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.
Sunday, May 22, 2011
Saturday, April 2, 2011
Development of triple play and UT valuation going forward
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.
Saturday, March 26, 2011
IPTV and development of Triple Play
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.
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.
Thursday, March 17, 2011
Increased CAPEX spending in China
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."
------------------------------------------------------------------------------------
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).
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."
------------------------------------------------------------------------------------
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).
Tuesday, March 15, 2011
UT ipad multi-media terminal and other products
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
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
Sunday, March 13, 2011
Q4 2010 Recap
The Q4 2010 Conference call had an interesting format with a powerpoint presentation slide to go along with the recap of the quarterly/yearly performance as well as some historical improvements, and guidance for the year.
The company's PR touted the exceedence of guidance on the top line for Q4 (which had been reduced) and the operating positive cash flow in the quarter. As a long time suffering shareholder, my main focus is on the turnaround and numbers going forward and to see this new CEO (management) performance to gauge whether there is tangible progress. I did not particularly care for all the slides touting the potential at this stage (since that has been provided before and the important thing is whether UT can actually participate in it). I also didn't care for all the comparissons with improving losses, margins, etc that were simply well below normal/industry performance. No, I was looking for data points that would indicate (1) stabilization of the business (are the revenues/bookings still going down for ex.) and (2) whether there is improvements/growth opportunities to the business. The first point is critical in keeping the current shareholder base and determining if the business is still spiraling down and out of control. The second point is there a reason for new shareholders to look at this company as a real turnaround (in the near future) and what value it can get to in the coming years.
So, instead of the usual point by point recap of the call, I will group the overall discussion based on those two general points. As a shareholder point one is important for holding on to shares at the current valuation and point two is important as the stakes are higher after all of these years to see if there is value creation and point one is not enough to keep shares. You can categorize point one as the "downside risk" and point two as "potential for appreciation". Ok, lets dive into the tangible information provided in the report and the call.
CASH - The major holding point for longs is the CASH. Downside investment protection for a small/Chinese company is the net cash it holds. The company reported a loss of 15 cents/share but generated $14m (or around 10 cents/share) in cash. The company now has $352m in cash/short term securities/investments (or about $2.35/share). The cash was a main theme in the Q/A portion as three analysts (yes, there were actually three that asked a lot of good questions) discussed how cash flow was going to be like for the rest of the year, how it relates to the revenue reported, what potential acquisitions it may make). Jack Lu mentioned that they picked low hanging fruit in the quarter and that cash flow won't be positive in Q1/Q2 but will be back in the black by Q3. In their business cash flow is slightly ahead of the revenue recognition. An interesting thing about UTs balance sheet is that while other newly minted Chinese companies performing "very well" are questioned, its been amazing how bad UTs balance sheet with all the writedowns have decimated its book value down to $1.68 at the end of Q3. At the end of Q4, it is down to about $1.66 even after the 15 cent loss and the cash actually going up by 10 cents. The tone of management has been clearly protecting/managing the cash very well.
OPEX - SG&A was $19.3m and R&D was $9m so w/out other one time items, its down to $28.3m. The target OPEX of under $25m/quarter has not been reached but the CFO mentioned it was solidly on track for it to be. The Q4 PR regarding management alignment (to be concluded in Q4) showed that they were still working hard to pare bloated expenses, which is obviously still high for the current revenues/bookings and even for longterm sustainability. I'll discuss OPEX more a little bit later.
Potential Acquisitions - Because of the poor operating performance year after year, the street mainly looks at the cash in valuing the company so the analysts wanted to ask what is their mindset on acquisitions. The management gave good generic response to what they would like to acquire.....(1) something aligned with their current goals/businesses, (2) top line growth and, (3) add to earnings. The analyst fired back that those would be very expensive specially when UT itself is trading UNDER cash. Mangement's response was atleast realistic.....that they are not looking at anything significant and only for the growth of the new Operational Support Services group and would focus more on internral growth via vendor financing.
So, to conclude this first part, I believe the cash is going to be managed very well going forward and provides substantial downward protection to the stock price (even more so before this call). Going on to the second part. The most important part looking ahead for small tech companies are the growth prospects. The street will reward growth (and not the cash or the book value). Q3 2010 could be the most dismal point in the company's history in terms of revenue/bookings as it was down to $60m (with the deferred PAS revenue) and only $36m in new bookings. This was just a continuation of a company losing revenue and could not get new business.
