There is really no way to sugarcoat the fact that UT stock collapsed in 2007.
http://www.lightreading.com/document.asp?doc_id=141870&page_number=2
With vonage's 15% rise on the final day and ocean networks (whatever that is) last day move, it may have just given the crown to UT as worse performing $5 stock (at the start of the year). The stock started the year at $8.75 and closed at $2.75 wiping out $720m in market cap. There is only one metric that really counts for management/BOD performance and that is the stock price. There really is no reason for management/BOD to be getting any bonuses or raises based on the stock performance so you can see the company's compensation committee is a farce and the company's internal controls are still very weak. That alone should merit some discount to the companys book value. It is one thing for management to look at each other in the eye but I am wondering how the workers (specially those that got laid off) look at management.
I have been saying for a while that UT is just "trying to survive the current bull market" and that 2007 is atleast over. One final look at the 2007 stock price performance. Does it really deserve to be the worse stock of 2007? Well, sadly it does have a strong case. The company started the year with the expectation that it could be sold with road shows for the investment bankers in China early in the year and positive news clippings about the business and their core iptv products. However, by May, the company announced that there would be no sale and that Wu (the China head and cofounder) was leaving. In July, a NEW China investigations on top of the options investigations was announced. In addition, net cash that was hovering around $250m in 2006 was down to $150m. With the new investigations, "obviously" the filings that were already a year delayed would be delayed even more. With that comes additional interest payments on the convertible bond because they would potentially be in default. It was so bad that it was a milestone that the bondholders "accepted" the terms of the additional interest payments. This is with all their China funds earning less than 2% interest rates and the question of being able to even transfer funds out of China. With all of this backdrop, the stock which peaked in February at over $10 sank to under $3 in August. For most of this time, the only communication we shareholders got from management was a few scant PRs with no real detailed explanations.
The second half of 2008 (after July) was much better. The company had its first cc in over a year to discuss liquidity and performance of the various business units. I guess the 70% drop from February and 40% in 2 weeks was enough to actually make them "concern" about the stock price. Anyway, this started a series of cc (5 total) that culiminated in the filing of 5 quarters and made the company current. The stock rallied to over $5 in October in anticipation of the filing and the better news flow/communications from management. The problem was the results were REALLY bad with cash burns in the $40-50m/quarter. Add to that the subprime woes in the market and you had long funds in trouble and bailing on the stock. The stock has sinced gone back under $3 that resulted in its distinction as one of the worse (if not the worse) performing stock in 2007.
Despite all the mismanagement, the soap operas, the CB overhang, the short position, the current stock price, the company did have some positives that make me question if this should have been really the worse stock in 2007. Of course, I am long and want to throw in some positives but here they are anyway.
The company restated earnings for the last 7 years and filed the last 5 quarters and is now current with the SEC. This has "freed up" management to do their job and get the company turned around. Lu has been in China since July stabilizing the void caused by Wu's departure. Blackmore was hired in late June to be the COO and future CEO. Blackmore has gone on a traveling tour of the various operations in the company, held a strategic 9-week study of all the business units, organized the company into core/none-core business units, signed one OEM, cut headcount, laid out target financial metrics, and committed to profitability in 2009 (or late 2008). Obviously, some other management helped out in the processes. Barton has given updates on liquidity, transferred $150m from China, is in the process of selling Gemdale/Infinera (which both appreciated nicely this year and could still bring in almost $100m together).
Shareholder equity which stood at $770m at the end of 2006 is down to $700m at the end of Q3 2007. Not great but not catastrophic as the shareprice would indicate either. At the start of the year, UT probably had 200k iptv live users on their systems. It is now up to 600k last month. Major iptv wins/deployments in India, Brazil, Taiwan, and expansions in China (380k last mentioned) show the company's iptv system is cost/technologically superior. Regulatory improvements for iptv around the world will drive the growth even further in 2008. Broadband wins in India ($120m BSNL deal), and other wins in Gepon/ip survilance/optical show that there are new markets being entered and a more sustainable revenue base is starting to form.
So, as we enter 2008 (the upcoming China olympics year), there are tremendous hopes that the shareprice will rebound after the collapse in 2007. There are major milestones to look for as the CB needs to be resolved and cash burn/pas slowdown needs to be addressed. The stock is being discounted rightly or wrongly depending on your point of view but it is being discounted heavily. Whether we "believe" in management or not is a personal position view and the street will only respond to results going forward anyway. Overall, I am optimistic based on the data after July that the negatives are mostly in the past and the positives are mostly in the future. Obviously, we need to temper our enthusiasm based on managements previous performance, the multiyear stock technical downtrend, and the competition going forward.
Happy New Year to everyone in 2008. Here is hoping management gets their act together and brings a MAJOR turnaround to the stock price. Expectations are at all time lows (as with the stock price) so this is their chance to outperform significantly. Good luck to everyone with their trading/investing in 2008.
Tuesday, January 1, 2008
Sunday, December 30, 2007
2008 Catalysts for UTStarcom
With only 1 trading day left in 2007, I look back to the summer of 2004, the first time I bought stock in UTStarcom. The reasons I bought into the stock at the time included the lure of the China market (UT was a pure play on China growth), other emerging markets (possibility of expanding PAS), incredibly profitable/good valuation during a time when the other telecom providers were still languishing (yes, they actually made profits before to the tune of $2 earnings for a $20 something stock with incredible growth), the Beijing olympics in a few years, US-based company/China manufacturing, disruptive technologies, and on and on. After the last 3+ years of poor performance and stock price collapse, those times and the potential for becoming a cornerstone tech company has vanished. All we shareholders are left with is "hope" that they still have enough resources to turn it around and get to profitability.
