I've been talking to a few shareholders and taking my notes from the earnings call but don't think I'll have time to do a full recap tonight so here are some initial thoughts.
One of the highlights of the call was Hong Lu's discussion on UTs role in the relief efforts in China. I was actually proud to be a UT shareholder because of the company's role in providing PAS equipment/24-hour tech support during this catastrophe.
The other highlight of the call for me was simply the consistent nature of the earnings call. There is "certainty" in the earnings call and an overall feeling that things are turning around. The management is also showing a lot of confidence that the turn around is working (they actually have a analyst meeting planned in June) but yet know there is a lot of work ahead. Here are some detailed items to be positive about:
1. Management reaffirmed 2008 cash flow (breakeven), GMs, revenues for each of the business units. Upside to guidance was discussed by one of the analysts but management would like to get through Q2 first before making any calls.
2. PCD is doing exceptional with a record 7.6% gross margins. The book to bill for PCD is also at 1.3 and overall margins of 6-6.5% should be met for the year.
3. Still in active discussions to divest none-core assets. Analysts did a good job in trying to get information from management about divestitures and Peter reiterated their focus is on the "core" businesses. There are also those external professional service expenses that may be due to all the "active discussions" :-)
4. Patents brought in $2m.
5. Second half expenses will be $110m or lower per quarter. Headcount reduced by 16% (up from initial 11%).
6. Hardly any iptv revenues were recognized, setting the stage for the 2nd half of the year.
7. IPTV at 850k (100k or 13% increase sequentially). Margins are healthy. China subs increased to 583k
8. Strategic contract with SARAFT.
9. PAS, packet data doing well. There was even a 50k handset order from Beijing for the olympics and packet data being implemented in Beijing (100k+ users).
10. Book to bill of 1.2.
The one major negative is Q2 will still be "bad" as expected but Q3 & Q4 will definitely be closer to breakeven as OPEX significantly goes down.
I don't have a crystal ball for tomorrow and its close to the $5 max pain on options expirations day so thats probably where it will settle in. I do believe the stock should continue to trend up for the rest of the year as the company continues its progress. Have a good Friday to everyone.
Thursday, May 15, 2008
Wednesday, May 14, 2008
Night before earnings
Twas the night before earnings, when all through the market
Not a creature was stirring, not even a short;
The preannouncement was delivered by the company with care,
In hopes that the bull will be there;
The longs were nestled all snug in their beds;
While visions of large gains danced in their heads........
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Most of the shareholders are focused on the recent stock run and tomorrow's earnings (as they should). However, I want to discuss valuation to remind people how "cheap" the stock is. The company went into a strategic alternative study in 2006 because it decided it was undervalued. The stock went form $6-7 to $10-11. Is the company better off now? Definitely. Significantly better. The market cap of $550m doesn't reflect a company that is the leader in iptv in multiple major countries. It doesn't reflect a company with net cash that is half the market cap. It doesn't reflect a company that has been investing heavily in their core technologies and competing and winning against companies 10, 20, 50x larger than they are.
Tonight, there is an article about Ericsson earmarking $25 Billion in R&D over the next 5 years. http://www.unstrung.com/document.asp?doc_id=153872
"Speaking at Ericsson’s Capital Markets Day event today, executive vice president and CFO Hans Vestberg said that in the first quarter of this year Ericsson focused R&D efforts on LTE, IPTV, and Ericsson mobile platforms. Ericsson’s R&D spend for the first quarter was $1.4 billion, which is up 30 percent from the company’s first quarter 2007 R&D expense of $1.07 billion."
UT spends about $40m/quarter compared to Ericsson's $1.4 billion. And UTStarcom has an end to end iptv system. That compares to other iptv system that require 5 or 6 companies scrapping together different components. In the long term, UT will get bought in my opinion. The company can compete due to spending a good chunk of their PAS profits over the years and will do well as the iptv, broadband, ngn, and pcd units ramp.
With literally billions in revenue up for grabs, UT will become more and more an ideal target for other companies. Countries that do not have home grown infrastructure companies like Brazil, India, etc could even "buy" the company just for the technology.
