The stock closed the week at $3.36, down 10 cents or 3%. The markets rallied hard on Friday to pare losses. For the week, Nasdaq lost 1.5%, DOW .27%, and S&P .46%. The stock has now closed lower the last six consecutive weeks, dropping from $5.57 on July 7 for a loss of $2.21 or 40%. Technically, the stock is weak, trading below the 50 day ($4.8 or so) and the 200 day ($3.6 or so). There were no specific PRs from the company so I'd just like to discuss a couple of items.
IPTV - One of the disappointments during the last earnings call update is the iptv subscriber numbers. The company only added around 100k subscribers to reach 956k and mostly in China (Shanghai). Fellow shareholder Shadowdoc99 posted on the slow developments in iptv in China.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=154720&mid=155008&tof=12&rt=2&frt=1&off=1 Hopefully, the olympics will accelerate the growth in China, which is the main growth driver for UTs iptv in the near term (6 to 12 months).
Shadow also discussed some developements that could help UT in India regarding iptv system storage clauses: The Information and Broadcasting Ministry in India, based on recommendation by TRAI, has mandated that all IPTV carriers make available up to 90 days of stored broadcasts for subscribers. Reliance is going to have conniptions over this requirement as they have signed on with Microsoft for IPTV and cannot meet this requirement without huge capex for storage. In fact, only UTSI's system can meet this requirement economically and so it seems India is standardizing on UTSI's IPTV system.
This blog has a lot of good information on the latest iptv news in India, http://dth-iptv-radio.blogspot.com/search/label/BSNL%20IPTV
It seems like the regulations in India are very favorable to UT's iptv system and that UT is well positioned in India. The problem now is that broadband uptake and iptv ramp is still very slow and overal iptv numbers are around 10k. Compared to the contract capacity that UT has signed with Aksh (with MTNL, BSNL), Bharti Airtel, Goa, and Sri Lanka numbering potentially over 2 million subscribers over the next 2 to 3 years, the current number is very disappointing to say the least.
The situation is not much different in other parts of the world, such as in Taiwan and Brazil, where UT has announced contract wins. The numbers are very small (about 5 to 10k live subscribers). The Taiwan contract for example was for an initial 20k UT set top boxes and targettied 500k within 2 years. That contract was announced in December of 2007 so it has been very slow as well. Recently, management has indicated some optimism there and from the China olympics but we'll just have to see how it plays out.
Share Buy Back and investor confidence - I've posted a couple of times on this the past week and shareholders have sent emails to management. The developments from the earnings call (revenue shortfall, cash losses) are very frustrating to shareholders. The company is reaching out to the investment community (roadshows, analyst day meetings, earnings call/shareholder meetings, webinars, etc) at a time when the company's performance does not seem to be improving (and in some respect deteriorating). As an existing shareholder, I have to now question why management is spending time/effort/money to tell their story, reach out to NEW analysts/investors when they can't even appease the existing shareholder base/investment community and when they have yet to even come close to sustainable profitability. It doesn't make any sense to me. From Sophie to Barton to Blackmore, it seems like management has kept on promising profitability in the "next year" but have not delivered. Everyone is hesitant to cut costs to get to profitability because they want huge growth further down the line but where are the committments? Where is the balance? Where does shareprice and shareholders come to play? More frustrating, when it doesn't happen, there are more excuses. Can someone there really deliver? I really want to challenge management to respond to their existing shareholders and be accountable for what you are spewing out. Management needs to act and start delivering.
I continue to call on shareholders to email management to implement a share buyback for all the reasons I have posted on. Have a good rest of the weekend to everyone.
Sunday, August 24, 2008
Saturday, August 23, 2008
Update on Stock Buyback
In response to shareholder's emails to management, a generic reply was sent back to shareholders.
Thank you for your recent e-mail to UTStarcom's management.
We have had a number of recent conversations with many investors during which we've heard a range of investor concerns and suggestions along with a great deal of excitement about our future. We appreciate this feedback and want to remind our investors that UTStarcom's management and board of directors regularly evaluate the company's priorities, including, but not limited to, possible uses of its existing cash balances.
We continue to be excited about the strategic plan we outlined in late 2007, the progress we've made thus far and the opportunities that are in front of us.
Thank you for your continued interest in and support of UTStarcom.
Sincerely,
Mr. Barry Hutton
Senior Director, Investor Relations
UTStarcom, Inc.(510) 769-2807
---------------------------------------------------------------------------------------------
Let me be clear from the very start that the "progress made thus far" has been significant but only when compared to the hole the company dug for itself. In terms of operating a company for profitability, it has been a disaster. The company's stance has been to focus on the long term turnaround and opportunities the company has (again, in the reply above, "excitement" was used"). I can't believe ANY shareholder is excited unless they sold out and rebought at these levels. The problem with management discussing the recent progress (last year) is to ignore the previous four years! Who is being short term? Shareholders or management. It is clear that shareholders have stuck with this company while management takes its time and "reacting" rather than being "proactive". All their consultants and executives have not made a dent or even get close to sustainable profitability.
The share price being up for the year is more an indication of the value the company had and NOT due to company performance. People that say they are doing well since the shares are up are simply idiots. Anyone looking at the company assets last year knows it is worth significantly more. The fact that the stock can move up close to the $6 level shows how little they have to do on the operational side of things to move the stock up.
The "hope" with "new" management rests with Peter Blackmore as the new CEO. This being Peter's first CEO role and with the low expectations, low share price, heavy assets/resources of the company showed that there was significant shareholder value that can be unlocked. Peter has discussed the company being a large startup and of course that was not the case. This shareholder group has consistently brought the history of underperformance in all the discussions we've had all the way back four years ago! Peter had a fresh start and another year to 18 months to perform and get to sustainable profitability. That time is running out and Peter should take responsibility for this.
Going back to the share buyback. People that say they need to think longer term and save cash either don't have a significant position or don't care about the company's performance. Even with the buildup for the $80m+ India Phase II contract and losses for the rest of the year, the company will have over $300m+ in net cash at the end of the year. That is about 70% of the current market cap! The CFO Fran Barton mentioned that he would not like to be involved in a company that just down sizes and not growing. Lets consider two cases. One, they do not grow (book business) the several hundred million they need to get to profitability. Are they then going to lose $300m+ next year in cash flow? Definitely not. So, they should cut costs and return funds to shareholders.
Case 2 is supposedely the one management is on, growing the company's core business significantly and ramping bookings and revenue. There was a good discussion on this by shareholders Tigre and Shadow (and I threw my two cents in). EVEN if they grow bookings by $100m/quarter next year and beyond, could they do a share buyback? Looking at the India Phase II contract for $80m+, that is probably at the extreme in terms of lower margins, longer DSOs and they only spent $60m in cash flows while funding all the material/hardware for this. How many building contractors can fund an entire buildings materials/equipment before the ink dries on the contract? Besides, most of their contracts will be much smaller, have higher GMs, quicker turnaround (lower DSOs), etc. This is a company with over $300m in net cash and probably more if they sell the CSBU and further reduce expenses. BTW, how long will they have "legacy" accounting, legal, and other expenses. They have been talking about this for 2 years. The company fights for a few million in gross profits and throw away so much in their "legacy" expenses. Anyway, back to funding the "growth". Don't forget the this is a company that owns their China building, worth about $180m. What is the problem in getting a $50m line of credit if they really need it? I am not a financial expert by any means but it is getting ridiculous when a company that has so many consultants and supposedely top-notch executives (not to mention a decade+ of operating in China) cannot find lines of credits when they have virtually no debt, huge NET cash, owns their properties, and planning to grow bookings 25 to 50% overall.
So, what is it gentlemen? Case 1 or 2 or if its even worse than any of those, then go to a strategic alternative to sell the company. Judging by the conversations I have heard, it is Case 2 and the shareprice is too low and supposedely progress has been made to make selling out now ridiculous. So, either way you look at, a share buyback should be implemented or confidence in your basic competence or charge for looking after shareholder value is gone. Going to roadshows and making promises after years (let alone the 2nd half shortfall) of underdelivering is not a productive use of time/effort. Don't be idiots and be pro-active for once. I personally like the management team but you need to do the share buyback and look competent for once. Its hard for me to defend the company/stock when time after time, the company has not produced. There is still so much value and potential with the company but that cannot be the only fighting charge we hold on. Tangible actions on the shareprice has to occur. It should not be at these levels.
Have a good weekend.
Thank you for your recent e-mail to UTStarcom's management.
We have had a number of recent conversations with many investors during which we've heard a range of investor concerns and suggestions along with a great deal of excitement about our future. We appreciate this feedback and want to remind our investors that UTStarcom's management and board of directors regularly evaluate the company's priorities, including, but not limited to, possible uses of its existing cash balances.
We continue to be excited about the strategic plan we outlined in late 2007, the progress we've made thus far and the opportunities that are in front of us.
Thank you for your continued interest in and support of UTStarcom.
