Tuesday, April 27, 2010

Tellabs Q1 call - What UT should aspire to

As we head into another UT quarterly call, I recall previous ones and cringe at the lack of guidance and transparency that a public company is supposed to show. That was highlighted once again with the Tellabs call. Here is a link to the transcripts:


Granted, Tellabs' quarter is signficantly better than UT's previous quarters but the detail of information provided gives a shareholder a good feel for their business. Tellabs provided discussions on

1. Number of customers, trials, and info for specific products

"Revenue for all three data products Tellabs 8600, 8800, and 9100, increased both year-over-year and sequentially."

"During the quarter, 23 new customers placed orders for the Tellabs 8600 and 8800, primarily for Tellabs mobile backhaul solution, and this was done all over the world.

"We continue to work with customers and now increased number of trials to 18"

2. Gross margin discussions and influences
3. Guidance for next quarter/current year and how it has changed from their last discussion
4. Bookings

Analysts on the call? Look at their lineup...

Jim Suva – Citigroup
Vivek Arya – Banc of America/Merrill Lynch
Ehud Gelblum – Morgan Stanley
Nikos Theodosopoulos – UBS
Rod Hall – JP Morgan
Michael Genovese – Soleil - Elevate Research, Inc.
Jeff Kvaal – Barclays Capital
George Notter – Jefferies & Co.
Simon Leopold – Morgan, Keegan & Company, Inc.
Chandan Sarkar – Auriga U.S.A
Larry Harris – C.L. King & Associates, Inc.
Todd Koffman – Raymond James

As a shareholder, we obviously want info on bookings, guidance, customers, trials, margins, product performances, etc etc. While we get sporadic info from a product or segment, it is very inconsistent and does not portray a unified picture.

NGN - We get 4 or 5 customers from Latin America to Europe in one call and then nothing.
PDSN - We get 40% of a particular tender (China) in one call and then nothing.
GEPON - There were trials in 20 province (China) in one call and then nothing.
IPTV - No subscriber info provided in over a year.
PTN - Supposedely lots of trials but only a couple of wins. Almost the entire Tellabs call was devoted to the mobile internet and their transport/backhaul equipment. UT has major carriers/customers in China, India, and Japan and there is very little material/substantial information on their 700 series of products as it pertains to their customers/traction. Tellabs backhaul equipment is used in literally hundreds of customers (240, from the call). UTs PTN products can be used for aggregation of 3G/4G systems as well as legacy networks. It can be used for mobile backhaul. There are tons of technical literature in their website but as an investor, who cares if you don't read about it elsewhere or what traction it has gotten?

From all indications, the growth in iptv, mobile internet, broadband capacity is just ramping up and have years of tremendous growth ahead. Can UT participate? They seemed to have the products, more focus, new investors, raised capital but can they sell their products. So far, they have not and can't convince even analysts to show up for the calls! Analysts have been burned so bad so I don't blame them either. Yes, they have done a lot of the hard lifting. But, good operational results have yet to materialize. That makes it even more essential for the company to discuss more information. The company should atleast start building their credibility by being more transparent, wrapping up the legacy items that they have been discussing for over a year, and discussing the business in more detail.

Monday, April 26, 2010


A couple of similar reports on the China iptv market project a doubling of iptv subscribers this year to over 8m users. UT currently has 44% market share but the iptv market numbers include all types of ip-based tv delivery systems, and not exactly comparable to the ones that UT and ZTE provide.


This recent article also mentions the # of cable subscribers in China.

"Meanwhile, other platforms continue to dominate the Chinese pay-TV market: there were an estimated 174mn cable TV subscribers in China by the end of 2009, including 65mn digital cable TV customers (up 190,000 from the previous year)."

Here is a link to the earlier article a month ago.


"Several drivers are expected to push IPTV growth in China between now and 2014, including Beijing's continuing advancement of its triple-play convergence policy, the ongoing competition between telcos and broadcast operators to dominate their own territories, and the strategy among operators to bundle wireline and wireless broadband with IPTV services."

Commentary: Thats a LOT of cable subscribers.......UT mentioned in the last call of winning 6 iptv cable contracts but those were just providing the equipment (old business model) and not including the vendor financing/service model. If UT can execute, maintain their iptv market share, grab material cable subscribers, it already would be a very good year. If something comes in the next few years that will make iptv a "must have" add on, then its lights out.

The company is releasing Q1 results on May 4, 2010. Lets see if they provide updates on the iptv markets in China and if there are any tangible developments with their new investors in Beijing.

