Monday, August 2, 2010

Delays have cost UT shareholders

A shareholder commented in the yahoo MB that "it will take some time, if indeed it can be done, to bring this company back from the brink that Blackmore led it to."

I am looking for incremental improvements in the following items on the call that should have been accomplished already.

1. China investment deal. Announced in Feb, even at the end of JUNE, we've heard (not from UT) in an article of approval from China and to be closing soon but still nothing.

2. BSNL-India Phase III - Initially should have been Q3 2009 (Q4 at the latest) and still no concrete update from the company.

3. Bookings - Even during the entire downturn the last two years, management was guiding to 50% bookings growth and then to double digit growth and then to just "good" bookings and then finally last quarter to booking way less than one.

4. OPEX - Even the latest restructuring should have been done before the end of Q4 last year and now revised to the end of Q2 but in Q1, the opex was still nowhere close to the target.

5. Transparency - Also should be improving but book to bill #s, iptv subscriber #s, # of trials, status of GEPON/GPON, PDSN, relationships in Latin America, Britain, Europe, etc - there is nothing. So, this is going the other way too.

I'm all for waiting but certain things should show incremental improvement or been completed already. The price at these levels is a joke for their assets, stated market positions, and projected growth of their markets but why is it still here and why hasn't someone made a higher offer by now?

So, the low price (that we longs feel) is directly related to incredible poor performance in such a way that all the "potential/cash/tech assets" that we longs talk about is easily negated by the incredible unresolved items up to now and the lack of even incremental improvements as I listed above. If they had resolved some of those items way before this year, the investment price would not even be close to $2.2.....That price may have been acceptable LAST June 2009 but not this Feb. 2010 and certainly not right now.

Shareholders deserve much more even at this stage.

UTs revenue decline

The following are UTs sales by country in Q1 for 2009 and then 2010.

China - $51.2m; $40m
US - $41.2m; $3.45m
Japan - $6.5m; $11.1m
Philippines - $.8m; $12.7m
Other - $19.5m; $13.6m

Of the $40m in China sales this past quarter, about half was deferred revenue so the actual revenue was down to around $20m in sales in China. At the peak of UTs growth, annual sales reached $2b so quarterly sales in China reached $500m or so. Going down to $20m is a staggering drop that shows the company has never recovered and until now, we don't know if it has bottomed. While Peter Blackmore, as CEO, is to blame overall, I wonder what China Sales and Marketing and Services SVP Charles Mah has contributed. The guy was hired in Novermber 2008 and now more than a year later, the sales have continued to deteriorate. Last quarter, Blackmore mentioned the book to bill was way below 1 signaling no signs of a turnaround.

With the guidance provided last quarter of similar revenues (including the deferred revenue), the company is still not close to any upturn in revenue, which at this stage is what investors really care about. Lets review the breakeven revenue of $85m/quarter (assuming the company even gets to the stated OPEX goal, which is another area they have been very slow to completing). The new COO (future CEO) mentioned getting to profitability in a year (from the February interview he gave in China.

From a geographical standpoint, here is what I estimate they should achieve for breakeven. I will group it into 3 areas for now, China, India and Japan+others. My estimate is for the following breakdown:

China (60%) - $51m/quarter
India (25%) - $22m/quarter
Japan/others (15%) - $12m/quarter

Not counting deferred revenue, the company should get to the $51m revenue level, which is a stagerring 150% growth from the current levels. The move to China, turnover of entire management to China, new board members/investors warrant the company to atleast get to 60% revenue in China (or else whats the point?). The company has talked about the new cable (iptv) revenue model, further growth in iptv, digital/interactive TV, NGB, TN opportunites and even GPON but no numbers or little information is provided.

The revenues in India and Japan/others are doable even right now if there are no delays in India and in a yearly total, should be quite doable even with just 1 large contract. Japan seems to have bottom a year ago as well and the base is still quite low. Another way to increase revenue is to use their cash to purchase businesses for external growth but in any situation, the revenue has to be increased.

So, it really comes down to China to stabilize the revenue base and in fact the need to increase it significantly from the current $20m/quarter level. I like that the company has put its focus in China but the revenue has simply continued to deteriorate and until there are bookings/wins to show it will go up, then there is no reason investors will support the stock other than sporadic speculative buys. On a more positive note, the overall US/China market seems to be moving away from a double dip and focusing on a better 2nd half of the year. As mentioned in the last quarterly comment, that should help UT stock as the company finishes their restructuring but in order to have sustainable gains and material stock support, it needs substantial revenue growth going forward. Absent this, the stock will continue in lackluster trading ranges with little volume.