UTSTARCOM-STOCKNEWS

Q1 2011 Report Recap/commentary

2011-05-22T03:00:00.000-07:00

The numbers from Q1 were not good. Revenue came it at only $61.3m and that included the PAS deferred revenue (about $23m/quarter for 2011). Expenses came in at $30.2m, and that led to a loss of $10.3m. Cash was also down by about $40m to $310.4m. Another negative was bookings came in at less than $40m, down from $52m in Q4. China revenue (not including PAS deferred) came in at just $10m for the quarter.

The company explained that the quarter had poor collections but it had resolved this already. It predicted Q2 would be around breakeven while also re-stating its committment/confidence for the full year 2011. However, the stock had "rallied" from the low $2s to the high $2s and was in the mid $2s going into the quarter call so obviously, there was some momentum/anticipation built in and the numbers were just too poor to hold the stock, not to mention the explanations were not clear during the call either. All in all, it was a very poorly run conference call by Jack Lu and the CFO Edmond Cheng. The two simply sounded like high school kids that were auditioning to be PR people (forget being executives) and for parts of the call, seem to be mumbling (hard to understand their english) and talking about useless numbers in the industry when more pertinent company information HAD to be discussed and explained. My advice on the English part is to just speak in Chinese and have an interpreter there to translate. It would atleast hide part of the amateurish sounding/lifeless words/feel from the call.

Ok, since everyone knows the bad numbers, lets look at some details closer and any positives going forward.

1. CASH- Even during the previous quarters, cash doesn't track closely with the operating numbers. The last quarters sudden increase of $14m came out of the blue and was a pleasant suprise so now that it suddenly drops is not fun but at the end of the day, will even out and still a major buffer for them to implement their turnaround plan.

2. Expenses - This quarter's expenses (w/out restructuring charges) gets it closer to the runrate below $100m/year and the revised lease terms provides a substantial yearly savings from the $10-15m range to just $2-3m.

3. Bookings - Q4 2010 yielded bookings of $52m, which was the highest in 2010. That was encouraging but Q1 2011 bookings of less than $40m was a let down. Is this just a "seasonal" drop where Q4 is normally stronger and Q1 is normally the weakest? Its possible but we'll have to see what Q2 brings. While Japan is encouraging, China is discouraging and their main focus is supposed to be in China.

4. ITV.CN - They gave some time line for trials (Q2) and revenue generation (Q3/Q4) and we now see the beta of the website so this is on target per their Stagesmart acquisition and filings for 2010 that this will launch in the 2nd half of 2011. Just a quick overview of the site, I like the TV channels with CCTV and the timeshift component. I don't particularly care for the movies as I think it will be the broadcast/news/local Chinese programming that will be the main features that will have overseas Chinese subscribe. The internet platform is good in that they won't have to negotiate with local cable/satellite providers in the US or other countries. It will just be able to offer it to anyone with a broadband/internet connection. Its too early to see the adoption of this but if successful, it will provide the company with a new identity, stable, and growing revenues that will have sustainability and more robust/scalable business.

5. Internet (cable) platform - The recent PR of the new internet platform and initial win with a cable company was encouraging but no discussion on contract size. Potentially, it could be large with all the cable companies there but again, like the itv.cn, too early to see how successful it can become.

6. TN in Japan - Looks like the most positive but at the same time the lack of wins in China is a negative. We understand that the equipment business is competitive (and thus the itv.cn/new platforms are the way to go) but we do expect a major uptick in sales in China as oppose to regressing with the "move" and emphasis in China.

The new products/businesses will add to the company's valuation but because it is a small part of it right now, there has to be substantial progress through the rest of the year in China. If not, then why still have close to 2k employees, most of it is in China?

The PR says they are still "committed" to breakeven in 2011. Even with PAS deferred revenue, there needs to be significant pickup in Q2-Q4 plus a material contribution from OSS. The credibility of the company is not good to begin with and now the poor Q1 call doesn't help. There are a lot more questions now AFTER the call than before it. The CEO/CFO officially have done only 2 calls and already their credibility and performance is in question.

I'll end with a positive comment that I like the new products (itv.cn/new platforms), the still substantial large cash position, the lower expense (revised building lease), improvement in Japan, potential India partner and overall large Chinese (and overseas Chinese market) but unless more positives come in and in a timely manner (and this is where credibility/execution comes in), the stock will remain in this $2 range and essentially the street will not care (volume low).

BTW, another shareholder/longtime poster Shadow had a good write up as well. He does make a more positive case from a business standpoint but a stock needs positive catalysts and some wow factor to get demand. Getting to breakeven is not exciting enough for the street. We need itv.cn for example to have some buzz....need major growth (since its a low base) from China either from the equipment side or new products. Otherwise, there will be no demand/respect from the street.

Development of triple play and UT valuation going forward

2011-04-02T10:23:00.000-07:00

To continue last week's post on triple play, here is another article providing China's development goals for the next 5-yr plan. It is a comprehensive look at how China is planning to develop different parts of their industry. I'll provide the excerpts on the triple play part. http://www.c114.net/m2m/2488/a592592-2.html "Triple play, things, wireless cities are included in the information technology construction of major projects. Triple play pilot project: Completion of two-way access to meet the requirements of triple play integrated business management platform and IPTV, mobile TV broadcast control platform. The implementation of triple play digital home pilot demonstration project. Promote the application of triple play model in the Universiade." "Hangzhou will twenty billion investment in the development of "triple play" "Triple play" one of ten projects include infrastructure, plans to invest 22.0 billion construction of telecommunications, mobile, Unicom transmission network ( base station ) project, the implementation of FTTH projects and build cloud computing, Internet of things base. Promote the "triple play" development. Explore the "triple play" of management models and mechanisms, and actively promote radio and television, two-way access to telecommunications services, to enhance the "triple play" infrastructure to build the most advanced network infrastructure. Promote the intelligent network , soft switch , a new generation of mobile communication, next generation Internet technologies such as research and development and applications. Full high-definition TV services for broadcast, interactive. Comprehensively promote the "triple play" industry, focus on supporting the new formats, new applications industry." ------------------------------------------------------ There are a lot of moving parts to triple play/network convergence and it is at the very early stage right now. In the short term, UT is still in the process of right sizing their expense structure and still relying primarily on "older" revenue streams predicated on selling direct equipment in support of iptv and broadband. That model has struggled to even break even as the huge expense base coupled with declining PAS sales could not be offset with sales of iptv primarily (as a non-Chinese company to boot). While that has showed significant improvement from an expense standpoint and their move to China will help in iptv/broadband sales in China, the long term major opportunity will come from using their existing technology to build new platforms inline with the triple play network convergence opportunity. As shareholders, we have been focused on the company getting to a profitable model. The company has not had that since 2004 so it is understandable that is a major priority. However, how much value will the market place on just breaking even with low margins and a fluctuating sales base. The business will have some value then (and the company will finaly trade above cash) but it is not the growing business that will attract shareholder interest. I also don't think that is the intent of the new investors buying in at $2. No, the real opportunity is building new platforms that will yield much higher gross margins, growth rates, and sustainable customers. Some ,and I emphasize some, value will be unlocked via getting to a profitable business model but as we've seen with others, the value lies in how scalable and differentiable a model they build (through unique products that the customers will be dependent on for years on out). UT targetting the cable industry, radio industry, triple play/network convergence is how the company will go from an "old" struggling to get to breakeven company to a "new" company the investment community will value. I think any new shareholders getting in or existing shareholders have to have that mindset or else there are many other companies which are already profitable but their business model is capped. We'll see how the company progress on the breakeven side but the value creation from that is limited. The progress by UT and the industry on the new platforms will be the key to major gains. Unlike some new companies which get the benefit of the doubt or are pure plays on a major theme, UT is (rightly so) perceived as a struggling to breakeven has been company but it could get real interesting to see where the shares will be priced as they make progress on the new platforms. Have a good weekend.

IPTV and development of Triple Play

2011-03-26T10:37:00.000-07:00

On Friday, a UT short seller posted the article stating "Wei Leping, the direct of China Telecom Science and Technology Commission, attended the 2011 China Triple Play Summit and said that the triple play is facing mortality risk, and in the past year, triple play has achieved no real progress and the pilot progress has obviously lagged behind the deployment of the State Council."

http://www.cn-c114.net/2501/a590281.html

How does this impact UTStarcom? UTStarcom has primarily invested in its IPTV system over the years and is targetting to use its iptv system as the base to create other networking/broadcasting distribution platforms in support of triple play/network convergence. So, the article has to be addressed.

First, lets be clear that IPTVs business over the last 5 years has not relied on network convergence because there simply was no network convergence to begin with until the recent 5 year plan started by the Chinese government last June 2010. So, UTs IPTV business/system has primarily been sold to telecom operators as a standalone. This fact is highlighted by the recent interview with Bestv CEO..

"Could you explain the government's plans for convergence of the country's telecoms and broadcasting networks?

The SARFT agency of the central government is responsible for overseeing the broadcasting networks in China. The State Council has recently issued a three-networks convergence policy, which explicitly allows for and promotes the adoption of IPTV in China.

What impact will these have on BesTV?

The impact is quite positive. BesTV will continue to follow these new regulations from the State Council and SARFT in developing our IPTV business, and we will continue to expand in our markets in China."

One side note is that BesTV has been doing very well with their iptv business and mentions iptv at its infancy.

"We strongly believe that we are still at the beginning of the growth stage for the IPTV market in China. Having surpassed 4mn IPTV subscribers recently, we are only at less than 5% penetration of the current 110+ million Chinese households with broadband internet service. We think that over the next few years, we would be able to quickly add many million more IPTV subscribers."

http://www.iptv-news.com/iptv_news/march_2011/we_are_still_at_the_beginning_of_the_growth_stage_for_iptv_in_china

In fact, business is so good that SMG chief Li Ruigang is building his media empire via the iptv platform and building up BesTV

http://www.c114.net/news/44/a591072.html

BesTV is profitable and they have been rolling (increased momentum) with the acquisition of Rupert Murdoch's Chinese assets last Aug. 2010 and SMG recently picking up the 3G mobile phone TV license.

http://www.newsmax.com/Newsfront/murdoch-china-tv-channels-sale-news-corp/2010/08/09/id/367045

http://www.cn-c114.net/2501/a580127.html

Back to the article regarding triple play mortality.....it states

"In the past year, triple play has achieved no substantial progress, and we have not held a conference of triple play for a year and half, I feel triple play will face the mortality risk." Wei Leping said"

Now, I don't know what conference of triple play has not been held for a year and a half but the pilot for network convergence was just started in June 2010 and all indications are that there IS "substantial progress"

http://www.c114.net/news/550/a584487.html

At the same time, the State Administration of Radio, attaches great importance to triple play, triple play by the State Council on promoting the overall programs and pilot programs, and actively promote and seriously implemented. According to Zhang Haitao introduced triple play key SARFT made for the following work:

"First, pay close attention to building a unified national planning, unified standards, unified organization, unified management of IPTV and mobile TV platform for the integration of broadcast control and monitoring platform; the second is to accelerate the cable TV network's integration and digital two-way, and the transformation of the next generation of wide power grid construction; third is to actively build the Chinese Radio and Television Network Company. "

Lets look at these 3 items with relation to UTStarcom. The triple play buildout would help its exsiting IPTV business with the unifcation of IPTV and mobile IPTV (and in fact Jack Lu mentioned the potential for devloping IPTV handsets). The 2nd point is a focus area for UT as well as they are targetting the cable TV industry and its 2000 operators. And the third is building platforms to link Radio and TV.

UT has participated in the trials but in essense the triple play part of it just described is still not a tangible part of the company, which includes IPTV, PTN, EPON, etc.

With respect to the progress of triple play....again, that article points to substantial progress

Zhang Haitao, said, "now the smooth progress of the work, especially in 12 pilot cities and regions have basically completed the integrated IPTV platform for the construction of broadcast control, and the total platform with the central docking. Also in the domestic Internet audio-visual program services sector, SARFT has been vetted and approved 594. To carry out the triple play of the experimental work laid a good foundation. "

so does that mean when that conference that Wei Leping is referring to happens, then there would be a spike in triple play progress?

Going back to the third aspect of triple play....here is an article that came out late Friday as well...

A Clear Direction of National Radio And Television Networks Company

http://www.cn-c114.net/583/a591023.html

"In early 2010, China decided to speed up triple play of telecommunications network, broadcast network and Internet, and considered the overall program to promote the triple play.

With the program, China will set up a national cable network company in 2012. It is learned that the company will be listed this year, and the registered capital may be over 100 billion yuan.

In this regard, Shen Xiangjun said that the demands from state and central is to completed the integration of networks within two years and achieve one network in one province."

------------------------------------------------------------

Does any of this guarantee the success of IPTV and/or triple play? And if it does, does this benefit UT, a perenial underperformer that can't hits it target even if its in front of it?

UT CEO Jack LU gave a recent interview stating....

Lu Ying: So I think the construction of triple play this year, including related to us a business opportunity should be much larger than last year, despite a quarter of the year just past, we clearly see that the various needs of the rapidly increased.

Daily: You are very optimistic about this year's market?

Lu Ying: Yes.

http://www.c114.net/topic/2732/a590530.html

UTStarcom has moved back to China, solidified cash position, added on 4 Chinese board members with substantial industry/China background, and picked up investment from the Beijing government. It has increased bookings from $36m to $52m from Q3 to Q4 of 2010.

Now, does any of this guarantee success and a higher stock price? NO, the company has to compete against huge competitors and prove themselves quarter to quarter. The market doesn't believe it either as it is valued at around cash and there really is no huge institutional interest but if you are long shreholder, isn't the picture getting better?

The short sellers and bashers are betting on past history and UT not getting any business. UT has also partnered with China Merchant Bank on Strategic Cooperation Agreement on Triple Network Convergence

http://www.prnewswire.com/news-releases/utstarcom-and-china-merchants-bank-sign-strategic-cooperation-agreement-on-triple-network-convergence-96574324.html

One last thoughts from the short seller:

"Tim, you are really screwed. I warned you!"
"When those Chinese investors such as Tiger and Tech all got out of this stock, it means something."
"posting something from the third party, please."

The above is basically what I have come up with and why I'm staying with the stock at these ridiculous valuations :-)....not sure what the "Chinese" investors think but I welcome the discussion and more importantly wait to see the progress quarter to quarter.

Have a good weekend.

Increased CAPEX spending in China

2011-03-17T17:19:00.000-07:00

There was a bunch of news today regarding increased spending in China.

1. China Mobile surprised analysts by increasing CAPEX...to a level that was 35% higher.

"Soh said she was surprised by the company’s projection, which was 35 percent more than the 98 billion yuan she estimated."

http://www.cn-c114.net/583/a588872.html

2. "It is reported that for the network upgrade, China Unicom will choose several cities to deploy PTN packet transport network to solve the high-bandwidth needs of 3G wireless backhaul."

http://www.cn-c114.net/583/a588834.html

Blackmore discussed this last year (or was it at the end of 2009!) that Unicom was behind China Mobile in their PTN deployments. This is a good potential for UT.

3. "China will coordinate the layout of the new generation mobile communication network, next generation Internet, digital radio and television networks, satellite communications and other facilities to form the ultra-high speed, large capacity, highly intelligent national trunk transmission network."

http://www.cn-c114.net/583/a588794.html

4. "China Telecom has announced its plans to increase its fiber optic broadband service subscriber base to three fold to reach 30 million in fiscal 2011."

http://www.cn-c114.net/583/a588676.html

"Wang Xiaochu, Chairman of China Telecom commented that China offers a huge market potential for broadband services, as only 23% of Chinese families are using Internet. This plan will offer rich media, 3D and HD IPTV services that need 10 Mb and more bandwidth."
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There is a huge amount of buildout going on in China whether its iptv or broadband, or mobile backhaul or new platforms for network convergence. UT has ramped and developed products over the last couple of quarters that they can now sell (as well as being a Chinese company now). It is now very hard to see how UT cannot ramp bookings significantly through this year and stake their position whether its with the 2000 cable operators or the major telecom players or even the enterprise (state grid, transportation, energy customers, etc).

UT ipad multi-media terminal and other products

2011-03-15T17:55:00.000-07:00

Ipad
http://www.c114.net/topic/2701/a588163.html
HD player
http://www.c114.net/topic/2701/a588161.html
Two set top box models
http://www.c114.net/topic/2701/a588153.html
http://www.c114.net/topic/2701/a588110.html
and an extensive article on their IPTV interface...and discussion of one deployment in Anhui province.
http://www.c114.net/topic/2699/a588093.html

UT is also participating in CCBN (China Content Broadcasting Network) conference + interview with a UT VP....regarding various products/platforms they have.

http://www.c114.net/news/128/a587189.html

Q4 2010 Recap

2011-03-13T11:01:00.000-07:00

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.

Stakes are high

2011-03-02T21:36:00.000-08:00

The stakes have always been high for the company getting to profiability and raising revenue. Unfortunately, the management/company has not been able to do it after 7 years.

Another company Sonus just reported a blowout quarter beating analyst estimates by 27% on the top line. Sonus did $227.5m in revenue in 2009 and just did $249m for 2010. It then gave guidance for revenue in the $265m-285m for 2011. Sonus has 60% GM so its not comparable to UT but it did have to get to profitability and increase revenue. By doing so in the last year, the company has now been rewarded with an enterprise value of around $800m compared to negative for UT.

UT's "core revenue" dipped to about $36m in the 3rd quarter and projected to do no better than that in the 4th quarter. OPEX is still in the $30m range and GMs are still in the 20s (I think its even lower than that when taking out the deferred PAS revenue margins and additional writeoffs).

Jack Lu has been with the company almost a year now and officially the CEO for over 6 months so he's had time to evaluate the company and laydown a pathforward. With still around 2k employees and $30m in quarterly expenses, that is way too much for this company. As a longtime shareholder, it is quite baffling to see how incompetent and poorly managed this company is. The stakes are still high and the market will reward performance but it has to start at some point.

I am looking for material booking increases way above $36m, GMs to be in the mid 30s, expenses to come down closer to $20m. Jack Lu doesn't have to be a genuis. He doesn't have to be very knowledgable in business or even in the technology. He just has to look at the bottom line and make the most fundamental changes in running a company (or any budget for that matter). I don't expect the company to reach 60% GMs but revenue growth of 10% like Sonus in China is laughable.

Here's an article on China Telecom on their fiber buildout...

http://www.cn-c114.net/583/a584981.html

"China Telecom plans to cover every city in China with the fiber broadband service in three years and convert all copper lines to fiber, China Daily reported. Under the Five-Year Plan, the Chinese government will focus on developing the telecommunications infrastructure, with total investments reaching 2 trillion yuan. Broadband development would account for 80 percent.

This plan will provide broadband access, high-definition IPTV, 3D and rich media services that require bandwidth of about 10 megabytes and above."

Like I said, the stakes are high.......does this management have any sense of urgency?

Basic business cycle

2011-02-07T13:48:00.000-08:00

UT had sold some significant assets from Gemdale to PCD to the building over the last few years . The problem has been the high expenses, and later the costs of unwinding these bloated infrastructre. Coupled with the collapse of PAS and slow adoption of iptv and even lack of traction in India/Japan, and you have a company on the defense and caught in a downward spiral.

The question now is will UT be able to use the accumulated funds to grow revenue going forward. It has NOT done so up to now (Q3 report) but lets look at some items that prevented it from happening or new developments that can make it doable now.

1. Japan/Softbank - Revenues for Japan had gone as low as $6m/quarters. TN revenue have started to come in last year and revenues have gone up to the $10m/quarter range. Full deployments (after the initial trials/equipment testing) are projected to occur this year.

2. India - The India market's security concern primarily targetting Chinese companies hit UT particularly hard. Additional writedowns had to be taken. The company talked about hiring Indian director(s), manufacturing in India, etc but so far nothing. All we know is that UT is still the iptv leader in India and that broadband needs are significant.

3. China - The network convergence trials for the Tier 1 cities just started mid last year. At the same time, UT has "moved" to China, finalized the investment deal from the local Beijing government and added Chinses board members familiar in the industry/regulatory framework.

4. Expenses - Target of under $100m/year has not been achieved...its about $30+m/quarter still. Recent PR from the company discuss additional reorganization of groups and the CEO taking on certain businesses directly. Full outsourcing has not been completed so further cost cuts should continue to lower expenses.

The above lead us to CASH. They have spent $10m on the StageSmart acquisition and put some $20m more in working capital into the acquisition. Providing telecom/communications equipment (everywhere) and the new platforms for network convergence is going to take some significant working capital and this is a UT advantage. While technology (or adoption) or management might not have been in place previously, this is not the case anymore. The world markets have rebounded but capital is still tight. This gives UT an edge over smaller companies or even larger comapnies that are spread too thin across product cycles or different markets.

At this stage, there has been little change in UT price the last couple of years and operating performance has not improved but with significant liquidity, adoption of UT technology now (TN/iptv), new manaegment/focus, the scenario might just be favoring a real turnaround.

Technicals

2011-01-08T13:16:00.000-08:00

(Click figure for more clarity)

How are technicals looking for UT stock? It felt "terrible" in December and suddenly "feels" good after an almost 20% move up from the recent bottom. Seems obvious but its good to know why that is and more importantly what to do at that moment (if any).

So, I did some TA on the stock and found some interesting points. Since the stock topped at $3.26 in April and the low in June ($1.65) it has been consolidating for some period. A symmetric triangle has now been formed by the events of the last few months. I have drawn a lower/rising support line from the lows in September and a resistance/falling line at the peak in October highs. This support line basically held throughout the October-November period after the revenue shortfall announcement but broke down in December. Volume actually picked up during this time which was worrisome but not really huge volume (only over 1m on a couple of days). It stopped going down in the $1.9s range (which is the lows in Sept). This was actually a critical hold for the stock as it was a FAKE breakdown, which is what we want to see in a symmetric triangle. Now, after a 20% rally, it is coming towards the resistance line.

While a major breakout is possible, it has to do it soon and it will take some huge volume. Barring that, it will continue to complete the triangle and trade in the $2-2.2 range and then its 50-50. Re-drawing the bottom support line shows it should have very good support and it may NOT ever see the $1s again for a long time and if we do, it is not a good sign.

Upside Target: The peak range is ($3.26-1.65) = $1.61. If it breaks out, it could hit $4 as an initial target. Breaking down in the $2 range would bring the stock to 35 cents.

Here is a definition of a symmetric triangle with some of my side comments in italics:

Most consolidation patterns are about indecision -- traders are uncertain about the near term direction of the stock so they do nothing. Symmetrical triangles are different because when a stock falls into one of these patterns, traders actually behave as though they have reached a consensus regarding price (Easy to dismiss the $2 level as a consensus like one poster Tigre has). We know this because there is a uniform narrowing of price over time. Symmetrical triangles usually develop after a stock has had a spectacular move (Feb - April 2010 when it moved from $1.8s to $3.2s). After reaching a relative new high price momentum may begin to fade modestly and the stock works lower. Because the fundamental news is so strong, Wall Street analysts will often dismiss this weakness as mere profit taking following a lengthy advance (UT didn't actually have strong fundamental news at the time but you may say the Roth conference put some fundamental news into new investors that made them act). The stock slips back to an intermediate term support level and price stabilizes ($1.8-2.2 range). At this point it is common for the stock to begin moving higher on a positive fundamental development (Closing of China investors/Network Convergence starting up). Perhaps the firm has raised guidance, announced a stock split or unveiled a new product but price slowly begins to move higher (Several Chinese contracts announce after Chinese investors close deal and Jack Lu gets appointed CEO). There is one problem, volume is noticeably lighter than previous rallies. The price rally continues but falls short of the recent new high ($2.5s in October). This secondary high will be an important point later in the formation of the pattern. After several days of strength, momentum once again fades and price begins to falter. Slowly the stock moves lower on no specific news and extremely light volume ($2.15 level to $1.9s). Sensing that sellers may not have an appetite to continue selling buyers reappear and the stock stops short of the intermediate term support level ($1.9s in late December). This secondary low completes the bottom parameter of a uniform or symmetrical triangle. Over time the stock begins to trade in an increasingly narrow range characterized by a series of lower highs and higher lows. As time passes traders grow to believe that the current stock price accurately reflects the true value of the stock. Volatility and volume slow dramatically as the stock approaches the apex of the triangle (We'll see how the stock reacts as it approaches the apex but there definitely is a lack of interest and consensus that it is not going anywhere). Then, abruptly there is a fundamental development that leads to a dramatic upside breakout. Volume swells and Wall Street analysts begin making new "buy" recommendations and raising their price targets. As prices moves beyond the upper parameter created by joining the recent new high and secondary high some investors that had felt the stock was fairly priced at lower levels begin selling but their shares are quickly absorbed by buyers. In fact, the demand for the stock becomes so intense that price very quickly surges beyond the recent new high. Weeks later the stock moves significantly higher.

The last part is the longs "hope" but as for the price remaining in this range, something has to give.........I just "hope" its not 35 cents.

BTW, I don't do much of TA on the blog but here's the last one I believe, on Sept 14, 2009

http://utstarcom-stocknews.blogspot.com/search?updated-min=2009-09-01T00%3A00%3A00-07%3A00&updated-max=2009-10-01T00%3A00%3A00-07%3A00&max-results=3

That was posted when the stock traded between $1.94-2.09 with 379,400 shares. My upside target was $3 in 20 days. On Sept 17, 2009, it traded up to $2.54 with 3.3m shares. Not exactly $3 but a nice jump nonetheless :-)

Have a good weekend everyone.

2010 Chinese International Exhibition

2010-12-15T13:39:00.000-08:00

This article came out in early October that talked about UTs new logo and products/focus in the Chinese market. It might also be the reason the stock rallied to the mid $2s at the time prior to the revenue fall announcement.

http://www.c114.net/news/128/a549170.html

Heres part of the article translated (poorly):

IPTV and new media as a pioneer in interactive video, UT Starcom, the torrents use their own research and development (RollingStream) IPTV system, launched the world's leading creative, and meet the needs of the real operators may be operational, management, flexible fit the three-screen integration of carrier-class end to end broadband TV solution for triple play help meet the needs of operators to build comprehensive business solutions. Through years of research and development in the area of the accumulation of interactive video, rushing (RollingStream) system has become the industry's leading open, multi-service, multi-service broadband terminal multimedia service platform, and with large-scale commercial world. Data show that the end of 2009, UT Starcom's IPTV system has become China Telecom , Shanghai, Shaanxi, Fujian, Zhejiang, Anhui, Hainan, Yunnan, Ningxia, Jiangxi and other branches of the IPTV system, the main partner in China Continental-scale deployment of IPTV commercial system has more than 200 million.

- the last statement I take as over 2m subscribers under UT.

It does have a nice picture of the UT booth and hopefully, that will increase awareness and drum up some Chinese business. Bookings in China which are probably in the $20m/qtr level need to go significantly higher.

Partnerships, Joint Ventures, and Acquisitions

2010-12-13T15:17:00.000-08:00

From the proxy materials (under related party transactions),

http://www.sec.gov/Archives/edgar/data/1030471/000104746910008922/a2200593zdef14a.htm

Yellowstone: In addition, as of the date of printing of this Proxy Statement, we are considering an engagement letter with Yellowstone pursuant to which Yellowstone will act as a strategic consultant to the Company and any of its subsidiaries, divisions or legal/organizational units to assist the Company in establishing or expanding strategic partnerships, joint ventures, acquisitions and the Company's business in Asia consistent with the Company's goals. The terms of the engagement letter and the fees payable thereunder are currently being negotiated; however, it is contemplated that we will pay Yellowstone a monthly fee of US$20,000 and certain success fees upon the successful completion of a specific transaction as proposed by Yellowstone and approved by the Company generally based upon a varying percentage of the transaction deal size, with certain exceptions. We will also reimburse Yellowstone's reasonable expenses incurred in connection with the services.

Softbank: Softbank Corp. is an affiliate of Softbank America, Inc., which holds approximately 9.7% of our common stock. During 2009, we recognized aggregate revenue of $28 million (includes $5 million in sales to NEC Networks & System Integration Corp., Japan Electronic Computer Co. Ltd., Nippon Telecom Sales KK and Oki Electric Industry Co., Ltd. for which Softbank Corp. was the ultimate customer) with respect to sales to affiliates of Softbank Corp., including (i) sales of telecommunications equipment to Softbank BB, (ii) sales of equipment and services to Softbank Telecom Co., Ltd, a wholly owned subsidiary of Softbank Corp. and (iii) sales of equipment to BB Cable, an affiliate of Softbank Corp. Our Audit Committee has reviewed and approved the transaction with Softbank Corp.

