Friday, July 3, 2009

2009 Shareholder Meeting Recap

I attended the shareholder meeting on June 25 at UTs Alameda office. Aside from myself, there was only one other shareholder that attended (last year there were about 10 shareholders). Peter Blackmore, Viraj Patel, Thomas Toy, Luis Dominguez, Susan Marsch, and Hong Lu were present (among others).

The meeting had three main components: Voting results, Prepared remarks from the CEO, and Q&A.

Voting results – Both directors and PricewaterhourseCoopers were re-elected/ratified. No details were given.

Prepared Remarks from the CEO – Peter Blackmore gave a brief overview of the company discussing the divestiture/closing of PCD and other non-core businesses, significant cash position, and fundamental change to the company simplifying its operations. He discussed the company’s market leadership in the China iptv market, specifically iptv signage. He talked about leveraging the company’s R&D to specific markets. Peter highlighted the India broadband market talking about the potential 200m broadband users, adding even if it was just half of that, it will be a huge market and UT is in good position. He mentioned the limited broadband market in China (position in China is not strong). There are also good opportunities with Softbank. As a recap, they had outsourced manufacturing and consolidated back office functions in China and targeting less than $100m in yearly operating expenses.

Q&A (Since there were only the two of us and the other shareholder had only one question, I had an opportunity to ask multiple questions as time permitted)

1. I first commented that for the last 4-5 years the company has not had an operating profit. Even when Barton was hired in 2005, the company’s near term goals then was to return the company to sustainable profitability. However, every year, the company falls short and does a restructuring. My question was directed to the board and asked if there is a point (limitation) to this cycle (especially in light of the latest significant cuts) that the company is better off sold or partner with other companies. I mentioned that the street is obviously concerned with the magnitude of the cuts and the company’s ability to operate.

Peter, being on the BOD, answered that their goal was to return to profitability as fast as possible and they had sufficient resources still. They could always ramp up in the future if needed and their R&D was targeted (as mentioned in the presentation). Thomas Toy added that the company is always willing to consider outside offers and mentioned there are not many companies in Silicon Valley that has 2000 employees.

As a follow-up, I asked if they were confident that they have more than enough resources and can operate with 2000 people, then why didn’t they make the cuts to 2000 people last year? (After all, we did meet with them last year talking about cost cuts). Peter mentioned the revenue projections for 2009 was off and we proceeded to the next question.

2. The second question came from the other shareholder and dealt with the company’s material weaknesses and ongoing concern from their auditors. Blackmore mentioned that they will end the year with a strong cash position and a pointed to the business model to get to profitability as addressing (hopefully) the ongoing concern. Regarding the material weakness, he mentioned there were still two that Viraj Patel is in charge of resolving.

3. My second question was addressed to Hong Lu. Since Peter was the CEO and the company had hired a China CEO as well, what, IF ANY, was Hong Lu’s day to day role? Hong mentioned that he was Executive chairman so he was still part of the management team. He is based in China, meets with customers, and continues to plan the company’s strategy. He added that he gets up early everyday and works with Peter very well. I followed up by saying that other shareholders I’ve talked to want him to be around since he is the founder and probably knows the company better than anyone BUT the issue here is there are two high priced executives acting as CEOs. I added that I would love to have 10 more people but this company simply cannot afford the cost. Hong responded by saying they are constantly looking into executive pay and that if shareholders were not happy, they obviously have a vote.

4. The next question was about the lack of revenue growth last year that led to the cuts at the end of the year and this year. Peter had talked about needing to ramp several hundred million to get to breakeven/profitability (without PCD and before PAS collapsed). I asked what those revenues he was expecting (what areas) and if those revenues are lost or just delayed. Peter answered that a major shortfall was the Korean designed handsets and that led to the winding down/shutdown. Peter also noted all areas in and outside China experienced a slowdown. I asked how the handset shortfall could be the main contributor since they kept on saying recently it had low margins anyway. How would that shortfall be the reason for closing a $130m profit gap anyway. Peter mentioned the lack of profit and loss was substantial if added up and again there was general slowdown in the world markets and hit all areas of operation.

5. Moving on to this year’s bookings. After the restructuring announcements, Peter had announced a breakeven point of $350m and that bookings in Q1 were good and Q2 was on track in China and ahead outside of China. I asked Peter that this doesn’t mean anything to investors as they don’t know what it means when the company says it has good bookings or tracking ahead? For all we know I said, your target is to lose $20m in 2010. Peter re-iterated their intention to get to profitability and that bookings were good in Q1 and Q2 but obviously they will have to wait for Q3/Q4. This is where it gets a little interesting. I said how can bookings in Q1 be good when core bookings were only about $65m. Annualized, this is only $260m, well below the $350m to breakeven. Peter was surprised and said that must be revenue and not bookings in Q1. I kind of looked at Barry to see if the numbers he gave was not correct. “I” tried to explain that the bookings in Q1 was $140m but half of that was in handsets so not part of the core (it was really weird since Peter was looking at Barry and there was some confusion). A day later, I was still trying to follow up with Barry and the resolution is they will try to give clearer information on Q2. I really hope so since it is the company directing investors to be patient and look at bookings and then still expect investors to guess and make assumptions on what a book to bill number applies to. Very confusing and unnecessary.

6. Next question was about the recent rumors about a Chinese handset maker/investor and that Merrill Lynch was hired. Peter mentioned that he doesn’t comment on rumors. I asked then if Merrill Lynch was recently hired. Again, they can’t comment only to say that Merrill Lynch is their ongoing advisor.

I could have asked a lot more questions but time was “up” and Peter mentioned if there were other questions, we could always schedule another call.

After the formal Q&A, I still had a chance to discuss certain topics as Blackmore, Lu, Toy, Dominguez, Barry, Viraj exchanged some small talk/greetings.

Share buy back – they are still against this. They commented the best thing for the stock is to get to profitability. I think most would agree BUT its hard when they haven’t been profitable in 5 years. I threw in a comment that they need to do some insider buying.

Peter mentioned that they can now (based on the restructured operations) get to profitability with just a little bit of core ramp. Isn’t this what shareholders had been asking for the last few years since the major ramp has not occurred.

IPTV- I mentioned that in Q1, China added 250k subscribers but UT added only 50k total (mostly in China but still low). Peter re-iterated they still had over 50% of the China iptv markets.

I asked Viraj Patel when the interim title goes away and he mentioned that we’ll see and they had a lot of work ahead of them first.

I missed asking Luis Dominguez anything.

The conversation with Toy was about a sale of the company but they can probably get a higher price if they get this thing turned around first.

In the parking lot, I even got to talk with Lu’s assistant and she was describing the sadness in seeing the company this way after the last few years. She mentioned how she understood shareholders losses as she bought stock in her employee account at $14 or higher as well. After I told her what I and other shareholders have lost, I think that ended that conversation. I reiterated my point that Lu has benefited from the company for years and needs to show leadership by sharing in some of the pain by cutting his salary significantly. Lu also has the most to gain from a higher share price.

BTW, this year’s food was also a disappointment. Just some cookies and drinks as compared to last year’s appetizers (budget cut?).

The above Q&A is obviously paraphrased but should capture the essence of the meeting. There really wasn’t anything materially new in terms of the operations of the company. I didn’t really expect anything new but wanted to share some of the investor’s concerns/questions with the board and other executives that are new or not aware of investor’s day to day issues. I’ll limit my comments to the above rather than make a big positive or negative statement. I won’t play psychologist and try to interpret various items/comments. It really comes down to performance and what they report anyway.

Have a great 4th of July weekend to everyone.