Recently, I have been posting about a stock buyback and have gotten some comments on the working capital needs of the company. From the company proxy statement discussing the repricing of employee stock options and why the stock has gone down,
"Prior to 2005, over 90% of the Company's revenues and profits were derived from sales in China of a second generation (" 2G ") wireless technology system. In the latter half of 2004, it was widely believed by companies engaged in the Chinese telecommunications market that the Chinese government would begin issuing licenses for the sale of third generation (" 3G ") wireless technologies in early 2005. In anticipation of such action by the Chinese government, our operator customers dramatically reduced their 2G capital expenditures. At the same time, with the intention of replacing our 2G revenues, we developed a full suite of 3G products to sell in China and also initiated a capital intensive strategy of global diversification. The Chinese government, however, never issued the expected 3G licenses, thus preventing us from selling any of our 3G products, and our global diversification has yet to yield results sizeable enough to offset the decline in China. We believe our stock price, which has fallen significantly over the past few years, reflects, among other things, the dramatic reduction in our China sales."
Due to the unforseen windfall in gemdale (mostly) and infinera and the initial progress in the company's "cash generation plans", the company has a net cash position of $269m by the end of Q1, 2008. Aside from the net cash position at the end of 2006 where it hit $300m, it has not been that high since the initial ipo. The difference between the end of 2006 and now is that the company faced another 5 quarters or so of burning $40-50 million of their cash while the company now is close to breaking even by the end of the year and getting their cost basis right (we hope). I always have some doubts due to the history but most people will look at the last 8 months and say this time, its more conceivable that the company is conservative and will reach breakeven/profitability at their forecasted timeframe. Peter Blackmore's statement on the state of the turnaround and preliminary Q1 numbers are very encouraging.
Now, lets get back to the capital expenditure and capital requirements. Quarterly expenditures previously had been as high as $185m+ and the company took the steps to write down their 3G businesses. The other major "reason" for their massive cash expenditures is the global expansion, specifically in India. The difference now is that gross margins are not 3% (in 2007) but over 20% in India and multiple wins in triple play business in India show the company is on the uptrend and actually setting the pace there.
During the March 17 meeting, one major focus was capital expenditures and most of the R&D now is focused towards NGN/iptv (some broadband/pcd). The company is forecasting expenses to go from the $120m level to under $110m by the end of the year. This should coincide with PAS slowdown. As PAS slows down, the SG&A portion should decline at similar rates.
Over the years, the company spent $100m for the Commworks division of 3com and $165m (plus debt) for the PCD of Audiovoxx. The commworks division will be profitable and is designated as none-core so it could actually be sold and bring in substantial cash (and reduce expenses to boot). We've talked about the PCD doing well. Other initiatives such as wimax, fixed mobile convergence, etc are on close watch where Blackmore is being careful on weighing the benefits/risk/rewards to continuing or pursuing deals.
In short, I don't see any major capital expenditures on the horizon and see gradual decline of OPEX. Cash generation from leasing the buildings, using OEMs (inventory reduction/efficiencies), licening of patents, AND the lack of massive costs for interest payments, options/China investigations, quarterly filings (as Barton mentioned, how many times have they redone the 2002 quarterly reports?). Add the fact that their accounting systems may be close to being completely installed/functional (thus providing more savings in head count) and you see that OPEX should be declining, cash should be building.
Rather than expecting an "acquisition", we have been anxiously waiting for divestitures. The company can only invest so much in iptv/NGN that is prudent and at a certain point the markets have to open up for them to consider putting MORE money (they are already putting in a lot for their "mature" systems).
Anyway, unless they are planning on a massive expense cycle in the upcoming year (which is unknown to us that follow the company closely), I don't see "liquidity" issues or even need to build massively on working capital. Shareholders are not asking to buy 50% of the float here but enough to make a material statement and reduction in the current float.
In summary, a stock buyback should be announced and implemented while the stock is "low".
Sunday, May 11, 2008
Saturday, May 10, 2008
Value of UTStarcom's PCD
I've written about UTs PCD and its potential sale before. This division has been designated as none-core so its natural to speculate how much UT can take in. Here is an initial background post in December 2007 where I discuss the PCD and Motorola's own handset division.
http://utstarcom-stocknews.blogspot.com/2007/12/motorola-palm-and-uts-pcd.html
Overall, worldwide handsets are set to grow again in 2008 but not everyone is doing well. The industry is fragmented and consolidation is ripe with Nokia leading the market and approaching 40% market share. In addition to Motorola seeking to sell its division, the following developments have taken place.
Lenovo - "PC maker Lenovo Group said yesterday (Feb 2008) it will offload its handset business for $100 million to a group of private equity firms to boost profitability."
http://english.peopledaily.com.cn/90001/90776/90884/6349259.html
"Lenovo's handsets were sold primarily in China, accounting for $108 million in revenue during the quarter ended on Dec. 31, 2007. That figure represented 2.4 percent of the company's total sales during that period. During the quarter, the company reported that handset shipments declined by 31 percent compared to the previous year."
The company eventually unloaded the division on March 31. I don't have a yearly revenue but extrapolating the quarterly revenue of $108m, it was probably around $400m/year but revenue was declining substantially and most if not all of the sales were in China. I also doubt if it was profitable.
http://www.pacificepoch.com/newsredirect/120576_0_1_0_C/
Huawei - "China's Huawei is reported to be considering selling a stake in its mobile phones division to foreign investors in exchange for access to the US market." "The company doesn't publicly release breakdowns of the revenues or profits of different divisions, but the sources told the newspaper that the division up for sale is profitable and that the sale isn't meant as an exit from the business. The company was recently reports as aiming to increase its handset production to 50 million units per year. Huawei currently outsources its handset manufacturing to Thailand based Cal-Comp Electronics and Singapore headquartered Flextronics."
http://www.cellular-news.com/story/31057.php
ZTE - "ZTE USA, the United States subsidiary to Chinese company ZTE, today announced that MetroPCS has signed an agreement to purchase ZTE’s CDMA PCS and AWS handsets. The agreement marks the company’s first handset customer in the United States."