Sincerely,
Mr. Barry Hutton
Senior Director, Investor Relations
UTStarcom, Inc.(510) 769-2807
---------------------------------------------------------------------------------------------
Let me be clear from the very start that the "progress made thus far" has been significant but only when compared to the hole the company dug for itself. In terms of operating a company for profitability, it has been a disaster. The company's stance has been to focus on the long term turnaround and opportunities the company has (again, in the reply above, "excitement" was used"). I can't believe ANY shareholder is excited unless they sold out and rebought at these levels. The problem with management discussing the recent progress (last year) is to ignore the previous four years! Who is being short term? Shareholders or management. It is clear that shareholders have stuck with this company while management takes its time and "reacting" rather than being "proactive". All their consultants and executives have not made a dent or even get close to sustainable profitability.
The share price being up for the year is more an indication of the value the company had and NOT due to company performance. People that say they are doing well since the shares are up are simply idiots. Anyone looking at the company assets last year knows it is worth significantly more. The fact that the stock can move up close to the $6 level shows how little they have to do on the operational side of things to move the stock up.
The "hope" with "new" management rests with Peter Blackmore as the new CEO. This being Peter's first CEO role and with the low expectations, low share price, heavy assets/resources of the company showed that there was significant shareholder value that can be unlocked. Peter has discussed the company being a large startup and of course that was not the case. This shareholder group has consistently brought the history of underperformance in all the discussions we've had all the way back four years ago! Peter had a fresh start and another year to 18 months to perform and get to sustainable profitability. That time is running out and Peter should take responsibility for this.
Going back to the share buyback. People that say they need to think longer term and save cash either don't have a significant position or don't care about the company's performance. Even with the buildup for the $80m+ India Phase II contract and losses for the rest of the year, the company will have over $300m+ in net cash at the end of the year. That is about 70% of the current market cap! The CFO Fran Barton mentioned that he would not like to be involved in a company that just down sizes and not growing. Lets consider two cases. One, they do not grow (book business) the several hundred million they need to get to profitability. Are they then going to lose $300m+ next year in cash flow? Definitely not. So, they should cut costs and return funds to shareholders.
Case 2 is supposedely the one management is on, growing the company's core business significantly and ramping bookings and revenue. There was a good discussion on this by shareholders Tigre and Shadow (and I threw my two cents in). EVEN if they grow bookings by $100m/quarter next year and beyond, could they do a share buyback? Looking at the India Phase II contract for $80m+, that is probably at the extreme in terms of lower margins, longer DSOs and they only spent $60m in cash flows while funding all the material/hardware for this. How many building contractors can fund an entire buildings materials/equipment before the ink dries on the contract? Besides, most of their contracts will be much smaller, have higher GMs, quicker turnaround (lower DSOs), etc. This is a company with over $300m in net cash and probably more if they sell the CSBU and further reduce expenses. BTW, how long will they have "legacy" accounting, legal, and other expenses. They have been talking about this for 2 years. The company fights for a few million in gross profits and throw away so much in their "legacy" expenses. Anyway, back to funding the "growth". Don't forget the this is a company that owns their China building, worth about $180m. What is the problem in getting a $50m line of credit if they really need it? I am not a financial expert by any means but it is getting ridiculous when a company that has so many consultants and supposedely top-notch executives (not to mention a decade+ of operating in China) cannot find lines of credits when they have virtually no debt, huge NET cash, owns their properties, and planning to grow bookings 25 to 50% overall.
So, what is it gentlemen? Case 1 or 2 or if its even worse than any of those, then go to a strategic alternative to sell the company. Judging by the conversations I have heard, it is Case 2 and the shareprice is too low and supposedely progress has been made to make selling out now ridiculous. So, either way you look at, a share buyback should be implemented or confidence in your basic competence or charge for looking after shareholder value is gone. Going to roadshows and making promises after years (let alone the 2nd half shortfall) of underdelivering is not a productive use of time/effort. Don't be idiots and be pro-active for once. I personally like the management team but you need to do the share buyback and look competent for once. Its hard for me to defend the company/stock when time after time, the company has not produced. There is still so much value and potential with the company but that cannot be the only fighting charge we hold on. Tangible actions on the shareprice has to occur. It should not be at these levels.
Have a good weekend.
Tuesday, August 19, 2008
Share buyback campaign
My fellow shareholders,
It has been a major disappointment to see the stock drop down to the low $3 level after reaching almost $6 this year. The company's management let shareholders down with this year's shortfall and cash flow metrics after repeatedely touting their turnaround plan in previous earnings calls, analyst day meetings, shareholders meetings, and webinars. It can be argued that some of the events were not in management's control. However, with the company's history over the last few years, these "good excuses/negative results" have become all too common and drive down investor confidence, whatever is left. Management has discussed (a lot) about getting to profitability and there are signs of operational improvements. It has improved the balance sheet and for the most part, I believe the company is in a much better situation this year compared to last year. However, the fact remains, there is a significant difference in the street's interpretation of the company's performance and outlook to what management is portraying. This is not due to a lack of effort from management's part either (with the numerous events/communications/projections). However, this latest set-back has eroded hard earned credibility built up over the last year. Let me repeat. It has eroded hard earned credibility built up over the last year. It will be hard for the company to gain back credibility unless it starts producing good operational results or doing something tangible (much more than just talk and projections).
Since last year, the shareholder group has discussed a share buyback with the management and with lead director Thomas Toy. It seems that everyone was in agreement that the shareprice is undervalued but there were always issues that prevented a share buyback such as resolving the convertible bond, reorganization, building up revenue, and other items. The Chief Financial Officier, Fran Barton, has mentioned that they cannot do a buyback unless they have "excess" cash. After the recent sale of the PCD, the company has amassed a net cash position of over $400m. Even after subtracting the cash flow losses for the remainder of the year, the company will still have over $300m in net cash. The company has also indicated that it may sell or merge the remaining none-core business, the CSBU, that can also generate cash or additional cost savings. With Barton's "conservatism" when getting bad news out, I think that cash is going to be even more by the end of the year. Revenue growth in the high double digits and bookings of 25-50% are predicted for 2009. This is also a company that has very little debt, has interest income, and owns their China building. In any case, unless there is something more horrendous that we shareholders do not know, the company has plenty of "excess" cash.
At this time, I am calling for the management/board to finally institute the long discussed share buyback to significantly reduce the float and enhance shareholder value. The last thing I want is that the "excess" cash sits in a bank making 1.9% while shareholders watch their holdings drop 40+% in the last few weeks and possibly more. An analogy would be shareholders starving NOW while management keeps all the food that shareholders own to begin with. I will contact institutions and management to campaign for a share buyback as this is the best use of excess cash. Period. I suggest that ALL shareholders send an email to the CEO Peter Blackmore and CFO Fran Barton to voice their support for a share buyback. This is simply a no brainer at this time and a major indication on whether the board is for shareholder value (and people we can continue to support). I and a lot of shareholders have been major supporters of the company for years but there comes a time when the company has to give something back to its own shareholders. This time, there are really no ifs ands or buts. Again, if you agree, send an email to management to voice your support for the share buyback.
Here are the emails:
Peter.Blackmore@utstar.com
Fran.Barton@utstar.com
It has been a major disappointment to see the stock drop down to the low $3 level after reaching almost $6 this year. The company's management let shareholders down with this year's shortfall and cash flow metrics after repeatedely touting their turnaround plan in previous earnings calls, analyst day meetings, shareholders meetings, and webinars. It can be argued that some of the events were not in management's control. However, with the company's history over the last few years, these "good excuses/negative results" have become all too common and drive down investor confidence, whatever is left. Management has discussed (a lot) about getting to profitability and there are signs of operational improvements. It has improved the balance sheet and for the most part, I believe the company is in a much better situation this year compared to last year. However, the fact remains, there is a significant difference in the street's interpretation of the company's performance and outlook to what management is portraying. This is not due to a lack of effort from management's part either (with the numerous events/communications/projections). However, this latest set-back has eroded hard earned credibility built up over the last year. Let me repeat. It has eroded hard earned credibility built up over the last year. It will be hard for the company to gain back credibility unless it starts producing good operational results or doing something tangible (much more than just talk and projections).
Since last year, the shareholder group has discussed a share buyback with the management and with lead director Thomas Toy. It seems that everyone was in agreement that the shareprice is undervalued but there were always issues that prevented a share buyback such as resolving the convertible bond, reorganization, building up revenue, and other items. The Chief Financial Officier, Fran Barton, has mentioned that they cannot do a buyback unless they have "excess" cash. After the recent sale of the PCD, the company has amassed a net cash position of over $400m. Even after subtracting the cash flow losses for the remainder of the year, the company will still have over $300m in net cash. The company has also indicated that it may sell or merge the remaining none-core business, the CSBU, that can also generate cash or additional cost savings. With Barton's "conservatism" when getting bad news out, I think that cash is going to be even more by the end of the year. Revenue growth in the high double digits and bookings of 25-50% are predicted for 2009. This is also a company that has very little debt, has interest income, and owns their China building. In any case, unless there is something more horrendous that we shareholders do not know, the company has plenty of "excess" cash.