In addition, as of the date of printing of this Proxy Statement, we, through a wholly owned subsidiary, are finalizing an agreement with ZTE (H.K) Limited ("ZTE"), a company incorporated in Hong Kong (the "ZTE Agreement"). Pursuant to the ZTE Agreement, we will agree to form a special purpose company incorporated in Hong Kong with ZTE (the "HK SPV") for the purpose of making and holding an investment in a high speed mobile data communication service business affiliated with Softbank Corp. (the "Softbank Affiliate"). We will agree to pay 176,000,000 Japanese yen (approximately US$2.17 million) for 35% of the equity of the HK SPV and provide a loan of 595,000,000 Japanese yen (approximately US$ 7.32 million) to the HK SPV. ZTE will agree to pay 327,000,000 Japanese yen (approximately US$4.03 million) for 65% of the equity of the HK SPV and provide a loan of 1,105,000,000 Japanese yen (approximately US$13.60 million) to the HK SPV. The
U.S dollar equivalents are based on the exchange rate of 81.105 Japanese yen per U.S. dollar. The HK SPV plans to use the paid-in capital and shareholder loans to invest in the Softbank Affiliate. Our Audit Committee has reviewed and approved the transaction.

--------------------------------------------------------------------------------
Depending on the side of spending you are on, the above is either going to be positive or negative on paper. This is a company that has cash as its strongest asset. If it can use it well to transform the company, then I am all for it as a transformation and turnaround is what we are looking for. The Yellowstone fee is minimal to what they have been paying their managers and resulting performance. On the flip side, spending for the sake of spending would obviously be negative.

The joint venture with ZTE (which ZTE is this?) seems interesting and could contribute right away to the relationship with Softbank and potentially boost company revenue in Japan much faster.

The amount of revenue and bookings are not enough at this stage to support their expenses so the company has to decide how long to keep up that expense base or act more aggressively to generate more revenue. For them to a player in the iptv/telecom-cable infra in 3 major countries no less, I would think they have to generate significantly more revenue and be aggressive for growth (and thus my vote for continued investments).

Random info on UT and industry related news

2010-12-08T23:34:00.000-08:00

Value of Network convergence infra spending:

"A report by the iChina Research Center, says that the Three Network Convergence related market will reach RMB 688 billion over the next three years, of which, RMB 249 billion will be spent on migration and construction of infrastructure for both telecom and cable networks, set-top boxes and content management and media service platforms, with the remaining RMB 439 billion generated through content demand and media consumption."

http://finance.yahoo.com/news/UTStarcom-Announces-Strategic-prnews-4271381014.html?x=0&.v=1

So, about $30B over 3 years will be spent. From the same UT PR,

"IPTV subscribers in China will be about 7 million by the end of this year and 10 million by the end of 2011."

"According to Lmtw.com, China Telecom had 5.36 mln IPTV subscribers as of August 2010, accounting for over 82% of national IPTV users."

http://www.cn-c114.net/576/a553725.html

According to recent Chinese articles, UTs share is over 2m subscribers and 33%, which is consistent with the overall numbers so by end of 2011, it could be 3m+ users.

From same article above, Shanghai has another tender and results should have just come out.....

National IPTV network status:

"According to the statement, the platform network has already joined with sub-networks of radio and television organizations in five pilot regions in Sichuan, Hubei, Beijing, Shenzhen and Shandong."

http://www.cn-c114.net/583/a565282.html

Key statement there was Radio as UT acquired Stagesmart and deal with Cristar. Also, UT has already mentioned winning some cities in the pilot.

China Telecom investing CNY15B ($2B) in EPON in 2011.....whats UT share?

http://www.cn-c114.net/576/a566980.html

In Japan with Softbank, see this interesting article...

Softbank Proposes Fiber Broadband Highway for Japan
http://www.cn-c114.net/576/a555240.html

Statement of Jack Lu in the earnings CC,

"Finally, for our broadband business in Japan as we shared on the last call that we passed all of soft SOFTBANK BB’s quality control test. We have already started to receive purchase orders from the clients for our key end technology in Tokyo, Osaka and Nagoya. As a result, we expect a sizable increase in 2011 once this initial rollout proves themselves."

http://seekingalpha.com/article/234469-utstarcom-ceo-discusses-q3-2010-results-earnings-call-transcript?source=yahoo

SIZABLE increase???

-----------------------------------------------------------------
Jack Lu:

"So, while we continue to cultivate the telecom space with pure equipment based sales, you can see that the opportunity in China in with three network convergence is significant, and I see it as my job to ensure UTStarcom and its investors win a significant portion of the upside."

UT PR on Q3 accomplishments:

"the Company won a project with Jinan City's Cable Network as the exclusive broadband solution provider"

"the Company won IPTV projects with operators in Sichuan (already announced), Hubei (new), Henan (new) and Shenzhen (new)"

(Good wins that are the same cities to the pilot cities of the National network cities)

"the Company expanded a previously established revenue sharing relationship with South Media Interactive Co., Ltd, the interactive business unit of South Media Group, to add HDTV options to their IDTV offering, be responsible for the development of interactive products and provide operational support services to the platform "

"the Company announced a strategic partnership with a company controlled by a national level broadcaster to provide technology and operational support for Internet TV service in China and abroad"

--------------------------------------------------------------------------

Unfortunate to see the stock doing so poorly in light of the bull market and year-end rally....The street (or atleast some investors) may finally be giving up on the company/stock as it pushed the price below the investor buy in price and way below cash ($338m + $34m more in restricted cash = $372m or about $2.4 in total cash).

Anyway, the above shows the market for their products are healthy and growing. The key as always is the amount of share they can win and how fast.

If you are a bagholder like myself, atleast you should know what you've got and what the "hope" is.....

Cash balance at the end of the year

2010-10-28T02:15:00.000-07:00

With the revenue shortfall for the year and the strategic investment in Stage Smart, here is an estimate of the cash balance @ the end of the year.

The projected revenue is down to $270m-$280m (say $275m).
Q1 & Q2 revenues combined was $154m, which leaves $121m for the last 2 quarters. The deferred revenue left at the end of the June quarter was $141.5m. It was about a total of $182m that was supposed to be recognized in 2 years. So, lets say $50m more to be recognized this last 2 quarters. That leaves only $71.5m of revenue. At 25% GMs, you have about $18m in gross profits.

Lets say OPEX is a full $60m the last 2 quarters and not the $50m they are projecting. That is a cash shortfall of $42m. Add the $20m for the Stage Smart investment and you will lose $62m from the cash balance.

The cash balance of $308m will be augmented by $36.6m from the new investment + another $8M if the last option is exercised.

So, you have ($308+36.6+8-62)m or roughly $290m left in cash. They have $34m more in restricted cash.

In summary, the cash is going lower as the company still does not have the revenues to support it and as the investment in Stage Smart shows, it will also spend for acquisitions. As it stands, by the end of the year, it will still have substantial cash. The cash burn will lessen if the revenue shortfall is due to a pushout and they can reduce their opex further. But more importantly, can they utilize this still sizable amount of money (around $300m) + the credit line early in the year to build a sustainable profitable business.

Delays have cost UT shareholders

2010-08-02T16:57:00.000-07:00

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

2010-08-02T00:14:00.000-07:00

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.

http://translate.google.com/translate?js=y&prev=_t&hl=en&ie=UTF-8&layout=1&eotf=1&u=http%3A%2F%2Fwww.lmtw.com%2FUT%2Frep%2F201004%2F56163.html&sl=zh-CN&tl=en

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.

India and China front

2010-07-10T17:03:00.000-07:00

While UT has had some tangible news coming out from China regarding credit lines, completion of the Beijing investment deal and agreements on interactive TV, there has been little news on the Indian security situation.

Here is an article that shows there is still a current "ban" on Chinese companies in India...

"India competes with China the wrong way " http://www.cn-c114.net/583/a522716.html

Although India has publicly assured that it is not banning Chinese telecom products, a recent Indian media report revealed that its government has a blacklist, which actually bars 25 Chinese telecom manufacturers in the name of security precautions.

Last month, UT CEO Peter Blackmore mentioned in an interview in India that they will have a local outsourcing manufacturer in place in India by Q3. There is also a glimmer of hope that eventually, the Indian situation will have to be resolved soon.

http://www.lightreading.com/document.asp?doc_id=194192&

Mukherjee said Reliance Communications and other major operators have the underlying passive and transport infrastructure ready to deploy 3G, which will involve a relatively painless overlay. "It will be rolled out very quickly... the electronics will come fairly quickly from China," stated the Reliance Communications president, who is obviously confident that the current barriers to sourcing network technology from Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) will soon be broken down. (See No Respite for Chinese Vendors and BSNL Blocks Huawei, ZTE Bids.)

"The speculation is that the leading operators will roll out their first-phase 3G services any time between September and December. The rollout and service launch won't take much time," added Mukherjee.

He believes there is an addressable broadband services market of 850 million people in India, so current broadband penetration, with only around 10 million fixed (mostly DSL) and wireless (mostly BSNL and MTNL's initial 3G) broadband users, is very low.
---------------------------------------------------

The company seems to be headed in the right direction but the unresolved issues in India and uncertainty in future value of UTs share of the businesses in these large markets keep a cap on the stock for now.

India manufacturing in Q3 & New Chinese Credit Lines

2010-06-14T19:28:00.000-07:00

Looks like things are starting to move. On the back of closing the building sale, UT has obtained a 2Billion Yuan minimum credit line over 3 years, with a minimum of 1 Billion the very first year.

http://www.caijing.com.cn/2010-06-13/110459191.html

In other news, Peter Blackmore has been giving some interviews in India and looks like they have gotten a local joint venture partner and plans to manufacture in India as early as Q3.

http://www.cn-c114.net/577/a515215.html

"While UTStarcom has already identified an Indian joint venture partner, Israel-based Alvarion is charting out its plans."

Speaking to Business Line, Mr Peter Blackmore, UTStarcom's Global CEO and President, said, “We had already made plans to manufacture in India, we are now accelerating these plans. Once we do that, we would have largely addressed the security problems. We want to comply with the Indian laws and if we set up a manufacturing here, then the debate is over.”

"The US-based company, which will soon shift its operational headquarters to China, plans to start production with an Indian partner in the third quarter.
Mr Blackmore did not reveal the name of the partner or the investment details."

Investor presentation in June?

2010-06-08T19:32:00.001-07:00

http://files.shareholder.com/downloads/UTSI/897918691x0x380206/09474f27-899d-4992-8ae2-68bb088b64ec/UTSI%20Investor%20Presentation%20-%20June%202010.pdf

Looks like there is some kind of investor presentation in June......Looks like they are still looking to close the Chinese investment and BSNL deal in the near term.

Conference Call with Peter Blackmore

2010-05-29T18:32:00.000-07:00

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.

Details of Beijing Investment and Commitments

2010-05-21T18:53:00.000-07:00

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.

India Situation and Beijing Investment

2010-05-08T11:36:00.000-07:00

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).

http://telecomtiger.com/PolicyNRegulation_fullstory.aspx?storyid=9075&flag=1&passfrom=topweekendstory&section=S174

"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.

Q1 2010 Recap

2010-05-04T22:07:00.000-07:00

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.

India

2010-05-02T20:31:00.000-07:00

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. http://www.ciol.com/Technology/Networking/News-Reports/UTStarcom-wins-8th-VARIndia-award/251109128144/0/

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. http://www.telecomtiger.com/fullstory.aspx?storyid=6353

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." http://asia.tmcnet.com/topics/india/articles/44293-utstarcom-discusses-indias-growing-broadband-market.htm

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.

Shanghai World Expo

2010-05-01T19:33:00.000-07:00

http://english.cntv.cn/program/newshour/20100430/104833.shtml

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.

Tellabs Q1 call - What UT should aspire to

2010-04-27T22:49:00.000-07:00

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:

http://seekingalpha.com/article/201153-tellabs-inc-q1-2010-earnings-call-transcript?source=yahoo

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...

Analysts
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.

IPTV

2010-04-26T18:53:00.000-07:00

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.

http://www.iptv-news.com/iptv_news/april_2010_3/chinese_iptv_subscribers_up_63_in_2009

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.

http://www.iptv-news.com/iptv_news/march_2010_4/chinese_iptv_subscribers_to_double_this_year

"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.

Pieces in place

2010-04-25T19:44:00.000-07:00

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.

Reasons for the recent rally.

2010-04-05T18:07:00.000-07:00

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 :-)

Stock Technicals

2010-04-04T22:23:00.001-07:00

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).

http://finance.yahoo.com/echarts?s=UTSI#chart2:symbol=utsi;range=20030313,20100329;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

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.

Revenue and Earnings Growth

2010-03-31T20:34:00.000-07:00

There have been numerous things that were accomplished during the last few years such as the restructuring (like the 5th one in the last 5 years), resolving accounting/filing issues, legal matters, raising capital (Softbank China, Gemdale sale, PCD sale, Building sale, and new stock issue/new investors), and moving to China/getting new BODs. There are still some work to be done on the cost side/restructuring but basically, the main issue now is can they get to profitability, sustain and grow revenues.

The company's model is to have around $350m in revenues, high 20s GMs, and an OPEX under $100m per year. Blackmore has repeatedely mentioned that the cost targets should be achieved by the end of Q2 when the restructuring will be completed, outsourcing in place, and headcount down below 2000 (maybe around 1700). The company has also worked on improving GMs by getting out of the handset business, improving execution on the new BSNL contract, and relying on new products (line of TN products). During Q4, GMs were already at their target range including the deferred revenue (low broadband margins offset by higher pas/iptv margins). On a side note, Huawei's GMs for the last two years were around 40%.

So, in order to drive to profitability, revenue growth is a priority. The company is confident it can get there by Q3 due to the deferred revenue (and lower expenses by that time) but the bigger question is can it sustain it without deferred revenue. The fact is the company will always have deferred revenue just based on the nature of their contracts. Without the $100m in deferred revenue, they would still have $250m this year in "non-deferred" revenue. The company should be able to replace the deferred revenue with the upcoming Phase 3 contract.

Where is the company going to derive "additional" revenue? The company has also layed out that plan and its to do vendor financing to land larger deals. At first glance vendor financing has its drawbacks but done properly, this has a good chance of working. Why? First, other companies like Cisco/Huawei do it and still get very high margins. For their customers, the margins are not as important as getting financing! With $400m in cash, UT is now in a position to go to banks and get low interest loans and do vendor financing. The areas they will be targetting are iptv cable in China and Softbank (TN product/others).

Projections for iptv in China (telecom/cable) should be very healthy and broadband in India as well.

The number of IPTV subscribers in China will double this year to reach 8.5mn by the end of the year (up from 4.4mn in 2009), according to a new report from iSuppli.
http://www.iptv-news.com/iptv_news/march_2010_4/chinese_iptv_subscribers_to_double_this_year

"According to me (Vijay Yadav), within next three to five years broadband usage should reach a minimum of 100 m subscribers"

http://www.telecomtiger.com/fullstory.aspx?storyid=8544

While UT has a good market share in broadband, the payoff will be in iptv and its related services once the number of broadband users expand in India. This will be another area where the additional cash will help going forward.

Revenue growth/impact to earnings - In order for the stock to move higher from here, it has to start generating revenue growth and profits (hard to imagine after all these years). The company has detailed certain time frames for the closing of the building sale/new investor shares. Once that is completed, they can focus on discussing getting their loans (if not already). At that point, it will be about execution as they have more control now of getting profitable contracts and can control their revenue/performance better. Every $100m in new revenue will represent a 30% increase from $350m and yield about $30m in additional gross profits (more if it is tilted to higher margin TN/iptv products and lower if its mostly broadband products). While $100m is large for this company, its not in the overall telecom world (as evidence by Huawei's $18.9 B and $21B revenue the last two years).

Back in 2008, the stock hit almost $6. Looking back, the company was in terrible footing. Without PCD, the company was losing $130m. It was still relying on $250-300m in PAS revenue and the major worldwide recession was still to hit. The company projected needing hundreds of millions in new revenue just to break even and their projections for 2009 was obviously off. This time, the projections could still be off but the much lowered expense by Q3, the existing revenue/deferred revenue, and potential for large revenue increases through vending financing make it more credible that they are on better footing (in terms of getting to sustainable profitability).

We will see if they can execute on their roadmap and start building some consistency/credibility/better performance. As UT CEO Peter Blackmore has said, the heavy lifting has been done and they just have to ride the wave in growth in China/India. Most investors are still cautious as they should due to the history of the company but I think the "ride" should be a lot better for investors going forward. So, how come we aren't at $6 yet :-)

Summary of items from the last earnings call

2010-03-29T13:52:00.000-07:00

Here is a comment from the message board today by a longtime shareholder, Flipocrat, and my response.

"I would be very happy if someone could talk me out of these concerns, because I had looked to the last cc to address all of this, but heard nothing really useful, just more generalities."

Flip,

I heard a bunch of useful things such as:

1. Restructuring to be completed by end of Q2.
2. OPEX yearly run-rate of less than $100m will be achieved by end of Q2. This includes factoring in rent.
3. On the Q&A, there was a question on profitability/cash flow and Peter answered that Q3 should be the breakeven/profitable point.
4. BSNL which is around $120m (from my talk with Peter and other inst. investors) should be signed in Q2.
5. IPTV demand is going well with STB orders picking up. The company mentioned they have 44% market share and a 3rd party estimate shows a major growth phase starting in 2010 continuing through 2014 in China.
6. Two areas that they will use their cash to boost revenue are IPTV cable and Softbank. Both are very credible as the company has strategic positions with both and have the cash/technology to determine their faith.
7. Beijing investment to close in April.

UTSTarcom CEO Peter Blackmore has been straightforward in what he wants to accomplish and how he is going to get there. The problem has been the execution, which has been poor and that has led to credibility issues but overall, they are doing what he has set out to do. With Q1 closing, there should be a lot of items to check off for the next couple of months and then they are at operationally where the company should be.

Call with Peter Blackmore

2010-03-21T23:00:00.000-07:00

I had an opportunity to talk with UTStarcom CEO Peter Blackmore last Thursday, 3/18/10. Linda Rothemund, UT IR manager set up and joined on the call. The call started a little bit later as they were running late but I very much appreciated them accomodating my noontime call request. (The following are not in a particular order and I have added color from listening to earnings/Roth conference calls.)

The call ocurred a couple of days after the Roth Growth Conference and the company's own earnings call the previous week. While the conference was a "growth" conference, I had heard that the investors in this conference also looked at turnaround stories. I asked Peter how was the Roth conference? Peter met one on one with atleast 6 investors/institutions. The investor's biggest concern was about execution going forward. Peter reiterated a few times on our call that this was the right time to do these types of investor conferences as the company is mostly through with the heavy lifting. Are they planning more going forward? Yes. In the Roth conference, there was a question regarding growth and basically why it was worth investing in the company. Peter answered that the company's enterprise value was negative, almost all the heavy lifting was done and basically a disconnect with the stock price since they were in leading positions in China and India in certain areas.

I had commented to Peter that credibility was an issue up till now and that the few metrics we heard such as the BSNL project and the restructuring being completed last year were both delayed. He assumed responsibility for that but did not see it as a big delay in the big picture.

On a side note, my own thoughts on the conference was that it was interesting to see Peter try to sell the company to new investors ...almost like me trying to defend the company with the same line of reasoning. Nice to see him work but then again, its not a fair comparison since he has gotten paid and I and a lot of shareholders have not.

Ok, moving on....BSNL contract. Phase III has been delayed due to BSNL management change. How confident is he that they will lock this in? Are there other bidders? The Phase III contract is part of a master contract that included Phase I-III with UTStarcom is the sole supplier. BSNL needs the equipment badly so will have to order it soon. After Phase III, then its open bidding. The amount is around $120-130m. Its possible that BSNL will not sign it but not likely. I asked what the margins are? In the 20s. What are the payment terms? Better than Phase I and II. Peter explains that there are new accounting rules in India that will benefit all suppliers as the equipment/software (service?) are separated. On the Roth call, Peter talked about the 900 cities that they have serviced and the technical challenges they have overcome so the Phase III is just finalizing the contract, which he mentioned in the earnings call to be in Q2.

Deferred Revenue - Phase 1 and 2 BSNL was around $200m total and they have only started to recognize Phase 1. From the past, I think Phase 1 was to be recognized in the next 8 years? Phase II about $3.2m or $3.6m/quarter for the next 5 years. The rest of the deferred revenue is PAS and IPTV. I asked Peter if it would increase book value once they are recognized. I don't think I put this very clearly but Linda definitively cut in (thank you) and said it will increase it. But since margins for the bulk are not high, the impact is not significant.

Cash collection this last quarter - I was trying to get more color but basically just good cash management/collection as some products were accepted and they received further funds. Peter reminded me about the restructuring amount that was already booked but cash yet to be paid out. I mentioned that I think it was still $20-25m and moved on. Peter was more upbeat on the Roth call than the earnings call I believe. In the Roth call, he had time to break down the quarter as almost breakeven and discussed the cash in more detail for the new audience. In the earnings call Q&A, he mentioned that cash should mimick the P&L more closely in the coming quarters after the restructuring (I guess barring a large order and material buy).

IPTV/Cable - With previous products and lack of traction, why does the company think this route has a good chance to succeed? Why can't Huawei/ZTE get in as well? Peter mentioned the fragmented cable industry, their ties to SARFT, Huawei/ZTE have bigger clients in the telecom industry, UTs overall better IPTV product, and service model/revenue sharing (advertising) experience/first mover advantage with Southern Media cable as all reasons he thinks they can be successful. All 6 cable iptv wins were still the traditional equipment sales only as well as the Markwell (Taiwan) contract previously. I asked if this was a good model for the Philippines. Not at this time as that market is small.

MSAN in Tiscali - Good business with Tiscali but MSAN is an older product.

TN with China Mobile, what happened? - Technically, UT's product scored well and priced well but there are certain things out of their control and CM can give the contract to whom they like regardless of the scores.

TN in general - My reading into TN make it seems Alcatel, Huawei, ZTE, and others have been developing TN for as long as UT and UTs lead of 1 year mentioned in 2008 may be gone, so what are its advantage in the TN product. Peter mentioned the software/management part of it and that TN is still very early acceptance stage with a lot of carriers. I asked if the BSNL project had some TN products. It has some (but little)TN, mostly RPR and IPDSLAM. I asked what about Bharti since they have a lot of mobile subscribers. Peter mentioned thats one they are looking at and obviously Softbank.

Softbank/Vendor financing - Regarding a major optimism from Peter is their cash and the importance of it with talking with Chinese banks to get loans for vendor financing. I was concerned about this and asked Peter if this made sense and he basically said most of the large contracts/companies (the Ciscos/Huaweis) do the vendor financing. The loans are like zero percent that they can get and then do large contracts. Rather than $5 to $10m, they can do in the $100m range.

Board of Directors - When Peter leaves the company, he will leave the board and Jack Lu will take his place. That will give the board 4 new directors, leaving 3 (Lu, Toy, and Ryan) for continuity. There is no word on Lu and Toy. Peter mentioned Toy's wife as Chinese (not sure what/if any importance to the conversation). Lu is spending more time with new businesses/investements in LED. Peter feels good with the management/board when he leaves.

Stock sale - To pay for his RSUs. Thats a big chunck just to pay taxes on. He reiterated he has not sold anything execpt for those tax sales.

Bookings - I mentioned my disappointed in the last year was the lack of bookings after he himself mentioned using bookings as a metric early on. I think I discussed this previously with Barry as well and there was problems with what numbers to report due to the contract language and Peter in the Roth conference mentioned some reason....whatever it is, this is something the company needs to work out and be more transparent on.

Competitiveness in India - Is this going to be affected now that they are a Chinese company? Probably not in the next 2 to 3 years as they are a relatively small company. Peter reiterated their personnel in India and positions with the carriers there. There is much more in the Roth conference regarding India that people should listen to. Peter said in the conference that as they ride the wave of growth in India/China, that the overall growth of the company should take care of itself. (thats what I thought in 2004 when I first heard about the company).

OPEX - Still targetting under $100m yearly run-rate by Q3 (including building rents). I've heard from others that headcount should be around 1600 by the end of the restructuring. This includes 900 in R&D that are untouchable at this point, 150 in service, 150 in marketing.... In the Roth call, he emphasized investments in IPTV/optical broadband that have been protected through this restructuring and their main areas of growth.

The call lasted well over 30 minutes and I was the one that ended it. Just scanning the headlines tonight and saw Tiger Woods only granted a 5-minute interview so I guess I should feel privileged. Overall, I expressed my appreciation for the communication over the years and the work that he has done. I mentioned that his tenure will probably be judged long after he has left the company. He wished there was more "growth" at this stage before he left but that it was the proper time to do so.

Side note: Sorry for the late posting. I still haven't posted on the earnings/Roth call but getting swamp with some work/travels and nothing really much to talk about that isn't discussed in the message boards.

Have a good week ahead everyone!

Borqs Acquisition?

2010-02-23T10:39:00.000-08:00

What to do with UTs cash? Well, there are rumors that UT is planning to acquire Borqs...

"Set up in September 2007, Borqs is a leading mobile software developer. It developed OPhone OS operating system for China Mobile Ltd. (SEHK: 0941 and NYSE: CHL)'s TD-SCDMA mobile phones, mobile Microsoft platform Mobile Widget, cloud computing platform Big Cloud, as well as mobile Internet application services Mobee."

http://asterisk.tmcnet.com/news/2010/02/23/4637034.htm

The company has "denied it"...

http://asterisk.tmcnet.com/news/2010/02/23/4636649.htm

The company had $241m in cash/short term securities at the end of Q3 2009. With $130m (from the building) and $48.5m (from new investors) coming in, that would put their cash at about $420m. Cash flow will be impacted from the completion of their restructuring and additional losses but it will still have sizable cash levels. Cash flow from India Phase I, II, II extension have yet to be fully collected so cash levels could be higher than what I projected in the last post.

So, what to do with it? Some have speculated vendor financing to drive revenue up. Some have mentioned it could be wasted on low margin contracts that would not do much for profitability. Despite its very slow transformation and recovery, the company has shown it is trying to address the gross margin situation by discarding low margin operations, even the handset making business in China (except for the iptv handsets). It has formed partnerships in South America and Europe in the last 6 months or so and have newer products (TN) that will improve margins. The outsourcing deal adds to this focus on margins. If the lower margin products (broadband mostly) get them market share and continue to serve their existing/future customers, and enable them to upsell future higher margins products, then that is a practical strategy. In any case, the management does seem to get this and the actions support it.

Now, with new cash, the company can be more aggressive in acquiring pieces to get them into higher margin sectors (software/services) or solidify their product offerings in mobile advertising, iptv, cable, convergence (Analysts believe that UTStarcom is aiming with IPTV to replicate the success it had several years ago with smart phones and that it will benefit from China's recent move to integrate the telecom, broadcast and Internet networks.).

Updated Cash/Book Value

2010-02-17T01:42:00.000-08:00

At the end of Q3, I made some projections on cash at the end of the restructuring (end of Q1 2010) and taking additional losses in Q4 2009/Q1 2010.

"As of Q3, the company had cash/short term investments of $241m and $296m in stockholder equity. For the next two quarters where losses are still projected and the restructuring is to be completed, lets evaluate the book value/cash. Cash usage for the restructuring will be $24m + $5-10m (for 2008/2009 restructuring). Cash usage for the losses in Q4 and Q1 (say $30m - just a guess). They will bring in $3.5m for the Starent settlement. So, by end of Q1 2010, cash can be down to the $180m level."

Due to the building sale and issuance of new stock, the company will receive an additional $130m + $48.5m = $178.5m. That will take cash after restructuring and additional losses due to unprofitable Q4 and Q1 to $358.5m. Lets round to $350m since there are settlement charges + bonuses/severance to Blackmore/Viraj. Divide this by 150m total shares, and you get $2.33/share in cash.

Book value is much less. The last estimate I had was around $260m in book value after Q1 2010. Factoring in the $35m of loss in the building and $48.5m in cash infusion would yield around $273.5m. Dividing by 150m total shares, and you get $1.82. This would be less if my loss estimates are worse than $30m for Q4/Q1. However, there is discussion that the deferred revenue could significantly add to the book value when it is recognized.

If there are $200m of PAS deferred revenue to be recognized at margins of 40%, that could add $80m to the book value and move the book value to about $2.35/share.

Ultimately, the cash and book value will not matter if the company becomes profitable or really fails to get any business traction. However, for the near term, the cash/book value of around $2.3s reflects a good cushion for buying shares in the $1.8-2.2 range (not to mention new investors paid $2.2/share).

It will be interesting to see what the company does with the more than $350m in cash and new relationships going forward.

200th posting; UT in position, add shares!

2010-02-03T20:57:00.000-08:00

The significant events of the last month (sale of the building, outsourcing, new CFO, SEC/DOJ resolutions, new board members, new investors, new CEO) are major changes no matter how you look at it. However, the stock is still stuck in the low $2 range. I think this will dramatically improve as the operations coming from these changes improve and institutional investors cross off negatives that prevent them from coming in.