ZTE and Huawei both want to get into the North American market and have often been mentioned as potential bidders for Motorola's handset division although the size of Motorola may preclude that.
http://telephonyonline.com/wireless/news/zte_handsets_USA_121907/
UTStarcom - 2007 sales of the PCD was at $1.664 billion, up from $1.34 billion in 2006 and $1.37 billion in 2005. The company shipped 2.8 million units and had record quarterly revenues in Q4 2007 of $560m and 6.2% GMs. Profit margins in 2005 and 2006 had been 4 and 3% respectively while it improved to 6% in 2007. For 2008, revenue is expected to be 1.74 billion and bring in gross profits of about $104m (up from $94m). The margins doubled from 2006 to 2007 due to higher average selling prices and large inventory write downs in 2006. Overall, the company shipped 1.5m units more in 2007 compared to 2006.
Impact of PCD to UTs bottom line - In 2007, the PCD made up 67% of the company's overall revenue and 30% of gross profits so even though it is "none-core", it has become a vital part of the company. About 35% of the revenue come from internally designed hand sets, up from 10% just a few years ago. At the same ratio, revenue from internal designed handsets will be 608m and 1130m for the resale component. If the company was to keep the internally designed portion and sell the "resale" portion, revenues will still be about $1.5 billion. We don't know what the exact margins for each division but assuming 12% GMs for the internal handset portion, the resale part will have GMs of 2.8%. Profit breakdown will be $73m and $31m.
Valuation - For the entire PCD, I am estimating it could be worth about $500m (higher revenue multiple from the Lenovo sale) due to its North American customers, increasing revenue and average unit selling prices. The division is very profitable and would be an attractive acquisition. From previous discussions, it is very difficult to get into the North American market and establish good relationship with the Verizons etc. The company has also mentioned it is on its 3rd generation of handsets and see continued growth. Based on gross profit breakdown, the separate portions could be worth $350m and $150m (5x gross profit) respectively. If the company keeps the internal design portion and hit their target of 25% of revenue for SG&A and R&D, that would be about $400m in yearly expenses (based on $1.6b of revenue in 2009 without the resale portion of PCD). That would average out to $100m/quarter. The company is targetting to get under $110m by Q4 of 2008.
Impact on 2009 earnings - Using some rough numbers at this point, the company could have $2.8b in sales and overall GMs of 16% (using Q1 GM). That would yield $450m in gross profits and yield to about breakeven if the company reduces expenses to under $110m per quarter (add in stockbased expenses/taxes). The company could sell other none-core assets to raise cash or take in massive cash from a sale of PCD but it would impact earnings in 2009 as the other business units will not be close to making up for the loss gross profits (obviously). Either way, expenses need to go down and a sale of none-core assets is expected. We'll keep up with the news with Huawei and Motorola (and other handset news) but in general the PCD is a valuable asset that can be sold to raise significant amount of cash or maintain their enormous quarterly expenses until the core business units can become profitable on their own.
http://utstarcom-stocknews.blogspot.com/2007/12/motorola-palm-and-uts-pcd.html
Overall, worldwide handsets are set to grow again in 2008 but not everyone is doing well. The industry is fragmented and consolidation is ripe with Nokia leading the market and approaching 40% market share. In addition to Motorola seeking to sell its division, the following developments have taken place.
Lenovo - "PC maker Lenovo Group said yesterday (Feb 2008) it will offload its handset business for $100 million to a group of private equity firms to boost profitability."
http://english.peopledaily.com.cn/90001/90776/90884/6349259.html
"Lenovo's handsets were sold primarily in China, accounting for $108 million in revenue during the quarter ended on Dec. 31, 2007. That figure represented 2.4 percent of the company's total sales during that period. During the quarter, the company reported that handset shipments declined by 31 percent compared to the previous year."
The company eventually unloaded the division on March 31. I don't have a yearly revenue but extrapolating the quarterly revenue of $108m, it was probably around $400m/year but revenue was declining substantially and most if not all of the sales were in China. I also doubt if it was profitable.
http://www.pacificepoch.com/newsredirect/120576_0_1_0_C/
Huawei - "China's Huawei is reported to be considering selling a stake in its mobile phones division to foreign investors in exchange for access to the US market." "The company doesn't publicly release breakdowns of the revenues or profits of different divisions, but the sources told the newspaper that the division up for sale is profitable and that the sale isn't meant as an exit from the business. The company was recently reports as aiming to increase its handset production to 50 million units per year. Huawei currently outsources its handset manufacturing to Thailand based Cal-Comp Electronics and Singapore headquartered Flextronics."
http://www.cellular-news.com/story/31057.php
ZTE - "ZTE USA, the United States subsidiary to Chinese company ZTE, today announced that MetroPCS has signed an agreement to purchase ZTE’s CDMA PCS and AWS handsets. The agreement marks the company’s first handset customer in the United States."
ZTE and Huawei both want to get into the North American market and have often been mentioned as potential bidders for Motorola's handset division although the size of Motorola may preclude that.
http://telephonyonline.com/wireless/news/zte_handsets_USA_121907/
UTStarcom - 2007 sales of the PCD was at $1.664 billion, up from $1.34 billion in 2006 and $1.37 billion in 2005. The company shipped 2.8 million units and had record quarterly revenues in Q4 2007 of $560m and 6.2% GMs. Profit margins in 2005 and 2006 had been 4 and 3% respectively while it improved to 6% in 2007. For 2008, revenue is expected to be 1.74 billion and bring in gross profits of about $104m (up from $94m). The margins doubled from 2006 to 2007 due to higher average selling prices and large inventory write downs in 2006. Overall, the company shipped 1.5m units more in 2007 compared to 2006.
Impact of PCD to UTs bottom line - In 2007, the PCD made up 67% of the company's overall revenue and 30% of gross profits so even though it is "none-core", it has become a vital part of the company. About 35% of the revenue come from internally designed hand sets, up from 10% just a few years ago. At the same ratio, revenue from internal designed handsets will be 608m and 1130m for the resale component. If the company was to keep the internally designed portion and sell the "resale" portion, revenues will still be about $1.5 billion. We don't know what the exact margins for each division but assuming 12% GMs for the internal handset portion, the resale part will have GMs of 2.8%. Profit breakdown will be $73m and $31m.
