How much is the company worth? Some would remark that it is worth $2.81/share (the closing price as of March 7, 2008). Some would point to book value (shareholder equity) of around $5/share. Some would assign a multiple of revenues. Some would do a discounted cash flow analysis. The problem is things change all the time and estimates over a year (or even a quarter) are not very accurate for UTStarcom. Based on the latest information from the last Q4 2007 report and guidance for 2008, and clarifications from IR, I will just post some "factual information" and come to a ballpark estimate that we can use to track from here.
Property Plant and Equipment - At the end of 2007, it was stated at $431.6m less accumulated depreciation (222.5m) yielding a value of $209m. This has not changed much from the end of 2006 at $213m. Recently, there has been a lot of discussion that the Hangzhou building alone was worth anywhere from $250-450m. I got some clarification from Chesha Kamieniecki.
The initial cost of the building was around $165m and UT started occupying it in 2004. The land is on a long term lease and UT receives a special high tech tax status for it. The company has repeatedely mentioned it cannot sell it due to various reasons (one being the tax status). It has 2.7 million square feet of space and about 2/3 occupied from the latest filing. You can actually see the facility from the outside (check U-tube). According to Chesha, they are under discussions to lease the excess space. She mantioned "....decision in the fourth quarter to outsource our handset manufacturing. At the same time, we are working with our handset outsourcing partner to lease our manufacturing space in Hangzhou. Thus having the double affect of improving working capital and providing income on the building. This is in the process of going into effect, so these results will most likely be in a few quarters." The latest appraisal was in October 2007 and valued it at $180m.
Personal Communications Division (PCD) - This division makes up their own internal design handsets (non-PAS) and the unit the company bought from Audiovox for $165m (plus some debt/inventory). Back in 2004, this division was at a $800-900m yearly revenue run rate. Margins have increased from 2-3% to 6.2% this year. It had revenues in 2007 of $1.664 billion and projected to grow by 4-5% more in 2008. During Q4, the division shipped 2.8 million units. Internally design handsets have steadily climbed as a percentage of overall units reaching 50% in Q2-Q3 2007. It is now about 25% due to the large increases in volumes. This unit is set to bring more than $100m ($107m estimate) in gross profits to the company in 2008 with little expenses tied in with the Terminals Business Unit. This unit has been the most discussed regarding a potential sale as it was classified as non-core. Motorolla has also been under pressure by Icahns investment group to sell their handset division. They see the Motorolla division worth 1x revenue or $20b. It will be hard to get anywhere near those valuations for Motorolla or even UTs. Most people have discussed a $200-250m conservative valuation for UTs PCD.
Cash - At the end of 2007 and as of the last earnings call (2/28/08), net cash was at $180m. The company has paid off the entire convertible bond plus interest of $289m. They also paid about $92m in other short term debt this quarter. There was a "going concern" statement that auditors will make because of the reduction in cash due to the two events and the recent cash burn and losses for 2007. Management made a strong statement of not diluting the existing shareholders by paying off the debts with existing cash and in the recent Merriman conference squashed liquidity concerns by saying they do not need to tap markets due to their adequate cash and improved performance going forward. They are also seeking ways of additional cash generation by a number of means (see my summary after the latest cc).
Rest of the company (not including PCD) - This includes the iptv/NGN/PAS division (MCBU), BBBU, TBU, Services, and Others. From the filings, I gathered a few numbers for 2007 and the projections for 2008 (using the mid-point of guidance in rev/GMs). In 2007, the "rest" had revenues of $803.5 million and gross margins of 28.3%. In 2008, it will have revenues of $838m (4.3% gain) and gross margins of 33.3%. The main negative year over year will be PAS (as expected). Another major concern is Japan. In 2007, revenues decline to $70m from $137m and $479m in 2006 and 2005 respectively. Their main customer (and large shareholder) Softbank has shifted their focus to wireless with their Vodafone purchases. Shareholders have focused on loss sales from PAS in China but Japan is also a source of concern but also of potential growth in the future. This is one area we will discuss with management during the meeting in March 17. The positives for 2008 include the 5% improvement in gross margins, the 4.3% revenue gain despite PAS declines and strong growth in iptv/ngn revs, broadband (GMs from 4% to over 20% for each quarter in 2008), and "others" with the commworks group increasing revs to $40m (100% gain) and GMs in the 70-80%. This group is also non-core and could be sold. Part of the "others" group (the commworks or CSBU) was purchased from 3com for $100m back in 2003. It is now starting to do very well and will be profitable in 2008.
If you place a 0.5x revenue multiple on the "REST", it will be $420m. At 1x revenue, it will be $838m and so on. The fact that they do not expect to be profitable until Q1 2009 or Q4 2008 at the earliest puts a cloud on valuations and a discount on even current assets (S&P has a $3.5/share target based on 0.7x book value).
My personal thoughts are that the company is making strides in explosive segments on the market and on emerging countries and winning many strategic contracts and gaining impressive market share that the street is misvaluing the "REST" and focusing on PAS declines, management poor historic execution and low margin PCD.
If we add the Hangzhou property alone ($180m) + PCD ($250m) + net cash ($180m), that would yield $610m. The building and net cash alone is worth more than the current market cap. So, the current penalty/discount is the entire PCD and the REST. People can argue and debate the timing of profitability but we have a lot more confidence that it will be soon with the expense cuts and contracts/bookings we are seeing. You can discuss the management mis-steps (and we will during the upcoming March 17 meeting) but we have a new COO and eventual CEO in Peter Blackmore that seems to have reinvigorated the company- I don't want to give him all the credit but he is the symbol of the changes we are seeing. According to Chesha, most of the management team (except for Hong Lu) has been in place only the past 18-24 months.
In summary of this valuation post, it is clear that the market is discounting the assets, future earnings, and franchises that the company has spent the last decade in building. Reasons such as historical mis-steps, weak internal controls, lack of confidence in management and lack of profitability come up very often but progress is being made. I see the signs of paying off debt, winning contracts, better communications (in the CCs) as concrete steps in the major turnaround unfolding before our eyes. The reasons for the discount are still there and we want management to address those items. It will not happen overnight but I am very comfortable with the valuation aspect of the company even 8 months ago and definitely more so now that the future operational performance have never been better (since the glory days of PAS). As for shareprice to valuation, it definitely has not been better at any point in the company's history.
