Based on the severe stock price decline on Thursday alone (27%) and the huge cash flow losses in Q3 and Q4, I decided to contact management to get some clarification and check if the long term thesis regarding the company is still intact. As you can imagine, the company would get a lot of calls from institutional investors/shareholders/analysts. The company scheduled 30 minute time blocks so that Peter Blackmore, Fran Barton, and Barry Hutton (individually or together) could respond to the interested parties. I got my share of phone calls Thursday morning as well and did not get back to Barry quickly enough so I was scheduled for Friday noontime. That worked out well as I was able to get feedback from other shareholders that had already talked with management and the digest the information. During my time block on Friday, I talked with all three (didn't expect Fran but having the CEO/CFO explaining/listening to your banter is always a treat for me). Anyway, here is what we (including other shareholders) found out.
2008 Revenue Shortfall - The 2008 projected earnings for the company (not including the PCD portion that they sold) was $1.035B ($755m core + $280m internal handset part of the PCD). This was reported in the June Analyst Day Meeting. Due to a loss contract in the internal part of the PCD, weakness in the PAS handset market and a little associated on the infrastructure side (due to the China telecomunications restructuring), 2008 company revenues will be around $900m instead of the $1.035B, or $130m less than expected. Because of this, all of my projections for Q4 breakeven to slightly profitable is out the window and instead of around $420m or so will come in at $290m-$300m. Note that analysts are even more bearish at consensus of around $240m-250m.
Impact of China Telecom Restructuring and PAS - I asked Peter if this was a two quarter or longer event and he responded that it should not be. Fran wanted to add that we should not extrapolate the sharp PAS handset declines (aside from normal declines) into 2009. On the earnings conference call, Barton made it a point to highlight PAS infrastructure has a longer contract period and subject to less fluctuations. For 2008, Barton mentioned PAS infrastructure is about $210m and handsets at $155m (about $20m or so of CDMA/GSM handsets sold in China are also lumped in this figure). For historical context and thinking about PAS impact in the future, those numbers are signficantly lower than the peak number of over $2b a few years ago but still represent about 1/3 the total company revenues for 2008.
Strong bookings growth in 2009 - Management will give more information on the 2009 financial model in the Q3 earnings call but did say that bookings growth for 2009 will be a very healthy 25 to 50%. I suggested that it might boost investor confidence to give more information on backlog/deferred revenue. While some of the contracts are multi-year, it would be nice to get information like when they reported having only booked $60m out of the $240m in iptv contracts a few quarters ago. Fran mentioned they will try to work on that part.
2009 Revenues - As mentioned, management will give more details about this in the Q3 call but other shareholders got indications the company is comfortable with high double digit revenue growth and one of the two analysts who downgraded UT has a $1.2B revenue target (per yahoo). That would indicate potential 2009 revenues in the $1.1 to $1.2B range. While not great considering that 2008 was projected to have $1.035B already, it is very healthy considering 2008 is down to $900m and factoring in PAS declines. Keep in mind though that these are only estimates and we know what can happen to those. Also, one analyst only has a $947m revenue target.
Phase II of BSNL (India) Broadband contract - This contract will be in excess of $80m+ but will not have the 30% GMs that Barton discussed other India contracts yielded this year. Peter mentioned that the company "had" to take this contract after Phase I. He did indicate it will still be profitable. The company will use up around $60m to purchase hardware for this contract in Q3 since they want to execute this without a glitch. One my questions was regarding potential cash burn to build a facility in India (we had heard something related to this in 2007 when they were ramping India contracts). This was a concern I had but Peter mentioned that they already had a logistics center that would assemble the products shipped from China.
China building lease - While at it, I asked about any updates on leasing space in the China building. They are looking to sublease currently to smaller tenants to establish price but nothing material.
Q3 book to bill - Q3 revenue will be around $180m but the company already mentioned that the Phase II India BSNL broadband contract will be booked in Q3. The number will definitely be higher than 1.0 but now that the recognized revenue will be low (compared to Q2), it should be. More importantly, the Q3 and Q4 bookings should be very strong to show good growth for 2009 and beyond.
Share buy back/strategic options - With the frustrations of shareholders, you can imagine this was discussed a lot. Other shareholders who brought up the share buy back got the indication that management will look into it but they are more focused on building the business for the growth phase. I myself did not bring this up anymore but did bring up the strategic options. I generally feel the stock price is ridiculously low anyway. With all the issues the company had back in 2006, the company felt the stock ($6-7) was undervalued and decided to try to sell the company. At the peak of that study, the stock hit almost $11, with an enterprise value closer to $1b. Now that they have resolved most legacy issues, streamlined operations, built up cash, and won significant strateigc contracts, the enterprise value is around $100m+ or so (even adjusting for the cash flow losses in the 2nd half). Anyway, I just wanted to point that out since Blackmore and Barton are also board members. Other shareholders have indicated that management response has been it would not make sense to do it when the price is at $5, let alone $3+. For the record, I believe in much higher valuations myself but the board/management (which has more information than we do) has to continuously think about shareholder value/share price and what the market is saying to them. My conspiracy theory is that management wants a lower stock price just to price the employee options and after that, we are really all in the same boat.
CSBU - Blackmore mentioned this in the earnings conference call that parts or all can be monetized and other parts that don't will be rolled over to MMCBU and broadband. Some shareholders also verified the $30-40m in expense savings if this was sold and got more confidence it will be sold in the near term as the company is bent on driving expenses lower. In the Analyst day meeting, Peter also mentioned all the none-core businesses will be resolved by the end of the year. Also, they are winding down their expenses for legal costs and reorganization so my spider senses tell me it will be sold fairly quickly (before the end of Q3).
Credibility - No doubt the management team took a major hit on this one and shareholders suffered. You can either give in and say this is the same UTStarcom and ignore all the progress that has been made or say this is one mis-step out of 20 good (and some very good) things that have happened (remember the non-dilutive resolution of the convertible bond, all the filings, sale of investements/assets, all contract wins, cost cuts, communication with the investing community, etc). I for one think that management is doing a fairly good job and have been defending the company/stock this last couple of days.
Cash flow for 2008 - The major bear point has been the company cannot make a profit and burns a lot of cash. The company got lucky with some investments and now have sold PCD to fund more cash burning. This is the same company that will push shareholders to their knees and shorts are right on the mark. One large institutional shareholder asked me on Thursday morning why I was not livid and that the company should be sold, blah blah blah. The way I look at the situation is based on the following. In 2006, the company actually generated $60m or so in positive cash flow while losing $1/share in the bottom line. In 2008, the company operations will lose $139m (without PCD, based on the Analyst day numbers) but guided to neutral cash flows for 2008 at the start of the year. Now that the cash flow loss is at $100m, every body is upset. Is this reasonable? Lets take a closer look. With part of the gemdale/infinera gains coming in Q1, the company was projecting neutral cash flows despite the operational losses. Out of the $100m in cash flow loss, $60m can be directly attributed to the hardware buildup for the Phase II BSNL contract. Part of it will be the loss of PCD gross profits for the 2nd half of the year (normally the strongest part of the year), and finally part of it is due to the 2008 revenue shortfall. After receiving all $240m from the PCD sale, the company should have about $465m. The $160m or so in cash flow losses will result in the company ending the year with about $305m. My previous projections taking into account PCD sale loss and positives from having the PCD cash was $386m. That is a difference of about $81m. $60m was for the buildup for the BSNL contract so essentially about $21m was due to the revenue shortfall. Is that commensurate with the recent price drop from the mid $5s less than a month ago? In the large scheme of things, is the short fall in the core businesses or will impact 2009 and beyond? Are people buying the stock based on the cash?
2009 cash flows - Currently, one of the analysts has a 47 cent operational loss in 2009 or say $58m. Cash flow can fluctuate a lot from the P/L but as we've seen in 2006, it could be positive despite operational losses. In Q3 2008 alone, the company will spend $60m that will become receivables in 2009. In Q4 2008, the company will have smaller losses (due to higher revenue and lower expenses than in Q3) so part of the $50m cash flow losses will be a benefit to the payables/receivables category. So, for those trying to extrapolate major cash flow losses into 2009, I just do not see it. With a potential sale of the CSBU and its corresponding expense reduction, that would further bolster the $305m in cash on hand. Add to that minimal interest payments, increased interest on their cash, continued benefit of yuan rising, and cash should be very solid. They SHOULD generate cash in 2009.
