Saturday, March 7, 2009

Viability of the company - Plan B

The stock closed at 70 cents this week, and hit a low of 64 cents on Friday. Down another 62% this year to a market cap of less than $90m, the street is telling us this is not a viable business going forward. Lets look at some of the ugly numbers/facts.

1. The company is projecting revenues in the $120-130m for Q1 and a loss of $50m. For a company with a market cap less than $100m, that is staggering.

2. The company is projecting continued losses for atleast the next 4 quarters and is not projecting breakeven/profitability until 2010 at the earliest. Since 2004, they have been predicting profitability a year out.

3. S&P has a $1/share target price and Jefferies has an even lower $.75 target. S&P notes the company will probably lose $200m more in cash in 2009 bringing cash levels to the $125m at the end of the year, and hence their $1 price target.

4. Company head count is still over 4300 after this recent headcount reduction and opex at best will be down to the $60m by Q4 of 2009.

With the stock in the 60-70 cent range, the company has not come out and discussed the stock price or shown any sense of urgency. The cycle of cutting cost and being behind the curve doesn't seem to end. This is even more disturbing because of the current state of the world economy and their competitive position.

How can the company get to breakeven when they so far could not when they had much higher PAS sales, China markets were booming (stock market went from 1k to 6k), and competitors ZTE/Huawei were much smaller?

Management and the board could not turn the ship around and unfortunately for shareholders, it is up to us to salvage what is left. Should we continue to "hope" that they can turn it around and risk looking at a situation where their cash is below $100m, revenues even lower, and options much worse? At the current stock price, the street has already made up its mind. The company is not viable and we shareholders need to act now.

I first talked with Peter during the 2007 November shareholder meeting and discussed with the management/board the background of the failed strategic alternatives. Basically, the company could not find a buyer that would offer an acceptable amount for the entire company and have it close, citing the bad economic environment/real estate problems. It was bizarre because this was in late 2006/early 2007. But then again, who would buy it when they had all the filing/investigation issues ongoing and yet to be announced. The only viable revenue stream was PAS so essentially they were asking somebody to pay atleast $1.2b (lets say $10) for PCD and the technology. In any case, if they broke it apart even then, shareholders would have been better off with $10 or even $8 or $6.

Throughout 2008, the stock was already in the $2+ range so the issue was still can the company be competitive and get back to profitability. Management was very confident in achieving their expense metrics and increasing the revenue base despite repeated questions on the PAS decline. Barton had a "plan" for 2009 and beyond that supposedely took into account PAS declines and expenses would only be cut incrementally. It was always two steps forward and one step back for them. Barton was so important that his yearly compensation was around $3m! The board vehemently defended his salary to shareholders last March and a few months later he was gone.

The above is just a sample of events (and as I summarized for Blackmore last March), it goes way back to 2004 and Barton in 2005 with all the failed projections. Barton always insisted they "met" his projections quarterly. Yes, they did because after they met expectations for one quarter, they projected such a massive shortfall the next! Sound familiar?

Anyway, when I formed the "exploratory" group to enhance shareholder value, we had good traction at the beginning and the company was able to sell PCD, improve performance for a quarter (they actually announced exceeding estimates ahead), and the stock shot up to almost $6. While many called for "Plan B" at the time, we were operating under "Plan A" because that was most logical at that stage and most institutions were happy to see if the company can still turn around (some had just bought in the $2s and were obviously happy with the price increases). I myself was hoping that UT can atleast get to breakeven and negotiate a sale when the stock was much north of $5.

With the turn of events last year and material changes to the markets/world economy, and obviously with the stock price, those hopes are gone and we shareholders must now transition to "Plan B". I again reiterate my tremendous disappointment that we must do this. It ends my hopes that the company can turn it around but in order to maximize shareholder value at this stage....

With the help of other institutional holders, we are gathering the shareholders for discussions on how to proceed. We definitely want to meet with Peter and the board when he gets back from China (he has a two week trip plan).

To all the shareholders out there, I understand your pain and the institutions that are on board share your pain and we will try to do whats best for shareholder value, something unfortunately the management and board have failed all of us.

I end this post by asking for all of your support in the group. The retail shareholders make up a significant amount of the outstanding shares and your voice must be heard.

I can be reached at if you want to send a private message. Currently we are contacting institutions in the top 15 holdings but welcome any institutional holder that share our frustration.

Have a good weekend.