Valuation - For the entire PCD, I am estimating it could be worth about $500m (higher revenue multiple from the Lenovo sale) due to its North American customers, increasing revenue and average unit selling prices. The division is very profitable and would be an attractive acquisition. From previous discussions, it is very difficult to get into the North American market and establish good relationship with the Verizons etc. The company has also mentioned it is on its 3rd generation of handsets and see continued growth. Based on gross profit breakdown, the separate portions could be worth $350m and $150m (5x gross profit) respectively. If the company keeps the internal design portion and hit their target of 25% of revenue for SG&A and R&D, that would be about $400m in yearly expenses (based on $1.6b of revenue in 2009 without the resale portion of PCD). That would average out to $100m/quarter. The company is targetting to get under $110m by Q4 of 2008.
Impact on 2009 earnings - Using some rough numbers at this point, the company could have $2.8b in sales and overall GMs of 16% (using Q1 GM). That would yield $450m in gross profits and yield to about breakeven if the company reduces expenses to under $110m per quarter (add in stockbased expenses/taxes). The company could sell other none-core assets to raise cash or take in massive cash from a sale of PCD but it would impact earnings in 2009 as the other business units will not be close to making up for the loss gross profits (obviously). Either way, expenses need to go down and a sale of none-core assets is expected. We'll keep up with the news with Huawei and Motorola (and other handset news) but in general the PCD is a valuable asset that can be sold to raise significant amount of cash or maintain their enormous quarterly expenses until the core business units can become profitable on their own.
Weekly recap - Stock traded above $4
The stock closed the week at $3.91, up around 18% for the week on the back of positive preannouncement from the company. The stock is still off about 60+ percent from the 2007 highs but up from the 2008 lows of $2.23.
Company preannounces positive Q1 results - See previous posting. The following describes the current situation properly,
"Since announcing our new corporate strategy in September 2007, we have made a good deal of progress," said Peter Blackmore, UTStarcom's president and chief operating officer. "These preliminary results reflect that progress, plus we benefited from some positive one time factors. There is still a lot of work to do in our turnaround, but we are on track with where we expected to be."
Before this week's announcement, there has been a lot of progress in settling lingering issues such as the delayed financials, options/China investigations, strategic direction of the company, control of the company, convertible bond overhang, internal control issues, communication with the investment community. However, there has been little signs of operational improvements with the company losing 40-50 cents/quarter and burning a lot of cash. As Blackmore mentioned in the PR, there is now tangible effects of the improvements showing up. Again, it is hard to get overly excited about certain contract wins when we investors don't know the value. Everthing up to this point has been "strategic" and "have faith". Remember, the company expenses have not gone down materially at over $120m so it is "expected" that they will win contracts. This weeks announcement do show their cash generation steps are working improving cash to $305m and lowering debt to $36m. Gross margins were guided up from 13% to 15-16%. This is significant because revenues also were guided up to $580-590m from $500-520m. Its not easy to move GMs up 300 basis points when the bulk of revenue comes from the low margin PCD.
I am definitely upbeat due to the stock price gains but this is off all-time low base. It is encouraging that management is more cautious and see this turnaround in the proper context. Just last week, Brian Caskey mentioned the 3 million iptv capacity as not very large and this week Blackmore citing progress but saying much more work needs to be done. Obviously, there has to be progress in expense reduction, sale of none-core assets, and maximizing their return on investment. The last item I touched upon on the last post regarding a share buy back. The company is not in the real-estate or investement banking/trading business so it should buy back shares at the current low prices.
Triple Play contract in GOA, India - "The end-to-end network will provide more than 100,000 subscribers in Goa with high-speed access to several new services including broadcast-quality IPTV and e-Governance applications." http://biz.yahoo.com/prnews/080508/aqth036.html?.v=57
Post of week - This one goes to Tigre for his recap of the significance of the GOA win. "Today's triple-play contract in Goa, following previously announced GEPON contract in that Indian state, billed today as "first deployment of IPTV, GEPON and NGN solutions on a single network," is a great illustration of the new sales approach adopted by UTSI to bundle broadband, NGN softswitch, and IPTV in one potent package to enhance the appeal of its products to potential customers, and thus gain more revenue and overall corporate margin as a result."
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151975&mid=151975&tof=9&frt=1
Price targets and analyst/institutional actions - Tigre adds, "Who knows, I might even have to raise my target stock price for end of this year, but I'd wait a bit for more signs that Blackmore can execute the strategy that he has put in place. " For the record, Tigre has a $5 target at the end of the year or early next year and I have a $10 target. At the end of the year, we'll see who can sell their crystal ball :-)
"So, my current end of the year target assuming they get to profitability is $8-9. I'll round up the target to $10 with the shorts giving it a $1 premium :-) Most of the analysts agree that the downside is limited (as also shown above) but are wary of the profitability/timing (hence the discount). As an investor/trader, we have to look at risk/rewards and it is looking like the biggest risk is opportunity cost. Of course, in this current market, the opportunity cost is not too great (unless you are shorting). The above is why I and most longs are sticking with this company. Because if management can get their act together, the stock should move significantly higher from here." http://utstarcom-stocknews.blogspot.com/2008/01/current-liquidity-and-2008-year-end.html
Except for BWS, most price targets are in the $3-3.5 range. S&P had a $11 price target early in 2007 and now has a $3.5 price target. As the stock goes up and the quarterly results start to show tangible progress, the stock price targets will start to go up.
Earnings report and cc on May 15 - It is nice to see the company back in a somewhat regular reporting cycle and investors can gauge their progress in the turnaround. The upcoming call will be close to the 1-yr anniversary (end of May 2007) when the company made the announcement to do nothing from the strategic study they started in 2006 (and once again implied they can do better by changing course - lets hope they stay committed/focused on the current track and get the stock price up). It will also be the last major opportunity for the company to communicate prior to the shareholder meeting in June (and Blackmore's transition to CEO). In a future post, I'll put out some topics that hopefully management will go over. Sometimes, management talks about certain items in one CC and then there are no more updates (such as the one signed OEM, selling/licening of patents, selling of none-core assets, stock buy back, etc).