2010 and assets - With bookings growth in 2009 in the order of 25-50%, margin improvements, ramp of iptv in China/worldwide and further expense cuts, 2010 should be solidly in the black operationally. Cash position that could grow in 2009 (due to sale of CSBU and other things I just highlighted could also be boosted by up to $50m by the end of 2010). Add in the $30m in restricted funds, $25m in other long term investments, and their buildings $180-220m), and... This really reminds me of the situation with Apple computer where it went down from $60 in 2000 to $12 in 2002 (trading at cash/assets) and now at $340 (split adjusted).
Summary - As a long term shareholder with this company (I am a trader on other companies), I have to look at the entire situation. Everyone has their own position and if they want to sell, I tell them to go ahead. I personally have added and built my position (not all the way yet to what I want but over 70k now) and am hurting looking at the paper losses. The way I look at it, the stock will be much higher in a year or two and that anything in the $5 level is a no brainer.
I will still post a weekly recap but felt I needed to do a post "earnings recap" because of the additional information the last couple of days. Its really brutal right now but am even more confident that this has a bright future for shareholders. Have a great weekend. (BTW, there were over 350 hits in the blog on Thursday alone, it was down to about 20-30 recently - lots of interest with this company :-)
Saturday, August 9, 2008
Wednesday, August 6, 2008
Q2 2008 Earnings Recap
The company reported Q2 2008 "Earnings" today and provided guidance/information on Q3 and Q4. Only Peter Blackmore and Fran Barton hosted the call. In summary, Q2 provided upside on revenue, opex, and cash flow. However, this will impact Q3 pretty hard. Q4 should have very strong revenue and will probably show a profit (per my calculation) but negative cash flows will also impact Q4 hard as the company pours money into their growth plans.
Q2 revenue came in at $633m with $449m in PCD sales. OPEX was down to $113m. Cash usage was expected to be negative $97m came in at $37m. Cash at the end of Q2 was $255m with only $29m in debt for a net cash position of $226m. This does not include the $240m from the PCD sale ($216m received immediately and $24m in escrow). The company could also receive up to $50m more at the end of 2010 depending on the performance of the PCD.
CSBU - While the PCD and MSBU were divested, Blackmore mentioned that parts of the CSBU will be monetized and part will be rolled into the broadband and MMCBU. This will result in further opex savings.
BSNL IPTV - The company continued their stanglehold in the India market by winning BSNL (through Aksh) that will result in deployments in 20 Indian cities almost immediately. This is not a huge revenue generator now but a very key strategic win.
China Telecom restructuring - This continues to impact UT as PAS handset revenue/GMs go down. In the mid to longer term, Blackmore commented the restructuring will definitely help the company.
IPTV update - Total live subscribers as of June 30 has reached 956k with 62% of the China market (twice the nearest competitor).
Tiscali - Acceptance was received.
Brasil Telecom - UT finalizing arranements for one of the first fixed mobile convergence (FMC) solutions in the world.
Interactive advertising - As mentioned previously in a PR, UT system will be deployed in 14 cities with 3600 concurrent streams.
Broadband - Phase 1 of the large Indian broadband contract has gone through 100% validation and in now in acceptance phase. Advance purchase order for phase 2 of the contract will result in a greater than $80m contract for UT that will be booked in Q3.
GEPON - Wins in 5 cities with CT/CN shows some traction with GEPON.
Transport (Packet) Network Product - Discussed in the analyst day meeting, this product has achieved some milestone testing with various carriers.
Barton discussed the numbers for each business units.
Broadband - $36m from $38m. GMs were only 5% due to a $7m charge from foreign currency fluctuations in India. Without this, GMs would be 25%. Barton added that he is confident all other India contracts booked are profitable with margins in the 30%.
MMCBU - 17% growth from $63m to $74m. Growth in China iptv and NGN softswich more than made up for PAS infra. GMs fell to 39% from 44% due to higher mix of STB.
PCD - Revenue went from $358m to $449m with a 8.1% GM! That should help in the cummulative performance in the 3 years that will determine how much more of the $50m the company can get.
Handset business - Declined from $62m to $50m with GMs going from 36% to 14%. In the future, the internal design PCD part of the PCD (designed in Korea) will be lumped into this business unit.
Services - Increased from $11m to $16m with GMs increasing from 1% to 30%.
Other BU - This includes CSBU and MSBU. This increase from $6m to $9m.
Book to Bill - The book to bill excluding PCD was 1.0. This was projected to be around 1.5 but based on a much lower projected non-PCD revenue. Previously, the projected non-PCD revenue was $125m (mid pt) so it would be around $180m in bookings. The bookings actually came in at around $211m.
Q3 guidance - Guidance for Q3 is $170-190m in revenue with 25% GMs. OPEX will be above $100m (still includes some divestiture expenses).
Q4 remaining revenue - I had previously signficantly overestimated the internal handset division revenue, which actually works out better since more revenue is left for the remaining quarters. The company provided a breakdown of the internal PCD revenues as follows. Q1 had $586m in total revenue with $431m in PCD revs. There was only $35m in internal PCD revenue (not the over $100m I assumed). That makes the core + internal PCD revenue at $190m. For Q2, core revenue came in at $184m ($633m total - $449m PCD). Adding back the $56m in internal PCD revenue yields a revenue of $240m for Q2. For Q3, the company is projecting $180m (mid pt). So, Q4 should still have about $405m in revenue ($1.035b 2008 revenue in the analyst day meeting - $190m - $240m - $180m - $20m less revenue in internal PCD that was guided). At a 25% GMs and OPEX of say $95m, that would leave Q4 with a sligh profit.
Negative cash flows - The company started the year guiding for neutral cash flows. With aggresive collections in Q1 to prepare for the repayment of the CB and money from Gemdale/infinera (partially in Q1), the company had positive cash flow of $97m after Q1 despite the operating loss. Add Q2 loss of $37m in cash flow and the company still had $60m in positive cash flow. Q3 will see a huge $110m cash flow loss due to Q3 losses, prepartion for India contract, and Q4/2009 revenue ramp. Q4 which will be slightly profitable (by my calc) will also have negative $50m in cash flow that will result in the company having a negative $100m in cash flow for the year. Part of the additional cash flow loss was expected due to the sale of the PCD which generated $80m in operating profit, with a good part of it in the 2nd half. I would expect negative cash flows as well due to the huge operating losses but the neutral guidance for cash flow led me to believe that would come mostly from the Gemdale/infinera gains and inventory reduction. Barton explained Q3 cash flow losses fairly well and is reasonable if they are buying raw materials/etc for the big Q4 revenue. I am a surprised with the Q4 cash flow losses because the quarter should be slightly profitable. I will try to get more information on this as soon as possible.
Overall, I was happy with the Q2 bookings, strategic wins (specially the phase 2 $80m+ contract), and huge cash base. However, the huge cash drain in the second half is a disappointment specially since those are particularly strong quarters for the remaining business units. I was also disappointed by the Q&A portion, which didn't touch on the important aspects of the cash drain. One of the analysts from Baird was more concerned about iptv STB (probably with their coverage of Sigma Designs and not UT). Blackmore did mention he will provide more guidance in Q3 regarding 2009. Bookings in Q3 and Q4 have to be really strong to validate their growth strategy. The company will still end the year with over $300m+ in cash and I would hope that spending all the cash in Q3 and Q4 will set up for a strong 2009. We will see......
Q2 revenue came in at $633m with $449m in PCD sales. OPEX was down to $113m. Cash usage was expected to be negative $97m came in at $37m. Cash at the end of Q2 was $255m with only $29m in debt for a net cash position of $226m. This does not include the $240m from the PCD sale ($216m received immediately and $24m in escrow). The company could also receive up to $50m more at the end of 2010 depending on the performance of the PCD.
