Saturday, May 29, 2010

Conference Call with Peter Blackmore

I had a 45-minute conference call late Thursday with UTStarcom CEO Peter Blackmore. Peter was back from China this week in time for the US holidays and set to travel to India after the break.

Here are the topics we discussed and relevant information provided.

Building Lease - The company formally closed the building sale and started the lease this week. I asked Peter if the lease would be accounted for as regular OPEX or some other one time charge on another line item. The lease would be part of the OPEX and included within the $25m/quarter or lower quarterly expense target.

Restructuring - I talked with Peter with regards to the still very high OPEX reported in Q1 (about $10m in R&D and $30m in SG&A). Peter mentioned they are still on track to bring this to less than $25m by Q3. I was skeptical about this and asked Peter how they can bring this down by then. Peter reiterated the 300 people that left in Q1, the additional people leaving in Q2 and the outsourcing transition that were all mentioned previously. He added that the new Newnet deal would basically remove their direct involvement/expenses for North/Latin America (including personnel and facility leases).

India Security issue (short term) - I asked Peter what the current situation in India and how has it affected business there (aside from BSNL phase III) and to comment on the Bharti iptv deal they said they had for Q1. Peter mentioned that the security issue did not apply to iptv and that the Chinese President was meeting with Indian officials in the near term and he could provide more updates in a couple of weeks as he is going to India right after the Memorial day break. Peter added that this security issue affects everybody (even non-Chinese companies) and that it was mainly directed at Huawei/ZTE. He said UT has very good local people on the ground and that they were well-connected.

India Security issue (long term) - I pointed out that ZTE/Huawei were planning to manufacture in India and potentially spinoff or list in the Indian stock exchange. Does UT have a longer term solution or developing one? Peter mentioned they are well aware of the manufacturing issue and the need for technology transfer and that they are looking at long term solutions.

Beijing E-town investment - I asked Peter how the move in headquarters affected their facility in Hangzhou, UTs commitment of $2.3B in revenue over 5 years (how doable), benefits to UT, etc. Peter mentioned that they currently have 100 people in Beijing and that it will only impact those people. The R&D people will stay in the Hangzhou facility. The $2.3B was arrived at by Yellowstone capital and Peter mentioned the length of time allowed them to ramp up to it. He said IF iptv ramps up, then it is "easy" to accomplish. The move to Beijing as a headquarters is strategic in that all the regulatory agencies are in Beijing (SARFT for ex.) and would have a "halo" effect in their operations all over China.

Company Financial Model - I asked Peter about the company's seemingly endeless restructuring and missed financial metrics they have set. I also asked Peter that once he leaves and becomes a shareholder, what metrics would he use to measure the company's performance. Peter mentioned interestingly that bookings would be important. I quickly reminded Peter they themselves haven't been giving any bookings information. I think he realized his ironic response and mentioned that due to the company's transformation they were not able to provide the numbers but to keep pushing the new management for bookings and that they should be able to provide it. I discussed other metrics such as iptv subscribers and he said they should provide more information on this in the future. I asked if they would be forever in the mode of missing targets and restructuring and he said it would be up to the new management to decide that in the future but as of now, there are no plans for further restructuring. That the company (due to revenue recognition of 6 to 9 months) was focused on bookings to drive revenue for 2011. I asked about the value of iptv/TN contracts trying to get more color on what it would take to achieve $350m in yearly revenue. How many large contracts do they need to go along with the smaller ones. No value of contracts given but it would probably take 2 large ones and that the most likely ones are BSNL phase III and Softbank TN.

TN - I asked about TN with regards to China Telecom/Unicom. Peter mentioned that China Telecom is evaluating their equipment and Unicom was well behind. Bharti is also a major potential but Softbank is the most likely major customer right now. He added that Softbank and China Mobile were the most progessive of the operators looking at the latest technology. Peter also highlighted their "enterprise" wins with utilities/etc, smaller current deals with BSNL, and Softbank. I asked Peter if they needed additional financing to land a major Softbank deal and he said no, that their cash position (specially after the building funds) now allowed them to do deals they could not before.

