How difficult is it to compete with ZTE in the international markets?
A quick background of the "size" of ZTE,
"First, as a global enterprise and China's only publicly listed telecommunication supplier both in Hong Kong and Shen Zhen, ZTE has made great achievements in business growth during the year 2007. The turnover of the first 3 quarters has increased 47%, and the annual profits are expected to increase by 50-70% in fiscal year 2007. ZTE has set its goal of $10 billion US dollars for global sales in 2008."
http://www.abs-cbnnews.com/storypage.aspx?StoryId=109164
Currently, there is a major bribery scandal in the Philippines involving ZTE and Philippine governement officials (all the way to the President's husband).
"The Philippine government in April 2007 awarded CTE a US$300 million-contract to build a broadband network to connect all government agencies and offices across the country. The project was later scrapped after allegations emerged that the deal had benefited high-ranking officials through commissions and kickbacks."
http://www.businessweek.com/globalbiz/content/feb2008/gb20080220_073482.htm?campaign_id=rss_daily
The Chinese government was going to loan the entire amount of the contract with loan payments not starting until 2012.
http://www.gmanews.tv/story/61876/Arroyo-Bribery-talk-over-ZTE-deal-was-uncorroborated
There are now hearings into this matter and officials from ZTE and the Chinese government are being called to testify. Obviously, they are refusing and instead using the massive trade between the two countries as leverage and instead trying to turn it around and saying this will discourage trade between foreign countries and the Philippines.
That is a tough situation for UTStarcom to compete against. The shear size of ZTE ($10b in revs and the backing/credit of the Chinese government) make it almost unsurmountable. However, they have managed to win at PLDT and is even using this as a showcase to win more projects in the region (and even in Italy with Tiscali very recently). Hopefully, these cases of corruption against ZTE will help UT in securing more wins as governments avoid the potential controversy in dealing with Chinese backed companies.
With the current very succesful PLDT win at hand, UT should go after the National Broadband Network (NBN) and Cyber Education Projects (CEP) in the Philippines that ZTE did not get and involved in the scandal. This is another discussion point we can bring up during the meeting with management.
Sunday, March 2, 2008
Saturday, March 1, 2008
Q4 2007 results and 2008 outlook
This latest earnings call will be remembered as the time the company paid down their entire convertible bond debt + interest, a whopping $289 million using existing funds from the US and those transferred from China.
While I am happy that they chose to pay it off completely, it does raise the question, why they didn't do this LAST year? Why pay the additional $22 million in interest payments on top of the $14 million in regular interest. I know they got lucky with the gemdale/infenera ($90+ million take) but was it worth having the CB cloud hang over shareholders who were peppered with endless PRs regarding defaults and uncertainties. I know market conditions change but paying $36 Million in interest payments last year is ridiculous and shows a lack of planning to resolve this. They could have easily saved half the interest payments and transferred China funds years ago.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=150000&mid=150000&tof=46&frt=2
After listening to the conference call twice and jotting my notes, there were some negatives but overall one of the most positive calls over the last 3 years and basically solidifies the longterm case for buying UTStarcom.
Peter Blackmore discussed the various business units, Hong Lu talked about China progress, and Fran Barton recapped Q4 numbers and outlook for 2008.
As you many know, there are six business units. The multi-media communications business unit (MCBU) includes IP-based technology and soft-switch related items such as IPTV, Next Generation Networks (NGN) and PAS.
Late in Q4, Tiscali of Italy decided to replace all of their TDM switching network with UTs MSAN equipment. This is a huge strategic win and being implemented already. Blackmore also mentioned recent wins in Taiwan, Brazil (Brazil Telecom), Thailand (TOT), and Argentina (Nextel) and feels that UT has the best soft-switch technology in the market.
IPTV- Currently over 750k subscribers, up from 600k late last year. That is huge growth of 25% in a little over 2 months. Aside from wins/expansions in China, they won in Taiwan (Markwell cable), Sri Lanka Telecom (SLT) and a new customer in India. Rollouts will predominantly start in Q2 and there is the usual 6-9 month revenue lag so these are nice strategic wins. Market share in IPTV in China is greater than 65% and well over 80% in India. More info from Lu in China but momentum is growing and there are lots of "activity" in this area. IP Surveilance (2 wins in China, more from Lu later on).
For this division (IPTV/NGN), Peter mentions "Booking can ramp up fast" and revenue growth will in greater than 80% for 2008. The MCBU will have flat revenues due to the decline in PAS. Gross margins will be 35-40% (including STB). Overall, the revenue bookings have caught up to PAS decline, which is good news. Seventy percent of the revenues planned are already supported by existing bookings which give them greater certainty for 2008.
Broadband Business Unit (BBU)- This includes IP-DSLAM, IAN8000, GEPON, and Netring. This will have 15-20% revenue growth in 2008 and support triple/quadruple play buildouts using both copper/fiber. UT is one of top 5 vendors in GEPON worldwide. Netring is the optical product that is already in 3rd generation. Gross margins are going to be above 20% for every quarter in 2008. This is key because GMs are sometimes negative in 2007 with writedowns for poor performance previously. Thirty percent of the revenue planned has alreadyy been booked.
Services Unit- Flat revenues are expected for 2008 with 30% GMs. This is expectated to ramp in the following years due to the new equipment being installed with new customers in 2008 and beyond.
Terminals Business Unit (TBU) - Supports handset business (CDMA and PAS). Overall growth of 15% in 2008. Looking for additional growth in WCDMA and in area in telematics (won some initial contracts in automobile industry). GMs in low 20s range.
Customs Solutions Business Unit (CSBU) - Mostly includes technogy acquired from 3coms Commworks unit. This includes IP-based messaging and transaction products. Revenue is expected to double to $40m with GMs above 50%. This unit is also expected to be profitable in 2008. Blackmore mentioned some of the "none-core" assets are becoming very attractive and this along with the PCD definitely fits the bill. What is this business unit worth alone? The company paid $100m to 3com a few years ago and has finally gotten this to profitability this year and growing very fast. This alone could be worth close to $80m-$100m if sold (based on 2-2.5x revenue for this type of business - check Starent/Infinera for valuations).
Mobile Solutions Business Unit (MSBU) - This includes the moving media 9000 and supports IPCDMA, GSM solutions. Growth is in the 30% and gross margins in the 40s in 2008.
Note that the CSBU and MSBU are consolidated in the "other category".
PCD - "Continues to exceed expectations." Three new smart phones released including a touch screen phone in Sprint, ultra slim phone (1450 model metro pcs), and refresh of the Gzone phone (verizon). Shipped 2.8 million units and had record quarterly revenue of $560m with 6.2% GMs, (wow). Twenty five percent of units are internally made UT handsets.
Supply Chain comment - outsourcing of terminals business and improved inventory turns (improve by 35%). Overall margin improvement of 3%.
Peter summarizes (like a CEO) that they are focusing on building their core businesses and manage/divest none-core to benefit shareholder value.
Hong Lu followed with a China update. Recently, China regulatory change - Both telecom/broadcom operators can compete in each others field. CT/CN may be able to offer iptv freely throughout China. This is big news if indeed interpreted this way. Lu gave an update on iptv demand. STB shipments signficantly jumped in January to a 60k/month run rate from 20k/month late last year. Currently, it is at 40k/month. While the regulatory issue is not clearly resolved, CT/CN is ramping up iptv and has made it a priority for 2008. Hong stated that China iptv subscribers are about 500k at the end of January so China is the main growth driver for the company (as we know). China bookings is also expected to ramp up this year and will translate into major revenue streams in 2009 and beyond (as we have hoped for a long time).
Here is Tigre's posting regarding this topic this morning.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=150092&mid=150092&tof=3&frt=2
A second major change is the long talked about reorganization in the China telecom industry (probably as long awaited as 3G licenses). Anyway, the reorganization will probably have 3 major carriers with China Mobile, China Telecom, and China Unicom. Impact to UT is downward pressure on PAS. On the bright side, it will allow UT to sell CDMA handsets and broaden their customer base (since they can all compete in fix and mobile markets). Hong also mentioned packet mode technology is compelling since it has faster data rates than current CDMA/GSM data rates.