CSBU - While the PCD and MSBU were divested, Blackmore mentioned that parts of the CSBU will be monetized and part will be rolled into the broadband and MMCBU. This will result in further opex savings.
BSNL IPTV - The company continued their stanglehold in the India market by winning BSNL (through Aksh) that will result in deployments in 20 Indian cities almost immediately. This is not a huge revenue generator now but a very key strategic win.
China Telecom restructuring - This continues to impact UT as PAS handset revenue/GMs go down. In the mid to longer term, Blackmore commented the restructuring will definitely help the company.
IPTV update - Total live subscribers as of June 30 has reached 956k with 62% of the China market (twice the nearest competitor).
Tiscali - Acceptance was received.
Brasil Telecom - UT finalizing arranements for one of the first fixed mobile convergence (FMC) solutions in the world.
Interactive advertising - As mentioned previously in a PR, UT system will be deployed in 14 cities with 3600 concurrent streams.
Broadband - Phase 1 of the large Indian broadband contract has gone through 100% validation and in now in acceptance phase. Advance purchase order for phase 2 of the contract will result in a greater than $80m contract for UT that will be booked in Q3.
GEPON - Wins in 5 cities with CT/CN shows some traction with GEPON.
Transport (Packet) Network Product - Discussed in the analyst day meeting, this product has achieved some milestone testing with various carriers.
Barton discussed the numbers for each business units.
Broadband - $36m from $38m. GMs were only 5% due to a $7m charge from foreign currency fluctuations in India. Without this, GMs would be 25%. Barton added that he is confident all other India contracts booked are profitable with margins in the 30%.
MMCBU - 17% growth from $63m to $74m. Growth in China iptv and NGN softswich more than made up for PAS infra. GMs fell to 39% from 44% due to higher mix of STB.
PCD - Revenue went from $358m to $449m with a 8.1% GM! That should help in the cummulative performance in the 3 years that will determine how much more of the $50m the company can get.
Handset business - Declined from $62m to $50m with GMs going from 36% to 14%. In the future, the internal design PCD part of the PCD (designed in Korea) will be lumped into this business unit.
Services - Increased from $11m to $16m with GMs increasing from 1% to 30%.
Other BU - This includes CSBU and MSBU. This increase from $6m to $9m.
Book to Bill - The book to bill excluding PCD was 1.0. This was projected to be around 1.5 but based on a much lower projected non-PCD revenue. Previously, the projected non-PCD revenue was $125m (mid pt) so it would be around $180m in bookings. The bookings actually came in at around $211m.
Q3 guidance - Guidance for Q3 is $170-190m in revenue with 25% GMs. OPEX will be above $100m (still includes some divestiture expenses).
Q4 remaining revenue - I had previously signficantly overestimated the internal handset division revenue, which actually works out better since more revenue is left for the remaining quarters. The company provided a breakdown of the internal PCD revenues as follows. Q1 had $586m in total revenue with $431m in PCD revs. There was only $35m in internal PCD revenue (not the over $100m I assumed). That makes the core + internal PCD revenue at $190m. For Q2, core revenue came in at $184m ($633m total - $449m PCD). Adding back the $56m in internal PCD revenue yields a revenue of $240m for Q2. For Q3, the company is projecting $180m (mid pt). So, Q4 should still have about $405m in revenue ($1.035b 2008 revenue in the analyst day meeting - $190m - $240m - $180m - $20m less revenue in internal PCD that was guided). At a 25% GMs and OPEX of say $95m, that would leave Q4 with a sligh profit.
Negative cash flows - The company started the year guiding for neutral cash flows. With aggresive collections in Q1 to prepare for the repayment of the CB and money from Gemdale/infinera (partially in Q1), the company had positive cash flow of $97m after Q1 despite the operating loss. Add Q2 loss of $37m in cash flow and the company still had $60m in positive cash flow. Q3 will see a huge $110m cash flow loss due to Q3 losses, prepartion for India contract, and Q4/2009 revenue ramp. Q4 which will be slightly profitable (by my calc) will also have negative $50m in cash flow that will result in the company having a negative $100m in cash flow for the year. Part of the additional cash flow loss was expected due to the sale of the PCD which generated $80m in operating profit, with a good part of it in the 2nd half. I would expect negative cash flows as well due to the huge operating losses but the neutral guidance for cash flow led me to believe that would come mostly from the Gemdale/infinera gains and inventory reduction. Barton explained Q3 cash flow losses fairly well and is reasonable if they are buying raw materials/etc for the big Q4 revenue. I am a surprised with the Q4 cash flow losses because the quarter should be slightly profitable. I will try to get more information on this as soon as possible.
Overall, I was happy with the Q2 bookings, strategic wins (specially the phase 2 $80m+ contract), and huge cash base. However, the huge cash drain in the second half is a disappointment specially since those are particularly strong quarters for the remaining business units. I was also disappointed by the Q&A portion, which didn't touch on the important aspects of the cash drain. One of the analysts from Baird was more concerned about iptv STB (probably with their coverage of Sigma Designs and not UT). Blackmore did mention he will provide more guidance in Q3 regarding 2009. Bookings in Q3 and Q4 have to be really strong to validate their growth strategy. The company will still end the year with over $300m+ in cash and I would hope that spending all the cash in Q3 and Q4 will set up for a strong 2009. We will see......
Tuesday, August 5, 2008
Earnings Preview
There are only two analysts listed in Yahoo that provide estimates for the company and today, the numbers were updated for one analyst that reflected the sale of the PCD. I will focus on Q3 estimates rather than Q2 numbers (that included the PCD). For Q3, the revenue estimate is a low of $215.8m and a high of $259.5m for an average of $237.6m.
By using the analyst day numbers of $1.035b in 2008 revenues ($755m core + $280m internal handset) and backing out Q1 & Q2 core and internal handset revenue, I estimate there are about $600m more in revenues to be recognized in Q3 & Q4. The estimates for Q3 suggest that more of that revenue will be recognized in Q4. The estimated loss of 29 cents also makes sense with the revenue estimates.
The potential negatives for the call tomorrow include:
1. Continued loss in Q3.
2. Guidance that is lower than consensus or the low of the estimates
3. Slow down in iptv implementation
4. Higher OPEX than $95m
5. Any write downs
The potential positives include:
1. Guidance that is higher than consensus
2. Good book to bill (previous guidance of 1.5 on the non-pcd)
3. Higher shareholder equity/book value due to sale of PCD/MSBU
4. New contract win announcements
5. Use of excess cash for share buy back or a special dividend
From the lists above, guidance for Q3 is going to be key in the short term. Q2 could come in better than expected and less revenue could be left for Q3/Q4. The range from $215m to $259m for Q3 is a wide range with only two analysts.
Overall, I am more bullish than bearish going into the call only because the Q3 revenue estimates don't seem too high and Q3 will include July and August that should see an uptick in China iptv/pas due to the olympics. If Q3 guidance is even lower than $237m, then there will be about $360m or more in revenue for Q4. That would yield a profitable Q4.
Another interesting number from today's updated estimates is the 2009 revenue estimates. The two estimates are for revenue of $1.2b and $1.29b. If 2008 revenue comes in at $1.035b, that would be revenue increases of 16% and 25% respectively and taking into account PAS. Looking at the 2nd half of 2008 numbers and 2009 makes me wish that the company still had the PCD profits! On the other hand, its nice to see that the company is more transparent at this stage and the focus is on the core business.
The recent price action has not been very encouraging but the company's execution over the last year has set the stage for much better performance the rest of 2008 and beyond.
By using the analyst day numbers of $1.035b in 2008 revenues ($755m core + $280m internal handset) and backing out Q1 & Q2 core and internal handset revenue, I estimate there are about $600m more in revenues to be recognized in Q3 & Q4. The estimates for Q3 suggest that more of that revenue will be recognized in Q4. The estimated loss of 29 cents also makes sense with the revenue estimates.
