Zacks keeps sell rating and reduced price target to $3

Two days before the shareholder meeting and following S&Ps and BofAs $3.5 and $3 targets, Zacks reduces its 6-month price target to $3.

http://biz.yahoo.com/zacks/071127/10399.html?.v=1

The key reasons include:

1. Lack of business momentum and declining GMs.
2. Not expecting profits till 2010. Company financials do not reflect the anticipated synergies from the restructuring activities.
3. Possible default of convertibles.
4. No near term growth elements.

I agree with the near term profitability picture as losses of 41 and 28 cents are expected for Q4 and Q1 but I would disagree with the declining GMs (these are set to go up from 10 to 13% and improve in 2008), no profits till 2010, default on convertibles, and near term growth elements (need to check bookings and new wins). I do agree with the financials not reflecting the restructuring activities because these won't be felt until Q1.

Hopefully, the current low shareprice and reports like this will spur management to make significant structural changes and make tough choices that they have not done in the past. If so, then we can look at these months as the bottoming phase and look forward to the long-awaited turnaround.

Letter to management

This is a letter that I will be sending to management ahead of the shareholder meeting.

Dear Sirs,

I have been a shareholder for the better part of the last three years and have been very disappointed with the company/stock performance to say the least. The recent filings show the continued losses in 2006 and 2007 but more importantly, the street has lost confidence in the company due to their lack of communication during these critical times, poor internal controls, bloated expense structure, and lack of visibility in the company’s businesses. The continued losses into 2008 and history of over-promising and under-delivering has weighed on the stock.

It is very difficult to stay positive in light of the current sub $3 share price and know it will take some time to turn this around. I do have some hope with the recent actions from the company such as (1) finishing the options/China investigations-filing the financials for the last 5 quarters, (2) reclassifying and selling long term holdings in Gemdale/Infinera, (3) being able to transfer funds from China, (4) identifying core/non-core operations, (5) cutting operating expenses to $115m/quarter, (6) seeking out cash flow efficiency savings, (7) monetizing the patent portfolio, (8) showing tractions in iptv/broadband, gepon, optical, surveillance and other new initiatives and (9) hopes for profitability in late 2008/early 2009.

I have recently started a web-blog at http://utstarcom-stocknews.blogspot.com. So far, it has generated about 600 visits in just the last 12 days. The purpose of the blog is to compile information about the company, share investor opinions, and hopefully provide a conduit between shareholders and management. One of the reasons I am writing now is to discuss topics in the upcoming shareholder meeting. Because the stock price is at historic lows right now, shareholders have many questions on the company’s future turnaround plans as well as previous decisions and results. Let me emphasize that as much as we’d all like to move on towards the future, we need to learn from the past. With the stock being where it is, it is apparent that the street is also not moving into the future yet. Most stock price targets are in the $3.5 range and continued significant losses are expected in 2008.

A few topics that I have put on a poll (in the web-blog) that management can hopefully give more color to in the shareholder meeting are the following:

-Details of the strategic options study with Merrill Lynch. Shareholders are very dissatisfied with the explanations and lack of details surrounding such a critical event in the company. Where there offers to buy the company? At what price? If not, what where the major issues? What where the attractive points and negative points? We shareholders can appreciate that some information cannot be disclosed but I am also sure you understand where we shareholders are coming from in light of the shareprice.
-Gemdale/Infinera sale. Updates regarding liquidity are very important during these credit tough times.
-PCD divestiture. Most shareholders did not buy into the company with the PCD in mind and are mostly in favor of divesting the PCD to solidify liquidity position and focus on core businesses. I can appreciate that you cannot divulge too much but anything towards the divestiture of this division will help the shareprice. For me, this was the symbolic move away from core goals of the company and would represent a symbolic re-focusing the goals of the company.
-Japan revenues. Shareholders have not heard much regarding Japan and the close ties with Softbank.
-Convertible Bond update.
-Share repurchase or insider buying. The low share price has to be addressed by management. Projections are great but the street is looking for tangible actions by the company/management.