At this time, I am calling for the management/board to finally institute the long discussed share buyback to significantly reduce the float and enhance shareholder value. The last thing I want is that the "excess" cash sits in a bank making 1.9% while shareholders watch their holdings drop 40+% in the last few weeks and possibly more. An analogy would be shareholders starving NOW while management keeps all the food that shareholders own to begin with. I will contact institutions and management to campaign for a share buyback as this is the best use of excess cash. Period. I suggest that ALL shareholders send an email to the CEO Peter Blackmore and CFO Fran Barton to voice their support for a share buyback. This is simply a no brainer at this time and a major indication on whether the board is for shareholder value (and people we can continue to support). I and a lot of shareholders have been major supporters of the company for years but there comes a time when the company has to give something back to its own shareholders. This time, there are really no ifs ands or buts. Again, if you agree, send an email to management to voice your support for the share buyback.
Here are the emails:
Peter.Blackmore@utstar.com
Fran.Barton@utstar.com
Sunday, August 17, 2008
Weekly recap - No rebound
The stock closed at $3.46, down 2 cents or .57% for the week. This was disappointing in light of the strength in the Nasdaq (up over 1.5%) and the failure to bounce from a 27% decline last week. There were no announcements from the company but here are some discussion topics.
2008 Revenue shortfall quantified- Fellow shareholder shadowdoc99 refined his estimates and writes:
"Okay, Tim, thanks for your reply. Basically, I made the following mistakes in my estimate. First of all, I forgot to subtract the previously expected operating profit from the sold PCD division for H2 which would be about $16.5M ($63M for entire PCD division in 2007 minus $30M for UTSI supplied cell phones to PCD divided by 2 for H2 only). Secondly, I used gross margin of 36% for handsets instead of 22% or less and 15% for UTSI manufactured handsets instead of 10.7%. Not sure where I got the 15% figure from but the 10.7% figure was from 2007 and I couldn't find a number for 2008.
So, of the $40M in unexpected cash burn, $23.5M still needs to be explained ($40M - $16.5M = $23.5M) from a loss of $135M in sales. Using $31M in lost sales for PAS handsets at 22% margin gives gross loss of $6.82M; $15M sales loss of PAS infra at 45% margin gives gross loss of $6.75M; $89M lost sales of UTSI manufactured PCD handsets at 10.7% margin gives gross loss of $9.71M.
So, adding these all up we get total sales loss of $135M with gross operating loss of $23.1M which is close enough to the $23.5M. So, all in all not so bad. The PCD handset sales are down due to recession in the US and PAS handset sales are down due to recession in China plus the restructuring. These are short term events and will resolve as we go into 2009. The PAS infrastructure sale loss still bothers me. If it is simply postponed into 2009 because of revenue recognition due to the carrier reorganization, that is no problem. If it is a cancelled contract, why was it cancelled and can other long-term PAS contracts be cancelled? If this is a one-time event, it is a small amount and of minimal consequence. Judging by company's guidance that PAS declines in H2 of this year are not going to continue into 2009, I would guess this is either delayed revenue recognition or a singular problem that will not be repeated. "
I think this latest quantification is right on and shows that the "legacy" and handset part of the company are still a significant portion of the overall revenue stream of the company. While it seems these are short term issues, we need to pay as much attention to this as well as the growing core businesses.
PCD Sale, some final words- There has been some continued discussions on whether UT did the right thing by selling PCD when it was doing well and when the company's other businesses are still unprofitable. I had replied in favor of the sale to another shareholder this week, "The overall PCD was only netting 3 to 4% gross margins a couple of years ago and that figure included the higher margin UT design phones. Now, it has spiked to 6-8% with the higher priced/higher margin smart phones. I don't think it can be maintained though. Look at Palm ordering 5 million smart phones a few days ago from their Chinese supplier for 2009. Rimm is coming out with 3 or 4 smartphones in the sub $100 category. Apple's iphone is $199 (although with high monthlys). Average selling price is going down industry wise as these are commodity products. Even UTs own internal handset business is questionable since the margins are still low and volumes are not comparable to others (scale is definitely important). So, overall, I don't think it would have continued like that but I do hope it performs well enough for UT to collect as much of the $50m due end of 2010. If UT doesn't get a decent piece of the CDMA/GSM market in China as part of the restructuring, they might as well sell that one too and save on the expenses. As for inventory, that is definitely questionable as UT also had to take in a lot of invetory from Pantech-curitel before for the exclusive agreement. That burned up a lot of cash and led to low margins for what seems like forever."
Shanghai/Harbin iptv- Tigre writes, "Given the low monthly ARPU and the necessary cost of acquiring programmings and the need to share revenue with local broadcast and media partners, it is not easy to make a profit for CT/N on IPTV at this stage. As illustratged in the Harbin article, the lack of local contents has also limited the growth of IPTV in Harbin, despite content partnership with SMG which is based in Shanghai. Also, having an IPTV operating license hasn't prevented local SARFT from prohibiting Netcom's 20 yuan/month IPTV promotion, citing that the price is too low. This is not an issue in Shanghai as SMG is the local partner of CT there. So Shanghai has its unique characteristics (including higher income of residents and being an Olympics city) and we can not generalize the success in Shanghai and expect simple replication elsewhere in China."
IPTV has done well in Shanghai with expectations that iptv subscribers will reach 800k by year's end. Shanghai with 19m in population shows the potential growth of iptv in China but the different regulatory/content issues elsewhere prevent a full openning up of the China market that makes estimates/projections difficult.
UT IPTV growth- My last posting gave some projections of growth for UTs iptv business in 2009 based on growth in the last year, looking at global growth, projections, and strategic wins/uptake in UT markets. http://utstarcom-stocknews.blogspot.com/2008/08/iptv-potential-100m-revenue-growth-in.html Obviously, this is just an estimate and there are many factors that can significantly increase/decrease this number and various events that can occur over the 2nd half of 2008 that could impact the market. I'll be interested to see what sigma designs says at the end of the month during the earnings call. There will also be another UT roadshow sometime in September and the impact of the olympics. Obviously, the bookings will be scrutinized during Q3 and the overall outlook from the company for 2009. Here is another recent article that discusses growth in iptv, specially in China. http://www.iptv-news.com/content/view/2213/64/
August 12, 2008 - The number of IPTV subscriber worldwide will reach 53mn in 2009, according to new estimates from a report from UK research firm Companies and Markets, with the APAC region leading growth in terms of subscribers, service revenue, infrastructure and other metrics, thanks to high broadband penetration and a supportive regulatory framework.
Worldwide IPTV service revenue is predicted to reach US$38bn in 2009, with the Americas and Western Europe forecast to be the biggest markets in terms of revenue per user, according to the report, entitled "Global IPTV Market Analysis (2006-2010)". China is expected to be the future "IPTV dragon", thanks to its rapid urbanisation, fast-growing economy and expanding middle class, while the US is expected to be a more difficult market for IPTV due to high existing pay-TV penetration, and stiff price and service competition likely to come from "entrenched" operators of cable and satellite services.
Potential restructuring? - With continued losses projected for the next several quarters, uncertain PAS market, uncertain revenue growth from the core businesses, one analyst and some shareholders are speculating that the company will need to further restructure. UT 2008 revenues of $900m include only about $350m or so in core revenues (iptv, ngn, and broadband). A bulk is still in PAS infra/handsets, and GSM/CDMA handsets. Expenses are still around $380m yearly run rate with $160m or so in R&D. Parts of the R&D are linked to PAS/handsets but the bulk is in the core business. However, obviously, that is still way too high no matter how you look at it. So, is it time to cut further? At this time, I have to say no. The company will continue to cut expenses by selling/merging the CSBU into other business units, will reap further cost savings after all the "legacy" expenses are done (some additional IT, accounting, legal expenses to wrap up). The company has raised substantial cash (I don't agree with all the particulars in the stock sales, interest spending, etc) the past year and will end the year with a strong net cash position. The company's focus is on growth and have earned some time (not a lot) to show that bookings are strong and return to cash flow positive is near. Management stands by its goal of increasing revenue several hundred million and I can see how that can happen but timing is as usual tricky (its already missed Blackmore's initial sustainable expense ratio targets for late 2008/early 2009).
Stock buyback- When the company had over $600-700m in cash, it also had a lot of debt and net cash was lower than where it will end up the year. In fact, most companies with similar market caps don't have anywhere near the net cash the company has. The problem is the cash at hand is still "lower" and do we really want them to borrow at 10.9% or dilute the stock if they require more working capital? I want them to buy the stock at these lower prices but not to the point the company will get in trouble (obviously). I still think a limited buyback may not be bad and show confidence. The flip side is do they have good visibility in and when the iptv markets/core markets will open up? This is where management (Barton in particular) has to start earning their pay. If all you do is be very conservative and sell everything and raise huge cash and use uncertainty as an excuse for everything, then what are you there for. That is too extreme on one side. Management has to get a handle on the business to be more balance in addressing shareholder needs while positioning the company for growth. Creativity? I haven't seen it. Estimates? Way off on the downside and upside. I remain a shareholder because of the huge potential, valuation of the assets (technology/resources/cash/connections/customers etc.).
