In quarter four, we also won our first NGN softswitch in Taiwan. Other recent notable contracts include Brasil Telecom, where our softswitch is supporting applications for fixed mobile convergence and IPTV, with TOT in Thailand, and also recently Nextel in Argentina. It is clear that this technology is gaining momentum and we believe we have the best performing softswitch on the market.”

Broadband (India) - The main revenue(cash) source lately has been from the BSNL contract in India (Phase I/II). We've heard about the recent extension of Phase II and possibly Phase III by year's end. From all accounts, India broadband is a consistent revenue source (although margins are low).

GEPON- "UTStarcom Deploys Largest GEPON Network in the World for Japan's Softbank" That was in 2004!

Over the years, there were wins in Pakistan (Sept 2007)
, Goa in India (May 2007),

China (July 2008)...The latest update in the last earnings call from Lu: "Moving on to broadband, we’re very pleased to be beating and are breaking through in our GEPON business in China. For example, we’re working with the China Telecom for GEPON contracts in the Jiangsu, Zhejiang, and Fujian provinces. We’re also looking at the expansion contract with the China Telecom for gigabit EPON in Ningxia Province and are planning the trial with the Hunan Province and Jiangxi Province. With China Netcom, we are expanding our GEPON business in the Heilongjiang, Shandong and Hunan provinces. We are pursuing enterprise opportunity for gigabit EPON and have won a small, but important contract with China’s State Administration of Radio, Film and TV in the Vinan Province."

Recently, Blackmore announced they were on the short list for 15 more provinces as they topped testing in 3 of 4 categories. Here is a recent article (June 12, 2009) on EPON in China..."World's larget EPON tender?"

8:55 AM -- China Unicom Ltd. (NYSE: CHU) is believed to have issued a tender for EPON equipment to support the rollout of 11 million high-speed fiber access broadband lines, according to a report from Interfax China.
If true, this is further evidence that China's EPON market is hotting up fast, and that Asia/Pacific's preference for EPON is ongoing, though China Telecom Corp. Ltd. (NYSE: CHA) is also checking out GPON's potential. (See China Telecom Uses AlcaLu's GPON.)
China Unicom is believed to have built out around 100,000 EPON lines so far, substantially less than China Telecom's 4 million lines at the close of 2008, according to Chinese vendor ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763). (See ZTE Secures $15B, Highlights R&D.)

PSDN - UT got 40% of the latest tender beating out Cisco/Starent. (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).

Transport Network (TN) - There has been build up of this product since last year on the analyst meeting. Recently, the company disclosed trials with Softbank and China Mobile to name a few. However, there has been no wins yet.


The company's investments in the above products have gone as far back as early this decade. As mentioned, PAS peaked back in 2004 so the company has thrown a lot of resources into various products and only now seeing some payoff. For years, investors have been telling the company to CUT costs because the revenues were not coming even though they had products (WCDMA trials went very well for example but 3G licenses were not issued until recently). So, now that the company has cut costs, there is concern about developing future products and maintaining customers. While management credibility is low and their performance is reflected in their stock (even today, it ranks as one of the worse performing US listed "China" stocks), I cannot argue with the cost cuts as I see their product line as being adequate. The timing of bookings and revenue are still questionable but initial wins and positions indicate there are enough products to support the new expense base. The company currently generates 80% of their revenue from 20 customers (compared to Starent having two customers make up 85% of revenue for example). The company's product line and depth of development over the years cannot be replicated with the current market cap. (I wonder what valuation they would get if they just become public with say $200m in cash, own their own building, have the above product line/customer wins, and projected to breakeven/become profitable in the near term).

It is a very unusual situation but the question remains can they convert the previous years investments/positions into bookings/revenues to become profitable and grow the business. One of the biggest negatives is their credibility/past performance and that is NOT easy to overcome after so many years so we will have to see.....

Have a good weekend.

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