-OPEX and growth of the Core businesses. There are major concerns that the target opex to core revenue ratios that management has given in the last cc will not be met anytime soon (even in early 2009 and be sustainable) and that opex should be cut further now rather than later. Updates to bookings and future plans are much needed to clarify confusion with this important goal. Aside from 3rd party projections, what do you see in the iptv/broadband markets that give you confidence in attaining these ratios? Otherwise, this is another example of over-promising and under-delivering.

I would like to end by stating I appreciate the updates from the company and hope that it continues. The last conference call presented a very good start to addressing the street concerns but results are needed. Because the turnaround will not occur overnight, shareholders need answers to a lot of questions and management can do much more to defend the share price right now. I am personally looking forward to meeting management during the shareholder meeting next week and hope to get some answers to share in the web-blog to fellow shareholders.

IPTV in Korea/Vietnam-Next front for UTStarcom?

Thanks to Nawar for providing updates on Korea IPTV.

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=ts&bn=27187&tid=146476&mid=146476&tof=1&frt=2

http://malaysia.news.yahoo.com/rtrs/20071122/tbs-markets-korea-hot-b8dd11d.html

From the last CC,

"In particular the IPTV business continues to gain momentum. Attributively we have booked approximately 240 million in IPTV contracts and recognized approximately $80 million in revenue. We recently won new contracts in Fujian Province in China and a major new customer in another Asian country, which we can announce in a few weeks. We currently have IPTV deployments in China, Japan, India and Brazil. We have about half a million live IPTV subscribers and contracts for about 2 million subscriber system capacity.

We are not sure if Korea is the next deployment for UT. Some are speculating Vietnam but the growth of worldwide iptv acceptance is good for UT. The trends support explosive growth in iptv:

http://www.telecompaper.com/news/article.aspx?id=193418&nr=&type=&yr=

The bull case for longterm share price appreciation

Let me begin by saying that earnings the last 2 years have been bad and going to be bad in 2008 again. Just looking at the earnings estimates for 2008, analysts are expecting losses of $1.02/share. That is a frightening number when compared with the current stock price of $3.3. The street is waiting for the company to be profitable or at least be cash flow positive. Target prices are a fraction of book value. While this may seem reasonable and a reality of the current moment, this ignores the strategic position and assets the company has. For the past few months, I and others have added up liquid assets (cash, investments, and even the PCD) to size up the current situation and assess potential for a liquidity crisis that could negate any potential for a future turnaround. This was necessary because we did not have access to the financials, did not know whether the company was going to be sold/go private, did not know how quickly they would burn through cash, the impending convertible bond situation or the status of the current business itself.

Through the filing of 5 quarters of past results (Q3/Q4 of 2006, and Q1-Q3 of 2007) and update conference calls, I can say that I have never felt as confident about the turnaround as I have now. What turnaround am I talking about here? The share price going to $6, 10, 15, 20 or higher? No, the turnaround will be about discarding none-core assets, reducing bloated expenses and growing core revenues in the sectors and countries with explosive growth. Most of the long shareholders that bought 2 to 3 years ago had this in mind but circumstances and company mismanagement has moved away from this. Now, I can see the beginning of getting back to this situation/goal. Let me highlight some key developments recently:

-Separating the core and none-core business. The acquisition of the PCD division was the beginning of the downturn, moving away from their core goals/competency. It tried to cover up revenue loss from PAS and the company moved away from growth to a low margin company with losses and lost direction. Now, management has decided to realign the business units and separate the PCD division. Most shareholders have been talking about separating and selling the PCD for a long time now. On the last CC, Blackmore is basing target R&D and SG&A ratios to revenue that does not include the PCD. An analyst also asked about operating expenses for the PCD under the cover that the PCD is the largest revenue source for the company. However, this is really to value the PCD for sale in 2008, which even S&P concedes will probably happen.