Bookings - Q4 had bookings of around $52m (0.68 book to bill x $76m reported revenues). This is a good size increase from $36m in Q3. Just on a percentage basis, this was very good but more of a relief as even this number is nowhere near enough to make up for the PAS deferred revenue that will be gone by 2012. I look at this as fairly positive due to the nature of the bookings. These are not low margin broadband revenues from India (BSNL phase III is still in limbo but don't think anyone is looking at that at this stage) or handsets or due to a major contract (we didn't really get much PRs in Q4). So, this was a grind it out $52m revenue that was the highest for 2010 (as they reported) but really didn't include much of the growth drivers that I will list.
Growth Drivers -
1. Softbank - Management mentioned a couple of times that the trials for the TN product was completed last year and they expect to generate significant orders early this year. Now, the Japan earthquake may slow that down but essentially this is on track.
2. IPTV growth - New win in Thaliand with TOT (Thailand's leading provider) was encouraging as this is a new country. Additional win/expansion with Bharti was also reported. The macro growth in China has also been very good to further UTs internal growth. As we've seen over a year ago, software upgrades could be nice revenue/profit generators and will increase as their # of users grow. Then, there is the potential in the mobile handset space (whether they make their own iptv handsets or license their software).
3. New platforms/Operational Service Support (OSS)- The deal with StageSmart will yield additional internet TV platforms to drive growth. The new OSS is expected to deliver 10% or around $30m in revenues. This will be reported as a new segment starting Q1 and be a high margin/growth for the rest of 2011 and beyond.
4. India- BSNL Phase III is still in limbo and could add tens of millions (if not more) in revenue but lower margin. The company did mention it was still working on getting local partnerships/JVs to help them maintain/extend their positions in India. The growth in OSS (new platforms developed for the network convergence in China will also carry over in India in the future). We still have not heard anything in the use of TN for India but their mobile/fix line customers there makes it a potential growth driver.
5. Broadband in China -Company mentioned partiicipating in trials for GEPON/EPON (fiber) but did not highlight this as a main priority although revenue wise, it would be a driver (just for the higher equipment sales).
6. Vendor Financing - In terms of cash usage, this is where the company mentions it will spend. Jack Lu, the CEO, made it a point about being stingy with the cash but this is where they will spend some money to driver growth, which makes definite sense and is a highlight of their growth strategy in higher margin/sustainable revenues.
7. Internal growth of the $52m base - These bookings are made up of small value trials/deployments/existing maintenance etc. that should increase as trends in broadband/network convergence continues.
As a side note, lets look at discussion on margins/opex. The company margins w/out PAS/one time items was around 28.6-28.8 (quarter/year). The guidance of 2011 for 300-320m and under 100m (say 100m) would imply 32.2% margins but in the Q/A, Lu mentioned high 20s. So, backing out OPEX at 29% GMs and 310m in revs would yield about 22.5m in quarterly opex at break even, which they seem fairly confident they can achieve.
So, going forward, we need to look at the growth drivers to determine how they can replace the PAS deferred revenue. There are still a lot of work but having $52m in bookings was a nice start in Q4 (basically the first full quarter of the new management/board and the 2nd quarter of network convergence trials).
The ultimate goal is still to get to a profiable/growing company that adds value more than the current cash position. As they solidify/stabilize the company from point (1), we can now focus on point (2). As we've seen with companies that are in the process/turning around, the payoff can be huge. There is still hope for this old dog :-)
Have a good weekend.
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.
Wednesday, March 2, 2011
Stakes are high
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?
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?
Monday, February 7, 2011
Basic business cycle
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.
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.
Saturday, January 8, 2011
Technicals
(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
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.
Wednesday, December 15, 2010
2010 Chinese International Exhibition
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.
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.
Monday, December 13, 2010
Partnerships, Joint Ventures, and Acquisitions
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).
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).
Wednesday, December 8, 2010
Random info on UT and industry related news
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:
"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.....
Thursday, October 28, 2010
Cash balance at the end of the year
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.
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.
Monday, August 2, 2010
Delays have cost UT shareholders
A shareholder commented in the yahoo MB that "it will take some time, if indeed it can be done, to bring this company back from the brink that Blackmore led it to."
I am looking for incremental improvements in the following items on the call that should have been accomplished already.
1. China investment deal. Announced in Feb, even at the end of JUNE, we've heard (not from UT) in an article of approval from China and to be closing soon but still nothing.
2. BSNL-India Phase III - Initially should have been Q3 2009 (Q4 at the latest) and still no concrete update from the company.