The potential negatives for the call tomorrow include:
1. Continued loss in Q3.
2. Guidance that is lower than consensus or the low of the estimates
3. Slow down in iptv implementation
4. Higher OPEX than $95m
5. Any write downs
The potential positives include:
1. Guidance that is higher than consensus
2. Good book to bill (previous guidance of 1.5 on the non-pcd)
3. Higher shareholder equity/book value due to sale of PCD/MSBU
4. New contract win announcements
5. Use of excess cash for share buy back or a special dividend
From the lists above, guidance for Q3 is going to be key in the short term. Q2 could come in better than expected and less revenue could be left for Q3/Q4. The range from $215m to $259m for Q3 is a wide range with only two analysts.
Overall, I am more bullish than bearish going into the call only because the Q3 revenue estimates don't seem too high and Q3 will include July and August that should see an uptick in China iptv/pas due to the olympics. If Q3 guidance is even lower than $237m, then there will be about $360m or more in revenue for Q4. That would yield a profitable Q4.
Another interesting number from today's updated estimates is the 2009 revenue estimates. The two estimates are for revenue of $1.2b and $1.29b. If 2008 revenue comes in at $1.035b, that would be revenue increases of 16% and 25% respectively and taking into account PAS. Looking at the 2nd half of 2008 numbers and 2009 makes me wish that the company still had the PCD profits! On the other hand, its nice to see that the company is more transparent at this stage and the focus is on the core business.
The recent price action has not been very encouraging but the company's execution over the last year has set the stage for much better performance the rest of 2008 and beyond.
Saturday, August 2, 2008
Weekly recap - Deteriorating technicals
The stock closed the week at $4.78, down 31 cents or 6%. The overall market was volatile as the DOW started the week down 200+, then ramped up 400+ and then ended the week overall slightly lower. The Nasdaq did a little better ending up for the week. Here are the UT related news from the past week and a preview of the upcoming week.
Settlement with Ying Wu - The final seperation agreement with Wu included an additional $100k payment and resolution on Wu's company car in China (he will pay $65k and keep the car-wonder what car he is driving?). http://biz.yahoo.com/e/080731/utsi8-k.html
Nortel, Motorola and Sun Microsystems earnings - Some larger technology companies on the 5+ year or more turnaround plan had their earnings last week. While each company is different, I wanted to get an idea of the market environment (both business wise and the street reactions). As you can imagine, even the turnaround takes a long time and all three companies are still struggling to get their costs in line and their revenues/margins to grow. Investor/street reaction was as expected swift, rewarding Motorola and punishing Nortel and Sun.
UT Earnings Date - The date was finally announced last Thursday and the earnings call will be Wednesday, next week after hours. The time is actually early compared to previous quarters where they would wait until mid to end of the month the month after the quarter closes.
Earnings Preview - Guidance to Q2 was given but as I mentioned that was confusing. In a previous post, I write..."Revenue of $580-610m and overall GMs of 14% were provided for a gross profit of $83.3m. PCD revenue of $460-480m and PCD GMs of 6.5% were provided for a gross profit of $30.5m. Non-PCD revenue of $120-130m and GMs of 36% were provided for a gross profit of $45m. Does $30.5m + 45m add up to $83.3m? I don't know about UT's accounting systems but it sure does not look encouraging." Expenses were also projected to be in the $120m+ range. Worse, cash flow will be negative $100m or so reversing last quarter's $90m+ in take. With the sale of the PCD and the previous guidance, I think the the street will focus more on the Q3 guidance and second half performance. Cash flows should be neutral as guided by Barton at the start of the year and reiterated throughout this year. By my calculation in a previous post (see July 4th weekend posts for all t he numbers/posts), the company should end the year with close to $386m in cash. Here is what I wrote previously for Q3 & Q4.
Q3 & Q4 2008 - Q1 Non-PCD booked was $155.3m ($586m total rev - $430.7m PCD rev). Q2 projection is for $120-130m (say $125m). So, the first half will have Non-PCD rev of only $280.3m. Nothing wrong with that and Barton could be very low balling Q2. IF 2008 Non-PCD rev is $755m, then the 2nd half should still have $474.7m of Non-PCD rev (I really need to have an accronym like NP for Non-PCD :-). Anyway, at 33% GMs, that would yield $156.6 in gross profits for the 2nd half or $78m/quarter. Of course, I still need to back out MSBU but say quarterly OPEX was still $100m/quarter for comparisson. Then, you still have to add the gross profits from the internal part of the PCD. This gets a little complicated because if it is only $280m of the $1.825b, then its 15.5% of the total but 25% of the PCD revenue in Q1 was internal UT made. So, if 25% of the $430.7m (or $107m) is gone, there is only $172m ($280m-$107m) left or $57m/quarter. At 12% GMs, that is still $7m in quarterly gross profits.Ok, back to the 2nd half quarters, IF NP was only $755m for the year (still including MSBU here), Q3 & Q4 would have gross profits of $78m+7m = $85m with a $100m expense or loss of $15m.
So, Q3 and Q4 performance should be decent with the backended core revenues. However, the more important thing will be bookings and revenue growth for 2009. Compared to the three companies I mentioned above, UT has signficant growth potentials and that drives my investment thesis on it (of course, its been that way for years :-)
Technicals - Unfortunately, the stock has broken down in the last week+. The 50 day moving average is $5.31. While there may be some support in the mid $4s (see July 4th week where it quickly bounced back), the next major support is the 200 day moving average, which is about $3.84 (from yahoo). While I am very bullish on the company/stock long term, I am cognizant of the technicals and what this market can do. There is still a huge short position and for the most part shorts have been right on with this market and UT.
Have a good weekend to everyone and good luck to UT and all shareholders on earnings week!
Settlement with Ying Wu - The final seperation agreement with Wu included an additional $100k payment and resolution on Wu's company car in China (he will pay $65k and keep the car-wonder what car he is driving?). http://biz.yahoo.com/e/080731/utsi8-k.html
Nortel, Motorola and Sun Microsystems earnings - Some larger technology companies on the 5+ year or more turnaround plan had their earnings last week. While each company is different, I wanted to get an idea of the market environment (both business wise and the street reactions). As you can imagine, even the turnaround takes a long time and all three companies are still struggling to get their costs in line and their revenues/margins to grow. Investor/street reaction was as expected swift, rewarding Motorola and punishing Nortel and Sun.
UT Earnings Date - The date was finally announced last Thursday and the earnings call will be Wednesday, next week after hours. The time is actually early compared to previous quarters where they would wait until mid to end of the month the month after the quarter closes.
Earnings Preview - Guidance to Q2 was given but as I mentioned that was confusing. In a previous post, I write..."Revenue of $580-610m and overall GMs of 14% were provided for a gross profit of $83.3m. PCD revenue of $460-480m and PCD GMs of 6.5% were provided for a gross profit of $30.5m. Non-PCD revenue of $120-130m and GMs of 36% were provided for a gross profit of $45m. Does $30.5m + 45m add up to $83.3m? I don't know about UT's accounting systems but it sure does not look encouraging." Expenses were also projected to be in the $120m+ range. Worse, cash flow will be negative $100m or so reversing last quarter's $90m+ in take. With the sale of the PCD and the previous guidance, I think the the street will focus more on the Q3 guidance and second half performance. Cash flows should be neutral as guided by Barton at the start of the year and reiterated throughout this year. By my calculation in a previous post (see July 4th weekend posts for all t he numbers/posts), the company should end the year with close to $386m in cash. Here is what I wrote previously for Q3 & Q4.
Q3 & Q4 2008 - Q1 Non-PCD booked was $155.3m ($586m total rev - $430.7m PCD rev). Q2 projection is for $120-130m (say $125m). So, the first half will have Non-PCD rev of only $280.3m. Nothing wrong with that and Barton could be very low balling Q2. IF 2008 Non-PCD rev is $755m, then the 2nd half should still have $474.7m of Non-PCD rev (I really need to have an accronym like NP for Non-PCD :-). Anyway, at 33% GMs, that would yield $156.6 in gross profits for the 2nd half or $78m/quarter. Of course, I still need to back out MSBU but say quarterly OPEX was still $100m/quarter for comparisson. Then, you still have to add the gross profits from the internal part of the PCD. This gets a little complicated because if it is only $280m of the $1.825b, then its 15.5% of the total but 25% of the PCD revenue in Q1 was internal UT made. So, if 25% of the $430.7m (or $107m) is gone, there is only $172m ($280m-$107m) left or $57m/quarter. At 12% GMs, that is still $7m in quarterly gross profits.Ok, back to the 2nd half quarters, IF NP was only $755m for the year (still including MSBU here), Q3 & Q4 would have gross profits of $78m+7m = $85m with a $100m expense or loss of $15m.
