Wednesday, March 31, 2010

Revenue and Earnings Growth

There have been numerous things that were accomplished during the last few years such as the restructuring (like the 5th one in the last 5 years), resolving accounting/filing issues, legal matters, raising capital (Softbank China, Gemdale sale, PCD sale, Building sale, and new stock issue/new investors), and moving to China/getting new BODs. There are still some work to be done on the cost side/restructuring but basically, the main issue now is can they get to profitability, sustain and grow revenues.

The company's model is to have around $350m in revenues, high 20s GMs, and an OPEX under $100m per year. Blackmore has repeatedely mentioned that the cost targets should be achieved by the end of Q2 when the restructuring will be completed, outsourcing in place, and headcount down below 2000 (maybe around 1700). The company has also worked on improving GMs by getting out of the handset business, improving execution on the new BSNL contract, and relying on new products (line of TN products). During Q4, GMs were already at their target range including the deferred revenue (low broadband margins offset by higher pas/iptv margins). On a side note, Huawei's GMs for the last two years were around 40%.

So, in order to drive to profitability, revenue growth is a priority. The company is confident it can get there by Q3 due to the deferred revenue (and lower expenses by that time) but the bigger question is can it sustain it without deferred revenue. The fact is the company will always have deferred revenue just based on the nature of their contracts. Without the $100m in deferred revenue, they would still have $250m this year in "non-deferred" revenue. The company should be able to replace the deferred revenue with the upcoming Phase 3 contract.

Where is the company going to derive "additional" revenue? The company has also layed out that plan and its to do vendor financing to land larger deals. At first glance vendor financing has its drawbacks but done properly, this has a good chance of working. Why? First, other companies like Cisco/Huawei do it and still get very high margins. For their customers, the margins are not as important as getting financing! With $400m in cash, UT is now in a position to go to banks and get low interest loans and do vendor financing. The areas they will be targetting are iptv cable in China and Softbank (TN product/others).

Projections for iptv in China (telecom/cable) should be very healthy and broadband in India as well.

The number of IPTV subscribers in China will double this year to reach 8.5mn by the end of the year (up from 4.4mn in 2009), according to a new report from iSuppli.

"According to me (Vijay Yadav), within next three to five years broadband usage should reach a minimum of 100 m subscribers"

While UT has a good market share in broadband, the payoff will be in iptv and its related services once the number of broadband users expand in India. This will be another area where the additional cash will help going forward.

Revenue growth/impact to earnings - In order for the stock to move higher from here, it has to start generating revenue growth and profits (hard to imagine after all these years). The company has detailed certain time frames for the closing of the building sale/new investor shares. Once that is completed, they can focus on discussing getting their loans (if not already). At that point, it will be about execution as they have more control now of getting profitable contracts and can control their revenue/performance better. Every $100m in new revenue will represent a 30% increase from $350m and yield about $30m in additional gross profits (more if it is tilted to higher margin TN/iptv products and lower if its mostly broadband products). While $100m is large for this company, its not in the overall telecom world (as evidence by Huawei's $18.9 B and $21B revenue the last two years).

Back in 2008, the stock hit almost $6. Looking back, the company was in terrible footing. Without PCD, the company was losing $130m. It was still relying on $250-300m in PAS revenue and the major worldwide recession was still to hit. The company projected needing hundreds of millions in new revenue just to break even and their projections for 2009 was obviously off. This time, the projections could still be off but the much lowered expense by Q3, the existing revenue/deferred revenue, and potential for large revenue increases through vending financing make it more credible that they are on better footing (in terms of getting to sustainable profitability).

We will see if they can execute on their roadmap and start building some consistency/credibility/better performance. As UT CEO Peter Blackmore has said, the heavy lifting has been done and they just have to ride the wave in growth in China/India. Most investors are still cautious as they should due to the history of the company but I think the "ride" should be a lot better for investors going forward. So, how come we aren't at $6 yet :-)

Monday, March 29, 2010

Summary of items from the last earnings call

Here is a comment from the message board today by a longtime shareholder, Flipocrat, and my response.

"I would be very happy if someone could talk me out of these concerns, because I had looked to the last cc to address all of this, but heard nothing really useful, just more generalities."