Sunday, April 25, 2010

Pieces in place

Looking forward, does the company have the pieces in place to perform better, and lead to higher stock prices?

Cash - This is clearly a major strongpoint for the company. It has $267m at the end of 2009 with another $130m from the building and $48m from new investors. There are still significant restructuring payments to be made but the company should have around a net $400m going forward. Companies from Ciena, to Adobe to Microsoft have been raising cash for potential acquisitions (or funding acquisitions and repleneshing their cash positions). Because of UTs poor operational history and low stock price, it was vital for them to raise cash before asset prices (PCD/building) go down or the markets turn against them. UT has indicated it may do some small acquisitions in the internet gaming area but nothing large. The indicated use for UTs cash horde is to get additional loans and show the company's stability and using it to finance new business.

Management - The new management emphasize their Chinese backgrounds but they also have international experience (education/previous positions). Focusing on China is a priority but having international experience for their other markets is still very critical.

US listing - I think it is still important for UT to be listed in the US markets as their filings can be more trusted. It can also lead to further capital raising down the road as performance improves. The company has over a Billion dollars in losses that could be used by an acquirer in the future to offset future taxes as well. Century Tel's acquistion of Quest had a potential $1.7b in tax savings.

Outsourcing/Sale of the building - Besides the cash raised from the building sale, the oursourcing deal provides more flexibility to the company. The company can reduce headcount and focus on their core business of developing higher margin IP products (software mostly). Companies like Dell, Sony, etc are discarding high price manufacturing plants and going more into outsourcing.

Inventory - UTs inventory in the last quarter was down to $72.3m, down from $167m, $187m, and $161m the previous 3 quarters. Inventory has been an issue with UT in terms of writing down inventory and requiring higher working capital. The new outsourcing deal will also alleviate inventory issues (working capital freed up).

Margins - UTs decision to move away from handsets/smartphones will increase margins from the teens to the high 20s/30 range. This is still below industry averages (Huawei at 39+%). The company's iptv (software portion) already has very high margins as was evident from the MCBU's 50% GMs last quarter. It also generated about $40m in revenues from a software upgrade. PAS deferred revenue has about a 33% GMs (and low Phase 1/2 BSNL GMs) so UTs target of high 20s/30 GMs for 2010 is not relying on the deferred revenue to increase GMs but on new revenue having higher overall margins (from PTN and iptv). As the entire industry is focused on services and recurring revenues, it is good that UT's new focus on the cable iptv industry will be on financing the equipment and collecting fees/services revenue. This will provide higher margins as well as a more dedicated customer.

IPTV- During the Roth conference, UT reiterated their 44% market share in IPTV in China as well as projections for subscriber count to increase to 15m in China by 2011. While estimates have been way optimistic in the past, the Chinese government's push for triple play/convergence will definitely drive business the next few years. IPTV has always been the major hope for longterm shareholders as the potential markets in China, India, and elsewhere are projected to be huge and other sources of revenue (from broadband sales, advertising, gaming, education, software, etc) could become material as scale ramps up. We have seen a glimpse of the revenue/margins the company can have in Q4 based on the software upgrade for just over 1m subscribers. Let us not forget that the company's R&D has been focused on iptv for the most part of the last decade. It is still their most attractive asset for differentiation, getting high margins, and developing a loyal customer base.

PTN - With other broadband products that they have previously, this could have a very long cycle as it can also be used from the backoffice handling of 3G/4G wireless systems. I'm not an expert but this product should anchor the broadband business for years with higher than average margins.

Visibility - The visibility of UTs business has never been good. The backdrop of losing PAS business, relying on low margin handsets, having high opex and waiting for equipment sales has been a losing combination. The lowered expenses, inventory, outsourcing, control of financing, focus on iptv software, etc etc should improve visibility and allow the company to execute at a much higher level from the past.

Nothing is guaranteed and no guidance or tangible contracts have been provided but the above shows the company has been doing some signficant groundwork that will allow them to perform better. I am hopeful that their technology is still relevant and they are still in position to be a leader in certain segments/areas. Right now, I like their position but would like to hear more tangible news on progress from the starting points established above. I think they have a real opportunity to perform well and start regaining credbility from the street. There is always the chance of being acquired but I think they should really move forward and aggressively attack their market strengths right now (iptv-China, Softbank, India). Ciena, for example, has been aggressive and been rewarded. UT is now in a position to be on the offense. As a small company, they are disadvantaged from a longer term perspective but have certain niche advantage that they should use now. Shareholder value will be dictated in how quickly they can move now.