So, Q3 and Q4 performance should be decent with the backended core revenues. However, the more important thing will be bookings and revenue growth for 2009. Compared to the three companies I mentioned above, UT has signficant growth potentials and that drives my investment thesis on it (of course, its been that way for years :-)
Technicals - Unfortunately, the stock has broken down in the last week+. The 50 day moving average is $5.31. While there may be some support in the mid $4s (see July 4th week where it quickly bounced back), the next major support is the 200 day moving average, which is about $3.84 (from yahoo). While I am very bullish on the company/stock long term, I am cognizant of the technicals and what this market can do. There is still a huge short position and for the most part shorts have been right on with this market and UT.
Have a good weekend to everyone and good luck to UT and all shareholders on earnings week!
Saturday, July 26, 2008
Weekly recap - Break down or break out?
The stock closed lower for the week at $5.09, losing 9 cents or 1.7%. Oil continued lower this week ending at $123. However, the markets remained volatile and ended mixed with the DOW falling 1.09%, S&P losing 0.23% and the Nasdaq rallying 1.22%. While trading in Ut was limited to a narrow band and low volumes, the focus was on the symmetrical triangle converging to a vertex. I'll discuss this a little more at the end of the post but here are UT related news for the week.
UT debuts first iptv-based video advertising network in China - "UTStarcom will provide Guangxi Telecom with 3,600 concurrent IPTV streams for the initial deployment of the interactive advertising system in 14 Guangxi cities. In the first phase, set-top boxes will be deployed in supermarkets, department stores, office buildings and in Guangxi Telecom's facilities in Nanning, Liuzhou, Guiling, Qinzhou, Guigang, Wuzhou, Beihai and Baise." http://biz.yahoo.com/prnews/080721/aqm060.html?.v=54 While revenues from the advertising systems and previously announced video surveilance wins will be small, it demonstrates the extent of iptv's functionality and potential usage/markets away from the home. Cisco, Nortel, and others have targetted markets such as tele-presence (setting up massive video conferencing rooms/networks). I see UTs expansion of iptv into different markets as similarly promoting iptv, broadband, and its ngn capabilities. The markets are small right now but the wins show that demand is there. The difference is UTs surveilance and advertising systems can easily explode as various cities in China implement it.
China internet users surpass the U.S. - "China said the number of Internet users in the country reached about 253 million last month, putting it ahead of the United States as the world’s biggest Internet market." "The new estimate represents only about 19 percent of China’s population, underscoring the potential for growth." The US and other countries have a 70% penetration rates.
http://www.nytimes.com/2008/07/26/business/worldbusiness/26internet.html?_r=1&adxnnl=1&adxnnlx=1217098892-bFfepPXNrM74A0haJi+1xQ&oref=slogin There were also discussions on the growth of internet advertising that should help UT in iptv/broadband areas. "With Internet use booming, so is Web advertising. The investment firm Morgan Stanley says online advertising in China is growing by 60 to 70 percent a year, and forecasts that by the end of this year, it could be a $1.7 billion market." It will be the Baidus that will benefit directly with UT benefitting indirectly with equipment/service sales. I like the following statement, "“The Internet market is the fastest-growing consumer market sector in China,” said Richard Ji, an Internet analyst at Morgan Stanley. “We are still far from saturation. So the next three to five years, we’re still going to see hyper-growth in this market.”
China operators statistics- From curious_tigre posting on the yahoo board, http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=154045&mid=154045&tof=28&frt=1 Thanks to Tigre for a very nice summary!
Brocade buys Foundry for $2.9b - Foundry makes hardward that competes with Cisco (routers, networking equipment, etc) with primary markets in North America. http://www.reuters.com/article/marketsNews/idINN2142364220080722?rpc=44 Foundry had about a billion in cash/investments so Brocade paid about $2b for the business. Lets look at the valuation that they paid. Foundry had revenue of $607m in 2007 (about 3x revenue), gross margins of 61%, expenses of about $282m and operating profits of about $100m (20x operating profits). Its not an apples to apples comparison between UT but it shows the market will pay for high gross margin businesses and operating profits. With UTs shares around $5, the UT business (about $1b in revenue) alone is being valued at 0 or negative at this stage. It would really surprise me with the current management focus on the core business and continued R&D/expenses that it cannot get the valuation higher than $0 or negative. The market will give UT time to execute their current focus (which they have done so) but at a certain point, shareholders will get frustrated and thats when pressure will build again for a full sale of the company. Lets hope that will be at much higher share prices and better positions than back in late 2006, their last venture of selling the company.
Worldwide IPTV and broadband growth- Aside from Tigre (which usually posts good information), Yahoo poster "Bamboozled" gets this week's contributor of the week for his various posts. http://www.iptv-news.com/content/view/2104/64 It is interesting to note that Latin America, Middle East, and Africa are just starting and are UT targetted markets.
Iptv subscribers in various regions:
Region Q1 2007 Q1 2008
Europe 3,875,266 8,425,370
Asia Pacific 1,129,355 2,619,035
North America 850,601 2,258,601
South and East Asia 1,353,000 2,086,000
Latin America 2,300 11,183
Middle East & Africa 10,000 10,000
Total 7,220,522 15,410,189
Broadband growth for each region:
Region Q1 2007 Q1 2008 % growth
Western Europe 81,937,250 97,610,797 16.06%
North America 70,972,699 84,601,988 16.11%
South and East Asia 61,253,850 78,390,614 21.86%
Asia Pacific 53,310,214 59,017,122 9.67%
Latin America 14,867,952 20,154,134 29.3%
Eastern Europe 11,867,952 17,627,532 32.67%
Middle East & Africa 7,068,699 10,284,381 31.27%
Other 9,842 18,509 46.83%
"UTStarcom eyes growing iptv market in China"- "The prediction that IPTV in China is facing an opportunity, made three years ago, appears to be coming true.
According to one report of statistics from researchers Frost & Sulivan, the number of IPTV subscribers in the region is predicted to grow from the current 1.5 million to 27.4 million by 2013. Deployment will be strengthened by the explosion of broadband in various high-growth markets across the region, as well as through advancements in transmission, compression and watermarking technologies that have enabled more service providers to move toward IPTV delivery. http://iptv.tmcnet.com/topics/iptv-deployments/articles/34663-utstarcom-eyes-growing-iptv-market-china.htm
Short position and Naked short list - Short position increased again to 27.5m and there was a report of about 1.5m shares that have been failed to deliver. http://hdvoice.tmcnet.com/news/2008/07/17/3553127.htm
Technical Analysis - While the stock has basically stayed in the $5 area for most of the last 7 weeks, the stock price is converging to the vertex of a symmetrical triangle. Traders have mentioned potential major break down or breakout of the stock price in the very near term. Something has to give. For the longer term, the stock should do well as the company has streamlined operations and are more focused. The technology and markets seem to be well positioned as well. However, there are always short term forces that could derail the stock such as continued losses, market weakness, etc. There is also the upcoming earnings announcement and pricing of employee options that may influence the stock price. I hope management stays positive and not purposely derail the stock for better options pricing. That would be sick but I've seen a lot of weird things in the market just this year alone so who knows. On the positive (optimistic) side, I am hoping management finally institute the long discussed stock buyback. As Barton mentioned, they would have to do something creative if they have excess cash :-) This is the time to do it guys............
Have a great weekend to everyone!