Saturday, March 8, 2008
Friday, March 7, 2008
India Telecom Landscape and UT's Strategic Wins
Lightreading had a nice article on the telecom landscape in India.
http://www.lightreading.com/document.asp?doc_id=147300
On the fixed-line side, BSNL dominates with 31.6 million subscribers, followed by MTNL, Bharti Airtel, Reliance, Tata, and a couple of smaller ones.
http://www.lightreading.com/document.asp?doc_id=147300&page_number=1&table_number=1
UT recently announced during the Merriman conference that they had won a 3rd and 4th iptv customer but cannot announce them yet. We know UT has won with MTNL and Bharti and Microsoft has teamed up with Reliance. The wins with BSNL in the broadband area suggests that the two new wins are with BSNL and probably with Tata. Because of the skewed number of lines that BSNL has, winning 4 out of the 5 iptv customers would mean almost 97% of the potential iptv market. The number of broadband lines able to support iptv is nowhere near what it is in China but the strategic wins in India show that both the BBBU and MCBU will have a strong pipeline of contracts and growth for years to come.
Unlike in China, the wins in India are even more attractive to potential suitors such as Ericsson, Alcatel-Lucent, NSN, Cisco, Nortel, etc who are trying to expand into high growth countries that don't have local equipment providers (such as in China's ZTE/Huawei). While UT has had problems with their initial contracts in India (with writedowns of $30m in 2006 and 8m last quarter), management has indicated that gross margins in the broadband unit will be over 20% in each quarter for 2008. Hopefully, they have turned the corner and learned from their past contracts in India and can fully take advantage of the growth in India.
One last note regarding the India landscape. Back in late 2006, Merrill Lynch's report on UTs prospects did NOT even include India IPTV and India revenues at that time was only in the $20-30m/yearly run rate. Sooner or later, the market will catch on to UTs progress in IPTV and India and may even give the company a little bit of credit (valuation bump) for it.
http://www.lightreading.com/document.asp?doc_id=147300
On the fixed-line side, BSNL dominates with 31.6 million subscribers, followed by MTNL, Bharti Airtel, Reliance, Tata, and a couple of smaller ones.
http://www.lightreading.com/document.asp?doc_id=147300&page_number=1&table_number=1
UT recently announced during the Merriman conference that they had won a 3rd and 4th iptv customer but cannot announce them yet. We know UT has won with MTNL and Bharti and Microsoft has teamed up with Reliance. The wins with BSNL in the broadband area suggests that the two new wins are with BSNL and probably with Tata. Because of the skewed number of lines that BSNL has, winning 4 out of the 5 iptv customers would mean almost 97% of the potential iptv market. The number of broadband lines able to support iptv is nowhere near what it is in China but the strategic wins in India show that both the BBBU and MCBU will have a strong pipeline of contracts and growth for years to come.
Unlike in China, the wins in India are even more attractive to potential suitors such as Ericsson, Alcatel-Lucent, NSN, Cisco, Nortel, etc who are trying to expand into high growth countries that don't have local equipment providers (such as in China's ZTE/Huawei). While UT has had problems with their initial contracts in India (with writedowns of $30m in 2006 and 8m last quarter), management has indicated that gross margins in the broadband unit will be over 20% in each quarter for 2008. Hopefully, they have turned the corner and learned from their past contracts in India and can fully take advantage of the growth in India.
One last note regarding the India landscape. Back in late 2006, Merrill Lynch's report on UTs prospects did NOT even include India IPTV and India revenues at that time was only in the $20-30m/yearly run rate. Sooner or later, the market will catch on to UTs progress in IPTV and India and may even give the company a little bit of credit (valuation bump) for it.
Tuesday, March 4, 2008
Wimax - Tata or BSNL in India ?
A few months ago, we noticed some nifty Wimax gear from the UT website and started speculating on potential contracts with BSNL.
http://www.utstar.co.jp/Company/Events/07interop/WiMAX_e.pdf
http://www.lightreading.com/document.asp?doc_id=136729
Today, Tata unleash its wimax deployment.
http://www.unstrung.com/document.asp?doc_id=147494
UT announced on the earnings call and on the Merriman conference that they had won a 3rd and 4th IPTV contract in India and those are probably with BSNL and Tata since Reliance is working with Microsoft-Alcatel-Lucent. While Tata contracted with a local vendor Telsima for its wimax deployment, it is also looking to add other vendors and UT could be in the running. UTs wimax gear is formally the Moving Media 9000 and its part of the Mobile Solutions Business Unit (MSBU). This business unit supports IPCDMA, GSM solutions. Growth is in the 30% and gross margins are expected to be in the 40s in 2008. It would be a tremendous boost to this business unit if they can win in India and showcase their gear. There seems to be a ton of wimax business to be had and UTs investments and products coincide with the market demand in India.
"Tata isn't the only operator with WiMax plans in India. Some have described the market as being poised for a WiMax "big bang" as operators prefer to build out significant portions of their networks before making formal launch announcements."
http://www.utstar.co.jp/Company/Events/07interop/WiMAX_e.pdf
http://www.lightreading.com/document.asp?doc_id=136729
Today, Tata unleash its wimax deployment.
http://www.unstrung.com/document.asp?doc_id=147494
UT announced on the earnings call and on the Merriman conference that they had won a 3rd and 4th IPTV contract in India and those are probably with BSNL and Tata since Reliance is working with Microsoft-Alcatel-Lucent. While Tata contracted with a local vendor Telsima for its wimax deployment, it is also looking to add other vendors and UT could be in the running. UTs wimax gear is formally the Moving Media 9000 and its part of the Mobile Solutions Business Unit (MSBU). This business unit supports IPCDMA, GSM solutions. Growth is in the 30% and gross margins are expected to be in the 40s in 2008. It would be a tremendous boost to this business unit if they can win in India and showcase their gear. There seems to be a ton of wimax business to be had and UTs investments and products coincide with the market demand in India.