Anyway, just some thoughts on valuation before tomorrow's call. Good night everyone and pleasant dreams :-)
Not a creature was stirring, not even a short;
The preannouncement was delivered by the company with care,
In hopes that the bull will be there;
The longs were nestled all snug in their beds;
While visions of large gains danced in their heads........
---------------------------------------------------------
Most of the shareholders are focused on the recent stock run and tomorrow's earnings (as they should). However, I want to discuss valuation to remind people how "cheap" the stock is. The company went into a strategic alternative study in 2006 because it decided it was undervalued. The stock went form $6-7 to $10-11. Is the company better off now? Definitely. Significantly better. The market cap of $550m doesn't reflect a company that is the leader in iptv in multiple major countries. It doesn't reflect a company with net cash that is half the market cap. It doesn't reflect a company that has been investing heavily in their core technologies and competing and winning against companies 10, 20, 50x larger than they are.
Tonight, there is an article about Ericsson earmarking $25 Billion in R&D over the next 5 years. http://www.unstrung.com/document.asp?doc_id=153872
"Speaking at Ericsson’s Capital Markets Day event today, executive vice president and CFO Hans Vestberg said that in the first quarter of this year Ericsson focused R&D efforts on LTE, IPTV, and Ericsson mobile platforms. Ericsson’s R&D spend for the first quarter was $1.4 billion, which is up 30 percent from the company’s first quarter 2007 R&D expense of $1.07 billion."
UT spends about $40m/quarter compared to Ericsson's $1.4 billion. And UTStarcom has an end to end iptv system. That compares to other iptv system that require 5 or 6 companies scrapping together different components. In the long term, UT will get bought in my opinion. The company can compete due to spending a good chunk of their PAS profits over the years and will do well as the iptv, broadband, ngn, and pcd units ramp.
With literally billions in revenue up for grabs, UT will become more and more an ideal target for other companies. Countries that do not have home grown infrastructure companies like Brazil, India, etc could even "buy" the company just for the technology.
Anyway, just some thoughts on valuation before tomorrow's call. Good night everyone and pleasant dreams :-)
Tuesday, May 13, 2008
Q1 2008 Earnings Call Preview
Credibility. Once lost, its hard to get back. Its been 12 consecutive quarters in the red and even with the upside preannouncement, it will be another quarter of operational losses. However, there are clear, steady, and material progress that the street can no longer ignore and thus the rally in the stock lately. I re-read the Q3 and Q4 earnings call transcripts to review the progress on the turnaround and to preview the upcoming Q1 call. Unlike the earnings call in 2005 and 2006, management seems to have a unified turnaround plan, communicating it with the investment community, and more importantly benchmarking their progress. Credibility will only be gained through better performance and will take several good quarters but I could not be happier with the share price and progress at this stage of the turnaround. There is a lot of work still to be done but I give management and the employees much credit for the recent turnaround.
Overall, Peter Blackmore, Fran Barton, and Hong Lu have communicated well during the last couple of conference calls and I'm sure they will provide a wealth of information this coming Thursday. I've come up with a list of items that hopefully they will address in the coming call.
OEM Agreement - Peter talked about using both local and worldwide OEM partners and having signed 1 global Asian partner. Improvements in supply chain and inventory control were to be implemented by Q1. This is essential in improving cash flow, lowering expenses and increasing margins.
FMC - Brazil Telecom was mentioned as starting to use UTs fixed mobile convergence product for their 3.7m GSM subs. We have not seen much progress/contracts for FMC for the last few years.
Russia - Russia was briefly mentioned in the Q3 call but no details/contracts have been mentioned. Russia is part of the BRIC countries that major institutional investors are focused on and progress in Russia would be very attractive to round out the successes in Brazil, India, and China.
BSNL IPTV - UT has had a lot of success in India and have BSNL as a major customer for broadband equipment. We know they have been trialing iptv for over a year.
Progress in China - Hong Lu has been in China for almost a year and aside from stabilizing the situation when Ying Wu left, his goal was to increase revenue from sources outside of PAS and iptv. However, aside from a couple of ip surveilance contracts, there have not been concrete news. Broadband/gepon/optical etc were supposed to be getting traction. Also, Hong mentioned extending PAS via the 128k packet data and selling associated equipment with it. However, there has been no concrete details.