UT debuts first iptv-based video advertising network in China - "UTStarcom will provide Guangxi Telecom with 3,600 concurrent IPTV streams for the initial deployment of the interactive advertising system in 14 Guangxi cities. In the first phase, set-top boxes will be deployed in supermarkets, department stores, office buildings and in Guangxi Telecom's facilities in Nanning, Liuzhou, Guiling, Qinzhou, Guigang, Wuzhou, Beihai and Baise." http://biz.yahoo.com/prnews/080721/aqm060.html?.v=54 While revenues from the advertising systems and previously announced video surveilance wins will be small, it demonstrates the extent of iptv's functionality and potential usage/markets away from the home. Cisco, Nortel, and others have targetted markets such as tele-presence (setting up massive video conferencing rooms/networks). I see UTs expansion of iptv into different markets as similarly promoting iptv, broadband, and its ngn capabilities. The markets are small right now but the wins show that demand is there. The difference is UTs surveilance and advertising systems can easily explode as various cities in China implement it.
China internet users surpass the U.S. - "China said the number of Internet users in the country reached about 253 million last month, putting it ahead of the United States as the world’s biggest Internet market." "The new estimate represents only about 19 percent of China’s population, underscoring the potential for growth." The US and other countries have a 70% penetration rates.
http://www.nytimes.com/2008/07/26/business/worldbusiness/26internet.html?_r=1&adxnnl=1&adxnnlx=1217098892-bFfepPXNrM74A0haJi+1xQ&oref=slogin There were also discussions on the growth of internet advertising that should help UT in iptv/broadband areas. "With Internet use booming, so is Web advertising. The investment firm Morgan Stanley says online advertising in China is growing by 60 to 70 percent a year, and forecasts that by the end of this year, it could be a $1.7 billion market." It will be the Baidus that will benefit directly with UT benefitting indirectly with equipment/service sales. I like the following statement, "“The Internet market is the fastest-growing consumer market sector in China,” said Richard Ji, an Internet analyst at Morgan Stanley. “We are still far from saturation. So the next three to five years, we’re still going to see hyper-growth in this market.”
China operators statistics- From curious_tigre posting on the yahoo board, http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=154045&mid=154045&tof=28&frt=1 Thanks to Tigre for a very nice summary!
Brocade buys Foundry for $2.9b - Foundry makes hardward that competes with Cisco (routers, networking equipment, etc) with primary markets in North America. http://www.reuters.com/article/marketsNews/idINN2142364220080722?rpc=44 Foundry had about a billion in cash/investments so Brocade paid about $2b for the business. Lets look at the valuation that they paid. Foundry had revenue of $607m in 2007 (about 3x revenue), gross margins of 61%, expenses of about $282m and operating profits of about $100m (20x operating profits). Its not an apples to apples comparison between UT but it shows the market will pay for high gross margin businesses and operating profits. With UTs shares around $5, the UT business (about $1b in revenue) alone is being valued at 0 or negative at this stage. It would really surprise me with the current management focus on the core business and continued R&D/expenses that it cannot get the valuation higher than $0 or negative. The market will give UT time to execute their current focus (which they have done so) but at a certain point, shareholders will get frustrated and thats when pressure will build again for a full sale of the company. Lets hope that will be at much higher share prices and better positions than back in late 2006, their last venture of selling the company.
Worldwide IPTV and broadband growth- Aside from Tigre (which usually posts good information), Yahoo poster "Bamboozled" gets this week's contributor of the week for his various posts. http://www.iptv-news.com/content/view/2104/64 It is interesting to note that Latin America, Middle East, and Africa are just starting and are UT targetted markets.
Iptv subscribers in various regions:
Region Q1 2007 Q1 2008
Europe 3,875,266 8,425,370
Asia Pacific 1,129,355 2,619,035
North America 850,601 2,258,601
South and East Asia 1,353,000 2,086,000
Latin America 2,300 11,183
Middle East & Africa 10,000 10,000
Total 7,220,522 15,410,189
Broadband growth for each region:
Region Q1 2007 Q1 2008 % growth
Western Europe 81,937,250 97,610,797 16.06%
North America 70,972,699 84,601,988 16.11%
South and East Asia 61,253,850 78,390,614 21.86%
Asia Pacific 53,310,214 59,017,122 9.67%
Latin America 14,867,952 20,154,134 29.3%
Eastern Europe 11,867,952 17,627,532 32.67%
Middle East & Africa 7,068,699 10,284,381 31.27%
Other 9,842 18,509 46.83%
"UTStarcom eyes growing iptv market in China"- "The prediction that IPTV in China is facing an opportunity, made three years ago, appears to be coming true.
According to one report of statistics from researchers Frost & Sulivan, the number of IPTV subscribers in the region is predicted to grow from the current 1.5 million to 27.4 million by 2013. Deployment will be strengthened by the explosion of broadband in various high-growth markets across the region, as well as through advancements in transmission, compression and watermarking technologies that have enabled more service providers to move toward IPTV delivery. http://iptv.tmcnet.com/topics/iptv-deployments/articles/34663-utstarcom-eyes-growing-iptv-market-china.htm
Short position and Naked short list - Short position increased again to 27.5m and there was a report of about 1.5m shares that have been failed to deliver. http://hdvoice.tmcnet.com/news/2008/07/17/3553127.htm
Technical Analysis - While the stock has basically stayed in the $5 area for most of the last 7 weeks, the stock price is converging to the vertex of a symmetrical triangle. Traders have mentioned potential major break down or breakout of the stock price in the very near term. Something has to give. For the longer term, the stock should do well as the company has streamlined operations and are more focused. The technology and markets seem to be well positioned as well. However, there are always short term forces that could derail the stock such as continued losses, market weakness, etc. There is also the upcoming earnings announcement and pricing of employee options that may influence the stock price. I hope management stays positive and not purposely derail the stock for better options pricing. That would be sick but I've seen a lot of weird things in the market just this year alone so who knows. On the positive (optimistic) side, I am hoping management finally institute the long discussed stock buyback. As Barton mentioned, they would have to do something creative if they have excess cash :-) This is the time to do it guys............
Have a great weekend to everyone!
Saturday, July 19, 2008
Weekly recap - quiet on the UT front
The stock closed at $5.18, down 39 cents or 7% for the week. The stock traded from $5.06 to a high of $5.62. In the last six weeks during the market turmoil, UT has traded above $5 (except for a couple of days) and settled into a trading range. Most of the news was focused on oil pulling back from the highs and the financials/airlines roaring back. That led to weekly gains of 3.57, 1.95, and 1.71% for the DOW, Nasdaq and S&P respectively. The only UT PR this week was a follow up iptv contract with Aksh in India. http://biz.yahoo.com/prnews/080714/aqm040.html?.v=55 Here are other news I happen to come across that may have some (little) bearing on UT.
Financials earnings reports - Merrill Lynch and other financial companies reported "earnings" that were pretty bad but the stocks rallied anyway. This could be due to short covering or the stock being beaten down too much. In any case, ML continues to raise funds through asset sales such as their 20% holding in Bloomberg ($4.4b) and interest in Financial Data Services company ($3.5b). Most of the attention was in financials due to their importance in the economy. Because we are in a bear market, investors that want to play turnarounds (like UT) have a lot of choices to make. Do you go with large companies that may take longer to turn around but have "less risk" of outright failure or do you go with a small cap like UTStarcom that has less of a history and "more risks" due to its smaller size?
Nokia's report - Nokia reported increasing its global market share to 40% and expect global device volumes to grow by 10% or more in 2008 from 2007. More importantly, they reported a 42% unit growth in phone sales in the quarter in the Asia-Pacific region compared to flat sales in Europe. UT still derives $280m or so in their handsets unit (not including PAS) so this is an important segment to keep an eye on. Also, the growth in broadband, iptv, ngn in the areas UT is targetting looks to be a sound strategy.
Yahoo-Microsoft-Icahn soap opera - Its amazing how much information comes out and concern for the shareholders that management/boards show when put in a situation. I was amazed previously that Yahoo management balked at the $33 offer and now is begging Microsoft to offer it again. The one major lesson for all management/boards is to listen to your shareholders (and not when its wayyyyyyyy too late that it becomes embarrassing :-)
Naked shorting - I'm fairly sure that UT was hurt with naked shorting and partially responsible for the stock price diving down to the $2/share range. However, with all the problems that UT had, the shorts were right. If management/shareholders feel the stock gets too low, then they should do something about it. In the end, performance is what counts.