PAS gained market share in Q4 and early 2008 by switching to distribution model from direct sales model.
IPTV will take time to mature. I believe LU is being cautious to mention that it has not openned up completely and obviously it is just at the beginning. 70% market share (slightly higher than what Peter said).
IP survielance wins and Tunchin and Hangchou. Additional opportunities in government and health departments.
Using iptv to get into enterprise and advertising markets.
Upgrading PAS soft switch to release 5 and improving opportunities broadband access. and optical networks. Increased employee morale and higher business activity in China even with the Q4 restructuring. Government representatives/customer visited UT to show support.
Fran Barton discussed liquidity and financial results. Convertible notes due on March 1 was paid completely ("successfully"....hmmmm, not sure about that).
Going concern modification seemed very negative but is really based on historical actions. The company drained a ton of cash by paying the CB ($289m) and $92m for other short term debt.
The company is taking steps such as (1) Q4 restructuring, (2) refocu direct sales efforts to productive areas, (3) using OEM, (4) reducing inventory via improved supply chain/outsourcing, (5) potential sales of non-core assets (active ongoing discussions), (6) license/sale of patents, (7) additional lines of credits (public/private financing), and additional reductions.
At year end 2007, Cash/short term securities was $503m and $320m in debt. This is net $180m in cash. Currently, they have $228m in cash and only $48m in debt. Comment: Debt to equity ratio is down to less than 0.1. If they can sell additional assets or drive to profitability soon, the valuations start becoming very apparent.
Here is a summary of revenue in the business units in Q4, Q3 revenue comparison.
MCBU - $118m , 57m
BBU - $51m, 41m
TBU - $43m, $59m
CSBU - $6m, $2m
MSU - $1m, $10m
Service - $18m, $19m
PCD - $560m, $458m
Book to Bill was 0.8 - not bad considering the 25% increase in revenue from Q3 and traditionally strong revenue recognition in Q4.
GMs for business units (see filing)
Bad news - OPEX was $155m due to restructuring, non-cash impairments, and New taxes in China for Gemdale sale and other income taxes. The GMs for BBU was also negative with an $8m loss provision in India. I think the reason Barton did not preannounce was also because of these "hidden" negatives. While there is a lot of positives, its these kinds of things that make the market think twice. Heman Chou, one of the analysts asking a question asked Barton last quarter if there was any more write downs and Barton said no (my recollection). Barton NOW says he hopes he did not say anything foolish like that, but he did say no more writedowns last quarter and now this again.
2008 preliminary guidance - 3 to 6% revenue growth. This is above any estimates that I have seen specially on top of the $160m higher Q4 2007 revenue reported. GMs of 14 to 16% is what I expected. It is good in that BBU GMs are going to be above 20% every quarter (if there is no more surprises). Expenses for the first couple of quarters are still $115-120m (this is disappointing). For the back half of 2008, expenses will be under $110m (Barton mentioned the company would like it to be lower and KNOWS it has to be lower).
I will post again later regarding GMs of BUs and more anlaysis on 2008 and some of the Q&A, which had a lot of info.
Overall, very good call for 2008, and potentailly GREAT 2009. For the next 3 months, I would say neutral because Q1 is going to be worse and then things will start to improve dramatically. Based on the report and new items, I have much more questions and data to discuss with management in two weeks. I'll definitely circulate those thoughts to the group and we may have another shareholder cc before meeting with management.
While I am happy that they chose to pay it off completely, it does raise the question, why they didn't do this LAST year? Why pay the additional $22 million in interest payments on top of the $14 million in regular interest. I know they got lucky with the gemdale/infenera ($90+ million take) but was it worth having the CB cloud hang over shareholders who were peppered with endless PRs regarding defaults and uncertainties. I know market conditions change but paying $36 Million in interest payments last year is ridiculous and shows a lack of planning to resolve this. They could have easily saved half the interest payments and transferred China funds years ago.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=150000&mid=150000&tof=46&frt=2
After listening to the conference call twice and jotting my notes, there were some negatives but overall one of the most positive calls over the last 3 years and basically solidifies the longterm case for buying UTStarcom.
Peter Blackmore discussed the various business units, Hong Lu talked about China progress, and Fran Barton recapped Q4 numbers and outlook for 2008.
As you many know, there are six business units. The multi-media communications business unit (MCBU) includes IP-based technology and soft-switch related items such as IPTV, Next Generation Networks (NGN) and PAS.
Late in Q4, Tiscali of Italy decided to replace all of their TDM switching network with UTs MSAN equipment. This is a huge strategic win and being implemented already. Blackmore also mentioned recent wins in Taiwan, Brazil (Brazil Telecom), Thailand (TOT), and Argentina (Nextel) and feels that UT has the best soft-switch technology in the market.
IPTV- Currently over 750k subscribers, up from 600k late last year. That is huge growth of 25% in a little over 2 months. Aside from wins/expansions in China, they won in Taiwan (Markwell cable), Sri Lanka Telecom (SLT) and a new customer in India. Rollouts will predominantly start in Q2 and there is the usual 6-9 month revenue lag so these are nice strategic wins. Market share in IPTV in China is greater than 65% and well over 80% in India. More info from Lu in China but momentum is growing and there are lots of "activity" in this area. IP Surveilance (2 wins in China, more from Lu later on).
For this division (IPTV/NGN), Peter mentions "Booking can ramp up fast" and revenue growth will in greater than 80% for 2008. The MCBU will have flat revenues due to the decline in PAS. Gross margins will be 35-40% (including STB). Overall, the revenue bookings have caught up to PAS decline, which is good news. Seventy percent of the revenues planned are already supported by existing bookings which give them greater certainty for 2008.
Broadband Business Unit (BBU)- This includes IP-DSLAM, IAN8000, GEPON, and Netring. This will have 15-20% revenue growth in 2008 and support triple/quadruple play buildouts using both copper/fiber. UT is one of top 5 vendors in GEPON worldwide. Netring is the optical product that is already in 3rd generation. Gross margins are going to be above 20% for every quarter in 2008. This is key because GMs are sometimes negative in 2007 with writedowns for poor performance previously. Thirty percent of the revenue planned has alreadyy been booked.
Services Unit- Flat revenues are expected for 2008 with 30% GMs. This is expectated to ramp in the following years due to the new equipment being installed with new customers in 2008 and beyond.
Terminals Business Unit (TBU) - Supports handset business (CDMA and PAS). Overall growth of 15% in 2008. Looking for additional growth in WCDMA and in area in telematics (won some initial contracts in automobile industry). GMs in low 20s range.
Customs Solutions Business Unit (CSBU) - Mostly includes technogy acquired from 3coms Commworks unit. This includes IP-based messaging and transaction products. Revenue is expected to double to $40m with GMs above 50%. This unit is also expected to be profitable in 2008. Blackmore mentioned some of the "none-core" assets are becoming very attractive and this along with the PCD definitely fits the bill. What is this business unit worth alone? The company paid $100m to 3com a few years ago and has finally gotten this to profitability this year and growing very fast. This alone could be worth close to $80m-$100m if sold (based on 2-2.5x revenue for this type of business - check Starent/Infinera for valuations).
Mobile Solutions Business Unit (MSBU) - This includes the moving media 9000 and supports IPCDMA, GSM solutions. Growth is in the 30% and gross margins in the 40s in 2008.
Note that the CSBU and MSBU are consolidated in the "other category".
PCD - "Continues to exceed expectations." Three new smart phones released including a touch screen phone in Sprint, ultra slim phone (1450 model metro pcs), and refresh of the Gzone phone (verizon). Shipped 2.8 million units and had record quarterly revenue of $560m with 6.2% GMs, (wow). Twenty five percent of units are internally made UT handsets.
Supply Chain comment - outsourcing of terminals business and improved inventory turns (improve by 35%). Overall margin improvement of 3%.
Peter summarizes (like a CEO) that they are focusing on building their core businesses and manage/divest none-core to benefit shareholder value.
Hong Lu followed with a China update. Recently, China regulatory change - Both telecom/broadcom operators can compete in each others field. CT/CN may be able to offer iptv freely throughout China. This is big news if indeed interpreted this way. Lu gave an update on iptv demand. STB shipments signficantly jumped in January to a 60k/month run rate from 20k/month late last year. Currently, it is at 40k/month. While the regulatory issue is not clearly resolved, CT/CN is ramping up iptv and has made it a priority for 2008. Hong stated that China iptv subscribers are about 500k at the end of January so China is the main growth driver for the company (as we know). China bookings is also expected to ramp up this year and will translate into major revenue streams in 2009 and beyond (as we have hoped for a long time).
Here is Tigre's posting regarding this topic this morning.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=150092&mid=150092&tof=3&frt=2
A second major change is the long talked about reorganization in the China telecom industry (probably as long awaited as 3G licenses). Anyway, the reorganization will probably have 3 major carriers with China Mobile, China Telecom, and China Unicom. Impact to UT is downward pressure on PAS. On the bright side, it will allow UT to sell CDMA handsets and broaden their customer base (since they can all compete in fix and mobile markets). Hong also mentioned packet mode technology is compelling since it has faster data rates than current CDMA/GSM data rates.
PAS gained market share in Q4 and early 2008 by switching to distribution model from direct sales model.
IPTV will take time to mature. I believe LU is being cautious to mention that it has not openned up completely and obviously it is just at the beginning. 70% market share (slightly higher than what Peter said).
IP survielance wins and Tunchin and Hangchou. Additional opportunities in government and health departments.
Using iptv to get into enterprise and advertising markets.
Upgrading PAS soft switch to release 5 and improving opportunities broadband access. and optical networks. Increased employee morale and higher business activity in China even with the Q4 restructuring. Government representatives/customer visited UT to show support.
Fran Barton discussed liquidity and financial results. Convertible notes due on March 1 was paid completely ("successfully"....hmmmm, not sure about that).
Going concern modification seemed very negative but is really based on historical actions. The company drained a ton of cash by paying the CB ($289m) and $92m for other short term debt.
The company is taking steps such as (1) Q4 restructuring, (2) refocu direct sales efforts to productive areas, (3) using OEM, (4) reducing inventory via improved supply chain/outsourcing, (5) potential sales of non-core assets (active ongoing discussions), (6) license/sale of patents, (7) additional lines of credits (public/private financing), and additional reductions.
At year end 2007, Cash/short term securities was $503m and $320m in debt. This is net $180m in cash. Currently, they have $228m in cash and only $48m in debt. Comment: Debt to equity ratio is down to less than 0.1. If they can sell additional assets or drive to profitability soon, the valuations start becoming very apparent.
Here is a summary of revenue in the business units in Q4, Q3 revenue comparison.
MCBU - $118m , 57m
BBU - $51m, 41m
TBU - $43m, $59m
CSBU - $6m, $2m
MSU - $1m, $10m
Service - $18m, $19m
PCD - $560m, $458m
Book to Bill was 0.8 - not bad considering the 25% increase in revenue from Q3 and traditionally strong revenue recognition in Q4.
GMs for business units (see filing)
Bad news - OPEX was $155m due to restructuring, non-cash impairments, and New taxes in China for Gemdale sale and other income taxes. The GMs for BBU was also negative with an $8m loss provision in India. I think the reason Barton did not preannounce was also because of these "hidden" negatives. While there is a lot of positives, its these kinds of things that make the market think twice. Heman Chou, one of the analysts asking a question asked Barton last quarter if there was any more write downs and Barton said no (my recollection). Barton NOW says he hopes he did not say anything foolish like that, but he did say no more writedowns last quarter and now this again.
2008 preliminary guidance - 3 to 6% revenue growth. This is above any estimates that I have seen specially on top of the $160m higher Q4 2007 revenue reported. GMs of 14 to 16% is what I expected. It is good in that BBU GMs are going to be above 20% every quarter (if there is no more surprises). Expenses for the first couple of quarters are still $115-120m (this is disappointing). For the back half of 2008, expenses will be under $110m (Barton mentioned the company would like it to be lower and KNOWS it has to be lower).
I will post again later regarding GMs of BUs and more anlaysis on 2008 and some of the Q&A, which had a lot of info.
Overall, very good call for 2008, and potentailly GREAT 2009. For the next 3 months, I would say neutral because Q1 is going to be worse and then things will start to improve dramatically. Based on the report and new items, I have much more questions and data to discuss with management in two weeks. I'll definitely circulate those thoughts to the group and we may have another shareholder cc before meeting with management.
Sunday, February 24, 2008
Expenses and mandate of the exploratory group
The last profitable quarter was in early 2005 but that was due to recognizing the huge $290m Japan Telecom contract. The last profitable year was way back in 2004. It will be late 2008 or even early 2009 before the company can even get back to profitability and may take up to 2010 for full year profitability according to some analysts and projections.
One of the main obstacles getting to profitability is expense control during the last few years. While there is no question the PAS downturn and lag in other products have contributed significantly to losses, expenses have not come close into being in line with the revenue losses. During the last earnings call, Peter Blackmore put up some target expense ratios to return the company to profitability. He based this on the core revenues, which investors have been hoping the company would do for a while.
From the earnings transcripts which I encourage people to read before the next call,
"The model for our R&D is between 10-11% of our revenue, excluding PCD. We believe this is a reasonable ratio for an infrastructure business. The SG&A model is between 13-14%, excluding PCD. Excluding PCD revenues is the right way of looking at our cost base, as PCD is a stand alone business."
Peter adds: "They will all get to benchmark by end of 2008."
http://seekingalpha.com/article/53890-utstarcom-q3-2007-earnings-call-transcript?source=yahoo&page=2
If that was the case, and the company returns to profitability by end of 2008/start of 2009, the share price today should be at the minimum $5/share or a $600m market cap (an amount close to shareholder equity at the end of 2008). But, the stock is still under $3 and target prices for the next 6-12 months are $3-3.5. Why? The street simply does not believe the company can get to these benchmarks.
Lets look at the previous years expenses/revenues and an estimated expense/revenue based on CSFB report.
http://tim94305.googlepages.com/Ratios.pdf
The last time that the company had expense ratios that are what Peter is targetting is back in 2004, the last profitable year (and a very profitable year to boot). Ever since then, the ratios have ballooned to 42% and 23% for SG&A and R&D respectively at the end of 2007. Even if I factored in revenue from 30% of the PCD, the ratios stand at 26 & 14%. Now, this does not include the cost cut benefits and other expenses that will not be incurred in 2008. With the higher revenue projections/lower costs, the expense ratios will still be 22 and 12% for 2008, far higher than the 13.5 and 11.5% target expense ratios. Of course, Peter could be targetting the traditionally higher Q4 2008 to reach his metrics but obviously, this needs to be sustainable as well.
Lets go back to the PCD. If they are truly an infrastructure company, and I still include PAS handsets but completely exclude PCD revs, then core revenue based on SG&A (at 13.5%) would be over $2b, which is almost 3x projected revs in 2008. Core revenues based on R&D (at 11.5%) would be $1.36b., which is more reasonably attained. What this shows is that SG&A is simply too much. I don't have as much of a problem with R&D expenses as I believe the core revs from broadband and iptv will significantly ramp in 2009 (book to bill in 2008 should confirm this). Anyway, management has to signficantly continue to slash SG&A in 2008. It should not be a moderate cut but a signficant cut.
Some additional comments and conclusions.
1. Management should break down book to bill for PCD and non-PCD going forward.
2. The PCD is a huge asset right now but the company needs to reduce expenses and not play around with the ratios as part of the PCD. Barton mentioned that there is minimal R&D/SG&A related to the PCD in the terminals business unit. This highlights that SG&A is WAY too much.
3. Most of the core revenue growth will come from iptv/India broadband for now.
4. What has the R&D over the last few years yielded? Most of the core revenue still comes from PAS, and some iptv/wireless, which were mostly paid for 5 years ago. Lu mentioned he is working on "broadband access products, GEPON and Optical transport" in China. There has been mention of wimax, ip surveilance, base stations in the US, submarine/emergency applications, fixed mobile convergence, etc. However, has someone done an evaluation of the revenues/profits these new technologies are bringing in compared to the $1b they have probably spent in the last 5 years?
These are fundamental questions that need to be answered by management and the BOD.
Even if there is an explosion in iptv in 2008 and beyond, there has to be an accounting on research and SG&A going forward. The PCD has performed very well but it should not be counted on for running an infrastructure business. Without the PCD in 2008, the company would lose $200m. There is no liquidity problems even with the upcoming CB because of their signficant inventory (over $600m) and cash/short term securities ($600m). The question in the future is whether the next surge (in iptv) will make the company just breakeven/slightly profitable or VERY profitable, which is what I hope this company has been spending for the last 5 years.
For some people, this continues to be a long term proposition which they expect to be a huge winner. However, there has to be a thorough evaluation of shareholder value here at this stage, which the group is trying to address with management.
If the company cannot control and slash their expenses and get to very profitable status, and if management feels they have to spend so much to compete and maintain their technology, then it may be time to plan for strategic alternatives during the next upturn and not wait until the next downturn.
I have listened to both longtime shareholders and their wish to give the company time and I have listed to the shareholders who want immediate change. I hope both sides can see that it is not an easy black/white situation here but one thing is for sure, the current shareprice and performance is not acceptable. Management has been saying this for years as well but have been unable/unwilling to get the job done. This is where shareholders and this group has come in and thats why it will need to be a sustainable effort on our part as well.
One of the main obstacles getting to profitability is expense control during the last few years. While there is no question the PAS downturn and lag in other products have contributed significantly to losses, expenses have not come close into being in line with the revenue losses. During the last earnings call, Peter Blackmore put up some target expense ratios to return the company to profitability. He based this on the core revenues, which investors have been hoping the company would do for a while.
From the earnings transcripts which I encourage people to read before the next call,
"The model for our R&D is between 10-11% of our revenue, excluding PCD. We believe this is a reasonable ratio for an infrastructure business. The SG&A model is between 13-14%, excluding PCD. Excluding PCD revenues is the right way of looking at our cost base, as PCD is a stand alone business."
Peter adds: "They will all get to benchmark by end of 2008."
http://seekingalpha.com/article/53890-utstarcom-q3-2007-earnings-call-transcript?source=yahoo&page=2
If that was the case, and the company returns to profitability by end of 2008/start of 2009, the share price today should be at the minimum $5/share or a $600m market cap (an amount close to shareholder equity at the end of 2008). But, the stock is still under $3 and target prices for the next 6-12 months are $3-3.5. Why? The street simply does not believe the company can get to these benchmarks.
Lets look at the previous years expenses/revenues and an estimated expense/revenue based on CSFB report.
http://tim94305.googlepages.com/Ratios.pdf
The last time that the company had expense ratios that are what Peter is targetting is back in 2004, the last profitable year (and a very profitable year to boot). Ever since then, the ratios have ballooned to 42% and 23% for SG&A and R&D respectively at the end of 2007. Even if I factored in revenue from 30% of the PCD, the ratios stand at 26 & 14%. Now, this does not include the cost cut benefits and other expenses that will not be incurred in 2008. With the higher revenue projections/lower costs, the expense ratios will still be 22 and 12% for 2008, far higher than the 13.5 and 11.5% target expense ratios. Of course, Peter could be targetting the traditionally higher Q4 2008 to reach his metrics but obviously, this needs to be sustainable as well.
Lets go back to the PCD. If they are truly an infrastructure company, and I still include PAS handsets but completely exclude PCD revs, then core revenue based on SG&A (at 13.5%) would be over $2b, which is almost 3x projected revs in 2008. Core revenues based on R&D (at 11.5%) would be $1.36b., which is more reasonably attained. What this shows is that SG&A is simply too much. I don't have as much of a problem with R&D expenses as I believe the core revs from broadband and iptv will significantly ramp in 2009 (book to bill in 2008 should confirm this). Anyway, management has to signficantly continue to slash SG&A in 2008. It should not be a moderate cut but a signficant cut.
Some additional comments and conclusions.
1. Management should break down book to bill for PCD and non-PCD going forward.
2. The PCD is a huge asset right now but the company needs to reduce expenses and not play around with the ratios as part of the PCD. Barton mentioned that there is minimal R&D/SG&A related to the PCD in the terminals business unit. This highlights that SG&A is WAY too much.
3. Most of the core revenue growth will come from iptv/India broadband for now.
4. What has the R&D over the last few years yielded? Most of the core revenue still comes from PAS, and some iptv/wireless, which were mostly paid for 5 years ago. Lu mentioned he is working on "broadband access products, GEPON and Optical transport" in China. There has been mention of wimax, ip surveilance, base stations in the US, submarine/emergency applications, fixed mobile convergence, etc. However, has someone done an evaluation of the revenues/profits these new technologies are bringing in compared to the $1b they have probably spent in the last 5 years?
These are fundamental questions that need to be answered by management and the BOD.
Even if there is an explosion in iptv in 2008 and beyond, there has to be an accounting on research and SG&A going forward. The PCD has performed very well but it should not be counted on for running an infrastructure business. Without the PCD in 2008, the company would lose $200m. There is no liquidity problems even with the upcoming CB because of their signficant inventory (over $600m) and cash/short term securities ($600m). The question in the future is whether the next surge (in iptv) will make the company just breakeven/slightly profitable or VERY profitable, which is what I hope this company has been spending for the last 5 years.
For some people, this continues to be a long term proposition which they expect to be a huge winner. However, there has to be a thorough evaluation of shareholder value here at this stage, which the group is trying to address with management.
If the company cannot control and slash their expenses and get to very profitable status, and if management feels they have to spend so much to compete and maintain their technology, then it may be time to plan for strategic alternatives during the next upturn and not wait until the next downturn.
I have listened to both longtime shareholders and their wish to give the company time and I have listed to the shareholders who want immediate change. I hope both sides can see that it is not an easy black/white situation here but one thing is for sure, the current shareprice and performance is not acceptable. Management has been saying this for years as well but have been unable/unwilling to get the job done. This is where shareholders and this group has come in and thats why it will need to be a sustainable effort on our part as well.
Saturday, February 23, 2008
Rethinking UTs strategy going forward
As we prepare to meet with management in March, one of the major issues that will be discussed is the overall strategy and strategic options the company has and will try to implement. It has been mentioned that UTs unique situation of being a US company with China manufacturing and roots give it a great advantage. However, as we've seen, the problems and disadvantages outweigh the benefits the last few years. As a long time shareholder that is very much vested in the company, I am constantly rethinking their options and strategy going forward. The management and the board of directors have worked on expanding the business away from PAS roots and dependence on the China market. This venture has been costly and has plunged the shareprice from the $30-40 range to sub $3. Lets look back at some of the strategic steps the management has taken in the past few years.
UT acquired select assets of 3coms' commworks business for $100m (an amount that is equivalent to UTs enterprise value on some trading days).
http://www.3com.com/corpinfo/en_US/pressbox/press_release.jsp?INFO_ID=142360
I encourage people to read the article and all the nuisances in it - interesting to read the old articles and the thoughts behind the purchase such as...
"CommWorks is the worldwide market leader in Code Division Multiple Access (CDMA) 2000 Packet Data Serving Nodes (PDSN); and has deployed softswitches, media gateways, remote access servers (RAS), and applications around the world."
That acquisition has no doubt brought technologies that led to some revenue and customer contacts but have probably also led to MORE spending and expenses in WCDMA, PCD, IPTV as UT went on to try to develop a full suite of products in the wireless, broadmand, multimedia and fix line (and FMC) space.
"The financial rationale for purchasing CommWorks' assets is compelling. "One of our strategic goals is to increase our global sales and support infrastructure," continued Lu. "Integrating CommWorks into our organization will diversify our sources of revenue, increasing our pro forma non-China revenues from approximately 25 percent to approximately 30 to 35 percent in calendar year 2003. Moreover we believe CommWorks' large customer support and professional services organization, which represents between 40 and 50 percent of its total sales, provides an excellent source of recurring and stable revenue." "
The resulting company has more replicated the New York Knick basketball team, a collection of overpriced talent (technology analogy) with very poor results (no profits-heavy losses-literally on both accounts). As you can see, for the last 5 years and probably earlier, the company has tried to increase their footprint in terms of technology, products, markets, etc at the expense of deteriorating financials and collapse in shareprice.
The company went into a strategic alternative study in 2006 but their collection of assets/businesses have not produced consistent growing profits and stable markets. They had issues with the options investigations, filings, and China investigations (which we didn't even know about). It was not surprising that buyers were hesitant in tendering an offer for the entire company. Also, it goes back to their "unique" situation being a US company with deep Chinese roots. Should they list in China, sell to a Chinese competitor or sell to a "foreign" company (outside of China).
On the news the past week or so is the sale of 3com to Bain Capital Partner and Huawei for $2.2 billion. Was it rejected because of Huawei's China military/political ties or was it because the price offered was simply too high in this environment. I would think its buyers remorse since the stock has fallen to $1.2 billion.
As mentioned previously, we would like to stick to Plan A to turn the company around but we need to discuss Plan B with management as I believe they are open to selling out as well (with their recent golden parachutes in place). I believe the company was "hoping" for $12-15/share range last year as the stock already hit $11. With a full turnaround, the company may be able to achieve that on their own but the question is WHEN? Also, the competition will only get worse so consolidation is inevitable for UT and their size. Aside from the multiple acquisitions, the company has spent hundreds of millions in R&D year after year for the last ? years.
My personal preference is a Cisco acquisition only because I'd rather get Cisco stock than other company stock. An acquisition by PE may happen but they would turn around and break the pieces because its worth more than the complete company right now. A Chinese acquisition will not have as tough a hurdle to overcome but there is a question to whether the Chinese would deal with UT at this stage base on their battles the last few years and the shareholder makeup of the Chineses companies (had some discussions with Charlie Yang on this although he has not been in touch with ZTE for a while). Cisco on the other hand is on a never ending acquisition spree for technology and markets in the emerging countries (BRIC anyone). Cisco is interested like everyone with IP and IPTV. They are going into the consumer space, local base stations, broadband (obviously), and are spending money on R&D in India ($2billion committement? etc). They are headquartered within driving distance and would not have regulatory hurdles. I would not have a problem with getting Cisco currency rather than cash as I think the stock would actually move up with the acquisition (on the cost savings on their own R&D, acquiring tech/markets on the cheap). So, a 1 UT share to .6 Cisco share may do it :-)
Another neverending news is Motorola's goal of enhancing shaerholder value by dealing with its own handset division (see Friday's WSJ). Icahn has taken a 5 percent position in Moto and want them to sell the division for around 1x revenue or $19B. The problem is Moto's handset division lost $1.2 billion. ZTE was quoted as being interested but now may have some issues as well with regulatory approval, not to mention the steep price. I wanted to bring this up because Moto hired a CFO recently,Paul Liska. This guy worked at several PE firms and worked at Sears as finance chief which sold their credit card division to Citigroup. We need the company to show tangible evidence of constantly looking at strategic options to unleash the value. Someone with experience in finance and the techs pace and their sole purpose is to look at strategic options and is accountable to shareholders.
Anyway, back to the shareholder meeting. I have sent an email to the shareholders and will need to do further planning to prepare for the meeting.
UT acquired select assets of 3coms' commworks business for $100m (an amount that is equivalent to UTs enterprise value on some trading days).
http://www.3com.com/corpinfo/en_US/pressbox/press_release.jsp?INFO_ID=142360
I encourage people to read the article and all the nuisances in it - interesting to read the old articles and the thoughts behind the purchase such as...
"CommWorks is the worldwide market leader in Code Division Multiple Access (CDMA) 2000 Packet Data Serving Nodes (PDSN); and has deployed softswitches, media gateways, remote access servers (RAS), and applications around the world."
That acquisition has no doubt brought technologies that led to some revenue and customer contacts but have probably also led to MORE spending and expenses in WCDMA, PCD, IPTV as UT went on to try to develop a full suite of products in the wireless, broadmand, multimedia and fix line (and FMC) space.
"The financial rationale for purchasing CommWorks' assets is compelling. "One of our strategic goals is to increase our global sales and support infrastructure," continued Lu. "Integrating CommWorks into our organization will diversify our sources of revenue, increasing our pro forma non-China revenues from approximately 25 percent to approximately 30 to 35 percent in calendar year 2003. Moreover we believe CommWorks' large customer support and professional services organization, which represents between 40 and 50 percent of its total sales, provides an excellent source of recurring and stable revenue." "
The resulting company has more replicated the New York Knick basketball team, a collection of overpriced talent (technology analogy) with very poor results (no profits-heavy losses-literally on both accounts). As you can see, for the last 5 years and probably earlier, the company has tried to increase their footprint in terms of technology, products, markets, etc at the expense of deteriorating financials and collapse in shareprice.
The company went into a strategic alternative study in 2006 but their collection of assets/businesses have not produced consistent growing profits and stable markets. They had issues with the options investigations, filings, and China investigations (which we didn't even know about). It was not surprising that buyers were hesitant in tendering an offer for the entire company. Also, it goes back to their "unique" situation being a US company with deep Chinese roots. Should they list in China, sell to a Chinese competitor or sell to a "foreign" company (outside of China).
On the news the past week or so is the sale of 3com to Bain Capital Partner and Huawei for $2.2 billion. Was it rejected because of Huawei's China military/political ties or was it because the price offered was simply too high in this environment. I would think its buyers remorse since the stock has fallen to $1.2 billion.
As mentioned previously, we would like to stick to Plan A to turn the company around but we need to discuss Plan B with management as I believe they are open to selling out as well (with their recent golden parachutes in place). I believe the company was "hoping" for $12-15/share range last year as the stock already hit $11. With a full turnaround, the company may be able to achieve that on their own but the question is WHEN? Also, the competition will only get worse so consolidation is inevitable for UT and their size. Aside from the multiple acquisitions, the company has spent hundreds of millions in R&D year after year for the last ? years.
My personal preference is a Cisco acquisition only because I'd rather get Cisco stock than other company stock. An acquisition by PE may happen but they would turn around and break the pieces because its worth more than the complete company right now. A Chinese acquisition will not have as tough a hurdle to overcome but there is a question to whether the Chinese would deal with UT at this stage base on their battles the last few years and the shareholder makeup of the Chineses companies (had some discussions with Charlie Yang on this although he has not been in touch with ZTE for a while). Cisco on the other hand is on a never ending acquisition spree for technology and markets in the emerging countries (BRIC anyone). Cisco is interested like everyone with IP and IPTV. They are going into the consumer space, local base stations, broadband (obviously), and are spending money on R&D in India ($2billion committement? etc). They are headquartered within driving distance and would not have regulatory hurdles. I would not have a problem with getting Cisco currency rather than cash as I think the stock would actually move up with the acquisition (on the cost savings on their own R&D, acquiring tech/markets on the cheap). So, a 1 UT share to .6 Cisco share may do it :-)
Another neverending news is Motorola's goal of enhancing shaerholder value by dealing with its own handset division (see Friday's WSJ). Icahn has taken a 5 percent position in Moto and want them to sell the division for around 1x revenue or $19B. The problem is Moto's handset division lost $1.2 billion. ZTE was quoted as being interested but now may have some issues as well with regulatory approval, not to mention the steep price. I wanted to bring this up because Moto hired a CFO recently,Paul Liska. This guy worked at several PE firms and worked at Sears as finance chief which sold their credit card division to Citigroup. We need the company to show tangible evidence of constantly looking at strategic options to unleash the value. Someone with experience in finance and the techs pace and their sole purpose is to look at strategic options and is accountable to shareholders.
Anyway, back to the shareholder meeting. I have sent an email to the shareholders and will need to do further planning to prepare for the meeting.
Saturday, February 16, 2008
What Shareholders Can Do?
Now that we have started and established this exploratory group, the real work begins. I started this group because I wanted to harness the resources of the shareholder base in order to enact changes in the company and lead to maximing shareholder value.
I have received numerous emails from the members (both retail/institution) on what can be done and how they can help. Some have recently mentioned writing to Wu or Icahn. Some have suggested filing a lawsuit against the BOD. Some have suggested going to potential suitors now. Some are focused on the shorts. Some have suggested going to Merrill Lynch to explore strategic options for the company. Some have suggested to file a 13D to get better representation from serious investors. Some have suggested to just wait and see the results of the upcoming quarters. Outside the group, other shareholders are reluctant to join because they feel that selling out at this stage is a tremendous waste and loss of opportunity in a unique franchise/position.
Over the last week, there has been a common theme that it is now a wait and see attitude. Wait for the results and then have the shareholder meeting with management. However, there is a lot of work that needs to be done. While I appreciate the suggestions above, the stated goal of this group for now is to work with management (plan A) and "encourage" them to do their jobs in turning the company around, defend the stock price, and enable the company to be in position to reap the benefits of the growths in their products/markets.
What can we do now? In my letter to management and to other institutions, I have listed down the issues that need to be resolved such as compensation, bloated expense, defense of the stock price, resolution of the CB, debt/captial management, monetization of assets/cash flow, board accountability, etc. As I have stated in the past, I am a retail shareholder with limited resources (I have a day job and just this week had to consult on another project). The large institutions as well have other stocks to follow and may only have one or two financial analysts/portfolio managers. So, this is really the time to tap into our resource base (all shareholders that are frustrated and want change). We need you to research information on the issues I noted above or that you are concerned with. We cannot go in the shareholder meeting unprepared like we were last November when it was an un-organized group of shareholders. For ex. compensation, this has been discussed in the past. We need concrete examples of other executive compensations (similar situations, etc). Share buyback- how much. Expense ratios/cuts - how much. If you are concerned with the building situation in China, do some legwork and research what can be done (how much is it worth, what options to get financing, etc). If you want to involve a particular organization, contact them or have them contact me. You can pour over the company SEC filings and look for inefficiencies. If you want to change the makeup of the board, do some research - get the legal issues/procedures, dates.
Send me this information and I can collate it for the group. Just like the shareholder meeting, I set out the agenda, selected the speakers etc but not everyone is going to be happy with it, specially if you don't give me input.
Finally, we have gained good momentum (35 participants in the shareholder meeting and 150 downloads of the call in the following couple of days) but the group's level of success going forward will directly be correlated to the level of interest and effort by the members. We have an incredible opportunity to enact change and release tremendous value but only if we act. I will continue to push for more support and go through the core issues that management/BOD has to resolve. Again, it will be more effective the more information/research we have. So, send me articles, quotes, facts, linkes, examples, etc.
Once the company releases the date of the earnings call, I will email Peter Blackmore to follow up with the shareholder meeting.
I have received numerous emails from the members (both retail/institution) on what can be done and how they can help. Some have recently mentioned writing to Wu or Icahn. Some have suggested filing a lawsuit against the BOD. Some have suggested going to potential suitors now. Some are focused on the shorts. Some have suggested going to Merrill Lynch to explore strategic options for the company. Some have suggested to file a 13D to get better representation from serious investors. Some have suggested to just wait and see the results of the upcoming quarters. Outside the group, other shareholders are reluctant to join because they feel that selling out at this stage is a tremendous waste and loss of opportunity in a unique franchise/position.
Over the last week, there has been a common theme that it is now a wait and see attitude. Wait for the results and then have the shareholder meeting with management. However, there is a lot of work that needs to be done. While I appreciate the suggestions above, the stated goal of this group for now is to work with management (plan A) and "encourage" them to do their jobs in turning the company around, defend the stock price, and enable the company to be in position to reap the benefits of the growths in their products/markets.
What can we do now? In my letter to management and to other institutions, I have listed down the issues that need to be resolved such as compensation, bloated expense, defense of the stock price, resolution of the CB, debt/captial management, monetization of assets/cash flow, board accountability, etc. As I have stated in the past, I am a retail shareholder with limited resources (I have a day job and just this week had to consult on another project). The large institutions as well have other stocks to follow and may only have one or two financial analysts/portfolio managers. So, this is really the time to tap into our resource base (all shareholders that are frustrated and want change). We need you to research information on the issues I noted above or that you are concerned with. We cannot go in the shareholder meeting unprepared like we were last November when it was an un-organized group of shareholders. For ex. compensation, this has been discussed in the past. We need concrete examples of other executive compensations (similar situations, etc). Share buyback- how much. Expense ratios/cuts - how much. If you are concerned with the building situation in China, do some legwork and research what can be done (how much is it worth, what options to get financing, etc). If you want to involve a particular organization, contact them or have them contact me. You can pour over the company SEC filings and look for inefficiencies. If you want to change the makeup of the board, do some research - get the legal issues/procedures, dates.
Send me this information and I can collate it for the group. Just like the shareholder meeting, I set out the agenda, selected the speakers etc but not everyone is going to be happy with it, specially if you don't give me input.
Finally, we have gained good momentum (35 participants in the shareholder meeting and 150 downloads of the call in the following couple of days) but the group's level of success going forward will directly be correlated to the level of interest and effort by the members. We have an incredible opportunity to enact change and release tremendous value but only if we act. I will continue to push for more support and go through the core issues that management/BOD has to resolve. Again, it will be more effective the more information/research we have. So, send me articles, quotes, facts, linkes, examples, etc.
Once the company releases the date of the earnings call, I will email Peter Blackmore to follow up with the shareholder meeting.
Saturday, February 9, 2008
Draft Letter to Institutions
This is a letter I will be sending to other institutions to get more active with their shareholding. Please send me any comments you have. I plan to send the letter starting on Monday (there are a ton of holders so it will be as many I can get emails on).
Dear Sir or Madam,
I am a shareholder in UTStarcom and have been following the company for about four years now. I am writing to you and the institution/shareholders that you represent to inquire about your interest in joining the exploratory group I have recently formed to address shareholder value in the company. Let me give a background of the company and my motivation for starting this exploratory group.
I was interested in the company because it had tremendous growth in emerging markets such as China, had their manufacturing base in China, and yet was a US company (with US listing), which I believed provided better governance and regulations. Over the years, the growth in their Personal Handy Phone (PAS) was tremendous from basically zero users to almost 100 million users. This type of disruptive technology changed the landscape in China and allowed the masses to own/use a mobile phone. With this base technology and incredible revenue/resources, the hope was the company could develop other disruptive products, take advantage of their user base/clients in China, and transport the growth to other emerging markets.
The company, through its US listing, was able to raise almost half a billion dollars, and had revenues that topped over $2 billion in China alone. However, it was common knowledge that the company had to develop other products and diversify away from China and PAS. Back in 2004, the company had a quarterly shortfall that signaled the seriousness of the PAS decline and started a slide in the stock price that has shaved about 90% in the last three and a half years. During that time, the company has undertaken some restructuring but has not been able to right size the company. Because it had continued PAS revenue, it allowed the company time to develop new products and turn the company around. However, they have not been able to do it. While it is not uncommon for companies to take 6 months to 1 or even 2 years to develop new products and have it impact the bottom line, it is also not acceptable to risk the company’s financial condition to the extent that it is in.