It is not shocking to see posters on the message boards are still quite negative at this stage. However, one of the few positive posters, "Shadow" (who was accused of being "arrogant") stated:

"Don't mean to be arrogant. Just tired of guys posting how they want instant results from corporate management now. This company is clearly in the midst of a complete reorganization with outsourcing of products and reduction in head count from 8000 to 2000 or less. Products eliminated, sections sold off, legal issues resolved. What a mess it has been. So, we are, I hope, near the end of a multi-year debacle. What difference does another 3 months make in waiting to see the results? If you believe in the company's products and broadly outlined business plan, then 3 more months doesn't really matter. If you don't, why would you want to continue to own the stock?

Looking back on all the things that have happened, I am just happy the company is still in business and has IMHO a good chance of doing very well in the next few years. I never expected the company to have the problems it has had. Apparently, neither did management but every time they turned around there was another problem...accounting, bribery, insider trading, unexpected more rapid decline in PAS with premature terminaition, etc. etc. etc. You may think in that environment, CEO should still have been able to increase sales. What if the chips you need for your need PON products are delayed by 2 years? What if your largest customers become biased against you because you are a "foreigner"? Tigre points to Baidu as a foreign company successful in China. True, but where is the Huawei and ZTE in their industry that they had to compete against? I never pump the stock.....if people want to buy, fine, sell, fine, none of business. I just try to find things that apply to company. Some of them were really bad, like when MII decided only 3 companies would be allowed to provide DSL in China, and UTSI was one of the odd men out. Told to take back all of its already delivered DSL even. That is one of the reasons I think UTSI could never be considered indigenous to China, no matter what. ZTE, Huawei and Alcalu (ASB) are already considered indigenous and there is just not room for a fourth, at least in the telecom industry. Hope it is different for cable industry, but no guarantee. Risk remains high, but reward if UTSI is successful, will also be high. That is the nature of speculative investments. Have a nice evening. Shadow"

My response is the following:

Shadow,

Most shareholders actually share your sentiment despite a few negative posters on the MB. Most institutional shareholders have stayed put or added during the last 2-3 years. UT markets are intact but have not ramped up even in the last 2 years where management expected/hoped it would. The difference over the last year is that management has been aggressive in cutting costs, putting in flexibility/liquidity in the company to withstand the tough credit environment/competition. I think they are where we wanted them to be 2-3 years ago, which is to be in position to take advantage of any ramp in various sectors in their markets. Here is an article on China Telecom expanding iptv trials.

http://www.iptv-news.com/iptv_news/february_2010/china_telecom_moves_closer_to_expanding_iptv_trials

Five years since their win in iptv and iptv is still at this "early" stage. That is just one of many product lines/customers that have not yet come in. PTN is another that has been delayed or just started. About a year ago, I was just hoping for a small window of outperformance to make UT more salable but the recent events show they are positioning themselves for a more stable future (which doesn't have to involve a sale). That said, on a personal note, all of my buys above $1 for the last year have been traded but now bought yesterday at $2.12 for the longer term. I think there are a lot of issues still at UT with regards to institutional investors getting introduced to the stock. There is still the remaining internal controls/ongoing concern stamp on their company that should be resolved soon. There is the lack of profitability that prevents institutions from buying. Thre is the low/non-marginable share price, etc. etc. However, I have more confidence that it will be resolved in the longs favor over the following quarters and the big reward will come just as people feel the most frustrated (maybe now). I agree with you on the big potential rewards and think UT can reach $6-8 (maybe more) in the next 8 quarters as the issues get resolved, better quarterly performance come in and institutions see the potential in their markets. I'll get more aggessive in trading in the $3 range when the volume should be in the 2-3 million shares. Right now, its all noise with little volume and its accumulation (a few thousand shares) based strictly when certain longs get frustrated and decide to give away shares after so long.

Have a good rest of the week.

Argentina and Latin America - Interview with Diego Martinez

2010-01-08T09:30:00.000-08:00

Last month, Diego Martinez did an interview with BNAmericas.

http://www.bnamericas.com/news/telecommunications/UTStarcom_eyes_IPTV_opportunities_in_2010

"IP networking solutions provider UTStarcom is expecting to see a boom in IPTV deployments in 2010, Diego Martinez, Americas VP and general manager for UTStarcom, told BNamericas."

Argentina - "Argentina has finally approved a law that allows the cooperatives to apply for a broadcast license. The bigger incumbents can't deliver those services, but we believe they want to participate in the value chain considering the restrictions they may have," Martinez said.

Brazil - "With respect to Brazil, we do expect the PL29 [bill to allow telcos to offer the full range of channels rather than only video on demand (VOD)] to move and to be approved by the beginning of 2010. That will open a whole set of opportunities in the country, and we believe we're well positioned as a recognized brand in IPTV," the executive added.

Here is another article on their trial in Argentina (a month earlier).

http://www.nextvlatam.com/nota.aspx?idcontenido=1135&ididioma=2

Dario Oliver, Manager of Telpin, told NexTV Latam that IPTV trials were being carried out with an UTStarcom platform, but the purchase decision had not been taken yet. Regarding the platform's functioning, the executive assured that tests were being carried out without inconveniencies and that the last mile might take place with WiFi or PLC. "We are evaluating the network scope taking into account the need to reach homes with 12 Mbps. We have not decided how the installation in the client's house will be carried out. PLC and WiFi are the two alternatives we are analyzing since UTP wiring would be too expensive and slow", he considered.

---------------------------------------------------------------------------------

UT continues to stick with the playbook of broadband/ngn and then iptv. While most of the business is in China, India, and Japan, UT continues to put their stakes in other parts of the world (despite the restructuring). That strategy was appealing to investors for the last few years but the opex was just too high to wait for revenues to ramp (while seeing the PAS declines). The lowered expense base make these new developments much more interesting as the seeds start to bloom.

Building Sale

2009-12-28T12:36:00.000-08:00

After selling their property, UTStarcom will lease back part of the facility.

"The Company will lease back 70,000 sqm gross floor area ("GFA") aboveground and 12,000 sqm GFA belowground of the property for a period of 6 years at a rate of RMB 2.5, 3.0 and 3.2 (approximately US $0.37, $0.44, $0.47, respectively) per sqm per day for years 1-2, 3-4 and 5-6, respectively, of the leaseback period for the aboveground space; and for RMB 25 (approximately US $3.66) per sqm per month for the underground space for the full leaseback period.

The Company may terminate the Agreement for any reason prior to the transfer of the title to the property upon repayment of all amounts paid to the Company by the Buyer and payment by the Company to the Buyer of an additional RMB 50 million (approximately US $7.3 million)."

http://biz.yahoo.com/e/091224/utsi8-k.html

One poster wrote that this is a very bad deal for UTStarcom.

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=te&bn=27187&tid=162353&mid=162353&tof=5&frt=2#162353

My response is in italics.....

Tim, I admire you willingness to look for positives in this situation, but I totally disagree about your assessment of the deal. I believe it is very bad. Here are my reasons:

Johnny, Nothing to admire really. Your points are very easy to disagree with and management is just going by a very rational playbook (not going to give them genius status either).

First, the property was sold below book value. I did not expect them to get $760M – after all the local government was not likely to allow a US company to profit from speculation in Chinese land. However, given the property value, I expected they will get the full book value. It turns out that we have to take an impairment charge.

1. Book Value? You can talk all about what something is worth but if you cannot sell it or make use of it effectively, then its not worth what it says on some book. A lot of bashers looked at the property as zero since they could not monetize it. Now you and others think this is much more. As I've mentioned, anyone can step up and pay $7.3m and take over the deal if it was such a great deal. I say its a fair deal for both sides (win/win as both got what they needed out of the deal).

Second, the leaseback price is much higher than it should be. I expected it to be about $3M/year. A typical amount of yearly rent in undistorted markets is about 1/15th of the purchase price. In case of this transaction, that would be $9.3M for the entire building. Since UT leases only about a third of the building, I consider $3.1M to be reasonable. Selling the property some 80% below market value, the seller should be able to negotiate reasonable (as defined above) leaseback terms, because he has the option of walking away from the deal and denying the buyer the arbitrage profit (unless it is a sale of desperation as please_buy_while_I_sell suggested). The buyer still has 2/3 of the building to be leased out at the market rate and gets to profit from arbitrage when he eventually sells the property. Very generous terms for the buyer, with much lower leaseback payments.

2. Do you really think anybody would spend $140m and only expect to get back $3m/year in lease. We're not talking about liquid US treasuries here either (and those yield higher than 3/140). Again, the only reason UT was even able to monetize it is because they were willing to lease it back and give the buyers cash flow for a certain number of years.

Third, and most important, it adds $11.4M to yearly expenses (average over 6 years). At gross margin in upper 20s, UT will need approximately $40M in extra sales just to pay the rent. I just don’t see them bringing in those sales.

3. For UT, spending $11m/year is not too much considering how much they were spending in the US in rents (that they have cancelled already and shifted operations to China). The amount is probably less if they tried to borrow the money outright. How many people would lend at close to "book value" anyway and there is no comparable building for sale/lease there. UT gets $131m in cash during a very difficult credit environment. Most endowments or funds can make 7-10% with no problem.

Feel free to disagree.

Can the property go up? Sure. Can UT borrow against it? Sure. Can UT lease the other parts of the building? Sure. However, none of those are a certainty. Cash is a certainty. Flexibility/liquidity is a certainty. With the additional cash/working capital, they have also increased the ceiling for amount of contracts they can go after. Without the sale, they had a much lower ability to win additional contracts simply because of their working capital. UT is reducing their overall risk profile (lowering expense structure, selecting better contracts, building up cash) in very uncertain times. The liquidity/monetization is really a no brainer excellent move for UT at this stage.

Ultimately, UT core business has to show growth and profits. This sale (as part of a series of moves over the last couple of years) puts the focus on the business/operation side where they will have simplified/resolved the following metrics:

1. $350m revenue (high 20s GMs) breakeven point.
2. Less than $100m in OPEX.
3. More than $300m in cash.
4. Operations back in China.
5. Targetted markets/clients in China, Japan, and India.

They have really put themselves in a highly flexible/liquid position as compared to just a year ago when they were dependent on PAS/PCD.

Have a good rest of the holidays everyone!

UT's India Opportunity

2009-12-05T16:04:00.000-08:00

While the primary focus is the overall company restructuring and "refocus" in China and Japan, the Indian market provides a lot of opportunity for UT in the coming years. The main revenue driver for UT has been the BSNL multi-play contracts (Phase I, II, and II extension). Here is a summary of the contract:

"The expansion will see UTStarcom deploying its B1000 multi-service access node (MSAN) solution across India to add approximately 475,000 ports of capacity to BSNL’s existing broadband network, enabling additional subscribers to experience triple-play services."

http://www.telecomtiger.com/fullstory.aspx?storyid=6214

Earlier in its first phase, UTStarcom deployed 1.3 million broadband subscriber lines for BSNL, with an additional 1.1 million broadband subscriber lines during the second phase.

UTs MSAN product was highlighted in the recent investor presentation as having MSAN services to over 27 million subscribers.

http://files.shareholder.com/downloads/UTSI/771583119x0x322559/c6305869-1a53-4779-80bf-e5b5e643e0de/UTStarcom%20Investor%20PPT%20-%20September%202009.pdf

Here is a recent article on UTs perspective on the India market reaching 100 million broadband users:

"At a recently held event, UTStarcom MD for South Asia, Mr. Vijay Yadav said that with the use of television as an end user device, the broadband subscriber base can be reached to 100 million subscribers by 2012. He also called for opening of the last mile to private players. According to him in next few years communication over video will take precedence to communication over voice and hence television offered the ideal mode for delivery of broadband services."

http://www.telecomtiger.com/fullstory.aspx?storyid=7760

Aside from the broadband opportunities (nearterm Phase III contract from BSNL), the ultimate payoff is when iptv can ramp.

Here is an article from Aksh raising $20m:

"Aksh OptiFibre said that it has receive approval from its board to raise $ 20 million in funds through the preferential route.
The company intends to utilize these funds towards the expansion of its IPTV and VoIP business verticals."

http://www.telecomtiger.com/fullstory.aspx?storyid=7304

India is a place where UT has relationships with the major state-owned and private carriers
(MTNL, Reliance, Bharti, BSNL and Tata). There is also a current trend towards favoring non-Chinese suppliers.

"Chinese companies not allowed in BSNL’s Rs 10,000 cr ($2 Billion) project for Defence, says report"

http://www.telecomtiger.com/PolicyNRegulation_fullstory.aspx?storyid=7912&section=S174

The company has been particulary positive in India sparing it any cuts during this massive restructuring and Peter has mentioned the level playing field in India (or even advantageous to UT). The upcoming 3G license in India should also clear up spending plans.

"Union Communications Minister A Raja said on Thursday on the sidelines of the Indian Telecom event that the 3G auctions will happen on time as scheduled on January 14, 2010."

http://www.telecomtiger.com/3G_fullstory.aspx?storyid=7910&section=S208

Side note: The win in Tiscali for UTs MSAN products give us shareholders some insights to the pricing as it was a $29.8m contract to be shared by UT and Infinera (interestingly a stock I had recently bought, which led me to finding out UT won a part of it). For Infinera, an 8 figure contract is a big deal. For UT, there isn't even a PR. Anyway, this contract should be completed by Q1 2010 per the article and UTs equipment goes ahead of Infinera.

http://www.lightreading.com/document.asp?doc_id=185447&f_src=lightreading_gnews

The near term company goal is to get to profitability in the 1st half of 2010. The much reduced cost base provides them a better position to select contracts and execute better while waiting for the iptv market to ramp. While the TN product is something new, opens doors and the initial wins will improve broadband revenue and margins, the major growth driver going forward will still be centered with iptv.

Have a good weekend everyone.

Q3 2009 CC Recap

2009-11-22T11:07:00.000-08:00

The transcript from the Q3 2009 call can be found in the following link:

http://seekingalpha.com/article/171704-utstarcom-inc-q3-2009-earnings-call-transcript?source=yahoo

The live broadcast and SEC filings can be found in the company website. I have talked to some institutional investors that communicated with management and will add some "color" to the information provided in the call.

Q3 Results - Revenue came in at $71m with 34% gross margins. The GMs included a $6.5m benefit from reversing some handset writeoffs for PCD. Factoring that, GMs were in the mid 20s. The expenses were $58m (with $8.9 restructuring charge and $1.7m non-cash charge for divestiture of Korea based handset operations). I'll have much more on the expenses and restructuring later.

Business Units - MMCBU had revenue of $22m and 46% GMs; Broadband BU had $16m revenue and 22% GMs. Services had $17m in rev and 44% GMs; Handsets had $16m revenue and 21% GMs. The overall revenues ($71m) is still lighter than the $85m needed for breakeven but the margins are close to their target of high 20s. The margins for the MMCBU was lower than last year(with PAS) but seems higher than what I expect with iptv STB. The mix this quarter probably had more software/infra component than subscribers, which support the lowered expansion in subscriber count for 2009. The highlight of the quarter was the 22% GMs for the broadband unit as they managed the BSNL phase II contract well and gives added confidence that the Phase III contract will have decent margins (as long as they execute well). The services actually increased revenue (from $14m to $17m) and had very good margins. Handsets were down significantly from last year (that included much more PAS/PCD). The GMs of 21% benefitted from the $6.5m reverse of writeoff. The company is de-emphasizing this lower margin business unit except for handsets specifically sold with their mobile iptv system.

Broadband - Peter Blackmore expects the company to take in a significant order for the Phase III BSNL multi-play project this quarter. Part of the order will be this quarter and the 2nd part around April 2010. Peter mentioned on the call that execution of this contract is a key focus and this will affect the outsourcing transition and result in significant shipments in Q1 2010. Additional shipments in Q1 2010 will be driven by the Transport Network (TN) win with Softbank. Together with better execution of the BSNL project, the higher margins with the TN product will drive the margins for the broadband unit going forward. Peter mentioned the TN product as having good growth opportunity and a leadership product (also "exciting"). There was mention that they are actively bidding this product on a number of RFPs, notably China Mobile, where they are partnering with Nokia Siemens (NSN). The margins with Nokia Siemens will be lower but give them a better chance of winning part of the China Mobile tender and break in with China Mobile. NSN has been a major supplier to China Mobile but they don't have the TN product. Other partners of NSN such as Juniper do not have a competitive product as well.

Additional specifications/marketting materials on the TN product can be found in the UT website (this is additional items from what I linked to previously).

http://www.utstar.com/Document_Library/2009.pdf

Aside from the TN 703, 705, and 725 products, there is a 735 product with 240GB/s switching capacity not formally announced yet. IR has mentioned providing access to UT engineers for technical questions from the industry on the TN product.

In South America, Peter discussed the recently announced Logicalis sales agreement leading to projects in Argentina, Paraguay, Peru, and Chile for their IPDSLAM, MSAN, and GEPON products.

IPTV - Due to spending focus by Chinese carriers on 3G, iptv momentum in 2008 did not carry forward to 2009 although Peter believes there will be a return to significant iptv investment in 2010. There was a recent win with the Beijing SARFT and chosen as solution provider in 4 cities with (CCTV/Hunan). They were selected as a preferred vendor by China Telecom to deploy the new STB Standard 2.0 (this would allow them to compete for STB business with other iptv systems). Also, "And in Guangzhou, the capital of Guangzhou province recently launched the IDTV service, SMIC, the Southern Media Group and this is the revenue sharing model, we share in the advertising revenues, and we are expected to expand the service to other cities throughout the province."

Restructuring - The employee count is down to below 2700 by the end of October from around 4300 in June. The company will continue to reduce headcount in Q4 and Q1 2010 (probably 500 in Q4 and another 300 in Q1). SG&A for Q3 stood at $33m and R&D at $14m. The target model is around $11m SG&A and $14m R&D. Based on the 10Q, $35.143m of the announced "2009 restructuring" has been recorded but there is still $19.8m balance (cash to be paid out). For the 2008 restructuring, there is still a balance as well. So, for modeling cash and book value going forward, there is still $24m in cash to be spent on restructuring that have been charged to book value and another $5m to 10m in charges/cash to be added (to get to the $40-45m they announced back in June). The company is down to 1 building from 3 in Alameda and will probably maintain 30-40 employees in Alameda. The company "formally" announced in the call that they are looking into moving the HQ to China.

As a side comment, Barry Hutton, UT IR left the company (last day was Friday). They still have offices in Rolling Meadows and in Miami for the Latin America/International sales force team.

An outsourcing vendor has been selected and a PR on it is coming.

Other items - Peter talked about adding new board members and the potential sale of their building in China but no new information on that front.

Company Credibility/always LATE - For years, I have been against the poor BOD and management. Unfortunately, this has continued during Peter Blackmore's tenure. Lets look at just some items that have been executed poorly or "late".

Divestitures of holdings such as Infinera, Gemdale, and even PCD.
Filings and accounting issues that added tens of millions in interest costs.
Last minute transfer of funds from China.
Restructuring and expense cuts time and again.

There is just a corporate culture of being behind the curve and acceptance of poor performance and no accountability. Up to now, I still cannot believe that Lu/Toy and the rest of the BOD are still there with no major changes.

Peter has done things that shareholders want such as the restructuring/focus on core products but he has been late again. I believe he is on the right track and will eventually get there but in the meantime, the company has racked up over $1B in negative retained earnings and the book value has plummeted from the $700m+ level to less than $300m in 3 years (despite the investment gains).

Book Value/Cash flows - Despite the above issues with the BOD/management, the company is incredibly cheap. As of Q3, the company had cash/short term investments of $241m and $296m in stockholder equity. For the next two quarters where losses are still projected and the restructuring is to be completed, lets evaluate the book value/cash. Cash usage for the restructuring will be $24m + $5-10m (for 2008/2009 restructuring). Cash usage for the losses in Q4 and Q1 (say $30m - just a guess). They will bring in $3.5m for the Starent settlement. So, by end of Q1 2010, cash can be down to the $180m level. Because $35m of the $40-45m has already been charged, shareholder equity will decrease by only $10m (upper range of restructuring remaining) - $3.5m (Starent gain) + $30m (Q4/Q1 loss). That will leave shareholder equity at $260m. For 2010, there will be over $100m deferred revenue to be recognized + cash generated from BSNL Phase III so both tangible book value and cash should not be reduced and may start turning upward. Again, this is just my evaluation of where the bottom in cash and shareholder equity will be ($180m and $260m). That compares to the $245m market cap the shares are trading at. So, they are trading above cash based on Q4/Q1 losses and restructuring cash expenditures. But the shares are trading lower than book value even incorporating the Q1/Q4 losses/restructuring charges.

The negatives offsetting the valuation is the BOD/management and their culture of underperforming. Have they done "good things"? Absolutely, such as selling investments, non-core businesses, cutting expenses massively, refocusing on China but they have ALWAYS been late and lateness comes with a price that shareholders have taken the bulk of the brunt.

Company status - There is a powerpoint presentation on the company website on a Sept 30 2009 roadshow.

http://files.shareholder.com/downloads/UTSI/771583119x0x322559/c6305869-1a53-4779-80bf-e5b5e643e0de/UTStarcom%20Investor%20PPT%20-%20September%202009.pdf

95% of the material is what has been posted/discussed in the past. However, it does show major operational differences from the years past and the current situation. The customer list is still broad and targetted at the high growth markets. The product line-up is sensible and there is a renewed focus in China (broadband and overall company basis). The company is emphasizing China, India, AND Japan again so there is a renewed traction in Japan with the TN product (margins emphasized). There are still major questions on whether the upside can justify the expenses of the last few years or even now (given their company culture). It is easy in the past to cite a lot of links to technology or worldwide growth in related sectors/products but for UT, it comes to are they in position with their current customers and products (and can they execute). I am not in this investment for the current management/BOD but for traction in their products with their current customers/geographic markets. I am also not for a quick sale based on declining cash/book value because as the above indicates, this is near the bottom (for now). In the next year or two, the company has to either show progress in adding to the tangible book value or there is no turnaround hope anymore.

A lot of the sentiments (above) are what shareholders have discussed but hopefully, it has been quantified a little bit more and provide some metrics to track for the next few quarters.

Have a good rest of the weekend.

Institutional Holdings/Activity

2009-11-17T23:15:00.000-08:00

The following link shows institutional activity as of the end of the 3rd quarter (9/30/09).

http://www.nasdaq.com/asp/Holdings.asp?symbol=utsi&selected=utsi

Shah Capital, the #1 UT holder, increased their position by over 1m to around 7.5m shares. It is interesting to note that they are concentrated on China and their #1 holding is a major winner this year, China Yucha, Intl LTD (CYD). That holding alone is worth around $36m! For each $1 that CYD goes up, thats a $2m gain, enough to fund buying a million shares of UT every quarter.

I don't know what Shah's intentions are but I hope they use it to motivate the board/management to think about shareholder value for once. In addition, with the low volume, low share price, and their major wins this year, Shah could literally have a ball with UT stock. I would not bet against these guys.

NSN partnership

2009-11-06T07:36:00.000-08:00

UT announced on yesterday's Q3 2009 earnings call a partnership with Nokia-Siemens.

"We are bidding this product actively in a number of current RFPs. Most notably, we are pursuing the China Mobile tender, which is already gone out to RFP stage, and we are doing this through a joint partnership with a new partner we have in China, Nokia-Siemens."

There will be some institutional calls today with management and I've fed some of my questions to them and one of them is the NSN relationship. Why do they need them for the China mobile TN bid when they won the other contracts without anyone else? Is this a case where the RFP stipulates some added requirements that UT cannot fulfill and highlights UTs weakness or lack of experience.

How is the partnership with NSN structured? Does it mean NSN/UT will team up in NSN's backyard in the future, thereby giving UT another outlet to sell their products. NSN is a huge entity with 64000 people and they are planning to cut 6-7k to save $700m/year. They are looking to partners/acquisitions to drive their strategy going forward.

So, UT is partially adressing the "scale" issues by partnering/signing sales agreements (DESCA/Logicalis). Ultimately, if this NSN partnership works out well, NSN could just acquire UT seeing UT's cheaper labor workforce in China and the technology/client base they have is more cost efficient.

I was out during yesterday's call and will post a summary of the Q3 2009 call this weekend. That will include some information/clarifications from institutional calls today.

BTW, there was NO one asking questions yesterday. UT has become irrelevant and something the management/BOD is responsible for.

Discussion on sale of UT, its prospects and GM situation

2009-11-01T13:07:00.000-08:00

This is my response to some message board chatter:

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=161650&mid=161666&tof=1&rt=2&frt=2&off=1

"Must have been the board exams working on your mind."

I dont doubt that Flip. I'm still recovering after the 160 questions in 8 hrs. I just don't get why it takes them 13 weeks to get us the results....O'well alteast it won't ruin the holidays if the results are bad.

"I see no reason why the company could not be sold now for more than the current trading range. If I wanted a company with cash, no debt, technology, a global footprint and a US listing, I would be willing to pay over the current price.....if the company was for sale. The point is, the company is becoming worth less every day given the cash burn and lack of revenue."

Again, this is flawed thinking. The company was burning $50m/quarter for quite some time so we knew their book value was going down. However, did you buy the company for their "value" or for the potential turnaround and increase in profits? For any tech company, I would argue that people don't buy it for their book value but more for upturn in their business. Actually, for most tech companies, its the "cycle" in their businesses. The memory companies for example do really well as memory prices stabilize and move up. You can't even touch those companies at ANY price if the prices are falling but they are like gold when it is increasing (look at SandDisk, WDC, and STX for ex.).

The question with UT is not about management/BOD at this point but whether you believe there will be an up cycle in the next 2-3 years. Have they atleast put themselves in position to take advantage of the boom in 3G, iptv, broadband, etc. I continue to be negative on the board and sometimes Blackmore (for not acting quick enough and no defense of the stock) BUT, I didn't really invest in those things 4-5 years ago and definitely didn't invest in those the last 2 years.

I could and have been wrong on the ramp of the business but that doesn't mean it will never happen. There is a significantly higher chance of success after this current restructuring, move back to China, focus on certain markets/products than at anytime before. I'm sorry if you don't like my optimism but I am more focused on the business than whether they can be sold for $5 (we talk about it but thats not the main focus).

You and others can focus if the cuts were too much or too little but does it do the company any good in producing products that were way ahead than before? I am more interested in quality of contracts with higher margins than just getting contracts. I am more interested that their breakeven point is $350m rather than $750m or over $1B in revenues.

As I've said before, the company has already lost its chance to become the next Cisco, Huawei, etc a LONG time ago. The question is whether they can be profitable and have a nice niche position/business model that could potentially accelerate as markets/products ramp. I would not have a problem bringing up the potential sale when it actually is meaningful (when the stock is much higher and business has turned around). Even earlier this year before the restructuring, there was a potential sale but definitely not now. Anything is possible but it would really be idiotic at this stage.

I end this posting with some excerpts on a very good article recapping the GM bankruptcy/restructuring by Steven Rattner (in the latest Fortune magazine). Steven Rattner led the government takeover/bailout of GM/Chrysler. In it he talks about the GM board:

"It seemed completely obvioius to us that any management team that had burned through $21 billion of cash in a year and another $13 billion in the first quarter of 2009 could not be allowed to continue. Equally important, GM's February viability plan was more "business as usual" and not the aggressive new approach that we felt was essential."

He ends the article by saying, "Like any patient that undergoes major surgery, a successful recovery is far from assured. .....In the case of GM, the overacrching question is whether, without infusion of new blood, its management team can implement the massive cultural change that is essential. But by dramatically lowering the break-even point for both companies, we believed we were creating a healthy margin of error."

This is really the question for investors right now.

Have a good rest of the weekend.

MPLS-TP Based Packet Transport Network (PTN)

2009-10-28T21:50:00.000-07:00

For the techy's out there, the specs for UTs PTN product is available on their website.

http://www.utstar.com/Products/Optical_Transport_Networks/MPLS-TP/

A recent article on China mobile and plans for PTN in China.

http://www.cn-c114.net/583/a452063.html

From Lightreading,

Trebnick thinks Juniper needs to get a mobile packet core product, specifically. If it's developing one on its own, that's going to take $250 million to $300 million in R&D costs, she writes.