As a summary for the week, I am simply frustrated with the shareprice but think the company is close to realizing the growth in their core businesses soon (after years and years) and the stock is back to being an incredible value. It always seems darkest when the ...... Have a good weekend everybody. BTW, the olympics have been very exciting so far! Phelps...amazing skill, execution and luck.
2008 Revenue shortfall quantified- Fellow shareholder shadowdoc99 refined his estimates and writes:
"Okay, Tim, thanks for your reply. Basically, I made the following mistakes in my estimate. First of all, I forgot to subtract the previously expected operating profit from the sold PCD division for H2 which would be about $16.5M ($63M for entire PCD division in 2007 minus $30M for UTSI supplied cell phones to PCD divided by 2 for H2 only). Secondly, I used gross margin of 36% for handsets instead of 22% or less and 15% for UTSI manufactured handsets instead of 10.7%. Not sure where I got the 15% figure from but the 10.7% figure was from 2007 and I couldn't find a number for 2008.
So, of the $40M in unexpected cash burn, $23.5M still needs to be explained ($40M - $16.5M = $23.5M) from a loss of $135M in sales. Using $31M in lost sales for PAS handsets at 22% margin gives gross loss of $6.82M; $15M sales loss of PAS infra at 45% margin gives gross loss of $6.75M; $89M lost sales of UTSI manufactured PCD handsets at 10.7% margin gives gross loss of $9.71M.
So, adding these all up we get total sales loss of $135M with gross operating loss of $23.1M which is close enough to the $23.5M. So, all in all not so bad. The PCD handset sales are down due to recession in the US and PAS handset sales are down due to recession in China plus the restructuring. These are short term events and will resolve as we go into 2009. The PAS infrastructure sale loss still bothers me. If it is simply postponed into 2009 because of revenue recognition due to the carrier reorganization, that is no problem. If it is a cancelled contract, why was it cancelled and can other long-term PAS contracts be cancelled? If this is a one-time event, it is a small amount and of minimal consequence. Judging by company's guidance that PAS declines in H2 of this year are not going to continue into 2009, I would guess this is either delayed revenue recognition or a singular problem that will not be repeated. "
I think this latest quantification is right on and shows that the "legacy" and handset part of the company are still a significant portion of the overall revenue stream of the company. While it seems these are short term issues, we need to pay as much attention to this as well as the growing core businesses.
PCD Sale, some final words- There has been some continued discussions on whether UT did the right thing by selling PCD when it was doing well and when the company's other businesses are still unprofitable. I had replied in favor of the sale to another shareholder this week, "The overall PCD was only netting 3 to 4% gross margins a couple of years ago and that figure included the higher margin UT design phones. Now, it has spiked to 6-8% with the higher priced/higher margin smart phones. I don't think it can be maintained though. Look at Palm ordering 5 million smart phones a few days ago from their Chinese supplier for 2009. Rimm is coming out with 3 or 4 smartphones in the sub $100 category. Apple's iphone is $199 (although with high monthlys). Average selling price is going down industry wise as these are commodity products. Even UTs own internal handset business is questionable since the margins are still low and volumes are not comparable to others (scale is definitely important). So, overall, I don't think it would have continued like that but I do hope it performs well enough for UT to collect as much of the $50m due end of 2010. If UT doesn't get a decent piece of the CDMA/GSM market in China as part of the restructuring, they might as well sell that one too and save on the expenses. As for inventory, that is definitely questionable as UT also had to take in a lot of invetory from Pantech-curitel before for the exclusive agreement. That burned up a lot of cash and led to low margins for what seems like forever."
Shanghai/Harbin iptv- Tigre writes, "Given the low monthly ARPU and the necessary cost of acquiring programmings and the need to share revenue with local broadcast and media partners, it is not easy to make a profit for CT/N on IPTV at this stage. As illustratged in the Harbin article, the lack of local contents has also limited the growth of IPTV in Harbin, despite content partnership with SMG which is based in Shanghai. Also, having an IPTV operating license hasn't prevented local SARFT from prohibiting Netcom's 20 yuan/month IPTV promotion, citing that the price is too low. This is not an issue in Shanghai as SMG is the local partner of CT there. So Shanghai has its unique characteristics (including higher income of residents and being an Olympics city) and we can not generalize the success in Shanghai and expect simple replication elsewhere in China."
IPTV has done well in Shanghai with expectations that iptv subscribers will reach 800k by year's end. Shanghai with 19m in population shows the potential growth of iptv in China but the different regulatory/content issues elsewhere prevent a full openning up of the China market that makes estimates/projections difficult.
UT IPTV growth- My last posting gave some projections of growth for UTs iptv business in 2009 based on growth in the last year, looking at global growth, projections, and strategic wins/uptake in UT markets. http://utstarcom-stocknews.blogspot.com/2008/08/iptv-potential-100m-revenue-growth-in.html Obviously, this is just an estimate and there are many factors that can significantly increase/decrease this number and various events that can occur over the 2nd half of 2008 that could impact the market. I'll be interested to see what sigma designs says at the end of the month during the earnings call. There will also be another UT roadshow sometime in September and the impact of the olympics. Obviously, the bookings will be scrutinized during Q3 and the overall outlook from the company for 2009. Here is another recent article that discusses growth in iptv, specially in China. http://www.iptv-news.com/content/view/2213/64/
August 12, 2008 - The number of IPTV subscriber worldwide will reach 53mn in 2009, according to new estimates from a report from UK research firm Companies and Markets, with the APAC region leading growth in terms of subscribers, service revenue, infrastructure and other metrics, thanks to high broadband penetration and a supportive regulatory framework.
Worldwide IPTV service revenue is predicted to reach US$38bn in 2009, with the Americas and Western Europe forecast to be the biggest markets in terms of revenue per user, according to the report, entitled "Global IPTV Market Analysis (2006-2010)". China is expected to be the future "IPTV dragon", thanks to its rapid urbanisation, fast-growing economy and expanding middle class, while the US is expected to be a more difficult market for IPTV due to high existing pay-TV penetration, and stiff price and service competition likely to come from "entrenched" operators of cable and satellite services.
Potential restructuring? - With continued losses projected for the next several quarters, uncertain PAS market, uncertain revenue growth from the core businesses, one analyst and some shareholders are speculating that the company will need to further restructure. UT 2008 revenues of $900m include only about $350m or so in core revenues (iptv, ngn, and broadband). A bulk is still in PAS infra/handsets, and GSM/CDMA handsets. Expenses are still around $380m yearly run rate with $160m or so in R&D. Parts of the R&D are linked to PAS/handsets but the bulk is in the core business. However, obviously, that is still way too high no matter how you look at it. So, is it time to cut further? At this time, I have to say no. The company will continue to cut expenses by selling/merging the CSBU into other business units, will reap further cost savings after all the "legacy" expenses are done (some additional IT, accounting, legal expenses to wrap up). The company has raised substantial cash (I don't agree with all the particulars in the stock sales, interest spending, etc) the past year and will end the year with a strong net cash position. The company's focus is on growth and have earned some time (not a lot) to show that bookings are strong and return to cash flow positive is near. Management stands by its goal of increasing revenue several hundred million and I can see how that can happen but timing is as usual tricky (its already missed Blackmore's initial sustainable expense ratio targets for late 2008/early 2009).
Stock buyback- When the company had over $600-700m in cash, it also had a lot of debt and net cash was lower than where it will end up the year. In fact, most companies with similar market caps don't have anywhere near the net cash the company has. The problem is the cash at hand is still "lower" and do we really want them to borrow at 10.9% or dilute the stock if they require more working capital? I want them to buy the stock at these lower prices but not to the point the company will get in trouble (obviously). I still think a limited buyback may not be bad and show confidence. The flip side is do they have good visibility in and when the iptv markets/core markets will open up? This is where management (Barton in particular) has to start earning their pay. If all you do is be very conservative and sell everything and raise huge cash and use uncertainty as an excuse for everything, then what are you there for. That is too extreme on one side. Management has to get a handle on the business to be more balance in addressing shareholder needs while positioning the company for growth. Creativity? I haven't seen it. Estimates? Way off on the downside and upside. I remain a shareholder because of the huge potential, valuation of the assets (technology/resources/cash/connections/customers etc.).
As a summary for the week, I am simply frustrated with the shareprice but think the company is close to realizing the growth in their core businesses soon (after years and years) and the stock is back to being an incredible value. It always seems darkest when the ...... Have a good weekend everybody. BTW, the olympics have been very exciting so far! Phelps...amazing skill, execution and luck.
Saturday, August 16, 2008
IPTV - potential $100m revenue growth in 2009
Over the last year, UTStarcom has provided subscriber numbers to track the growth in their iptv system in China and worldwide. I have kept tract with the following chart.
http://tim94305.googlepages.com/UTIPTVSubscriberNumbers.pdf
During the last earnings call, we learned that the global subsriber base for UT has increased to 956k, increasing by about 100k in the previous 3 months, mostly from China. Out of the total, China has about 670k, Japan about 250k, and the rest of the world less than 50k. Aside from China and Japan, the company has contracts in India (MTNL, Bharti Airtel, BSNL, Goa, Sri Lanka), Taiwan (Markwell cable), and Brazil.
