Sunday, November 22, 2009

Q3 2009 CC Recap

The transcript from the Q3 2009 call can be found in the following link:

The live broadcast and SEC filings can be found in the company website. I have talked to some institutional investors that communicated with management and will add some "color" to the information provided in the call.

Q3 Results - Revenue came in at $71m with 34% gross margins. The GMs included a $6.5m benefit from reversing some handset writeoffs for PCD. Factoring that, GMs were in the mid 20s. The expenses were $58m (with $8.9 restructuring charge and $1.7m non-cash charge for divestiture of Korea based handset operations). I'll have much more on the expenses and restructuring later.

Business Units - MMCBU had revenue of $22m and 46% GMs; Broadband BU had $16m revenue and 22% GMs. Services had $17m in rev and 44% GMs; Handsets had $16m revenue and 21% GMs. The overall revenues ($71m) is still lighter than the $85m needed for breakeven but the margins are close to their target of high 20s. The margins for the MMCBU was lower than last year(with PAS) but seems higher than what I expect with iptv STB. The mix this quarter probably had more software/infra component than subscribers, which support the lowered expansion in subscriber count for 2009. The highlight of the quarter was the 22% GMs for the broadband unit as they managed the BSNL phase II contract well and gives added confidence that the Phase III contract will have decent margins (as long as they execute well). The services actually increased revenue (from $14m to $17m) and had very good margins. Handsets were down significantly from last year (that included much more PAS/PCD). The GMs of 21% benefitted from the $6.5m reverse of writeoff. The company is de-emphasizing this lower margin business unit except for handsets specifically sold with their mobile iptv system.

Broadband - Peter Blackmore expects the company to take in a significant order for the Phase III BSNL multi-play project this quarter. Part of the order will be this quarter and the 2nd part around April 2010. Peter mentioned on the call that execution of this contract is a key focus and this will affect the outsourcing transition and result in significant shipments in Q1 2010. Additional shipments in Q1 2010 will be driven by the Transport Network (TN) win with Softbank. Together with better execution of the BSNL project, the higher margins with the TN product will drive the margins for the broadband unit going forward. Peter mentioned the TN product as having good growth opportunity and a leadership product (also "exciting"). There was mention that they are actively bidding this product on a number of RFPs, notably China Mobile, where they are partnering with Nokia Siemens (NSN). The margins with Nokia Siemens will be lower but give them a better chance of winning part of the China Mobile tender and break in with China Mobile. NSN has been a major supplier to China Mobile but they don't have the TN product. Other partners of NSN such as Juniper do not have a competitive product as well.

Additional specifications/marketting materials on the TN product can be found in the UT website (this is additional items from what I linked to previously).

Aside from the TN 703, 705, and 725 products, there is a 735 product with 240GB/s switching capacity not formally announced yet. IR has mentioned providing access to UT engineers for technical questions from the industry on the TN product.

In South America, Peter discussed the recently announced Logicalis sales agreement leading to projects in Argentina, Paraguay, Peru, and Chile for their IPDSLAM, MSAN, and GEPON products.

IPTV - Due to spending focus by Chinese carriers on 3G, iptv momentum in 2008 did not carry forward to 2009 although Peter believes there will be a return to significant iptv investment in 2010. There was a recent win with the Beijing SARFT and chosen as solution provider in 4 cities with (CCTV/Hunan). They were selected as a preferred vendor by China Telecom to deploy the new STB Standard 2.0 (this would allow them to compete for STB business with other iptv systems). Also, "And in Guangzhou, the capital of Guangzhou province recently launched the IDTV service, SMIC, the Southern Media Group and this is the revenue sharing model, we share in the advertising revenues, and we are expected to expand the service to other cities throughout the province."

Restructuring - The employee count is down to below 2700 by the end of October from around 4300 in June. The company will continue to reduce headcount in Q4 and Q1 2010 (probably 500 in Q4 and another 300 in Q1). SG&A for Q3 stood at $33m and R&D at $14m. The target model is around $11m SG&A and $14m R&D. Based on the 10Q, $35.143m of the announced "2009 restructuring" has been recorded but there is still $19.8m balance (cash to be paid out). For the 2008 restructuring, there is still a balance as well. So, for modeling cash and book value going forward, there is still $24m in cash to be spent on restructuring that have been charged to book value and another $5m to 10m in charges/cash to be added (to get to the $40-45m they announced back in June). The company is down to 1 building from 3 in Alameda and will probably maintain 30-40 employees in Alameda. The company "formally" announced in the call that they are looking into moving the HQ to China.