The other option would be an acquisition. Cisco and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) have put claims on Starent Networks Corp. (Nasdaq: STAR) and WiChorus, respectively, in the past two weeks. Assuming Juniper doesn't want to start a bidding war for those two, it could try acquiring Stoke Inc. or the mobile core assets of Harris Stratex Networks Inc. (Nasdaq: HSTX), Trebnick writes. (See Cisco to Buy Starent for $2.9B and Cisco/Starent Deal Hurts Juniper.)

http://www.lightreading.com/document.asp?doc_id=183728&

While the market has surged this year, it has been another frustrating year for UT shareholders. I do choose to look forward and stick with the company. With their balance sheet, controlled expenses, product line, target markets and renewed focus in China, thats a recipe for success. Have I mentioned how incredibly cheap this company is? :-)

Conference Call with Peter Blackmore

2009-10-03T02:52:00.000-07:00

Earlier in the week, I had a conference call with Peter Blackmore, UTStarcom CEO and Barry Hutton, Senior IR for the company. Peter had just come back from a three week trip from China (and also recently in Japan). I had some concerns with the management situation of the company (among other things) and Peter allocated some time for a call this week before going back to China again. Here are the items that were discussed.

Management Team - With Hong Lu stepping down from his executive position, the departures of Robert Wu (China CEO) and Craig Samuel (UTStarcom CTO), the vacant COO and Viraj Patel’s Interim position, the management ranks seemed disorganized, light and was not positioned for the long term. Peter responded by highlighting Luis Dominguez (SVP) of International Sales, Marketing, and Services and the heads in India and Japan. He specially alluded to the company’s “move” to China and the executives based there, namely Charles Mah (SVP, China Sales, Marketing, and Services) and the business unit heads (Yanya Sheng/BBU, Dr. Baijun Zhao/MCBU, and K.P. Lim/VP Chief Quality Officer). Peter seemed very happy with the current transition/restructuring in China and discussed potentially rounding up the team with a COO.

I specifically wanted to discuss his hire of Craig Samuel. Peter mentioned that Craig Samuel was the #2 CTO guy at HP and would have liked to have kept him but due to the restructuring, parted ways.

I asked Peter if he was personally involved in any of the hiring in China and he mentioned not at the BU (business unit) level but just under. The BU heads have been with the company a while. Peter also mentioned hiring new sales people, some from Huawei and commented that he liked them because of their aggressiveness.

Bookings – I asked Peter why he did not discuss bookings (book to bill) in detail the last quarter like they do in previous years. Peter mentioned that book to bill was “positive” (I take that to mean >1) but they do not give breakdowns of the bookings. Barry commented that it is not simple to come up with a definitive number due to the way various contracts are set up. Peter added that international was “positive”. I definitely wanted to get a number and breakdown by BUs but the best I could do was a reassurance that they are not trying to hide anything and that business was tracking well. I asked about new contracts. It seems that some of the contracts we hear are very similar to previous ones and Peter said they definitely take a good amount of time to select which ones to discuss on the CC and that they are all new wins. This led to the next topic.

PRs – Why don’t we see more of these? Once every six months is hardly representative of the business. Barry mentioned they are working to improve on this end but even putting out PRs takes a tremendous amount of time (talking to various people/legal/sales/contracts in preparing the PRs) specially during the move back to China where resources are more constrained now. Again, I mentioned there has to be a middle ground where investors can get a more representative view of the business end. Peter mentioned an upcoming PR on an enterprise TN win coming up (more on TN later).

Taiwan IPTV – I wanted to get more information on the progress with Markwell since the original PR was in late 2007 and it only went “live” in May (which they announced in one of the CC this year). Peter mentioned that Taiwan iptv is not going to be anywhere as large as India/China. They do also have some broadband contracts with CHT in Taiwan that’s doing well, selling their MSTP product. (Got into a quick back/forth and said whats well? $2-3m? Peter mentioned more than that…). I also talked about DESCA and tried to get a ballpark revenue target but didn’t get a figure. Peter did mention DESCA’s main supplier was Cisco and I guess it was a good arrangement that they are also now a supplier.

Mobile IPTV- I asked about the competition with CMMB, the China mobile iptv standard that others are using for video. How competitive will UTs mobile iptv be against that when 30 other suppliers may go with the CMMB. Peter mentioned that they are also talking to other handset suppliers to license/use their mobile iptv software/system. How much is their handsets for mobile iptv. Peter mentioned it doesn’t take a major smart phone like the I-phone so the cost right now per handset is $150-200 (mid-tier pricing).

India BSNL Phase III – On track for Q4 – I didn’t bring this up but Peter talked about this as part of another discussion.

GPON – I mentioned to Peter about hearing they had presented GPON as part of their product lineup in a recent conference/marketing event. Peter mentioned that this must have been the China Telecom event where they were a major sponsor and he got to talk with many government officials. He said they are modifying their GEPON product to develop GPON as well but that the GPON product is not ready as of yet.

Transport Network (TN) Product –As part of the product discussions, we got to TN and Peter brought up Bill Huang, UT’s former CTO now with China Mobile. Peter mentioned that Bill Huang was quite impressed (not sure if that was the exact word) with UTs current product lineup/R&D and will be in discussions for the TN product in Q4. I asked do they have ANY contracts with China mobile now. Peter said no and that is due to their backing off the broadband market previously. Regarding TN, Peter mentioned that as usual, this market will be shared with ZTE, Huawei, and possibly another vendor. Peter mentioned that Softbank also had positive words for their TN product and its performing well. He added that China Telecom, which is their main customer for years is late in the TN area and is just in the pilot testing stage.

US Partner – I wanted to check with Peter if DESCA is the partner that he talked about in previous cc. He said no and that the technology partner he was talking about wants to sell UT products in the US. Peter mentioned the TN product in particular.

Being more “Chinese” – Towards the end, I discussed with Peter the situation with him being non-Chinese and the Western BOD meant that they are still perceived as handicapped and what they are doing. Peter mentioned (again) about looking into Chinese board members and looking potentially for a Chinese COO. Are there investors, partners, etc? No other comment on that front (not that I expected an answer but I’m sure other investors have discussed this with Peter). Peter mentioned he is working 15-16 hr days and has an apartment in China.

One of my last comments to Peter (and there were probably a lot of “last” comments) was that bottom line, the company’s business is being valued at zero (or less) so there is a lot of disappointed shareholders. Peter mentioned there is a lot of work still ahead. I thanked him for his time.

As I write this post, I think of other items such as IPTV discussions, the sale of the building, OPEX, PDSN, cash positions and other usual points of discussion but there is always just a limited amount of time and some topics just flow in certain directions.

Have a good weekend.

Bull Flag

2009-09-14T15:15:00.000-07:00

While the message boards is full of the usual negativity (understandable by the way), UTs stock chart has formed a "bull flag".

http://www.baresearch.com/education/technical_analysis/chart_patterns/continuation/bull_flag.php

http://finance.yahoo.com/echarts?s=UTSI#chart2:symbol=utsi;range=1m;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

Vital Signs

Bull flag formations involve two distinct parts, a near vertical, high volume flag pole and a parallel, low volume consolidation comprised of four points and an upside breakout.

The actual flag formation of a bull flag pattern must be less than 20 trading sessions in duration.
Most flag patterns occur at the middle of the larger move higher for a stock.

Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level.

If the stock closes below this level (now support) for any reason the pattern becomes invalid

=============================================================

The pole measured a hefty 84 cents ($2.36-$1.52), give or take a few cents. This consolidation (symmetrical triangle or pennant) breakout is at $2.05-2.1 range. That would put UT close to $3 within a month IF this played out.

As with TA, "timing" may be a little off (head fakes) and you should look for volume confirmation.

Have a good evening.

DESCA, IPTV, Trading Range, Profitability, and Partner

2009-09-10T13:23:00.000-07:00

Reseller Agreement with DESCA -

ALAMEDA, Calif., Sept. 9 /PRNewswire-FirstCall/ -- UTStarcom, Inc. (Nasdaq: UTSI - News) today announced a Reseller Agreement with DESCA, a Miami-based infrastructure and telecommunications networking company and wholly-owned subsidiary of eLandia (OTC Bulletin Board: ELAN - News). The Agreement will help accelerate UTStarcom's expansion into 14 markets in Central and South America with the support from DESCA's team of more than 700 sales, service delivery professionals and customer service agents.

http://finance.yahoo.com/news/UTStarcom-Announces-Reseller-prnews-2299357254.html?x=0&.v=1

These are a couple of comments from the message boards,

"TTM of revenue for the holdin g company is $211MM. The 3rd and 4th Q are their strongest quarters so don't go by the first 6 months. Also, DESCA is just 1 of 3 or 4 operations of theirs so the total reveue is higher for the entire holding company (ELAN)They have $30mm in cash with no real long-term debt other than a $17MM capital infrastructure project that makes them $$. The receivables are $50MM and CSCO capital is the reason why they have short term debt. CSCO demands payment very quickly. So they have short term debt like any other company would to pay the vendor. The receivables take care of that. Why don't you call the company and ask then about the DESCA deal? It looks like DESCA has a lot of stock coming to them based on performance and that's why they sold the 30% for little cash. They want the stock at low prices where there is far more upside. They stand to make a lot of money by taking future stock considerations. "

"ELAN is the holding company. revenue for TTM is $211MM. DESCA accounts for 80% of the revenue. DESCA's revenue is at least $170MM. It could be more. I had heard that the company was planning on $300MM in revenue in the coming year 2010 and 2011. Also, remember, most companies in the world saw declines in revenue throughout the recession so that is not something to look at. The CEO over there came from Telefonica USA which is a subsidiary of the largest telecom company in the world- telefonica Espana. he went there b/c they have an amazing growth platform ahead of them. UTSI WILL do well with this partnership. Actually, both companies stand to do very well with this partnership. Hope this helps you. DESCA also has very high achievements and is a top CSCO vendor in may categories."

I'd like to add that this agreement does a few things:

1. The company gets to work with a local partner to market their products in 14 countries.
2. They get added revenue while introducing products into small to mid-size projects. Those DESCA clients exposed to UT products (may be better or cheaper) will start building confidence in UT products.
3. They can cut costs/scale back employees in these areas while still maintaining a foothold.
4. They continue to sell their IP besed products (rather than handsets for ex.) and generate revenue from their core products. UT has spent significant money on R&D for their core products over the years so they just need new markets without having to spend a lot for marketing/trials.
5. The company can get a set margin for their products (with agreed pricing) as DESCA orders them and get paid earlier.

IPTV market share - From the same DESCA PR, "UTStarcom is the IPTV market share leader in both China and India. UTStarcom is also the market share leader in India's broadband market."

Blackmore has mentioned that there was a slowdown in IPTV in China due to the carriers focus on 3G this year. While UT will lose some contracts as per the last blog posting shows, UT should still be well positioned (if not better now) for the boom projected for the next few years.

New stock trading range - The stock had traded in the $1.4-1.8 range for the last few months and finally broke out last week. Its interesting to note the $1.88 "high" on the last trading range and the same price it hit this week after coming down from $2.36 last week. While not important for long time holders, traders need to pay attention to these things so they are buying and not selling at the lower end.

Profitability - The sale of non-core assets, the move back to China, the massive cost cuts, outsourcing manufacturing, partnering all point to a focused and aggressive plan by Blackmore and the company to get to profitability despite the world recession, slow ramp of core products, and collapse of PAS and Japanese revenues. While shareholders have still suffered a lot, I like the moves and believe Blackmore can unlock significant shareholder value as they drive towards profitability.

Partner - Blackmore mentioned the US partner in one of the previous conference call and discussed the partner (with investors) as filling in product lines that UT did not have and vice versa (for example GPON). While the DESCA partnership is good, this did not look like the "partner" that Peter was talking about. I asked one institutional investor to check and confirm if there was another partner Peter was talking about and got confirmation that this was not the partner that Peter was talking about. They are also working with multiple potential partners.

Closing comments - I'd like to reiterate that a sale is probably not in the works for various reasons but this is actually a very good thing as the stock is (I believe) tremendously undervalued. My discussions with management with the stock in the $3-$5+ range and more suggest they believe the best way to get to higher share prices is to get to profitability. Of course, shareholders could not have agreed more but it looks like this new path (see above) to profitability has more chances of success (rather than just hoping hundreds of millions in revenue would come in).

ZTE win in Anhui, China

2009-09-01T14:42:00.000-07:00

"Reportedly, this award is for 300,000 IPTV lines, to be deployed over 17 cities and counties in the province. It will provide comprehensive Internet TV services including direct cast, video-on-demand, time-shift, and value-add. Huawei, ZTE, and UTStarcom bidded on the contract. Eventually, ZTE won."

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=160943&mid=160943&tof=1&frt=1

There hasn't been a lot of news regarding UT but the above win by ZTE over UT is a concern prompting cries of selling out the company.

Chinese shareholder Techbroker stated last year in a note to management:

"....Ironically, IPTV's boom day in China is likely UTStarcom's doom day -- We have two too aggressive, too successful and competitive, and too big competitors waiting out there for the same day too. They will offer zero or negative bet price to get you out of the business if they see the booming day is coming...."

Today, Tech states: "This latest serves a wake-up call to Blackmore and the Board: UT's last and only hope is finally gone now."

Is it???

Here is what Blackmore mentioned in the last CC:

"Our IP TV wins during the quarter include expansion contracts with China Telecom across a broad range of provinces, which include Fujian, Hainan, Shenzhen, and Shanghai. A partnership with CCTV also enabled China Telecom's first IPTV deployment in Hunan."

So, it is not cut and dry that ZTE can just muscle them and win all the contracts in iptv.
UT did $80m in core revenue in Q2 and bookings were tracking well. The Q2 bookings was the same as Q1 revenues if you subtract the Korean handset but since Q1 had some more PAS, the core part is improving.

I'm surprised with the 300k line deployment contract in Anhui since that shows even with the focus on 3G, iptv is picking up. IPTV is something the comapany will fight to defend. If they have to tweak their pricing a little bit, this would be worth it.

After all, their OPEX/quarter is not $130m or $60m but going to be under $25m.

Blackmore adds:

"Let me now turn to bookings. In the second quarter we continued to see good demand for our IP systems business in our target markets, and I'll discuss some wins in a moment. Based on our sales pipeline for the balance of 2009, we continued to expect to have good booking levels in the second half of the year."

I'll end this post with an earlier post on yahoo today,

On an earlier post this year, I brushed aside Shadow's and Coach's call for "more information" saying they needed to slash and burn. They have done the slash and burn. They also say they are focusing now on earnings and higher margins (hence letting go of handsets and not going after every broadband tender out there).

However, this loss to ZTE on iptv is critical and we definitely need information regarding this. IPTV is UTs higher margin product that they have put their hopes on. Is ZTE going for the kill and severely underpricing UT, in which case the board has to do a major about face regarding operating the company and looking for an exit point. Or did they just lose this by a few % points and the market reinforces the potential of IPTV in China. Only the company knows this.

As for having no choice but to sell out, thats not true. They have 2000 employees still after the restructuring. Others have much less (look at a Sonus for ex. at under 1000) I'm not making a case that this is a good thing (for them to keep restructuring if the revenue doesn't come in). Just that if you are playing this for a buyout, it might not happen soon. It does tip the balance more on the sell out option rather than the operational route (which some institutions are already grumbling for.....)

One thing on the building.. I am FOR selling it of course but that may be more of an indication that the company continues to operate the business than selling out completely.

Have a good day.

Gemdale

2009-08-12T22:21:00.000-07:00

In the June restructuring call, Peter mentioned hiring a real estate company to sell their Hangzhou property. It is interesting but probably not surprising that this company is Gemdale. Here is a chart of Gemdale the past 3 years (split adjusted).

http://www.reuters.com/finance/stocks/chart?symbol=600383.SS

UT sold their Gemdale shares between 15-20Y back in late 2007 netting about $90m. The stock actually got to a low of 3+Y and now trades at about 17Y.

The property is on the books for around $160m and another shareholder (Techbroker) talked about the rising property values in China and an estimated $300m for the land alone.

The company is projected to end the year with net cash of over $200m and to break even next year. Working capital needs (credit lines) are much lower than before but so is their available credit. The building could be use for collateral (and it will be if certain threshold amounts are used up per the last quarterly filing) so I'm not sure what they would need a major cash influx for. Peter did mention the upcoming Phase III BSNL contract so that they may use the funds for that contract. Anyway, that sale will take some time as Peter mentioned but its interesting that he mentioned it again this last call.

Technicals

2009-08-08T11:21:00.000-07:00

Here is a 6 month chart with the 20 and 50 day overlay.

http://finance.yahoo.com/q/ta?s=UTSI&t=6m&l=on&z=l&q=b&p=m50,m20&a=&c=

The initial cross back at 90 cents was a prelude to a nice run to $2.43, close to the November 2008 highs.

Now, the stock sits right at the 50 day with the 20 day trending up and coming up fast. I had commented in the past about the 20 day moving average. The stock was comfortably above the 20 day on its run up but broke down around the $2 area, subsequently reaching $1.35, which interestingly enough was the launch from the low $1 range. For trading, the 20 day is a farily good indicator and you should be long as it is above that. The bears had a nice attack early Friday but failed to bring it down. A few weeks ago, the 50 day was around $1.8 and $1.83/1.84 was the high just after the shareholder meeting. Now, that it has gone down slightly, the breakout point is here. Next week could be the long overdue breakout as the stock is incredibly cheap.

Just some gibberish technicals for traders out there. I'd like to see more volume for more confirmation from a technical standpoint. I'll post more on the earnings call later this weekend.

Q2 2009 Report

2009-08-06T21:47:00.000-07:00

Here are notes I took from the conference call.

The company highlighted the cash balance at the end of the quarter at $276m. Cash usage in the first half of $38m. "Good" progress in the restructuring with 1100 cuts in June and July. Further cuts in Q3 and completed in Q4. In Q4, manufacturing will be outsourced.

Bookings - No book to bill or numbers given. Peter had mentioned to detail this and instead not even book to bill was given. Peter mentioned good demand in iptv and expected to have good bookings in 2nd half based on sales channels. Again, no hard numbers, which is disappointing.

Q2 Revenue was $80m, which consisted of no Korea based handset revenue so mostly "core" revenue. I am confused why there was no handset revenue and yet some final inventory sales in Q3. Margins were negative due to several charges highlighted in the PR. Stripping out these charges, the GMs were about 20% (breakdown later).

Wins in the Quarter - IPTV expansion contract with China Telecom in provinces including Fujian, Hainan, Shanghai and Zhejiang. IPTV win with CCTV in Hunan. PDSN expansion contract in 10 provinces (35% market leader ahead of Cisco/Starent and the Chinese competitors). Some milestones included the mobile IPTV win, start of upgrade of STB from version 1.0 to 2.0 (software upgrade), "Dual SP" upgrade for CT (not sure what that is), IP Signage/advertising, Pilot project for SMIC for intertactive TV/"ITV" cable solution. Some new entertainment features implemented in IPTV for India. No subscriber update count for
IPTV.

Broadband - MSAN win with PLDT, BSNL/Bharti, continued product evaluations with Softbank with initial pilot orders for their TN product. Commercially deployed GEPON in 25 cities in 11 provinces in China. Advance negotiations in Q4 for BSNL Phase III contract to be awarded in late Q3, probably in Q4. Got professional service contracts with CT and China Unicom (multi-year contracts that can further relationships).

Recap restructuring progress and summaring focus on IP products.

The Q2 charge of $28m was for the 1850 people already let go (1100 people) and the ones identified. A smaller charge in Q3 for the rest. While the charge is taken, cash will be used in Q3/Q4 as mentioned previously.

Mentioned monetizing the Hangzhou building (nothing new).

Viraj talked about the business unit breakdown.

MCBU (IPTV/NGN) - $39m revenue and 31% gross margin. Later learned first India iptv revenue finally realized this quarter.

Broadband - $14m and 5% GMs. Lower revenue due to exit of lower margin business (note: Revenue from Phase I/II not recognized although cash is collected).

Services - $14m and 39% GMs.

Handsets - $13m (negative GMS - Most in China/no Korea designed handsets).

Peter talked about rest of 2009... talked about Hong Lu's contribution and wishes him luck in his new role (not sure if anything really changed there). Board is seeking to add people with expertise in the local markets (thats been discussed so often before and very late in this regard).

Blackmore spends more than 50% in China (and another 20% travelling is my guess)

NO 3rd quarter guidance due to the restructuring.

Reiterated 2010 business model of $350m in revenue, high 20s GMs and under $100m in opex. This will be added to by deferred revenue from the India contracts.

Q&A - Broadband GMs of 5% this quarter (whats up with that anyway when they talked about 20% last year). How can they achieve the higher company GMs with such a low broadband GM. This was an excellent question and Peter had a reasonable answer. Peter is expecting their TN product with Softbank to have much higher margins and contribute more revenue. The margins from BSNL is the low one but others in India (Bharti, Tata, Reliance) have larger GMs. Other Asian broadband contracts are much higher. GEPON contracts will be selected so that margins can be optimized (they will not go after every tender out there). Peter talked about India iptv mostly starting this year and still at the very early stages.

Peter discussed iptv pricing and said their infrastructure products are made of mostly 3rd party equipment and their software (which gives them higher margins). STB has GMs in the teens and cost $50. The upgrade coming up will be mostly software upgrades.

Not a lot of questions but Peter mentioned having discussions with Shareholders tomorrow. I should get additional feedback tomorrow after those talks.

Commentary - It wasn't a pretty quarter. The negatives included no detailed info on bookings, no iptv subscriber count, no announcement of the partner, no Q3 guidance. The positives included the company has ample cash with $276m. Subtract $45m for restructuring and you have $231m. OPEX for this quarter without restructuring was about $43m ($16m in R&D and $27m in SG&A). Weren't they targetting to get OPEX under $60m by Q4 when they talked with investors at the end of Feb. Core revenue of $80m was not bad with half in MCBU. Without PAS, it shows IPTV is doing well with the business unit having 31% GMs. So, OPEX for Q3/Q4 should rapidly going down as well. Any more writedowns in Q3/Q4? Handsets are mostly gone so...There are still those Phase I/II payments at about $25m/quarter so cash balance by the end of the year should be well over $200m. By early 2010, OPEX will be down to under $25m/quarter. Peter talked AGAIN about exceeding the breakeven revenue and bookings expected to do well in the 2nd half. The book value is down to about $2.55/share and projected to go lower. I anticipate the stock to edge closer and fill the gap to the book value and ultimately exceed it as it gets closer to 2010 and bookings are clarified. For now, the negative quarterly reports dominate the headlines and the company doesn't use any funds in defense of the stock price. Peter has done a good job in the expense cuts (which we have been asking for a LONG time) and there is progress in the "core business". The credibility is low as again they chose NOT to give color to bookings, guidance, etc.

Product Lineup

2009-08-01T19:45:00.000-07:00

While the company has addressed one side of the business equation to profitability by targetting a lowered expense rate under $100m/year, the bookings/revenue side doesn't show clarity even after years of churning out products. The most reliable/consistent revenue source came from PAS infra/handsets and their PCD handsets. Both of those areas are winding down to almost zero. PAS peaked around 2004 and the search for new revenue streams started way before that. Big investments and hope in 3G (WCDMA), Wimax, Softbank, and handsets failed/disappointed badly. A $2.5B revenue company at one point, UT has scaled back drastically and positioned itself to break even with $350m in yearly revenues. How doable is this? What products do they have? Over the last few years, there are various products thrown out that gave hope. The size of the markets were large but consistency of revenue and wins were lacking. Here is a smattering of products that the company is relying on to generate revenue in the future.

IPTV Infra (Basic) - By all accounts, this business has done well ramping to a subscriber base of 1.32m mostly in China. The problem is that UT has invested so much in their end-to-end system that the revenue generated so far has not justified the cost. Blackmore mentioned last year, “Our view is that these two product areas, NGN and IPTV are at the beginning of their life cycles and bookings can ramp fast. We are very pleased with the momentum they are gaining in their respective markets and believe the revenue for each of these product lines can grow in excess of 80% in 2008.” Its interesting that now, Blackmore makes the point that IPTV/NGN softswitch are mature in terms of their investments.

IPTV (cable) - The initial win was with Markwell in Taiwan. That was announced back in December of 2007 and just went "live" this year. Other cable wins in China were recent as well.

(translated) The tender was finalized before the Spring Festival, UT Starcom to become the project's platform and terminal equipment provider, and the South together with the media for the city of Canton 800,000 cable provides the platform and equipment. 其互动电视业务将与广东的省网现有单向数字电视业务紧密关联。 Its interactive television business will be with the Guangdong provincial network of existing one-way digital TV business closely related. 互动电视业务建立在单向数字电视业务基础上，依托同一HFC网络进行传输。 Interactive TV business set up in a one-way digital television business, based on relying on the same HFC networks. 而双向机顶盒需同时承载互动电视业务和单向数字电视业务。 And two-way set-top box is required to carry a one-way interactive television services and digital television business.

IPTV (digital signage, security) - There has been about 8 wins in digital signage and a couple in surveilance. Again, new revenue sources but size is small.

IPTV (mobile/iptv phones) - UTStarcom, Inc. (Nasdaq: UTSI) has been selected as the only technology supplier for the first Mobile Television (TV) system across Hainan province, driven by China Telecom's (NYSE: CHA) Hainan branch. This is the first large-scale Mobile TV system in China to adopt UTStarcom's end-to-end RollingStream(R) platform. The deployment is scheduled to go live on May 17, 2009, as an extension of the existing Internet Protocol Television (IPTV) service that Hainan Telecom and UTStarcom have been delivering since 2006. http://www.lightreading.com/document.asp?doc_id=175419

UT is now focusing handset efforts towards iptv. Given the general CDMA market's low margins, high working capital/inventory risks, charges even just recently, this is probably a good switch.

NGN/FMC - Blackmore mentions on one of last year's earnings call, “Focusing on our NGN solution, this is designed to support the growing number of advanced voice and data services as we see tremendous growth in Internet traffic and the end of life of traditional TDM switches. We’ve designed our mSwitch to allow the provision of next generation services but also significantly reducing operating expenses of current products. mSwitch supports multiple call types over all access technologies and currently supports over 60 million NGN customers globally. While PLDT is our largest network transformation project to date, our success there is winning us new customers worldwide. For example, last year a major European carrier, Tiscali in Italy asked us to supply them with our MSAN equipment. And just prior to year end, the carrier asked us to replace their entire TDM switching network with our softswitch. This is obviously a very key strategic decision for Tiscali and a very strategic win for us. We are currently implementing this project with them. In quarter four, we also won our first NGN softswitch in Taiwan. Other recent notable contracts include Brasil Telecom, where our softswitch is supporting applications for fixed mobile convergence and IPTV, with TOT in Thailand, and also recently Nextel in Argentina. It is clear that this technology is gaining momentum and we believe we have the best performing softswitch on the market.”

Broadband (India) - The main revenue(cash) source lately has been from the BSNL contract in India (Phase I/II). We've heard about the recent extension of Phase II and possibly Phase III by year's end. From all accounts, India broadband is a consistent revenue source (although margins are low).

GEPON- "UTStarcom Deploys Largest GEPON Network in the World for Japan's Softbank" That was in 2004! http://www.redorbit.com/news/technology/90954/utstarcom_deploys_largest_gepon_network_in_the_world_for_japans/index.html

Over the years, there were wins in Pakistan (Sept 2007) http://lw.pennnet.com/display_article/305689/13/ARTCL/none/XNEWS/Bell-&-Tell-installs-UTStarcom-GEPON-in-Pakistan/?dcmp=LWDENL_ARCH
, Goa in India (May 2007), http://lw.pennnet.com/display_article/293392/13/ARTCL/Display/none/United-Telecom-picks-UTStarcom-for-Indian-GEPON/?dcmp=LWDENL_ARCH

China (July 2008)...The latest update in the last earnings call from Lu: "Moving on to broadband, we’re very pleased to be beating and are breaking through in our GEPON business in China. For example, we’re working with the China Telecom for GEPON contracts in the Jiangsu, Zhejiang, and Fujian provinces. We’re also looking at the expansion contract with the China Telecom for gigabit EPON in Ningxia Province and are planning the trial with the Hunan Province and Jiangxi Province. With China Netcom, we are expanding our GEPON business in the Heilongjiang, Shandong and Hunan provinces. We are pursuing enterprise opportunity for gigabit EPON and have won a small, but important contract with China’s State Administration of Radio, Film and TV in the Vinan Province."

Recently, Blackmore announced they were on the short list for 15 more provinces as they topped testing in 3 of 4 categories. Here is a recent article (June 12, 2009) on EPON in China..."World's larget EPON tender?"

8:55 AM -- China Unicom Ltd. (NYSE: CHU) is believed to have issued a tender for EPON equipment to support the rollout of 11 million high-speed fiber access broadband lines, according to a report from Interfax China.
If true, this is further evidence that China's EPON market is hotting up fast, and that Asia/Pacific's preference for EPON is ongoing, though China Telecom Corp. Ltd. (NYSE: CHA) is also checking out GPON's potential. (See China Telecom Uses AlcaLu's GPON.)
China Unicom is believed to have built out around 100,000 EPON lines so far, substantially less than China Telecom's 4 million lines at the close of 2008, according to Chinese vendor ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763). (See ZTE Secures $15B, Highlights R&D.)

http://www.lightreading.com/blog.asp?blog_sectionid=752&doc_id=177920

PSDN - UT got 40% of the latest tender beating out Cisco/Starent. (The Packet Data Serving Node, or PDSN, is a component of a CDMA2000 mobile network . It acts as the connection point between the Radio Access and IP networks. This component is responsible for managing PPP sessions between the mobile provider's core IP network and the mobile station).