For me, the investment thesis has been reduced to a short term (1-2 year) turnaround, get to profitability and hope they are acquired. Over the last few years, I've found the competitive landscape has been increasing exponentially and come to the conclussion that you have to have revenues in the $10-15b minimum in order to support R&D, be competitive and keep the cycle going. Because of UTs success in PAS, they have been able to continue their expenses at a level of much larger companies. However, the massive losses and shareprice collapse has shown this cannot continue. China competitors such as ZTE and Huawei have grown immensely just over the last 3 years. Most analysts also believe that UT will have a hard time going it alone with the constant sell rumors that finally culminated with last years failed strategic study. Over the last year, I have accepted this scenario and even viewed the increase spending/new markets as one last push to get to profitability and a more sound exit strategy. Things can always change a year or two from now and others can probably lay out a longer term sustainable model but looking at the history of the company and the competitive landscape today, the best way to increase shareholder value is to shrink the company, focus on profitable markets sooner, and get bought out. With that being said, lets look at catalysts for the company going forward.
On the macro level, UT is actually in much better shape than other telecom equipment makers. UTs main core markets are still in emerging countries. UT customers are some of the strongest and faster growing carriers in the world. China is expected to grow 10% next year on top of 12% this year. India is expected to grow another 8-9% next year. Brazil, Russia, Korea, the Philippines, Taiwan, Pakistan, and others are expected to grow much more than in the US. Local consumer demands in those emerging countries are the drivers for growth. Broadband/networking growth according to companies like Cisco have never been better. Therefore, it comes down to UT execution going forward. For the stock price, it has been on a multi-year downtrend and needs "catalysts" to reverse the trend and sustain an uptrend that we shareholders have been waiting for. Here are the upcoming company specific catalysts (some are expected and some we hope for, a fellow shareholder Nawar started this off):
- Debt issue: for UTSI to pay a portion of the debt, and refinance the rest in a none-dilutive manner, or not overly dilutive. A quick summary of liquidity... http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=148249&mid=148249&tof=22&frt=2
- For UTSI to sign multiple IPTV contracts in China, signaling further relaxing of SARFT control on IPTV in China.
- Upgrade of the PAS network, for UTSI to gain a contract to upgrade CN and CT PAS network to allow for fast data.
- Asset divestures: for UTSI to divest some of its none-core assets.
- Q4 results/better outlook: for UTSI to announce decent Q4, and provide better outlook for 2008 then the market expect today.
- New NGN contracts, for UTSI to announce similar contracts to the PLDT contract, showing traction for their other product lines.
As for speculative potential developments:
- A modest buyback of stock..
- Action by Wu or an external party to acquire the company.
- Strategic partnership/joint venture with a key player for any of UTSI product lines.
- An investment in UTSI by a strategic player.
I added the following:
Signing of OEM partners.
Additional IPTV wins outside China (BSNL in India in early 2008?)
Completion of Gemdale/Infinera sale.
Developments in Russia specifically (got to have some developments in the last leg of BRIC countries)
Non-pas/iptv wins in China showing progress from Lu
Positive developments in Starent lawsuit (long shot)
Additional iptv licenses issued in China
Additional GEPON contracts (First phase in Pakistan and GOA in India are done-more expected)
Wimax initial win? http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_U/threadview?bn=27187&tid=147880&mid=147881
Cash flow outlook for 2008 needs to be good.
Announcement of "material" sale/licensing of UT patents (current 1 or 2 that they sold are not material)
Expansion broadband contracts with BSNL with higher margins.
Positive news out of Japan (which has been a while).
-Book to Bill (improvements in core markets).
And, the major catalysts.........PROFITS. The last profitable quarter was Q1 2005 when UT booked the large $290m Japan Telecom contract and earned 29cents for the quarter. Management has once again come out with their getting to sustainable profitability forecasts. This time with a sense of urgency and "committment" to boot. I say this with some sarcasm but with genuine hope after meeting management during the shareholder meeting. The above "catalysts" were mostly laid out by management in their ccs and PRs. There has definitely been major new revenue sources (iptv, broadband, ngn, gepon, ip surveilance), iprovments in PCD (their largest rev source) and cost cuts, but also continued decline in PAS/Japan (highest/most profitable segments).
There are definitely catalysts going forward both at the macro/micro level. Management supposedely is focused with the operations now that the China/options investigations/financials are finished/upto date. Blackmore, the COO, has to sign OEM deals, reduce expenses, and improve overall cash flows. Barton has to finish the Gemdale/Infinera asset sales, extract cash from their patent portfolios, resolve the CB, and better refine the cash flow/profitability expectations going forward (better communications with the street). Lu has to stabilize China PAS revenues and gain new revenue streams in China.
For shareholders and the street, its about seeing RESULTS from the company after years of massive poor performance. I would hope there is sense of urgency. I think it should even be beyond this (panick comes to mind although panick is not a word you want to portray to the street). At $2.7 per share, I encourage ALL shareholders to have management and BOD be accountable for increasing shareholder value. The company still has time and resources. The macro environment has never been better. They have major initial wins already but the stock has not reflected it currently at all time lows. Management has to be passionate and hungry- they have a tremendous opportunity to turn this around. I for one am sick of the potential and seeing the stock price languish here. If management executes, there is no reason that the turnaround will not happen. Then, we can change the conversation to being hugely profitable in the future.
For me, the investment thesis has been reduced to a short term (1-2 year) turnaround, get to profitability and hope they are acquired. Over the last few years, I've found the competitive landscape has been increasing exponentially and come to the conclussion that you have to have revenues in the $10-15b minimum in order to support R&D, be competitive and keep the cycle going. Because of UTs success in PAS, they have been able to continue their expenses at a level of much larger companies. However, the massive losses and shareprice collapse has shown this cannot continue. China competitors such as ZTE and Huawei have grown immensely just over the last 3 years. Most analysts also believe that UT will have a hard time going it alone with the constant sell rumors that finally culminated with last years failed strategic study. Over the last year, I have accepted this scenario and even viewed the increase spending/new markets as one last push to get to profitability and a more sound exit strategy. Things can always change a year or two from now and others can probably lay out a longer term sustainable model but looking at the history of the company and the competitive landscape today, the best way to increase shareholder value is to shrink the company, focus on profitable markets sooner, and get bought out. With that being said, lets look at catalysts for the company going forward.