As a side comment, Barry Hutton, UT IR left the company (last day was Friday). They still have offices in Rolling Meadows and in Miami for the Latin America/International sales force team.

An outsourcing vendor has been selected and a PR on it is coming.

Other items - Peter talked about adding new board members and the potential sale of their building in China but no new information on that front.

Company Credibility/always LATE - For years, I have been against the poor BOD and management. Unfortunately, this has continued during Peter Blackmore's tenure. Lets look at just some items that have been executed poorly or "late".

Divestitures of holdings such as Infinera, Gemdale, and even PCD.
Filings and accounting issues that added tens of millions in interest costs.
Last minute transfer of funds from China.
Restructuring and expense cuts time and again.

There is just a corporate culture of being behind the curve and acceptance of poor performance and no accountability. Up to now, I still cannot believe that Lu/Toy and the rest of the BOD are still there with no major changes.

Peter has done things that shareholders want such as the restructuring/focus on core products but he has been late again. I believe he is on the right track and will eventually get there but in the meantime, the company has racked up over $1B in negative retained earnings and the book value has plummeted from the $700m+ level to less than $300m in 3 years (despite the investment gains).

Book Value/Cash flows - Despite the above issues with the BOD/management, the company is incredibly cheap. As of Q3, the company had cash/short term investments of $241m and $296m in stockholder equity. For the next two quarters where losses are still projected and the restructuring is to be completed, lets evaluate the book value/cash. Cash usage for the restructuring will be $24m + $5-10m (for 2008/2009 restructuring). Cash usage for the losses in Q4 and Q1 (say $30m - just a guess). They will bring in $3.5m for the Starent settlement. So, by end of Q1 2010, cash can be down to the $180m level. Because $35m of the $40-45m has already been charged, shareholder equity will decrease by only $10m (upper range of restructuring remaining) - $3.5m (Starent gain) + $30m (Q4/Q1 loss). That will leave shareholder equity at $260m. For 2010, there will be over $100m deferred revenue to be recognized + cash generated from BSNL Phase III so both tangible book value and cash should not be reduced and may start turning upward. Again, this is just my evaluation of where the bottom in cash and shareholder equity will be ($180m and $260m). That compares to the $245m market cap the shares are trading at. So, they are trading above cash based on Q4/Q1 losses and restructuring cash expenditures. But the shares are trading lower than book value even incorporating the Q1/Q4 losses/restructuring charges.

The negatives offsetting the valuation is the BOD/management and their culture of underperforming. Have they done "good things"? Absolutely, such as selling investments, non-core businesses, cutting expenses massively, refocusing on China but they have ALWAYS been late and lateness comes with a price that shareholders have taken the bulk of the brunt.

Company status - There is a powerpoint presentation on the company website on a Sept 30 2009 roadshow.

95% of the material is what has been posted/discussed in the past. However, it does show major operational differences from the years past and the current situation. The customer list is still broad and targetted at the high growth markets. The product line-up is sensible and there is a renewed focus in China (broadband and overall company basis). The company is emphasizing China, India, AND Japan again so there is a renewed traction in Japan with the TN product (margins emphasized). There are still major questions on whether the upside can justify the expenses of the last few years or even now (given their company culture). It is easy in the past to cite a lot of links to technology or worldwide growth in related sectors/products but for UT, it comes to are they in position with their current customers and products (and can they execute). I am not in this investment for the current management/BOD but for traction in their products with their current customers/geographic markets. I am also not for a quick sale based on declining cash/book value because as the above indicates, this is near the bottom (for now). In the next year or two, the company has to either show progress in adding to the tangible book value or there is no turnaround hope anymore.

A lot of the sentiments (above) are what shareholders have discussed but hopefully, it has been quantified a little bit more and provide some metrics to track for the next few quarters.

Have a good rest of the weekend.

Tuesday, November 17, 2009

Institutional Holdings/Activity

The following link shows institutional activity as of the end of the 3rd quarter (9/30/09).

Shah Capital, the #1 UT holder, increased their position by over 1m to around 7.5m shares. It is interesting to note that they are concentrated on China and their #1 holding is a major winner this year, China Yucha, Intl LTD (CYD). That holding alone is worth around $36m! For each $1 that CYD goes up, thats a $2m gain, enough to fund buying a million shares of UT every quarter.

I don't know what Shah's intentions are but I hope they use it to motivate the board/management to think about shareholder value for once. In addition, with the low volume, low share price, and their major wins this year, Shah could literally have a ball with UT stock. I would not bet against these guys.

Friday, November 6, 2009

NSN partnership

UT announced on yesterday's Q3 2009 earnings call a partnership with Nokia-Siemens.