"Tata isn't the only operator with WiMax plans in India. Some have described the market as being poised for a WiMax "big bang" as operators prefer to build out significant portions of their networks before making formal launch announcements."
Monday, March 3, 2008
New All-time closing low - two new India IPTV wins
UT closed at an all-time low today at $2.49. The Q4 result exceeded expectations on the top and bottom line and so did preliminary 2008 guidance so what happened. The stock started off well last Friday (above $3.1) but reports late in the day surfaced that UT was going to delay their 10k filing (see terminal updates) and there was a reiteration of a hold and lowered price target from $4.25 to $3.
http://tim94305.googlepages.com/UTTerminalUpdates.tif
In addition to the "going concern statement" that management discussed in the call, additional items showed up in the terminal of traders this morning such as:
UTStarcom cites material weakness, sees significant change from prior year, and the delayed 10k. Coupled with the weak market this morning, the stock opened at $2.45 and hovered at $2.5 for the rest of the day ending at $2.49 on almost 3 million shares (prior days saw very low volume under 1 million shares on some days).
There was also a note on a Morningstar review but that was positive.
"We're placing UTStarcom UTSI under review while we revisit our valuation, taking into account the firm's newly released fourth-quarter and full-year results and 2008 guidance. We expect an increase in our fair value estimate."
During the day, I sent an email to Chesha Kamieniecki (UT Director of IR) to hopefully have Peter Blackmore or Fran Barton addressed the filings issue and material weakness/internal control issues during their conference in San Francisco (Merriman Curhan Ford & Co. Annual IP Video Conference at the St. Regis Hotel in San Francisco, CA.).
During the end of the call, Peter addressed the filings and liquidity issue saying that the filing will be done later today or the next day (10k was subsequently filed in the afternoon). Peter also wanted to squash "rumors" regarding the company's liquidity situation and said they had enough funds and do not intend to go to the markets at this time.
Interestingly, Peter Blackmore also disclosed not only a 3rd win in India but also a 4th win! Also, Chesha mentioned:
"Thanks for the note. We will address the filing on the call today. With respect to the internal controls issue; these are not new and have been fully disclosed in our 2006 filing. In fact we reduced the number of material weaknesses from 9 to 3 in 2007."
It does seem like there is an over-reaction by the market to negative headline news but the damage has been done. Rather than the stock being at $3.2 or higher as it was in the premarket on Friday, it is at $2.49 at the close on Monday.
There is no doubt the communication could have been better. The company could have even pre-announced the quarter (20% revenue upside), announce contract wins in Italy, iptv wins in Sri Lanka, full payment of the CB and other positive news. There were also negatives in the report such as the $8m loss in India and the $23m non-cash writedown. However, overall, Q4 was very solid and the outlook for 2008 coupled with strategic wins were very positive. I just wish the good news would be circulated and communicated as well as the rumors or the "bad" headlines news.
http://tim94305.googlepages.com/UTTerminalUpdates.tif
In addition to the "going concern statement" that management discussed in the call, additional items showed up in the terminal of traders this morning such as:
UTStarcom cites material weakness, sees significant change from prior year, and the delayed 10k. Coupled with the weak market this morning, the stock opened at $2.45 and hovered at $2.5 for the rest of the day ending at $2.49 on almost 3 million shares (prior days saw very low volume under 1 million shares on some days).
There was also a note on a Morningstar review but that was positive.
"We're placing UTStarcom UTSI under review while we revisit our valuation, taking into account the firm's newly released fourth-quarter and full-year results and 2008 guidance. We expect an increase in our fair value estimate."
During the day, I sent an email to Chesha Kamieniecki (UT Director of IR) to hopefully have Peter Blackmore or Fran Barton addressed the filings issue and material weakness/internal control issues during their conference in San Francisco (Merriman Curhan Ford & Co. Annual IP Video Conference at the St. Regis Hotel in San Francisco, CA.).
During the end of the call, Peter addressed the filings and liquidity issue saying that the filing will be done later today or the next day (10k was subsequently filed in the afternoon). Peter also wanted to squash "rumors" regarding the company's liquidity situation and said they had enough funds and do not intend to go to the markets at this time.
Interestingly, Peter Blackmore also disclosed not only a 3rd win in India but also a 4th win! Also, Chesha mentioned:
"Thanks for the note. We will address the filing on the call today. With respect to the internal controls issue; these are not new and have been fully disclosed in our 2006 filing. In fact we reduced the number of material weaknesses from 9 to 3 in 2007."
It does seem like there is an over-reaction by the market to negative headline news but the damage has been done. Rather than the stock being at $3.2 or higher as it was in the premarket on Friday, it is at $2.49 at the close on Monday.
There is no doubt the communication could have been better. The company could have even pre-announced the quarter (20% revenue upside), announce contract wins in Italy, iptv wins in Sri Lanka, full payment of the CB and other positive news. There were also negatives in the report such as the $8m loss in India and the $23m non-cash writedown. However, overall, Q4 was very solid and the outlook for 2008 coupled with strategic wins were very positive. I just wish the good news would be circulated and communicated as well as the rumors or the "bad" headlines news.
Sunday, March 2, 2008
UT IPTV Worldwide and China Subscribers
On July 6, 2005, Softbank launched their iptv service powered by UTs M-vision (what it was called back then).
http://www.prnewswire.com/cgi-bin/micro_stories.pl?ACCT=159138&TICK=UTSI2&STORY=/www/story/07-06-2005/0004062192&EDATE=Jul+6,+2005
On November 2005, China Telecom officially launched their iptv service in Shanghai using UTs solution with a modest 5k target that drew a lot of headlines since Shanghai had 13 million people.
http://www.lightreading.com/document.asp?doc_id=84314&WT.svl=deptfin_1
Back then in late 2005, the stock was already "struggling" but managed to surged to the $8-9 range briefly on the news that this was THE turnaround. Obviously, it wasn't. As before, the market is still waiting for the growth in IPTV. During the strategic study by ML in late 2006/early 2007, they highlighted iptv as UTs potential savior but didn't have a good handle on when IPTV would take off and what their situation all over the world.