On the macro level, UT is actually in much better shape than other telecom equipment makers. UTs main core markets are still in emerging countries. UT customers are some of the strongest and faster growing carriers in the world. China is expected to grow 10% next year on top of 12% this year. India is expected to grow another 8-9% next year. Brazil, Russia, Korea, the Philippines, Taiwan, Pakistan, and others are expected to grow much more than in the US. Local consumer demands in those emerging countries are the drivers for growth. Broadband/networking growth according to companies like Cisco have never been better. Therefore, it comes down to UT execution going forward. For the stock price, it has been on a multi-year downtrend and needs "catalysts" to reverse the trend and sustain an uptrend that we shareholders have been waiting for. Here are the upcoming company specific catalysts (some are expected and some we hope for, a fellow shareholder Nawar started this off):
- Debt issue: for UTSI to pay a portion of the debt, and refinance the rest in a none-dilutive manner, or not overly dilutive. A quick summary of liquidity... http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=148249&mid=148249&tof=22&frt=2
- For UTSI to sign multiple IPTV contracts in China, signaling further relaxing of SARFT control on IPTV in China.
- Upgrade of the PAS network, for UTSI to gain a contract to upgrade CN and CT PAS network to allow for fast data.
- Asset divestures: for UTSI to divest some of its none-core assets.
- Q4 results/better outlook: for UTSI to announce decent Q4, and provide better outlook for 2008 then the market expect today.
- New NGN contracts, for UTSI to announce similar contracts to the PLDT contract, showing traction for their other product lines.
As for speculative potential developments:
- A modest buyback of stock..
- Action by Wu or an external party to acquire the company.
- Strategic partnership/joint venture with a key player for any of UTSI product lines.
- An investment in UTSI by a strategic player.
I added the following:
Signing of OEM partners.
Additional IPTV wins outside China (BSNL in India in early 2008?)
Completion of Gemdale/Infinera sale.
Developments in Russia specifically (got to have some developments in the last leg of BRIC countries)
Non-pas/iptv wins in China showing progress from Lu
Positive developments in Starent lawsuit (long shot)
Additional iptv licenses issued in China
Additional GEPON contracts (First phase in Pakistan and GOA in India are done-more expected)
Wimax initial win? http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_U/threadview?bn=27187&tid=147880&mid=147881
Cash flow outlook for 2008 needs to be good.
Announcement of "material" sale/licensing of UT patents (current 1 or 2 that they sold are not material)
Expansion broadband contracts with BSNL with higher margins.
Positive news out of Japan (which has been a while).
-Book to Bill (improvements in core markets).
And, the major catalysts.........PROFITS. The last profitable quarter was Q1 2005 when UT booked the large $290m Japan Telecom contract and earned 29cents for the quarter. Management has once again come out with their getting to sustainable profitability forecasts. This time with a sense of urgency and "committment" to boot. I say this with some sarcasm but with genuine hope after meeting management during the shareholder meeting. The above "catalysts" were mostly laid out by management in their ccs and PRs. There has definitely been major new revenue sources (iptv, broadband, ngn, gepon, ip surveilance), iprovments in PCD (their largest rev source) and cost cuts, but also continued decline in PAS/Japan (highest/most profitable segments).
There are definitely catalysts going forward both at the macro/micro level. Management supposedely is focused with the operations now that the China/options investigations/financials are finished/upto date. Blackmore, the COO, has to sign OEM deals, reduce expenses, and improve overall cash flows. Barton has to finish the Gemdale/Infinera asset sales, extract cash from their patent portfolios, resolve the CB, and better refine the cash flow/profitability expectations going forward (better communications with the street). Lu has to stabilize China PAS revenues and gain new revenue streams in China.
For shareholders and the street, its about seeing RESULTS from the company after years of massive poor performance. I would hope there is sense of urgency. I think it should even be beyond this (panick comes to mind although panick is not a word you want to portray to the street). At $2.7 per share, I encourage ALL shareholders to have management and BOD be accountable for increasing shareholder value. The company still has time and resources. The macro environment has never been better. They have major initial wins already but the stock has not reflected it currently at all time lows. Management has to be passionate and hungry- they have a tremendous opportunity to turn this around. I for one am sick of the potential and seeing the stock price languish here. If management executes, there is no reason that the turnaround will not happen. Then, we can change the conversation to being hugely profitable in the future.
Sunday, December 23, 2007
UTStarcom - Year 2008 Outlook
Another year has passed and the stock price has not only languished this year but has outright collapsed, falling 70%. Its gotten so bad that I even started a blog and went to the shareholder meeting. In the coming year, I plan to have some "fire side" conference calls with shareholders to discuss the companies prospects and progress in their key markets and financial metrics. I would like to invite fellow shareholders to drop me an email if they want to discuss UT in the coming year.
On to the 2008 outlook. Management has been proactive lately in communicating their turnaround plans, financial targets, and key markets. In short, management does not expect a quick turnaround but have outlined some realistic goals going forward. Management does not anticipate turning a profit until 2009 but are trying to make that happen in late 2008 as the best case scenario.
Expenses. The target quarterly operating expense is $115m/quarter. From the CCs and analysts estimates, this is probably conservative and will be in the $100-110m range by the end of the year. Most investors would like it to be further reduced to the $90-100m range. Management has said it is well-aware of investor sentiment and operating under a high sense of urgency so the cuts that they have made after undergoing a 9-week evaluation of all business units suggest that they see revenues ramping up and that the cuts are adequate to get them to profitability. Management has focused attention on bookings (book-to-bill ratios). Up to a few months ago, management has not done this and gives me some confidence it is on the upturn with ratios above 1. Management has indicated expense ratios about 23-25% of revenues (not including PCD). There has been some confusion about this because UT produces their own handsets with R&D expenses and a seperate distribution portion. From the last earnings call transcript and the shareholder meeting, the expense ratios will be based on all revenues not including the distribution portion of the PCD.