Global IPTV subscribers and growth projections - I had posted previously on the state of iptv globally from the end of 2006. http://utstarcom-stocknews.blogspot.com/2008/04/state-of-worldwide-iptv-deployment.html
The report, entitled “IPTV: The Killer Broadband Application”, forecasts that there will be nearly 60mn subscribers to IPTV services around the world by 2010, with a growth rate of over 500% expected during the next three years. http://www.iptv-news.com/content/view/1849/64/
2011. - Worldwide IPTV subscribers to reach 72.6 million by 2011, says MRG. http://broadcastengineering.com/news/worldwide-iptv-subscribers-1127/From the subscriber
Recently, here were iptv growth rates from Q1 2007 to Q2 2008:
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
While Europe has led the way, most projections have the APAC region leading the way in the next 2 years. Here is a recent article (June 2008) that I posted previously but is a good read specifically on UT markets in Asia.
http://www.telecomasia.net/article.php?id_cat3=0&id_article=5880 Here are some excerpts:
"The research firm notes that IPTV currently is deployed in seven Asian markets: China, Hong Kong, Malaysia, Singapore, South Korea, Taiwan and Thailand. Service introductions are anticipated in India and the Philippines later this year." UT management has discussed the NGN in the Philippines but not iptv. We still have not heard anything official out of Hong Kong except for the local news interview with a UTStarcom executive.
"In-Stat Research predicted that APAC's IPTV market would grow 80% annually through 2010, when revenue would hit $4.2 billion. China, Japan, India and South Korea are expected to account for most of the region's growth." Japan has been stalled for some time because of regulatory issues regarding multi-cast/time shifting that negate iptv/UTs advantage but it seems like there is some growth potential as well (definitely massive if regulations change).
"China is the untapped market with the potential to drive the Asian IPTV numbers through the roof. While current deployments are limited, future rollouts are planned in conjunction with upcoming global events.
"The growth of IPTV will remain modest for now and will take off only after 2008," says Serene Fong, broadband analyst for ABI Research. "Adoption will be boosted by major events, such as the Beijing Olympics in 2008 and then the 2010 World Expo in Shanghai." She adds that the Chinese government is backing IPTV because the technology is aligned with its long-term plan to unify broadband, Internet and telephony services. ABI projects that the IPTV subscriber base in China will surpass 23 million by 2012.
In her report, Fong warns, however, that there are bottlenecks in China that may restrict IPTV growth. These include a shortage of content and too much government regulation."
"A report from Pyramid Research forecasts 10 million Chinese subscribers by 2011"
Alcatel-Lucent's Schutte says China "is a difficult market to enter and do business in" because it is complex and involves competing IPTV technologies and standards deployed in different regions. Its clear that foreign companies will be shut out in the iptv market in China.
End of 2008- The company will probably end the year with around 1.2m subscribers, maybe a little more due to the olympics. This is about double the 600k that the company started with and consistent with global trends of about 100% growth. UT will probably have about 900k in China. At 62% of the China market, that puts total China iptv subscribers at around 1.5m. Sometimes, the numbers for China are inflated due to counting other iptv services that are not comparable so I will use UT's subscriber and market share numbers.
China Growth for 2009 and beyond- Lets say China doubles every year. It will have 3m by end of 2009, 6m by end of 2010, 12m by 2011, and 24m by 2012. That will be around the projections reported above. If UT gets 50% market share in China, they will increase their own subscriber base by 600k in 2009 (1.5m-900k), 1.5m in 2010(3m-1.5m), 3m in 2011 (6m-3m), and 6m in 2012 (12m-6m). Assuming STB revenue of $125/box and $40 for infra/service/maintenance, revenues could be $100m, $250m, $500m, and about $1b in the next few years. UT started the year with about 400k in China and will end the year with close to 900k so about double. The growth in China will probably exceed the 100% in the earlier years and UT will have a higher than 50% of the market. If we use those trends to fine tune the numbers, UT could have 1.8m-2m or more subscribers in China by the end of 2009. That is a growth of about 1m in 2009.
India - UT has been winning a lot of contracts, topped off by the recent win with BSNL in 20 cities. http://www.iptv-news.com/content/view/2196/64/
August 6, 2008 - Indian firm Aksh Optifibre is planning to invest US$100mn in its joint venture with Bharat Sanchar Nigam Ltd (BSNL) to deploy IPTV services in 20 cities in the regions of Rajasthan, Jammu & Kashmir, Punjab, Haryana and Uttar Pradesh (west), according to local reports.
K S Choudhary, Managing Director of Aksh Optifibre, commented that the company is targeting a subscriber base of 500,000 in the next three years: "[IPTV] technology allows the use of internet, telephone and television at the same time... It's difficult to ascertain the business dynamics of this highly volatile segment. We already have more than 7,000 subscribers in New Delhi and Mumbai where we are offering iControl on broadband network of MTNL."Under the terms of its agreement with BSNL, Aksh Optifibre needs to have 10,000 IPTV subscribers within the next nine months across 20 cities, however it is reportedly confident that it can reach this number. Aksh concluded a GDR/FCCB issue of US$40mn in January of this year to finance the IPTV and VoIP services in Delhi and Mumbai.
On one hand, the subscriber number target for 3 years and dollar amount seem to be good but then they are only targetting 10k users in 9 months. UTs broadband phase I contract was for 900 cities so the 20 city iptv deployment is only a fraction of BSNL's footprint. MTNL, Bharti Airtel have similar growth targets but the current numbers show slow movements in India. You also have Goa, Sri Lanka, Taiwan with high growth targets from 100k to 500k but slow movements as well.
Brazil - UT has a win with Brazil telecom but again it is only for 10k users. It also won a FMC contract and is deploying it currently but how quickly the market accelerates is unknown.
Russia - UT is said to be working on a couple of contracts by year end and iptv could be one of them. This is another huge market (heck all of them are huge but timing is the key).
Latin America, Middle East, Eastern Europe - UT has had some success in PAS, NGN, broadband so iptv will also be a part in the future. Blackmore mentioned an update in Q3 regarding these other regions. Obviously, they are even behind the other countries/regions if wins have not even been announced yet.
UT revenues - As I mentioned in the last post, if $210m of the $315m total revenues for the MMCBU comes from PAS infra, then only $105m is expected for iptv/ngn. IPTV users will increase by about 600k users for UT. That is $75m in STB. Infra/service/maintenance have longer revenue recognition cycles. If we consider half will be recognized, that could be $12m. NGN is about $20m, maybe more if PAS infra is less.
2009 iptv growth for UT - If UT doubles their iptv subscriber base, they could end 2009 with about 2.5m subscribers. That is a growth of 1.25m (about 1m from China and 250k from outside China). IPTV revenues could be about $156m in STB and $50m in infra/service/maintenance for a total of about $200m.
Uncertainties and potential - Even with the growth in iptv in 2009, the number of iptv users in UT markets will be very small. Based on the continued opex for UT in the second half, management has indicated it will spend to further their markets in iptv, NGN, and broadband. The company had initially projected about $1.1b in revenue for 2008 at the start of the year and now is down to about $900m (numbers adjusted for PCD sale). The company needs to further cut costs while ramping revenues by several hundred million. It seems iptv can add about $100m for 2009. NGN and broadband will show good growth as well but definitely not enough to get to profitability in 2009. On the bright side, the company has built up a nice cash base (ending 2008 with over $300m in net cash), cutting expenses, and potentially selling additional assets (CSBU). More importantly, the iptv revenues (while still lumpy) has significant growth, strategic wins, and worldwide traction behind it.
http://tim94305.googlepages.com/UTIPTVSubscriberNumbers.pdf
During the last earnings call, we learned that the global subsriber base for UT has increased to 956k, increasing by about 100k in the previous 3 months, mostly from China. Out of the total, China has about 670k, Japan about 250k, and the rest of the world less than 50k. Aside from China and Japan, the company has contracts in India (MTNL, Bharti Airtel, BSNL, Goa, Sri Lanka), Taiwan (Markwell cable), and Brazil.
Global IPTV subscribers and growth projections - I had posted previously on the state of iptv globally from the end of 2006. http://utstarcom-stocknews.blogspot.com/2008/04/state-of-worldwide-iptv-deployment.html
The report, entitled “IPTV: The Killer Broadband Application”, forecasts that there will be nearly 60mn subscribers to IPTV services around the world by 2010, with a growth rate of over 500% expected during the next three years. http://www.iptv-news.com/content/view/1849/64/
2011. - Worldwide IPTV subscribers to reach 72.6 million by 2011, says MRG. http://broadcastengineering.com/news/worldwide-iptv-subscribers-1127/From the subscriber
Recently, here were iptv growth rates from Q1 2007 to Q2 2008:
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
While Europe has led the way, most projections have the APAC region leading the way in the next 2 years. Here is a recent article (June 2008) that I posted previously but is a good read specifically on UT markets in Asia.
http://www.telecomasia.net/article.php?id_cat3=0&id_article=5880 Here are some excerpts:
"The research firm notes that IPTV currently is deployed in seven Asian markets: China, Hong Kong, Malaysia, Singapore, South Korea, Taiwan and Thailand. Service introductions are anticipated in India and the Philippines later this year." UT management has discussed the NGN in the Philippines but not iptv. We still have not heard anything official out of Hong Kong except for the local news interview with a UTStarcom executive.