IPTV - I asked what metrics/data he could give that shows his confidence in iptv in general. No specific data except that STB demand for all providers have been very good. In India, I asked what the situation with each of their customers. Peter felt confident about their positions with each customer in India and that each one is expanding but pales to China in current demand. There is no new contracts under the new service type model yet but there were additional cable iptv wins since his last announcement. Peter could only point to the STB demand, the overall iptv growth projections, and government focus on promoting iptv. How big will the cable iptv market be? Are they going to be getting large contracts (like BSNL phase III or Softbank TN)? No, it will be similar to the telco iptv in establishing beachheads and growing from there.

Philippine Business - Just a random question from me since this was a large (over $10m in Q1) source of revenue. Peter mentioned that they don't have long term contracts but are constantly gaining business as PLDT (MSAN product) expands since they are the incumbent. I think this is really the key to other product/customer situations like TN with Softbank, BSNL broadband, China/India iptv, etc.

Confidence in the business/company - I suggested to Peter that shareholders were getting less confident (via the lowered stock price) and asked how he felt about the business/company in general. Peter mentioned that he was still very confident about the company prospects.

Comments: I think this was the most guarded Peter has been regarding our conversations, careful to not be overly optimistic and give out any data not material/public (which is understandable). I did not directly ask Peter about the closing of the Beijing investment group as I felt through the conversation it was a foregone conclussion that just takes time (as the Building closing showed). I would neither characterize that as positive or negative in the short term because there are very valid arguments for those wanting the company to operate as a successful ongoing concern and those that want the company sold due to the company's poor operating results and potential to continue the poor performance. So, for better or worse, I believe the deal is 99% going through. As for the BSNL Phase III, I believe that will also be done eventually but the current (short/long term) uncertainty in India is not good for the stock. The stock at these levels continue to project virtually little to no value to the business and trades way below cash as the company fails to provide any confidence to the market. While the market has been shaky as well, the company trading way below cash shows a very negative bias towards the company's prospects.

I continue to like the stock valuation from a long term view but as I mentioned in the Q1 posting, the company's weak bookings, late restructuring, market's shakiness and now negative bias towards small caps/Chinese stocks will keep UT down but better prospects in the 2nd half of the year should coincide with much better stock performance.

Have a good Memorial Day weekend to everyone.

Friday, May 21, 2010

Details of Beijing Investment and Commitments

General Info (from the SEC filing)

On February 1, 2010, UTStarcom, Inc. (the “Company”) entered into an Agreement of Entry into the Zone (the “Campus Agreement”) with the Management Committee of Beijing Economic and Technology Development Zone (the “Zone”), an affiliate of Beijing E-town International Investment and Development Co., Ltd. (“BEIID”), pursuant to which the Company will move its operational headquarters to Beijing, China by forming a new wholly-owned subsidiary in the Zone (the “NewCo”), and authorizing the NewCo to be the Company’s new operational headquarters. After beginning production and generating tax revenue as provided in the Campus Agreement, the NewCo will be eligible to receive certain benefits and assistance from the Zone.

Why is it taking so long? The "PRC Approvals" ......

As a condition to the consummation of the Placement, the Investors must obtain the applicable authorizations, approvals or permits, especially, if applicable, from various government agencies of China, including, but not limited to, approvals and confirmations from the applicable levels of the National Development Reform Commission, State-owned Assets Supervision and Management Commission, the Ministry of Commerce, the National Development Reform Commission and State Administration of Foreign Exchange, that are required in connection with the lawful purchase of the Shares, and the purchase and procurement of the foreign exchange necessary for the payment of the Purchase Price pursuant to the Purchase Agreements.

UT will be getting the $25m in US dollars wired to them in the US. The other two "financial investors' - Ram and Shah will only be putting in their contributions once the Beijing investments are finalized.

UT Company description and product lineup:

UTStarcom is mainly engaged in the business of IP-based telecommunications with products and technologies covering areas including wireless, broadband, next generation networks and end-to-end networking, providing a variety of products and system solutions including TMRollingStream®IPTV and IP video information publishing solutions, Interactive iDTV, Mobile TV and OpticalXpressEPON system solutions that can be applied to broadcast and television industries, broadband integration and industry application solutions such as PTN/MSTP comprehensive solutions, NetRing next generation optical network systems, AN/iAN series new generation multi-service access platforms, EBox enterprise telecommunication systems, PDSN and CDMA,CMMB, TD-SCDMA and WiFi mobile phone terminals.

Seems like a good description so I added it so shareholders know where the revenues are going to come from.