PCD. The PCD unit (atleast the distribution part) has been classified as non-core and we hope to see this unit sold. It is not part of the expense ratio metrics described by Blackmore and can bring in substantial cash to the company.
PAS. Unfortunately, the most profitable revenue generator for the company continues to go down. The company has indicated that margins will actually improve and that backlog is still signficant but there is no question this will go down more in 2008. The hope is their improvements and other features (128k packet data) will slow down booking losses. I believe further developments in PAS (good or bad) will impact the shareprice more than some of the iptv announcements in the near term.
Broadband. While the revenues are increasing in India with the coming highlighting their BSNL contracts, it is in the single to mid teens in GMs as of now. Going forward, Blackmore highlighted GMs above 20% so this will contribute much needed margin improvement in 2008. Additional contracts can be expected.
IPTV. This is definitely the company's brightest spot but it can also be the most frustrating because of the timing of revenues due to regulatory issues and content/usage/functionality situations in various countries. Currently, the company has over 600k subscribers and system capacity of over 1 million. Contracts are multi-year and all iptv projections (for both equipment and total revenues) are staggering to say the least. Here is where I believe the best opportunity for the company and more importantly the shareholders are right now. Because of all the previous past disappointments, lack of internal controls, lack of profits, declining PAS, etc, the market is so focused on the timing of these contracts and not the potential markets and UTs own position. Take the solar industry for example, companies are being valued for potential revenues in 2009, 2010 and beyond. Those companies are being given ALL the benefits of a declining dollar, higher oil prices, very high margins, unlimited demand, no supply etc. Bascially, stock valuations have gone up 10-20 fold in some cases. On the other hand, UT plugs along having won in MTNL and Bharti in India (with BSNL soon to follow), 18 deployments in China (60% market share), wins in Brazil, and Taiwan. In the latest Taiwan contract for example, the stock price actually dropped 3 cents. Why? During the last earnings call, Lu detailed the steps to recognize iptv revenue. The company gets a down payment but a majority of the revenues don't get recognized until full deployment or a year from signing. Of the $240m they have booked, only $80m have been signed. So, from this standpoint, you can see why the stock doesn't move a lot. However, these are the opportunities I am talking about. A year ago, there was no India, Brazil, Taiwan, and most China deployments were very early. The fact that industry is starting to open up and UT is winning are very important. The Taiwan contract for example is with one out of the three CABLE companies they are talking to. I don't think this model working with cable companies to augment their offering was discussed previously. In Taiwan alone, they are projecting having 1 million customers in 2009. With Markwell, they are anticipating shipping 500k STB in 2 years! That means UT is going to have huge market share in the country.
In Shanghai alone, they are projecting to have 500k subscribers by 2008. That is in Shanghai alone while winning another 200k contract to be the SOLE iptv provider in Fujian province. By next year, we will have to break down iptv deployments in China to the different cities/provinces. But the key take away is that with most revenue recognition so backended, it is good news that profitability may be expected in late 2008.
In summary, the stock price is reflecting the CB, the continued losses, PAS declines, and a lot of timing issues without regard for their assets, sale of non-core assets, explosive gains in worldwide iptv growth (specifically with UTs now confirmed position), growth in all the "startup" technologies they are still spending $160m in R&D (for years). So, you can look at the shareprice and relate to the negatives which are being dealt with or focus on the positives which are happening and will only get realized as we go forward. The same way with the highflyers of today. You can pay for their "expected" growth for the next 10 years or you can pay for almost $0 for UTs growth with significiant inital contracts already signed and the street not giving any credit for. I know where my money is on.
I'll be travelling to Southeast Asia tonight for vacation so have a wonderful holiday to everyone (ok.. inlcuding the shorts).
On to the 2008 outlook. Management has been proactive lately in communicating their turnaround plans, financial targets, and key markets. In short, management does not expect a quick turnaround but have outlined some realistic goals going forward. Management does not anticipate turning a profit until 2009 but are trying to make that happen in late 2008 as the best case scenario.
Expenses. The target quarterly operating expense is $115m/quarter. From the CCs and analysts estimates, this is probably conservative and will be in the $100-110m range by the end of the year. Most investors would like it to be further reduced to the $90-100m range. Management has said it is well-aware of investor sentiment and operating under a high sense of urgency so the cuts that they have made after undergoing a 9-week evaluation of all business units suggest that they see revenues ramping up and that the cuts are adequate to get them to profitability. Management has focused attention on bookings (book-to-bill ratios). Up to a few months ago, management has not done this and gives me some confidence it is on the upturn with ratios above 1. Management has indicated expense ratios about 23-25% of revenues (not including PCD). There has been some confusion about this because UT produces their own handsets with R&D expenses and a seperate distribution portion. From the last earnings call transcript and the shareholder meeting, the expense ratios will be based on all revenues not including the distribution portion of the PCD.
PCD. The PCD unit (atleast the distribution part) has been classified as non-core and we hope to see this unit sold. It is not part of the expense ratio metrics described by Blackmore and can bring in substantial cash to the company.
PAS. Unfortunately, the most profitable revenue generator for the company continues to go down. The company has indicated that margins will actually improve and that backlog is still signficant but there is no question this will go down more in 2008. The hope is their improvements and other features (128k packet data) will slow down booking losses. I believe further developments in PAS (good or bad) will impact the shareprice more than some of the iptv announcements in the near term.
Broadband. While the revenues are increasing in India with the coming highlighting their BSNL contracts, it is in the single to mid teens in GMs as of now. Going forward, Blackmore highlighted GMs above 20% so this will contribute much needed margin improvement in 2008. Additional contracts can be expected.