"In-Stat Research predicted that APAC's IPTV market would grow 80% annually through 2010, when revenue would hit $4.2 billion. China, Japan, India and South Korea are expected to account for most of the region's growth." Japan has been stalled for some time because of regulatory issues regarding multi-cast/time shifting that negate iptv/UTs advantage but it seems like there is some growth potential as well (definitely massive if regulations change).
"China is the untapped market with the potential to drive the Asian IPTV numbers through the roof. While current deployments are limited, future rollouts are planned in conjunction with upcoming global events.
"The growth of IPTV will remain modest for now and will take off only after 2008," says Serene Fong, broadband analyst for ABI Research. "Adoption will be boosted by major events, such as the Beijing Olympics in 2008 and then the 2010 World Expo in Shanghai." She adds that the Chinese government is backing IPTV because the technology is aligned with its long-term plan to unify broadband, Internet and telephony services. ABI projects that the IPTV subscriber base in China will surpass 23 million by 2012.
In her report, Fong warns, however, that there are bottlenecks in China that may restrict IPTV growth. These include a shortage of content and too much government regulation."
"A report from Pyramid Research forecasts 10 million Chinese subscribers by 2011"
Alcatel-Lucent's Schutte says China "is a difficult market to enter and do business in" because it is complex and involves competing IPTV technologies and standards deployed in different regions. Its clear that foreign companies will be shut out in the iptv market in China.
End of 2008- The company will probably end the year with around 1.2m subscribers, maybe a little more due to the olympics. This is about double the 600k that the company started with and consistent with global trends of about 100% growth. UT will probably have about 900k in China. At 62% of the China market, that puts total China iptv subscribers at around 1.5m. Sometimes, the numbers for China are inflated due to counting other iptv services that are not comparable so I will use UT's subscriber and market share numbers.
China Growth for 2009 and beyond- Lets say China doubles every year. It will have 3m by end of 2009, 6m by end of 2010, 12m by 2011, and 24m by 2012. That will be around the projections reported above. If UT gets 50% market share in China, they will increase their own subscriber base by 600k in 2009 (1.5m-900k), 1.5m in 2010(3m-1.5m), 3m in 2011 (6m-3m), and 6m in 2012 (12m-6m). Assuming STB revenue of $125/box and $40 for infra/service/maintenance, revenues could be $100m, $250m, $500m, and about $1b in the next few years. UT started the year with about 400k in China and will end the year with close to 900k so about double. The growth in China will probably exceed the 100% in the earlier years and UT will have a higher than 50% of the market. If we use those trends to fine tune the numbers, UT could have 1.8m-2m or more subscribers in China by the end of 2009. That is a growth of about 1m in 2009.
India - UT has been winning a lot of contracts, topped off by the recent win with BSNL in 20 cities. http://www.iptv-news.com/content/view/2196/64/
August 6, 2008 - Indian firm Aksh Optifibre is planning to invest US$100mn in its joint venture with Bharat Sanchar Nigam Ltd (BSNL) to deploy IPTV services in 20 cities in the regions of Rajasthan, Jammu & Kashmir, Punjab, Haryana and Uttar Pradesh (west), according to local reports.
K S Choudhary, Managing Director of Aksh Optifibre, commented that the company is targeting a subscriber base of 500,000 in the next three years: "[IPTV] technology allows the use of internet, telephone and television at the same time... It's difficult to ascertain the business dynamics of this highly volatile segment. We already have more than 7,000 subscribers in New Delhi and Mumbai where we are offering iControl on broadband network of MTNL."Under the terms of its agreement with BSNL, Aksh Optifibre needs to have 10,000 IPTV subscribers within the next nine months across 20 cities, however it is reportedly confident that it can reach this number. Aksh concluded a GDR/FCCB issue of US$40mn in January of this year to finance the IPTV and VoIP services in Delhi and Mumbai.
On one hand, the subscriber number target for 3 years and dollar amount seem to be good but then they are only targetting 10k users in 9 months. UTs broadband phase I contract was for 900 cities so the 20 city iptv deployment is only a fraction of BSNL's footprint. MTNL, Bharti Airtel have similar growth targets but the current numbers show slow movements in India. You also have Goa, Sri Lanka, Taiwan with high growth targets from 100k to 500k but slow movements as well.
Brazil - UT has a win with Brazil telecom but again it is only for 10k users. It also won a FMC contract and is deploying it currently but how quickly the market accelerates is unknown.
Russia - UT is said to be working on a couple of contracts by year end and iptv could be one of them. This is another huge market (heck all of them are huge but timing is the key).
Latin America, Middle East, Eastern Europe - UT has had some success in PAS, NGN, broadband so iptv will also be a part in the future. Blackmore mentioned an update in Q3 regarding these other regions. Obviously, they are even behind the other countries/regions if wins have not even been announced yet.
UT revenues - As I mentioned in the last post, if $210m of the $315m total revenues for the MMCBU comes from PAS infra, then only $105m is expected for iptv/ngn. IPTV users will increase by about 600k users for UT. That is $75m in STB. Infra/service/maintenance have longer revenue recognition cycles. If we consider half will be recognized, that could be $12m. NGN is about $20m, maybe more if PAS infra is less.
2009 iptv growth for UT - If UT doubles their iptv subscriber base, they could end 2009 with about 2.5m subscribers. That is a growth of 1.25m (about 1m from China and 250k from outside China). IPTV revenues could be about $156m in STB and $50m in infra/service/maintenance for a total of about $200m.
Uncertainties and potential - Even with the growth in iptv in 2009, the number of iptv users in UT markets will be very small. Based on the continued opex for UT in the second half, management has indicated it will spend to further their markets in iptv, NGN, and broadband. The company had initially projected about $1.1b in revenue for 2008 at the start of the year and now is down to about $900m (numbers adjusted for PCD sale). The company needs to further cut costs while ramping revenues by several hundred million. It seems iptv can add about $100m for 2009. NGN and broadband will show good growth as well but definitely not enough to get to profitability in 2009. On the bright side, the company has built up a nice cash base (ending 2008 with over $300m in net cash), cutting expenses, and potentially selling additional assets (CSBU). More importantly, the iptv revenues (while still lumpy) has significant growth, strategic wins, and worldwide traction behind it.
Quantifying the shortfall
Fellow shareholder Shadow tried to quantify the $100m cash flow shortfall for 2008. Normally, I would just reply on the yahoo board but this is a good discussion so I will post my reply on the blog. Based on $60m in cash usage used in preparation of the phase II BSNL broadband contract, Shadow focused on the $40m cash shortfall as follows:
"I gathered some numbers together from UTSI's 10Q and Tim's blog with the following results. Handset sales (PAS plus China CDMA/GSM) in H1 2008 were around $93M and for year are expected to be $155M indicating H2 sales of only $62M or $31M per quarter. I previously estimated that H2 resulted in an unexpected cash loss of an additional $40M to Analyst Day estimates by management and a loss of $135M in sales (initial sales were to be $1.035B and were revised per Tim's Blog now down to $900M). If you assume H2 handset sales were to match H1 sales then lost sales of $31M are now predicted. At 36% gross margin this would account for gross profit loss of $11.2M in gross profit from this division. If you estimate PAS infrastructure sales loss/delayed recognition of $30M with margin of 45%, you get a loss of another $13.5M. Using the sales constraint above, $135M total sales lost in H2 - $31M (handset division) - $30M (PAS infrastructure) = $74M of lost sales of CDMA handsets due to lost PCD contract. This results in loss of $11.1M in gross profit since gross margins for this product were given to us at 15%. So, total lost gross profit with above assumtions would be $35.8M which is close enough to the $40M in lost cash to be an acceptable solution."
I had commented previously that I was surprised with the $755m in non-PCD revenue expected for 2008 that was in the Analyst Day meeting. Using the mid-range values given late last year, I had come up with $833m. The initial company target for 2008 for the terminals business unit was $210m with a 22% gross margin so the $155m number that Barton mentioned to me a week ago was responsible for the bulk of that. The increase in PCD revenue noted in the Analyst Day meeting made up for the lost TBU revenue but it was also a bad sign already that I should have pursued more. The second item was during the cc to discuss the PCD sale. We learned that the internal handset part of the PCD would have $280m in revenue as noted in the Analyst Day slides. However, Barton was hesitant in backing this number during the CC and only mentioned that it was in the $200m something range. Again, this was something that could have helped in identifying the revenue shortfall.