UTStarcom is planning to set up a wholly foreign-owned enterprise (the “New WFOE”) in the Zone and authorize the New WFOE as its operational headquarters.

Here are the commitments of each of the "parties"....

II. Party A’s (Investor) support to Party B (UT).

1. As a newly registered foreign investment enterprise in the Mobile Silicon Valley Park, If New WFOE’s contracted foreign investment amount is more than US$15 million, then after it starts production and generating taxes within the first year from the date of its registration in the Zone, the New WFOE may apply for a financial support in an amount equal to 3% of the paid-in registered capital (as converted into RMB) up to a maximum amount of RMB 20 million.

2. As a newly introduced enterprise in the Mobile Silicon Valley Park, if the New WFOE leases the office facilities or real properties developed by the Head Company for its research, development and production, after it starts generating taxes, the New WFOE may apply for rent support. The term and amount of such support shall be based on the relevant encouraging policies of of Mobile Silicon Valley Park in Beijing Economic And Technology Development Zone (the “ Silicon Valley Encouraging Policies ”).

If the New WFOE meets both the conditions set forth in the subsections 1 and 2 above, it may choose to apply for only one of the two financial supports.

3. If the New WFOE qualifies for the support under the relevant provisions of thebn Management Measures for the Special Funds for Science and Innovation of Beijing Economic and Technology Development Zone , it may apply for the relevant monetary support.

4. The New WFOE may apply for the benefits of the support and financial encouragement policies applicable to the senior management and senior under the Silicon Valley Encouraging Policies.

5. As an enterprise registered in the Mobile Silicon Valley Park, the New WFOE may apply for the benefits of the relevant preferential policies according to the relevant Silicon Valley Encouraging Policies. Party A agrees to use its best efforts to help the New WFOE obtain the benefits of relevant preferential policies.

6. Party A may help Party B in developing markets in Beijing, coordinate with Party B regarding any issues relating to export credit, bank financing etc. and support Party B in obtaining the high-tech enterprise certificate.

7. Party A will render continuous support for the growth of Party B’s project, and provide high-quality services for the entry of Party B’s project into the Zone.

III. Party B’s Commitments

Party B agrees to make the following commitments:

1. Party B commits to initiate the application process for the incorporation of the New WFOE in the Zone within one month after the closing of the investment by Beijing Yizhuang International Investment and Development Corporation in Party B and register or move its operational headquarters in or to the Zone within three months following the completion of all procedures of various governmental approvals, registrations and filings related to the formation and funding of the New WFOE. The registered capital of the project shall reach US$15 million by the end of the six months after Party B completes the registration of the New WFOE.

2. Party B commits that, after establishing its operational headquarters in the Zone and approximately 5 years of such date (and shall take reasonable measures to ensure that such date is no later than the end of 2015), its accumulated sales revenue contribution to the Zone will reach approximately US$2.3 billion, and its accumulated paid taxes will reach approximately US$34.5 million (limited to various national and local taxes excluding customs duties).

3. Party B commits that its operation term in the Zone shall be no less than six (6) years from the date of registration.

This looks like a very complex process in nailing down the agreements with getting all the PRC (Peoples Republic of China) Approvals (thats why they had to extend the time period 30-days and may need to do it again soon) as well as the substantial support/commitments of each party. It also looks like the company is commiting to atleast $2.3B (or about 460m in revenue) out of that economic zone in the next 5 years.

This is interesting as their lease on their Hangzhou building is now very flexible (they can pay it off to move out completely).

I'm in the process of setting up a call with Peter Blackmore next week and might get to discuss the China deal and these various commitments. It would be a nice change to get major contracts and a sustainable base of business for the next few years and this move/agreement provides the opportunities for it. We'll see.

Have a good weekend.

Saturday, May 8, 2010

India Situation and Beijing Investment

The perceived benefits of the investment/involvement of Beijing E-Town International Investment and Development Co., a company formed by the local government in Beijing is now weighed down by the company's strategy in India.

While UT CEO Peter Blackmore mentioned on the call that they are pushing hard to nail down the significant BSNL Phase III contract, the security issues in India have delayed this contract for a couple of quarters now.

The security issue in India is mostly directed at Huawei (see article).

"However, the Indian security agencies - IB and RAW - are convinced that Huawei is part of Chinese spy network. They have cited its links with PLA as evidence against it.