IPTV. This is definitely the company's brightest spot but it can also be the most frustrating because of the timing of revenues due to regulatory issues and content/usage/functionality situations in various countries. Currently, the company has over 600k subscribers and system capacity of over 1 million. Contracts are multi-year and all iptv projections (for both equipment and total revenues) are staggering to say the least. Here is where I believe the best opportunity for the company and more importantly the shareholders are right now. Because of all the previous past disappointments, lack of internal controls, lack of profits, declining PAS, etc, the market is so focused on the timing of these contracts and not the potential markets and UTs own position. Take the solar industry for example, companies are being valued for potential revenues in 2009, 2010 and beyond. Those companies are being given ALL the benefits of a declining dollar, higher oil prices, very high margins, unlimited demand, no supply etc. Bascially, stock valuations have gone up 10-20 fold in some cases. On the other hand, UT plugs along having won in MTNL and Bharti in India (with BSNL soon to follow), 18 deployments in China (60% market share), wins in Brazil, and Taiwan. In the latest Taiwan contract for example, the stock price actually dropped 3 cents. Why? During the last earnings call, Lu detailed the steps to recognize iptv revenue. The company gets a down payment but a majority of the revenues don't get recognized until full deployment or a year from signing. Of the $240m they have booked, only $80m have been signed. So, from this standpoint, you can see why the stock doesn't move a lot. However, these are the opportunities I am talking about. A year ago, there was no India, Brazil, Taiwan, and most China deployments were very early. The fact that industry is starting to open up and UT is winning are very important. The Taiwan contract for example is with one out of the three CABLE companies they are talking to. I don't think this model working with cable companies to augment their offering was discussed previously. In Taiwan alone, they are projecting having 1 million customers in 2009. With Markwell, they are anticipating shipping 500k STB in 2 years! That means UT is going to have huge market share in the country.
In Shanghai alone, they are projecting to have 500k subscribers by 2008. That is in Shanghai alone while winning another 200k contract to be the SOLE iptv provider in Fujian province. By next year, we will have to break down iptv deployments in China to the different cities/provinces. But the key take away is that with most revenue recognition so backended, it is good news that profitability may be expected in late 2008.
In summary, the stock price is reflecting the CB, the continued losses, PAS declines, and a lot of timing issues without regard for their assets, sale of non-core assets, explosive gains in worldwide iptv growth (specifically with UTs now confirmed position), growth in all the "startup" technologies they are still spending $160m in R&D (for years). So, you can look at the shareprice and relate to the negatives which are being dealt with or focus on the positives which are happening and will only get realized as we go forward. The same way with the highflyers of today. You can pay for their "expected" growth for the next 10 years or you can pay for almost $0 for UTs growth with significiant inital contracts already signed and the street not giving any credit for. I know where my money is on.
I'll be travelling to Southeast Asia tonight for vacation so have a wonderful holiday to everyone (ok.. inlcuding the shorts).
Saturday, December 22, 2007
Commentary of Fran Barton (UTs CFO) - Overpaid or Underpaid
As many know, during the last shareholder meeting, I was able to meet and talk with Fran Barton, UTs chief financial officer, and Peter Blackmore, UTs COO and designated future CEO. A lot of people on the message boards think that because of this meeting with Mr. Barton and Mr. Blackmore, that I have suddenly been brainwashed and support all their decisions. While it was a good opportunity to meet with them and discuss certain issues, the final judgement on their performance is the stock price. On this post, I wanted to highlight my thoughts on Mr. Barton just because of the upcoming convertible bond and the fact that he has been with the company for over 2 years.
For those that have followed the message board for some time, they know I have singled out Fran Barton ever since he started and even made a comparisson to UTs former CFO, Mike Sophie. http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=139373&mid=139373&tof=-1&rt=2&frt=2&off=1
People obviously don't have a good impression on any of the management based on the stock performance but Sophie was well versed with the company's operations and was even promoted to COO. But this is not a post to rehash problems with Sophie or even Barton but to discuss Mr. Barton's compensation and the critical resolution of the convertible bonds.
On top of Mr. Barton's pay in 2006, he received a "double bonus" for dealing with the internal investigations and now has a retention clause worth $10m over the next 4 years. There was even an earlier SEC filing that mentioned how important the key management to the success of the company. If you read the fine print on the bonuses, it is NOT tied to the company shareprice and the metrics are really very favorable to management (unfortunately for shareholders). It is very difficult for me or any shareholders to see the stock price near the all-time lows when their CFO is getting increasing salaries, yearly bonuses, and now retention bonuses. The "independent" compensation committee definitely is non-existent and I would love to be in management's position. Anyway, with that ugly background out of the way, Fran Barton can prove his worth to the company AND to the shareholders by resolving the convertible bonds in a way favorable to the shareholders (as he has mentioned plenty of times).
For 2007 alone, the stock price has dropped $6 or $720m in market cap. It is atleast $3 under book value with an enterprise/revenue ratio of 0.04. There are STILL over 30 million shares that are short. Even after being removed from the index where about 15 million shares exchanged hands, the number of shorts outstanding have remained very high at almost 30% of the outstanding shares. This is the immediate battleground that the shareholders are facing in the upcoming year. Barton does not have an easy job with the stock under $3 and they are in yet another "transition" period with the current credit environement and the expense intensive operations they are running. Nevertheless, they have adequate funds to pay off the entire loan or do a bridge loan for part of it. Selling part of the company by offering shares and diluting the current base is really unacceptable and not required. While the company has some cash requirements it has to maintain in China to satisfy Government requirements, they are nowhere near the financial institutions here that need to maintain triple A ratings and capital reserve requirements. Most of their $500m in cash over the last couple of years have been earning interest at 1.9%!
Going forward, the company will report financials for Q4 2007 and give their estimates for 2008. The outlook for 2008 will determine short term cash requirements and vitale for short term credit. This is where Barton's worth will be tested. He single handedly can resolve the CB issue by moving the timeline away to a much better credit situation. The shorts will not have the shares they are counting on to cover their positions. It will not dilute the current share price. On a side note, the other institutional longs that have gotten into redemption situation with owning UT should be in much better situations as well. It seems "obvious" to shareholders on what needs to be done.