At this time, UT has shown that it has maintained market share and steadily growing the business in China and worldwide with wins in Japan, China, Inida, Brazil, Taiwan, and Sri Lanka. Strategic wins in the broadband/Pas areas in Italy, Philippines, Pakistan, Argentina, Chile, (Mexico, Russia, Turkey not publicized but...) show that UT has its foot in the door in a lot of places as well. Recently, UT has been providing subscriber numbers worldwide and in China and I have collected and will maintain those numbers as it is critical to one side of the profitability equation. The numbers are directly from UTStarcom, either though a PR or a source mentioned in a particular article.
http://tim94305.googlepages.com/UTIPTVSubscriberNumbers.pdf
In China, from the November 2005 start, subscribers grew to about 200k by end of 2006 and to 385k by November and 500k by end of January 2008. By end of 2008, it should be around 1 million just on the number of STB shipping currently. I was going to post potential iptv subscriber growth in China and worldwide but that is a futile exercise as the numbers are all over the place and have been off by a lot in recent years due to uncertain regulatory environment, which still exists today. Most of those predictions in iptv subscribers come from the number of broadband users and penetration rates that iptv can achieve. Since those reports are not worth the paper they are printed (I wonder if those companies charging for them give refunds when they are so off), I will just go with some broadband data I plucked out from the web this morning.
"China ranks second in number of broadband users worldwide People's Daily,June 7, 2007 - Zhao Houlin, Vice Secretary General of the International Telecommunication Union (ITU), said on June 5th that China now has 97 million broadband users. This number of broadband users ranks the second only to the US. The development of the broadband communication industry has gained worldwide attention. At the opening ceremony of Broadband World Forum Asia 2007 held by the China Network Communications Group Corporation, Zhao Houlin said that by the end of 2005, 74 percent of global broadband users were from developed countries, and China made up 17.5 percent. China's rate of broadband popularization is the fastest among developing countries. Zhao Houlin said the ITU expects that "China's successful experience can be used as reference and be applied in other countries, thereby helping to narrow the gap between broadband users the world." At present, China's broadband users has exceeded 50 million; of which China Telecom's broadband access users has exceeded 30 million, and China Netcom's broadband access users has exceeded 20 million."
http://www.chinatoday.com/it/it.htm
The numbers are all over the place but broadband users (and the quality of the broadband connections) are going much higher than whatever iptv uptake currently is in China and worldwide in UT markets. Prior to 2007, we only had contract wins but its good the company is providing numbers whenever they release an iptv related PR (as we had wanted them to :-).
I don't want to be overly excited since the penetration rates are still way low and the company is still struggling. I also want to highlight the fact that in the Softbank PR, you could already see the company deploying Rolling stream, Gepon, IPDSLAM and other technologies, which tells you that the company has been spending a ton of money in R&D for a long time to get to where they are (either maintaining those technologies or developing new ones) and they are still not profitable. That is something we need management to discuss with shareholders and the market in general. We are a long way from where we want to get but tangible contracts/subscribers in iptv are validating the potential (not necessarily the return of investment).
http://www.prnewswire.com/cgi-bin/micro_stories.pl?ACCT=159138&TICK=UTSI2&STORY=/www/story/07-06-2005/0004062192&EDATE=Jul+6,+2005
On November 2005, China Telecom officially launched their iptv service in Shanghai using UTs solution with a modest 5k target that drew a lot of headlines since Shanghai had 13 million people.
http://www.lightreading.com/document.asp?doc_id=84314&WT.svl=deptfin_1
Back then in late 2005, the stock was already "struggling" but managed to surged to the $8-9 range briefly on the news that this was THE turnaround. Obviously, it wasn't. As before, the market is still waiting for the growth in IPTV. During the strategic study by ML in late 2006/early 2007, they highlighted iptv as UTs potential savior but didn't have a good handle on when IPTV would take off and what their situation all over the world.
At this time, UT has shown that it has maintained market share and steadily growing the business in China and worldwide with wins in Japan, China, Inida, Brazil, Taiwan, and Sri Lanka. Strategic wins in the broadband/Pas areas in Italy, Philippines, Pakistan, Argentina, Chile, (Mexico, Russia, Turkey not publicized but...) show that UT has its foot in the door in a lot of places as well. Recently, UT has been providing subscriber numbers worldwide and in China and I have collected and will maintain those numbers as it is critical to one side of the profitability equation. The numbers are directly from UTStarcom, either though a PR or a source mentioned in a particular article.
http://tim94305.googlepages.com/UTIPTVSubscriberNumbers.pdf
In China, from the November 2005 start, subscribers grew to about 200k by end of 2006 and to 385k by November and 500k by end of January 2008. By end of 2008, it should be around 1 million just on the number of STB shipping currently. I was going to post potential iptv subscriber growth in China and worldwide but that is a futile exercise as the numbers are all over the place and have been off by a lot in recent years due to uncertain regulatory environment, which still exists today. Most of those predictions in iptv subscribers come from the number of broadband users and penetration rates that iptv can achieve. Since those reports are not worth the paper they are printed (I wonder if those companies charging for them give refunds when they are so off), I will just go with some broadband data I plucked out from the web this morning.