Transport Network (TN) - There has been build up of this product since last year on the analyst meeting. Recently, the company disclosed trials with Softbank and China Mobile to name a few. However, there has been no wins yet.

----------------------------------------------

The company's investments in the above products have gone as far back as early this decade. As mentioned, PAS peaked back in 2004 so the company has thrown a lot of resources into various products and only now seeing some payoff. For years, investors have been telling the company to CUT costs because the revenues were not coming even though they had products (WCDMA trials went very well for example but 3G licenses were not issued until recently). So, now that the company has cut costs, there is concern about developing future products and maintaining customers. While management credibility is low and their performance is reflected in their stock (even today, it ranks as one of the worse performing US listed "China" stocks), I cannot argue with the cost cuts as I see their product line as being adequate. The timing of bookings and revenue are still questionable but initial wins and positions indicate there are enough products to support the new expense base. The company currently generates 80% of their revenue from 20 customers (compared to Starent having two customers make up 85% of revenue for example). The company's product line and depth of development over the years cannot be replicated with the current market cap. (I wonder what valuation they would get if they just become public with say $200m in cash, own their own building, have the above product line/customer wins, and projected to breakeven/become profitable in the near term).

It is a very unusual situation but the question remains can they convert the previous years investments/positions into bookings/revenues to become profitable and grow the business. One of the biggest negatives is their credibility/past performance and that is NOT easy to overcome after so many years so we will have to see.....

Have a good weekend.

Chinese 3G Investment, IPTV phone, and Ericsson

2009-07-23T19:19:00.000-07:00

China's 3G investment - "China's top three telecommunication operators, China Telecom, China Mobile and China Unicom, invested 80 billion yuan to boost the third-generation (3G) network so far this year, the Ministry of Industry and Information Technology said Wednesday." "The ministry expected the three operators would invest 170 billion yuan (24.87 billion U.S dollars) in 3G network construction this year. "

http://english.sina.com/business/2009/0722/257615.html

So far, subscriber numbers for 3G has been low. "According to the article, China's 3 mobile operators have targeted 50 million 3G subscribers by the end of this year. But since the issuance of 3G licenses in Jan 7 this year, subscribers of all kinds have not reached 3 m under the most optimistic estimate. Of that total, more than a million use 3G cards or 3G laptops. Among the handset users, .74m are on China Mobile's TD-SCDMA network by the end of May, including users acquired during early trials and during the Olympics last year when free give-aways and other promotions were in place. There are only .1+ m users on China Telecom's 3G service. China Unicom now aims for .2m users for its WCDMA service by the end of Oct. In stark contrast, the total population of mobile subs in China is 600m right now. Average monthly uptake in mobile subs in Q1 this year is 9.6m in China. Clearly, the initial growth of 3G has not lived up to market potential and expectation. "

http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_U/threadview?m=tm&bn=27187&tid=160363&mid=160363&tof=8&rt=1&frt=1&off=1

The 3G handsets cost $300-450 so they are not cheap.

UT's mobile iptv- UTStarcom, Inc. (Nasdaq: UTSI) has been selected as the only technology supplier for the first Mobile Television (TV) system across Hainan province, driven by China Telecom's (NYSE: CHA) Hainan branch. This is the first large-scale Mobile TV system in China to adopt UTStarcom's end-to-end RollingStream(R) platform. The deployment is scheduled to go live on May 17, 2009, as an extension of the existing Internet Protocol Television (IPTV) service that Hainan Telecom and UTStarcom have been delivering since 2006.

http://www.lightreading.com/document.asp?doc_id=175419

CMMB- Shanghai. May 20. INTERFAX-CHINA - China's three telecom operators are accelerating their plans to roll out mobile TV services in order to gain ground in the forthcoming 3G era, with China Mobile the favorite to win among both analysts and consumers.

Although the 3G networks deployed by operators have the potential to provide streaming TV services, all three operators plan to rely mainly on the China-developed China Multimedia Mobile Broadcasting (CMMB) mobile TV standard to deliver their mobile TV services to both their 2G and 3G customers.

On May 19, China Mobile became the first telecom operator to sign a deal with China Satellite Mobile Broadcasting Co. Ltd. (CSMB), the national operator of CMMB, allowing China Mobile's CMMB-enabled handsets to access the CMMB network, according to Shen Hongbin, general manager of TiMi Technology Co. Ltd., a chip manufacturer and the developer of CMMB.

http://tmt.interfaxchina.com/news/1741

Commentary: It is interesting that UTStarcom, known for its low cost PAS handsets, has now switched gears targetting the higher end handset market and focusing on iptv. While the market is not large compared to the overall 600m mobile/handset market in China, investments by operators in 3G, iptv, and their goal to increase overall revenue could make UTs startegy pay off. The number of handset suppliers number in the 30s but UT can leverage their advantage in iptv to carve a nice market share in iptv enabled handsets. Handsets using CMMB (see above) will be competition but UT can offer more from their iptv system. Also, note that May starting dates are very close. This is a nice consumer product that UT can build on (and they have 1.32m iptv subscribers to market the handsets to already).

Ericsson- Back in 2006 (and maybe earlier), Ericsson was discussed as a potential buyer of UTStarcom. Ericsson has been a major acquirer and has targetted IPTV as one of its important areas of growth. Ericsson has acquired other companies since such as Redback Networks but its expansion hunger continues. The company is projected to spend $25B in R&D over 5 years and recently made inroads in China (I've discussed their India business previously).

"Recently, L.M. Ericsson (ERIC) (Analyst Report) received fiber-to-the home (FTTH) equipment contracts from all of China Mobile, China Unicom, and China Telecom. Ericsson’s GPON (Gigabit Passive Optical Network) technology will be used for high-speed internet access and high-definition IPTV services in 9 Chinese provinces."

http://seekingalpha.com/article/150148-anticipating-china-s-broadband-boom?source=yahoo

Here is a note on Ericsson's IPTV strategy: "Ericsson characterized the existing IPTV systems as First Generation and stated that its conversations with IPTV operators indicate that they have strong concerns about the ability of these systems to scale. Ericsson told me that it thinks that many of these systems will top out at 500 thousand IPTV subscribers. It expects that moving to a second genreation of IPTV systems will create major opportunities for it."

http://telcotv-view.blogspot.com/2008/08/ericssons-iptv-strategy.html

The author commented: "There is no question that Ericsson is late to the IPTV party. Its acquisition of Tandberg clearly gives it a strong presence in the market but not as a full service provider.It will be interesting to see if its view of the market will pan out. Personally, I think it will be much more difficult for Ericsson, or any other large full service system supplier, to break into the market at this time. "

Today, Ericsson threw its hat in the bidding for Nortel's CDMA/LTE assets. "The Swedish giant confirmed Thursday morning that it is "going to participate in the auction for Nortel's CDMA and LTE access" assets, and confirmed it had submitted an initial pre-auction bid by the end-of-Tuesday deadline, but did not disclose any further details."

http://www.lightreading.com/document.asp?doc_id=179571&

Ericsson+UT still makes sense.

IPTV and its related revenue streams (handsets, mobile/fixed infra, advertising/digital signage/commerce/education, etc) are still in the very early stage. UTs wins in India, Taiwan, and China have barely scratched the surface and some are just going live now. Thats both frustrating and shows the potential growth in the future.......

Focus on Blackmore and China

2009-07-11T09:38:00.000-07:00

The biggest news for UT during the first half of the year was the restructuring that took place taking their employee count from the mid-4000 level to under 2000. This will result in an OPEX run-rate of less than $100m going into 2010.

Let me highlight a few metrics from the Q1 report:

IPTV slowdown - Total subscriber for UT only increased by 50k in Q1.
China revenue - Total revenue of $50m and this included some handsets/PAS.
Softbank/Japan revenue - $6m.
India/others - $20m

About a year ago, UTs quarterly OPEX still hovered around $120-130m. The company sold "non-core" businesses and closed/merged others but basically the revenue lost was mainly from handsets/PAS and show that the previous year's "investments" and the company's projections of the ramp in growth of non-PAS/non-handset businesses was way off.

Here are a couple of articles showing the growth in ZTE/Huawei over the years as well as expected growth in the China telecom market in the next few years.

"Huawei and ZTE benefit from the fact that the Chinese government holds stakes in dozens of local phone companies. It is not surprising that these telcos increasingly buy much of their infrastructure from homegrown companies. Financially, China's telecom suppliers also benefit (like some struggling U.S. companies today) from tax rebates and R&D grants. But what really irks rivals are the government's low- to no-interest "loans" that needn't be repaid, and the deep discounts local companies get on the energy and raw materials they purchase from other Chinese companies. According to public filings, this year ZTE received a credit line from the government of nearly $15 billion. Beijing bestowed $10 billion on Huawei in 2004."

http://money.cnn.com/2009/06/23/technology/china_telecom_latin_america.fortune/index.htm?postversion=2009062505

"If the Pyramid team's projections are accurate, China Mobile is on course for annual revenues of more than $110 billion in 2014, up from nearly $70 billion in 2009.

China Mobile's position will be underpinned by a 7.4 percent compound annual growth rate (CAGR) in mobile subscriptions that, Pyramid's analysts estimate, will see the Chinese mobile market hitting the 1 billion subscriber milestone in 2012, and reaching 1.1 billion in 2014, when the mobile penetration rate will hit 80 percent, compared with 52 percent at the end of 2008."

http://www.lightreading.com/document.asp?doc_id=178855

Ericsson Scores GPON Wins in China - http://www.lightreading.com/document.asp?doc_id=178813

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I talked with shareholders this week, some of whom had conversations with Peter Blackmore. The discussions centered on similar long time issues but also on how well position UT is to compete in the China market. Blackmore's tenure started when the stock was in the mid $5s and while he has simplified the company and reduced OPEX, there are major issues on credibility and ability to ramp up "core" revenues (or even bookings at this stage). This is an important issue because the center of growth in the telecom world will still be China/India. Does UT have a viable wireless strategy? It gave up on 3G/WCDMA, wimax, and now most of its handset plans. Its main strength from a technological point of view is iptv and broadband (GEPON/TN).

From the same article above,

"Both operators have already been offering packages using various combinations of voice, data, and IPTV services, and now with the new line of services acquired, they can offer quadruple plays at an attractive price point to high-end users," notes Yu.

Indeed, both telcos have been rolling out fiber aggressively since 2007 and continue to do so. Pyramid predicts that FTTH will increase at a CAGR of 104 percent between 2009 and 2014, taking the number of users from 1.5 million to 50.8 million.

The number of UT employees even after the restructuring will still be around 2000. This is still much more than other companies such as Sonus, Infinera, Starent, Sigma Designs, etc.

I had campaigned recently to remove Lu because of the performance of the company over the last few years and if Blackmore was on the ballot, I would have campaigned to remove him as well. Its all about performance after all.

Despite the bad performance over the last few years, I actually feel more optimistic now because the cost base (whether it was by choice or forced on the company) has been reset to realistic revenue projections without hoping for a major ramp. Investors are correct to bash management and point to focusing on their own compensation/job security. The flip side is they took a major hit by doing the last restructuring. They are maintaining a net cash balance larger than anytime during the last 4-5 years and the OPEX will be down to the lowest level.

Like most shareholders, I am frustrated with the stock price and the indifference the company seems to have on it. However, I have to look at the base assets/numbers/growth projections of their markets. I believe that Softbank will increase their orders materially in the coming years. I believe that the iptv/fiber market in China (alone) should be able to grow materially and produce sustained profits. I believe there will be significant demand-driven growth in the coming years that will reward the company that has reset their cost base to 1/5th the expenses it had in 2008. Ultimately, this will power the stock price much higher.

Will this happen overnight.......No. The company has to show by bookings and growth of their core business that even this current target expense is realistic/optimal. One last note. The volume the last couple of days has been the lowest ever showing a wait and see attitude from investors. The price has also declined as the market has gone down 4 weeks in a row. Without news from the company, it doesn't seem the stock can gain traction but I do like the way the first half has played out for UT.

Have a good weekend.

2009 Shareholder Meeting Recap

2009-07-03T00:02:00.000-07:00

I attended the shareholder meeting on June 25 at UTs Alameda office. Aside from myself, there was only one other shareholder that attended (last year there were about 10 shareholders). Peter Blackmore, Viraj Patel, Thomas Toy, Luis Dominguez, Susan Marsch, and Hong Lu were present (among others).

The meeting had three main components: Voting results, Prepared remarks from the CEO, and Q&A.

Voting results – Both directors and PricewaterhourseCoopers were re-elected/ratified. No details were given.

Prepared Remarks from the CEO – Peter Blackmore gave a brief overview of the company discussing the divestiture/closing of PCD and other non-core businesses, significant cash position, and fundamental change to the company simplifying its operations. He discussed the company’s market leadership in the China iptv market, specifically iptv signage. He talked about leveraging the company’s R&D to specific markets. Peter highlighted the India broadband market talking about the potential 200m broadband users, adding even if it was just half of that, it will be a huge market and UT is in good position. He mentioned the limited broadband market in China (position in China is not strong). There are also good opportunities with Softbank. As a recap, they had outsourced manufacturing and consolidated back office functions in China and targeting less than $100m in yearly operating expenses.

Q&A (Since there were only the two of us and the other shareholder had only one question, I had an opportunity to ask multiple questions as time permitted)

1. I first commented that for the last 4-5 years the company has not had an operating profit. Even when Barton was hired in 2005, the company’s near term goals then was to return the company to sustainable profitability. However, every year, the company falls short and does a restructuring. My question was directed to the board and asked if there is a point (limitation) to this cycle (especially in light of the latest significant cuts) that the company is better off sold or partner with other companies. I mentioned that the street is obviously concerned with the magnitude of the cuts and the company’s ability to operate.

Peter, being on the BOD, answered that their goal was to return to profitability as fast as possible and they had sufficient resources still. They could always ramp up in the future if needed and their R&D was targeted (as mentioned in the presentation). Thomas Toy added that the company is always willing to consider outside offers and mentioned there are not many companies in Silicon Valley that has 2000 employees.

As a follow-up, I asked if they were confident that they have more than enough resources and can operate with 2000 people, then why didn’t they make the cuts to 2000 people last year? (After all, we did meet with them last year talking about cost cuts). Peter mentioned the revenue projections for 2009 was off and we proceeded to the next question.

2. The second question came from the other shareholder and dealt with the company’s material weaknesses and ongoing concern from their auditors. Blackmore mentioned that they will end the year with a strong cash position and a pointed to the business model to get to profitability as addressing (hopefully) the ongoing concern. Regarding the material weakness, he mentioned there were still two that Viraj Patel is in charge of resolving.

3. My second question was addressed to Hong Lu. Since Peter was the CEO and the company had hired a China CEO as well, what, IF ANY, was Hong Lu’s day to day role? Hong mentioned that he was Executive chairman so he was still part of the management team. He is based in China, meets with customers, and continues to plan the company’s strategy. He added that he gets up early everyday and works with Peter very well. I followed up by saying that other shareholders I’ve talked to want him to be around since he is the founder and probably knows the company better than anyone BUT the issue here is there are two high priced executives acting as CEOs. I added that I would love to have 10 more people but this company simply cannot afford the cost. Hong responded by saying they are constantly looking into executive pay and that if shareholders were not happy, they obviously have a vote.

4. The next question was about the lack of revenue growth last year that led to the cuts at the end of the year and this year. Peter had talked about needing to ramp several hundred million to get to breakeven/profitability (without PCD and before PAS collapsed). I asked what those revenues he was expecting (what areas) and if those revenues are lost or just delayed. Peter answered that a major shortfall was the Korean designed handsets and that led to the winding down/shutdown. Peter also noted all areas in and outside China experienced a slowdown. I asked how the handset shortfall could be the main contributor since they kept on saying recently it had low margins anyway. How would that shortfall be the reason for closing a $130m profit gap anyway. Peter mentioned the lack of profit and loss was substantial if added up and again there was general slowdown in the world markets and hit all areas of operation.

5. Moving on to this year’s bookings. After the restructuring announcements, Peter had announced a breakeven point of $350m and that bookings in Q1 were good and Q2 was on track in China and ahead outside of China. I asked Peter that this doesn’t mean anything to investors as they don’t know what it means when the company says it has good bookings or tracking ahead? For all we know I said, your target is to lose $20m in 2010. Peter re-iterated their intention to get to profitability and that bookings were good in Q1 and Q2 but obviously they will have to wait for Q3/Q4. This is where it gets a little interesting. I said how can bookings in Q1 be good when core bookings were only about $65m. Annualized, this is only $260m, well below the $350m to breakeven. Peter was surprised and said that must be revenue and not bookings in Q1. I kind of looked at Barry to see if the numbers he gave was not correct. “I” tried to explain that the bookings in Q1 was $140m but half of that was in handsets so not part of the core (it was really weird since Peter was looking at Barry and there was some confusion). A day later, I was still trying to follow up with Barry and the resolution is they will try to give clearer information on Q2. I really hope so since it is the company directing investors to be patient and look at bookings and then still expect investors to guess and make assumptions on what a book to bill number applies to. Very confusing and unnecessary.

6. Next question was about the recent rumors about a Chinese handset maker/investor and that Merrill Lynch was hired. Peter mentioned that he doesn’t comment on rumors. I asked then if Merrill Lynch was recently hired. Again, they can’t comment only to say that Merrill Lynch is their ongoing advisor.

I could have asked a lot more questions but time was “up” and Peter mentioned if there were other questions, we could always schedule another call.

After the formal Q&A, I still had a chance to discuss certain topics as Blackmore, Lu, Toy, Dominguez, Barry, Viraj exchanged some small talk/greetings.

Share buy back – they are still against this. They commented the best thing for the stock is to get to profitability. I think most would agree BUT its hard when they haven’t been profitable in 5 years. I threw in a comment that they need to do some insider buying.

Peter mentioned that they can now (based on the restructured operations) get to profitability with just a little bit of core ramp. Isn’t this what shareholders had been asking for the last few years since the major ramp has not occurred.

IPTV- I mentioned that in Q1, China added 250k subscribers but UT added only 50k total (mostly in China but still low). Peter re-iterated they still had over 50% of the China iptv markets.

I asked Viraj Patel when the interim title goes away and he mentioned that we’ll see and they had a lot of work ahead of them first.

I missed asking Luis Dominguez anything.

The conversation with Toy was about a sale of the company but they can probably get a higher price if they get this thing turned around first.

In the parking lot, I even got to talk with Lu’s assistant and she was describing the sadness in seeing the company this way after the last few years. She mentioned how she understood shareholders losses as she bought stock in her employee account at $14 or higher as well. After I told her what I and other shareholders have lost, I think that ended that conversation. I reiterated my point that Lu has benefited from the company for years and needs to show leadership by sharing in some of the pain by cutting his salary significantly. Lu also has the most to gain from a higher share price.

BTW, this year’s food was also a disappointment. Just some cookies and drinks as compared to last year’s appetizers (budget cut?).

The above Q&A is obviously paraphrased but should capture the essence of the meeting. There really wasn’t anything materially new in terms of the operations of the company. I didn’t really expect anything new but wanted to share some of the investor’s concerns/questions with the board and other executives that are new or not aware of investor’s day to day issues. I’ll limit my comments to the above rather than make a big positive or negative statement. I won’t play psychologist and try to interpret various items/comments. It really comes down to performance and what they report anyway.

Have a great 4th of July weekend to everyone.

India

2009-06-16T21:39:00.000-07:00

Here are some articles that relate to UT in India I quickly pulled from a couple of websites:

No cuts in India - Company’s India MD, Vijay Yadav confirmed to TelecomTiger that India operations will remain largely unaffected by the move. “ We continue to report strong growth in the broadband and IPTV market in India. It means that the India operations will remain unaffected by the announced job cuts,” said the MD.

UTStarcom’s India headcount totals around 125-150. Though the employee strength might appear to be small, the company is consistently consolidating its position in the broadband market including IPTV infrastructure in India with regular contracts from state-run PSUs BSNL and MTNL.

http://www.telecomtiger.com/fullstory.aspx?storyid=6353

BSNL Extension Contract - "In the first phase, UTStarcom deployed 1.3mn broadband subscriber lines for BSNL with an additional 1.1mn broadband subscriber lines during the second phase. With the new expansion phase, UTStarcom will deploy its B1000 multi-service access node (MSAN) solution throughout India to add approximately 475,000 ports of capacity to BSNL's existing broadband network."

http://www.iptv-news.com/iptv_news/may_09_2/bsnl_extends_utstarcom_contract

Aksh-BSNL - Commenting on the launch, Dr. K.S. Choudhari, MD, Aksh Optifibre Ltd, said, “This launch is a testament of the spread and growing popularity of icontrol IPTV in India. Aksh believes in expanding mediums of entertainment at competitive pricing through this breakthrough technology of IPTV service. This expansion of the service to multiple cities highlights the growing popularity of the real power of interactivity. With the launch in Agra we have reached a footprint of 15 cities in the country already and plan to increase it to 22 in the next 30 days”

BSNL - Chennai - BSNL’s Chennai circle subsidiary, Chennai Telephones and Smart Digivsion Pvt. Ltd. announced the launch of Myway BSNL IPTV services.

http://www.telecomtiger.com/fullstory.aspx?storyid=5962 (UT mentioned in the Q1 call about BSNL deployment in Chennai).

Bharti-Airtel -While one agrees that broadband sector is still at an infancy stage in India and the market dynamics will certainly change post introduction of wireless broadband services in the country, Bharti Airtel is expected to continue to be among the top performers in the field complimented by its position as an integrated telecom player which will help it to offer wireline as well as wireless broadband services.

http://www.telecomtiger.com/fullstory.aspx?pagenum=2&storyid=6378 (Bharti Airtel is the leader in mobile in India...UT could introduce their mobile iptv solutions in India in the future)

----------------------------------------------------

During the Initiatives call, Blackmore commented on the bookings outside China and that it was above expectations (whatever that means). UTs strategic position in India has generated some costly sales in the past (low margins/losses). The iptv subscriber numbers have been very low. However, broadband seems to show a lot of promise while iptv deployments are now taking place. The lowered cost base in 2010 plus the early cycle nature of UTs products in high growth tech space/countries should get them to profitability. The company credibility is non-existant and shareholder confidence is very low. The company has to prove they can execute and deliver bookings but the ramp in core bookings in India (low compared to all the other revenues before) should start making a bigger impact and lead to some enthusiasm in the coming months and set the stage for 2010.

Its easy to get discouraged with the disappointments but the main question is can UT ramp the core revenues in light of the targetted cost base in 2010. The company obviously had to cut costs in light of the slow ramp of "core products", divestitures/wind-downs of handsets (mostly), and almost complete loss of PAS. Some people may not understand why I and other shareholders are positive (or even say I'm always positive) but after years of worrying about the loss of PAS, the high expenses, and slow ramp of "core" products (or maybe unrealistic growth expectations), its really good to know the company can realistically "outperform" going forward and the focus would be on the core products.

Q1 Bookings

2009-06-15T18:40:00.000-07:00

I talked with Barry Hutton, UTStarcom Senior Director of Investor Relations, today and discussed details of the Q1 bookings.

The total dollar amount for Q1 bookings was $140m (compared to Q1 revenue of $119m). Here is the breakdown:

1. Korean-designed handsets - $40m
2. China handsets - $30m ($10m PAS & $20m CDMA)
3. "Core" infrastructure (including) service - $70m (This amount includes around $5m in PAS infra).

In the Initiatives call last week, Blackmore mentioned focusing on the higher-end CDMA handsets that take advantage/compatible with their other products such as mobile iptv. I was trying to nail Barry down on a good number to use going forward for Chinese handsets and $15m seems to be reasonable (use whatever number you are comfortable with, The $15m is less than $20m because the $20m is more "lower end" right now but when they sell the higher end, then thats more money per unit). It is interesting that the $20m that they booked is equivalent if not more than what they sold for the entire last year in China. Again, they are going to focus on higher end units.

If you take $65m in core bookings (without PAS) and add in CDMA handsets ($15m), then that is only $80m or $320m annualized. The core itself is only $260m, still short of the $350m breakeven point that Blackmore discussed.

There are a few items that could/should boost this figure such as:

1. Core bookings are expected to increase double digits. (I remember them mentioning core bookings last year to grow 50% in 2009 so again there are issues with the rosy projections and credibility of the management).
2. Q1 bookings are normally/seasonally lower.
3. IPTV subscriber growth was only 50k from Q4 to Q1. China alone is projected to add 2m subscribers so the last 3 quarters for UT should be much better. Also, new wins in China, expansion in India and Taiwan going live (I know weird that it just went live in April 1) should help.
4. Potential Phase III contract from BSNL not included.
5. Transport Network product has been highlighted for a year now and is in trial with among others Softbank/China mobile. (I tried to get info on the size of tenders but no info. there. Maybe others can comment).
6. GEPON. On the Initiatives call, Blackmore mentioned one win from the CTC procurement bid, ranked first in 3 of 4 categories leading to being on the short list in 15 provinces.
7. IPTV in cable/digital tv solution, first mobile iptv win, now 8 wins in iptv adverstising show the early cycle of UTs products.

Tradeoffs/Credibility Commentary - Last year at the Analyst Day meeting, the company projected it would lose $130m without PCD. In order to close that gap, Blackmore framed that situation as needing to ramp revenue several hundred million. Is that possible? Yes. Again, there is a credibility issue.

Last March when shareholders met with management, we questioned how they would get to profitability and did they account for PAS in 2009. Barton proudly said yes and he had the game plan in his folder. Again, major credibility problems.

Even the last Q1 earnings call and initiatives call, they again mention that the negatives were known, built in, or expected. Now, bookings and cost cuts are going as planned/according to company projections. But, they never really say what those numbers/metrics are. There ARE major credibility problems that I have highlighted over the postings but been optimistic because of their technology, markets, valuation, and on and on. This might seem contradictory but things are not always black and white and why UT can rally from the $2s to almost $6 last year and then plunge to 63 cents and then rally to $2.43 this year.

In order to get to profitability last year, without PCD, the company would have to raise revenue by several hundred million (about $400m) and NOW have to make up for most of the $350m in PAS sales generated in 2008. That is without the opex cuts announced. So, now that the total breakeven revenue is $350m, I WAS positive in my posts. Is it because I suddenly think management is credible. Of course not. Without the cost cuts at the end of last year and the ones announced last week, where would the company get the additional $700m or so in additional revenues?

Peter was confident in the call in getting to the $350m in revenues for 2010. Based on the above, I can see how he can reach it. Lets say none of the points I mention happen and they miss by $30m on revenue, then they lose $10m for the YEAR (2010). That is a far cry from the $50m or so quarterly losses that investors have been accustomed to. The downside risk for a loss in 2010 is so much lower now. Any breakthrough in contracts or subscriber ramps, or more efficiencies go to the bottom line.

BTW, any point I make above that you feel is positive or too positve, just think how biased I am. Any point that you feel is a negative, then that must be unbiased.

Have a good evening.

A Viable Business Model

2009-06-13T06:37:00.000-07:00

The announcement this week by the company to cut yearly operating expenses to less than $100m was stunning and radically different from previous behind the curve/half baked restructuring actions. Lets look at the outlook/ramifications of the cuts going forward.

Divided BOD? - On Friday, various institutional investors had the opportunity to talk with Peter Blackmore/Viraj Patel and came away feeling that there could be major divisions among the board between the strategic steps the company have and would take. Peter Blackmore came in 20+ months ago with an operations background and very early on focused on streamlining the company. After about 9 weeks, they came up with a plan to divest non-core assets as well as improving sales, marketing, and operating management of the company. While those were significant moves by itself, the model was also predicated on a revenue ramp (despite ongoing PAS declines) to achieve Peter's targetted expense metrics goal of around 25% for both SG&A & R&D. Peter discussed the company as a "startup" and asked people to measure their progress by the bookings. The company executed on the divestitures part but not on the revenue ramp and the rapid deterioration of PAS sales and the very slow ramp (in some cases) of iptv and other core products forced the company to slash costs by $100m late in 2008. The global meltdown late in 2008 did not help but the primary reasons were company specific (such as PAS closedown, regulatory issues, etc). This is evident by the continued growth by companies such as Huawei and ZTE.