Back to Fran Barton's compensation. Goldman Sachs CEO Lloyd Blankfein will get $68.5 m in bonuses while other CEOs will forgoe any bonuses. I would definitely like Mr. Barton's compensation tied to the shareprice but that is wishful thinking. Mr. Barton can prove his worth and more with the correct resolution of the convertible bond. We shareholders can talk about operational performance, iptv, window dressing, etc but the shareprice in 2008 is going to be driven to a large extent by the CB.
Mike Sophie raised a lot of money and did a lot of good for the company but that was during more favorable times. Fran Barton is faced with a much tougher scenario BUT a lower shareprice comes with much lower expectations and can be seen as a springboard to outsized gains. The next shareholder meeting with management will either be a major celebration or an even bigger train wreck. I hope I can tell Mr. Barton how underpaid he is and a job well done..........
For those that have followed the message board for some time, they know I have singled out Fran Barton ever since he started and even made a comparisson to UTs former CFO, Mike Sophie. http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=139373&mid=139373&tof=-1&rt=2&frt=2&off=1
People obviously don't have a good impression on any of the management based on the stock performance but Sophie was well versed with the company's operations and was even promoted to COO. But this is not a post to rehash problems with Sophie or even Barton but to discuss Mr. Barton's compensation and the critical resolution of the convertible bonds.
On top of Mr. Barton's pay in 2006, he received a "double bonus" for dealing with the internal investigations and now has a retention clause worth $10m over the next 4 years. There was even an earlier SEC filing that mentioned how important the key management to the success of the company. If you read the fine print on the bonuses, it is NOT tied to the company shareprice and the metrics are really very favorable to management (unfortunately for shareholders). It is very difficult for me or any shareholders to see the stock price near the all-time lows when their CFO is getting increasing salaries, yearly bonuses, and now retention bonuses. The "independent" compensation committee definitely is non-existent and I would love to be in management's position. Anyway, with that ugly background out of the way, Fran Barton can prove his worth to the company AND to the shareholders by resolving the convertible bonds in a way favorable to the shareholders (as he has mentioned plenty of times).
For 2007 alone, the stock price has dropped $6 or $720m in market cap. It is atleast $3 under book value with an enterprise/revenue ratio of 0.04. There are STILL over 30 million shares that are short. Even after being removed from the index where about 15 million shares exchanged hands, the number of shorts outstanding have remained very high at almost 30% of the outstanding shares. This is the immediate battleground that the shareholders are facing in the upcoming year. Barton does not have an easy job with the stock under $3 and they are in yet another "transition" period with the current credit environement and the expense intensive operations they are running. Nevertheless, they have adequate funds to pay off the entire loan or do a bridge loan for part of it. Selling part of the company by offering shares and diluting the current base is really unacceptable and not required. While the company has some cash requirements it has to maintain in China to satisfy Government requirements, they are nowhere near the financial institutions here that need to maintain triple A ratings and capital reserve requirements. Most of their $500m in cash over the last couple of years have been earning interest at 1.9%!
Going forward, the company will report financials for Q4 2007 and give their estimates for 2008. The outlook for 2008 will determine short term cash requirements and vitale for short term credit. This is where Barton's worth will be tested. He single handedly can resolve the CB issue by moving the timeline away to a much better credit situation. The shorts will not have the shares they are counting on to cover their positions. It will not dilute the current share price. On a side note, the other institutional longs that have gotten into redemption situation with owning UT should be in much better situations as well. It seems "obvious" to shareholders on what needs to be done.
Back to Fran Barton's compensation. Goldman Sachs CEO Lloyd Blankfein will get $68.5 m in bonuses while other CEOs will forgoe any bonuses. I would definitely like Mr. Barton's compensation tied to the shareprice but that is wishful thinking. Mr. Barton can prove his worth and more with the correct resolution of the convertible bond. We shareholders can talk about operational performance, iptv, window dressing, etc but the shareprice in 2008 is going to be driven to a large extent by the CB.
Mike Sophie raised a lot of money and did a lot of good for the company but that was during more favorable times. Fran Barton is faced with a much tougher scenario BUT a lower shareprice comes with much lower expectations and can be seen as a springboard to outsized gains. The next shareholder meeting with management will either be a major celebration or an even bigger train wreck. I hope I can tell Mr. Barton how underpaid he is and a job well done..........
Thursday, December 20, 2007
UT continues IPTV momentum with win in Taiwan. BSNL in India next?
One day after closing at the all-time low share price, UT unveiled the Asian iptv customer that they discussed during the last cc. The deployment in Taiwan is as follows:
"The Markwell contract includes system capacity for 500,000 RollingStream IPTV subscribers and 20,000 set-top boxes initially. Markwell plans to deploy an additional 480,000 RollingStream set-top boxes over the next two years."
http://biz.yahoo.com/prnews/071220/aqth130.html?.v=25
Based on previous discussions on pricing, this contract may yield $20-30m for the intial system setup (hardware+software) and another $3m for the first 20k STB. Maintenance and other revenues for the STB will come later. It normally takes them 3 to 6 months to recognize revenue so it will probably be in Q3 2008.
The deployment in Brazil was for an initial 10k subscribers and system capacity of 50k more so this Taiwan deployment is much larger.
Another PR this week was the official launched of BSNL's multiplay broadband Internet services in India. This was positive because (1) it showed there was no major glitches in this large scale deployment which UT spearheaded, (2) the company can recognize broadband revenue, and (3) can anticipate more expansion contracts in broadband and iptv.
A fellow shareholder (Nawar) posted this on BSNLs launch of iptv on Jan 1, 2008
http://www.telegraphindia.com/1071219/asp/calcutta/story_8670469.asp
After the first IPTV win in India from MTNL early this year, UT had mentioned expecting two more wins in India which turned out to be Bharti and now probably BSNL. Reliance in India is working with Microsoft/Alcatel for their iptv but it would seem that it should cost much more with the half a billion contract with Microsoft alone. I am not sure how Reliance can recoup their costs on that venture.