"China ranks second in number of broadband users worldwide People's Daily,June 7, 2007 - Zhao Houlin, Vice Secretary General of the International Telecommunication Union (ITU), said on June 5th that China now has 97 million broadband users. This number of broadband users ranks the second only to the US. The development of the broadband communication industry has gained worldwide attention. At the opening ceremony of Broadband World Forum Asia 2007 held by the China Network Communications Group Corporation, Zhao Houlin said that by the end of 2005, 74 percent of global broadband users were from developed countries, and China made up 17.5 percent. China's rate of broadband popularization is the fastest among developing countries. Zhao Houlin said the ITU expects that "China's successful experience can be used as reference and be applied in other countries, thereby helping to narrow the gap between broadband users the world." At present, China's broadband users has exceeded 50 million; of which China Telecom's broadband access users has exceeded 30 million, and China Netcom's broadband access users has exceeded 20 million."
http://www.chinatoday.com/it/it.htm
The numbers are all over the place but broadband users (and the quality of the broadband connections) are going much higher than whatever iptv uptake currently is in China and worldwide in UT markets. Prior to 2007, we only had contract wins but its good the company is providing numbers whenever they release an iptv related PR (as we had wanted them to :-).
I don't want to be overly excited since the penetration rates are still way low and the company is still struggling. I also want to highlight the fact that in the Softbank PR, you could already see the company deploying Rolling stream, Gepon, IPDSLAM and other technologies, which tells you that the company has been spending a ton of money in R&D for a long time to get to where they are (either maintaining those technologies or developing new ones) and they are still not profitable. That is something we need management to discuss with shareholders and the market in general. We are a long way from where we want to get but tangible contracts/subscribers in iptv are validating the potential (not necessarily the return of investment).
UTStarcom competitor ZTE and Philippine National Broadband Network (NBN) and Cyber Education Projects (CEP).
How difficult is it to compete with ZTE in the international markets?
A quick background of the "size" of ZTE,
"First, as a global enterprise and China's only publicly listed telecommunication supplier both in Hong Kong and Shen Zhen, ZTE has made great achievements in business growth during the year 2007. The turnover of the first 3 quarters has increased 47%, and the annual profits are expected to increase by 50-70% in fiscal year 2007. ZTE has set its goal of $10 billion US dollars for global sales in 2008."
http://www.abs-cbnnews.com/storypage.aspx?StoryId=109164
Currently, there is a major bribery scandal in the Philippines involving ZTE and Philippine governement officials (all the way to the President's husband).
"The Philippine government in April 2007 awarded CTE a US$300 million-contract to build a broadband network to connect all government agencies and offices across the country. The project was later scrapped after allegations emerged that the deal had benefited high-ranking officials through commissions and kickbacks."
http://www.businessweek.com/globalbiz/content/feb2008/gb20080220_073482.htm?campaign_id=rss_daily
The Chinese government was going to loan the entire amount of the contract with loan payments not starting until 2012.
http://www.gmanews.tv/story/61876/Arroyo-Bribery-talk-over-ZTE-deal-was-uncorroborated
There are now hearings into this matter and officials from ZTE and the Chinese government are being called to testify. Obviously, they are refusing and instead using the massive trade between the two countries as leverage and instead trying to turn it around and saying this will discourage trade between foreign countries and the Philippines.
That is a tough situation for UTStarcom to compete against. The shear size of ZTE ($10b in revs and the backing/credit of the Chinese government) make it almost unsurmountable. However, they have managed to win at PLDT and is even using this as a showcase to win more projects in the region (and even in Italy with Tiscali very recently). Hopefully, these cases of corruption against ZTE will help UT in securing more wins as governments avoid the potential controversy in dealing with Chinese backed companies.
With the current very succesful PLDT win at hand, UT should go after the National Broadband Network (NBN) and Cyber Education Projects (CEP) in the Philippines that ZTE did not get and involved in the scandal. This is another discussion point we can bring up during the meeting with management.
A quick background of the "size" of ZTE,
"First, as a global enterprise and China's only publicly listed telecommunication supplier both in Hong Kong and Shen Zhen, ZTE has made great achievements in business growth during the year 2007. The turnover of the first 3 quarters has increased 47%, and the annual profits are expected to increase by 50-70% in fiscal year 2007. ZTE has set its goal of $10 billion US dollars for global sales in 2008."
http://www.abs-cbnnews.com/storypage.aspx?StoryId=109164
Currently, there is a major bribery scandal in the Philippines involving ZTE and Philippine governement officials (all the way to the President's husband).
"The Philippine government in April 2007 awarded CTE a US$300 million-contract to build a broadband network to connect all government agencies and offices across the country. The project was later scrapped after allegations emerged that the deal had benefited high-ranking officials through commissions and kickbacks."
http://www.businessweek.com/globalbiz/content/feb2008/gb20080220_073482.htm?campaign_id=rss_daily
The Chinese government was going to loan the entire amount of the contract with loan payments not starting until 2012.
http://www.gmanews.tv/story/61876/Arroyo-Bribery-talk-over-ZTE-deal-was-uncorroborated
There are now hearings into this matter and officials from ZTE and the Chinese government are being called to testify. Obviously, they are refusing and instead using the massive trade between the two countries as leverage and instead trying to turn it around and saying this will discourage trade between foreign countries and the Philippines.
That is a tough situation for UTStarcom to compete against. The shear size of ZTE ($10b in revs and the backing/credit of the Chinese government) make it almost unsurmountable. However, they have managed to win at PLDT and is even using this as a showcase to win more projects in the region (and even in Italy with Tiscali very recently). Hopefully, these cases of corruption against ZTE will help UT in securing more wins as governments avoid the potential controversy in dealing with Chinese backed companies.
With the current very succesful PLDT win at hand, UT should go after the National Broadband Network (NBN) and Cyber Education Projects (CEP) in the Philippines that ZTE did not get and involved in the scandal. This is another discussion point we can bring up during the meeting with management.
Saturday, March 1, 2008
Q4 2007 results and 2008 outlook
This latest earnings call will be remembered as the time the company paid down their entire convertible bond debt + interest, a whopping $289 million using existing funds from the US and those transferred from China.
While I am happy that they chose to pay it off completely, it does raise the question, why they didn't do this LAST year? Why pay the additional $22 million in interest payments on top of the $14 million in regular interest. I know they got lucky with the gemdale/infenera ($90+ million take) but was it worth having the CB cloud hang over shareholders who were peppered with endless PRs regarding defaults and uncertainties. I know market conditions change but paying $36 Million in interest payments last year is ridiculous and shows a lack of planning to resolve this. They could have easily saved half the interest payments and transferred China funds years ago.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=150000&mid=150000&tof=46&frt=2
After listening to the conference call twice and jotting my notes, there were some negatives but overall one of the most positive calls over the last 3 years and basically solidifies the longterm case for buying UTStarcom.