Anyway, I digress. Despite the public statements by the company of good core bookings, I believe Peter knew that the restructuring/divestitures were not enough, the core revenue ramp was not enough, and that the company needed to do something more drastic. This is a credibility issue that Blackmore has but it doesn't mean he doesn't know what needed to be done. As an investor, I also rely on projections based on the company's public statements. This definitely hurt a lot of investors as the stock went from $5-6 to under $1. A major turning point or peak of my frustration was the time of the Q4 2008 earnings call. The company projected $125m in Q1 revenues which was way below expectations and then left investor's with the company trying to cut quarter opex to under/around $60m/quarter by the end of 2009. What??? Even for this company, this was ridiculous. The stock plummeted from $1.1 to under $1 despite the company having cash/book value that was 4 to 5 times the market cap. The street basically said it looks like the company will continue their business as usual ways well into 2010. Obviously, this is NOT acceptable for shareholders and we organized as best as we can. I increased my postings to highlight the fact that the stock was pricing in this scenario and shareholders needed to be as vocal as possible because there is tremendous value wasted (as if the previous years were not bad enough).

The stock dropping to $1 I believe also made it ridiculous enough that the people in the company that favored more cuts finally had a platform. It took months and there were rumors of more cash injection, selling out the company, and more job cuts. It all culminated yesterday in the massive restructuring. I initially listed the benefits of a handset investor but then wondered what price could they have paid if the deal was negotiated when the stock was under $1 or in the low $1s? This would be inconsitent with the company not diluting the existing share base as they did not last year when paying the CB.

Anyway, I believe the rumors of an investor was still valid and obviously, there are always major resistance to any cuts, let alone this magnitude. Again, I probably gave the history of the world but it is important to go through to understand the weaknesses of the company and where do we go from here. I believe Peter is fully in control and sets the tone of the company. There is resistance in the board but obviously supporters as well. I believe Peter got the cuts he wanted and now is comfortable with the metrics and revenue expectations going forward. I don't believe that management/board gets a pass for their credibility issues and believe that Lu should not be re-elected. I also believe that if Lu gets voted down and submits his resignation that the board will accept.

For people that have been waiting for this announcement before voting, there is no real other option now but to vote against the re-election of Lu. I also voted against Jeff Clarke because he is part of the board but will not campaign on that. I voted against the accounting firm because for the last 2 years, they have been paid $11.5m and think that is just outrageous for a company the size of UT.

Dream being dead? - Some people will say this is a sad day for UT? Why? The dream of UT being the Cisco of China was long over and Huawei/ZTE were the ones who benefitted from the China boom. UT was not going to "compete" with Huawei whether it had $180m/quarter in opex or $25m/quarter. Most investors "dreams" are to get to profitability as quickly as possible and potentially sell itself. Even this dream for me was gone because the company, even with Blackmore's yapping about revenue growth/cost cuts, just didn't seem to "get it" and continued with its yearly end of the year cuts and projections for better days with a lot of very hopeful assumptions. Thats why I changed course and just hoped for the company to sell itself. The announcement yesterday was very significant. Does this bring the hope back that it will be the next Cisco or Huawei (ironic)? No. It does bring the realistic probability the company will be profitable in the near term and then can have better options to sell itself or organically grow its profits/earnings from there.

Cash Flow- Blackmore emphasizes the cash because they will need it to get to the profitable business model. The company has $301m in cash at the end of Q1. They will go through another 3 quarters of losses at the minimum. They will incur restructuring charges of $40-45m. On the positive cash flow ledger, the company will take in $100m as part of the Phase I & II India contract throughout this year. This is not part of the "revenue" estimates due to the accounting rules. As I was informed, Phase I will be completely paid of by Q2 and even some of the Phase II contract will not be paid until 2010. There are the Korean designed handset inventories to still wind down. There is also $10m left over from PCD escrow to be paid in July. Will the company burn through all the $300m in cash this year? No. Lets do a little math. Lets assume that core revenues for the rest of the year at $90, 100, and 110m for a total of $300m. Thats $75m in gross profits. Lets say opex is $65, 60, and 55m for $180m in opex. Thats an operating loss of $105m. So, lets add it up.

$301m - $105m + $20m (Handset inventory wind-down) - $45m (restructuring) + $10m (PCD) + $75m (India Phase I/II for last 3 quarters) -$15m (other expenses, taxes/options) + 0 for interest earnings/currency fluctuation/etc) = $241m. Lets "round this off" to $200m just for any other contingencies. Does this seem like the cash is going to zero?

The company is in dicussion with the Phase III BSNL contract but that is towards the later part of the year. Even if they have to spend ahead for inventory, it will be $60m or so. The larger it is, the better for UT since it means the contract is higher.

Breakeven point for 2010 - Blackmore laid out the business model needing $350m in revenues as the breakeven point. Thats an assumption of about 27 to 28% GMs with an under $100m opex. The GM assumption is debatable but it will not include significant handsets (and they are only targetting "strategic handsets" for their mobile iptv, etc). An analyst even commented how come the GMs is way below the industry standard (around 35 to 40+%). Blackmore mentioned the set top boxes had low GMs but that could be outsourced as well. Anyway, the driver now will be core revenue and those can be tracked by bookings. Another point I want to make. FINALLY, we are not talking about revenues without PCD, without internal PCD, without PAS infra, without PAS handsets, without Korean design handsets, without China handsets.. There may be very little handsets but basically 2010 revenues will finally be core products. Geeez...And any revenues book now will be products that are not "legacy" types. These will be hard earned revenues in this environment.

2009 Bookings - Q1 revenues was $119m but about $40m in Korean-handset design inventory being closed off. That leaves about $80m. There may be some other non-core sales there but one institutional investor clarified the 1.2 (book to bill ratio) bookings for the core and was it $96m and the company said that is a good number. (Who knows if this is true but that is the best we have for now). Q2 bookings will be announced when Q2 cc rolls around but Blackmore indicated that China bookings are on track and international bookings are ahead of projections. An Analyst asked during the call if the international bookings are primarily in India but Blackmore mentioned its in other places as well such as Korea, Taiwan, and the Philippines. Blackmore mentioning Taiwan is very interesting as the iptv contract for Taiwan was press released in December of 2007. Blackmore also mentioned that iptv just went live in Taiwan a month or so ago (I gave a sarcastic comment in my blog posting at the time but that may be going well enough that they are booking material revenues now). During the initiatives call, Blackmore talked about iptv/softswitch as being more mature technologies and GEPON/TN as products they will require more investments. It is a very positive sign that bookings for Q1 is around the $90-100m range without GEPON/TN products having any or very little impact. That Q1 number also didn't include potentially the Phase III BSNL contract and shouldn't the 2nd half of the year bookings be better than Q1?

Working Capital - The company has no debt, has short term credit lines in the $100m+ range, and cash. Looking at 2010, the business model could be a $350m revenue company, under $100m in OPEX, $200m in cash, and the credit lines supported with a $170m building that they own. Is that not a sustainable business model?

Tangible Book Value - I think Tigre, another shareholder, brought this metric a while ago and it was deteriorating. I argued that who buys the company based on the tangible book value. I was wrong to ignore this metric and have used it often to gauge the stock price as it has fallen way below the book value. As a company losing money, using cash/book value is useful but as I originally mentioned, its less correlated for those that are profitable. A tech company trading below tangible value is a major sign that it has problems (as if the stock price declines was not warning enough). Anyway, I expect the stock to trade above the book value as it loses cash to get closer to breakeven/profitability. Eventually, it should trade much higher than book value as the focus becomes earnings power/growth of the business.

Startup/Chinese company/Credibility - There are obvious risks and the issue with UT board and not being "Chinese". Institutional investors have been discussing this with management on an ongoing basis for a long time but just like the Starent lawsuit, takes time to play out. This in no way ignores this very important issue. There is also the credibility of not getting ahead of the curve for so long. Peter has talked about the company being a startup and at the same time mentioned that UT is unlike other companies because of their background. While it is not a pure Chinese company, at this stage, we can look at things from a half glass full point of view. Unlike a Starent for ex trying to break into the PSDN market in China, UT being a semi-Chinese company with years of operations has advantages. UT, having worked on their technologies for a decade, does have advantages in having a wider product line using less resources than someone just starting out. The company having no debt is a tremendous advantage and owning their building has tremendous advantage. While a few years ago, we may have given too much credit for these intangible assets, the extreme case of looking at the glass half empty or empty is now wrong.

Share Price - Do I have a crystal ball? Well, yes, but it doesn't work sometimes. Technically, there was resistance in the $2.5-2.6 levels. Short term, you always have to look at technicals as it incorporates money flow and other factors that we don't forsee. I do think that the stock will generally trend higher as 2010 (only 6 months from now) approaches. While a sale would have been great from a short term pay off, this restructuring is significant and will pay shareholders in the longer term. The institutions probably know all of the above metrics, etc but my main audience has been those retail shareholders just like myself that have been "stuck" with a higher cost basis. There are always opportunities (specially in this market) elsewhere but I believe the opportunities (risk/reward) in UT at these levels are as good if not better than other investments. That of course is up for debate but this is a UT blog so I focus on the UT investment. I don't get in diversification or commodity speculation or shorting or whatever. There are plenty of other sites and analysts for that.

Have a good weekend.

Company Initiatives

2009-06-11T20:42:00.000-07:00

Peter started the call discussing some background information:

1. Positive momentum in bookings growth
2. Improvements to their CRM, sales, and operations management
3. Moving back office operations to China
4. $301m in cash @ the end of Q1
5. Focus on accelerated profits and having the same basic strategy
6. Highlighted IPTV leadership in China/India and broadband leadership in India
7. Anticipates double digit growth in 2009 bookings for infrastructure products

The call was mainly about the opex cuts to less than $100m/year and a reduction in work force by 2300. Some of the cuts have already started with the majority being done in Q3 and completed by Q4. The company will maintain essential capabilities in sales/R&D and outsource manufacturing. The focus will be on the higher revenue growth/margin products.

Handsets - The company will target the higher end China handset market focusing on specialized handsets that incorporate their iptv system (for ex) as oppose to the entire CDMA market. This will reduce inventory risk, reduce working capital, and improve handset margins.

The opex reductions have various components:
1. Having a direct sales model in China/India and an account based approach for the rest of Asia.
2. Working with OEMs
3. Reduce SG&A (consolidate back office operations into China)

The company will take a $40-45m charge in Q2 with the cash loss in Q3/Q4.

Targetted Business Model to profitability - With a yearly opex of less than $100m, and GMs in the high 20s, the company will need $350m in revenues to break even. Peter mentioned he was confident that they can achieve and exceed this level. He expanded later during the Q&A regarding bookings turning into revenue about 9 months later. Bookings for Q2 in China is as projected and bookings for outside China is above expectations.

Cash - No further information but by the end of the year, the company should have more than sufficient cash to support the business and its improved financial model.

Handset windown - The Korean designed handset business is almost wound down and the China handset operations is also reduced.

Hangzhou building - The company hired a realtor to sell the building but the size and amount will make this a difficult sale.

The company has a "margin improvement" plan regarding the Indian broadband (outsourcing manufacturing). They see continued significant growth in India broadband. They will be leaner/more flexible with less than 2000 employees and confident in returning to profitability.

Info. from the Q&A

1. Virtually no PAS infra in Q1, very little PAS handsets.
2. They have the confidence even with reduced R&D due to looking at the growth with their primary customers. They have 20 major customers making up 80% of the revenue.
3. They are focusing their R&D in the newer products (Transport Network and GEPON). Other products (iptv/softswitch) are more mature and need less development. Most of the huge work has been completed in those two areas as iptv customers don't need more functionality and with their stable product. Regarding their softswitch, most of the code has been written for the Class 5 legacy switches. Peter talked with their leading product managers and were cutting costs because they were spending too much money for the return.
4. A lot of savings on SG&A because of their move back to China. SG&A will be about 10% and R&D in the "teens". If I interpret this correctly, R&D may be about $65m and SG&A at $35m for a target of $100m. They are keeping the infra sales and reducing significantly the handset sales team.
5. Bookings for outside China ahead of projections and not only in India but also in Taiwan, Korea, and the Philippines.
6. Rupee strength - Will help some in the current quarter
7. Transport Network product being trialed with China Mobile and Softbank as the two most notable (any bookings will be revenue in 2010).
8. New Partners - Will be announced in the Q2 call but they picked up one in the US.
9. Workforce in U.S @ the end of the year will consist of a small support staff, legal, and some due to its corporate office.

----------------------------------------------------------------------
Let me comment on various issues.

1. Cost cuts - Ever since the end of Feb Q4 earnings call, the management has been baraged by investors and the company has mentioned taking significant actions to accelerate profitability. The $60m target opex for Q4 2009 was clearly too high specially in light of the Q1 company estimates and little ramp through the year. There have been some investors that mentioned it can't be reduced much more without hurting their competitive positions. That the company knew more than investors. Well, it turns out that the majority of the shareholders/the market that have been pushing for much lower expenses were right and finally the company has deviated from their usual year end announcements for cuts and waiting another year. It says a lot about the management and their projections that it has taken them so long to even project a realistic business model. Its not easy to cut 2300 people but if the realistic revenues cannot support more, then that is what has to be done.

2. Rumored Investor - No one knows if there was even an investor and a deal could not be hashed out but this would be inconsistent with the company diluting the shareholders at these levels. They didn't do it when paying the CB when the stock was higher and now with more cash, it didn't make sense (as I thought about it). I still think a local Chinese handset maker could partner and make use of UTs technology/equipment/license/building space.

3. Future Revenues - Q1 revenue was $119m with about $40m in handsets. PAS was very little so the core revenues was about $80m. Book to bill was above 1 (and didn't include BSNL Phase 2 revs) so a little growth and some handset sales in the future could lead to the breakeven revenue and above.

4. Expectations - Some shareholders were expecting an outright sale or an investor. The stock price movement did not support an outright sale. The investor scenario was plausible but the shareholders would have been diluted at these stock levels. Some were expecting a huge contract. That would be odd when they are reducing 2300 people. Can you imagine Peter announcing a major contract and then saying by the way, we are letting half the people go?

5. Valuations - We have discussed cash/tangible book value. The stock was discounting these levels due to the continued losses. More losses this year plust the restructuring costs will lower the cash/tangible book value levels. However, if the company is at breakeven or profitable in 2010, then instead of a discount to book value (let alone cash), it will be greater than those levels. This is not scientific but an approach could be estimating the end of the year book value and then looking at other small cap/technology comanies with around breakeven P/L and what their market cap to tangible book value is. Then, discount or add a premium based on what you feel the growth rates/bookings/margins/technology of UT compared to the other company.

6. Board member re-election - There is no question the company has been way behind their cost cuts and have not developed a profitable business model. While it is more probable now with the additional cuts, shareholder value has been lost. For this reason alone (do you need more?), shareholders must vote out Lu/Clarke and send a message that the performance over the last 5 years have been disastrous. The announcements today just re-affirms the failure of the board and their lack of urgency the last 5 years.

7. Blackmore's credibility/company projections - Blackmore discussed ramping revenue during last year's shareholder and Analyst Day's meetings by hundreds of millions. In March last year, Barton talked about his 2009 business plan that incorporated PAS. Last September, Peter said the company did not feel the recession yet. The cost cuts at the end of last year that would chop $100m/year were clearly not enough. Is it any wonder why investors don't have any confidence/trust with the company/management.

I have been waiting for a long time for profitability and for revenue to ramp. The additional cost cuts and the corresponding revenue breakeven point of around $350m are finally realistic and doesn't require a tremendous revenue ramp. Today was a good start and obviously the company has to execute. The management/board should cut some more of their compensation and consider buying some shares. The news is out so there are no excuses. Overall, Peter went into a lot of details during the call and address a lot of investor concerns regarding the cuts/revenues going forward. I think this was a very good call that addressed a lot of investor concerns. Some may have higher expectations but again I have to remind people this is a $2 stock and the main goal was to operationally break even first and stop the bleeding. The moves today signify their seriousness to get to a profitable business model and made them more attractive to a potential buyer going forward. We'll continue to debate whether the cost cuts will impact them in the future but when you don't have the existing revenue and the returns are not justifiable for the expenses, then you have to cut. I'm positive on the current valuation but I'm biased and always like the valuation :-)

CC/Initiatives

2009-06-09T20:16:00.000-07:00

In typical company fashion, the anticipated end of May conference call is happening this Thursday, June 11, 2009. After following the company closely for the last 5 years, I can speak for longterm shareholders in expressing concern and doubt that the company can actually execute or release shareholder value. The Chinese articles discussing the potential new Chinese investor and additional significant cost cuts are intriguing and seems very promising. Lets discuss the different components.

Investor Point of View - Some shareholders ask "Why does the company need cash and dilute existing shareholders? The more optimistic take is "Why would an investor take a stake in UT? Will someone invest $50m or $100m because they want to lose money? I'm sure they have done their due diligence and decided the shares are undervalued and see significant upside potential.

Price - During the phone conversation I had with Peter Blackmore, he mentioned the stock is not even trading at cash levels. Cash is at $2.35/share. Tangible book value is around $3.15. Normally, technology companies don't trade under cash/book but then again UT has been unprofitable for so long.

Working Capital - UT's cash position is strong but their working capital is not. While competitors have access to lenders, UTs credit lines are small and most of the cash is in China. An influx of cash will provide more working capital and help in the restructuring.

Chinese handset maker - The benefits go beyond the cash that it will bring in. UT has made CDMA handsets for the China market but so far has limited success. Co-marketing, technology sharing, etc will help both companies. UT may lease out their equipment/building. UT still has a small ownership in PCD and that relationship could be monetized or made more profitable.

Board representation/Local Chinese representation - As the number one UT shareholder, this new investor will have significant input to the success/failure of the company. The company move to bring in a shareholder that will hold them accountable for performance is long over due.

Cost cuts/Profitability - After 5 years of waiting till next year, this latest round of cuts maybe the one that gets the company to profitability. After the company projected quarterly OPEX of around $60m for Q4 and the lowered revenue projections for Q2 (after the Q4 report), shareholders were all over management. Not only were they far from profitability as before but their projections showed they were not serious in getting to profitability.

Core Business - It would be impossible for the company to continue and enhance shareholder value without making significant structural change. With the above steps, the company still maintains its core business. Investors did not invest due to PCD or PAS but on IPTV and the growth in China. The above steps will hopefully get the business right sized and positioned to participate in that growth and be profitable.

Potential Partial Sale/New Investor

2009-06-05T22:32:00.000-07:00

After the poor Q1 earnings call, lack of Q2/2009 guidance, and the announcement that more information regarding "additional steps" will be announced, it was a signal that a sale or something more than the usual cost cuts was going on. After talking to some shareholders right after the call, it made sense that a sale might be in the works and posted about it. My choice/hope was for a direct competitor to scoop up UT at north of $5/share to take advantage of the tangible and intangible assets UT has and spare shareholders the continuous hope for profitability that doesn't seem to get any closer. With things looking bleak, that is often the time that management/board is forced to do something significant.

The stock closed at $1.55 before the earnings call and held its ground the next few days and started climbing. However, the amount of increase and volume did not support a sale north of $5/share which is a level that long time shareholders, the board, and management (I think) would have to get at a minimum to justify the existing tangible book value, failed sale of a couple of years ago, and potential growth of the core business. Also, the board will not let go for peanuts so a substantial increase would be needed for an outright sale. Contrary to the hopes of the more bullish investors, the market is too efficient to allow the stock to trade up for a significant amount of time (with the rumors already) and still get a huge premium.

Articles the last few days indicate a potential new investor will take a major position in UT. An outright sale to a direct competitor would bring in a quicker/higher price so the news that an investor will take a non-controlling (although large) stake actually supports the price action. While I would like a much higher price, it now looks like the price will most likely be much less than $5 and probably lower than $3 and could even be lower than the close today ($2.43).

Why? The negotiations started before the earnings call so the stock would have been below $1.5. A 50% premium would take it to $2.25 and a 100% premium to $3 (and thats considering that it rallied into earnings). Secondary's announced have almost always come with the stock already pricing in the event and often running past the agreed price (lots of examples).

Is this bad? Not necessarily. Actually, it should be very positive. A major Chinese investor paying $2, 3 or higher obviously think that its worth more than what they are paying for. Also, not being one of the direct competitors that could take advantage of the intangibles (tax savings, consolidation, saving of R&D, strategic contracts, technology, etc) means that it believes that the company can execute and operationally move higher as a standalone company (look at Palm for ex.).

It would seem unusual for the company to sell below tangible book or even cash but then again, UT is operationally losing money for the last 4-5 years. Also, even with the high cash position, future contracts/working capital needs may become higher (which is a good sign for future revenues). Also, it didn't trade below $1 if not for those same concerns.

Again, the overly bullish should look at WHY its not trading much higher (if you expect $8, is that reasonable the stock is still trading at $2.43 when everybody and their brother knows about the rumors). Those that sold much lower also have to ask why it moved higher after a bad Q1. Those that sold at $1.1-1.15 after buying at $1.25 thinking it was a good value buy should question their entire investment philosophy (just kidding Tigre :-)
Those hoping for the stock to go higher just because shorts are going to panick as if the offer will go higher are not making sense either. A deal has been worked out and just needs formalization.

Another issue about the cost cuts. A lot of people have been calling for cost cuts and I have posted a ton about the need for drastic cost cuts. Some have wanted more information as if the company's performance over the last 4-5 years, their guidance, and their behind the curve moves are now suddenly going to be justified by a humongous contract that we just don't know of are also misguided. And now they are "surprised" that there will be enormous cost cuts...Duh...Face it...the company has been behind the last 4-5 years! (But, this could be the turnaround sign that they finally get it and are taking drastic actions BEFORE another year passes).

Anyway, obviously the new investor will benefit UT in many ways from market confidence, Chinese/local involvement/contacts, potential strategic involvement, pushing the board/company for more accountability, etc. The stock will be much higher than the current price but it will get there unexpectedly as it has to this stage. I expected a bounce from the 60-80 but did not expect it to quadruple (although I still have the bulk of those shares and would gladly take more positive surprises).

Just be realistic out there and as I am constantly reminded, the market knows more than you (well this time, I'll pat my back and take the good fortune that it played out the way it did :-). By the way, the fact that it won't be sold entirely gives long time shareholders an opportunity to beneift in the short term as well as the opportunity to move forward with a drastically different UT and benefit if the revenue ramp finally comes. And thats a win-win (would be another win if Lu/Clarke are voted out as well and management/directors left buy shares after all the announcements are out of the way).

PS. As I mentioned during my trading discussions with Tigre, there is no chance for me to make doubles or even 30-40% in any other stock besides UT just because of the way I trade this market. On the other hand, I'm diehard enough to hold onto UT and this fortunately happened (or maybe I should take full credit and say I called it all the way...:-)

Have a good weekend.

UTStarcom's ELEVENTH HOUR

2009-05-30T11:32:00.000-07:00

During downturns, the strong get stronger and the weak die off. UTs downturn has unfortunately culminated during the worse recession in decades. Peter Blackmore was brought in to buy the company some time, cut the fat and make the company a world-class operating company. Unfortunately, you also need to have a certain base revenue to build off from but instead, their cash cows from previous years (PAS, handsets, and Japan) have run out. The company continues to put a good spin on the viability of the business showing an upturn in core demand (from basically a very low base), strong cash position (from asset sales mainly), and their technology range of their products. However, to be a viable company, you will ultimately need to be profitable and have stable/growing revenues. More importantly, you need to have a strong leadership team/BOD in place that is compatible with the company's base of operations. UT does not. As I've said, I invested in the company because of its potential a few years ago to grow as China grew and more recently due to valuation and their "potential" rewards the technology could bring.

During the last couple of months, I have reversed my position from believing the company can become profitable and then selling itself to just selling itself as the best alternative to enhance shareholder value. The actions (or non-actions) by the board/management over the last couple of years and more recent business prospects have led to this conclussion, which is basically supported by the markets. This has not been an easy change for a lot of shareholders but we need to face reality and the opportunities the next few years may bring.

UT is making significant changes to their operations but at this late stage, it shows once again how behind the curve they are. Time and time again, they do not show the same level of urgency that shareholders or what the market/business situation dictates. The recent rumors of a sale of the entire company or parts of it may have finally been caused by the cost cuts the company has tried to implement. Chinese employees may have reached their breaking point as to seeing the highly compensated Western counterparts drain money from China and seeing how well the other Chinese competitors have done. Whatever the reason, I think the Western management/board have come to the realization that this is an unbearable situation for everyone.

Everywhere you look, companies in distress or disappointed with their stock price are making significant moves to position their company for the future. The wave of capital buildup has been unprecedented, from REITs such as Simon Property/Pro Logis doing secondaries, biotech company Elan selling part of itself to Bristol Myers, to Time Warner finally breaking off from AOL, and of course the financial/auto industry. Companies either grow or die off and unfortunately for UT, its the later.

The number of potential suitors for UT including Cisco, Juniper, Ericsson, Chinese or Indian companies are endless. The challenges UT faces to get to profitability are also endless. Shareholder patience is gone. Assets are intact for re-distribution to stronger entities. Confidence in UT business, management/board is very low and capital markets are shut off (basically). There is no other good reason to keep this entity going except for the benefit of a few people, which I can guarantee will have a tough time getting re-elected if nothing significant happens that benefit shareholders AND remaining employees.

Have a good weekend.

Cisco

2009-05-28T17:59:00.000-07:00

The rumor of Cisco buying UT has been around for years. Recently, Techbroker (a shareholder who has been following UT for a while and who diligently scans the Chinese news regarding UT) posted the following link regarding a potential Cisco acquisition of UT.

http://translate.google.com/translate?js=n&prev=_t&hl=en&ie=UTF-8&u=http%3A%2F%2Fwww.c114.net%2Fnews%2F128%2Fa414554.html&sl=zh-CN&tl=en&history_state0=

Lets look at the reasons Cisco may acquire UT.

1. Previous working relationships - http://www.unstrung.com/document.asp?doc_id=48512 UTs Alameda office is near Cisco's home campus as well.

2. India - Cisco's CTO is Indian (also known as a visionary herself) and Cisco has made announcements year after year of their investments in India (a couple of billion on one article). Furthermore, the Indian government has security issues with working with Chinese companies so Cisco would be a more ideal acquirer.

3. Acquisition/Expansion - Cisco's acquisition of Scientific Atlanta for $6.9b, Linksys, Pure Digital shows they are willing to spend money to get closer to the consumer/home entertainment space. Pure Digital was bought for $590m. http://gigaom.com/2009/03/19/cisco-to-buy-pure-digital-for-590m/

4. Handsets - UT still has the handset capabilities and relationship with PCD. If Cisco wants to get into the handset space (they did have the "iphone" trademark), this would be a cheap way for Cisco to experiment and build a Cisco phone.

5. Telepresence - Cisco is into the video conferencing space and UT technology would compliment their products.

6. Networking - Again, UT/Cisco ip based products should be complementary and Cisco is looking to expand into new markets.

7. Tax losses - Cisco would be able to take advantage of UT losses in the US and overseas.

8. PSDN - UT announced winning 40% of the tender beating Cisco/Starent. The Starent lawsuit may be of value to Cisco as well. Blackmore and UT have a tendency to build up businesses for a potential sale (back in 2007 with the articles of how iptv was progressing, the Chinese profits, and lately with PCD and just recently the core business doing well).

9. China foothold - What a tremendous acquisition to pick up the iptv assets/contracts in China as well as the Hangzhou building and Chinese employees (with US-backed R&D based on Ying Wu's template from Bell Labs (Lucent))!

10. FMC/Wifi - Again these technologies may complement the Linksys division from Cisco (sorry, not a techy so others can explain the tech better).

11. IPTV - The crown jewel of UT can be bought for pennies on the dollar that UT invested in it.

PRICE

UT has $2.4 in cash/$3.2 bookvalue but I think the above list makes it much more valuable to a Cisco. I think Cisco can offer $7/share with no problem at all. Thats only $600m in net cash which is nothing for Cisco. It may be difficult to imagine UT getting that premium but not if they were a private company right now. Why is Face Book worth $10B with $300m in revenues (if that) and losing money? Cisco has 5.77Billion outstanding shares. If Cisco offers 0.4 Cisco shares for every UT share, that would be only 50m Cisco shares (less if part of the offer is UTs cash).

In early 2007, UT was trading at $10 and the potential acquirers wanted only the core assets and UT balked. UT has continued developing their core assets and has gotten rid of non-core assets. Imagine going to other countries with a Cisco IPTV system. Thats credible and could go up against Microsoft. It makes too much sense for both sides. I think the question is when and how much.....

Have a good evening.

PS. For the last week or so, I have had little or no Chinese visitors to the blog...It could be the company is now blocking internet access and it is very tight lipped right now.

Potential company announcements

2009-05-23T09:35:00.000-07:00

The company has built up certain expectations by announcing it will provide additional steps it would take to accelerate the timeline to profitability at the end of the month (next week). Here are a few items that the company could discuss, some of which are from shareholder "wish lists".