After iptv deployments in Japan, China, India, Brazil, Taiwan, other possible areas could be Chile, Philippines, Pakistan, Korea, and Mexico? Previous articles mentioned trials in 40+ other areas. Also, if more licenses are issued in China or some "city" starts deployment, then the iptv revenue numbers will start to become significant.
"The Markwell contract includes system capacity for 500,000 RollingStream IPTV subscribers and 20,000 set-top boxes initially. Markwell plans to deploy an additional 480,000 RollingStream set-top boxes over the next two years."
http://biz.yahoo.com/prnews/071220/aqth130.html?.v=25
Based on previous discussions on pricing, this contract may yield $20-30m for the intial system setup (hardware+software) and another $3m for the first 20k STB. Maintenance and other revenues for the STB will come later. It normally takes them 3 to 6 months to recognize revenue so it will probably be in Q3 2008.
The deployment in Brazil was for an initial 10k subscribers and system capacity of 50k more so this Taiwan deployment is much larger.
Another PR this week was the official launched of BSNL's multiplay broadband Internet services in India. This was positive because (1) it showed there was no major glitches in this large scale deployment which UT spearheaded, (2) the company can recognize broadband revenue, and (3) can anticipate more expansion contracts in broadband and iptv.
A fellow shareholder (Nawar) posted this on BSNLs launch of iptv on Jan 1, 2008
http://www.telegraphindia.com/1071219/asp/calcutta/story_8670469.asp
After the first IPTV win in India from MTNL early this year, UT had mentioned expecting two more wins in India which turned out to be Bharti and now probably BSNL. Reliance in India is working with Microsoft/Alcatel for their iptv but it would seem that it should cost much more with the half a billion contract with Microsoft alone. I am not sure how Reliance can recoup their costs on that venture.
After iptv deployments in Japan, China, India, Brazil, Taiwan, other possible areas could be Chile, Philippines, Pakistan, Korea, and Mexico? Previous articles mentioned trials in 40+ other areas. Also, if more licenses are issued in China or some "city" starts deployment, then the iptv revenue numbers will start to become significant.
Wednesday, December 19, 2007
All time closing low - letter to management
It is unfortunate to see the stock hit a new all-time closing low of $2.61 today. The market has been volatile and the year-end selling has pushed UT even lower. I sent an email to management to see if they would be willing to hold an update call or meet with shareholders. The company has done a much better job in communicating with shareholders the last few months but I am taking this "opportunity" now that the stock has hit another low to question management if there are plans to support/defend the stock if it goes any lower. Here is my letter:
Dear Sirs,
Today, the stock closed at $2.61, the lowest closing price in the history of the company and 12% lower compared to 3 weeks ago during the shareholder meeting. While I appreciate the efforts for turning the company around in the long term, I would like to know what (if any) plans does management have to defend the stock price in the short term if it goes lower. Is there any price point that you would consider low enough to prompt a response from management.
I know there are a lot of issues that you have to deal with in the short term such as (1) selling holdings (Gemdale/Infinera), (2) finalizing/implementing cost savings plan, (3) closing the quarter, (4) planning for the convertible bonds, (5) working on/negotiating future contracts, and others. However, the current share price is at a point that I believe deserves your attention, We could all wait for possible further share price deterioration but I think that is unfair to all shareholders and that your responsibility is also to address the share price as it goes lower. I understand your position for focusing on running the business but as I’ve mentioned before, the share price cannot be avoided. I would like to ask if you would be willing to schedule a conference call to update shareholders or to meet with shareholders in Alameda early next year.
Dear Sirs,
Today, the stock closed at $2.61, the lowest closing price in the history of the company and 12% lower compared to 3 weeks ago during the shareholder meeting. While I appreciate the efforts for turning the company around in the long term, I would like to know what (if any) plans does management have to defend the stock price in the short term if it goes lower. Is there any price point that you would consider low enough to prompt a response from management.
I know there are a lot of issues that you have to deal with in the short term such as (1) selling holdings (Gemdale/Infinera), (2) finalizing/implementing cost savings plan, (3) closing the quarter, (4) planning for the convertible bonds, (5) working on/negotiating future contracts, and others. However, the current share price is at a point that I believe deserves your attention, We could all wait for possible further share price deterioration but I think that is unfair to all shareholders and that your responsibility is also to address the share price as it goes lower. I understand your position for focusing on running the business but as I’ve mentioned before, the share price cannot be avoided. I would like to ask if you would be willing to schedule a conference call to update shareholders or to meet with shareholders in Alameda early next year.
Sunday, December 16, 2007
Motorola, Palm, and UTs PCD
I was reading the Thursday edition (12/13/07) of the Wall Street Journal and came across a couple of articles regarding Motorola and Palm that were related to UT's PCD and the company in general.
UT has designated the personal communications division (PCD) as none-core and the consensus is this will be sold off/spun off in the future to generate cash and refocus the company to its core networking divisions. During the shareholder meeting, some shareholders asked Hong Lu why it even bought the PCD back in 2004. Hong gave a quick history and mentioned that UT was the biggest handset maker in China previously and that they could leverage the Audiovox division and their own division. A fellow shareholder Nawar has given a good historical perspective on the PCD performance the last few years: http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=147623&mid=147657&tof=1&rt=2&frt=2&off=1
Anyway, how much can the company get for this division if it were to sell it? Here is a base reference from their 2004 purchase: http://utstarcom-stocknews.blogspot.com/2007/11/link-to-uts-audiovox-buy-in-jue-2004.html Based on rev/margin improvements, people are speculating that it could bring in $200-300m or more.