Peter Blackmore discussed the various business units, Hong Lu talked about China progress, and Fran Barton recapped Q4 numbers and outlook for 2008.
As you many know, there are six business units. The multi-media communications business unit (MCBU) includes IP-based technology and soft-switch related items such as IPTV, Next Generation Networks (NGN) and PAS.
Late in Q4, Tiscali of Italy decided to replace all of their TDM switching network with UTs MSAN equipment. This is a huge strategic win and being implemented already. Blackmore also mentioned recent wins in Taiwan, Brazil (Brazil Telecom), Thailand (TOT), and Argentina (Nextel) and feels that UT has the best soft-switch technology in the market.
IPTV- Currently over 750k subscribers, up from 600k late last year. That is huge growth of 25% in a little over 2 months. Aside from wins/expansions in China, they won in Taiwan (Markwell cable), Sri Lanka Telecom (SLT) and a new customer in India. Rollouts will predominantly start in Q2 and there is the usual 6-9 month revenue lag so these are nice strategic wins. Market share in IPTV in China is greater than 65% and well over 80% in India. More info from Lu in China but momentum is growing and there are lots of "activity" in this area. IP Surveilance (2 wins in China, more from Lu later on).
For this division (IPTV/NGN), Peter mentions "Booking can ramp up fast" and revenue growth will in greater than 80% for 2008. The MCBU will have flat revenues due to the decline in PAS. Gross margins will be 35-40% (including STB). Overall, the revenue bookings have caught up to PAS decline, which is good news. Seventy percent of the revenues planned are already supported by existing bookings which give them greater certainty for 2008.
Broadband Business Unit (BBU)- This includes IP-DSLAM, IAN8000, GEPON, and Netring. This will have 15-20% revenue growth in 2008 and support triple/quadruple play buildouts using both copper/fiber. UT is one of top 5 vendors in GEPON worldwide. Netring is the optical product that is already in 3rd generation. Gross margins are going to be above 20% for every quarter in 2008. This is key because GMs are sometimes negative in 2007 with writedowns for poor performance previously. Thirty percent of the revenue planned has alreadyy been booked.
Services Unit- Flat revenues are expected for 2008 with 30% GMs. This is expectated to ramp in the following years due to the new equipment being installed with new customers in 2008 and beyond.
Terminals Business Unit (TBU) - Supports handset business (CDMA and PAS). Overall growth of 15% in 2008. Looking for additional growth in WCDMA and in area in telematics (won some initial contracts in automobile industry). GMs in low 20s range.
Customs Solutions Business Unit (CSBU) - Mostly includes technogy acquired from 3coms Commworks unit. This includes IP-based messaging and transaction products. Revenue is expected to double to $40m with GMs above 50%. This unit is also expected to be profitable in 2008. Blackmore mentioned some of the "none-core" assets are becoming very attractive and this along with the PCD definitely fits the bill. What is this business unit worth alone? The company paid $100m to 3com a few years ago and has finally gotten this to profitability this year and growing very fast. This alone could be worth close to $80m-$100m if sold (based on 2-2.5x revenue for this type of business - check Starent/Infinera for valuations).
Mobile Solutions Business Unit (MSBU) - This includes the moving media 9000 and supports IPCDMA, GSM solutions. Growth is in the 30% and gross margins in the 40s in 2008.
Note that the CSBU and MSBU are consolidated in the "other category".
PCD - "Continues to exceed expectations." Three new smart phones released including a touch screen phone in Sprint, ultra slim phone (1450 model metro pcs), and refresh of the Gzone phone (verizon). Shipped 2.8 million units and had record quarterly revenue of $560m with 6.2% GMs, (wow). Twenty five percent of units are internally made UT handsets.
Supply Chain comment - outsourcing of terminals business and improved inventory turns (improve by 35%). Overall margin improvement of 3%.
Peter summarizes (like a CEO) that they are focusing on building their core businesses and manage/divest none-core to benefit shareholder value.
Hong Lu followed with a China update. Recently, China regulatory change - Both telecom/broadcom operators can compete in each others field. CT/CN may be able to offer iptv freely throughout China. This is big news if indeed interpreted this way. Lu gave an update on iptv demand. STB shipments signficantly jumped in January to a 60k/month run rate from 20k/month late last year. Currently, it is at 40k/month. While the regulatory issue is not clearly resolved, CT/CN is ramping up iptv and has made it a priority for 2008. Hong stated that China iptv subscribers are about 500k at the end of January so China is the main growth driver for the company (as we know). China bookings is also expected to ramp up this year and will translate into major revenue streams in 2009 and beyond (as we have hoped for a long time).
Here is Tigre's posting regarding this topic this morning.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=150092&mid=150092&tof=3&frt=2
A second major change is the long talked about reorganization in the China telecom industry (probably as long awaited as 3G licenses). Anyway, the reorganization will probably have 3 major carriers with China Mobile, China Telecom, and China Unicom. Impact to UT is downward pressure on PAS. On the bright side, it will allow UT to sell CDMA handsets and broaden their customer base (since they can all compete in fix and mobile markets). Hong also mentioned packet mode technology is compelling since it has faster data rates than current CDMA/GSM data rates.
PAS gained market share in Q4 and early 2008 by switching to distribution model from direct sales model.
IPTV will take time to mature. I believe LU is being cautious to mention that it has not openned up completely and obviously it is just at the beginning. 70% market share (slightly higher than what Peter said).
IP survielance wins and Tunchin and Hangchou. Additional opportunities in government and health departments.
Using iptv to get into enterprise and advertising markets.
Upgrading PAS soft switch to release 5 and improving opportunities broadband access. and optical networks. Increased employee morale and higher business activity in China even with the Q4 restructuring. Government representatives/customer visited UT to show support.
