Why did I and other longs invest in this company and some have continued to hold on to shares? I was banking on the growth in China. UTStarcom was one of the few growing telecommunications provider 5-6 years ago and their rapid growth, US listing, and potential for becoming the Chinese version of Cisco was very tempting at the time. The monumental collapse can be attributed to some major strategic mistakes such as investing in WCDMA instead of the home grown TDSCDMA, spending massively on R&D/marketting in overseas markets that had well-placed local providers and/or had regulations that would prevent adoption of the technology at the time. The company's main revenue/profit source in China and Japan (Softbank) also deteriorated significantly in the last 4 years while all the other ventures/revenue source could not come close to addressing the PAS/Japan losses despite the company's efforts to reduced overall spending.
The "growth" that investors hope to see can actually be seen in Huawei and ZTE! http://www.lightreading.com/document.asp?doc_id=175673&
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=ts&bn=27187&tid=158749&mid=158750&tof=12&rt=1&frt=1&off=1
Peter Blackmore, who came in 20 months ago mentioned being impressed by the combination of Western management/US listing/markets as well as the low cost base of operations in China. The problem is that UTStarcom is competing against ZTE/Huawei in China where UT is disadvantaged (previously by not being a true Chinese company and now also by scale due to years of losses). Outside of China, it is competing against well-entrenched global providers with huge scale and credibility of having revenues 20-100x UT has.
I listened to the Analyst Day meeting held in June 2008 and was reinforced again that it is not the technology that is the issue but management/other external factors that may prevent UT from ever becoming profitable and eventually sold/go down. Brian Caskey mentioned some of these technologies have been developed since 2000-2001. Peter Blackmore mentioned that they had too many technology and had a cost problem.
While Peter can articulate the problems and fix certain operational issues in the company, he has to deal with a company headed by now Chairman Hong Lu and lead independent director Thomas Toy, both with UT performance history that would have them removed already. They are not even well liked as Ying Wu was by the employees/customers. Being non-Chinese, Peter is also disadvantaged when the company's base of operation and main market is China! So, the current leadership situation at UT is tremendously bad for shareholders.
Peter understands that high gross margins and profits are the key to turning the valuation of the company around. He has focused the company on broadband, iptv, and ngn. Lets discuss whether the company's products/deployments are commoditized or not. The company focuses on all IP type products, which in turns brings customer protection on their investments. That is good for the customers BUT not good for shareholders/UT. There are "few" true non-commoditized platforms/products that will do well for a long period of time such as Apple's iphone or Mircrosoft's operating software. The one high margin product/business that UT has is IPTV. When UT wins a contract for a certain region, it has a hold for that period. The company makes the correct argument that bundling ngn/broadband can reap added savings and make the systems work more efficiently and thus a better value proposition. However, there are other major factors such as vendor financing or worse State-backed financing that UT cannot compete. It cannot compete on scale and therefore we see the results of no large wins in any of their technology segments that they offer. Even the key strategic wins have not taken off.
While the initial mis-steps by the company is understandable to an extent (dellusions of grandeur after hitting $2.5b in revenues in a short time gives the company some slack), not cutting costs more rapidly and the overseas expansion was not acceptable (the last 3-4 years). As far back as 2003, PAS was expected to peak in 2004. Failed ventures from WCDMA, Softbank, India, PCD, and other expansions are examples of the mis-steps. The company has not even settled their "identity" as of now.
Blackmore mentioned early in his tenure that UT was like a start up company. I commented that the company's huge cost base, lack of growth, internal issues made this statement false. The company had $40-50m in R&D that normal startups do not have. They still had $26m in the last quarter. The company has a LOT of resources to turn this around but unless they make fundmental changes in the leadership and their identity as a Chinese company, the street doesn't buy it (hence the weak rise in the stock price even during the latest rally). As an example of a "startup" doing all the right things is Starent. However, just like in Sigma Designs case, the larger competitors look at the growth/margins that they have and come swarming in. Eventually, Starent will go bust or be bought out.
Going back to their current strategies. There is the "wireless" backdoor plays such as FMC, PDSN, IPTV, handsets and their broadband/ngn technologies such as GEPON/transport network products. The problem again is that individually, it may not be a commoditized product and have certain differentiations but by the time there is any large scale implementation, it IS commoditized.
Because of the lost in scale and diminished resources, the company has a much higher hill to climb than even when Peter came on board. Yes, another growth wave can lift all boats and UT will benefit. The lower cost base will take some of the pressure off. The question for the board/shareholders is the missed opportunities of getting a much higher valuation just a couple of years ago. (http://utstarcom-stocknews.blogspot.com/2008/01/wu-interview-uts-strategic-alternative.html)
I realize the above items have been mentioned many times but it does reinforce the issues preventing the higher valuation of the company and that shareholders should continue to hold management/board to performance and structural change. Peter must produce results/changes and get to the core of the problems. If he can't, I have mentioned to him and the board to sell the company. I wonder if the company will have a 2009 Analyst Day meeting ?
BTW, Ford Motor has gone from $1 to $5 because it now increased sales estimates by 10k for the quarter and may be profitable in 2011. The street has no confidence in UT and whether or not UT management/board does something/anything will be telling.
Have a good rest of the weekend.
Sunday, April 26, 2009
Saturday, April 18, 2009
Conference Call with Peter Blackmore
I had a conference call with Barry Hutton and CEO Peter Blackmore this last Wednesday, April 15 at 12 noon (Pacific time). I appreciate them accomodating me at that time since I do have a day job. There was initial hesitancy on Barry's part to schedule the conference call since the quarter has closed and they were on the quiet period. I assured Barry that my intent was not to discuss the current quarter but just to go through topics related in 2008 and general issues. During these calls, its hard to stick to one topic (since they are all inter-related), get information that is not material, and yet useful. The call lasted 45 minutes. Here are the questions/comments that I had and Peter's response.
During previous meetings that we've had (March 2008, June 2008 Shareholder meeting) and conference calls, the company has constantly reiterated that their core business was doing well (bookings doing well), developing countries which were their target markets were either not affected or less affected, PAS declines and eventual shutdown were built in, and they were looking to ramp revenues by several hundred million, so what prompted the cutbacks at the end of the year and the revenue shortfall? Entering 2008, the estimate was for non-PCD revenues of $1.1 billion and it came in at $700m.
The perceived revenue shortfall in core revenues (not including PCD/internal) was around $100m (from the $700m+ to $600m). Bookings are doing well but certain revenue such as the India broadband contracts were not recognized in 2008 and won't even be recognized until end of 2009 at the earliest. Over two hundred million of revenue from Phase I & II have not been recognized. The cutbacks were part of the overall plan of getting more focus on the core IP businesses, general world recession at the end of 2008, and a new model of moving back to China.
Cash from those projects are being collected, right? Why not move earlier and move entirely to China? Also, why go into 2009 with a budget of losing $150m? (note: some of the questions might not be in order and Q&A is ongoing for 45 minutes and I didn't want to get bogged down on any single topic)
Cash is being collected from the India contract. It is "debatable" on whether to move entirely back to China but it was prudent to do so at this time for better cost control. Towards the end of the year, they were trying also to wind down some Chicago assets and it was a tough environment so decisions had to be made to consolidate or move stuff to China. The losses in 2009 are street estimates and they have only given estimates for Q1. (note: Cash flow could also be better than street P&L estimates would indicate due to the unrecognized revenue from the India broadband and another $10m in July from PCD - I forgot to ask more information on the potentially $50m more in payment due at the end of 2010).
Peter had mentioned he was on the job for 20 months, so I asked how he felt the turnaround plan was going and at what stage was he in that plan?
Peter mentioned he felt he had made the right moves towards the overall goal of streamlining the business into the core IP technologies and he reiterated the goal of getting to profitability. With hindsight, he says they could have done some things differently but gave examples such as selling the PCD and indicated they were fortunate at completing the deal when they did. They had cut a lot of costs out, sold non-core assets, improved the supply chain/sales/marketing, etc.
I commented it seems like for the last 4 years or so, the company has had one plan. Wait for non-PAS revenues to ramp and when it doesn't, the company does its annual cut backs.