Here is where the Motorola article comes in. Carl Icahn has amassed a 3.3% holding in Motorola and wants to sell Motorola's handset division to release shareholder value (sound familiar :-). Based on Icahn's estimates, the handset division is being valued at $0 right now but should fetch one times yearly revenue of $20billion. Nokia is trading at about 2x yearly revenue. Analysts actually agree with Icahn but notes they have to fix certain problems before it can yield the desired value. The valuations (1x-2x revenue) are not applicable to UTs case because the majority of its handsets are resale/distribution and they don't have anywhere near the margins or brand recognition of Motorola or Nokia. In any case, the takeaway is even Motorola's handset division may be for sale.
There is also the confusion about UTs PCD because it has its own internally designed phones with higher margin and expenses plus the distribution part with higher rev/low expenses. Based on conversations with Barton/Blackmore, my impression is there is no immediate sale and that if any sales comes about, it will only be the distribution part. Let me say that this is just my feeling and I could be way off. Other knowledgable posters may shed more info if this makes sense or not. Anyway, even with the Motorola sale, there is the added problem of the current credit markets. The good thing for UT is that they are the smaller sized handset provider so it is more affordable and anyone that picks up the Motorola handset may just make a clean sweep to eliminate competition. Also, other smaller players that produce generic handsets can decide they only want UTs distribution portion.
What about the Palm article? Palm recently hired Apple's "podfather" Jon Rubinstein to revamp their own operations. Ruinstein has been on the job since July and has been putting in 70-hour weeks (Blackmore came in at the same time). I believe Palm is even in worse situation than UTStarcom. They have less share in their markets, as strong competition as any (heard of Apple and Research in Motion), and have declining revs/demand for their own products (their share of the smartphone market has gone down from 5.4% to 3.6% ouch!). It will also take them 18 months to develop new phones from scratch! UT on the other hand is incresing revs in India, iptv, and other lines of businesses.
One positive about Rubinstein is that 1 million of his stock options are tied to the company's stock hitting 50 to 200% above their grant date. This sounds good from a shareholder perspective but it didn't say how many OTHER options/shares/compensation he got. Anyway, both are turnaround stories but it seems to me UT has a larger chance to turn it around just based on their more diverse businesses, explosive growing and target markets. They have a larger expense ratio so there is that risk but that can be cut anytime as things change.
Another final take away is that other companies are not doing well also. This doesn't fully excuse management's performance but it is a tough environment that they have to navigate through. I feel UTs chances are very good for a turnaround given that they have been doing this for years now and have maintained or increasing their market share even now. A lot of UTs competitiors are also pulling back from certain markets while Nokia, Apple, and Research in Motion continue to assault Motorola and Palms markets. Anyway, its some consolation and things to think about.
UT has designated the personal communications division (PCD) as none-core and the consensus is this will be sold off/spun off in the future to generate cash and refocus the company to its core networking divisions. During the shareholder meeting, some shareholders asked Hong Lu why it even bought the PCD back in 2004. Hong gave a quick history and mentioned that UT was the biggest handset maker in China previously and that they could leverage the Audiovox division and their own division. A fellow shareholder Nawar has given a good historical perspective on the PCD performance the last few years: http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=147623&mid=147657&tof=1&rt=2&frt=2&off=1
Anyway, how much can the company get for this division if it were to sell it? Here is a base reference from their 2004 purchase: http://utstarcom-stocknews.blogspot.com/2007/11/link-to-uts-audiovox-buy-in-jue-2004.html Based on rev/margin improvements, people are speculating that it could bring in $200-300m or more.
Here is where the Motorola article comes in. Carl Icahn has amassed a 3.3% holding in Motorola and wants to sell Motorola's handset division to release shareholder value (sound familiar :-). Based on Icahn's estimates, the handset division is being valued at $0 right now but should fetch one times yearly revenue of $20billion. Nokia is trading at about 2x yearly revenue. Analysts actually agree with Icahn but notes they have to fix certain problems before it can yield the desired value. The valuations (1x-2x revenue) are not applicable to UTs case because the majority of its handsets are resale/distribution and they don't have anywhere near the margins or brand recognition of Motorola or Nokia. In any case, the takeaway is even Motorola's handset division may be for sale.
There is also the confusion about UTs PCD because it has its own internally designed phones with higher margin and expenses plus the distribution part with higher rev/low expenses. Based on conversations with Barton/Blackmore, my impression is there is no immediate sale and that if any sales comes about, it will only be the distribution part. Let me say that this is just my feeling and I could be way off. Other knowledgable posters may shed more info if this makes sense or not. Anyway, even with the Motorola sale, there is the added problem of the current credit markets. The good thing for UT is that they are the smaller sized handset provider so it is more affordable and anyone that picks up the Motorola handset may just make a clean sweep to eliminate competition. Also, other smaller players that produce generic handsets can decide they only want UTs distribution portion.
What about the Palm article? Palm recently hired Apple's "podfather" Jon Rubinstein to revamp their own operations. Ruinstein has been on the job since July and has been putting in 70-hour weeks (Blackmore came in at the same time). I believe Palm is even in worse situation than UTStarcom. They have less share in their markets, as strong competition as any (heard of Apple and Research in Motion), and have declining revs/demand for their own products (their share of the smartphone market has gone down from 5.4% to 3.6% ouch!). It will also take them 18 months to develop new phones from scratch! UT on the other hand is incresing revs in India, iptv, and other lines of businesses.
One positive about Rubinstein is that 1 million of his stock options are tied to the company's stock hitting 50 to 200% above their grant date. This sounds good from a shareholder perspective but it didn't say how many OTHER options/shares/compensation he got. Anyway, both are turnaround stories but it seems to me UT has a larger chance to turn it around just based on their more diverse businesses, explosive growing and target markets. They have a larger expense ratio so there is that risk but that can be cut anytime as things change.
Another final take away is that other companies are not doing well also. This doesn't fully excuse management's performance but it is a tough environment that they have to navigate through. I feel UTs chances are very good for a turnaround given that they have been doing this for years now and have maintained or increasing their market share even now. A lot of UTs competitiors are also pulling back from certain markets while Nokia, Apple, and Research in Motion continue to assault Motorola and Palms markets. Anyway, its some consolation and things to think about.
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