Shareholder meeting - This is still at the end of June but people should plan to go. During Ford Motor's meeting only 56 people attended! For UT, it was 3 people in 2006 and about 11 in 2007. You will get a chance to ask some questions and meet management. I encourage people to go to have more confidence in the company. Those people that went on March 17 during the market lows probably got more confidence in holding their shares or even adding. So, there are "benefits" to going (yes, venting is a good benefit as well :-). Otherwise, you'll have to rely on my reporting and crystal ball, which hasn't been the best the last few years but my technicians say they have fixed the bugs for the last 3 years and should work fine now :-)
Have a great rest of the weekend and Happy Mothers Day to all mothers out there.
Company preannounces positive Q1 results - See previous posting. The following describes the current situation properly,
"Since announcing our new corporate strategy in September 2007, we have made a good deal of progress," said Peter Blackmore, UTStarcom's president and chief operating officer. "These preliminary results reflect that progress, plus we benefited from some positive one time factors. There is still a lot of work to do in our turnaround, but we are on track with where we expected to be."
Before this week's announcement, there has been a lot of progress in settling lingering issues such as the delayed financials, options/China investigations, strategic direction of the company, control of the company, convertible bond overhang, internal control issues, communication with the investment community. However, there has been little signs of operational improvements with the company losing 40-50 cents/quarter and burning a lot of cash. As Blackmore mentioned in the PR, there is now tangible effects of the improvements showing up. Again, it is hard to get overly excited about certain contract wins when we investors don't know the value. Everthing up to this point has been "strategic" and "have faith". Remember, the company expenses have not gone down materially at over $120m so it is "expected" that they will win contracts. This weeks announcement do show their cash generation steps are working improving cash to $305m and lowering debt to $36m. Gross margins were guided up from 13% to 15-16%. This is significant because revenues also were guided up to $580-590m from $500-520m. Its not easy to move GMs up 300 basis points when the bulk of revenue comes from the low margin PCD.
I am definitely upbeat due to the stock price gains but this is off all-time low base. It is encouraging that management is more cautious and see this turnaround in the proper context. Just last week, Brian Caskey mentioned the 3 million iptv capacity as not very large and this week Blackmore citing progress but saying much more work needs to be done. Obviously, there has to be progress in expense reduction, sale of none-core assets, and maximizing their return on investment. The last item I touched upon on the last post regarding a share buy back. The company is not in the real-estate or investement banking/trading business so it should buy back shares at the current low prices.
Triple Play contract in GOA, India - "The end-to-end network will provide more than 100,000 subscribers in Goa with high-speed access to several new services including broadcast-quality IPTV and e-Governance applications." http://biz.yahoo.com/prnews/080508/aqth036.html?.v=57
Post of week - This one goes to Tigre for his recap of the significance of the GOA win. "Today's triple-play contract in Goa, following previously announced GEPON contract in that Indian state, billed today as "first deployment of IPTV, GEPON and NGN solutions on a single network," is a great illustration of the new sales approach adopted by UTSI to bundle broadband, NGN softswitch, and IPTV in one potent package to enhance the appeal of its products to potential customers, and thus gain more revenue and overall corporate margin as a result."
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151975&mid=151975&tof=9&frt=1
Price targets and analyst/institutional actions - Tigre adds, "Who knows, I might even have to raise my target stock price for end of this year, but I'd wait a bit for more signs that Blackmore can execute the strategy that he has put in place. " For the record, Tigre has a $5 target at the end of the year or early next year and I have a $10 target. At the end of the year, we'll see who can sell their crystal ball :-)
"So, my current end of the year target assuming they get to profitability is $8-9. I'll round up the target to $10 with the shorts giving it a $1 premium :-) Most of the analysts agree that the downside is limited (as also shown above) but are wary of the profitability/timing (hence the discount). As an investor/trader, we have to look at risk/rewards and it is looking like the biggest risk is opportunity cost. Of course, in this current market, the opportunity cost is not too great (unless you are shorting). The above is why I and most longs are sticking with this company. Because if management can get their act together, the stock should move significantly higher from here." http://utstarcom-stocknews.blogspot.com/2008/01/current-liquidity-and-2008-year-end.html
Except for BWS, most price targets are in the $3-3.5 range. S&P had a $11 price target early in 2007 and now has a $3.5 price target. As the stock goes up and the quarterly results start to show tangible progress, the stock price targets will start to go up.
Earnings report and cc on May 15 - It is nice to see the company back in a somewhat regular reporting cycle and investors can gauge their progress in the turnaround. The upcoming call will be close to the 1-yr anniversary (end of May 2007) when the company made the announcement to do nothing from the strategic study they started in 2006 (and once again implied they can do better by changing course - lets hope they stay committed/focused on the current track and get the stock price up). It will also be the last major opportunity for the company to communicate prior to the shareholder meeting in June (and Blackmore's transition to CEO). In a future post, I'll put out some topics that hopefully management will go over. Sometimes, management talks about certain items in one CC and then there are no more updates (such as the one signed OEM, selling/licening of patents, selling of none-core assets, stock buy back, etc).
Shareholder meeting - This is still at the end of June but people should plan to go. During Ford Motor's meeting only 56 people attended! For UT, it was 3 people in 2006 and about 11 in 2007. You will get a chance to ask some questions and meet management. I encourage people to go to have more confidence in the company. Those people that went on March 17 during the market lows probably got more confidence in holding their shares or even adding. So, there are "benefits" to going (yes, venting is a good benefit as well :-). Otherwise, you'll have to rely on my reporting and crystal ball, which hasn't been the best the last few years but my technicians say they have fixed the bugs for the last 3 years and should work fine now :-)
Have a great rest of the weekend and Happy Mothers Day to all mothers out there.
