Tuesday, February 23, 2010

Borqs Acquisition?

What to do with UTs cash? Well, there are rumors that UT is planning to acquire Borqs...

"Set up in September 2007, Borqs is a leading mobile software developer. It developed OPhone OS operating system for China Mobile Ltd. (SEHK: 0941 and NYSE: CHL)'s TD-SCDMA mobile phones, mobile Microsoft platform Mobile Widget, cloud computing platform Big Cloud, as well as mobile Internet application services Mobee."


The company has "denied it"...


The company had $241m in cash/short term securities at the end of Q3 2009. With $130m (from the building) and $48.5m (from new investors) coming in, that would put their cash at about $420m. Cash flow will be impacted from the completion of their restructuring and additional losses but it will still have sizable cash levels. Cash flow from India Phase I, II, II extension have yet to be fully collected so cash levels could be higher than what I projected in the last post.

So, what to do with it? Some have speculated vendor financing to drive revenue up. Some have mentioned it could be wasted on low margin contracts that would not do much for profitability. Despite its very slow transformation and recovery, the company has shown it is trying to address the gross margin situation by discarding low margin operations, even the handset making business in China (except for the iptv handsets). It has formed partnerships in South America and Europe in the last 6 months or so and have newer products (TN) that will improve margins. The outsourcing deal adds to this focus on margins. If the lower margin products (broadband mostly) get them market share and continue to serve their existing/future customers, and enable them to upsell future higher margins products, then that is a practical strategy. In any case, the management does seem to get this and the actions support it.

Now, with new cash, the company can be more aggressive in acquiring pieces to get them into higher margin sectors (software/services) or solidify their product offerings in mobile advertising, iptv, cable, convergence (Analysts believe that UTStarcom is aiming with IPTV to replicate the success it had several years ago with smart phones and that it will benefit from China's recent move to integrate the telecom, broadcast and Internet networks.).

Wednesday, February 17, 2010

Updated Cash/Book Value

At the end of Q3, I made some projections on cash at the end of the restructuring (end of Q1 2010) and taking additional losses in Q4 2009/Q1 2010.

"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."

Due to the building sale and issuance of new stock, the company will receive an additional $130m + $48.5m = $178.5m. That will take cash after restructuring and additional losses due to unprofitable Q4 and Q1 to $358.5m. Lets round to $350m since there are settlement charges + bonuses/severance to Blackmore/Viraj. Divide this by 150m total shares, and you get $2.33/share in cash.

Book value is much less. The last estimate I had was around $260m in book value after Q1 2010. Factoring in the $35m of loss in the building and $48.5m in cash infusion would yield around $273.5m. Dividing by 150m total shares, and you get $1.82. This would be less if my loss estimates are worse than $30m for Q4/Q1. However, there is discussion that the deferred revenue could significantly add to the book value when it is recognized.

If there are $200m of PAS deferred revenue to be recognized at margins of 40%, that could add $80m to the book value and move the book value to about $2.35/share.

Ultimately, the cash and book value will not matter if the company becomes profitable or really fails to get any business traction. However, for the near term, the cash/book value of around $2.3s reflects a good cushion for buying shares in the $1.8-2.2 range (not to mention new investors paid $2.2/share).

It will be interesting to see what the company does with the more than $350m in cash and new relationships going forward.

Wednesday, February 3, 2010

200th posting; UT in position, add shares!

The significant events of the last month (sale of the building, outsourcing, new CFO, SEC/DOJ resolutions, new board members, new investors, new CEO) are major changes no matter how you look at it. However, the stock is still stuck in the low $2 range. I think this will dramatically improve as the operations coming from these changes improve and institutional investors cross off negatives that prevent them from coming in.

It is not shocking to see posters on the message boards are still quite negative at this stage. However, one of the few positive posters, "Shadow" (who was accused of being "arrogant") stated:

"Don't mean to be arrogant. Just tired of guys posting how they want instant results from corporate management now. This company is clearly in the midst of a complete reorganization with outsourcing of products and reduction in head count from 8000 to 2000 or less. Products eliminated, sections sold off, legal issues resolved. What a mess it has been. So, we are, I hope, near the end of a multi-year debacle. What difference does another 3 months make in waiting to see the results? If you believe in the company's products and broadly outlined business plan, then 3 more months doesn't really matter. If you don't, why would you want to continue to own the stock?

Looking back on all the things that have happened, I am just happy the company is still in business and has IMHO a good chance of doing very well in the next few years. I never expected the company to have the problems it has had. Apparently, neither did management but every time they turned around there was another problem...accounting, bribery, insider trading, unexpected more rapid decline in PAS with premature terminaition, etc. etc. etc. You may think in that environment, CEO should still have been able to increase sales. What if the chips you need for your need PON products are delayed by 2 years? What if your largest customers become biased against you because you are a "foreigner"? Tigre points to Baidu as a foreign company successful in China. True, but where is the Huawei and ZTE in their industry that they had to compete against? I never pump the stock.....if people want to buy, fine, sell, fine, none of business. I just try to find things that apply to company. Some of them were really bad, like when MII decided only 3 companies would be allowed to provide DSL in China, and UTSI was one of the odd men out. Told to take back all of its already delivered DSL even. That is one of the reasons I think UTSI could never be considered indigenous to China, no matter what. ZTE, Huawei and Alcalu (ASB) are already considered indigenous and there is just not room for a fourth, at least in the telecom industry. Hope it is different for cable industry, but no guarantee. Risk remains high, but reward if UTSI is successful, will also be high. That is the nature of speculative investments. Have a nice evening. Shadow"

My response is the following:


Most shareholders actually share your sentiment despite a few negative posters on the MB. Most institutional shareholders have stayed put or added during the last 2-3 years. UT markets are intact but have not ramped up even in the last 2 years where management expected/hoped it would. The difference over the last year is that management has been aggressive in cutting costs, putting in flexibility/liquidity in the company to withstand the tough credit environment/competition. I think they are where we wanted them to be 2-3 years ago, which is to be in position to take advantage of any ramp in various sectors in their markets. Here is an article on China Telecom expanding iptv trials.


Five years since their win in iptv and iptv is still at this "early" stage. That is just one of many product lines/customers that have not yet come in. PTN is another that has been delayed or just started. About a year ago, I was just hoping for a small window of outperformance to make UT more salable but the recent events show they are positioning themselves for a more stable future (which doesn't have to involve a sale). That said, on a personal note, all of my buys above $1 for the last year have been traded but now bought yesterday at $2.12 for the longer term. I think there are a lot of issues still at UT with regards to institutional investors getting introduced to the stock. There is still the remaining internal controls/ongoing concern stamp on their company that should be resolved soon. There is the lack of profitability that prevents institutions from buying. Thre is the low/non-marginable share price, etc. etc. However, I have more confidence that it will be resolved in the longs favor over the following quarters and the big reward will come just as people feel the most frustrated (maybe now). I agree with you on the big potential rewards and think UT can reach $6-8 (maybe more) in the next 8 quarters as the issues get resolved, better quarterly performance come in and institutions see the potential in their markets. I'll get more aggessive in trading in the $3 range when the volume should be in the 2-3 million shares. Right now, its all noise with little volume and its accumulation (a few thousand shares) based strictly when certain longs get frustrated and decide to give away shares after so long.

Have a good rest of the week.