Shareholder Conference Information and Agenda

We will be holding the shareholder conference call this Saturday, Feb. 2, 2008 (10AM Pacific/1PM ET). I have emailed the call-in number to shareholders that have expressed interest in joining the group. If you have not received the number, send me an email so I can put you on the list. Here is the agenda for the conference call.

Log In - As you log in to the call, give your name (first name/screen name is fine). I will check you off so I know who is on the call.

Introduction – I will reiterate and expand on the goal and possible initiatives that the group can take up.

Message to management – I am planning to send an email to management prior to this critical Q4 earnings call to convey the shareholder’s concern and issues we want management to address. I will draft the email and post prior to the shareholder meeting.

Views from larger shareholders/institutions – I will call on shareholders by first name/screen name to discuss their positions on UTStarcom. Shareholders can identify themselves and the institutions they represent and how many shares they own/represent (if they want). They will have the opportunity to discuss why they own the stock, what their major concerns, strengths of the company, what their outlook for the company, what they think the steps this group should take going forward, etc. If you own 100k shares or more, please be prepared to contribute and express your views. If you prefer to just listen, just say pass. I hope I am not slighting the shareholders with less holdings but I want to let the larger shareholders have their say first since they have “earned” it painfully.

Open Q&A from the rest of the shareholders – After the larger shareholders have had a chance to speak, I would like to give all the other shareholders a chance to bring up topics that have not been touched upon or want to discuss further. Just for protocol, please identify yourself by first name/screen name and disclose as much/little as you are comfortable with.

Pathforward – We will conclude the shareholder conference call by listing items that we can do going forward.

I am allocating up to 2 hours for the conference call depending on how the discussions proceed. If there are items that will require more time, you can contact me separately and I will summarize in the blog (as appropriate). As I’ve mentioned previously, all options will be considered. I am just a retail shareholder bringing this group together. The initiatives I have put forward are just a start and I can only take it so far. I expect to get the assistance from the “membership” to take this to the next level (with a more formal structure for example). I look forward to talking with my fellow UTStarcom shareholders this Saturday. We currently have over 22.5m shares that are represented or 18.5% of the total but would definitely welcome more shareholders to join. This is everyone’s opportunity to be heard and participate. If you have not “joined” in and want to listen in or participate, just send me an email.

Exploratory group goal and initiatives to achieve this goal

The goal of this group is to simply to unlock/enhance shareholder value. There are two basic plans or phases to achieve this goal.

“Plan A”: Pro-actively “support” and monitor the management during this turnaround phase. This involves:
· Organizing and maintaining retail/institutional shareholder base to discuss the progress of the company.
· Communicating as a group with management through emails.
· Meeting with management (as needed) to discuss various issues such as compensation, operating expenses, profitability and other strategic initiatives.
· Using the resources of the group to disseminate information to the group’s members and other (existing/potential) shareholders. (via blog/email base, letter campaign to other news organizations such as Businessweek, Lightreading, gathering of information in China/other parts of the world)
· Reinforce sense of urgency to management/BOD by being prepared to implement “Plan B” quickly.

“Plan B”: Seek change in management and/or a sale of the company. This involves:
· Meeting with management/BOD to discuss sale of company.
· Letter campaign to other institutional shareholders to join this group (activist group at this point)
· Proposing management changes and putting up slate of directors that will make significant operational changes or seek a sale of the company.
· Court potential suitors for the company.

During the upcoming shareholder conference call, I will provide some additional details to the above initiatives but these are broadly the initiatives that are typical in these types of cases. I would like to receive input from the other shareholders during the meeting but basically present this to other shareholders now to clarify the intent of this group.

Exploratory group to enhance share holder value

Over the last few weeks and since I started this blog, I have been contacting other shareholders in order to gauge sentiment about the company and management's turnaround strategy. While it is too early to evaluate the impact of the turnaround plan, I believe this is the proper time to organize an "exploratory group" to enhance shareholder value and track the progress of the company. Currently, just on the few shareholders I have talked with, we have about 1.2 million shares or 1%. In addition, a large overseas fund manager whom I met at the shareholder meeting disclosed having about 10%. This manager has sent information to support his holdings and I don't have any reason to doubt his position. In any case, with so much at stake and a lot of value left in the company, we would like to invite other shareholders to "join" our group. There are no major committments except to participate and discuss the company's progress.

The first "event" I am planning for the group is a conference call to be held within 2 weeks and prior to the Q4 earnings. As you know, this upcoming earnings call will be critical with respect to the convertible bond and the outlook for 2008. This shareholder conference call will be an opportunity for interaction with other shareholders and for us to draft a document to send to management on items they should address at the shareholder meeting.

I understand that shareholders (retail/institutional) will have different goals and expectations. Some want immediate actions from the company. Some are willing to give the company time to work out this current turnaround. However, we are all currently in the same boat with little good options. It is imperative that the company produces tangible results very quickly and throughout 2008.

Again, I invite all interested shareholders whether you have 1k shares or an institutional holder. If you want a voice, this is your opportunity to be proactive with your investment. You can email me at tim_94305@yahoo.com if interested.

Feds fund rate cut by 3/4% to 3.5% and UT goes down 9% to an all-time closing low

The market makes a lot of sense, right?



One of the major weaknesses of UT as a company has been management. For some reason or another, it has been "behind" the curve regarding managing the PAS downturn, anticipating the rise of 3G, iptv, and cutting costs or selling assets (divisions and/or holdings). But, it may be catching a break at an opportune time here in dealing with the convertible bond. Consider:



-Over the last few months, the feds funds rate has gone down from 5.25% down to 3.5%. In addition, further rate cuts are expected. Despite the negative percerptions on what rate the company can get, the sharp drop in the fed funds rate, slowing economy, and expectations of further cuts will allow the company to negotiate a lower short or long term deal.



-Efficient use of capital. The convertible coming due has forced the company to transfer funds from China that were earning 2%. The company paid $22 million in additional interest in 2007 just for being late in filing on top of the regular interest payments.



-Appreciation of investments. Gemdale and Infinera were less than $5m at the start of 2007 and was close to $90-100m at the end of 2007. The fact that the CB is coming due has forced the company to sell at relative highs.



-Falling dollar/appreciating currencies outside US. Since the debt is in dollars, the company has been able to take advantage of the currency appreciation the last few years and will continue to do so if they get additional bridge loans as revenues from outside the US will pay for any new loans denominated in dollars.



-Slowing worldwide outlook will help PAS extend its life. Pas revenues are still very critical to UT and delays in spending/implenting 3G rollouts can only extend the life of PAS.



-Cost cutting/2008 cash flow outlook. In a few weeks, UT will discuss q4 2007 results and present 2008 projections. The street will watch for signficant improvements in cash flows for 2008. The head count reduction completed in q4 will start having an impact in q1 2008. The lack of investigation costs related to the options/China contracts/interest payments should help signficantly. Blackmore mentioned signing one Asian OEM and in talks with others. He talked about cost savings of $50m or more from inventory management. If there was any time that management needs to present a good outlook, this is it.



In summary, Barton has been presented with a much better environment than 6 months ago. Some have been by design as UT hired Blackmore, implemented cost cuts, and took a lot of the write-offs/spending in 2007. Others have been by chance (luck) as investments went up, the economy is slowing down and rates being cut. They have sufficient funds to pay most if not all of the convertible bond and could get a bridge loan or even a longer term loan for much better rates. The debtors know this is a company that will pay their debt back (and more!). Barton has collected some serious compensation for terrible work in my opinion. He is now presented with an almost slam dunk situation to deal with the CB to the shareholders best interest (as if he had to say that in public-unbelievable). In any case, todays drop to $2.57 is ridiculous indeed. I picked up a token 3k shares for $2.62 in defiance of this madness :-) I expect a major earnings run coming up....hopefully.

Barrons article on Comcast

http://online.barrons.com/article/SB120058257204297773.html

If you haven't read the previous post, I suggest reading that one first for some context before preoceeding to this Barron's article.

The bear case against UTStarcom

It is always constructive to evaluate the negative as well as the positive issues for companies that you owns shares in or those you are thinking of buying. Here are the negatives for UTStarcom (for those with a weak heart and don't want to read anything negative about the company, you can and are advised strongly to skip this post now).

Weak operational results - Did I just say weak? Maybe collapse is a better word for this. All data are from the recent Q3 2007 filings (no need to go very far to dig up this kind of performance). For the 3rd quarter, broadband infra revenues declined from $50.7m to 42m yoy. Wireless infra (PAS) declined from 110.3m to 67.7m. In addition, GMs declined significantly. For the gross margins, I will use the latest 9 month comparisson. Broadband infra GMs went down from 18% to 7%. Wireless infra went down from 48 to 36%. Handsets (PAS) declined from 93.1m to 59.2m for the 3 months yoy. GMs moved up slightly but that is a huge drop in PAS handset revenue. The only bright spot was the PCD which had increasing revenues and gross margins but did anyone buy UTStarcom for the PCD business unit and its perpetual low margins and even tougher competition?

IPTV growth - This is the main growth driver for the future and by late 2007, the company had 600k live users. However, they have been developing iptv for years and have spent hundreds of millions over the years. Net revenue recognized so far was a pitiful $80m of the $240m in contracts signed. It takes anywhere from 6 months to 12 months to recognize revenue for any given project. Gross margins are in the 40s but only for the core equipment. Set top boxes have GMs under 20% and comprise the bulk of the per user iptv revenues the company expects. There is also no guarantee that clients will use UT STBs. Deployments in China, UTs biggest potential markets have been slow and projections for the "inflection" point/significant increase in orders have been consistently pushed back year after year.

Expenses - UTs iptv growth could be considered exponential and they are one of the top providers already. However, when compared with the amount of revenue/profits it brings compared to their expenses, the numbers do not currently justify the costs over the years. The company has projected to cut costs from $130m to $115m per quarter. The problem is their gross profits are in the $70-90m range. For a company that has been unprofitable since Q2 2005, facing rapid/steep declines in its PAS cash cow and an upcoming convertible bond due in March, it is seems their bloated cost structure is not their priority over the last 2 years.

Liquidity/Convertible Bond - A $275m convertible bond comes up in March. Its kind of an important issue specially when the entire market cap of the company is $350m and almost a third of the shares have been shorted. They have enough money to pay it off in theory but most of it is in China. Working capital has diminished significantly and expected to decline more with the recent operational performance. The company does expect to have sufficient working capital for the next 12 months. Thats always good to hear. Shareholders are reduced to waiting for them to liquidate precious investments that have luckily gone up. Of course, they need to transfer more cash from China.

Competition - In their largest core market China, they have two of the fastest growing, very well capitalized locally developed competitors in ZTE and Huawei. Those two compete in every core product category in China and abroad. Overseas, they face incumbent or much larger competitors in Ericsson, Cisco, Alcatel-Lucent, Nokia-Siemens, and others.

India and international expansion - This has been a "bright" spot with revenues increasing significantly but at numerous write offs of significant amounts and very low initial margin contracts. From the most recent 9 months, China revenues have declined from $595m to $390m. This should be offset by international revenue outside China, right? Japan, with much higher gross margins, delivered $54.7m, down from $116m in the same 9 month period in 2006. What happened to their relationship with Softbank? Revenue from "Others" declined from $117m to $103m. Of course, these were in 2007 and 2008 has added bookings and contracts to be recognized, but they have been talking about replacing China revenue with overseas revenue since 2004 (and probably much earlier). Most of the lost revenues have so far been made up from the PCD group, which they had to acquire for $165m (plust debt) and then susbsequently miss most margin targets for this business unit. In addition to buying assets, they took on the resale business for certain parts of the world from Pantech Curitel. This is only for 3 years and the company had to write off inventory from this deal.

The cost of the filings - An additional 20000 manhours were spent in performing investigations and refiling the previous 7 years of results. In addition, in order to avoid being in default with the CB, they had to pay an additional $22m just in 2007 to satisfy the bondholders so that UT would not be in default. Let me repeat that number again. $22m! The company would have to sell about $400m from the PCD just to recoup that amount. Thats on top of the regular bond interest of $16m year after year. The company does get 2% on most of their half a billion worth of cash sitting in safe Chinese banks. They have not touched most of these funds for collateral purposes. Thats a good example of the "low" cost of doing business in China. The company per Barton is very proud of the recently filed SEC report displaying all the gory details of the additional CB interest and Nasdaq filings. Its like re-enacting a horror show over and over again. It will send chills up your body when you read those. At every step of the way, we investors thought the company MUST be close to filing. They could not possibly be so incompetent as to pay millions in additional interest, could they?

Strategic Alternative Study - Covered well in my recent posts but what where the chances of an outside entity buying the company with the issues it was facing in late 2006 and 2007. They did get rid of their Chinese CEO and co-founder Ying Wu, which was suppose to take over as CEO just in early 2007. Its always nice to add some additional news like when Apple CEO Steve Jobs says, BTW,....For UT, it was no sale of the company, no detailed explanation, and BTW, Ying Wu is out. All at a time, when all we shareholders wanted was the filings to be done and to get some information on the performance of the company. For a publicly held company, you would think they may share some preliminary information with the public. Over a year of silence went by until the stock had lost 70% in value and 90% in just a few years.

Intangible Assets - In a SEC filing, the company put out a note saying it is essential that key management personnel be retained and that performance would be impacted if they were to leave. Huh?!? BTW, I know that wasn't the intangible assets you were thinking of. Rather than talk about the $2/share and $4 billion 2005 guidance, or the strength of iptv and 3G (and its subsequent writing off the entire WCDMA group), the 2007 and early 2008 cash/Gaap profits forecasted, we can talk about their salary (tied to other $2.5b companies no less but that inclused PCD if you are keeping track), raises, bonuses, and retention bonuses. Lets not.

Future forecasts - A new future CEO in Peter Blackmore was announced in 2007. Wait, wasn't Wu going to be the new CEO as announced in 2006. How about a "constant quarter by quarter improvement" forcasted by then new CFO Fran Barton 2 years ago. Supposedely, they were getting improved accounting systems and supply chain management thingamajigs implemented 2 years ago. I guess they forgot to tell Blackmore they have been working on tightening the controls for a while. Don't want Blackmore to look silly, do we? or to reinvent the wheel (maybe they do). Head count and cost reductions. Been there and done that. Good to see they are still lowering costs and waiting for revs to catch up. There is now a sense of urgency and a committment from Peter Blackmore. That sounds good and new. One thing that is new for sure is the new 52 week lows that we saw continuously flash before our eyes in 2007. If the next few quarters don't go according to the sense of urgency plan, I guess they could always cut more costs, fire somebody (or maybe promote somebody first ala Sophie), announce another strategic study (thats always good for a few bucks on the stock price and this time they will have current filings to make it more credible). Heck, it may be better to just announce more investigations to delay results for another year if results are really going to be bad again.

Is there a siliver lining to all of this? Definitely, read most other posts on this blog. Just wanted to remind longs that with valuations this low comes real drama and excitement with this company. For new/potential longs, just wanted to let you in on the fun. I do recommend buying based on the accumulated knowledge you will gain on what to look for in a good investment (think about that one for a while), and you may even gain significantly if this is the start of a major turnaround. If this is not enough excitement for you, you can always just do what most sensible UT longs have done............Give up. Hell no,........ double down :-)

BTW, this post may not have been fully endorsed by the blog creator or written with the clearest of minds or may have just been a bad dream. Now, back to your regular local programming and count down to the NEXT "earnings" report.

IPTV penetration rates

At the end of 2006, Merrill Lynch took a stab at UTs iptv market potential in China alone.

"Assuming 10% penetration of the approximately 80+mn urban households in China in the next 5 years, with UTSI capturing a maximum market share of 50% only gives 4mn subs on UTSI equipment. At an estimated revenue of $200 persub (including backend CPE and subscriber STB), the revenue opportunity translates into up to $160mn in annual sales for UTSI. We estimate gross margins would range from 40% for CPE to <20%>90% TV householdpenetration in China and more significantly, projections for almost 50mn broadband internet subscribers in China at the end of 2006 and about 60mn at the end of 2007. However, these numbers do not take into account that some of the connections may not have the necessary infrastructure to carry higher bandwidth IPTV signals, or likely competition from digital TV rollout by cable operators.In the mid to longer term, we believe that the potential Chinese IPTV market is could be between 30-60mn households. Even if UTSI’s market share was only 30% and blended gross margins were only ~25%, the potential margin contribution to UTSI could still be up to 2 – 4x higher than our conservative baseline scenario above."

An article from lightreading highlighted the top 10 iptv operators and their current number of subscribers.

http://www.lightreading.com/document.asp?doc_id=142594

It is worth noting that "In addition, we have only included service providers that have provided us directly with IPTV subscriber data. So while we believe that China Netcom Corp. Ltd. (NYSE: CN - message board; Hong Kong: 0906) and Japan's Softbank BB Corp. likely merit a place in our Top 10, we won't be adding them until we have sourced data directly from those operators, which haven't yet responded to our requests. "

Here is a table of the top 10 operators, the number of subscribers, broadband lines, and iptv penetration rates.

http://www.lightreading.com/document.asp?doc_id=142594&page_number=1&table_number=2

For those that have been following the last couple of years from UTs initial 5k deployment in Shanghai to now, you have read about iptv's potential. However, this has not translated into overall profits for UT. For longs like myself, I have put my faith in UTs system and the markets in developing countries. From the table, China Telecom has 310k subscribers. China Telecom and China Netcom basically split the country in providing fixed line (and PAS deployments). From the last update, UT already had 380k subscribers in China alone and over 600k worldwide. From the table, CT has a 35 million broadband subscriber base. CN probably has comparable numbers. The key take away from the table however is the 0.9% penetration rates for CT. All other operators have a 9 to 78% penetration rate. As mentioned earlier, this does not include CN and Softbank and guess who provides the iptv equipment to them. So, overall, the iptv market in China right now has 70m broadband lines with an 0.9% penetration rate.

The Merrill analyst did a credible job in estimating the potential but conceded it is probably conservative. Broadband numbers will also keep growing in the next 5 years. The analyst also did not include models for India, Brazil, and Taiwan where UT has gotten major contracts, and the other 40 locations (such as in South America, Middle East, Eastern Europe) where UT has trials. In India, wins at MTNL and Bharti Airtel are for an initial 120k subscribers each with up to a million users. Taiwan and Brazil are for 10s of thousands with higher caps (Taiwan up to a million or two).

The wins in other countries are great but the near term growth/explosion (next year or two) will definitely come from China. In one sense, it is disappointing that the company is not yet profitable and the stock is under $3. However, if you look at the growth that lies ahead and the probability that they will be profitable in a few more quarters, this is an incredible situation.

BTW, there was also an article about BSNL's potential $10b ipo. UT has provided and deployed broadband lines to BSNL, the largest operator in India.

http://www.lightreading.com/document.asp?doc_id=143133

The push in broadband and relatively large iptv contracts that UT has won in India show that this is not a bad "secondary" market to ship iptv gear to.