3. Bookings - Even during the entire downturn the last two years, management was guiding to 50% bookings growth and then to double digit growth and then to just "good" bookings and then finally last quarter to booking way less than one.
4. OPEX - Even the latest restructuring should have been done before the end of Q4 last year and now revised to the end of Q2 but in Q1, the opex was still nowhere close to the target.
5. Transparency - Also should be improving but book to bill #s, iptv subscriber #s, # of trials, status of GEPON/GPON, PDSN, relationships in Latin America, Britain, Europe, etc - there is nothing. So, this is going the other way too.
I'm all for waiting but certain things should show incremental improvement or been completed already. The price at these levels is a joke for their assets, stated market positions, and projected growth of their markets but why is it still here and why hasn't someone made a higher offer by now?
So, the low price (that we longs feel) is directly related to incredible poor performance in such a way that all the "potential/cash/tech assets" that we longs talk about is easily negated by the incredible unresolved items up to now and the lack of even incremental improvements as I listed above. If they had resolved some of those items way before this year, the investment price would not even be close to $2.2.....That price may have been acceptable LAST June 2009 but not this Feb. 2010 and certainly not right now.
Shareholders deserve much more even at this stage.
I am looking for incremental improvements in the following items on the call that should have been accomplished already.
1. China investment deal. Announced in Feb, even at the end of JUNE, we've heard (not from UT) in an article of approval from China and to be closing soon but still nothing.
2. BSNL-India Phase III - Initially should have been Q3 2009 (Q4 at the latest) and still no concrete update from the company.
3. Bookings - Even during the entire downturn the last two years, management was guiding to 50% bookings growth and then to double digit growth and then to just "good" bookings and then finally last quarter to booking way less than one.
4. OPEX - Even the latest restructuring should have been done before the end of Q4 last year and now revised to the end of Q2 but in Q1, the opex was still nowhere close to the target.
5. Transparency - Also should be improving but book to bill #s, iptv subscriber #s, # of trials, status of GEPON/GPON, PDSN, relationships in Latin America, Britain, Europe, etc - there is nothing. So, this is going the other way too.
I'm all for waiting but certain things should show incremental improvement or been completed already. The price at these levels is a joke for their assets, stated market positions, and projected growth of their markets but why is it still here and why hasn't someone made a higher offer by now?
So, the low price (that we longs feel) is directly related to incredible poor performance in such a way that all the "potential/cash/tech assets" that we longs talk about is easily negated by the incredible unresolved items up to now and the lack of even incremental improvements as I listed above. If they had resolved some of those items way before this year, the investment price would not even be close to $2.2.....That price may have been acceptable LAST June 2009 but not this Feb. 2010 and certainly not right now.
Shareholders deserve much more even at this stage.
UTs revenue decline
The following are UTs sales by country in Q1 for 2009 and then 2010.
China - $51.2m; $40m
US - $41.2m; $3.45m
Japan - $6.5m; $11.1m
Philippines - $.8m; $12.7m
Other - $19.5m; $13.6m
Of the $40m in China sales this past quarter, about half was deferred revenue so the actual revenue was down to around $20m in sales in China. At the peak of UTs growth, annual sales reached $2b so quarterly sales in China reached $500m or so. Going down to $20m is a staggering drop that shows the company has never recovered and until now, we don't know if it has bottomed. While Peter Blackmore, as CEO, is to blame overall, I wonder what China Sales and Marketing and Services SVP Charles Mah has contributed. The guy was hired in Novermber 2008 and now more than a year later, the sales have continued to deteriorate. Last quarter, Blackmore mentioned the book to bill was way below 1 signaling no signs of a turnaround.
With the guidance provided last quarter of similar revenues (including the deferred revenue), the company is still not close to any upturn in revenue, which at this stage is what investors really care about. Lets review the breakeven revenue of $85m/quarter (assuming the company even gets to the stated OPEX goal, which is another area they have been very slow to completing). The new COO (future CEO) mentioned getting to profitability in a year (from the February interview he gave in China.
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.
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.
Saturday, July 10, 2010
India and China front
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.
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.
Monday, June 14, 2010
India manufacturing in Q3 & New Chinese Credit Lines
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."
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."
Tuesday, June 8, 2010
Investor presentation in June?
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.
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.
Saturday, May 29, 2010
Conference Call with Peter Blackmore
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.
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.
Friday, May 21, 2010
Details of Beijing Investment and Commitments
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.
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.
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