Peter mentioned he can only comment on his 20 month term that they are working and executing (see above) to get to profitability and it takes a lot of work to do what they have done. He reiterated understanding the share price is so low ("its not even trading at cash") and the need to get to profitability. He says he is not waiting around for the next few quarters but actively taking more steps and will discuss it in a few weeks (I took that to mean in the next earnings call).
Leadership - Who is really in charge of the company? Is this turnaround plan your plan? Hong Lu is still very active in China and drawing CEO type pay.
Peter mentioned he knows where I am going with this since he read the blog or that people mentioned it to him. He understands having two "high priced executives". He mentioned that he is in control. The China executives all report to him. He is there once a month. Hong Lu is involved with PAS and is consulting because he was there during the transition from Wu and can speak Mandarin to the executives/customers. Ultimately, he (Peter) is in charge and lays out the plan but of course subject to board approval.
How is his relation to the board? I mentioned to him that I have followed a lot of other companies and whenever you have company and share price performance like in UTs case, there are major changes made. It also seems like the board is non-existant. How can they decide on a strategic option when they felt the stock was underpriced at $7 and not at $1.
Peter mentioned the board is very active and meets often. Again, he's been there for 20 months and can't comment previously but they are implementing his plan. He mentioned the stock is very low and that strategic options are discussed and they are open to it. He brought up the buyback and again reiterated they are not for a buyback because that is short term and they are trying to get to profitability, which is the best way to increase the stock price.
I mentioned that a buyback would show confidence and gave the underperformance of their stock even in the recent market rally. I forgot to mention that buying back stock at prices less than tangible book value is a very good investment in itself. Anyway, I think everyone agrees they need to improve operational performance and that the stock price at these levels is unacceptable.
I brought up Ying Wu asking is the difference between Wu and Lu too great that Wu could not be placed on the board?
Blackmore mentioned he did not think that would work out due to the falling out that happened years ago.
Switching gears, I mentioned that IPTV is the company's future. How is their competitive situation? ZTE recently got $15b in financing and both ZTE/Huawei seems to be catching up to them.
Huawei doesn't really have a competitive product and is trying to give it away. UT has spent significant R&D money and has continued to improve its system architecture. It has the most scalable and best system even when compared to Alcatel-Lucent/Microsoft, ZTE, others. Peter mentioned that ZTEs system actually failed during the Beijing olympics but was not publicized. In India, it is a "clean sweep" even though others are trying to get in. "Its not like UT has favored nation status or anything like that". UT still has the most market share in China. Peter mentioned that there will be a PR on mobile iptv tomorrow (Thursday) and that Markwell is about to go live (Seems that should have gone live way back since the initial Markwell PR in December 2007). Peter emphasized their penetration into cable, mobile iptv, digital signage/advertising, etc. Later in the conversation, Peter is still waiting for that "tipping point" and characterized that as "gold" when it happens. (damn, I hate when they get you excited :-)
I also asked if ZTE/Huawei were trying to copy their system (edge router, etc) and regarding their patents in iptv.
Peter mentioned that ZTE/Huawei could reverse engineer their system if they wanted to but are not so its a different system. They have good patent protection.
Even though I am not a techy, I asked about PDSN, GEPON, and overall markets in China (note: The Packet Data Serving Node, or PDSN, is a component of a CDMA2000 mobile network . It acts as the connection point between the Radio Access and IP networks. This component is responsible for managing PPP sessions between the mobile provider's core IP network and the mobile station).
Peter mentioned UT got 40% of the recent PDSN tender (as was already mentioned in the Q4 call). Competition came from Starent and Cisco. The market is not in the hundreds of millions but good wins for UT. Nothing new in GEPON but said they are behind in GEPON in China because Wu did not want to sell broadband in China before (publicly, this is one of reasons we've heard before about the disagreements between the founders). Peter mentioned that in other places like India, UT is ahead but did not do well initially with the Phase I broadband contract but doing better now.
I asked ,besides shareholders call them constantly, what keeps him up at night? After a brief laughter, I followed up what are his major concerns going forward?
Peter mentioned that as the company gets more focused, leaner, and smaller, he is worried about scale. That is why they are working with the NECs of the world to take on part of the load.
I ended the Q&A by saying I have been a believer since meeting him in November 2007 and for the most part his strategic moves have been what shareholders want. Revenue ramp has not come in and wished him and all of us the best.
Peter mentioned he truly appreciates the support and understands the share price is very low and they are working diligently to get to profitability.
Peter is very articulate, humble, and has a quiet confidence. I have often commented to other shareholders that say they are going to talk to him that they WILL feel good after talking to him. At the end of the day, its about performance but we shareholders do have to feel confident about the CEO leading the company. We still have to roll the dice but if I'm wrong about Peter and the company's prospects, atleast I feel that I've done what I can to get the best possible information for myself and other shareholders.
I want to thank all shareholders that have sent letters/emails to the management/board. Even when the stock was at $3 or $5, it is an uphill battle. I do feel that management spending 45 minutes with "us" is overall positive.
During previous meetings that we've had (March 2008, June 2008 Shareholder meeting) and conference calls, the company has constantly reiterated that their core business was doing well (bookings doing well), developing countries which were their target markets were either not affected or less affected, PAS declines and eventual shutdown were built in, and they were looking to ramp revenues by several hundred million, so what prompted the cutbacks at the end of the year and the revenue shortfall? Entering 2008, the estimate was for non-PCD revenues of $1.1 billion and it came in at $700m.
The perceived revenue shortfall in core revenues (not including PCD/internal) was around $100m (from the $700m+ to $600m). Bookings are doing well but certain revenue such as the India broadband contracts were not recognized in 2008 and won't even be recognized until end of 2009 at the earliest. Over two hundred million of revenue from Phase I & II have not been recognized. The cutbacks were part of the overall plan of getting more focus on the core IP businesses, general world recession at the end of 2008, and a new model of moving back to China.
Cash from those projects are being collected, right? Why not move earlier and move entirely to China? Also, why go into 2009 with a budget of losing $150m? (note: some of the questions might not be in order and Q&A is ongoing for 45 minutes and I didn't want to get bogged down on any single topic)
Cash is being collected from the India contract. It is "debatable" on whether to move entirely back to China but it was prudent to do so at this time for better cost control. Towards the end of the year, they were trying also to wind down some Chicago assets and it was a tough environment so decisions had to be made to consolidate or move stuff to China. The losses in 2009 are street estimates and they have only given estimates for Q1. (note: Cash flow could also be better than street P&L estimates would indicate due to the unrecognized revenue from the India broadband and another $10m in July from PCD - I forgot to ask more information on the potentially $50m more in payment due at the end of 2010).
Peter had mentioned he was on the job for 20 months, so I asked how he felt the turnaround plan was going and at what stage was he in that plan?
Peter mentioned he felt he had made the right moves towards the overall goal of streamlining the business into the core IP technologies and he reiterated the goal of getting to profitability. With hindsight, he says they could have done some things differently but gave examples such as selling the PCD and indicated they were fortunate at completing the deal when they did. They had cut a lot of costs out, sold non-core assets, improved the supply chain/sales/marketing, etc.
I commented it seems like for the last 4 years or so, the company has had one plan. Wait for non-PAS revenues to ramp and when it doesn't, the company does its annual cut backs.
Peter mentioned he can only comment on his 20 month term that they are working and executing (see above) to get to profitability and it takes a lot of work to do what they have done. He reiterated understanding the share price is so low ("its not even trading at cash") and the need to get to profitability. He says he is not waiting around for the next few quarters but actively taking more steps and will discuss it in a few weeks (I took that to mean in the next earnings call).
Leadership - Who is really in charge of the company? Is this turnaround plan your plan? Hong Lu is still very active in China and drawing CEO type pay.
Peter mentioned he knows where I am going with this since he read the blog or that people mentioned it to him. He understands having two "high priced executives". He mentioned that he is in control. The China executives all report to him. He is there once a month. Hong Lu is involved with PAS and is consulting because he was there during the transition from Wu and can speak Mandarin to the executives/customers. Ultimately, he (Peter) is in charge and lays out the plan but of course subject to board approval.
How is his relation to the board? I mentioned to him that I have followed a lot of other companies and whenever you have company and share price performance like in UTs case, there are major changes made. It also seems like the board is non-existant. How can they decide on a strategic option when they felt the stock was underpriced at $7 and not at $1.
Peter mentioned the board is very active and meets often. Again, he's been there for 20 months and can't comment previously but they are implementing his plan. He mentioned the stock is very low and that strategic options are discussed and they are open to it. He brought up the buyback and again reiterated they are not for a buyback because that is short term and they are trying to get to profitability, which is the best way to increase the stock price.
I mentioned that a buyback would show confidence and gave the underperformance of their stock even in the recent market rally. I forgot to mention that buying back stock at prices less than tangible book value is a very good investment in itself. Anyway, I think everyone agrees they need to improve operational performance and that the stock price at these levels is unacceptable.
I brought up Ying Wu asking is the difference between Wu and Lu too great that Wu could not be placed on the board?
Blackmore mentioned he did not think that would work out due to the falling out that happened years ago.
Switching gears, I mentioned that IPTV is the company's future. How is their competitive situation? ZTE recently got $15b in financing and both ZTE/Huawei seems to be catching up to them.
Huawei doesn't really have a competitive product and is trying to give it away. UT has spent significant R&D money and has continued to improve its system architecture. It has the most scalable and best system even when compared to Alcatel-Lucent/Microsoft, ZTE, others. Peter mentioned that ZTEs system actually failed during the Beijing olympics but was not publicized. In India, it is a "clean sweep" even though others are trying to get in. "Its not like UT has favored nation status or anything like that". UT still has the most market share in China. Peter mentioned that there will be a PR on mobile iptv tomorrow (Thursday) and that Markwell is about to go live (Seems that should have gone live way back since the initial Markwell PR in December 2007). Peter emphasized their penetration into cable, mobile iptv, digital signage/advertising, etc. Later in the conversation, Peter is still waiting for that "tipping point" and characterized that as "gold" when it happens. (damn, I hate when they get you excited :-)
I also asked if ZTE/Huawei were trying to copy their system (edge router, etc) and regarding their patents in iptv.
Peter mentioned that ZTE/Huawei could reverse engineer their system if they wanted to but are not so its a different system. They have good patent protection.
Even though I am not a techy, I asked about PDSN, GEPON, and overall markets in China (note: The Packet Data Serving Node, or PDSN, is a component of a CDMA2000 mobile network . It acts as the connection point between the Radio Access and IP networks. This component is responsible for managing PPP sessions between the mobile provider's core IP network and the mobile station).
Peter mentioned UT got 40% of the recent PDSN tender (as was already mentioned in the Q4 call). Competition came from Starent and Cisco. The market is not in the hundreds of millions but good wins for UT. Nothing new in GEPON but said they are behind in GEPON in China because Wu did not want to sell broadband in China before (publicly, this is one of reasons we've heard before about the disagreements between the founders). Peter mentioned that in other places like India, UT is ahead but did not do well initially with the Phase I broadband contract but doing better now.
I asked ,besides shareholders call them constantly, what keeps him up at night? After a brief laughter, I followed up what are his major concerns going forward?
Peter mentioned that as the company gets more focused, leaner, and smaller, he is worried about scale. That is why they are working with the NECs of the world to take on part of the load.
I ended the Q&A by saying I have been a believer since meeting him in November 2007 and for the most part his strategic moves have been what shareholders want. Revenue ramp has not come in and wished him and all of us the best.
Peter mentioned he truly appreciates the support and understands the share price is very low and they are working diligently to get to profitability.
Peter is very articulate, humble, and has a quiet confidence. I have often commented to other shareholders that say they are going to talk to him that they WILL feel good after talking to him. At the end of the day, its about performance but we shareholders do have to feel confident about the CEO leading the company. We still have to roll the dice but if I'm wrong about Peter and the company's prospects, atleast I feel that I've done what I can to get the best possible information for myself and other shareholders.
I want to thank all shareholders that have sent letters/emails to the management/board. Even when the stock was at $3 or $5, it is an uphill battle. I do feel that management spending 45 minutes with "us" is overall positive.
Saturday, April 11, 2009
Shareholder Proposals
During the last several years of following the company, there have been many suggestions/comments by shareholders on how to turn around the company and enhance shareholder value.
The positive actions from the company such as resolving their investigations/filing their quarterly/yearly reports, selling non-core operations (such as PCD), selling investments (Gemdale, Infinera), cutting expenses, settling the convertible bond, controlling executive compensation (Barton's compensation) have been touted by the company as examples of their progress and sense of urgency. All of the above actions, however, were recommended by shareholders long before the actions were initiated or completed. These "common sense" actions that shareholders (with much less information than the company) have proposed shows the company has been several steps behind and really have no sense of urgency.
The current stock price shows that the market feels the company is still very much behind in terms of their cost basis, corporate governance and having a viable business plan to enhance shareholder value.
Here is a list of items to discuss with management and/or file as formal proposals (yes, its that time of the year where the management/board actually have to consider that they are a public company and at least pretend to address shareholder concerns and run through the obligatory procedures to be compliant with the minimum requirements).
Leadership position - Blackmore is the official CEO but has the former CEO/chairman of the board/founder Hong Lu drawing CEO compensation and leading the efforts in China, the company's main market. This is on top of the new China CEO that they hired and other new executives. I have discussed this issue in previous postings in painstaking detail but is a very important point that have major implications in the performance of the company in China and who is really in charge?
Corporate governance - When the company performance/stock has been so bad for so long, you might expect a signficant change to the board or an outright clean up. Nope, instead insiders have continuously been promoted. Ying Wu, the one significant person let go, was probably the best hope for the company in solidifying their China position. Letting Wu go sent a bad signal on UTs committment to the China market. Having a board/leadership team made up of non-Chinese is also illogical. Having no major outside shareholder (someone that actually paid for their stock positions) is also a terrible situation. The company has to include members of the board with significant share holdings for it to have credibility. At the same time, they need to allow the board to come up for re-election EVERY year.
Compensation - Executives are still reaping bonuses like it was 1999. I think it is clear to everyone that compensation packages developed during the bull market days are outdated and again illogical. Any bonus should be tied to real accomplishments above and beyond their normal already compensated duties. Barton was a single example of how ridiculous the compensation had gotten at UTStarcom. Today's situation with Lu is another. Shouldn't compensation that was tied to revenue metrics when UT still had the PCD (that was stupid to begin with) be scaled back. Shouldn't compensation be tied to profitability at the very least? Why should bonuses be tied to normally compensated job functions? Ridiculous. Some have mentioned this has been criminal and clawbacks have to be pursued. I don't disagree but at the bare minumum, the compensation system at UT has to revamped completely.
Expenses - The company has to further cut costs based on their expected realistic revenue/margin stream. At the same time the company talks about their leadership position in technology areas, they cannot justify all the future expenses when their customers are simply not purchasing or regulatory issues are clouded at best. As I said in many recent postings after their last cc, how can the company come into 2009 (with all the uncertainty and environment that goes with 2008/2009) with a budget of losing $150m?
Strategic Options - Share buybacks, M&A, viability, future revenues, expenses, and others are all tied to the strategic options the company has. With the low stock price (compared to current tangible book value/cash, and future expectations), the company should at the very least explore strategic options to enhance shareholder value. It makes absolutely no sense for the company to explore strategic options in 2006 and not do one now (for a ton of reasons). The 2006 strategic options study in 2006 was a joke because of all the issues the company had at the time and was primarily used to set up Wu for failure and buy the current leadership more time.
There are probably a lot more other items that can be proposed but the above are issues the company should address or shareholders should pursue at a minimum.
I will send an email to Peter Blackmore to get more background and his thoughts on the above topics. I'd also like to get shareholder feedback on what other proposals and/or how to go about this current proxy season.
Have a good weekend everyone.
The positive actions from the company such as resolving their investigations/filing their quarterly/yearly reports, selling non-core operations (such as PCD), selling investments (Gemdale, Infinera), cutting expenses, settling the convertible bond, controlling executive compensation (Barton's compensation) have been touted by the company as examples of their progress and sense of urgency. All of the above actions, however, were recommended by shareholders long before the actions were initiated or completed. These "common sense" actions that shareholders (with much less information than the company) have proposed shows the company has been several steps behind and really have no sense of urgency.
The current stock price shows that the market feels the company is still very much behind in terms of their cost basis, corporate governance and having a viable business plan to enhance shareholder value.
Here is a list of items to discuss with management and/or file as formal proposals (yes, its that time of the year where the management/board actually have to consider that they are a public company and at least pretend to address shareholder concerns and run through the obligatory procedures to be compliant with the minimum requirements).
Leadership position - Blackmore is the official CEO but has the former CEO/chairman of the board/founder Hong Lu drawing CEO compensation and leading the efforts in China, the company's main market. This is on top of the new China CEO that they hired and other new executives. I have discussed this issue in previous postings in painstaking detail but is a very important point that have major implications in the performance of the company in China and who is really in charge?
Corporate governance - When the company performance/stock has been so bad for so long, you might expect a signficant change to the board or an outright clean up. Nope, instead insiders have continuously been promoted. Ying Wu, the one significant person let go, was probably the best hope for the company in solidifying their China position. Letting Wu go sent a bad signal on UTs committment to the China market. Having a board/leadership team made up of non-Chinese is also illogical. Having no major outside shareholder (someone that actually paid for their stock positions) is also a terrible situation. The company has to include members of the board with significant share holdings for it to have credibility. At the same time, they need to allow the board to come up for re-election EVERY year.
Compensation - Executives are still reaping bonuses like it was 1999. I think it is clear to everyone that compensation packages developed during the bull market days are outdated and again illogical. Any bonus should be tied to real accomplishments above and beyond their normal already compensated duties. Barton was a single example of how ridiculous the compensation had gotten at UTStarcom. Today's situation with Lu is another. Shouldn't compensation that was tied to revenue metrics when UT still had the PCD (that was stupid to begin with) be scaled back. Shouldn't compensation be tied to profitability at the very least? Why should bonuses be tied to normally compensated job functions? Ridiculous. Some have mentioned this has been criminal and clawbacks have to be pursued. I don't disagree but at the bare minumum, the compensation system at UT has to revamped completely.
Expenses - The company has to further cut costs based on their expected realistic revenue/margin stream. At the same time the company talks about their leadership position in technology areas, they cannot justify all the future expenses when their customers are simply not purchasing or regulatory issues are clouded at best. As I said in many recent postings after their last cc, how can the company come into 2009 (with all the uncertainty and environment that goes with 2008/2009) with a budget of losing $150m?
Strategic Options - Share buybacks, M&A, viability, future revenues, expenses, and others are all tied to the strategic options the company has. With the low stock price (compared to current tangible book value/cash, and future expectations), the company should at the very least explore strategic options to enhance shareholder value. It makes absolutely no sense for the company to explore strategic options in 2006 and not do one now (for a ton of reasons). The 2006 strategic options study in 2006 was a joke because of all the issues the company had at the time and was primarily used to set up Wu for failure and buy the current leadership more time.
There are probably a lot more other items that can be proposed but the above are issues the company should address or shareholders should pursue at a minimum.
I will send an email to Peter Blackmore to get more background and his thoughts on the above topics. I'd also like to get shareholder feedback on what other proposals and/or how to go about this current proxy season.
Have a good weekend everyone.
Sunday, April 5, 2009
Failure of Lu & Toy
ALAMEDA, Calif., May 10, 2006 — UTStarcom, Inc. (Nasdaq: UTSI), today announced that its Chairman and Chief Executive Officer, Hong Lu, notified the Board of Directors of his resignation. Mr. Lu will remain as Chairman and CEO of the company until December 31, 2006, focusing on the Company's strategic opportunities and assisting during the transition. Mr. Lu will remain as a strategic advisor to the company after his formal departure in December. Tom Toy, currently an independent director of UTStarcom, will assume the position of chairman of the board as of January 1, 2007.
http://investorrelations.utstar.com/releasedetail.cfm?ReleaseID=246809
"Our Board of Directors and management team believe that the inherent value of the company and its opportunities are not reflected in our current share price," said Hong Lu, chairman and CEO of UTStarcom, in a prepared statement. "We believe the engagement of Merrill Lynch will help us to carefully examine a range of short and long-term alternatives," he said.
- October 12, 2006 http://www.wirelessweek.com/utstarcom-explores-its-options.aspx
"After careful consideration of a number of short- and long-term alternatives, we have determined that our best course of action is to move forward with the company as it exists today," said Thomas Toy, chairman of UTStarcom's board of directors. "Our stated goal when we commenced the strategic alternatives process in October 2006 was to explore potential options to maximize the company's value for UTStarcom's shareholders. In exploring those alternatives, we concluded that the optimal means of enhancing shareholder value is to focus our efforts on returning the company to profitability by building on the opportunities we have developed in key markets around the world."
In addition, the company today announced the departure of Ying Wu, executive vice president and chief executive officer of UTStarcom China.
June 1, 2007
http://investorrelations.utstar.com/releasedetail.cfm?ReleaseID=246809
Soon after, Peter Blackmore was brought in to be the COO and promised the CEO position.
While there has been changes from management with Sophie, Barton, Huang, and Wu leaving, the constant presence has been Hong Lu and the BODs, led by Thomas Toy. In a monumental collapse such as in the case of UTStarcom, the leadership has to be accountable and from the very beginning, Lu/Toy have been in charge.
I do not know the exact details of the events and decisions made by the company privately but there can be no question that shareholder value has been destroyed and any other company would have asked both Lu/Toy to step down by now.
The current situation between the CEO Blackmore in the US, BOD chairman Lu in China and a new Chinese CEO (and the other Chinese executives in China) show that at best, the leadership question is cloudy and more likely a bad joke to the existing suffering shareholders. The company should immediately clear up the leadership situation as it shows waste at the best and lack of control by the current CEO (Blackmore). Again, I ask why should Lu/Toy having driven the company/share price to the ground still even be involved with the company.
The rest of the board is equally useless as the handling of the strategic study, leadership situation, compensation and the collapsed stock price show ($2m retention bonuses for Barton, etc..; 50% salary increase from $500k to $750k for a job well done when the company continued to bleed and the stock sliding).
Its time (way late actually) for shareholders to demand that Lu/Toy step down. Only then can the company truly enhance shareholder value. Lu/Toy have done way too much damage already and are not fit to run/lead this company.
Shareholders can ask for more information on this and that, hope for profitability at this or that date, dream of the potential returns and other scenarios but until Lu/Toy are removed, nothing will really change for the prospects of the company.
One final thought...in a country with the growth prospects and entrepreneurial skills in China, Lu/Toy are the barriers to getting people that can actually increase shareholder value. Long suffering shareholders can still hope and fight for real transformation of this company and it starts with getting rid of Lu/Toy.
Have a good weekend.
http://investorrelations.utstar.com/releasedetail.cfm?ReleaseID=246809
"Our Board of Directors and management team believe that the inherent value of the company and its opportunities are not reflected in our current share price," said Hong Lu, chairman and CEO of UTStarcom, in a prepared statement. "We believe the engagement of Merrill Lynch will help us to carefully examine a range of short and long-term alternatives," he said.
- October 12, 2006 http://www.wirelessweek.com/utstarcom-explores-its-options.aspx
"After careful consideration of a number of short- and long-term alternatives, we have determined that our best course of action is to move forward with the company as it exists today," said Thomas Toy, chairman of UTStarcom's board of directors. "Our stated goal when we commenced the strategic alternatives process in October 2006 was to explore potential options to maximize the company's value for UTStarcom's shareholders. In exploring those alternatives, we concluded that the optimal means of enhancing shareholder value is to focus our efforts on returning the company to profitability by building on the opportunities we have developed in key markets around the world."
In addition, the company today announced the departure of Ying Wu, executive vice president and chief executive officer of UTStarcom China.
June 1, 2007
http://investorrelations.utstar.com/releasedetail.cfm?ReleaseID=246809
Soon after, Peter Blackmore was brought in to be the COO and promised the CEO position.
While there has been changes from management with Sophie, Barton, Huang, and Wu leaving, the constant presence has been Hong Lu and the BODs, led by Thomas Toy. In a monumental collapse such as in the case of UTStarcom, the leadership has to be accountable and from the very beginning, Lu/Toy have been in charge.
I do not know the exact details of the events and decisions made by the company privately but there can be no question that shareholder value has been destroyed and any other company would have asked both Lu/Toy to step down by now.
The current situation between the CEO Blackmore in the US, BOD chairman Lu in China and a new Chinese CEO (and the other Chinese executives in China) show that at best, the leadership question is cloudy and more likely a bad joke to the existing suffering shareholders. The company should immediately clear up the leadership situation as it shows waste at the best and lack of control by the current CEO (Blackmore). Again, I ask why should Lu/Toy having driven the company/share price to the ground still even be involved with the company.
The rest of the board is equally useless as the handling of the strategic study, leadership situation, compensation and the collapsed stock price show ($2m retention bonuses for Barton, etc..; 50% salary increase from $500k to $750k for a job well done when the company continued to bleed and the stock sliding).
Its time (way late actually) for shareholders to demand that Lu/Toy step down. Only then can the company truly enhance shareholder value. Lu/Toy have done way too much damage already and are not fit to run/lead this company.
Shareholders can ask for more information on this and that, hope for profitability at this or that date, dream of the potential returns and other scenarios but until Lu/Toy are removed, nothing will really change for the prospects of the company.
One final thought...in a country with the growth prospects and entrepreneurial skills in China, Lu/Toy are the barriers to getting people that can actually increase shareholder value. Long suffering shareholders can still hope and fight for real transformation of this company and it starts with getting rid of Lu/Toy.
Have a good weekend.
Saturday, March 28, 2009
Weekly recap - 85 cents
The stock increased 16 cents or 23% to 85 cents this week. The stock is now down only $1/share or 54% year to date. It has a market cap of $107m. For me, these are numbers that would warrant major sense of urgency from a company that maybe missed earnings for a quarter or two. But for a company that has not posted an operating profit in about 4 years, its business as usual. The company did have this enlightening response to shareholder emails:
Like you we are very unsatisfied with the current stock price and feel that it does not fairly represent the value of the company.
Value? The company has tangible book value of about $3.7/share but will rapidly dwindle as the company continues to post ridiculous operating losses while hoping markets turn around. This is bad enough but does the company realize what being valued at 1/4 of tangible book mean? The street is telling them that they have zero confidence in their prospects or ability to manage the company. That after years and years of failure, the street will not even look 6 months ahead in discounting the company but maybe a full two years of continued business as usual. The UT train wreck would not be so disappointing if not for shareholders watching a "slow motion" disaster for the last 4 years that is projected to last at least two more years. For current shareholders, the only choice is to sell, hold and hope or press for action.
Salary Cuts - "On March 23, 2009, in connection with the Company's overall cost reduction initiative, the Company entered into letter agreements with Hong Liang Lu, Chairman of the Board, and Peter Blackmore, Chief Executive Officer and President, providing for voluntary and temporary base salary reductions of twenty percent (20%) for a one year period."
This would be a good start in most normal situations but this is so long overdue that it again shows they are 3 steps behind. Also, why is Lu still making $700k/year in salary as Chairman of the Board ($560k after the cuts)? If Lu is still running the company, then why is Blackmore drawing CEO pay/compensation? If he is just the operations guy, then he should be the COO. Also, if Lu is managing the China operations, then why have another China CEO?
Looking at it another way, a Chinese company would have one CEO based most likely in China and most likely a Chinese. No interpreters, no flying back and forth from China to the US, positioned closer to customers and in touch with regulators in China and aware of the business climate. It all starts from the top and the current situation at the top with UT is cloudy, disorganized, and wasteful (expensive) at best.
ZTE - A couple of weeks ago, we saw the news about ZTE getting a $15Billion line of credit. They already have $1.6b in cash so they have all the funds to expand overseas and compete against any multinational firm. There are a couple of points with this. Whether or not UT spends $45m or $60m/quarter is not going to make a difference on whether they can compete or not. The second point is why doesn't ZTE just take out UT for the market share? In any "normal" situation, the UT board has to look at the situation and see if there is a realistic chance of UT increasing shareholder value above tangible book and more in the next few years or whether its balance sheet/competitive position will erode even more.
Short Interest - Short interest as of March 10 has increased by over a million to close to 15m shares. This was around the time the company announced Q4 results/Q1 projections. Company insiders also sold shares under $1 for tax purposes. So, even with the market surge the last few weeks, is it any wonder UT shares are still under $1? Its time for the company to get their heads out of their #@%3 and stop wondering why the current stock price not fairly represent the value of the company.
IPTV worldwide subscribers - http://www.iptv-news.com/iptv_news/march_09_2/western_europe_passes_10mn_iptv_subs
“During 2008, IPTV operators showed that TV over IP could be deployed on a large scale," said John Bonsell, a Senior Analyst with Point Topic, who prepared the stats for the Broadband Forum. "Western Europe remains the largest single region for IPTV. As expected, due to the global economic situation, broadband growth slowed, however all countries experienced overall growth during the last year."
IPTV subscribers per region from Q4 2007 to Q4 2008
Western Europe 7,045,860 10,388,000
North America 1,777,671 3,835,544
South/East Asia 1,840,000 3,615,000
Asia Pacific 2,199,828 3,082,182
Eastern Europe 465,223 884,466
Latin America 8991 21,495
Middle East/Africa 10k 10k
Total 13.3m 21.8m
UT grew its iptv subscribers from 600k to about 1.3m. While the numbers show very good growth in this segment, it shows that UT should not rely on hypergrowth from iptv to generate any significant revenue in the next year or two. Its time to get the cost basis right and it should start from the top.
Hong Lu - I'll end the week's post discussing Hong Lu. He is the founder of the company and only Chinese on the board and had been the CEO for years. With all the disadvantages to being a "non-Chinese" company, it would make sense to have a Chinese overall CEO based in China. However, Lu is definitely NOT that person. Between Blackmore and Lu, Blackmore has atleast shown more concern for shareholder value with his bonus conversion to shares, reduction of pay (when his contract called for no reduction ever), and divesting of non-core assets. It hasn't led to shareholder value but he is more in-tune with shareholders than Lu will ever be. His current age, non-attachment as a founder, and operations background make him the best hope for shareholders to salvage tangible value from this failed investment.
Have a good weekend.
Like you we are very unsatisfied with the current stock price and feel that it does not fairly represent the value of the company.
Value? The company has tangible book value of about $3.7/share but will rapidly dwindle as the company continues to post ridiculous operating losses while hoping markets turn around. This is bad enough but does the company realize what being valued at 1/4 of tangible book mean? The street is telling them that they have zero confidence in their prospects or ability to manage the company. That after years and years of failure, the street will not even look 6 months ahead in discounting the company but maybe a full two years of continued business as usual. The UT train wreck would not be so disappointing if not for shareholders watching a "slow motion" disaster for the last 4 years that is projected to last at least two more years. For current shareholders, the only choice is to sell, hold and hope or press for action.
Salary Cuts - "On March 23, 2009, in connection with the Company's overall cost reduction initiative, the Company entered into letter agreements with Hong Liang Lu, Chairman of the Board, and Peter Blackmore, Chief Executive Officer and President, providing for voluntary and temporary base salary reductions of twenty percent (20%) for a one year period."
This would be a good start in most normal situations but this is so long overdue that it again shows they are 3 steps behind. Also, why is Lu still making $700k/year in salary as Chairman of the Board ($560k after the cuts)? If Lu is still running the company, then why is Blackmore drawing CEO pay/compensation? If he is just the operations guy, then he should be the COO. Also, if Lu is managing the China operations, then why have another China CEO?
Looking at it another way, a Chinese company would have one CEO based most likely in China and most likely a Chinese. No interpreters, no flying back and forth from China to the US, positioned closer to customers and in touch with regulators in China and aware of the business climate. It all starts from the top and the current situation at the top with UT is cloudy, disorganized, and wasteful (expensive) at best.
ZTE - A couple of weeks ago, we saw the news about ZTE getting a $15Billion line of credit. They already have $1.6b in cash so they have all the funds to expand overseas and compete against any multinational firm. There are a couple of points with this. Whether or not UT spends $45m or $60m/quarter is not going to make a difference on whether they can compete or not. The second point is why doesn't ZTE just take out UT for the market share? In any "normal" situation, the UT board has to look at the situation and see if there is a realistic chance of UT increasing shareholder value above tangible book and more in the next few years or whether its balance sheet/competitive position will erode even more.
Short Interest - Short interest as of March 10 has increased by over a million to close to 15m shares. This was around the time the company announced Q4 results/Q1 projections. Company insiders also sold shares under $1 for tax purposes. So, even with the market surge the last few weeks, is it any wonder UT shares are still under $1? Its time for the company to get their heads out of their #@%3 and stop wondering why the current stock price not fairly represent the value of the company.
IPTV worldwide subscribers - http://www.iptv-news.com/iptv_news/march_09_2/western_europe_passes_10mn_iptv_subs
“During 2008, IPTV operators showed that TV over IP could be deployed on a large scale," said John Bonsell, a Senior Analyst with Point Topic, who prepared the stats for the Broadband Forum. "Western Europe remains the largest single region for IPTV. As expected, due to the global economic situation, broadband growth slowed, however all countries experienced overall growth during the last year."
IPTV subscribers per region from Q4 2007 to Q4 2008
Western Europe 7,045,860 10,388,000
North America 1,777,671 3,835,544
South/East Asia 1,840,000 3,615,000
Asia Pacific 2,199,828 3,082,182
Eastern Europe 465,223 884,466
Latin America 8991 21,495
Middle East/Africa 10k 10k
Total 13.3m 21.8m
UT grew its iptv subscribers from 600k to about 1.3m. While the numbers show very good growth in this segment, it shows that UT should not rely on hypergrowth from iptv to generate any significant revenue in the next year or two. Its time to get the cost basis right and it should start from the top.
Hong Lu - I'll end the week's post discussing Hong Lu. He is the founder of the company and only Chinese on the board and had been the CEO for years. With all the disadvantages to being a "non-Chinese" company, it would make sense to have a Chinese overall CEO based in China. However, Lu is definitely NOT that person. Between Blackmore and Lu, Blackmore has atleast shown more concern for shareholder value with his bonus conversion to shares, reduction of pay (when his contract called for no reduction ever), and divesting of non-core assets. It hasn't led to shareholder value but he is more in-tune with shareholders than Lu will ever be. His current age, non-attachment as a founder, and operations background make him the best hope for shareholders to salvage tangible value from this failed investment.
Have a good weekend.
Tuesday, March 24, 2009
Expenses
"Fran and I will work closely toward disciplined execution of UTStarcom's strategy and timely attainment of the company's goals, including a return to sustainable revenue growth and profitability."
- Mike Sophie on the hiring of Fran Barton, Aug. 2, 2005
"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."
- Peter Blackmore, Q3 2007 earnings call."
"We have been aggressive on cost by taking actions to reduce our coststructure by 50% between Sept 2007 and Sept 2009. Most of the actions are complete. We also recognize we need to take additional action given the tough market, and as we said on the recent earnings call we will lower our quarterly operating expenses to $60M or less by Q4 of this year. We are moving a number of functions from our Alameda headquarters to China to further simplify the company and reduce cost."
"In summary, our objective is to reduce costs further to minimize our cash usage and also accelerate our return to profitability. As we mentioned on the last earnings call - we are positioning the company to exit 2009 with a business model that achieves profitability in 2010."
- Barry Hutton, Official response from the company to shareholder emails, March 17, 2009.
"They have a decent amount of cash and no debt. Cutting OPEX in places like R&D, which many people here are demanding, can be VERY bad for the company, long term. Obviously, they have about another 18 months of cash, and if current products cannot generate enough revenue in the next year, they might have to consider drastic action, but now is not that time."
"Personally, I think they are MUCH more qualified to decide how and where to spend their R&D than anyone here is."
"I think we would all be better served if we bombarded the company with e-mails requesting information rather than trying to tell management how to run the company."
- Statements from two shareholders posting on yahoo board today.
----------
As an individual shareholder trying to enhance shareholder value, it has been painful to see UT try and fail to get back to profitability. Am I qualified to manage the company? No. My background is in Civil Engineering and not in business (I am the Asst. VP of California Engineering for a Tetra Tech company). I AM a long term shareholder that can see that expenses have been too high.
Blackmore has targetted reasonable expense metrics. If the company has 25-30% GMs, then expenses have to be around that area. Coming into 2008, the non-PCD revenue estimated revenue was $1.08B. Coming into 2009, it is down to around $600m. I and others have often mentioned the company being one-step behind on their cost cutting. I have been bullish on the stock as the company's products/markets made it seem realistic the company could achieve revenue growth to get to profitability.
However, at a certain point, the company has to err on the conservative side and get their cost base right without hoping for revenue growth that has been elusive and specially in this uncertain market. With the planned cuts announced in December, it seemed the company was finally catching up. However, as we learned, the company was actually 3 steps behind and the last cost cutting plans were not anywhere close. Are shareholders (already facing a sub-$1 stock) suppose to trust management that $60m/quarter OPEX is sufficient to get the company back to profitability?
For years, the company line has been needing to maintain their R&D for longterm success. This is hard to argue against but the $800m in losses in the books show that continued spending doesn't guarantee profitability. (Check out the expense ratios table on the left hand side of the blog that I created last year showing the last time they achieved the expense metrics was in 2004).
"But now that only the core business will be left by the end of this year, I can sense there wouldn't be much more room to cut before it cause significant adverse impact to core revenue growth and long term competitiveness."
-Shareholder Tigre commenting on the $60m/quarter opex target.
It seems interesting to me that Barry Hutton's email mentioned,
"We continue to see bookings growth in our core business - particularly in China and India."
Why does it always have to be clarified with "core". Isn't everything by now or by the end of the year "core"?
Anyway, $600m revenues at say 30% GMs yields $180m in gross profits. So, in order to get close to profitability, the company needs to cut opex to $40-$45m/quarter (including other expenses).
A target of $60m (or under) just doesn't cut it and the street was all over the stock as the company continues business as usual. So, looking at historic performance and even the CEO's targets, is it any wonder even the most bullish long term shareholders want to cut costs? Do we shareholders know how to manage the company? No. Do we shareholders know more about the operations than the company? No. But does it take a genius to see that something needs to be done on expenses now that revenue has fallen off the clip? No. Has the company finally gotten close or still behind the curve? Hmmmmm?
Now, IF all the "discussions" between shareholders and management, and the low share price can actually prompt some action/cost cuts, then maybe there will be actual performance that lead to higher valuation (imagine that idea).
IF the company is serious on getting the cost base right, they can. IF they can get the cost base right with a "lowered" revenue base and iptv markets not openning up yet, then can you imagine how much more profitable they can become when it finally moves. If that happens, then we can start discussing how 2010 to 2015 will be much better than 2005 to 2009.
Until the company acts, its business as usual for the company and shareholders continue to suffer.
Have a good night.
- Mike Sophie on the hiring of Fran Barton, Aug. 2, 2005
"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."
- Peter Blackmore, Q3 2007 earnings call."
"We have been aggressive on cost by taking actions to reduce our coststructure by 50% between Sept 2007 and Sept 2009. Most of the actions are complete. We also recognize we need to take additional action given the tough market, and as we said on the recent earnings call we will lower our quarterly operating expenses to $60M or less by Q4 of this year. We are moving a number of functions from our Alameda headquarters to China to further simplify the company and reduce cost."
"In summary, our objective is to reduce costs further to minimize our cash usage and also accelerate our return to profitability. As we mentioned on the last earnings call - we are positioning the company to exit 2009 with a business model that achieves profitability in 2010."
- Barry Hutton, Official response from the company to shareholder emails, March 17, 2009.
"They have a decent amount of cash and no debt. Cutting OPEX in places like R&D, which many people here are demanding, can be VERY bad for the company, long term. Obviously, they have about another 18 months of cash, and if current products cannot generate enough revenue in the next year, they might have to consider drastic action, but now is not that time."
"Personally, I think they are MUCH more qualified to decide how and where to spend their R&D than anyone here is."
"I think we would all be better served if we bombarded the company with e-mails requesting information rather than trying to tell management how to run the company."
- Statements from two shareholders posting on yahoo board today.
----------
As an individual shareholder trying to enhance shareholder value, it has been painful to see UT try and fail to get back to profitability. Am I qualified to manage the company? No. My background is in Civil Engineering and not in business (I am the Asst. VP of California Engineering for a Tetra Tech company). I AM a long term shareholder that can see that expenses have been too high.
Blackmore has targetted reasonable expense metrics. If the company has 25-30% GMs, then expenses have to be around that area. Coming into 2008, the non-PCD revenue estimated revenue was $1.08B. Coming into 2009, it is down to around $600m. I and others have often mentioned the company being one-step behind on their cost cutting. I have been bullish on the stock as the company's products/markets made it seem realistic the company could achieve revenue growth to get to profitability.
However, at a certain point, the company has to err on the conservative side and get their cost base right without hoping for revenue growth that has been elusive and specially in this uncertain market. With the planned cuts announced in December, it seemed the company was finally catching up. However, as we learned, the company was actually 3 steps behind and the last cost cutting plans were not anywhere close. Are shareholders (already facing a sub-$1 stock) suppose to trust management that $60m/quarter OPEX is sufficient to get the company back to profitability?
For years, the company line has been needing to maintain their R&D for longterm success. This is hard to argue against but the $800m in losses in the books show that continued spending doesn't guarantee profitability. (Check out the expense ratios table on the left hand side of the blog that I created last year showing the last time they achieved the expense metrics was in 2004).
"But now that only the core business will be left by the end of this year, I can sense there wouldn't be much more room to cut before it cause significant adverse impact to core revenue growth and long term competitiveness."
-Shareholder Tigre commenting on the $60m/quarter opex target.
It seems interesting to me that Barry Hutton's email mentioned,
"We continue to see bookings growth in our core business - particularly in China and India."
Why does it always have to be clarified with "core". Isn't everything by now or by the end of the year "core"?
Anyway, $600m revenues at say 30% GMs yields $180m in gross profits. So, in order to get close to profitability, the company needs to cut opex to $40-$45m/quarter (including other expenses).
A target of $60m (or under) just doesn't cut it and the street was all over the stock as the company continues business as usual. So, looking at historic performance and even the CEO's targets, is it any wonder even the most bullish long term shareholders want to cut costs? Do we shareholders know how to manage the company? No. Do we shareholders know more about the operations than the company? No. But does it take a genius to see that something needs to be done on expenses now that revenue has fallen off the clip? No. Has the company finally gotten close or still behind the curve? Hmmmmm?
Now, IF all the "discussions" between shareholders and management, and the low share price can actually prompt some action/cost cuts, then maybe there will be actual performance that lead to higher valuation (imagine that idea).
IF the company is serious on getting the cost base right, they can. IF they can get the cost base right with a "lowered" revenue base and iptv markets not openning up yet, then can you imagine how much more profitable they can become when it finally moves. If that happens, then we can start discussing how 2010 to 2015 will be much better than 2005 to 2009.
Until the company acts, its business as usual for the company and shareholders continue to suffer.
Have a good night.
Sunday, March 22, 2009
Palm, ZTE, Cisco, Starent, Blackmore
Just some random thoughts on misc. topics.
Palm - Lets look at some numbers from Palm compared to UT. Palm is projected to lose $2.02/share and 71 cents/share compared to UTs $1.25 and 0.52/share losses. Tangible assets for Palm is negative $631m compared to a postive $466m. Palm market cap is $873m compared to $87m for UT. Palm just raised another $103m to make up for their 90m loss last quarter. It looks like their Pre phone will be a hit but will not result in a profitable company. UT competes with Huawei and ZTE while Palm competes with RIMM and Apple.
Palm stock hit a low of $1.14/share but has recovered to the the $8-9 level. Palm has about 38% of their shares short so there is no shortage of people betting they are overvalued. The main difference the last few months is the street's perception that Palm is on the mend while UT continues with business as usual. This has resulted with Palm getting a couple of hundred million more from an investor while UT institutional investors are mostly selling the stock even at these "low" prices.
ZTE - says it has secured a $15 billion line of credit from China Development Bank. http://www.lightreading.com/document.asp?doc_id=173930&
ZTE (Shenzhen: 000063; Hong Kong: 0763) defied the economic downturn in 2008 with a 27.4 percent increase in annual revenues to 44.3 billion Yuan Renminbi ($6.5 billion) and a near 33 percent rise in net profit to RMB1.66 billion ($243 million). (See ZTE Reports 2008.)
http://www.lightreading.com/document.asp?doc_id=173864&
"Competitive and pricing pressure hit ZTE's infrastructure margins, though. In 2008, the gross margin on carrier network equipment sales was 35.8 percent, down from 39.6 percent in 2007.
But the gross margin for handset sales improved slightly, to 23.7 percent from 21.7 percent a year earlier, while the margin from software and services jumped to 30.3 percent from 16.7 percent in 2007. ZTE's overall gross margin for 2008 was 32.5 percent, down slightly from 2007's 32.7 percent.
ZTE ended 2008 with cash and cash equivalents of RMB11.3 billion ($1.66 billion)."
The last couple of articles shows the resources ZTE has and their progress the last couple of years. Its interesting to note the high margins from handsets that they get. One has to wonder if this is due to efficient operations and/or advantages to the large volumes. This is a "none-core" area for UT that management has to decide whether to compete in or choose to back away from. This is another tempting market specially with their "experience" in PAS/PCD but if its going to take years and years to generate any decent revenue, then why bother?
It also looks like ZTE actually makes money and has decent companywide gross margins. If they are giving away their equipment as some have suggested, how do they achieve their positive operating margins? This is another data point suggesting how inefficient UT is and how the management/operations are nowhere near their competitor's.
Cisco/SUN/IBM - Cisco buys Pure Digital for $590m and IBM is looking into SUN for about $8.5b or so. The large tech companies have a lot of cash and face the same stagnant world economy. It is natural that M&A will pick up. Shareholders in UT have speculated for years why it has not been bought out. It could be their products are not really that good or that Lu/board are not really serious in any M&A and just want the status quo. At these levels, shareholders do have the added "hope" it may really be too low for the competitors to ignore (such as in SUNs case).
Starent - Starent is growing and has a $1.2b market cap. Its revenues are in the $300m+ level and is being sued by UT. Back in 2003-2004, there was already talk of PAS peaking and the move by the company to diversify into other products. UT bought 3com's comworks division, which eventually yielded workers to form Starent. With all of UTs resources and products that it has developed, why could UT not produce "something" as successful as Starent did? All of the hundreds of millions the company has spent in R&D over the years have yielded little.
Blackmore - UT CEO has been with the company almost 2 years now. His contract (signed a few months before the stock markets peaked) was a hefty $750k/year with huge incentives and bonuses. Peter did convert the bonus into shares at $3.2 showing he too was intrigued by the US listing/management and China manufacturing combination like most shareholders. Peter was brought in to make the company a first class operating company (his words basically). Peter used the traditional outsourcing, more efficient supply chains, cuts, and others to reduce costs while waiting for revenues to ramp. His presence gave investors "hope" that he can turn around the company, make it focus and profitable. I really like Peter because he brought an operational background that shareholders felt was needed at the time (since the technology/revenues were not the main issues at the time).
At this juncture however, I have to bring up the question of whether Peter is still the right person for the job just as the company pondered whether Barton was really the right person for his job (don't really want to discuss Barton as it I could go on and on...again and makes my blood boil). There has always been the issue of who is in control with the founder Hong Lu still around. Why should shareholders pay two people CEO salaries/compensation fit for successful companies/much larger companies in a totally different era? At the very least, both Lu and Blackmore have to significantly reduce their compensations. Frankly, I don't care Blackmore has his contract (we can see what those contracts that AIG bonuses are based on). There should be a renegotiation on his contract. Period.
There is also the fundamental issues of Peter being a CEO. A CEO realizes the importance of the share price and growing the business. I'm not sure how many CEOs survive the job presiding over massive operating losses and share price losses of this magnitude. Also, if the company is done with the major cost cuts/operational issues, what is Peter's role? We know he has not been able to generate any meaningful revenue growth. He is a non-Chinese leading mainly Chinese executives and still their main/core market is China. He is not a marketing person either. I'm not advocating removing Peter because I don't think it could afford to pay him to leave either. Again, as a start, his salary/compensation have to be re-evaluated.
Executive search firm/compensation advisors - Do these firms have a clue on what they are doing? When an individual shareholder can see things are getting ridiculous and the board still continues with ridiculous behavior, one has to question the competency and/or agenda of the board. Why does this company have a heavily compensated non-Chinese CEO? Why is the board made up of non-Chinese (except for the founder who is bent on keeping control of the company at all costs) that have basically no "skin" in the game. Put a board with actual stakeholders and you'll see a difference in stock performance. Period.
I've talked with institutional holders over the last year and all are not "activists". Most are now waiting for some other institution to lead the way even though everyone is disappointed in the performance of the company/share price (what a shock). Anyway, I hear that there seems to be more serious discussions on actions from the company now that the stock is well below $1 (Really?).
At this stage, after watching the company for the last 4 years, I am indifferent from inaction or any appeasement actions from the company. We've seen that the company is not only one step behind but 3 or 4. Thats why every "positive" step they have taken has not yielded higher shareholder value or led the company closer to breakeven.
My biggest hope now is that there is action from institutional holders that all disappointed shareholders can rally behind and finally rid this company of people that don't produce any value for shareholders.
Have a good week everyone.
Palm - Lets look at some numbers from Palm compared to UT. Palm is projected to lose $2.02/share and 71 cents/share compared to UTs $1.25 and 0.52/share losses. Tangible assets for Palm is negative $631m compared to a postive $466m. Palm market cap is $873m compared to $87m for UT. Palm just raised another $103m to make up for their 90m loss last quarter. It looks like their Pre phone will be a hit but will not result in a profitable company. UT competes with Huawei and ZTE while Palm competes with RIMM and Apple.
Palm stock hit a low of $1.14/share but has recovered to the the $8-9 level. Palm has about 38% of their shares short so there is no shortage of people betting they are overvalued. The main difference the last few months is the street's perception that Palm is on the mend while UT continues with business as usual. This has resulted with Palm getting a couple of hundred million more from an investor while UT institutional investors are mostly selling the stock even at these "low" prices.
ZTE - says it has secured a $15 billion line of credit from China Development Bank. http://www.lightreading.com/document.asp?doc_id=173930&
ZTE (Shenzhen: 000063; Hong Kong: 0763) defied the economic downturn in 2008 with a 27.4 percent increase in annual revenues to 44.3 billion Yuan Renminbi ($6.5 billion) and a near 33 percent rise in net profit to RMB1.66 billion ($243 million). (See ZTE Reports 2008.)
http://www.lightreading.com/document.asp?doc_id=173864&
"Competitive and pricing pressure hit ZTE's infrastructure margins, though. In 2008, the gross margin on carrier network equipment sales was 35.8 percent, down from 39.6 percent in 2007.
But the gross margin for handset sales improved slightly, to 23.7 percent from 21.7 percent a year earlier, while the margin from software and services jumped to 30.3 percent from 16.7 percent in 2007. ZTE's overall gross margin for 2008 was 32.5 percent, down slightly from 2007's 32.7 percent.
ZTE ended 2008 with cash and cash equivalents of RMB11.3 billion ($1.66 billion)."
The last couple of articles shows the resources ZTE has and their progress the last couple of years. Its interesting to note the high margins from handsets that they get. One has to wonder if this is due to efficient operations and/or advantages to the large volumes. This is a "none-core" area for UT that management has to decide whether to compete in or choose to back away from. This is another tempting market specially with their "experience" in PAS/PCD but if its going to take years and years to generate any decent revenue, then why bother?
It also looks like ZTE actually makes money and has decent companywide gross margins. If they are giving away their equipment as some have suggested, how do they achieve their positive operating margins? This is another data point suggesting how inefficient UT is and how the management/operations are nowhere near their competitor's.
Cisco/SUN/IBM - Cisco buys Pure Digital for $590m and IBM is looking into SUN for about $8.5b or so. The large tech companies have a lot of cash and face the same stagnant world economy. It is natural that M&A will pick up. Shareholders in UT have speculated for years why it has not been bought out. It could be their products are not really that good or that Lu/board are not really serious in any M&A and just want the status quo. At these levels, shareholders do have the added "hope" it may really be too low for the competitors to ignore (such as in SUNs case).
Starent - Starent is growing and has a $1.2b market cap. Its revenues are in the $300m+ level and is being sued by UT. Back in 2003-2004, there was already talk of PAS peaking and the move by the company to diversify into other products. UT bought 3com's comworks division, which eventually yielded workers to form Starent. With all of UTs resources and products that it has developed, why could UT not produce "something" as successful as Starent did? All of the hundreds of millions the company has spent in R&D over the years have yielded little.
Blackmore - UT CEO has been with the company almost 2 years now. His contract (signed a few months before the stock markets peaked) was a hefty $750k/year with huge incentives and bonuses. Peter did convert the bonus into shares at $3.2 showing he too was intrigued by the US listing/management and China manufacturing combination like most shareholders. Peter was brought in to make the company a first class operating company (his words basically). Peter used the traditional outsourcing, more efficient supply chains, cuts, and others to reduce costs while waiting for revenues to ramp. His presence gave investors "hope" that he can turn around the company, make it focus and profitable. I really like Peter because he brought an operational background that shareholders felt was needed at the time (since the technology/revenues were not the main issues at the time).
At this juncture however, I have to bring up the question of whether Peter is still the right person for the job just as the company pondered whether Barton was really the right person for his job (don't really want to discuss Barton as it I could go on and on...again and makes my blood boil). There has always been the issue of who is in control with the founder Hong Lu still around. Why should shareholders pay two people CEO salaries/compensation fit for successful companies/much larger companies in a totally different era? At the very least, both Lu and Blackmore have to significantly reduce their compensations. Frankly, I don't care Blackmore has his contract (we can see what those contracts that AIG bonuses are based on). There should be a renegotiation on his contract. Period.
There is also the fundamental issues of Peter being a CEO. A CEO realizes the importance of the share price and growing the business. I'm not sure how many CEOs survive the job presiding over massive operating losses and share price losses of this magnitude. Also, if the company is done with the major cost cuts/operational issues, what is Peter's role? We know he has not been able to generate any meaningful revenue growth. He is a non-Chinese leading mainly Chinese executives and still their main/core market is China. He is not a marketing person either. I'm not advocating removing Peter because I don't think it could afford to pay him to leave either. Again, as a start, his salary/compensation have to be re-evaluated.
Executive search firm/compensation advisors - Do these firms have a clue on what they are doing? When an individual shareholder can see things are getting ridiculous and the board still continues with ridiculous behavior, one has to question the competency and/or agenda of the board. Why does this company have a heavily compensated non-Chinese CEO? Why is the board made up of non-Chinese (except for the founder who is bent on keeping control of the company at all costs) that have basically no "skin" in the game. Put a board with actual stakeholders and you'll see a difference in stock performance. Period.
I've talked with institutional holders over the last year and all are not "activists". Most are now waiting for some other institution to lead the way even though everyone is disappointed in the performance of the company/share price (what a shock). Anyway, I hear that there seems to be more serious discussions on actions from the company now that the stock is well below $1 (Really?).
At this stage, after watching the company for the last 4 years, I am indifferent from inaction or any appeasement actions from the company. We've seen that the company is not only one step behind but 3 or 4. Thats why every "positive" step they have taken has not yielded higher shareholder value or led the company closer to breakeven.
My biggest hope now is that there is action from institutional holders that all disappointed shareholders can rally behind and finally rid this company of people that don't produce any value for shareholders.
Have a good week everyone.
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