Thursday, May 8, 2008
Valuation and speculation regarding UTs cash
$305m in cash/securities and $36m in debt. That is a net cash of $269m for a company with a market cap of $476m. Thats 57% of the market cap in cash. Their real estate assets have been in the $200-220m all these years despite the significant rise in China real estate and the fact that commodities have significantly gone up (that translates to significantly higher building costs if one was to build the same building today!). Anyway, just the real estate and net cash/securities make up the market cap. The PCD (resale & internal designs) will generate over $100m in gross profits and about $60m in net profits. That may be worth close to half a billion (I still have to get on that post but there are a lot of examples that I am reading that indicate UTs PCD is worth around that amount). That doesn't even include iptv, broadband, PAS and NGN business units that form the core and are the future of the company (and how much R&D have they pumped in over the years?).
For this post however, I'd like to focus on the cash. With $305m in cash and little debt (and no more CB in the horizon), my speculation is that the company will announce a buyback and/or sell some none-core assets in the next earnings call. This is the perfect opportunity to make best use of the funds. The stock is still way undervalued. According to Thomas Toy, the company went into the ML strategic alternative study to unlock shareholder value when the board perceived the shares were undervalued (at $6-7 at the time). What more now that a lot of the issues have been dealt with and the company is in full turnaround mode and showing good progress in winning contracts (not so much on the expense side yet). Coupled with Barton's 6-7 point plan of cash generation (selling none-core assets, leasing the building, using OEMs, cutting head count, licensing/selling patents, improving efficiencies/GMs, etc), the company should be very comfortable using some of their cash horde to buy back shares.
In the past, the interest burden on the CB, uncertainties in their markets, and other issues have prevented them from buying back stock. Their cash mostly sat in Chinese banks making 2%. Nowadays, cash is king and they have signficant amount of it. With their guidance of getting their expenses in line within the next few quarters and getting back to breakeven, a stock buyback will also pave the way to supercharge earnings when there are earnings to talk about.
While other companies have to raise cash and reach out to some foreign states, paying 12-15% and getting discounted shareprice/convertibles to boot, you would think that UT can do something with their cash to get a decent return - and a stock buyback is a good start.
For this post however, I'd like to focus on the cash. With $305m in cash and little debt (and no more CB in the horizon), my speculation is that the company will announce a buyback and/or sell some none-core assets in the next earnings call. This is the perfect opportunity to make best use of the funds. The stock is still way undervalued. According to Thomas Toy, the company went into the ML strategic alternative study to unlock shareholder value when the board perceived the shares were undervalued (at $6-7 at the time). What more now that a lot of the issues have been dealt with and the company is in full turnaround mode and showing good progress in winning contracts (not so much on the expense side yet). Coupled with Barton's 6-7 point plan of cash generation (selling none-core assets, leasing the building, using OEMs, cutting head count, licensing/selling patents, improving efficiencies/GMs, etc), the company should be very comfortable using some of their cash horde to buy back shares.
In the past, the interest burden on the CB, uncertainties in their markets, and other issues have prevented them from buying back stock. Their cash mostly sat in Chinese banks making 2%. Nowadays, cash is king and they have signficant amount of it. With their guidance of getting their expenses in line within the next few quarters and getting back to breakeven, a stock buyback will also pave the way to supercharge earnings when there are earnings to talk about.
While other companies have to raise cash and reach out to some foreign states, paying 12-15% and getting discounted shareprice/convertibles to boot, you would think that UT can do something with their cash to get a decent return - and a stock buyback is a good start.
Tuesday, May 6, 2008
UTStarcom preannounces - stock up 19% AH
I checked my yahoo email this afternoon and saw there was another email alert from UTStarcom. More option grants? More details on management/board compensation? Delayed quarterly filings? Someone else being investigated by the SEC or justice department? Nope, it was a preannouncement that the company exceeded their previous guidance for Q1. Instead of revenues of $500m to $520m, it will come in between $580m to $590m. Gross margins are going to be 15-16% instead of the 13% estimated previously.
I then proceeded to read through the PR for the REAL negative news. There has to be negative news. Almost every quarter that the company has exceeded (since 2004) has come with very poor guidance. In May 2005, the company reported 29 cents/share due to the Japan contract being recognized and then poor guidance followed. They exceeded in Q1 2006 but again guidance was not good. Is there more China investigations? Well, they did have higher than estimated expenses due to "unanticipated professional services expenses". Its actually pretty bad when you give guidance 1 month before the quarter ends (end of Feb) and then say its unanticipated.
The upside in revenue was partially expected as Fran Barton has been very conservative but the 300 basis point upside in GMs is significant showing the non-PCD businesses are also doing well. Another big positive surprise is the liquidity position. Back in the end of February, Barton updated the cash position at $228m with $48m in debt. At the end of the quarter (one month later), the cash/short term investments has become $305m and the debt down to $36m. The company attributed the "strong cash flow from operations generated primarily by management of working capital." So, the "cash" went from a net $180m to $269m in one month! We'll still need to see the balance sheet (payables/inventory) but this is clearly good news and that their cash generation plan is working.
The company is still implementing a new ERP system and had to delay the filings. Looking at the glass half empty, I still wonder why they would release preliminary numbers now and they didn't in late 2006 to most of 2007. Maybe their legal department has no issues with releasing good news :-) Anyway, looking at the glass half full, its good to know that they actually listened to some of the items we talked about during the shareholder meeting (communication, preannounce when you have good news, etc).
PS. Its funny how the yahoo board/management is now under the gun because they DIDN'T listen to their shareholders. It may be a good idea to actually listen to shareholders once in a while :-) Again, I am not a braniac like some people on the boards (specially those that bash me) but I think the stock is on an uptrend.
I then proceeded to read through the PR for the REAL negative news. There has to be negative news. Almost every quarter that the company has exceeded (since 2004) has come with very poor guidance. In May 2005, the company reported 29 cents/share due to the Japan contract being recognized and then poor guidance followed. They exceeded in Q1 2006 but again guidance was not good. Is there more China investigations? Well, they did have higher than estimated expenses due to "unanticipated professional services expenses". Its actually pretty bad when you give guidance 1 month before the quarter ends (end of Feb) and then say its unanticipated.