Earnings wait - Here we go again. Usually, UT reports about a month and a half after the quarter closes, so that puts the next call around mid August. With all the automation and resources that companies put in their finance departments, you would think they could get this done much sooner. As an engineer(none-finance person) voicing out again, why does it take so long for the finance people to do their audits and file their paperwork when most of the numbers can be automated. Its funny when I see these "MBAs" or economists struggle in their business math classes (watered down versions of math classes) and yet they hold the money/decision making powers. Anyway, hope they can file it sooner and give some decent projections for the second half and how revenue will close the gap with the expense metrics they have been mentioning since last year.
Personal trading and dentist - I did well last week (if you are basically long and you didn't, I don't know what to say) specially since I am waiting for UT to pull back. There is still a large short interest in the stock so that is both worrisome and encouraging. So, in the words of fellow shareholder Gator, it will either break the 52 week high and go into the $6s or it will fall under $5 :-) As for my crown, the dentist had postponed the appointment until this week and only to put the "temporary" crown. I still have to go back in two weeks to get the permanent crown. By that time, I will have another cavity. he he.
Have a good weekend everyone!
Financials earnings reports - Merrill Lynch and other financial companies reported "earnings" that were pretty bad but the stocks rallied anyway. This could be due to short covering or the stock being beaten down too much. In any case, ML continues to raise funds through asset sales such as their 20% holding in Bloomberg ($4.4b) and interest in Financial Data Services company ($3.5b). Most of the attention was in financials due to their importance in the economy. Because we are in a bear market, investors that want to play turnarounds (like UT) have a lot of choices to make. Do you go with large companies that may take longer to turn around but have "less risk" of outright failure or do you go with a small cap like UTStarcom that has less of a history and "more risks" due to its smaller size?
Nokia's report - Nokia reported increasing its global market share to 40% and expect global device volumes to grow by 10% or more in 2008 from 2007. More importantly, they reported a 42% unit growth in phone sales in the quarter in the Asia-Pacific region compared to flat sales in Europe. UT still derives $280m or so in their handsets unit (not including PAS) so this is an important segment to keep an eye on. Also, the growth in broadband, iptv, ngn in the areas UT is targetting looks to be a sound strategy.
Yahoo-Microsoft-Icahn soap opera - Its amazing how much information comes out and concern for the shareholders that management/boards show when put in a situation. I was amazed previously that Yahoo management balked at the $33 offer and now is begging Microsoft to offer it again. The one major lesson for all management/boards is to listen to your shareholders (and not when its wayyyyyyyy too late that it becomes embarrassing :-)
Naked shorting - I'm fairly sure that UT was hurt with naked shorting and partially responsible for the stock price diving down to the $2/share range. However, with all the problems that UT had, the shorts were right. If management/shareholders feel the stock gets too low, then they should do something about it. In the end, performance is what counts.
Earnings wait - Here we go again. Usually, UT reports about a month and a half after the quarter closes, so that puts the next call around mid August. With all the automation and resources that companies put in their finance departments, you would think they could get this done much sooner. As an engineer(none-finance person) voicing out again, why does it take so long for the finance people to do their audits and file their paperwork when most of the numbers can be automated. Its funny when I see these "MBAs" or economists struggle in their business math classes (watered down versions of math classes) and yet they hold the money/decision making powers. Anyway, hope they can file it sooner and give some decent projections for the second half and how revenue will close the gap with the expense metrics they have been mentioning since last year.
Personal trading and dentist - I did well last week (if you are basically long and you didn't, I don't know what to say) specially since I am waiting for UT to pull back. There is still a large short interest in the stock so that is both worrisome and encouraging. So, in the words of fellow shareholder Gator, it will either break the 52 week high and go into the $6s or it will fall under $5 :-) As for my crown, the dentist had postponed the appointment until this week and only to put the "temporary" crown. I still have to go back in two weeks to get the permanent crown. By that time, I will have another cavity. he he.
Have a good weekend everyone!
Saturday, July 12, 2008
Weekly recap - stock rebound
The stock closed at $5.57, up 97 cents or 21% for the week, recouping all of last week's 95 cent loss and adding 2 cents for good measure. On the other hand, the markets continued to make new lows (S&P officially in a bear market) as oil's early week pullback was shortlived and new concerns in the financial markets (Fannie/Freddie) and technology (Cisco warning tech spending will comeback in 2009 instead of 2nd half 2008). All of this further highlights UTs outperformance. Aside from the closing of the PCD sale, there was no other UT official news release so I will discuss various pillars of strength for UTs stock outperformance.
Strong asset/balance sheet - Last weekend, I highlighted the cash and assets and it is around $5-6/share (taking into account the rest of the year's cash flows).
Execution - Primarily, this has been tied more to resolving past issues, strengthening the balance sheet (with asset sales) rather than operational turnaround to profitability. These included paying off the CB, settling SEC investigations, finishing internal investigations, catching up on the quarterly/yearly filings, etc.
Turnaround expectations - With most of the previous issues resolved and the balance sheet very strong, the company can now focus on its turnaround. Compared to other companies that have to worry about loans coming due (or raising funds/diluting shares), deteriorating macro environments (slowing economy, high oil prices, real estate falling, etc), UT can focus on its operations. The company is also one year into the tenure of Peter Blackmore (as opposed to other companies that are just switching - See Wachovia and others). The "turnaround" for UT has actually been going on for years (except that progress has been slow). At the "core" of this turnaround has been reducing expenses at the same time growing the core businesses significantly while offsetting the declines in PAS. Since Blackmore arrived a year ago, much work has been done to put the company in position for a return to profitability. With the asset sales, the company has put itself in position (and scrutiny) for this expected significant growth with Peter targetting growth of the core businesses by several hundred million dollars. Let us review the history and in essense the entire strategy that the new CEO has laid out for shareholders and to which he will be held responsible for.
This is what Peter mentioned last November at the Q3 2007 earnings call.
"We have cut the cost base in the functions against a benchmark goal measured by best in class in our industry and we did this against revenue reflecting our core technologies only. Not all the functions get to benchmark immediately as we do have internal controls to improve, new IT systems to implement and some legal costs as we close out this years investigations. They will all get to benchmark by end of 2008.
Although both our Research and Development, and SG&A percentages are currently too high, we believe we can do much better. 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. The SG&A is still too high, but there are a number of costs driving that, including, improving financial controls and implementing a new ERP system. We can get to the ratio as I stated by late 2008 and 2009. The revenues of the early part of 2008 are still ramping."
He added: “We shall see progress in 2008, but I want to make it clear that the revenue ramp in many of these contracts is deferred until implementation is complete, so the way to measure progress will be by bookings, plus a gradual growth in revenue and with it profitability.”
During all these times, Peter has not wavered on this repeating it time after time. The expense ratio goal is 25% of revenue and the overall GM target is around 30% for a net 5% profit.
Commentary (based on last weekend's assumptions of CSBU OPEX): If they sell CSBU, opex will be down to about $85m or $340m/year. If I use Peter's numbers of 25% of the revenue, then the revenue should be $1.36B. On my last blog post, I used the 30% (gross profit) to figure breakeven revenue, which would be $1.133B. Even the $1.133B would be about a 17% increase (plus the offset of PAS decline) so even that would be a $170m+ improvement over 2008 revenues. I suspect that not only is the backlog for the rest of 2008 heavy. The numbers in the Analyst Day meeting are very conservative and Q3/Q4 will be very good. However, for sustaining the metrics, 2009 should have a good ramp as well so that bookings for Q3, Q4 should also be very good. Q2 will only have $120-130m of non-pcd revenue (although with a 25% increase in Q1 bookings of 150m, that would already be a book to bill of 1.5+ although off a very low base).