Fran Barton discussed liquidity and financial results. Convertible notes due on March 1 was paid completely ("successfully"....hmmmm, not sure about that).
Going concern modification seemed very negative but is really based on historical actions. The company drained a ton of cash by paying the CB ($289m) and $92m for other short term debt.
The company is taking steps such as (1) Q4 restructuring, (2) refocu direct sales efforts to productive areas, (3) using OEM, (4) reducing inventory via improved supply chain/outsourcing, (5) potential sales of non-core assets (active ongoing discussions), (6) license/sale of patents, (7) additional lines of credits (public/private financing), and additional reductions.
At year end 2007, Cash/short term securities was $503m and $320m in debt. This is net $180m in cash. Currently, they have $228m in cash and only $48m in debt. Comment: Debt to equity ratio is down to less than 0.1. If they can sell additional assets or drive to profitability soon, the valuations start becoming very apparent.
Here is a summary of revenue in the business units in Q4, Q3 revenue comparison.
MCBU - $118m , 57m
BBU - $51m, 41m
TBU - $43m, $59m
CSBU - $6m, $2m
MSU - $1m, $10m
Service - $18m, $19m
PCD - $560m, $458m
Book to Bill was 0.8 - not bad considering the 25% increase in revenue from Q3 and traditionally strong revenue recognition in Q4.
GMs for business units (see filing)
Bad news - OPEX was $155m due to restructuring, non-cash impairments, and New taxes in China for Gemdale sale and other income taxes. The GMs for BBU was also negative with an $8m loss provision in India. I think the reason Barton did not preannounce was also because of these "hidden" negatives. While there is a lot of positives, its these kinds of things that make the market think twice. Heman Chou, one of the analysts asking a question asked Barton last quarter if there was any more write downs and Barton said no (my recollection). Barton NOW says he hopes he did not say anything foolish like that, but he did say no more writedowns last quarter and now this again.
2008 preliminary guidance - 3 to 6% revenue growth. This is above any estimates that I have seen specially on top of the $160m higher Q4 2007 revenue reported. GMs of 14 to 16% is what I expected. It is good in that BBU GMs are going to be above 20% every quarter (if there is no more surprises). Expenses for the first couple of quarters are still $115-120m (this is disappointing). For the back half of 2008, expenses will be under $110m (Barton mentioned the company would like it to be lower and KNOWS it has to be lower).
I will post again later regarding GMs of BUs and more anlaysis on 2008 and some of the Q&A, which had a lot of info.
Overall, very good call for 2008, and potentailly GREAT 2009. For the next 3 months, I would say neutral because Q1 is going to be worse and then things will start to improve dramatically. Based on the report and new items, I have much more questions and data to discuss with management in two weeks. I'll definitely circulate those thoughts to the group and we may have another shareholder cc before meeting with management.
While I am happy that they chose to pay it off completely, it does raise the question, why they didn't do this LAST year? Why pay the additional $22 million in interest payments on top of the $14 million in regular interest. I know they got lucky with the gemdale/infenera ($90+ million take) but was it worth having the CB cloud hang over shareholders who were peppered with endless PRs regarding defaults and uncertainties. I know market conditions change but paying $36 Million in interest payments last year is ridiculous and shows a lack of planning to resolve this. They could have easily saved half the interest payments and transferred China funds years ago.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=150000&mid=150000&tof=46&frt=2
After listening to the conference call twice and jotting my notes, there were some negatives but overall one of the most positive calls over the last 3 years and basically solidifies the longterm case for buying UTStarcom.
Peter Blackmore discussed the various business units, Hong Lu talked about China progress, and Fran Barton recapped Q4 numbers and outlook for 2008.
As you many know, there are six business units. The multi-media communications business unit (MCBU) includes IP-based technology and soft-switch related items such as IPTV, Next Generation Networks (NGN) and PAS.
Late in Q4, Tiscali of Italy decided to replace all of their TDM switching network with UTs MSAN equipment. This is a huge strategic win and being implemented already. Blackmore also mentioned recent wins in Taiwan, Brazil (Brazil Telecom), Thailand (TOT), and Argentina (Nextel) and feels that UT has the best soft-switch technology in the market.
IPTV- Currently over 750k subscribers, up from 600k late last year. That is huge growth of 25% in a little over 2 months. Aside from wins/expansions in China, they won in Taiwan (Markwell cable), Sri Lanka Telecom (SLT) and a new customer in India. Rollouts will predominantly start in Q2 and there is the usual 6-9 month revenue lag so these are nice strategic wins. Market share in IPTV in China is greater than 65% and well over 80% in India. More info from Lu in China but momentum is growing and there are lots of "activity" in this area. IP Surveilance (2 wins in China, more from Lu later on).
For this division (IPTV/NGN), Peter mentions "Booking can ramp up fast" and revenue growth will in greater than 80% for 2008. The MCBU will have flat revenues due to the decline in PAS. Gross margins will be 35-40% (including STB). Overall, the revenue bookings have caught up to PAS decline, which is good news. Seventy percent of the revenues planned are already supported by existing bookings which give them greater certainty for 2008.
Broadband Business Unit (BBU)- This includes IP-DSLAM, IAN8000, GEPON, and Netring. This will have 15-20% revenue growth in 2008 and support triple/quadruple play buildouts using both copper/fiber. UT is one of top 5 vendors in GEPON worldwide. Netring is the optical product that is already in 3rd generation. Gross margins are going to be above 20% for every quarter in 2008. This is key because GMs are sometimes negative in 2007 with writedowns for poor performance previously. Thirty percent of the revenue planned has alreadyy been booked.
Services Unit- Flat revenues are expected for 2008 with 30% GMs. This is expectated to ramp in the following years due to the new equipment being installed with new customers in 2008 and beyond.
Terminals Business Unit (TBU) - Supports handset business (CDMA and PAS). Overall growth of 15% in 2008. Looking for additional growth in WCDMA and in area in telematics (won some initial contracts in automobile industry). GMs in low 20s range.