The upside in revenue was partially expected as Fran Barton has been very conservative but the 300 basis point upside in GMs is significant showing the non-PCD businesses are also doing well. Another big positive surprise is the liquidity position. Back in the end of February, Barton updated the cash position at $228m with $48m in debt. At the end of the quarter (one month later), the cash/short term investments has become $305m and the debt down to $36m. The company attributed the "strong cash flow from operations generated primarily by management of working capital." So, the "cash" went from a net $180m to $269m in one month! We'll still need to see the balance sheet (payables/inventory) but this is clearly good news and that their cash generation plan is working.
The company is still implementing a new ERP system and had to delay the filings. Looking at the glass half empty, I still wonder why they would release preliminary numbers now and they didn't in late 2006 to most of 2007. Maybe their legal department has no issues with releasing good news :-) Anyway, looking at the glass half full, its good to know that they actually listened to some of the items we talked about during the shareholder meeting (communication, preannounce when you have good news, etc).
PS. Its funny how the yahoo board/management is now under the gun because they DIDN'T listen to their shareholders. It may be a good idea to actually listen to shareholders once in a while :-) Again, I am not a braniac like some people on the boards (specially those that bash me) but I think the stock is on an uptrend.
Sunday, May 4, 2008
Weekly recap - 6 month high
The stock closed at $3.32 for the week, up almost 11%. Although there were some "fundamental" news during the week, the highlight was the stock price action. During the previous week (on Monday), we saw the lowest volume ever (April 21, 2008 - 317k shares). I am not a stock technician but the price action was really bullish this week. On Monday morning, the stock took a "dip" to $2.96 at the open where the market (or MM) tried to fake off the bullish sentiment growing in anticipation of the iptv webinar. The stock then closed the month at $3.25, a nice 14% increase that I'm sure fund managers (long & short) had to take note of. The stock broke through the $3.19 (triple top price action of the last couple of months) and then proceeded to take out 6 month high of $3.42 and then having succesive day highs of $3.43 and $3.44 before some profit taking late Friday. Overall, I'm not a braniac like a lot of people on the message boards but I think the stock is going higher :-)
I could end the weekly recap with the stock price but there were some interesting developments that I'd like to touch upon for recrod keeping purposes.
IPTV Webinar - I still want to do a seperate posting but my initial impression was positive due to the 3 million overall subscriber capacity already booked (compared to very little 3 years ago when Bill Huang held a similar iptv webinar). I like the fact that Brian Caskey mentioned the 3 million as not a lot yet, offering an insight that they have only scratched the surface. For comparison, Merrill Lynch estimated that UT could have a "base" subscriber number of 4 million in China over 5 years (with an upside of 2 to 4x). The number of wins that have been announced (specially in India) show that the potential of iptv is real and UT has material traction. I was happy with the 1 million number with MTNL (it was only 500k on the November call) but had questions with the 800k live users since it was already 750k two months ago (and supposedely had 40k STBs being shipped/month in China alone). Also, why wasn't the India/Sri Lanka contracts discussed in more detail. Also, what "new developments" were discussed in the webinar. I was hoping for information on Hong Kong or other new wins but the company is probably saving this for the earnings call. Anyway, I posed those questions to Barry Hutton, UTs director of IR and he gave the following response.
"Hi Tim,
Thanks for the question. I see where you are pulling certain numbers from the February 28th earnings call and then trying to approximate future results and metrics. However, estimating these future results may not be as straight forward of a process as it might appear. So doing that simple math might lead to some misleading estimates.
Unfortunately, Reg FD somewhat limits my ability to give you adefinitive updated number or a detailed explanation in a closed forum such as this e-mail or even a phone call. But we want to be sensitive to your question. So on the upcoming earnings call we will not only give you updated subscriber numbers but also try to provide clarity on how best to think about the growth of the business going forward. In regards to our not mentioning certain customer or geographic wins, I remind you of the conversation you had with management in mid March. Recall that our ability to discuss certain wins is often limited by certain factors like customer approval requirements etc. Even if thedeal is discussed by other parties or in other forums we are sometimes limited in our ability to issue a release. Again, on our upcoming earnings call we hope to provide a more complete update as to our progress. I hope this helps and you will hear more shortly"
Here was my response to his response.
"Barry, Thanks for your response. If you have other ways toclarify the growth in the business, that would be welcome as well but STB shipped and live users were provided previously, and only live users were provided yesterday. It would help to have some clarification specially since the only conclusion from the live numbers is STB are not being shipped/ordered at the same rate or that adoption/subscriber uptake has slowed down.
As for the PR, I was NOT asking for a PR on Hong Kong but information/confirmation on the contract. This is not similar to Motorolas wimax announcement because the HK iptv info came directly from a UTStarcom executive (not other parties).
As for the "forum",Y esterday's iptv webinar was suppose to discuss thedevelopments in iptv, wasn't it? Let me make it more clear. Why can a UTStarcom executive in Hong Kong announce they have won a signficant contract in iptv and Peter and Brian Caskey not even mention HK during the "iptv" webinar? BTW, I think these are not "material" disclosures but simply clarification on news that was already provided."
Anyway, I think we will hear much more in the earnings call but I really should have asked those questions during the webinar.
Post of the week - This one goes to a relative unknown rrbassplayer who posted on the "unsurmountable problems UTSI faces". http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151764&mid=151764&tof=10&frt=1
The poster brings up valid issues in India regarding broadband users and the pace of iptv adoption there. However, it is good that UT has a broadband group in India to help push the countries broadband development (what a coincidence :-) Some shareholders also point to the negative posts at a time when the stock is making new 6 month highs as bullish and somehow this is some short attack (nah, can't be....:-)
SEC Settlement - See my previous post.
Yahoo-Microsoft - Most people have probably heard that Microsoft made a last gasp offer of $33/share but Yahoo rejected it and wanted $37-38. This is very relevant for UT because of what happened as recent as last year. Ultimately we shareholders hope that the board/management think of shareholder value (I know that seems like a hard concept to grasp the last few years). Anyway, when the group met with management on March 17, I wanted to start the discussion with a simple question. Does the management believe it can turn itself around or is it better to go into a strategic option now rather than wasting years again (and hurting its balance sheet even more). Even during my last meeting with Thomas Toy, I mentioned the opportunity costs for shareholders that the board/management has bascially decided on when they went into the strategic option, rejected some offers (for atleast part of the company) and decided it was better to go it alone and do a turnaround (when the stock was even at $7). Back to Yahoo, they rejected a $40 offer for Microsoft over a year ago, and now a $33 offer when the stock was at $19 (before this latest overture by Microsoft). The company is holding out for $3 to $4 more. However, what are the chances it can recover from the beating it will take (probably drop to the low $20s if not the teens) and then recover to $37 to $38 in the next yea? Shareholders did not even get the right to "vote" on the offer.
