Sunday, March 13, 2011

Q4 2010 Recap

The Q4 2010 Conference call had an interesting format with a powerpoint presentation slide to go along with the recap of the quarterly/yearly performance as well as some historical improvements, and guidance for the year.

The company's PR touted the exceedence of guidance on the top line for Q4 (which had been reduced) and the operating positive cash flow in the quarter. As a long time suffering shareholder, my main focus is on the turnaround and numbers going forward and to see this new CEO (management) performance to gauge whether there is tangible progress. I did not particularly care for all the slides touting the potential at this stage (since that has been provided before and the important thing is whether UT can actually participate in it). I also didn't care for all the comparissons with improving losses, margins, etc that were simply well below normal/industry performance. No, I was looking for data points that would indicate (1) stabilization of the business (are the revenues/bookings still going down for ex.) and (2) whether there is improvements/growth opportunities to the business. The first point is critical in keeping the current shareholder base and determining if the business is still spiraling down and out of control. The second point is there a reason for new shareholders to look at this company as a real turnaround (in the near future) and what value it can get to in the coming years.

So, instead of the usual point by point recap of the call, I will group the overall discussion based on those two general points. As a shareholder point one is important for holding on to shares at the current valuation and point two is important as the stakes are higher after all of these years to see if there is value creation and point one is not enough to keep shares. You can categorize point one as the "downside risk" and point two as "potential for appreciation". Ok, lets dive into the tangible information provided in the report and the call.

CASH - The major holding point for longs is the CASH. Downside investment protection for a small/Chinese company is the net cash it holds. The company reported a loss of 15 cents/share but generated $14m (or around 10 cents/share) in cash. The company now has $352m in cash/short term securities/investments (or about $2.35/share). The cash was a main theme in the Q/A portion as three analysts (yes, there were actually three that asked a lot of good questions) discussed how cash flow was going to be like for the rest of the year, how it relates to the revenue reported, what potential acquisitions it may make). Jack Lu mentioned that they picked low hanging fruit in the quarter and that cash flow won't be positive in Q1/Q2 but will be back in the black by Q3. In their business cash flow is slightly ahead of the revenue recognition. An interesting thing about UTs balance sheet is that while other newly minted Chinese companies performing "very well" are questioned, its been amazing how bad UTs balance sheet with all the writedowns have decimated its book value down to $1.68 at the end of Q3. At the end of Q4, it is down to about $1.66 even after the 15 cent loss and the cash actually going up by 10 cents. The tone of management has been clearly protecting/managing the cash very well.

OPEX - SG&A was $19.3m and R&D was $9m so w/out other one time items, its down to $28.3m. The target OPEX of under $25m/quarter has not been reached but the CFO mentioned it was solidly on track for it to be. The Q4 PR regarding management alignment (to be concluded in Q4) showed that they were still working hard to pare bloated expenses, which is obviously still high for the current revenues/bookings and even for longterm sustainability. I'll discuss OPEX more a little bit later.

Potential Acquisitions - Because of the poor operating performance year after year, the street mainly looks at the cash in valuing the company so the analysts wanted to ask what is their mindset on acquisitions. The management gave good generic response to what they would like to acquire.....(1) something aligned with their current goals/businesses, (2) top line growth and, (3) add to earnings. The analyst fired back that those would be very expensive specially when UT itself is trading UNDER cash. Mangement's response was atleast realistic.....that they are not looking at anything significant and only for the growth of the new Operational Support Services group and would focus more on internral growth via vendor financing.

So, to conclude this first part, I believe the cash is going to be managed very well going forward and provides substantial downward protection to the stock price (even more so before this call). Going on to the second part. The most important part looking ahead for small tech companies are the growth prospects. The street will reward growth (and not the cash or the book value). Q3 2010 could be the most dismal point in the company's history in terms of revenue/bookings as it was down to $60m (with the deferred PAS revenue) and only $36m in new bookings. This was just a continuation of a company losing revenue and could not get new business.

Bookings - Q4 had bookings of around $52m (0.68 book to bill x $76m reported revenues). This is a good size increase from $36m in Q3. Just on a percentage basis, this was very good but more of a relief as even this number is nowhere near enough to make up for the PAS deferred revenue that will be gone by 2012. I look at this as fairly positive due to the nature of the bookings. These are not low margin broadband revenues from India (BSNL phase III is still in limbo but don't think anyone is looking at that at this stage) or handsets or due to a major contract (we didn't really get much PRs in Q4). So, this was a grind it out $52m revenue that was the highest for 2010 (as they reported) but really didn't include much of the growth drivers that I will list.

Growth Drivers -

1. Softbank - Management mentioned a couple of times that the trials for the TN product was completed last year and they expect to generate significant orders early this year. Now, the Japan earthquake may slow that down but essentially this is on track.

2. IPTV growth - New win in Thaliand with TOT (Thailand's leading provider) was encouraging as this is a new country. Additional win/expansion with Bharti was also reported. The macro growth in China has also been very good to further UTs internal growth. As we've seen over a year ago, software upgrades could be nice revenue/profit generators and will increase as their # of users grow. Then, there is the potential in the mobile handset space (whether they make their own iptv handsets or license their software).

3. New platforms/Operational Service Support (OSS)- The deal with StageSmart will yield additional internet TV platforms to drive growth. The new OSS is expected to deliver 10% or around $30m in revenues. This will be reported as a new segment starting Q1 and be a high margin/growth for the rest of 2011 and beyond.

4. India- BSNL Phase III is still in limbo and could add tens of millions (if not more) in revenue but lower margin. The company did mention it was still working on getting local partnerships/JVs to help them maintain/extend their positions in India. The growth in OSS (new platforms developed for the network convergence in China will also carry over in India in the future). We still have not heard anything in the use of TN for India but their mobile/fix line customers there makes it a potential growth driver.

5. Broadband in China -Company mentioned partiicipating in trials for GEPON/EPON (fiber) but did not highlight this as a main priority although revenue wise, it would be a driver (just for the higher equipment sales).

6. Vendor Financing - In terms of cash usage, this is where the company mentions it will spend. Jack Lu, the CEO, made it a point about being stingy with the cash but this is where they will spend some money to driver growth, which makes definite sense and is a highlight of their growth strategy in higher margin/sustainable revenues.

7. Internal growth of the $52m base - These bookings are made up of small value trials/deployments/existing maintenance etc. that should increase as trends in broadband/network convergence continues.

As a side note, lets look at discussion on margins/opex. The company margins w/out PAS/one time items was around 28.6-28.8 (quarter/year). The guidance of 2011 for 300-320m and under 100m (say 100m) would imply 32.2% margins but in the Q/A, Lu mentioned high 20s. So, backing out OPEX at 29% GMs and 310m in revs would yield about 22.5m in quarterly opex at break even, which they seem fairly confident they can achieve.

So, going forward, we need to look at the growth drivers to determine how they can replace the PAS deferred revenue. There are still a lot of work but having $52m in bookings was a nice start in Q4 (basically the first full quarter of the new management/board and the 2nd quarter of network convergence trials).

The ultimate goal is still to get to a profiable/growing company that adds value more than the current cash position. As they solidify/stabilize the company from point (1), we can now focus on point (2). As we've seen with companies that are in the process/turning around, the payoff can be huge. There is still hope for this old dog :-)

Have a good weekend.

No comments: