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.