Back to UT, this is precisely why the board/management took a major responsibilty/risk in this turnaround and investors should keep in mind the opportunity loss by the boards' decisions.
Have a good rest of the weekend to everyone.
I could end the weekly recap with the stock price but there were some interesting developments that I'd like to touch upon for recrod keeping purposes.
IPTV Webinar - I still want to do a seperate posting but my initial impression was positive due to the 3 million overall subscriber capacity already booked (compared to very little 3 years ago when Bill Huang held a similar iptv webinar). I like the fact that Brian Caskey mentioned the 3 million as not a lot yet, offering an insight that they have only scratched the surface. For comparison, Merrill Lynch estimated that UT could have a "base" subscriber number of 4 million in China over 5 years (with an upside of 2 to 4x). The number of wins that have been announced (specially in India) show that the potential of iptv is real and UT has material traction. I was happy with the 1 million number with MTNL (it was only 500k on the November call) but had questions with the 800k live users since it was already 750k two months ago (and supposedely had 40k STBs being shipped/month in China alone). Also, why wasn't the India/Sri Lanka contracts discussed in more detail. Also, what "new developments" were discussed in the webinar. I was hoping for information on Hong Kong or other new wins but the company is probably saving this for the earnings call. Anyway, I posed those questions to Barry Hutton, UTs director of IR and he gave the following response.
"Hi Tim,
Thanks for the question. I see where you are pulling certain numbers from the February 28th earnings call and then trying to approximate future results and metrics. However, estimating these future results may not be as straight forward of a process as it might appear. So doing that simple math might lead to some misleading estimates.
Unfortunately, Reg FD somewhat limits my ability to give you adefinitive updated number or a detailed explanation in a closed forum such as this e-mail or even a phone call. But we want to be sensitive to your question. So on the upcoming earnings call we will not only give you updated subscriber numbers but also try to provide clarity on how best to think about the growth of the business going forward. In regards to our not mentioning certain customer or geographic wins, I remind you of the conversation you had with management in mid March. Recall that our ability to discuss certain wins is often limited by certain factors like customer approval requirements etc. Even if thedeal is discussed by other parties or in other forums we are sometimes limited in our ability to issue a release. Again, on our upcoming earnings call we hope to provide a more complete update as to our progress. I hope this helps and you will hear more shortly"
Here was my response to his response.
"Barry, Thanks for your response. If you have other ways toclarify the growth in the business, that would be welcome as well but STB shipped and live users were provided previously, and only live users were provided yesterday. It would help to have some clarification specially since the only conclusion from the live numbers is STB are not being shipped/ordered at the same rate or that adoption/subscriber uptake has slowed down.
As for the PR, I was NOT asking for a PR on Hong Kong but information/confirmation on the contract. This is not similar to Motorolas wimax announcement because the HK iptv info came directly from a UTStarcom executive (not other parties).
As for the "forum",Y esterday's iptv webinar was suppose to discuss thedevelopments in iptv, wasn't it? Let me make it more clear. Why can a UTStarcom executive in Hong Kong announce they have won a signficant contract in iptv and Peter and Brian Caskey not even mention HK during the "iptv" webinar? BTW, I think these are not "material" disclosures but simply clarification on news that was already provided."
Anyway, I think we will hear much more in the earnings call but I really should have asked those questions during the webinar.
Post of the week - This one goes to a relative unknown rrbassplayer who posted on the "unsurmountable problems UTSI faces". http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151764&mid=151764&tof=10&frt=1
The poster brings up valid issues in India regarding broadband users and the pace of iptv adoption there. However, it is good that UT has a broadband group in India to help push the countries broadband development (what a coincidence :-) Some shareholders also point to the negative posts at a time when the stock is making new 6 month highs as bullish and somehow this is some short attack (nah, can't be....:-)
SEC Settlement - See my previous post.
Yahoo-Microsoft - Most people have probably heard that Microsoft made a last gasp offer of $33/share but Yahoo rejected it and wanted $37-38. This is very relevant for UT because of what happened as recent as last year. Ultimately we shareholders hope that the board/management think of shareholder value (I know that seems like a hard concept to grasp the last few years). Anyway, when the group met with management on March 17, I wanted to start the discussion with a simple question. Does the management believe it can turn itself around or is it better to go into a strategic option now rather than wasting years again (and hurting its balance sheet even more). Even during my last meeting with Thomas Toy, I mentioned the opportunity costs for shareholders that the board/management has bascially decided on when they went into the strategic option, rejected some offers (for atleast part of the company) and decided it was better to go it alone and do a turnaround (when the stock was even at $7). Back to Yahoo, they rejected a $40 offer for Microsoft over a year ago, and now a $33 offer when the stock was at $19 (before this latest overture by Microsoft). The company is holding out for $3 to $4 more. However, what are the chances it can recover from the beating it will take (probably drop to the low $20s if not the teens) and then recover to $37 to $38 in the next yea? Shareholders did not even get the right to "vote" on the offer.
Back to UT, this is precisely why the board/management took a major responsibilty/risk in this turnaround and investors should keep in mind the opportunity loss by the boards' decisions.
Have a good rest of the weekend to everyone.
Thursday, May 1, 2008
SEC Settlement and stock "technicals"
"UTStarcom, Inc. (Nasdaq: UTSI - News), today announced a final settlement with the Securities and Exchange Commission (the "SEC") regarding the previously-disclosed SEC investigation of the Company's financial disclosures during prior reporting periods, historic option grant awards practices, certain historical sales contracts in China and other matters."
http://biz.yahoo.com/prnews/080501/aqth551.html?.v=1
"UTStarcom Chief Executive Hong Liang Lu and former Chief Financial Officer Michael Sophie paid penalties of $100,000 and $75,000 respectively, but did not admit or deny the allegations, the SEC said in a statement."