Patent Program - Fran Barton mentioned this in the Q3 earnings cc and part of the cash generation plan.
Building Lease - Management has talked about leasing extra space in the Hangzhou building to generate some income from this asset.
Sale of None-core Assets - From the time the business units were separated to core and none-core, expectations of divestitures have been high and mentioned several times during the last earnings call, where the management mentioned it was in "active" discussions.
Stock Buyback - Have I talked about this before?? :-)
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On a side "trading" note, the stock has had a good run and you all know how I feel about the valuation but certain traders have bought $5 calls for this Friday. Seems like a stretch but good luck to them :-) If Google can go from $450 to $545 in a day, why not UT?
Overall, Peter Blackmore, Fran Barton, and Hong Lu have communicated well during the last couple of conference calls and I'm sure they will provide a wealth of information this coming Thursday. I've come up with a list of items that hopefully they will address in the coming call.
OEM Agreement - Peter talked about using both local and worldwide OEM partners and having signed 1 global Asian partner. Improvements in supply chain and inventory control were to be implemented by Q1. This is essential in improving cash flow, lowering expenses and increasing margins.
FMC - Brazil Telecom was mentioned as starting to use UTs fixed mobile convergence product for their 3.7m GSM subs. We have not seen much progress/contracts for FMC for the last few years.
Russia - Russia was briefly mentioned in the Q3 call but no details/contracts have been mentioned. Russia is part of the BRIC countries that major institutional investors are focused on and progress in Russia would be very attractive to round out the successes in Brazil, India, and China.
BSNL IPTV - UT has had a lot of success in India and have BSNL as a major customer for broadband equipment. We know they have been trialing iptv for over a year.
Progress in China - Hong Lu has been in China for almost a year and aside from stabilizing the situation when Ying Wu left, his goal was to increase revenue from sources outside of PAS and iptv. However, aside from a couple of ip surveilance contracts, there have not been concrete news. Broadband/gepon/optical etc were supposed to be getting traction. Also, Hong mentioned extending PAS via the 128k packet data and selling associated equipment with it. However, there has been no concrete details.
Patent Program - Fran Barton mentioned this in the Q3 earnings cc and part of the cash generation plan.
Building Lease - Management has talked about leasing extra space in the Hangzhou building to generate some income from this asset.
Sale of None-core Assets - From the time the business units were separated to core and none-core, expectations of divestitures have been high and mentioned several times during the last earnings call, where the management mentioned it was in "active" discussions.
Stock Buyback - Have I talked about this before?? :-)
------------------------------------------------------------------
On a side "trading" note, the stock has had a good run and you all know how I feel about the valuation but certain traders have bought $5 calls for this Friday. Seems like a stretch but good luck to them :-) If Google can go from $450 to $545 in a day, why not UT?
Sunday, May 11, 2008
UT capital expenditures and working capital requirements
Recently, I have been posting about a stock buyback and have gotten some comments on the working capital needs of the company. From the company proxy statement discussing the repricing of employee stock options and why the stock has gone down,
"Prior to 2005, over 90% of the Company's revenues and profits were derived from sales in China of a second generation (" 2G ") wireless technology system. In the latter half of 2004, it was widely believed by companies engaged in the Chinese telecommunications market that the Chinese government would begin issuing licenses for the sale of third generation (" 3G ") wireless technologies in early 2005. In anticipation of such action by the Chinese government, our operator customers dramatically reduced their 2G capital expenditures. At the same time, with the intention of replacing our 2G revenues, we developed a full suite of 3G products to sell in China and also initiated a capital intensive strategy of global diversification. The Chinese government, however, never issued the expected 3G licenses, thus preventing us from selling any of our 3G products, and our global diversification has yet to yield results sizeable enough to offset the decline in China. We believe our stock price, which has fallen significantly over the past few years, reflects, among other things, the dramatic reduction in our China sales."