Discussion with IR: I sent Barry Hutton, UTs new senior director of IR, an email to clarify the CSBU opex that Barton mentioned in the last earnings call and the discrepancy in the guidance. Rather than getting a quick email response, he asked me to call him and we ended up talking for 45 minutes. I don't know if other people have this experience but I just cannot get a quick straight answer from Barry. Its like talking to one of my new engineers right out of college that either doesn't know the answer, doesn't understand the question, is afraid to say he doesn't know, or acknowledge anything wrong or what. The guy kept on repeating that the current end of the year quarterly target is $95m and mentioning that the 10% discrepancy in the simple math guidance was not a concern (to him maybe). Anyway, the talk reminded me of having my teeth pulled. So, after wasting 45 minutes (I do enjoy talking about UT but that was like trying to get my 2.5 year old to do something!), we "agreed" that the opex would be $95m/quarter and he didn't want to get hopes up for anything lower. I tried to explain that the revenue target would be more aggressive with $95m/quarter! Anyway, we went through the math at $95m/quarter (just to see if he got what I was saying), and came to $380m for the yearly run rate. At 25% of revenue, the revenue back calculated would be $1.520B. Management definitely realizes the significant ramp that is needed in core revenues to hit Peter's target metrics.
As a shareholder, I am not worried about the current valuation (based on the assets, and recent execution performances) but still wonder about the aggressive revenue ramp target. If they get close to that in 2009 (sustainable), I am going to have to increase my stock price targets :-)
Personal trading - As stated last weekend, I had accumulated UT shares when the stock was collapsing the previous week. I did not get to my stated goal of doubling my holdings as it did not go lower. I did manage to buy all the way down from $5.5 (high) to $4.55 (my lowest). I did sell most of it at prices above $5 all the way to $5.6 (mainly because of this market). Let me clarify that I am keeping the core (obviously) but no reason not to add when the stock slides down or sell when you have a decent profit. I also bought a bunch of Nortel last week as the market is getting oversold. By the way, there were a bunch of posts discussing possible sale of UT due to its more streamlined company, better balance sheet, and most of the issues resolved. I definitely think it is much more desirable now than back in late 2006 (considering all the issues and lack of traction in their core markets). The potential suitors only wanted the core part and the fact that the company is pouring the majority of their resources into it (and selling the rest) leads me to believe that the core is worth something (amazing, huh ;-) Anyway, if a sale were to happen, it better have a huge premium or else it is so much better to see the company in the revenue ramp phase for once and see how high the stock can go.
Have a good rest of the weekend to everyone!
Strong asset/balance sheet - Last weekend, I highlighted the cash and assets and it is around $5-6/share (taking into account the rest of the year's cash flows).
Execution - Primarily, this has been tied more to resolving past issues, strengthening the balance sheet (with asset sales) rather than operational turnaround to profitability. These included paying off the CB, settling SEC investigations, finishing internal investigations, catching up on the quarterly/yearly filings, etc.
Turnaround expectations - With most of the previous issues resolved and the balance sheet very strong, the company can now focus on its turnaround. Compared to other companies that have to worry about loans coming due (or raising funds/diluting shares), deteriorating macro environments (slowing economy, high oil prices, real estate falling, etc), UT can focus on its operations. The company is also one year into the tenure of Peter Blackmore (as opposed to other companies that are just switching - See Wachovia and others). The "turnaround" for UT has actually been going on for years (except that progress has been slow). At the "core" of this turnaround has been reducing expenses at the same time growing the core businesses significantly while offsetting the declines in PAS. Since Blackmore arrived a year ago, much work has been done to put the company in position for a return to profitability. With the asset sales, the company has put itself in position (and scrutiny) for this expected significant growth with Peter targetting growth of the core businesses by several hundred million dollars. Let us review the history and in essense the entire strategy that the new CEO has laid out for shareholders and to which he will be held responsible for.
This is what Peter mentioned last November at the Q3 2007 earnings call.
"We have cut the cost base in the functions against a benchmark goal measured by best in class in our industry and we did this against revenue reflecting our core technologies only. Not all the functions get to benchmark immediately as we do have internal controls to improve, new IT systems to implement and some legal costs as we close out this years investigations. They will all get to benchmark by end of 2008.
Although both our Research and Development, and SG&A percentages are currently too high, we believe we can do much better. 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. The SG&A is still too high, but there are a number of costs driving that, including, improving financial controls and implementing a new ERP system. We can get to the ratio as I stated by late 2008 and 2009. The revenues of the early part of 2008 are still ramping."
He added: “We shall see progress in 2008, but I want to make it clear that the revenue ramp in many of these contracts is deferred until implementation is complete, so the way to measure progress will be by bookings, plus a gradual growth in revenue and with it profitability.”
During all these times, Peter has not wavered on this repeating it time after time. The expense ratio goal is 25% of revenue and the overall GM target is around 30% for a net 5% profit.
Commentary (based on last weekend's assumptions of CSBU OPEX): If they sell CSBU, opex will be down to about $85m or $340m/year. If I use Peter's numbers of 25% of the revenue, then the revenue should be $1.36B. On my last blog post, I used the 30% (gross profit) to figure breakeven revenue, which would be $1.133B. Even the $1.133B would be about a 17% increase (plus the offset of PAS decline) so even that would be a $170m+ improvement over 2008 revenues. I suspect that not only is the backlog for the rest of 2008 heavy. The numbers in the Analyst Day meeting are very conservative and Q3/Q4 will be very good. However, for sustaining the metrics, 2009 should have a good ramp as well so that bookings for Q3, Q4 should also be very good. Q2 will only have $120-130m of non-pcd revenue (although with a 25% increase in Q1 bookings of 150m, that would already be a book to bill of 1.5+ although off a very low base).
Discussion with IR: I sent Barry Hutton, UTs new senior director of IR, an email to clarify the CSBU opex that Barton mentioned in the last earnings call and the discrepancy in the guidance. Rather than getting a quick email response, he asked me to call him and we ended up talking for 45 minutes. I don't know if other people have this experience but I just cannot get a quick straight answer from Barry. Its like talking to one of my new engineers right out of college that either doesn't know the answer, doesn't understand the question, is afraid to say he doesn't know, or acknowledge anything wrong or what. The guy kept on repeating that the current end of the year quarterly target is $95m and mentioning that the 10% discrepancy in the simple math guidance was not a concern (to him maybe). Anyway, the talk reminded me of having my teeth pulled. So, after wasting 45 minutes (I do enjoy talking about UT but that was like trying to get my 2.5 year old to do something!), we "agreed" that the opex would be $95m/quarter and he didn't want to get hopes up for anything lower. I tried to explain that the revenue target would be more aggressive with $95m/quarter! Anyway, we went through the math at $95m/quarter (just to see if he got what I was saying), and came to $380m for the yearly run rate. At 25% of revenue, the revenue back calculated would be $1.520B. Management definitely realizes the significant ramp that is needed in core revenues to hit Peter's target metrics.
As a shareholder, I am not worried about the current valuation (based on the assets, and recent execution performances) but still wonder about the aggressive revenue ramp target. If they get close to that in 2009 (sustainable), I am going to have to increase my stock price targets :-)
Personal trading - As stated last weekend, I had accumulated UT shares when the stock was collapsing the previous week. I did not get to my stated goal of doubling my holdings as it did not go lower. I did manage to buy all the way down from $5.5 (high) to $4.55 (my lowest). I did sell most of it at prices above $5 all the way to $5.6 (mainly because of this market). Let me clarify that I am keeping the core (obviously) but no reason not to add when the stock slides down or sell when you have a decent profit. I also bought a bunch of Nortel last week as the market is getting oversold. By the way, there were a bunch of posts discussing possible sale of UT due to its more streamlined company, better balance sheet, and most of the issues resolved. I definitely think it is much more desirable now than back in late 2006 (considering all the issues and lack of traction in their core markets). The potential suitors only wanted the core part and the fact that the company is pouring the majority of their resources into it (and selling the rest) leads me to believe that the core is worth something (amazing, huh ;-) Anyway, if a sale were to happen, it better have a huge premium or else it is so much better to see the company in the revenue ramp phase for once and see how high the stock can go.
Have a good rest of the weekend to everyone!
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