"The executives "did little to ensure that the company's internal controls were adequate and effective" after they were warned of accounting weaknesses by outside auditors, said Marc Fagel of the SEC's San Francisco office."
http://www.reuters.com/article/marketsNews/idINN0147203920080501?rpc=44
The biggest winners in another one of the sad episodes with this company have been the shorts, accountants, Barton, and to a certain extent Blackmore. The company has been using the "growing too fast" excuse for just about all their accounting problems but can someone for once take some responsibility? I atleast hope Peter or some of the other senior executives can step up and overcome the "all excuses/poor performing" environment/mentality they have been in.
Being an engineer, I am biased towards the technical people in the company against the management/finance people. How long does it take to fix all the finances and accounting systems? Even up to now, their internal controls/accounting systems are not fully functional yet (let alone "world class").
I work for a company called Tetra Tech with close to 10k people that was put together with over 40 acquisitions through the years. Do things go wrong? Yes. Does it take 3 years to fix something? No Way. Can it go for 12 or 16 quarters without being profitable? No Way. Does it waste tens of millions in interest payments? No Way. Can it take its time addressing cost cuts when it is severely needed? No Way. And on and on.......
Instead of trumpeting the settlement today, the company should release how much the REAL cost to shareholders have been, offer an apology, and what restitutions the responsible parties will do with their compensations. Will it happen? I guess when pigs fly :-)
On a side note, the stock hit a 6 month high ($3.43) and up about 14% just this week. Did anything fundamentally change this week? Not really. Is it fundamentally different from when it hit $2.23 on March 17? Not really. The opportunities and roadblocks that we have been discussing in the blog, with management/board, and in the message boards continue whether the stock is at $3 or $10 (right now).
As a side note, see this set of posts from March 17, 2008:
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=150760&mid=150780&tof=269&rt=2&frt=1&off=1
and this one yesterday.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151750&mid=151750&tof=19&frt=1
I selected the posts from Tigre as he is a well known poster and well informed regarding the company/technology/industry. Nothing has changed "fundamentally" but he went from looking at the glass half empty (or cracking) to buying the stock and even discussing broadband uptake in India (of all places). http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151807&mid=151807&tof=6&frt=1
Ultimately, the stock will be driven by fundamentals as Tigre mentioned but the technicals (stock) have improved and incorporates a whole slew of items and is the primary driver at this stage. This blog/group will continue to discuss fundamental issues and oversee the company performance every step of the way (and hopefully have given shareholders confidence to hold/buy under $3 which we have discussed constantly) but as we've seen in the past, people have to watch the technicals closely because it incorporates things we are not aware of.
If the stock goes back down or it pulls back as the stock moves higher, you can always come back to the blog/group. We will be here as a "put" on the price (in some respect). Otherwise, good luck on the way up and pay particular attention to Hangman's posts. He seems to know what he is talking about :-)
http://biz.yahoo.com/prnews/080501/aqth551.html?.v=1
"UTStarcom Chief Executive Hong Liang Lu and former Chief Financial Officer Michael Sophie paid penalties of $100,000 and $75,000 respectively, but did not admit or deny the allegations, the SEC said in a statement."
"The executives "did little to ensure that the company's internal controls were adequate and effective" after they were warned of accounting weaknesses by outside auditors, said Marc Fagel of the SEC's San Francisco office."
http://www.reuters.com/article/marketsNews/idINN0147203920080501?rpc=44
The biggest winners in another one of the sad episodes with this company have been the shorts, accountants, Barton, and to a certain extent Blackmore. The company has been using the "growing too fast" excuse for just about all their accounting problems but can someone for once take some responsibility? I atleast hope Peter or some of the other senior executives can step up and overcome the "all excuses/poor performing" environment/mentality they have been in.
Being an engineer, I am biased towards the technical people in the company against the management/finance people. How long does it take to fix all the finances and accounting systems? Even up to now, their internal controls/accounting systems are not fully functional yet (let alone "world class").
I work for a company called Tetra Tech with close to 10k people that was put together with over 40 acquisitions through the years. Do things go wrong? Yes. Does it take 3 years to fix something? No Way. Can it go for 12 or 16 quarters without being profitable? No Way. Does it waste tens of millions in interest payments? No Way. Can it take its time addressing cost cuts when it is severely needed? No Way. And on and on.......
Instead of trumpeting the settlement today, the company should release how much the REAL cost to shareholders have been, offer an apology, and what restitutions the responsible parties will do with their compensations. Will it happen? I guess when pigs fly :-)
On a side note, the stock hit a 6 month high ($3.43) and up about 14% just this week. Did anything fundamentally change this week? Not really. Is it fundamentally different from when it hit $2.23 on March 17? Not really. The opportunities and roadblocks that we have been discussing in the blog, with management/board, and in the message boards continue whether the stock is at $3 or $10 (right now).
As a side note, see this set of posts from March 17, 2008:
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=150760&mid=150780&tof=269&rt=2&frt=1&off=1
and this one yesterday.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151750&mid=151750&tof=19&frt=1
I selected the posts from Tigre as he is a well known poster and well informed regarding the company/technology/industry. Nothing has changed "fundamentally" but he went from looking at the glass half empty (or cracking) to buying the stock and even discussing broadband uptake in India (of all places). http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151807&mid=151807&tof=6&frt=1
Ultimately, the stock will be driven by fundamentals as Tigre mentioned but the technicals (stock) have improved and incorporates a whole slew of items and is the primary driver at this stage. This blog/group will continue to discuss fundamental issues and oversee the company performance every step of the way (and hopefully have given shareholders confidence to hold/buy under $3 which we have discussed constantly) but as we've seen in the past, people have to watch the technicals closely because it incorporates things we are not aware of.
If the stock goes back down or it pulls back as the stock moves higher, you can always come back to the blog/group. We will be here as a "put" on the price (in some respect). Otherwise, good luck on the way up and pay particular attention to Hangman's posts. He seems to know what he is talking about :-)
Subscribe to:
Posts (Atom)