Institutional Interest/Short position - No signficant net movements on both front. Institutional holdings are around 50% while short position is in the 12m range. Volume has atleast moved from ridiculously low (300k/day) to above 1m lately. Both the institutional holdings can still increase significantly and the short position drop significantly. I think this will ultimately happen as the picture clarifies and shareholders will finally be rewarded.

Monday, April 5, 2010

Reasons for the recent rally.

While some posters will point to the Chinese investors as the MAIN reason, that is idiotic to say the least.

I would say the company stock is still a lagger and just catching up with the market. But, why did it lag and why did it now catch up? During late last year, what metrics could we judge the company by? The only ones were the restructuring, outsourcing of the manufacturing, sale of the building, BSNL phase III, potential wins with China Mobile. There was no quarterly guidance, bookings, contracts, or anything much provided.

What did they accomplish? They failed on a lot of those above items above and hence the stock continued to lag. Even after the announcement of the Chinese investors, did the stock rally? No, it went down 15% below the price that investors were going to pay for the new stock.

What has led to this rally is the performance in Q4, info in the CC, and the Roth conference presentation.

1. The company did over $100m in revenues in Q4, had positive cash flows of $20m+, and w/out charges almost had a breakeven quarter.
2. The company gave details of the BSNL delay.
3. The company gave details on the closing of the building.
4. The company discussed when the investment group influx would close.
5. The company convinced new shareholders from the Roth conference and buyers emerged.
6. Clarification on deferred revenue (the mix composing mainly Phase 1 & 2 BSNL contracts, which would be replaced with higher margin Phase III revenues).
7. Ongoing progress with outsourcing/restructuring and that it would be completed in Q2 (not Q3 but some in Q1 and be completed by Q2).
8. Continued market share leadership in China IPTV (44%), new cable iptv deals, and the push by government to increase iptv subscribers (note the projections for double the iptv subscribers for 2010 and increasing to 2014 or so).

So, while the Chinese investors and new iptv/cable models (not contracts) are definitely welcome, it hasn't yielded anything tangible in the business. There have been no contracts and no loans to discuss as of yet.

The volume in the stock is still very low and has not had a breakout day (10-20x average daily volume) as of yet. I think it will come but the company has yet to even complete certain items listed above, not to mention any benefits from having new board members and the relationship with the Beijing government entity.

In any case, there is much to look forward to but until we get a significant upside volume breakout day and a break of the 7-year downtrend, the stock is just reflecting a rally from the recent quarterly update (which was also long overdue).

Will UT benefit from being a Chinese company? I hope so. I just want them to get their operational items in order (finish restructuring, get margins up, manage contracts/inventory better, etc) so that they are a "normal" company, let alone a Chinese company. If they can get to being a normal company, and then a normal Chinese company, then maybe we shareholders can still benefit from the 8-10% growth in China :-)

Sunday, April 4, 2010

Stock Technicals

A year ago, anyone that stuck it out in the market and/or bought more did very well. Some stocks "only" doubled and some went up 10 or 20 fold. UT went up over 300% from the lows but since its still a sub $3 stock, its still fairly quiet and disappointing for longs that have been in it for far too long.

In this post, I will focus on the long term downtrend of the stock. I could go all the way to the $80 range but I'll stick with the 7-year bear market back to 2003 or so. I've posted a chart for reference (you may need to adjust to plot the 7-year chart).


During the last few years, the stock has had a "run" from $5 to almost $11 and from $2.23 to $5.94. However, as we know, those runs were primarily based on sellout environments and not on company operational performance. The operational side has been so bad that it hasn't had an operating profit since 2005 (due to the large recognition from Softbank) so it was really 2004 since the last sustained profitable environment.

In the last post, I discussed some potential drivers for revenue/earnings growth as this is a crucial time for the stock. Looking at the chart, it is either just another rally in this (atleast) 7-year downtrend, or a true change in operational performance/consistency that longs are waiting for.

There are two Major resistance I see around the $3 area, one being the 7-year downtrend line and the other horizontal resistance from July 2007 to March 2008.

There can be a lot of further discussions on the company's fundamentals but at this juncture, the stock technicals are the main storyline. This would be a good time to sell if you had been waiting to take profits or cut losses. However, if it breaks $3, then, we will be in uncharted territory as the longterm stock decline will have been broken. At that point, I believe we will test the last high of $5.94 somewhere down the road. Regardless of whether it breaks it (or not; $3 level), there will be violent moves as the $3 level is a crucial resistance level.

Have a good week everyone.