Anyway, back to Shadow's calculations. I think the PAS handset contribution revenue wise is a good estimate but the gross margin of 36% is on the high side as the company knew even at the beginning of the year that margins would be lower (hence overall 22% GMs). This may lead you to increase the PAS infrastructure contribution of the loss but a large part of the shortfall in cash flow stems from the PCD distribution sale. Also, the $60m+ in TBU sales left might even be less than what you are estimating. The company did not specifically mention PAS infra regarding the cash flow delta in the earning call except in the conversation I had and that was described as "some" so the $30m you estimated is probably on the high side. This is a good discussion because of the importance still of PAS as it still generates about $210m + $155m or $365m in revenue for the company (assuming those numbers are still correct for 2008). I am a little reassured during the conversation that Barton emphasized not to extrapolate the PAS handset declines into the future and that Barton spent time in emphasizing that the PAS infra have much longer time horizons. Blackmore added that the telecom merger impact should help past this short term pain.
MCBU insight - I was going to post on iptv subscribers/revenues and the above discussion is a good backdrop to the MCBUs revenue stream. At the start of the year, the estimate for the MCBU was $315m. Since PAS infra was at $210m, only $115m or so is left for iptv and NGN. This might be more if the PAS infra number that Barton gave me did not include the expected shortfall. I'll continue this on the next post.
In summary, management lost credibility in not identifying the shortfalls in the Analyst Day meeting/slides. Maybe they thought no one followed the company anyway. Maybe they got complacent since they were going to sell the PCD and generate a lot of cash. The 27% one day drop after the earnings call only emphasized that the company has to communicate guidance and manage expectations much better. I had already emphasized my frustration for the discussion I had with Barry Hutton when we were discussing the guidance given in the Q1 earnings call for Q2. I want to point out that our conversation was when the stock was well above $5. While most shareholders will agree with the company's focus on the long term, the company cannot dismiss a drop from almost $6 to $3.5. Can you imagine the uproar of Apple shareholders if the stock drop to $90 in the next two weeks due to some short term issues?
"I gathered some numbers together from UTSI's 10Q and Tim's blog with the following results. Handset sales (PAS plus China CDMA/GSM) in H1 2008 were around $93M and for year are expected to be $155M indicating H2 sales of only $62M or $31M per quarter. I previously estimated that H2 resulted in an unexpected cash loss of an additional $40M to Analyst Day estimates by management and a loss of $135M in sales (initial sales were to be $1.035B and were revised per Tim's Blog now down to $900M). If you assume H2 handset sales were to match H1 sales then lost sales of $31M are now predicted. At 36% gross margin this would account for gross profit loss of $11.2M in gross profit from this division. If you estimate PAS infrastructure sales loss/delayed recognition of $30M with margin of 45%, you get a loss of another $13.5M. Using the sales constraint above, $135M total sales lost in H2 - $31M (handset division) - $30M (PAS infrastructure) = $74M of lost sales of CDMA handsets due to lost PCD contract. This results in loss of $11.1M in gross profit since gross margins for this product were given to us at 15%. So, total lost gross profit with above assumtions would be $35.8M which is close enough to the $40M in lost cash to be an acceptable solution."
I had commented previously that I was surprised with the $755m in non-PCD revenue expected for 2008 that was in the Analyst Day meeting. Using the mid-range values given late last year, I had come up with $833m. The initial company target for 2008 for the terminals business unit was $210m with a 22% gross margin so the $155m number that Barton mentioned to me a week ago was responsible for the bulk of that. The increase in PCD revenue noted in the Analyst Day meeting made up for the lost TBU revenue but it was also a bad sign already that I should have pursued more. The second item was during the cc to discuss the PCD sale. We learned that the internal handset part of the PCD would have $280m in revenue as noted in the Analyst Day slides. However, Barton was hesitant in backing this number during the CC and only mentioned that it was in the $200m something range. Again, this was something that could have helped in identifying the revenue shortfall.
Anyway, back to Shadow's calculations. I think the PAS handset contribution revenue wise is a good estimate but the gross margin of 36% is on the high side as the company knew even at the beginning of the year that margins would be lower (hence overall 22% GMs). This may lead you to increase the PAS infrastructure contribution of the loss but a large part of the shortfall in cash flow stems from the PCD distribution sale. Also, the $60m+ in TBU sales left might even be less than what you are estimating. The company did not specifically mention PAS infra regarding the cash flow delta in the earning call except in the conversation I had and that was described as "some" so the $30m you estimated is probably on the high side. This is a good discussion because of the importance still of PAS as it still generates about $210m + $155m or $365m in revenue for the company (assuming those numbers are still correct for 2008). I am a little reassured during the conversation that Barton emphasized not to extrapolate the PAS handset declines into the future and that Barton spent time in emphasizing that the PAS infra have much longer time horizons. Blackmore added that the telecom merger impact should help past this short term pain.
MCBU insight - I was going to post on iptv subscribers/revenues and the above discussion is a good backdrop to the MCBUs revenue stream. At the start of the year, the estimate for the MCBU was $315m. Since PAS infra was at $210m, only $115m or so is left for iptv and NGN. This might be more if the PAS infra number that Barton gave me did not include the expected shortfall. I'll continue this on the next post.
In summary, management lost credibility in not identifying the shortfalls in the Analyst Day meeting/slides. Maybe they thought no one followed the company anyway. Maybe they got complacent since they were going to sell the PCD and generate a lot of cash. The 27% one day drop after the earnings call only emphasized that the company has to communicate guidance and manage expectations much better. I had already emphasized my frustration for the discussion I had with Barry Hutton when we were discussing the guidance given in the Q1 earnings call for Q2. I want to point out that our conversation was when the stock was well above $5. While most shareholders will agree with the company's focus on the long term, the company cannot dismiss a drop from almost $6 to $3.5. Can you imagine the uproar of Apple shareholders if the stock drop to $90 in the next two weeks due to some short term issues?
Sunday, August 10, 2008
Weekly recap - 27% stock decline!
The stock closed the week at $3.48, down $1.3 or 27%. To make matters worse for UT shareholders, the market was solidly in the black with the DOW up 3.5%. Earnings related news dominated the headlines this week but there were also plenty of UT related news provided by fellow shareholders (Bamboozled and Techbroker....yes, we shareholders got bamboozled this week, thats for sure). I had discussed the earnings recap and post earnings recap in the last two posts but here are other UT related news this week.
BSNL iptv contract for UT - This was a huge win for UTStarcom in India solidifying their already dominant position in the India region IPTV (previous wins with MTNL, Bharti Airtel, Goa, and Sri Lanka). Back in the shareholder meeting, the company mentioned that they were pushing their system through their partner Aksh Optifibre to other carriers and this was confirmed in the earnings call when Peter Blackmore alluded to the expansion of iptv in India with BSNL (through Aksh) in 20 Indian cities. Earlier in the week, here was a link posted by Bamboozled, http://cable.tmcnet.com/topics/cable/articles/35915-bsnl-aksh-optifibre-launch-jaipur-iptv-service.htm "With this partnership, BSNL would help increase the reach of IPTV to six million homes,” said G.K Aggarwal, CGM (Rajasthan Circle) BSNL, while addressing a press conference here." "icontrol is a television connection that allows viewers to watch the programs at their convenience with more than 120 channels, and an extensive movie library with Hollywood and Bollywood titles at no extra cost" I had some discussion with fellow shareholders Tigre and Shadow regarding expansion of UTs iptv and one of the concerns in poorer countries was affordability and penetration of iptv due to its benefits. It really looks like that UT has worked out an ad based/multi-use model that works well in China, India, and Brazil. I cannot emphasize enough how huge this win with BSNL, the leading provider of broadband/fixed lines in India.
Brazil iptv expansion - From UTs 2000 subscriber trial back in August 2005 to last December's initial 10k subscriber capacity contract in Brazil, it has been a very slow process. This last week or so, we heard about UTs fixed mobile convergence (FMC) solution being launched formally and now expansion of iptv. UT did not provide an update in Latin America (Blackmore will provide more updates in Q3) but we did get this link this week on Brazil iptv expansion. "Brasil Telecom (BrT) is preparing to expand the availability of its "Videon" IPTV service beyond the capital of Brasilia shortly, according to BrT's Network Engineering Director Sebastião Nacimento" http://www.iptv-news.com/content/view/2186/64/ The slow progress in iptv has been frustrating but it also shows the investments and "moat" that UT is building as it wins strategic contracts in key monster markets.
Impact of Beijing olympics on UTs iptv - When I talked with Peter Blackmore on Friday, he was much more upbeat than the earnings call (not surprising due to the revenue shortfall). Peter discussed the impact of the olympics would have on UTs iptv uptake in China. I myself watched the openning ceremony and today's tape delay of the US-China basketball game. It would be awesome if I could replay swimmer Michael Phelps 1st gold medal or a particular gymnastics event. That is what the over 1 million Chinese (mostly in Shanghai) are experiencing now! Here is a link that shows the record increase in iptv in China right now. http://www.iptv-news.com/content/view/2182/64/
August 4, 2008 - Chinese telcos are receiving a record number of new subscribers to their IPTV services each day ahead of the Beijing Olympic Games next week, say reports in the Shanghai Morning Post. China Telecom is estimated to be receiving around 3,000 applications for IPTV services each day, thanks in part to a replay function that allows users to revisit programmes aired within the past 48 hours. Shanghai Telecom has also said that it will promote a new service during the Olympics that will enable viewers to watch different sporting events on different windows in the same screen. "To receive HDTV channels, broadband Internet users should meet specific conditions," said Shanghai Telecom official Feng Yaozhou. "So far about 300,000 Shanghai broadband Internet users are qualified to apply for the service." Shanghai Telecom reports that it currently has 510,000 IPTV subscribers, and expected to reach 800,000 by the end of the year.