Customs Solutions Business Unit (CSBU) - Mostly includes technogy acquired from 3coms Commworks unit. This includes IP-based messaging and transaction products. Revenue is expected to double to $40m with GMs above 50%. This unit is also expected to be profitable in 2008. Blackmore mentioned some of the "none-core" assets are becoming very attractive and this along with the PCD definitely fits the bill. What is this business unit worth alone? The company paid $100m to 3com a few years ago and has finally gotten this to profitability this year and growing very fast. This alone could be worth close to $80m-$100m if sold (based on 2-2.5x revenue for this type of business - check Starent/Infinera for valuations).
Mobile Solutions Business Unit (MSBU) - This includes the moving media 9000 and supports IPCDMA, GSM solutions. Growth is in the 30% and gross margins in the 40s in 2008.
Note that the CSBU and MSBU are consolidated in the "other category".
PCD - "Continues to exceed expectations." Three new smart phones released including a touch screen phone in Sprint, ultra slim phone (1450 model metro pcs), and refresh of the Gzone phone (verizon). Shipped 2.8 million units and had record quarterly revenue of $560m with 6.2% GMs, (wow). Twenty five percent of units are internally made UT handsets.
Supply Chain comment - outsourcing of terminals business and improved inventory turns (improve by 35%). Overall margin improvement of 3%.
Peter summarizes (like a CEO) that they are focusing on building their core businesses and manage/divest none-core to benefit shareholder value.
Hong Lu followed with a China update. Recently, China regulatory change - Both telecom/broadcom operators can compete in each others field. CT/CN may be able to offer iptv freely throughout China. This is big news if indeed interpreted this way. Lu gave an update on iptv demand. STB shipments signficantly jumped in January to a 60k/month run rate from 20k/month late last year. Currently, it is at 40k/month. While the regulatory issue is not clearly resolved, CT/CN is ramping up iptv and has made it a priority for 2008. Hong stated that China iptv subscribers are about 500k at the end of January so China is the main growth driver for the company (as we know). China bookings is also expected to ramp up this year and will translate into major revenue streams in 2009 and beyond (as we have hoped for a long time).
Here is Tigre's posting regarding this topic this morning.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=150092&mid=150092&tof=3&frt=2
A second major change is the long talked about reorganization in the China telecom industry (probably as long awaited as 3G licenses). Anyway, the reorganization will probably have 3 major carriers with China Mobile, China Telecom, and China Unicom. Impact to UT is downward pressure on PAS. On the bright side, it will allow UT to sell CDMA handsets and broaden their customer base (since they can all compete in fix and mobile markets). Hong also mentioned packet mode technology is compelling since it has faster data rates than current CDMA/GSM data rates.
PAS gained market share in Q4 and early 2008 by switching to distribution model from direct sales model.
IPTV will take time to mature. I believe LU is being cautious to mention that it has not openned up completely and obviously it is just at the beginning. 70% market share (slightly higher than what Peter said).
IP survielance wins and Tunchin and Hangchou. Additional opportunities in government and health departments.
Using iptv to get into enterprise and advertising markets.
Upgrading PAS soft switch to release 5 and improving opportunities broadband access. and optical networks. Increased employee morale and higher business activity in China even with the Q4 restructuring. Government representatives/customer visited UT to show support.
Fran Barton discussed liquidity and financial results. Convertible notes due on March 1 was paid completely ("successfully"....hmmmm, not sure about that).
Going concern modification seemed very negative but is really based on historical actions. The company drained a ton of cash by paying the CB ($289m) and $92m for other short term debt.
The company is taking steps such as (1) Q4 restructuring, (2) refocu direct sales efforts to productive areas, (3) using OEM, (4) reducing inventory via improved supply chain/outsourcing, (5) potential sales of non-core assets (active ongoing discussions), (6) license/sale of patents, (7) additional lines of credits (public/private financing), and additional reductions.
At year end 2007, Cash/short term securities was $503m and $320m in debt. This is net $180m in cash. Currently, they have $228m in cash and only $48m in debt. Comment: Debt to equity ratio is down to less than 0.1. If they can sell additional assets or drive to profitability soon, the valuations start becoming very apparent.
Here is a summary of revenue in the business units in Q4, Q3 revenue comparison.
MCBU - $118m , 57m
BBU - $51m, 41m
TBU - $43m, $59m
CSBU - $6m, $2m
MSU - $1m, $10m
Service - $18m, $19m
PCD - $560m, $458m
Book to Bill was 0.8 - not bad considering the 25% increase in revenue from Q3 and traditionally strong revenue recognition in Q4.
GMs for business units (see filing)
Bad news - OPEX was $155m due to restructuring, non-cash impairments, and New taxes in China for Gemdale sale and other income taxes. The GMs for BBU was also negative with an $8m loss provision in India. I think the reason Barton did not preannounce was also because of these "hidden" negatives. While there is a lot of positives, its these kinds of things that make the market think twice. Heman Chou, one of the analysts asking a question asked Barton last quarter if there was any more write downs and Barton said no (my recollection). Barton NOW says he hopes he did not say anything foolish like that, but he did say no more writedowns last quarter and now this again.
2008 preliminary guidance - 3 to 6% revenue growth. This is above any estimates that I have seen specially on top of the $160m higher Q4 2007 revenue reported. GMs of 14 to 16% is what I expected. It is good in that BBU GMs are going to be above 20% every quarter (if there is no more surprises). Expenses for the first couple of quarters are still $115-120m (this is disappointing). For the back half of 2008, expenses will be under $110m (Barton mentioned the company would like it to be lower and KNOWS it has to be lower).
I will post again later regarding GMs of BUs and more anlaysis on 2008 and some of the Q&A, which had a lot of info.
Overall, very good call for 2008, and potentailly GREAT 2009. For the next 3 months, I would say neutral because Q1 is going to be worse and then things will start to improve dramatically. Based on the report and new items, I have much more questions and data to discuss with management in two weeks. I'll definitely circulate those thoughts to the group and we may have another shareholder cc before meeting with management.
Subscribe to:
Posts (Atom)