However, the bigger embarrassment for the Chinese officials may be the issue of corrupt practices that Huawei officials are allegedly involved in India. Corruption is a serious issue in China and officials involved in corruption are executed."

Blackmore has mentioned on the call that the company understands the seriousness of this issue in India. With analysts/investors, he mentioned potentially partnering with a local Indian company down the road but now is going back to India this month. At this stage, the longterm potential benefits of the Beijing investment group is having a short term negative impact on the company via the BSNL phase III contract being delayed.

The net effect is obviously negative as nothing was clarified. The overall 6-7% market drop this week, very low Q1 bookings, still high opex on top of the unresolved Beijing investment/BSNL phase III contract lead to a further 23% decline this week and an overall 30+% decline in just the last two weeks.

With all the uncertainties/negatives mentioned above, most institutional investors stayed on the sidelines after the quarterly update. However, it has now become a compelling buy again for traders and those that want to play either a (market) bounce or short term resolution of the above items or longer term accumulation.

Tuesday, May 4, 2010

Q1 2010 Recap

I was travelling at both ends of the day/night and working hard in the middle to make up some losses on UT so didn't have time to answer my fans in the message board, who seem to come out in herds during the down days. This recap will be in bulleted format with some comments in italics.

1. Revenue - $81m; GMs 34% (Higher GMs due to TN products)

2. OPEX - $46m ($30m SG&A; $10m in R&D); Q2 much lower as 300 employees left in Q1; Still on target to achieving $100m opex run-rate by Q3 as outsourcing gets done in Q2 and employee headcount goes below 1800. Still high....seems like a lot of people took advantage of staying as long as possible...must be additional farewell gift from UT. This is a net negative.

3. Cash - $235m (includes $14m from the building). An additional $56m in escrow in April and the balance of $63m with a bank guarantee and should be in by Q2. Losing $30m is a net negative tied to higher OPEX still.

4. BDA investment - Closing in Q2

5. Building - Title transfer already accepted. Buyer has paid taxes...will close in weeks. Positive as there were questions why this was taking so long. Looks like a done deal.

6. New CFO and General Counsel completes management team. Negative as confusing to see a new CFO with high salary/compensation replacing the previous CFO that only stayed a few months.

7. General buisiness discussion - Company focused on IPTV/broadband and China/India/Japan. What happened to NGN?
Leading iptv in China/India (good STB demand in China); Mentioned again the industry projection of >15m in iptv subscribers in China compared to 4m now. Neutral as projections look good but no specifics to UT.

8. Presentation to CCDM (cable industry) - Company products got good reviews. Same with EPON-EOC which they won an award.

9. Misc. IPTV wins in Q1 - Best TV, Shanghai expansion, China Mobile Research, CT Fujian province, Bharti. The Bharti is interesting as atleast they were not banned in India for iptv.

10. India - 30% market share in broadband; company aware of security issue and as a US based company governed by US laws, will comply with Indian government needs. I think Blackmore could have discussed this more and better.

11. BSNL phase III - Still pushing hard for significant contract by Q2. Sees potential to join mobile market in India via for optical TN products. Specific target in broadband in India and Softbank. Very positive as deal is not cancelled and looks like good prospects for TN in general and India market a plus. The stock has declined from about 40 cents due to the market selloff and concerns in India.

12. Book to Bill - Well below 1. Blackmore says this is unacceptable. Very negative in the short-term. I will see if I can get clarification on what well below 1 is. If BSNL phase III is excluded, bookings of $60m/quarter would still add to about >$350m run-rate (w/out PAS deferred revenues). So, .75 book to bill would not be bad. 0.5 would mean only $40m and that would not be good - and would need to be made up.

13. Business units - MMCBU - $42m with 38% GMs ($21m deferred with 35% GMs); BB - $35m with 28% GMs (MSAN/GEPON/TN). Slight positive as margins for broadband is good. Revenue (w/out deferred) is about neutral from the run-rate for this year. What happened to services?