In addition to iptv programming, here is a link of The Nine's game channel that will help promote iptv even more. http://www.tradingmarkets.com/.site/news/Stock%20News/1807310/ "The Shanghai Branch of China Telecom ( CHA.NYSE; 0728.HK) announced that it would cooperate with The9 (NCTY. Nasdaq) to build a game channel on Interactive Personal TV (IPTV) in Shanghai." "The9 has provided four tailored games for this game channel in June this year. " Do not underestimate gaming in China....its huge.
More on the impact of the PCD sale - It seems that a lot of shareholders discussed this with Peter Blackmore after the price drop this week. So much so that Peter started our discussion by discussing this with me as well. I am a major proponent for getting to profitability as other shareholders but I was really happy to have the PCD sold so no explanation was really needed for me. This is not why shareholders bought into UTStarcom and for most of the time, it yielded gross margins of 2 to 4%. The company was able to get a reasonable price, keep its internal PCD contracts, and bring liquidity and focus to the company so I was happy. Obviously, there would be impact to the quarterly cash flows as the PCD was profitable but you have to love the fact the company is focused on their core business, which should be the main priority. As the company mentioned as well, the margins were hitting all-time highs of 7-8%, which would not be sustainable. Even their internal handsets already had a revenue shortfall. Peter also noted that this business which will be folded into the handset division (the one that makes PAS handsets and CDMA/GSM handsets to China) may also be divested or its design center be moved from Korea to China. The singular focus of divesting/reorganizing the business units show that management is executing and that business is not as usual (hard to say when the shareprice is near all-time lows but they have been performing).
Transport network product - I'm not a techy but Peter brought this up again during our discussion and said they had undergone more testing and is being used by Softbank and will be used in China. When Peter mentions certain things such as this product or potential monetization of the CSBU, I listen closely as it seems it will impact the company very soon.
Pricing of employee stock option and cash flow for 2009 - I forgot to touch on these subjects but hope they could give more color on this as soon as possible.
Summary - It was a very tough week for shareholders as the stock was hammered like the company was about to write down some auction rate securities (ARS) or collateral debt obligations (CDOs) or announced they are diluting their stock (heck even Merrill Lynch diluted their stock 38% and it went up!). I had been wary of the technicals the last couple of weeks and mentioned the possibility of going down to the 200 day MA. It was still hard to actually see it and even closed the gap from mid $3s. Someone wanted this to fall back hard and it did. However, in the longer term, I remain as bullish (probably more) due to the company's execution, focus, strong balance sheet and strategic position of their technology and markets.
Thanks for the shareholders who shared information this week. Unfortunately, there are much more discussions when the stock goes down. Have a good rest of the weekend and hoping for a MUCH better week for the stock :-)
BSNL iptv contract for UT - This was a huge win for UTStarcom in India solidifying their already dominant position in the India region IPTV (previous wins with MTNL, Bharti Airtel, Goa, and Sri Lanka). Back in the shareholder meeting, the company mentioned that they were pushing their system through their partner Aksh Optifibre to other carriers and this was confirmed in the earnings call when Peter Blackmore alluded to the expansion of iptv in India with BSNL (through Aksh) in 20 Indian cities. Earlier in the week, here was a link posted by Bamboozled, http://cable.tmcnet.com/topics/cable/articles/35915-bsnl-aksh-optifibre-launch-jaipur-iptv-service.htm "With this partnership, BSNL would help increase the reach of IPTV to six million homes,” said G.K Aggarwal, CGM (Rajasthan Circle) BSNL, while addressing a press conference here." "icontrol is a television connection that allows viewers to watch the programs at their convenience with more than 120 channels, and an extensive movie library with Hollywood and Bollywood titles at no extra cost" I had some discussion with fellow shareholders Tigre and Shadow regarding expansion of UTs iptv and one of the concerns in poorer countries was affordability and penetration of iptv due to its benefits. It really looks like that UT has worked out an ad based/multi-use model that works well in China, India, and Brazil. I cannot emphasize enough how huge this win with BSNL, the leading provider of broadband/fixed lines in India.
Brazil iptv expansion - From UTs 2000 subscriber trial back in August 2005 to last December's initial 10k subscriber capacity contract in Brazil, it has been a very slow process. This last week or so, we heard about UTs fixed mobile convergence (FMC) solution being launched formally and now expansion of iptv. UT did not provide an update in Latin America (Blackmore will provide more updates in Q3) but we did get this link this week on Brazil iptv expansion. "Brasil Telecom (BrT) is preparing to expand the availability of its "Videon" IPTV service beyond the capital of Brasilia shortly, according to BrT's Network Engineering Director Sebastião Nacimento" http://www.iptv-news.com/content/view/2186/64/ The slow progress in iptv has been frustrating but it also shows the investments and "moat" that UT is building as it wins strategic contracts in key monster markets.
Impact of Beijing olympics on UTs iptv - When I talked with Peter Blackmore on Friday, he was much more upbeat than the earnings call (not surprising due to the revenue shortfall). Peter discussed the impact of the olympics would have on UTs iptv uptake in China. I myself watched the openning ceremony and today's tape delay of the US-China basketball game. It would be awesome if I could replay swimmer Michael Phelps 1st gold medal or a particular gymnastics event. That is what the over 1 million Chinese (mostly in Shanghai) are experiencing now! Here is a link that shows the record increase in iptv in China right now. http://www.iptv-news.com/content/view/2182/64/
August 4, 2008 - Chinese telcos are receiving a record number of new subscribers to their IPTV services each day ahead of the Beijing Olympic Games next week, say reports in the Shanghai Morning Post. China Telecom is estimated to be receiving around 3,000 applications for IPTV services each day, thanks in part to a replay function that allows users to revisit programmes aired within the past 48 hours. Shanghai Telecom has also said that it will promote a new service during the Olympics that will enable viewers to watch different sporting events on different windows in the same screen. "To receive HDTV channels, broadband Internet users should meet specific conditions," said Shanghai Telecom official Feng Yaozhou. "So far about 300,000 Shanghai broadband Internet users are qualified to apply for the service." Shanghai Telecom reports that it currently has 510,000 IPTV subscribers, and expected to reach 800,000 by the end of the year.
In addition to iptv programming, here is a link of The Nine's game channel that will help promote iptv even more. http://www.tradingmarkets.com/.site/news/Stock%20News/1807310/ "The Shanghai Branch of China Telecom ( CHA.NYSE; 0728.HK) announced that it would cooperate with The9 (NCTY. Nasdaq) to build a game channel on Interactive Personal TV (IPTV) in Shanghai." "The9 has provided four tailored games for this game channel in June this year. " Do not underestimate gaming in China....its huge.
More on the impact of the PCD sale - It seems that a lot of shareholders discussed this with Peter Blackmore after the price drop this week. So much so that Peter started our discussion by discussing this with me as well. I am a major proponent for getting to profitability as other shareholders but I was really happy to have the PCD sold so no explanation was really needed for me. This is not why shareholders bought into UTStarcom and for most of the time, it yielded gross margins of 2 to 4%. The company was able to get a reasonable price, keep its internal PCD contracts, and bring liquidity and focus to the company so I was happy. Obviously, there would be impact to the quarterly cash flows as the PCD was profitable but you have to love the fact the company is focused on their core business, which should be the main priority. As the company mentioned as well, the margins were hitting all-time highs of 7-8%, which would not be sustainable. Even their internal handsets already had a revenue shortfall. Peter also noted that this business which will be folded into the handset division (the one that makes PAS handsets and CDMA/GSM handsets to China) may also be divested or its design center be moved from Korea to China. The singular focus of divesting/reorganizing the business units show that management is executing and that business is not as usual (hard to say when the shareprice is near all-time lows but they have been performing).
Transport network product - I'm not a techy but Peter brought this up again during our discussion and said they had undergone more testing and is being used by Softbank and will be used in China. When Peter mentions certain things such as this product or potential monetization of the CSBU, I listen closely as it seems it will impact the company very soon.
Pricing of employee stock option and cash flow for 2009 - I forgot to touch on these subjects but hope they could give more color on this as soon as possible.
Summary - It was a very tough week for shareholders as the stock was hammered like the company was about to write down some auction rate securities (ARS) or collateral debt obligations (CDOs) or announced they are diluting their stock (heck even Merrill Lynch diluted their stock 38% and it went up!). I had been wary of the technicals the last couple of weeks and mentioned the possibility of going down to the 200 day MA. It was still hard to actually see it and even closed the gap from mid $3s. Someone wanted this to fall back hard and it did. However, in the longer term, I remain as bullish (probably more) due to the company's execution, focus, strong balance sheet and strategic position of their technology and markets.
Thanks for the shareholders who shared information this week. Unfortunately, there are much more discussions when the stock goes down. Have a good rest of the weekend and hoping for a MUCH better week for the stock :-)
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