-Growth drivers. Broadband and IPTV. UT current has 500k live subscribers and 2m system capacity. Current booked revenues are $240m, which only $80m has been recognized. These are not impressive numbers considering trials have been going on for years and the amount of R&D and other expenses they have incurred to acquire/develop the technology. However, the key take away is that commercial deployments have started and UT is the leader in very large markets. They have commercial deployments in Brazil (10,000 subscriber deployment now confirmed with Brazil Telecom), China (over 60% market share and 380k live subscribers-compared with 800k for PCCW-leader in HK, also was awarded sole provider for one province), India, and a new Asian country to be announced. UT is also providing the massive NGN/broadband infrastructure that needs to be built to support IPTV and other related products (65% market share in Korea, replacing old Siemens, Alcatel equipment in the Philippines, where other Asian telecoms are reviewing the deployments). The market is aware of this but is focusing on the “timing” when broadband/IPTV revs are going to hit. With the liquidity issue aside, I am more concern now about market share and start of deployments.

-Other technologies/drivers. Gepon, IP surveillance, FMC, new PAS technologies etc will provide future growth as well. Even with all the losses, the company is able to maintain R&D. There is a difference between a dying company burning cash and a company “choosing” to maintain R&D because they see the bookings and potential markets. This really is about the longer term growth and profitability so I agree with the steps taken now.

-China market. Almost every other company tries to get in China and increase revenue there. For the last 3 years, China revs have been declining and they are reducing head count and expenses. Since June, Lu has spent time there and have hired new management, improved controls/customer relationship and looking into the broadband market aside from iptv/pas. Aligning the PAS business back into core was smart to do. They cannot lose the relationship built up over the years. I am happy to see the company is refocused in China.

-Liquidity. This is a concern due to the current cash burn and CB due March 2008. The company was fortunate to have Gemdale and Infinera increased. Barton mentioned they have started monetizing Gemdale last week. They are able to transfer significant sums of money from China and have a target to reduce OPEX to $115-120m. At end of Q4, they still should have over $200m net cash and if they are able to extend the CB, would have half a billion to see this turnaround through.

The timing of the turnaround has always been questionable but this depends on the definition as well. For me, the turnaround has started and will be symbolized by the sale of the PCD division. Blackmore has targeted end of 2008/early 2009 to realize his target ratios. Previous discussions of profitability were not believable because there was no plan. Now, there are cost cuts and bookings to guide management.

The management has laid down a reasonable timeframe and benchmarks. Previously, I had lost hoped and wanted a sale. We are way past that point at this stage and prepared to wait it out. I think the strategy has a very good chance of working and the share price will appreciate significantly.

S&P Lowers 12 month target to $3.5

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=145807&mid=145807&tof=20&frt=2

Thanks to Rspen for posting this early today.

S&P has now cut their 12 month target price from $11 early this year all the way to $3.5 now. I can understand the cut due to disappointment in earnings pushout. But, not due to sum of the parts analysis, specially after their investments have gone up by over $100m. Remember, that sum of the parts analysis at $11 was just early this year! Definitely does not make sense.

Now, lets take a look at their estimates going forward. For 2008, they estimate 2% gains from 2007. That obviously has to go up for a couple of reasons. Q3 and Q4 revs are significantly higher than current estimates. Also, book-to-bill have been 1 to 1.2. They do have a 16% GM estimate but that could change significantly depending on mix and timing. Overall, they have a 87 cent loss for 2008. Thats actually higher than consensus right now but the consensus should go up some. It will be interesting to see how estimates are revised after Q3....

Q3 2007 CC transcript

http://seekingalpha.com/article/53890-utstarcom-q3-2007-earnings-call-transcript?source=yahoo

Q3/Q4 earnings/revs expectations

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=144725&mid=144725&tof=-1&rt=2&frt=2&off=1

Q3 and Q4 revs are much larger than analyst estimates but GMs are much less in Q3 because of the large PCD mix. On my yahoo post, I was using managements 15% guidance for rev growth in Q3 but it turned out to be 20%. On the surface, this was good but it lowered the revs I was guestimating in Q4. I was expecting the loss to be much lower in Q4 (35 cent analyst predictions) but it seems like its going to be around 26 cents. Still better than expectations but not as big a beat as I was expecting. Q4 could still turn out to be better in revs and GMs so it may come in lower than 26 cents. We'll just have to wait and see what the analysts come up with by next week.