Discarding the rest of the handset division - The company has been touting iptv, ngn, and broadband as their future. However, the bulk of their revenues has been from PAS (infra/handsets) and PCD (resale/Korean design/CDMA in China). The company is winding the Korean handset operations and selling remaining inventory. The company has been enamored with handsets for years now and are planning to replace PAS handset sales with CDMA sales in China. However, is this a good idea? Their Hangzhou building was supposed to be used for manufacturing 10s of millions of handsets. The problem now is that competition is very stiff and margins are tight in the handset market. Bidders for handset tenders are more than 10 suppliers so the previous PAS handet success cannot be translated here. We've seen how little gross profits are in handsets and the inventory/working capital headaches. As a side note, here is an article regarding ZTE and their US expansion. http://www.forbes.com/global/2009/0525/058-china-telecom-zte-man-in-dallas.html?partner=yahoomag ZTE has a solid base of revenues/profits and can "experiment" with new markets. UT cannot afford these anymore. The article highlights the previously mentioned $15b line of credit and ZTEs climb into the elite companies.

Move the rest of US operations to China - There was a time when UT was planning to expand in North America via PCD and selling networking gear to their handset customers but this clearly did not work out. The move to China has started and they should move the rest as soon as possible. The lease committments should also be winding down on properties and the accounting expense (just to outside firm was $11.5m) is too much. A lot more savings can be squeezed out and efficiency will be improved by moving operations to where customers are.

Starent negotiations/Sale of PSDN - The litigation with Starent that has been dragging on for years seems like it might be resolved via the courts early next year (according to Starent). Both sides obviously state they have a good case but both sides are spending money in legal fees and uncertainties (mostly for Starent) don't help either company. UT has recently announced some wins in PSDN in China (grabbing 40% of the last tender beating out Cisco/Starent). Starent is valued at $1.4B and wants to expand into China. It makes sense for a settlement and even for Starent to buy UTs PSDN assets or atleast forge a partnership that will save both companies development/marketing costs and help each other in various markets.

Monetizing the Hangzhou building - A lot of the operational decisions obviously impact this building. UT is using the building as collateral for credit lines and as an asset to transfer their cash out of China (see my previous posting). However, the company can do more by seeking out a buyer and leasing back the part of the building they can use. If UT unloads the handset part of the business to a local Chinese manufacturer, they could also lease out the building/equipment.

Executive/Board changes/being "more Chinese" - The company desparately needs a major change in the makeup of the board and the leadership team. How many companies that primarily get their revenues from China have a non-Chinese board/leadership team? The compensation of individual board members are MORE than a lot of Chinese CEO's that have larger revenue/market caps than UT. The company has to announce steps that show they can compete with other Chinese companies in China.

Listing in Shanghai/Hong Kong markets - A US listing doesn't bring the company additional capital and costs the company in expenses. They need to be able to tap the Chinese markets for a source of capital and get Chinese institutional investors. This in turn will bring added influence in the Chinese markets.

Investing in China - For the hundreds of millions spent over the years in R&D/overseas expansion, we don't hear the company buying startups and smaller companies in China. The company's main investment success was Gemdale, a real estate company in China. The company should use their presence in China to buy startups over the years and integrate them into the company rather than more expansion overseas and internal spending. The China markets went up from 1k to 6k level and UT did not fully participate (in fact selling off an early investment in Softbank that yielded Alibaba, which I think Tigre estimated at half a billion).

The above is just a sampling that I came up with and some of the more technical shareholders can probably add more but the bottom line is the company needs to do something significant. The performance the last few years is beyond shame at this point. As I've mentioned previously, the board should have been completely turned over by now but the same (#@%#$$@) are still in place (pardon the jamming of the keys).

I'll end this posting by again reminding people to vote their shares against the company backed proposals and have a good Memorial Day weekend to everyone.

Company info and future steps

2009-05-17T20:38:00.000-07:00

At the end of the month, the company will provide information regarding "accelerating" the timeline to profitability which the company has recently stated to be "sometime" in 2010. The current opex target is for around $60m/quarter by the end of 2009. Presumably, this information might involve cost cuts, restructuring, outsourcing and maybe closing certain operations. I wanted to check some figures in the 2008 yearly 10-K and gain some additional insights into the company. There is only one official analyst following the company now and little institutional interest in the company. The operational performance has (not surprisingly) depressed the stock but even with the latest "surge" and decrease in tangible book value, the shares still only trade for half book.

1. Cash in China - "At December 31, 2008 we had cash and cash equivalents of $309.6 million, of which $200.8 million was held by our subsidiaries in China. The amount of cash available for transfer from the China subsidiaries for use by our non-China subsidiaries is limited both by the liquidity needs of the subsidiaries in China and by Chinese-government mandated limitations including currency exchange controls on transfers of funds outside of China." "As a result of these and other restrictions under PRC laws and regulations, our China subsidiaries are restricted in their ability to transfer a portion of their net assets to the U.S. parent; such restricted portion amounted to approximately $186.1 million, or 40% of our total consolidated net assets as of December 31, 2008. We believe we have sufficient non-cash assets available to meet the above reserved net assets in China restriction; such that none of our cash balances are legally restricted from transfer."

The restrictions in transferring cash out of China has always been a point of contention but it is clear that they have enough non-cash assets that pulling cash out of China is not a major issue. Moving part of their US operations back to China will reduce capital needs outside of China as well.

2. Credit Lines - At December 31, 2008, we had approximately $219.0 million available for future borrowings on this China credit facility, of which an aggregate of $146.6 million remained available for general working capital purposes and $72.4 million remained available in support of letters of credit and corporate guarantees. This China line of credit expires in the third quarter of 2009. In January 2009, we entered into a second credit facility in China for an additional $58.5 million of available credit which expires in December 2009.

The credit facility in China is supported partially by the Hangzhou facility but its also clear they have a good chunk of credit facility within China.

3. China Piggy Bank - Our China subsidiaries paid an aggregate $150 million in dividends to our U.S. parent company during the year ended December 31, 2007 and another $100 million in February 2008. While these cash transfers are offset and eliminated in preparing our consolidated cash flow statements, they have been a principal source of funding of our non-China operations during the periods in which they were made. In February 2009, our China subsidiaries paid an additional $50 million in dividends to our U.S. parent company, and additional cash dividends from our China based subsidiaries to the U.S. parent company may be necessary to fund our non-China cash requirements in 2009.

Pulling an additional $50m in February seems like a lot. Cash usage in Q1 was only $12m.

4. Global Footprint - The headquarters for our China operations are located in Hangzhou. In 2001, we purchased the rights to use 49 acres of land located in Zhejiang Science and Technology Industry Garden of Hangzhou Hi-tech Industry Development Zone and have built a 2.7 million square foot facility on this site. The facility was occupied in October 2004 and is used for manufacturing operations, research and development and administrative offices. At the end of 2008, approximately two-thirds of the facility was being utilized.
We lease approximately 0.8 million square feet of property, of which 0.4 million square feet are properties in China and 0.2 million square feet are properties in North America. We maintain 31 sales and customer support offices in 21 countries covering the United States, Canada, Latin America, the Caribbean, Europe, the Middle East, India, and the Asia-Pacific region. We lease sales offices in 28 locations in China.

The global expansion and operations in the US has been a cash drain to the company and has not produced the desired revenue ramp. The company may announce further reductions in the US and other countries outside of China.

5. Japan Revenues/Non-China/US Revenues - Japan revenues were down again in 2008 from 70+m to $40.6m. The non-China/non-US/non-Japan revenues is $160.9m.

Japan has been a major disappointment, specially with Softbank as a major shareholder. From $400m+ in revenue to $40.6m ($38.3m from Softbank). The $160.9m revenue in other countries does not justify the investments there and the lost focus in China. The company has had enough time to decide which countries they will continue to invest in and which to abandon. Blackmore from the start talked about each business unit being profitable and/or cash flow positive. He needs to make additional tough choices when things don't pan out.

6. Carry Loss - As of December 31, 2008, the Company's U.S. federal net operating loss carryforwards were $213.8 million and expire in varying amounts between 2025 and 2028. As of December 31, 2008, state net operating loss carryforwards were $138.0 million and expire in varying amounts between 2010 and 2028. As of December 31, 2008, the Company also had net operating loss carryforwards ("NOLs") in China of approximately $217.2 million. The China net operating loss carryforwards will expire in varying amounts between 2010 and 2013. As of December 31, 2008, the Company had NOLs in countries other than the U.S. and China. These NOLs are approximately $87.2 million. The majority of the NOLs do not expire and can be carried forward indefinitely.

Even in China, the loss is significant. Depending on a particular country's tax laws, acquiring UT could provide some tax incentive but not as significant as had been discussed because of the breakdown in each country.

7. Hanghzhou Facility Valuation - Using the income capitalization approach, we determined the estimated fair value of the facility and related improvements at December 31, 2008 to be approximately $183.2 million, which exceeded its net book value by approximately $15.8 million. As a result, we concluded the headquarters for our China operations was not impaired.

The company has used the facility for its credit lines but this is still a huge asset to hold considering its value compared to the current market cap of the company.

8. Leased Space - Total (in millions) $ 19,245; Less than 1 year $ 10,854; 1-3 years $ 6,422; 3-5 years $ 1,969.

Moving operations fully to China will further reduce the expenses.

9. Accounts Receivable - 39% of receivable was from PCD at the end of the year.

This has come down since they took in about $40m from Q1. As they wind down operations in Q2, this will further simplify the balance sheet. Writing down assets and simplifying operations increases the odds of an outright sale of the company.

10. Accounting Firm Yearly Cost - $11.5m for the last couple of years.

I voted against renewing the accounting firm. At the very least, they should negotiate a lower price for fees. Spending $11.5m/year for the last two years is significant specially with the much lower revenue base and market cap. This is another reason why UTs expenses are out of line with revenues compared to other companies. The company has mentioned legal expenses, accounting expenses, etc as areas where they can further reduce cost but it this is a yearly event for the last 4 years. As a shareholder, I am blown away with their expenses compared to the performance. Being a US investor, I am used to high compensation for executives and general costs but I would also like to see performance.

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Overall Commentary:

The information above shows the massive resources the company had/has. It definitely is not a startup and shows the company never really developed a sustainable/profitable business plan. The company was given a huge windfall with PAS success and early capital from US markets but has squandered a lot of it. From the above, it seems clear they have much more costs they can cut but have ample liquidity to execute it (scary in itself). The company definitely has positives (or else none of us would still be interested in it) and is in a "unique" position as Blackmore puts it. While it seems long overdue that the company get ahead of the curve, their resources show why there is no sense of urgency. The sense of urgency has to come from investors fed up with the performance of the stock. Lu has basically led the company in the good times but clearly cannot lead the turnaround. Blackmore is a competent executive but may not be a good fit for the long term. The board ....well..

I voted against Hong Lu/Jeff Clarke. Your broker should send you information via mail/email to vote. Shareholders have until June 25, the day of the shareholder meeting (or a day before to be exact). I continue to believe in the valuation being that it is half book. The company hopefully will be serious in getting to profitability but we never know. The revenues for PAS/Japan are low but still material so there is possible further downside. Expense cuts clearly need to be lowered and maybe an outright move to China will be announced. Sale of certain technology/businesses need to be considered although it seems a lot is inter-related. Also, the market cap is low so the acquirer will probably want the entire company at this stage and it makes sense now that the balance sheet/operations are much cleaner.

The above points are good to keep in mind as things are announced and there is further discussion in the message boards.

Have a good week everyone.

Q1 2009 Earnings Call

2009-05-09T21:27:00.000-07:00

Revenues and earnings missed already lowered guidance for Q1. The book to bill was 1.2 on core products but what does that consist of and what is the overall dollar amount?

Here are a sampling of words used in the call...successful, pleased, ahead of internal expectations, continued progress, as expected, significant step, highlights, strong demand, strong position.

Then the reality of "actual and real" charges and losses sets in and instead of providing guidance for Q2 and the rest of the year, Peter mentions that there will be a call at the end of the month to discuss initiatives. Peter states that they had initially targetted ending the year with an opex run rate of $60m/quarter and be profitable "sometime" in 2010. But I guess that wasn't good enough with management, the board, and surprise ....investors. They are "evaluating" initiatives to "accelerate" the above.

Peter made a few key points around this announcement of evaluating initiatives:

1. Demand for key products in China/India continue to be good. (I KNOW I've heard that somewhere before)
2. This demand is consistent with internal projections as shown in the Q1 bookings and Q2 is tracking accordingly. (Very frightening if the bookings are so low dollar amount and it is tracking or above their projections)
3. Expense reductions "well ahead of time frame" (Again, sounds good if the time frame is 2005!)
4. The above gives them confidence in executing on the new initiatives to be announced (maybe the initiatives are like their bonus metrics that they can scale them with a broken foot)
5. Cash levels of $301m (and not a peep of a buyback.....amazing)

EVEN for this company, the call was bizarre and we've seen a lot during the last 4 years!

Other fun facts. The company added a monster 50k iptv subscribers to get to 1.32m subscribers and Taiwan just went live in April 2009. Great...wait..Is that the same contract announced in December .......of 2007! There were also "recycled" contracts from Yemen, Philippines, cable iptv, digital signage (4.8k units....thats 4800 and not 4.8m or 480k but 4.8k units....m or k, its just fine print).

Anyway, the $301m in cash + another $10m coming from the PCD escrow may be "enough" of a buffer for the rest of the year.....maybe.

I'm hoping that this soap opera ends with a buyout and soon. The insiders have a ton of options/shares and their golden parachutes. Does Lu really want to be voted out and face shareholders this June? Maybe all their experience selling non-core assets and the entire company back in 2006/2007 have someone saying how much for the rest of the company now? Didn't the board give as a reason that buyers in 2006/2007 only wanted the "core" buisiness? If that was attractive then, well at $1.64, maybe they are more attractive.

BTW, spending $11m (thats in American dollars) a year for accounting is reasonable (maybe for a $1b company and not a $200m company!)....NOT.

Ok, so the soap opera continues and another event is scheduled at the end of the month. I hope Lu can get more support than the boards 7m shares and Softbanks 14m. For his sake, because thats nowhere close to being elected -- unless of course, the $11m in fees the accounting firm is getting has a little part for ballot tallying :-) (BTW, I wonder how Peter is voting?.....maybe Peter should vote with us shareholders unless he wants to be voted out next year....by Lu)

Seriously, the operational route is getting to the end of the line and the best way to extract shareholder value is by calling Goldman and saying get what you can (if you haven't figured it out by now, GS is very good in deals :-) ($13b extracted from the insolvent AIG via tax payers..nice)(Advise/suggestion to company....get Goldman on your side - give them whatever they want. Rename your company UTStracom-Goldman or better yet GoldmanStarcom or maybe just Goldman-networking....

Finally, I am a UT shareholder and I hope to get your vote.......in voting against Hong Lu.

Have a good weekend.

Imminent Sale of the Company?

2009-05-07T17:56:00.000-07:00

Got off the phone from a major shareholder and his take is the company may finally be for sale.

There are many many reasons why the company is worth more being sold than the company can operationally work itself to at this stage. Peter, the leadership/BOD in Alameda are not really suited to fight it out in China/India and elsewhere. They all still have significant share holdings that would make it worth it for them to sell (even at $5-6. That sale price now compared to 2007 is equivalent to $10 or more in terms of the overall stock markets so its not the worse end result for shareholders.)

The other probabilities. Business is even WORSE than it really is and they have to cut more. So, they will drop another revenue bomb to go along with the cuts.

Another possibility is really to accelerate profitability. Although this is the context/reason for the wait, it seems odd. Is Peter, at his age, willing to fight it out a few more years traveling to China once a month and risking not even getting what they can at this stage? A lot of their compensation is in stock so even with their salary, it makes sense.

On the buyers side, you have Huawei with $30b in revenue so I guess they HAVE to expand. UT building would be valuable to Huawei and ZTE. Patents that they have can be used as leverage against Western competitors and would be very valuable. Ericsson has a yearly R&D of $5B. Cisco is investing a ton in China/India. Even Starent has a $1.4B market cap and R&D in the $30+m/quarter. They NEED to diversify out of North America.

A week or two ago, there was also about 300 hits on the blog mostly from China. That never happens. Maybe there are rumblings of a sale. More job cuts may not be palatable to the Chinese government and they would push for a purchase from ZTE/Huawei. Both have huge resources and could easily buy out UT.

Anyway, its speculation and while the company had internal issues in late 2006, it has resolved those issues and sold other non-core assets. The technology is still very good and the contracts/customers should be appealing to competitors. I posted a couple of years ago that ultimately UT would be sold but I was hoping for double digits. At this stage, with the intense competition, down world markets, and revenue ramp not occuring, this makes too much sense.

Voting against Lu

2009-05-02T17:55:00.000-07:00

Required Vote
Each director must be elected by a majority of the votes cast, meaning that the number of shares entitled to vote on the election of directors and represented in person or by proxy at the Annual Meeting casting their vote "FOR" a director must exceed the number of votes "AGAINST" a director. Abstention votes with respect to the election of directors will be counted for purposes of determining the presence or absence of a quorum at the Annual Meeting but will have no other legal effect upon election of directors. You may not cumulate your votes for the election of directors. If a nominee for director fails to receive the required number of votes for election, he or she is required to tender his or her resignation to the Board. In such a case, the Nominating and Corporate Governance Committee of the Board has the option of accepting or declining such resignation, considering any factors that the Committee deems relevant.

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Given the performance of the company and the stock price, it is obvious that Hong Lu should not be re-elected. The fact that the current board is recommending his re-election is further proof that the entire board doesn't have "outside" shareholder's best interest and are determined to maintain the status quo of high management/board compensation and poor company/share price performance. Despite this clarity to remove Lu, it will be an uphill climb due to the number of shares the insiders hold. Softbank alone has about 15m shares. Nevertheless, I am hoping to rally "outside" shareholders to vote against Lu. I am hoping the new rule of majority votes will help. I am hoping that Wu, Huang, Barton, and other former executives may actually care about the share price and vote against Lu. I am hoping that the retail shareholder base that is more significant now and the current institutional holders are so fed up that they actually take some time to vote.

Last week, there was an unusually high amount of visits to the blog from China. I and all the long-term shareholders would be open to any suggestions coming from China to improve company performance and board/management accountability.

If you still own shares, this is one of the few outlets to have your voice heard. There are still a huge number of shares out there and I encourage all the shareholders to vote against the re-election of Lu.

Have a good weekend.

Shareholder hopes & dreams - Sad realities

2009-04-26T10:44:00.000-07:00

Why did I and other longs invest in this company and some have continued to hold on to shares? I was banking on the growth in China. UTStarcom was one of the few growing telecommunications provider 5-6 years ago and their rapid growth, US listing, and potential for becoming the Chinese version of Cisco was very tempting at the time. The monumental collapse can be attributed to some major strategic mistakes such as investing in WCDMA instead of the home grown TDSCDMA, spending massively on R&D/marketting in overseas markets that had well-placed local providers and/or had regulations that would prevent adoption of the technology at the time. The company's main revenue/profit source in China and Japan (Softbank) also deteriorated significantly in the last 4 years while all the other ventures/revenue source could not come close to addressing the PAS/Japan losses despite the company's efforts to reduced overall spending.

The "growth" that investors hope to see can actually be seen in Huawei and ZTE! http://www.lightreading.com/document.asp?doc_id=175673&
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=ts&bn=27187&tid=158749&mid=158750&tof=12&rt=1&frt=1&off=1

Peter Blackmore, who came in 20 months ago mentioned being impressed by the combination of Western management/US listing/markets as well as the low cost base of operations in China. The problem is that UTStarcom is competing against ZTE/Huawei in China where UT is disadvantaged (previously by not being a true Chinese company and now also by scale due to years of losses). Outside of China, it is competing against well-entrenched global providers with huge scale and credibility of having revenues 20-100x UT has.

I listened to the Analyst Day meeting held in June 2008 and was reinforced again that it is not the technology that is the issue but management/other external factors that may prevent UT from ever becoming profitable and eventually sold/go down. Brian Caskey mentioned some of these technologies have been developed since 2000-2001. Peter Blackmore mentioned that they had too many technology and had a cost problem.

While Peter can articulate the problems and fix certain operational issues in the company, he has to deal with a company headed by now Chairman Hong Lu and lead independent director Thomas Toy, both with UT performance history that would have them removed already. They are not even well liked as Ying Wu was by the employees/customers. Being non-Chinese, Peter is also disadvantaged when the company's base of operation and main market is China! So, the current leadership situation at UT is tremendously bad for shareholders.

Peter understands that high gross margins and profits are the key to turning the valuation of the company around. He has focused the company on broadband, iptv, and ngn. Lets discuss whether the company's products/deployments are commoditized or not. The company focuses on all IP type products, which in turns brings customer protection on their investments. That is good for the customers BUT not good for shareholders/UT. There are "few" true non-commoditized platforms/products that will do well for a long period of time such as Apple's iphone or Mircrosoft's operating software. The one high margin product/business that UT has is IPTV. When UT wins a contract for a certain region, it has a hold for that period. The company makes the correct argument that bundling ngn/broadband can reap added savings and make the systems work more efficiently and thus a better value proposition. However, there are other major factors such as vendor financing or worse State-backed financing that UT cannot compete. It cannot compete on scale and therefore we see the results of no large wins in any of their technology segments that they offer. Even the key strategic wins have not taken off.

While the initial mis-steps by the company is understandable to an extent (dellusions of grandeur after hitting $2.5b in revenues in a short time gives the company some slack), not cutting costs more rapidly and the overseas expansion was not acceptable (the last 3-4 years). As far back as 2003, PAS was expected to peak in 2004. Failed ventures from WCDMA, Softbank, India, PCD, and other expansions are examples of the mis-steps. The company has not even settled their "identity" as of now.

Blackmore mentioned early in his tenure that UT was like a start up company. I commented that the company's huge cost base, lack of growth, internal issues made this statement false. The company had $40-50m in R&D that normal startups do not have. They still had $26m in the last quarter. The company has a LOT of resources to turn this around but unless they make fundmental changes in the leadership and their identity as a Chinese company, the street doesn't buy it (hence the weak rise in the stock price even during the latest rally). As an example of a "startup" doing all the right things is Starent. However, just like in Sigma Designs case, the larger competitors look at the growth/margins that they have and come swarming in. Eventually, Starent will go bust or be bought out.

Going back to their current strategies. There is the "wireless" backdoor plays such as FMC, PDSN, IPTV, handsets and their broadband/ngn technologies such as GEPON/transport network products. The problem again is that individually, it may not be a commoditized product and have certain differentiations but by the time there is any large scale implementation, it IS commoditized.

Because of the lost in scale and diminished resources, the company has a much higher hill to climb than even when Peter came on board. Yes, another growth wave can lift all boats and UT will benefit. The lower cost base will take some of the pressure off. The question for the board/shareholders is the missed opportunities of getting a much higher valuation just a couple of years ago. (http://utstarcom-stocknews.blogspot.com/2008/01/wu-interview-uts-strategic-alternative.html)

I realize the above items have been mentioned many times but it does reinforce the issues preventing the higher valuation of the company and that shareholders should continue to hold management/board to performance and structural change. Peter must produce results/changes and get to the core of the problems. If he can't, I have mentioned to him and the board to sell the company. I wonder if the company will have a 2009 Analyst Day meeting ?

BTW, Ford Motor has gone from $1 to $5 because it now increased sales estimates by 10k for the quarter and may be profitable in 2011. The street has no confidence in UT and whether or not UT management/board does something/anything will be telling.

Have a good rest of the weekend.

Conference Call with Peter Blackmore

2009-04-18T08:32:00.000-07:00

I had a conference call with Barry Hutton and CEO Peter Blackmore this last Wednesday, April 15 at 12 noon (Pacific time). I appreciate them accomodating me at that time since I do have a day job. There was initial hesitancy on Barry's part to schedule the conference call since the quarter has closed and they were on the quiet period. I assured Barry that my intent was not to discuss the current quarter but just to go through topics related in 2008 and general issues. During these calls, its hard to stick to one topic (since they are all inter-related), get information that is not material, and yet useful. The call lasted 45 minutes. Here are the questions/comments that I had and Peter's response.

During previous meetings that we've had (March 2008, June 2008 Shareholder meeting) and conference calls, the company has constantly reiterated that their core business was doing well (bookings doing well), developing countries which were their target markets were either not affected or less affected, PAS declines and eventual shutdown were built in, and they were looking to ramp revenues by several hundred million, so what prompted the cutbacks at the end of the year and the revenue shortfall? Entering 2008, the estimate was for non-PCD revenues of $1.1 billion and it came in at $700m.

The perceived revenue shortfall in core revenues (not including PCD/internal) was around $100m (from the $700m+ to $600m). Bookings are doing well but certain revenue such as the India broadband contracts were not recognized in 2008 and won't even be recognized until end of 2009 at the earliest. Over two hundred million of revenue from Phase I & II have not been recognized. The cutbacks were part of the overall plan of getting more focus on the core IP businesses, general world recession at the end of 2008, and a new model of moving back to China.

Cash from those projects are being collected, right? Why not move earlier and move entirely to China? Also, why go into 2009 with a budget of losing $150m? (note: some of the questions might not be in order and Q&A is ongoing for 45 minutes and I didn't want to get bogged down on any single topic)

Cash is being collected from the India contract. It is "debatable" on whether to move entirely back to China but it was prudent to do so at this time for better cost control. Towards the end of the year, they were trying also to wind down some Chicago assets and it was a tough environment so decisions had to be made to consolidate or move stuff to China. The losses in 2009 are street estimates and they have only given estimates for Q1. (note: Cash flow could also be better than street P&L estimates would indicate due to the unrecognized revenue from the India broadband and another $10m in July from PCD - I forgot to ask more information on the potentially $50m more in payment due at the end of 2010).

Peter had mentioned he was on the job for 20 months, so I asked how he felt the turnaround plan was going and at what stage was he in that plan?

Peter mentioned he felt he had made the right moves towards the overall goal of streamlining the business into the core IP technologies and he reiterated the goal of getting to profitability. With hindsight, he says they could have done some things differently but gave examples such as selling the PCD and indicated they were fortunate at completing the deal when they did. They had cut a lot of costs out, sold non-core assets, improved the supply chain/sales/marketing, etc.

I commented it seems like for the last 4 years or so, the company has had one plan. Wait for non-PAS revenues to ramp and when it doesn't, the company does its annual cut backs.

Peter mentioned he can only comment on his 20 month term that they are working and executing (see above) to get to profitability and it takes a lot of work to do what they have done. He reiterated understanding the share price is so low ("its not even trading at cash") and the need to get to profitability. He says he is not waiting around for the next few quarters but actively taking more steps and will discuss it in a few weeks (I took that to mean in the next earnings call).

Leadership - Who is really in charge of the company? Is this turnaround plan your plan? Hong Lu is still very active in China and drawing CEO type pay.

Peter mentioned he knows where I am going with this since he read the blog or that people mentioned it to him. He understands having two "high priced executives". He mentioned that he is in control. The China executives all report to him. He is there once a month. Hong Lu is involved with PAS and is consulting because he was there during the transition from Wu and can speak Mandarin to the executives/customers. Ultimately, he (Peter) is in charge and lays out the plan but of course subject to board approval.

How is his relation to the board? I mentioned to him that I have followed a lot of other companies and whenever you have company and share price performance like in UTs case, there are major changes made. It also seems like the board is non-existant. How can they decide on a strategic option when they felt the stock was underpriced at $7 and not at $1.

Peter mentioned the board is very active and meets often. Again, he's been there for 20 months and can't comment previously but they are implementing his plan. He mentioned the stock is very low and that strategic options are discussed and they are open to it. He brought up the buyback and again reiterated they are not for a buyback because that is short term and they are trying to get to profitability, which is the best way to increase the stock price.

I mentioned that a buyback would show confidence and gave the underperformance of their stock even in the recent market rally. I forgot to mention that buying back stock at prices less than tangible book value is a very good investment in itself. Anyway, I think everyone agrees they need to improve operational performance and that the stock price at these levels is unacceptable.

I brought up Ying Wu asking is the difference between Wu and Lu too great that Wu could not be placed on the board?

Blackmore mentioned he did not think that would work out due to the falling out that happened years ago.

Switching gears, I mentioned that IPTV is the company's future. How is their competitive situation? ZTE recently got $15b in financing and both ZTE/Huawei seems to be catching up to them.

Huawei doesn't really have a competitive product and is trying to give it away. UT has spent significant R&D money and has continued to improve its system architecture. It has the most scalable and best system even when compared to Alcatel-Lucent/Microsoft, ZTE, others. Peter mentioned that ZTEs system actually failed during the Beijing olympics but was not publicized. In India, it is a "clean sweep" even though others are trying to get in. "Its not like UT has favored nation status or anything like that". UT still has the most market share in China. Peter mentioned that there will be a PR on mobile iptv tomorrow (Thursday) and that Markwell is about to go live (Seems that should have gone live way back since the initial Markwell PR in December 2007). Peter emphasized their penetration into cable, mobile iptv, digital signage/advertising, etc. Later in the conversation, Peter is still waiting for that "tipping point" and characterized that as "gold" when it happens. (damn, I hate when they get you excited :-)

I also asked if ZTE/Huawei were trying to copy their system (edge router, etc) and regarding their patents in iptv.