I heard a bunch of useful things such as:

1. Restructuring to be completed by end of Q2.
2. OPEX yearly run-rate of less than $100m will be achieved by end of Q2. This includes factoring in rent.
3. On the Q&A, there was a question on profitability/cash flow and Peter answered that Q3 should be the breakeven/profitable point.
4. BSNL which is around $120m (from my talk with Peter and other inst. investors) should be signed in Q2.
5. IPTV demand is going well with STB orders picking up. The company mentioned they have 44% market share and a 3rd party estimate shows a major growth phase starting in 2010 continuing through 2014 in China.
6. Two areas that they will use their cash to boost revenue are IPTV cable and Softbank. Both are very credible as the company has strategic positions with both and have the cash/technology to determine their faith.
7. Beijing investment to close in April.

UTSTarcom CEO Peter Blackmore has been straightforward in what he wants to accomplish and how he is going to get there. The problem has been the execution, which has been poor and that has led to credibility issues but overall, they are doing what he has set out to do. With Q1 closing, there should be a lot of items to check off for the next couple of months and then they are at operationally where the company should be.

Sunday, March 21, 2010

Call with Peter Blackmore

I had an opportunity to talk with UTStarcom CEO Peter Blackmore last Thursday, 3/18/10. Linda Rothemund, UT IR manager set up and joined on the call. The call started a little bit later as they were running late but I very much appreciated them accomodating my noontime call request. (The following are not in a particular order and I have added color from listening to earnings/Roth conference calls.)

The call ocurred a couple of days after the Roth Growth Conference and the company's own earnings call the previous week. While the conference was a "growth" conference, I had heard that the investors in this conference also looked at turnaround stories. I asked Peter how was the Roth conference? Peter met one on one with atleast 6 investors/institutions. The investor's biggest concern was about execution going forward. Peter reiterated a few times on our call that this was the right time to do these types of investor conferences as the company is mostly through with the heavy lifting. Are they planning more going forward? Yes. In the Roth conference, there was a question regarding growth and basically why it was worth investing in the company. Peter answered that the company's enterprise value was negative, almost all the heavy lifting was done and basically a disconnect with the stock price since they were in leading positions in China and India in certain areas.

I had commented to Peter that credibility was an issue up till now and that the few metrics we heard such as the BSNL project and the restructuring being completed last year were both delayed. He assumed responsibility for that but did not see it as a big delay in the big picture.

On a side note, my own thoughts on the conference was that it was interesting to see Peter try to sell the company to new investors ...almost like me trying to defend the company with the same line of reasoning. Nice to see him work but then again, its not a fair comparison since he has gotten paid and I and a lot of shareholders have not.

Ok, moving on....BSNL contract. Phase III has been delayed due to BSNL management change. How confident is he that they will lock this in? Are there other bidders? The Phase III contract is part of a master contract that included Phase I-III with UTStarcom is the sole supplier. BSNL needs the equipment badly so will have to order it soon. After Phase III, then its open bidding. The amount is around $120-130m. Its possible that BSNL will not sign it but not likely. I asked what the margins are? In the 20s. What are the payment terms? Better than Phase I and II. Peter explains that there are new accounting rules in India that will benefit all suppliers as the equipment/software (service?) are separated. On the Roth call, Peter talked about the 900 cities that they have serviced and the technical challenges they have overcome so the Phase III is just finalizing the contract, which he mentioned in the earnings call to be in Q2.

Deferred Revenue - Phase 1 and 2 BSNL was around $200m total and they have only started to recognize Phase 1. From the past, I think Phase 1 was to be recognized in the next 8 years? Phase II about $3.2m or $3.6m/quarter for the next 5 years. The rest of the deferred revenue is PAS and IPTV. I asked Peter if it would increase book value once they are recognized. I don't think I put this very clearly but Linda definitively cut in (thank you) and said it will increase it. But since margins for the bulk are not high, the impact is not significant.

Cash collection this last quarter - I was trying to get more color but basically just good cash management/collection as some products were accepted and they received further funds. Peter reminded me about the restructuring amount that was already booked but cash yet to be paid out. I mentioned that I think it was still $20-25m and moved on. Peter was more upbeat on the Roth call than the earnings call I believe. In the Roth call, he had time to break down the quarter as almost breakeven and discussed the cash in more detail for the new audience. In the earnings call Q&A, he mentioned that cash should mimick the P&L more closely in the coming quarters after the restructuring (I guess barring a large order and material buy).