Due to the unforseen windfall in gemdale (mostly) and infinera and the initial progress in the company's "cash generation plans", the company has a net cash position of $269m by the end of Q1, 2008. Aside from the net cash position at the end of 2006 where it hit $300m, it has not been that high since the initial ipo. The difference between the end of 2006 and now is that the company faced another 5 quarters or so of burning $40-50 million of their cash while the company now is close to breaking even by the end of the year and getting their cost basis right (we hope). I always have some doubts due to the history but most people will look at the last 8 months and say this time, its more conceivable that the company is conservative and will reach breakeven/profitability at their forecasted timeframe. Peter Blackmore's statement on the state of the turnaround and preliminary Q1 numbers are very encouraging.
Now, lets get back to the capital expenditure and capital requirements. Quarterly expenditures previously had been as high as $185m+ and the company took the steps to write down their 3G businesses. The other major "reason" for their massive cash expenditures is the global expansion, specifically in India. The difference now is that gross margins are not 3% (in 2007) but over 20% in India and multiple wins in triple play business in India show the company is on the uptrend and actually setting the pace there.
During the March 17 meeting, one major focus was capital expenditures and most of the R&D now is focused towards NGN/iptv (some broadband/pcd). The company is forecasting expenses to go from the $120m level to under $110m by the end of the year. This should coincide with PAS slowdown. As PAS slows down, the SG&A portion should decline at similar rates.
Over the years, the company spent $100m for the Commworks division of 3com and $165m (plus debt) for the PCD of Audiovoxx. The commworks division will be profitable and is designated as none-core so it could actually be sold and bring in substantial cash (and reduce expenses to boot). We've talked about the PCD doing well. Other initiatives such as wimax, fixed mobile convergence, etc are on close watch where Blackmore is being careful on weighing the benefits/risk/rewards to continuing or pursuing deals.
In short, I don't see any major capital expenditures on the horizon and see gradual decline of OPEX. Cash generation from leasing the buildings, using OEMs (inventory reduction/efficiencies), licening of patents, AND the lack of massive costs for interest payments, options/China investigations, quarterly filings (as Barton mentioned, how many times have they redone the 2002 quarterly reports?). Add the fact that their accounting systems may be close to being completely installed/functional (thus providing more savings in head count) and you see that OPEX should be declining, cash should be building.
Rather than expecting an "acquisition", we have been anxiously waiting for divestitures. The company can only invest so much in iptv/NGN that is prudent and at a certain point the markets have to open up for them to consider putting MORE money (they are already putting in a lot for their "mature" systems).
Anyway, unless they are planning on a massive expense cycle in the upcoming year (which is unknown to us that follow the company closely), I don't see "liquidity" issues or even need to build massively on working capital. Shareholders are not asking to buy 50% of the float here but enough to make a material statement and reduction in the current float.
In summary, a stock buyback should be announced and implemented while the stock is "low".
"Prior to 2005, over 90% of the Company's revenues and profits were derived from sales in China of a second generation (" 2G ") wireless technology system. In the latter half of 2004, it was widely believed by companies engaged in the Chinese telecommunications market that the Chinese government would begin issuing licenses for the sale of third generation (" 3G ") wireless technologies in early 2005. In anticipation of such action by the Chinese government, our operator customers dramatically reduced their 2G capital expenditures. At the same time, with the intention of replacing our 2G revenues, we developed a full suite of 3G products to sell in China and also initiated a capital intensive strategy of global diversification. The Chinese government, however, never issued the expected 3G licenses, thus preventing us from selling any of our 3G products, and our global diversification has yet to yield results sizeable enough to offset the decline in China. We believe our stock price, which has fallen significantly over the past few years, reflects, among other things, the dramatic reduction in our China sales."
Due to the unforseen windfall in gemdale (mostly) and infinera and the initial progress in the company's "cash generation plans", the company has a net cash position of $269m by the end of Q1, 2008. Aside from the net cash position at the end of 2006 where it hit $300m, it has not been that high since the initial ipo. The difference between the end of 2006 and now is that the company faced another 5 quarters or so of burning $40-50 million of their cash while the company now is close to breaking even by the end of the year and getting their cost basis right (we hope). I always have some doubts due to the history but most people will look at the last 8 months and say this time, its more conceivable that the company is conservative and will reach breakeven/profitability at their forecasted timeframe. Peter Blackmore's statement on the state of the turnaround and preliminary Q1 numbers are very encouraging.