More concerning however is the actions that management and the board of directors have taken over the last 2 years with respect to the following issues.
Management control – Hong Lu, one of the founders of the company had decided in 2006 to cede control to Ying Wu, the China CEO. However, in late 2006, it was announced that Wu would not take over as CEO and instead lead a strategic alternative study for the company. In late May of 2007, the strategic alternative study was concluded with no actions and instead led to the firing of Wu for differences in opinion regarding the direction of the company. In late June, Peter Blackmore was hired as COO and eventual successor to be CEO. At this time, Lu went to China to fill in for Wu. Up till now, there have been no updates on the CEO position in China and for the entire company.
Strategic Alternative Study – In late 2006, the company hired Merrill Lynch to perform a strategic alternative study. In May of 2007, the company concluded the study without any action except the firing of Ying Wu, the China CEO who is the main proponent of PAS and IPTV. The management’s only conclusion was that it was better to stay the course to realize the best shareholder value.
In the November shareholder meeting which I attended, we learned that there were offers for part of the company but nothing that the board considered worthwhile. The management/board mentioned they considered a wide range of options and even taking it private. However, none of the options were put to the shareholders for consideration. During the call, I asked what price range they were looking for to sell the company or what their objectives were. Obviously, you have to have an idea of what you are worth to make an adequate decision. Once again, there was no concrete response from management or the board. In the meantime the stock has gone down about 70% from the time the strategic alternative was announced. The only conclusion from the collapse in the share price is that this is another major management misstep. They have admitted that this caused management time and offered this as a reason for the company’s lack of focus.
Internal control/profitability - The company guided for $4 billion in revenues and $2 per share profits in 2005. In late 2005, the company significantly lowered expectations to getting back to profitability to early 2007. In a August 2007 call, management predicted cash flow and GAAP profitability in early 2008. Now, they are committed to profitability in early 2009 (maybe late 2008). The last profitable quarter was in early 2005 so even if the company hit their targets this time, it would be four years for this management to right size the business. Then, there are the options/China investigations that caused them to use 20000 man hours, risk bond default/Nasdaq delisting, and pay $22 million in additional bond interest.
Convertible bond – The company has used its PAS revenue over the last few years to pay down part of the debt and raise cash. However, there are a lot of questions of why the company chose to keep $400-500 million in China earning less than 2% and yet having to pay the interest on the convertible bond and another $22m in 2007 alone. The company has mentioned transfer restrictions from China but was able to transfer $150m in 2007 alone. It mentioned having to satisfy China laws of keeping a certain amount of funds for the business. It is difficult as a shareholder to imagine they have exhausted all options to transfer their own funds when it is most needed. After all of this, shareholders have yet to have final resolution when it is due in less than a month.
Management Compensation – Despite the continued losses and issued outlined above, the compensation committee of the board of directors has continued to pay bonuses. The CFO Fran Barton alone received huge bonuses for his role in filing the long delayed financials. Isn’t this the job he was paid to do. Does any reasonable person think they did this in a fast track or exceptional time frame that warranted an extra bonus? After the shareholder meeting, they announced new retention bonuses for management paying Barton alone $2 million per year just for staying with the company. There seems to be more PRs about compensation than progress.
Expenses – Despite continued losses for the past 3 years and the expectations of more losses, the company has only minimally cut expenses. The company’s expense ratios are about twice the industry average. For the last couple of years, they have justified their expense ratios and their compensation by including the Personal Communication Division (PCD), which include a significant resale component not standard in the industry.
Most of the investors that I have talked with share my belief that the company is significantly undervalued based on their assets alone. There is still hope that the company can turn it around and the fact they are making inroads in broadband/iptv in various countries is encouraging. However, there is a major concern regarding management and the board of directors, which could prevent any shareholder value being unlocked despite all of their current resources and potential.
Over the last few years, I have posted on the yahoo message boards to discuss the company’s prospects. More recently, I have started a blog on the company.
http://utstarcom-stocknews.blogspot.com/
Due to the all time low share price and continued management lack of performance in performing their duties to the shareholders, I have started an “exploratory group” to enhance shareholder value. There are two basic plans or phases to achieve this goal.
“Plan A”: Pro-actively “support” and monitor the management during this turnaround phase. This involves:
· Organizing and maintaining retail/institutional shareholder base to discuss the progress of the company.
· Communicating as a group with management through emails.· Meeting with management (as needed) to discuss various issues such as compensation, operating expenses, profitability and other strategic initiatives.
· Using the resources of the group to disseminate information to the group’s members and other (existing/potential) shareholders. (via blog/email base, letter campaign to other news organizations such as Businessweek, Lightreading, gathering of information in China/other parts of the world)
· Reinforce sense of urgency to management/BOD by being prepared to implement “Plan B” quickly.
“Plan B”: Seek change in management and/or a sale of the company. This involves:· Meeting with management/BOD to discuss sale of company.
· Letter campaign to other institutional shareholders to join this group (activist group at this point)
· Proposing management changes and putting up slate of directors that will make significant operational changes or seek a sale of the company.
· Court potential suitors for the company.
So far, I have only solicited support for the group from the message board/blog. Even with this limited effort, we have already had inquiries from shareholders representing over 22 million shares or 18.5% of the total shareholder base. We recently held our first shareholder meeting/conference call. You can access the conference call recording from this link:
http://www.sharebigfile.com/en/file/6535/UT-CC-2-2-08-wav.html
Last Wednesday (February 6, 2008), I sent out the group’s first letter to management seeking a shareholder meeting after the upcoming Q4 earnings call. On Thursday, Peter Blackmore, UTStarcom’s President and COO, sent an email reply and agreed to meet with the group (email chain available in the blog).
At this time, the exploratory group is operating under “Plan A” and just gathering inquiries and support from shareholders. I am asking for your group’s support in helping us enhance the share value of this company. If interested, please send me an email reply and we can further discuss this matter.
Dear Sir or Madam,
I am a shareholder in UTStarcom and have been following the company for about four years now. I am writing to you and the institution/shareholders that you represent to inquire about your interest in joining the exploratory group I have recently formed to address shareholder value in the company. Let me give a background of the company and my motivation for starting this exploratory group.
I was interested in the company because it had tremendous growth in emerging markets such as China, had their manufacturing base in China, and yet was a US company (with US listing), which I believed provided better governance and regulations. Over the years, the growth in their Personal Handy Phone (PAS) was tremendous from basically zero users to almost 100 million users. This type of disruptive technology changed the landscape in China and allowed the masses to own/use a mobile phone. With this base technology and incredible revenue/resources, the hope was the company could develop other disruptive products, take advantage of their user base/clients in China, and transport the growth to other emerging markets.
The company, through its US listing, was able to raise almost half a billion dollars, and had revenues that topped over $2 billion in China alone. However, it was common knowledge that the company had to develop other products and diversify away from China and PAS. Back in 2004, the company had a quarterly shortfall that signaled the seriousness of the PAS decline and started a slide in the stock price that has shaved about 90% in the last three and a half years. During that time, the company has undertaken some restructuring but has not been able to right size the company. Because it had continued PAS revenue, it allowed the company time to develop new products and turn the company around. However, they have not been able to do it. While it is not uncommon for companies to take 6 months to 1 or even 2 years to develop new products and have it impact the bottom line, it is also not acceptable to risk the company’s financial condition to the extent that it is in.
More concerning however is the actions that management and the board of directors have taken over the last 2 years with respect to the following issues.
Management control – Hong Lu, one of the founders of the company had decided in 2006 to cede control to Ying Wu, the China CEO. However, in late 2006, it was announced that Wu would not take over as CEO and instead lead a strategic alternative study for the company. In late May of 2007, the strategic alternative study was concluded with no actions and instead led to the firing of Wu for differences in opinion regarding the direction of the company. In late June, Peter Blackmore was hired as COO and eventual successor to be CEO. At this time, Lu went to China to fill in for Wu. Up till now, there have been no updates on the CEO position in China and for the entire company.