IPTV/Cable - With previous products and lack of traction, why does the company think this route has a good chance to succeed? Why can't Huawei/ZTE get in as well? Peter mentioned the fragmented cable industry, their ties to SARFT, Huawei/ZTE have bigger clients in the telecom industry, UTs overall better IPTV product, and service model/revenue sharing (advertising) experience/first mover advantage with Southern Media cable as all reasons he thinks they can be successful. All 6 cable iptv wins were still the traditional equipment sales only as well as the Markwell (Taiwan) contract previously. I asked if this was a good model for the Philippines. Not at this time as that market is small.

MSAN in Tiscali - Good business with Tiscali but MSAN is an older product.

TN with China Mobile, what happened? - Technically, UT's product scored well and priced well but there are certain things out of their control and CM can give the contract to whom they like regardless of the scores.

TN in general - My reading into TN make it seems Alcatel, Huawei, ZTE, and others have been developing TN for as long as UT and UTs lead of 1 year mentioned in 2008 may be gone, so what are its advantage in the TN product. Peter mentioned the software/management part of it and that TN is still very early acceptance stage with a lot of carriers. I asked if the BSNL project had some TN products. It has some (but little)TN, mostly RPR and IPDSLAM. I asked what about Bharti since they have a lot of mobile subscribers. Peter mentioned thats one they are looking at and obviously Softbank.

Softbank/Vendor financing - Regarding a major optimism from Peter is their cash and the importance of it with talking with Chinese banks to get loans for vendor financing. I was concerned about this and asked Peter if this made sense and he basically said most of the large contracts/companies (the Ciscos/Huaweis) do the vendor financing. The loans are like zero percent that they can get and then do large contracts. Rather than $5 to $10m, they can do in the $100m range.

Board of Directors - When Peter leaves the company, he will leave the board and Jack Lu will take his place. That will give the board 4 new directors, leaving 3 (Lu, Toy, and Ryan) for continuity. There is no word on Lu and Toy. Peter mentioned Toy's wife as Chinese (not sure what/if any importance to the conversation). Lu is spending more time with new businesses/investements in LED. Peter feels good with the management/board when he leaves.

Stock sale - To pay for his RSUs. Thats a big chunck just to pay taxes on. He reiterated he has not sold anything execpt for those tax sales.

Bookings - I mentioned my disappointed in the last year was the lack of bookings after he himself mentioned using bookings as a metric early on. I think I discussed this previously with Barry as well and there was problems with what numbers to report due to the contract language and Peter in the Roth conference mentioned some reason....whatever it is, this is something the company needs to work out and be more transparent on.

Competitiveness in India - Is this going to be affected now that they are a Chinese company? Probably not in the next 2 to 3 years as they are a relatively small company. Peter reiterated their personnel in India and positions with the carriers there. There is much more in the Roth conference regarding India that people should listen to. Peter said in the conference that as they ride the wave of growth in India/China, that the overall growth of the company should take care of itself. (thats what I thought in 2004 when I first heard about the company).

OPEX - Still targetting under $100m yearly run-rate by Q3 (including building rents). I've heard from others that headcount should be around 1600 by the end of the restructuring. This includes 900 in R&D that are untouchable at this point, 150 in service, 150 in marketing.... In the Roth call, he emphasized investments in IPTV/optical broadband that have been protected through this restructuring and their main areas of growth.

The call lasted well over 30 minutes and I was the one that ended it. Just scanning the headlines tonight and saw Tiger Woods only granted a 5-minute interview so I guess I should feel privileged. Overall, I expressed my appreciation for the communication over the years and the work that he has done. I mentioned that his tenure will probably be judged long after he has left the company. He wished there was more "growth" at this stage before he left but that it was the proper time to do so.

Side note: Sorry for the late posting. I still haven't posted on the earnings/Roth call but getting swamp with some work/travels and nothing really much to talk about that isn't discussed in the message boards.

Have a good week ahead everyone!