Peter mentioned that ZTE/Huawei could reverse engineer their system if they wanted to but are not so its a different system. They have good patent protection.

Even though I am not a techy, I asked about PDSN, GEPON, and overall markets in China (note: The Packet Data Serving Node, or PDSN, is a component of a CDMA2000 mobile network . It acts as the connection point between the Radio Access and IP networks. This component is responsible for managing PPP sessions between the mobile provider's core IP network and the mobile station).

Peter mentioned UT got 40% of the recent PDSN tender (as was already mentioned in the Q4 call). Competition came from Starent and Cisco. The market is not in the hundreds of millions but good wins for UT. Nothing new in GEPON but said they are behind in GEPON in China because Wu did not want to sell broadband in China before (publicly, this is one of reasons we've heard before about the disagreements between the founders). Peter mentioned that in other places like India, UT is ahead but did not do well initially with the Phase I broadband contract but doing better now.

I asked ,besides shareholders call them constantly, what keeps him up at night? After a brief laughter, I followed up what are his major concerns going forward?

Peter mentioned that as the company gets more focused, leaner, and smaller, he is worried about scale. That is why they are working with the NECs of the world to take on part of the load.

I ended the Q&A by saying I have been a believer since meeting him in November 2007 and for the most part his strategic moves have been what shareholders want. Revenue ramp has not come in and wished him and all of us the best.

Peter mentioned he truly appreciates the support and understands the share price is very low and they are working diligently to get to profitability.

Peter is very articulate, humble, and has a quiet confidence. I have often commented to other shareholders that say they are going to talk to him that they WILL feel good after talking to him. At the end of the day, its about performance but we shareholders do have to feel confident about the CEO leading the company. We still have to roll the dice but if I'm wrong about Peter and the company's prospects, atleast I feel that I've done what I can to get the best possible information for myself and other shareholders.

I want to thank all shareholders that have sent letters/emails to the management/board. Even when the stock was at $3 or $5, it is an uphill battle. I do feel that management spending 45 minutes with "us" is overall positive.

Shareholder Proposals

2009-04-11T10:11:00.000-07:00

During the last several years of following the company, there have been many suggestions/comments by shareholders on how to turn around the company and enhance shareholder value.

The positive actions from the company such as resolving their investigations/filing their quarterly/yearly reports, selling non-core operations (such as PCD), selling investments (Gemdale, Infinera), cutting expenses, settling the convertible bond, controlling executive compensation (Barton's compensation) have been touted by the company as examples of their progress and sense of urgency. All of the above actions, however, were recommended by shareholders long before the actions were initiated or completed. These "common sense" actions that shareholders (with much less information than the company) have proposed shows the company has been several steps behind and really have no sense of urgency.

The current stock price shows that the market feels the company is still very much behind in terms of their cost basis, corporate governance and having a viable business plan to enhance shareholder value.

Here is a list of items to discuss with management and/or file as formal proposals (yes, its that time of the year where the management/board actually have to consider that they are a public company and at least pretend to address shareholder concerns and run through the obligatory procedures to be compliant with the minimum requirements).

Leadership position - Blackmore is the official CEO but has the former CEO/chairman of the board/founder Hong Lu drawing CEO compensation and leading the efforts in China, the company's main market. This is on top of the new China CEO that they hired and other new executives. I have discussed this issue in previous postings in painstaking detail but is a very important point that have major implications in the performance of the company in China and who is really in charge?

Corporate governance - When the company performance/stock has been so bad for so long, you might expect a signficant change to the board or an outright clean up. Nope, instead insiders have continuously been promoted. Ying Wu, the one significant person let go, was probably the best hope for the company in solidifying their China position. Letting Wu go sent a bad signal on UTs committment to the China market. Having a board/leadership team made up of non-Chinese is also illogical. Having no major outside shareholder (someone that actually paid for their stock positions) is also a terrible situation. The company has to include members of the board with significant share holdings for it to have credibility. At the same time, they need to allow the board to come up for re-election EVERY year.

Compensation - Executives are still reaping bonuses like it was 1999. I think it is clear to everyone that compensation packages developed during the bull market days are outdated and again illogical. Any bonus should be tied to real accomplishments above and beyond their normal already compensated duties. Barton was a single example of how ridiculous the compensation had gotten at UTStarcom. Today's situation with Lu is another. Shouldn't compensation that was tied to revenue metrics when UT still had the PCD (that was stupid to begin with) be scaled back. Shouldn't compensation be tied to profitability at the very least? Why should bonuses be tied to normally compensated job functions? Ridiculous. Some have mentioned this has been criminal and clawbacks have to be pursued. I don't disagree but at the bare minumum, the compensation system at UT has to revamped completely.

Expenses - The company has to further cut costs based on their expected realistic revenue/margin stream. At the same time the company talks about their leadership position in technology areas, they cannot justify all the future expenses when their customers are simply not purchasing or regulatory issues are clouded at best. As I said in many recent postings after their last cc, how can the company come into 2009 (with all the uncertainty and environment that goes with 2008/2009) with a budget of losing $150m?

Strategic Options - Share buybacks, M&A, viability, future revenues, expenses, and others are all tied to the strategic options the company has. With the low stock price (compared to current tangible book value/cash, and future expectations), the company should at the very least explore strategic options to enhance shareholder value. It makes absolutely no sense for the company to explore strategic options in 2006 and not do one now (for a ton of reasons). The 2006 strategic options study in 2006 was a joke because of all the issues the company had at the time and was primarily used to set up Wu for failure and buy the current leadership more time.

There are probably a lot more other items that can be proposed but the above are issues the company should address or shareholders should pursue at a minimum.

I will send an email to Peter Blackmore to get more background and his thoughts on the above topics. I'd also like to get shareholder feedback on what other proposals and/or how to go about this current proxy season.

Have a good weekend everyone.

Failure of Lu & Toy

2009-04-05T16:51:00.000-07:00

ALAMEDA, Calif., May 10, 2006 — UTStarcom, Inc. (Nasdaq: UTSI), today announced that its Chairman and Chief Executive Officer, Hong Lu, notified the Board of Directors of his resignation. Mr. Lu will remain as Chairman and CEO of the company until December 31, 2006, focusing on the Company's strategic opportunities and assisting during the transition. Mr. Lu will remain as a strategic advisor to the company after his formal departure in December. Tom Toy, currently an independent director of UTStarcom, will assume the position of chairman of the board as of January 1, 2007.

http://investorrelations.utstar.com/releasedetail.cfm?ReleaseID=246809

"Our Board of Directors and management team believe that the inherent value of the company and its opportunities are not reflected in our current share price," said Hong Lu, chairman and CEO of UTStarcom, in a prepared statement. "We believe the engagement of Merrill Lynch will help us to carefully examine a range of short and long-term alternatives," he said.

- October 12, 2006 http://www.wirelessweek.com/utstarcom-explores-its-options.aspx

"After careful consideration of a number of short- and long-term alternatives, we have determined that our best course of action is to move forward with the company as it exists today," said Thomas Toy, chairman of UTStarcom's board of directors. "Our stated goal when we commenced the strategic alternatives process in October 2006 was to explore potential options to maximize the company's value for UTStarcom's shareholders. In exploring those alternatives, we concluded that the optimal means of enhancing shareholder value is to focus our efforts on returning the company to profitability by building on the opportunities we have developed in key markets around the world."

In addition, the company today announced the departure of Ying Wu, executive vice president and chief executive officer of UTStarcom China.

June 1, 2007
http://investorrelations.utstar.com/releasedetail.cfm?ReleaseID=246809

Soon after, Peter Blackmore was brought in to be the COO and promised the CEO position.

While there has been changes from management with Sophie, Barton, Huang, and Wu leaving, the constant presence has been Hong Lu and the BODs, led by Thomas Toy. In a monumental collapse such as in the case of UTStarcom, the leadership has to be accountable and from the very beginning, Lu/Toy have been in charge.

I do not know the exact details of the events and decisions made by the company privately but there can be no question that shareholder value has been destroyed and any other company would have asked both Lu/Toy to step down by now.

The current situation between the CEO Blackmore in the US, BOD chairman Lu in China and a new Chinese CEO (and the other Chinese executives in China) show that at best, the leadership question is cloudy and more likely a bad joke to the existing suffering shareholders. The company should immediately clear up the leadership situation as it shows waste at the best and lack of control by the current CEO (Blackmore). Again, I ask why should Lu/Toy having driven the company/share price to the ground still even be involved with the company.

The rest of the board is equally useless as the handling of the strategic study, leadership situation, compensation and the collapsed stock price show ($2m retention bonuses for Barton, etc..; 50% salary increase from $500k to $750k for a job well done when the company continued to bleed and the stock sliding).

Its time (way late actually) for shareholders to demand that Lu/Toy step down. Only then can the company truly enhance shareholder value. Lu/Toy have done way too much damage already and are not fit to run/lead this company.

Shareholders can ask for more information on this and that, hope for profitability at this or that date, dream of the potential returns and other scenarios but until Lu/Toy are removed, nothing will really change for the prospects of the company.

One final thought...in a country with the growth prospects and entrepreneurial skills in China, Lu/Toy are the barriers to getting people that can actually increase shareholder value. Long suffering shareholders can still hope and fight for real transformation of this company and it starts with getting rid of Lu/Toy.

Have a good weekend.

Weekly recap - 85 cents

2009-03-28T20:28:00.000-07:00

The stock increased 16 cents or 23% to 85 cents this week. The stock is now down only $1/share or 54% year to date. It has a market cap of $107m. For me, these are numbers that would warrant major sense of urgency from a company that maybe missed earnings for a quarter or two. But for a company that has not posted an operating profit in about 4 years, its business as usual. The company did have this enlightening response to shareholder emails:

Like you we are very unsatisfied with the current stock price and feel that it does not fairly represent the value of the company.

Value? The company has tangible book value of about $3.7/share but will rapidly dwindle as the company continues to post ridiculous operating losses while hoping markets turn around. This is bad enough but does the company realize what being valued at 1/4 of tangible book mean? The street is telling them that they have zero confidence in their prospects or ability to manage the company. That after years and years of failure, the street will not even look 6 months ahead in discounting the company but maybe a full two years of continued business as usual. The UT train wreck would not be so disappointing if not for shareholders watching a "slow motion" disaster for the last 4 years that is projected to last at least two more years. For current shareholders, the only choice is to sell, hold and hope or press for action.

Salary Cuts - "On March 23, 2009, in connection with the Company's overall cost reduction initiative, the Company entered into letter agreements with Hong Liang Lu, Chairman of the Board, and Peter Blackmore, Chief Executive Officer and President, providing for voluntary and temporary base salary reductions of twenty percent (20%) for a one year period."

This would be a good start in most normal situations but this is so long overdue that it again shows they are 3 steps behind. Also, why is Lu still making $700k/year in salary as Chairman of the Board ($560k after the cuts)? If Lu is still running the company, then why is Blackmore drawing CEO pay/compensation? If he is just the operations guy, then he should be the COO. Also, if Lu is managing the China operations, then why have another China CEO?

Looking at it another way, a Chinese company would have one CEO based most likely in China and most likely a Chinese. No interpreters, no flying back and forth from China to the US, positioned closer to customers and in touch with regulators in China and aware of the business climate. It all starts from the top and the current situation at the top with UT is cloudy, disorganized, and wasteful (expensive) at best.

ZTE - A couple of weeks ago, we saw the news about ZTE getting a $15Billion line of credit. They already have $1.6b in cash so they have all the funds to expand overseas and compete against any multinational firm. There are a couple of points with this. Whether or not UT spends $45m or $60m/quarter is not going to make a difference on whether they can compete or not. The second point is why doesn't ZTE just take out UT for the market share? In any "normal" situation, the UT board has to look at the situation and see if there is a realistic chance of UT increasing shareholder value above tangible book and more in the next few years or whether its balance sheet/competitive position will erode even more.

Short Interest - Short interest as of March 10 has increased by over a million to close to 15m shares. This was around the time the company announced Q4 results/Q1 projections. Company insiders also sold shares under $1 for tax purposes. So, even with the market surge the last few weeks, is it any wonder UT shares are still under $1? Its time for the company to get their heads out of their #@%3 and stop wondering why the current stock price not fairly represent the value of the company.

IPTV worldwide subscribers - http://www.iptv-news.com/iptv_news/march_09_2/western_europe_passes_10mn_iptv_subs

“During 2008, IPTV operators showed that TV over IP could be deployed on a large scale," said John Bonsell, a Senior Analyst with Point Topic, who prepared the stats for the Broadband Forum. "Western Europe remains the largest single region for IPTV. As expected, due to the global economic situation, broadband growth slowed, however all countries experienced overall growth during the last year."

IPTV subscribers per region from Q4 2007 to Q4 2008

Western Europe 7,045,860 10,388,000
North America 1,777,671 3,835,544
South/East Asia 1,840,000 3,615,000
Asia Pacific 2,199,828 3,082,182
Eastern Europe 465,223 884,466
Latin America 8991 21,495
Middle East/Africa 10k 10k
Total 13.3m 21.8m

UT grew its iptv subscribers from 600k to about 1.3m. While the numbers show very good growth in this segment, it shows that UT should not rely on hypergrowth from iptv to generate any significant revenue in the next year or two. Its time to get the cost basis right and it should start from the top.

Hong Lu - I'll end the week's post discussing Hong Lu. He is the founder of the company and only Chinese on the board and had been the CEO for years. With all the disadvantages to being a "non-Chinese" company, it would make sense to have a Chinese overall CEO based in China. However, Lu is definitely NOT that person. Between Blackmore and Lu, Blackmore has atleast shown more concern for shareholder value with his bonus conversion to shares, reduction of pay (when his contract called for no reduction ever), and divesting of non-core assets. It hasn't led to shareholder value but he is more in-tune with shareholders than Lu will ever be. His current age, non-attachment as a founder, and operations background make him the best hope for shareholders to salvage tangible value from this failed investment.

Have a good weekend.

Expenses

2009-03-24T20:01:00.000-07:00

"Fran and I will work closely toward disciplined execution of UTStarcom's strategy and timely attainment of the company's goals, including a return to sustainable revenue growth and profitability."

- Mike Sophie on the hiring of Fran Barton, Aug. 2, 2005

"We have cut the cost base in the functions against a benchmark goal measured by best in class in our industry and we did this against revenue reflecting our core technologies only. Not all the functions get to benchmark immediately as we do have internal controls to improve, new IT systems to implement and some legal costs as we close out this years investigations. They will all get to benchmark by end of 2008.

Although both our Research and Development, and SG&A percentages are currently too high, we believe we can do much better. The model for our R&D is between 10-11% of our revenue, excluding PCD. We believe this is a reasonable ratio for an infrastructure business. The SG&A model is between 13-14%, excluding PCD. Excluding PCD revenues is the right way of looking at our cost base, as PCD is a stand alone business. The SG&A is still too high, but there are a number of costs driving that, including, improving financial controls and implementing a new ERP system. We can get to the ratio as I stated by late 2008 and 2009. The revenues of the early part of 2008 are still ramping."

- Peter Blackmore, Q3 2007 earnings call."

"We have been aggressive on cost by taking actions to reduce our coststructure by 50% between Sept 2007 and Sept 2009. Most of the actions are complete. We also recognize we need to take additional action given the tough market, and as we said on the recent earnings call we will lower our quarterly operating expenses to $60M or less by Q4 of this year. We are moving a number of functions from our Alameda headquarters to China to further simplify the company and reduce cost."

"In summary, our objective is to reduce costs further to minimize our cash usage and also accelerate our return to profitability. As we mentioned on the last earnings call - we are positioning the company to exit 2009 with a business model that achieves profitability in 2010."

- Barry Hutton, Official response from the company to shareholder emails, March 17, 2009.

"They have a decent amount of cash and no debt. Cutting OPEX in places like R&D, which many people here are demanding, can be VERY bad for the company, long term. Obviously, they have about another 18 months of cash, and if current products cannot generate enough revenue in the next year, they might have to consider drastic action, but now is not that time."

"Personally, I think they are MUCH more qualified to decide how and where to spend their R&D than anyone here is."

"I think we would all be better served if we bombarded the company with e-mails requesting information rather than trying to tell management how to run the company."

- Statements from two shareholders posting on yahoo board today.
----------

As an individual shareholder trying to enhance shareholder value, it has been painful to see UT try and fail to get back to profitability. Am I qualified to manage the company? No. My background is in Civil Engineering and not in business (I am the Asst. VP of California Engineering for a Tetra Tech company). I AM a long term shareholder that can see that expenses have been too high.

Blackmore has targetted reasonable expense metrics. If the company has 25-30% GMs, then expenses have to be around that area. Coming into 2008, the non-PCD revenue estimated revenue was $1.08B. Coming into 2009, it is down to around $600m. I and others have often mentioned the company being one-step behind on their cost cutting. I have been bullish on the stock as the company's products/markets made it seem realistic the company could achieve revenue growth to get to profitability.

However, at a certain point, the company has to err on the conservative side and get their cost base right without hoping for revenue growth that has been elusive and specially in this uncertain market. With the planned cuts announced in December, it seemed the company was finally catching up. However, as we learned, the company was actually 3 steps behind and the last cost cutting plans were not anywhere close. Are shareholders (already facing a sub-$1 stock) suppose to trust management that $60m/quarter OPEX is sufficient to get the company back to profitability?

For years, the company line has been needing to maintain their R&D for longterm success. This is hard to argue against but the $800m in losses in the books show that continued spending doesn't guarantee profitability. (Check out the expense ratios table on the left hand side of the blog that I created last year showing the last time they achieved the expense metrics was in 2004).

"But now that only the core business will be left by the end of this year, I can sense there wouldn't be much more room to cut before it cause significant adverse impact to core revenue growth and long term competitiveness."

-Shareholder Tigre commenting on the $60m/quarter opex target.

It seems interesting to me that Barry Hutton's email mentioned,

"We continue to see bookings growth in our core business - particularly in China and India."

Why does it always have to be clarified with "core". Isn't everything by now or by the end of the year "core"?

Anyway, $600m revenues at say 30% GMs yields $180m in gross profits. So, in order to get close to profitability, the company needs to cut opex to $40-$45m/quarter (including other expenses).

A target of $60m (or under) just doesn't cut it and the street was all over the stock as the company continues business as usual. So, looking at historic performance and even the CEO's targets, is it any wonder even the most bullish long term shareholders want to cut costs? Do we shareholders know how to manage the company? No. Do we shareholders know more about the operations than the company? No. But does it take a genius to see that something needs to be done on expenses now that revenue has fallen off the clip? No. Has the company finally gotten close or still behind the curve? Hmmmmm?

Now, IF all the "discussions" between shareholders and management, and the low share price can actually prompt some action/cost cuts, then maybe there will be actual performance that lead to higher valuation (imagine that idea).

IF the company is serious on getting the cost base right, they can. IF they can get the cost base right with a "lowered" revenue base and iptv markets not openning up yet, then can you imagine how much more profitable they can become when it finally moves. If that happens, then we can start discussing how 2010 to 2015 will be much better than 2005 to 2009.

Until the company acts, its business as usual for the company and shareholders continue to suffer.

Have a good night.

Palm, ZTE, Cisco, Starent, Blackmore

2009-03-22T21:33:00.000-07:00

Just some random thoughts on misc. topics.

Palm - Lets look at some numbers from Palm compared to UT. Palm is projected to lose $2.02/share and 71 cents/share compared to UTs $1.25 and 0.52/share losses. Tangible assets for Palm is negative $631m compared to a postive $466m. Palm market cap is $873m compared to $87m for UT. Palm just raised another $103m to make up for their 90m loss last quarter. It looks like their Pre phone will be a hit but will not result in a profitable company. UT competes with Huawei and ZTE while Palm competes with RIMM and Apple.

Palm stock hit a low of $1.14/share but has recovered to the the $8-9 level. Palm has about 38% of their shares short so there is no shortage of people betting they are overvalued. The main difference the last few months is the street's perception that Palm is on the mend while UT continues with business as usual. This has resulted with Palm getting a couple of hundred million more from an investor while UT institutional investors are mostly selling the stock even at these "low" prices.

ZTE - says it has secured a $15 billion line of credit from China Development Bank. http://www.lightreading.com/document.asp?doc_id=173930&

ZTE (Shenzhen: 000063; Hong Kong: 0763) defied the economic downturn in 2008 with a 27.4 percent increase in annual revenues to 44.3 billion Yuan Renminbi ($6.5 billion) and a near 33 percent rise in net profit to RMB1.66 billion ($243 million). (See ZTE Reports 2008.)

http://www.lightreading.com/document.asp?doc_id=173864&

"Competitive and pricing pressure hit ZTE's infrastructure margins, though. In 2008, the gross margin on carrier network equipment sales was 35.8 percent, down from 39.6 percent in 2007.

But the gross margin for handset sales improved slightly, to 23.7 percent from 21.7 percent a year earlier, while the margin from software and services jumped to 30.3 percent from 16.7 percent in 2007. ZTE's overall gross margin for 2008 was 32.5 percent, down slightly from 2007's 32.7 percent.

ZTE ended 2008 with cash and cash equivalents of RMB11.3 billion ($1.66 billion)."

The last couple of articles shows the resources ZTE has and their progress the last couple of years. Its interesting to note the high margins from handsets that they get. One has to wonder if this is due to efficient operations and/or advantages to the large volumes. This is a "none-core" area for UT that management has to decide whether to compete in or choose to back away from. This is another tempting market specially with their "experience" in PAS/PCD but if its going to take years and years to generate any decent revenue, then why bother?

It also looks like ZTE actually makes money and has decent companywide gross margins. If they are giving away their equipment as some have suggested, how do they achieve their positive operating margins? This is another data point suggesting how inefficient UT is and how the management/operations are nowhere near their competitor's.

Cisco/SUN/IBM - Cisco buys Pure Digital for $590m and IBM is looking into SUN for about $8.5b or so. The large tech companies have a lot of cash and face the same stagnant world economy. It is natural that M&A will pick up. Shareholders in UT have speculated for years why it has not been bought out. It could be their products are not really that good or that Lu/board are not really serious in any M&A and just want the status quo. At these levels, shareholders do have the added "hope" it may really be too low for the competitors to ignore (such as in SUNs case).

Starent - Starent is growing and has a $1.2b market cap. Its revenues are in the $300m+ level and is being sued by UT. Back in 2003-2004, there was already talk of PAS peaking and the move by the company to diversify into other products. UT bought 3com's comworks division, which eventually yielded workers to form Starent. With all of UTs resources and products that it has developed, why could UT not produce "something" as successful as Starent did? All of the hundreds of millions the company has spent in R&D over the years have yielded little.

Blackmore - UT CEO has been with the company almost 2 years now. His contract (signed a few months before the stock markets peaked) was a hefty $750k/year with huge incentives and bonuses. Peter did convert the bonus into shares at $3.2 showing he too was intrigued by the US listing/management and China manufacturing combination like most shareholders. Peter was brought in to make the company a first class operating company (his words basically). Peter used the traditional outsourcing, more efficient supply chains, cuts, and others to reduce costs while waiting for revenues to ramp. His presence gave investors "hope" that he can turn around the company, make it focus and profitable. I really like Peter because he brought an operational background that shareholders felt was needed at the time (since the technology/revenues were not the main issues at the time).

At this juncture however, I have to bring up the question of whether Peter is still the right person for the job just as the company pondered whether Barton was really the right person for his job (don't really want to discuss Barton as it I could go on and on...again and makes my blood boil). There has always been the issue of who is in control with the founder Hong Lu still around. Why should shareholders pay two people CEO salaries/compensation fit for successful companies/much larger companies in a totally different era? At the very least, both Lu and Blackmore have to significantly reduce their compensations. Frankly, I don't care Blackmore has his contract (we can see what those contracts that AIG bonuses are based on). There should be a renegotiation on his contract. Period.

There is also the fundamental issues of Peter being a CEO. A CEO realizes the importance of the share price and growing the business. I'm not sure how many CEOs survive the job presiding over massive operating losses and share price losses of this magnitude. Also, if the company is done with the major cost cuts/operational issues, what is Peter's role? We know he has not been able to generate any meaningful revenue growth. He is a non-Chinese leading mainly Chinese executives and still their main/core market is China. He is not a marketing person either. I'm not advocating removing Peter because I don't think it could afford to pay him to leave either. Again, as a start, his salary/compensation have to be re-evaluated.

Executive search firm/compensation advisors - Do these firms have a clue on what they are doing? When an individual shareholder can see things are getting ridiculous and the board still continues with ridiculous behavior, one has to question the competency and/or agenda of the board. Why does this company have a heavily compensated non-Chinese CEO? Why is the board made up of non-Chinese (except for the founder who is bent on keeping control of the company at all costs) that have basically no "skin" in the game. Put a board with actual stakeholders and you'll see a difference in stock performance. Period.

I've talked with institutional holders over the last year and all are not "activists". Most are now waiting for some other institution to lead the way even though everyone is disappointed in the performance of the company/share price (what a shock). Anyway, I hear that there seems to be more serious discussions on actions from the company now that the stock is well below $1 (Really?).

At this stage, after watching the company for the last 4 years, I am indifferent from inaction or any appeasement actions from the company. We've seen that the company is not only one step behind but 3 or 4. Thats why every "positive" step they have taken has not yielded higher shareholder value or led the company closer to breakeven.

My biggest hope now is that there is action from institutional holders that all disappointed shareholders can rally behind and finally rid this company of people that don't produce any value for shareholders.

Have a good week everyone.

Failure of the BOD

2009-03-18T19:46:00.000-07:00

Why is the current board still in control of this company? If there was a "stress test" for determining competency of the board, how do you think the UT board would score?

Lets forget for a moment the $800m+ of losses retained on the books, the 4 years of continued operating losses, the musical chairs of management, showering management with mega salaries, bonuses, retention/exit compensations, and the sub $1 stock price (down 90+%), etc etc.

Coming into the worse recession since the 1930s depression, what budget plan did they sign off on for 2009. Continued losses of $10m, 50m, 100m.....NO, They "approved" losses of $150m or more. Are you kidding me? Some investors (sorry Shadow) say the company knows much more than the shareholders. Again, are you kidding me?

Here is part of the reply of the company for the all the emails sent last week: "We would remind you that we have been very active in the last 18 months.We defined the core products and have divested or initiated the wind down of all the non core businesses - a process that we expect to complete by July 2009; we have improved our net cash position from $180mat Dec 2007 to $314m at Dec 2008 and we currently have no debt."

Every year, the company trumpets their "accomplishments" rather than face the tremendous destruction of shareholder value. Last year, they mentioned the payment of the convertible bond, the sale of Gemdale/infinera, the completion of all the filings, the opex cuts, the resolution of certain material weakness, the repatriation of funds from China. The result of all of these accomplishments - further declines in the shareholder value (both tangible book value and actual share price) and going farther from breakeven.

So, excuse me for taking any of their "accomplishments" and efforts with a grain of salt. The bottom line is shareholders are faced with a stock that is about 1/5th of the tangible book value and about 1/3 of the cash.

The current opex target of $60m at the end of the year is simply undefensible. How much should they spend in Brazil, Taiwan, India, Russia, Latin America, and on and on if the returns are so minimal. They have the technology (as they have mentioned) but the markets are not ready. Why put in more money until you see some developments?

Sigma Designs has quarterly R&D of $3m+. UT had been maintaining an R&D of over $40m for quarter after quarter. When asked last year if they would develop their chip to be compatible to the China standard media processor, they responded that they will not spend the money until there is a clear standard developed. Sigma competes with Broadcom so its not impossible to be profitable competing against larger companies.

Sonus has revenues that are 1/3 to 1/2 UT and they are cutting costs to break even. Their valuation is atleast tangible book value.

So, even after years and years of losses, the plan for 2009 is even MORE losses and degradation of the stock price.

I hate to be so negative but every shareholder I have talked with can see that their cost is extremely high and that the board is non-existent. Again, why even have a board if this is the kind of shareholder destruction they have presided over?

It amazes me when I see other shareholders campaign against the board (like Bill Ackman going for 5 board seats in Target). I don't follow Target but I'm sure there are not many other companies that are not basically nationalized run worse or governed as poor as UT. The board simply has not done their duty to look after shareholder's interest and its time for them to go. I encourage shareholders to write the company expressing their opinions. Yes, we don't know the inside information but to believe the board can enhance shareholder value better than shareholders is ridiculous to say the least.