Saturday, July 11, 2009

Focus on Blackmore and China

The biggest news for UT during the first half of the year was the restructuring that took place taking their employee count from the mid-4000 level to under 2000. This will result in an OPEX run-rate of less than $100m going into 2010.

Let me highlight a few metrics from the Q1 report:

IPTV slowdown - Total subscriber for UT only increased by 50k in Q1.
China revenue - Total revenue of $50m and this included some handsets/PAS.
Softbank/Japan revenue - $6m.
India/others - $20m

About a year ago, UTs quarterly OPEX still hovered around $120-130m. The company sold "non-core" businesses and closed/merged others but basically the revenue lost was mainly from handsets/PAS and show that the previous year's "investments" and the company's projections of the ramp in growth of non-PAS/non-handset businesses was way off.

Here are a couple of articles showing the growth in ZTE/Huawei over the years as well as expected growth in the China telecom market in the next few years.

"Huawei and ZTE benefit from the fact that the Chinese government holds stakes in dozens of local phone companies. It is not surprising that these telcos increasingly buy much of their infrastructure from homegrown companies. Financially, China's telecom suppliers also benefit (like some struggling U.S. companies today) from tax rebates and R&D grants. But what really irks rivals are the government's low- to no-interest "loans" that needn't be repaid, and the deep discounts local companies get on the energy and raw materials they purchase from other Chinese companies. According to public filings, this year ZTE received a credit line from the government of nearly $15 billion. Beijing bestowed $10 billion on Huawei in 2004."

"If the Pyramid team's projections are accurate, China Mobile is on course for annual revenues of more than $110 billion in 2014, up from nearly $70 billion in 2009.

China Mobile's position will be underpinned by a 7.4 percent compound annual growth rate (CAGR) in mobile subscriptions that, Pyramid's analysts estimate, will see the Chinese mobile market hitting the 1 billion subscriber milestone in 2012, and reaching 1.1 billion in 2014, when the mobile penetration rate will hit 80 percent, compared with 52 percent at the end of 2008."

Ericsson Scores GPON Wins in China -


I talked with shareholders this week, some of whom had conversations with Peter Blackmore. The discussions centered on similar long time issues but also on how well position UT is to compete in the China market. Blackmore's tenure started when the stock was in the mid $5s and while he has simplified the company and reduced OPEX, there are major issues on credibility and ability to ramp up "core" revenues (or even bookings at this stage). This is an important issue because the center of growth in the telecom world will still be China/India. Does UT have a viable wireless strategy? It gave up on 3G/WCDMA, wimax, and now most of its handset plans. Its main strength from a technological point of view is iptv and broadband (GEPON/TN).

From the same article above,

"Both operators have already been offering packages using various combinations of voice, data, and IPTV services, and now with the new line of services acquired, they can offer quadruple plays at an attractive price point to high-end users," notes Yu.

Indeed, both telcos have been rolling out fiber aggressively since 2007 and continue to do so. Pyramid predicts that FTTH will increase at a CAGR of 104 percent between 2009 and 2014, taking the number of users from 1.5 million to 50.8 million.

The number of UT employees even after the restructuring will still be around 2000. This is still much more than other companies such as Sonus, Infinera, Starent, Sigma Designs, etc.

I had campaigned recently to remove Lu because of the performance of the company over the last few years and if Blackmore was on the ballot, I would have campaigned to remove him as well. Its all about performance after all.

Despite the bad performance over the last few years, I actually feel more optimistic now because the cost base (whether it was by choice or forced on the company) has been reset to realistic revenue projections without hoping for a major ramp. Investors are correct to bash management and point to focusing on their own compensation/job security. The flip side is they took a major hit by doing the last restructuring. They are maintaining a net cash balance larger than anytime during the last 4-5 years and the OPEX will be down to the lowest level.

Like most shareholders, I am frustrated with the stock price and the indifference the company seems to have on it. However, I have to look at the base assets/numbers/growth projections of their markets. I believe that Softbank will increase their orders materially in the coming years. I believe that the iptv/fiber market in China (alone) should be able to grow materially and produce sustained profits. I believe there will be significant demand-driven growth in the coming years that will reward the company that has reset their cost base to 1/5th the expenses it had in 2008. Ultimately, this will power the stock price much higher.

Will this happen overnight.......No. The company has to show by bookings and growth of their core business that even this current target expense is realistic/optimal. One last note. The volume the last couple of days has been the lowest ever showing a wait and see attitude from investors. The price has also declined as the market has gone down 4 weeks in a row. Without news from the company, it doesn't seem the stock can gain traction but I do like the way the first half has played out for UT.

Have a good weekend.