"We are bidding this product actively in a number of current RFPs. Most notably, we are pursuing the China Mobile tender, which is already gone out to RFP stage, and we are doing this through a joint partnership with a new partner we have in China, Nokia-Siemens."

There will be some institutional calls today with management and I've fed some of my questions to them and one of them is the NSN relationship. Why do they need them for the China mobile TN bid when they won the other contracts without anyone else? Is this a case where the RFP stipulates some added requirements that UT cannot fulfill and highlights UTs weakness or lack of experience.

How is the partnership with NSN structured? Does it mean NSN/UT will team up in NSN's backyard in the future, thereby giving UT another outlet to sell their products. NSN is a huge entity with 64000 people and they are planning to cut 6-7k to save $700m/year. They are looking to partners/acquisitions to drive their strategy going forward.

So, UT is partially adressing the "scale" issues by partnering/signing sales agreements (DESCA/Logicalis). Ultimately, if this NSN partnership works out well, NSN could just acquire UT seeing UT's cheaper labor workforce in China and the technology/client base they have is more cost efficient.

I was out during yesterday's call and will post a summary of the Q3 2009 call this weekend. That will include some information/clarifications from institutional calls today.

BTW, there was NO one asking questions yesterday. UT has become irrelevant and something the management/BOD is responsible for.

Sunday, November 1, 2009

Discussion on sale of UT, its prospects and GM situation

This is my response to some message board chatter:

"Must have been the board exams working on your mind."

I dont doubt that Flip. I'm still recovering after the 160 questions in 8 hrs. I just don't get why it takes them 13 weeks to get us the results....O'well alteast it won't ruin the holidays if the results are bad.

"I see no reason why the company could not be sold now for more than the current trading range. If I wanted a company with cash, no debt, technology, a global footprint and a US listing, I would be willing to pay over the current price.....if the company was for sale. The point is, the company is becoming worth less every day given the cash burn and lack of revenue."

Again, this is flawed thinking. The company was burning $50m/quarter for quite some time so we knew their book value was going down. However, did you buy the company for their "value" or for the potential turnaround and increase in profits? For any tech company, I would argue that people don't buy it for their book value but more for upturn in their business. Actually, for most tech companies, its the "cycle" in their businesses. The memory companies for example do really well as memory prices stabilize and move up. You can't even touch those companies at ANY price if the prices are falling but they are like gold when it is increasing (look at SandDisk, WDC, and STX for ex.).

The question with UT is not about management/BOD at this point but whether you believe there will be an up cycle in the next 2-3 years. Have they atleast put themselves in position to take advantage of the boom in 3G, iptv, broadband, etc. I continue to be negative on the board and sometimes Blackmore (for not acting quick enough and no defense of the stock) BUT, I didn't really invest in those things 4-5 years ago and definitely didn't invest in those the last 2 years.

I could and have been wrong on the ramp of the business but that doesn't mean it will never happen. There is a significantly higher chance of success after this current restructuring, move back to China, focus on certain markets/products than at anytime before. I'm sorry if you don't like my optimism but I am more focused on the business than whether they can be sold for $5 (we talk about it but thats not the main focus).

You and others can focus if the cuts were too much or too little but does it do the company any good in producing products that were way ahead than before? I am more interested in quality of contracts with higher margins than just getting contracts. I am more interested that their breakeven point is $350m rather than $750m or over $1B in revenues.

As I've said before, the company has already lost its chance to become the next Cisco, Huawei, etc a LONG time ago. The question is whether they can be profitable and have a nice niche position/business model that could potentially accelerate as markets/products ramp. I would not have a problem bringing up the potential sale when it actually is meaningful (when the stock is much higher and business has turned around). Even earlier this year before the restructuring, there was a potential sale but definitely not now. Anything is possible but it would really be idiotic at this stage.

I end this posting with some excerpts on a very good article recapping the GM bankruptcy/restructuring by Steven Rattner (in the latest Fortune magazine). Steven Rattner led the government takeover/bailout of GM/Chrysler. In it he talks about the GM board:

"It seemed completely obvioius to us that any management team that had burned through $21 billion of cash in a year and another $13 billion in the first quarter of 2009 could not be allowed to continue. Equally important, GM's February viability plan was more "business as usual" and not the aggressive new approach that we felt was essential."

He ends the article by saying, "Like any patient that undergoes major surgery, a successful recovery is far from assured. .....In the case of GM, the overacrching question is whether, without infusion of new blood, its management team can implement the massive cultural change that is essential. But by dramatically lowering the break-even point for both companies, we believed we were creating a healthy margin of error."

This is really the question for investors right now.

Have a good rest of the weekend.