14. Handset - $4m with 39% GMs (one time help).

15. Annualized goals still >$350m revenue (incl. deferred revenue of approx. $100m).

16. Q2 Rev - Similar to Q1 with high 20s GM.

17. Summary - Focus on growth since company is now simplified....

Commentary - Largest negative was the low book to bill, with the high opex a close second. India concerns alleviated for now but we'll see when it closes. Other positives include TN revenues rolling in as well as building closing/investment group on track. The stock could be vulnerable as the recent stock movement has been down and the market is taking a breather. On the other hand, the company looks like it will resolve the remaining restructuring, outsourcing, building sale, investment group....items within this quarter and opex should significantly be lower in Q2 and finally reach the mid 20s by Q3. In this quarter, despite the deferred revenue being recognized, the book value still went down to around $1.85 from $1.96 due to mostly the high opex. Depending on the mix in Q2, the book value could go down just a little more and may start going up in Q3. Cash is at $235m...Add $119m for the rest of the building and $48.5m from the investors and they will have $402.5m ($2.65/share in cash using 150m shares) minus any restructuring outlays/cash usage in Q2.

I think the stock bottom the rest of the year will be in Q2 and will trend up for the rest of the year in accordance with the better operating quarters ahead.

Sunday, May 2, 2010


Last week, there was negative news regarding India's department of Telecommunications restricting the purchase of communications equipment from Chinese manufacturers. Obviously, this would impact UT a great deal in India, one of their focus regions aside from China and Japan.

The knee-jerk reaction from posters on the message board is to spin-off UTs India operation. That UT should indegenize with respect to India. That it should move all hardware and software manufacturing to India.

Lets look at some current facts....

UT in India - 1. UT is the most trusted vendor in broadband/iptv for 3 years in a row.

Why didn't a pure non-Chinese company like Ericsson or Alcatel win these awards? Is all the effort that UT put in with their India operations out the door due to the new Chinese board members?

2. UTs director for South Asia/India Vijay Yadav leads a team of about 125-150 in India that was not affected by the recent restructuring. Mr. Yadav seems to be well connected/intune with the India market.

3. "We are also working to increase India’s contribution to the global operations of UTStarcom. For example we already have extension of our Global R&D team of BB based in Gurgaon, India, and the Escalation Centre for Asia Pacific is also based out of Gurgaon. This year we have established Centre of Excellence for IPTV in Gurgaon, India, and over the coming years we hope to contribute more to the global IPTV product line of UTStarcom from India."

So, I assume that atleast the software interface and network management are performed by Indians already and not Chinese workers, which is basically the requirement of the Indian government for security clearance.

Company makeup - UT is listed as a US company with still mostly non-Chinese investors. In fact, the largest holder is Shah Capital, headed by an Indian. It is interesting to note that the investment deal that brought Chinese investors included Shah Capital.

At this time, the China market with 90% of the employees and potential for their revenues are much more important than India and Japan. Japan is not a major issue due to Softbank as a major shareholder as well as Lu's connections there. The arguments for UT not truly being a Chinese company works the other way as well in India. IF it is critical to indegenize UT further, Shah will definitely have input.

Outsourcing - UT has considered opening a manufacturing plant in India but recently went with outsourcing firm Sanmina.

How important is the hardware manufacturing compared to the software? If it is, UT having outsourced its manufacturing will have an easier time to move manufacturing to India if necessary as they don't do it themselves anyway. In any case, Sanmina is not a Chinese company.

Partners/Joint Ventures - Should UT spinoff or move software/hardware manufacturing everywhere they decide to do business and there is a security concern (which is probably every government). Of course not. UT has shown it will partner in Latin America and even in individual bids in China (with NSN). UT also partnered with IBM in India before.

Value - What would a spinoff be worth? Until recently, the street valued UT at book value and even now less than cash on hand. The business in India is simply not worth spinning off at this stage. Can a local Indian company develop iptv and compete with UT like ZTE and Huawei in China. No, UT spent a decade and hundreds of millions on their iptv system.

Summary - As a shareholder, I obviously want UT to succeed in their venture in India. So do the board and other large institutional investors. Is it better to be indegenous with respect to India? Of course, but to what extent? Just as Huawei has to decide to what extent they will do so, UT management/board has to decide as well. I just don't think a spinoff makes sense at this time for several reasons, one important factor being how this security issue is really implemented by the Indian government and how it impacts companies like Huawei/ZTE. The company was already planning to add an Indian board member and the local management/team that they have put in place/previous "accomplishments" show they know their way around the local Indian market. If this situation is really hampering them in India, then I would expect the leadership to take additional steps.

Saturday, May 1, 2010

Shanghai World Expo

Heres a video of the opening ceremony of the Shanghai World Expo with fireworks along the river and showcasing the world's largest LED screen.