Strategic Alternative Study – In late 2006, the company hired Merrill Lynch to perform a strategic alternative study. In May of 2007, the company concluded the study without any action except the firing of Ying Wu, the China CEO who is the main proponent of PAS and IPTV. The management’s only conclusion was that it was better to stay the course to realize the best shareholder value.
In the November shareholder meeting which I attended, we learned that there were offers for part of the company but nothing that the board considered worthwhile. The management/board mentioned they considered a wide range of options and even taking it private. However, none of the options were put to the shareholders for consideration. During the call, I asked what price range they were looking for to sell the company or what their objectives were. Obviously, you have to have an idea of what you are worth to make an adequate decision. Once again, there was no concrete response from management or the board. In the meantime the stock has gone down about 70% from the time the strategic alternative was announced. The only conclusion from the collapse in the share price is that this is another major management misstep. They have admitted that this caused management time and offered this as a reason for the company’s lack of focus.
Internal control/profitability - The company guided for $4 billion in revenues and $2 per share profits in 2005. In late 2005, the company significantly lowered expectations to getting back to profitability to early 2007. In a August 2007 call, management predicted cash flow and GAAP profitability in early 2008. Now, they are committed to profitability in early 2009 (maybe late 2008). The last profitable quarter was in early 2005 so even if the company hit their targets this time, it would be four years for this management to right size the business. Then, there are the options/China investigations that caused them to use 20000 man hours, risk bond default/Nasdaq delisting, and pay $22 million in additional bond interest.
Convertible bond – The company has used its PAS revenue over the last few years to pay down part of the debt and raise cash. However, there are a lot of questions of why the company chose to keep $400-500 million in China earning less than 2% and yet having to pay the interest on the convertible bond and another $22m in 2007 alone. The company has mentioned transfer restrictions from China but was able to transfer $150m in 2007 alone. It mentioned having to satisfy China laws of keeping a certain amount of funds for the business. It is difficult as a shareholder to imagine they have exhausted all options to transfer their own funds when it is most needed. After all of this, shareholders have yet to have final resolution when it is due in less than a month.
Management Compensation – Despite the continued losses and issued outlined above, the compensation committee of the board of directors has continued to pay bonuses. The CFO Fran Barton alone received huge bonuses for his role in filing the long delayed financials. Isn’t this the job he was paid to do. Does any reasonable person think they did this in a fast track or exceptional time frame that warranted an extra bonus? After the shareholder meeting, they announced new retention bonuses for management paying Barton alone $2 million per year just for staying with the company. There seems to be more PRs about compensation than progress.
Expenses – Despite continued losses for the past 3 years and the expectations of more losses, the company has only minimally cut expenses. The company’s expense ratios are about twice the industry average. For the last couple of years, they have justified their expense ratios and their compensation by including the Personal Communication Division (PCD), which include a significant resale component not standard in the industry.
Most of the investors that I have talked with share my belief that the company is significantly undervalued based on their assets alone. There is still hope that the company can turn it around and the fact they are making inroads in broadband/iptv in various countries is encouraging. However, there is a major concern regarding management and the board of directors, which could prevent any shareholder value being unlocked despite all of their current resources and potential.
Over the last few years, I have posted on the yahoo message boards to discuss the company’s prospects. More recently, I have started a blog on the company.
http://utstarcom-stocknews.blogspot.com/
Due to the all time low share price and continued management lack of performance in performing their duties to the shareholders, I have started an “exploratory group” to enhance shareholder value. There are two basic plans or phases to achieve this goal.
“Plan A”: Pro-actively “support” and monitor the management during this turnaround phase. This involves:
· Organizing and maintaining retail/institutional shareholder base to discuss the progress of the company.
· Communicating as a group with management through emails.· Meeting with management (as needed) to discuss various issues such as compensation, operating expenses, profitability and other strategic initiatives.
· Using the resources of the group to disseminate information to the group’s members and other (existing/potential) shareholders. (via blog/email base, letter campaign to other news organizations such as Businessweek, Lightreading, gathering of information in China/other parts of the world)
· Reinforce sense of urgency to management/BOD by being prepared to implement “Plan B” quickly.
“Plan B”: Seek change in management and/or a sale of the company. This involves:· Meeting with management/BOD to discuss sale of company.
· Letter campaign to other institutional shareholders to join this group (activist group at this point)
· Proposing management changes and putting up slate of directors that will make significant operational changes or seek a sale of the company.
· Court potential suitors for the company.
So far, I have only solicited support for the group from the message board/blog. Even with this limited effort, we have already had inquiries from shareholders representing over 22 million shares or 18.5% of the total shareholder base. We recently held our first shareholder meeting/conference call. You can access the conference call recording from this link:
http://www.sharebigfile.com/en/file/6535/UT-CC-2-2-08-wav.html
Last Wednesday (February 6, 2008), I sent out the group’s first letter to management seeking a shareholder meeting after the upcoming Q4 earnings call. On Thursday, Peter Blackmore, UTStarcom’s President and COO, sent an email reply and agreed to meet with the group (email chain available in the blog).
At this time, the exploratory group is operating under “Plan A” and just gathering inquiries and support from shareholders. I am asking for your group’s support in helping us enhance the share value of this company. If interested, please send me an email reply and we can further discuss this matter.
Thursday, February 7, 2008
Response by Peter Blackmore
This was an email I received from Peter Blackmore, UTStarcom President and COO.
Tim
Thank you for your thoughtful e-mail.
We clearly appreciate your interest in the company. We are working very actively to address many of the issues you raise regarding UTStarcom with respect to shareholder value as we discussed at the last shareholder meeting.
We would be pleased to speak with you to discuss your thoughts on the Company after we report our Q4 earnings and file our 10K.
Obviously we need to have our discussions in line with Regulation FD so all shareholders benefit from the same knowledge from the company.
Regards
Peter
Here is my response:
Peter,
Thank you for your prompt reply. From the time stamp on your email, you are either overseas working hard to secure contracts for the company or have no idea your computer clock is off. Hopefully, it is the former.
The shareholders are very much looking forward to the upcoming earnings call and hope many of the issues that have been brought up can be resolved with the shareholder's best interest.
For the meeting after the earnings call, the group would like to have atleast one of the independent board members and a representative of the compensation committee to be present for the discussions.
I understand the need to follow regulations regarding disclosure and will work with your management team and the stakeholders to ensure that is met.
I will be posting your email and my response in the blog so that it is available to the group's members and interested stakeholders.
Once again, I thank you for your response and look forward to the upcoming earnings call and shareholder meeting.
Tim
Tim
Thank you for your thoughtful e-mail.
We clearly appreciate your interest in the company. We are working very actively to address many of the issues you raise regarding UTStarcom with respect to shareholder value as we discussed at the last shareholder meeting.
We would be pleased to speak with you to discuss your thoughts on the Company after we report our Q4 earnings and file our 10K.
Obviously we need to have our discussions in line with Regulation FD so all shareholders benefit from the same knowledge from the company.
Regards
Peter
Here is my response:
Peter,
Thank you for your prompt reply. From the time stamp on your email, you are either overseas working hard to secure contracts for the company or have no idea your computer clock is off. Hopefully, it is the former.
The shareholders are very much looking forward to the upcoming earnings call and hope many of the issues that have been brought up can be resolved with the shareholder's best interest.
For the meeting after the earnings call, the group would like to have atleast one of the independent board members and a representative of the compensation committee to be present for the discussions.
I understand the need to follow regulations regarding disclosure and will work with your management team and the stakeholders to ensure that is met.
I will be posting your email and my response in the blog so that it is available to the group's members and interested stakeholders.
Once again, I thank you for your response and look forward to the upcoming earnings call and shareholder meeting.
Tim
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