Now, lets get back to the capital expenditure and capital requirements. Quarterly expenditures previously had been as high as $185m+ and the company took the steps to write down their 3G businesses. The other major "reason" for their massive cash expenditures is the global expansion, specifically in India. The difference now is that gross margins are not 3% (in 2007) but over 20% in India and multiple wins in triple play business in India show the company is on the uptrend and actually setting the pace there.
During the March 17 meeting, one major focus was capital expenditures and most of the R&D now is focused towards NGN/iptv (some broadband/pcd). The company is forecasting expenses to go from the $120m level to under $110m by the end of the year. This should coincide with PAS slowdown. As PAS slows down, the SG&A portion should decline at similar rates.
Over the years, the company spent $100m for the Commworks division of 3com and $165m (plus debt) for the PCD of Audiovoxx. The commworks division will be profitable and is designated as none-core so it could actually be sold and bring in substantial cash (and reduce expenses to boot). We've talked about the PCD doing well. Other initiatives such as wimax, fixed mobile convergence, etc are on close watch where Blackmore is being careful on weighing the benefits/risk/rewards to continuing or pursuing deals.
In short, I don't see any major capital expenditures on the horizon and see gradual decline of OPEX. Cash generation from leasing the buildings, using OEMs (inventory reduction/efficiencies), licening of patents, AND the lack of massive costs for interest payments, options/China investigations, quarterly filings (as Barton mentioned, how many times have they redone the 2002 quarterly reports?). Add the fact that their accounting systems may be close to being completely installed/functional (thus providing more savings in head count) and you see that OPEX should be declining, cash should be building.
Rather than expecting an "acquisition", we have been anxiously waiting for divestitures. The company can only invest so much in iptv/NGN that is prudent and at a certain point the markets have to open up for them to consider putting MORE money (they are already putting in a lot for their "mature" systems).
Anyway, unless they are planning on a massive expense cycle in the upcoming year (which is unknown to us that follow the company closely), I don't see "liquidity" issues or even need to build massively on working capital. Shareholders are not asking to buy 50% of the float here but enough to make a material statement and reduction in the current float.
In summary, a stock buyback should be announced and implemented while the stock is "low".
Saturday, May 10, 2008
Value of UTStarcom's PCD
I've written about UTs PCD and its potential sale before. This division has been designated as none-core so its natural to speculate how much UT can take in. Here is an initial background post in December 2007 where I discuss the PCD and Motorola's own handset division.
http://utstarcom-stocknews.blogspot.com/2007/12/motorola-palm-and-uts-pcd.html
Overall, worldwide handsets are set to grow again in 2008 but not everyone is doing well. The industry is fragmented and consolidation is ripe with Nokia leading the market and approaching 40% market share. In addition to Motorola seeking to sell its division, the following developments have taken place.
Lenovo - "PC maker Lenovo Group said yesterday (Feb 2008) it will offload its handset business for $100 million to a group of private equity firms to boost profitability."
http://english.peopledaily.com.cn/90001/90776/90884/6349259.html
"Lenovo's handsets were sold primarily in China, accounting for $108 million in revenue during the quarter ended on Dec. 31, 2007. That figure represented 2.4 percent of the company's total sales during that period. During the quarter, the company reported that handset shipments declined by 31 percent compared to the previous year."
The company eventually unloaded the division on March 31. I don't have a yearly revenue but extrapolating the quarterly revenue of $108m, it was probably around $400m/year but revenue was declining substantially and most if not all of the sales were in China. I also doubt if it was profitable.
http://www.pacificepoch.com/newsredirect/120576_0_1_0_C/
Huawei - "China's Huawei is reported to be considering selling a stake in its mobile phones division to foreign investors in exchange for access to the US market." "The company doesn't publicly release breakdowns of the revenues or profits of different divisions, but the sources told the newspaper that the division up for sale is profitable and that the sale isn't meant as an exit from the business. The company was recently reports as aiming to increase its handset production to 50 million units per year. Huawei currently outsources its handset manufacturing to Thailand based Cal-Comp Electronics and Singapore headquartered Flextronics."
http://www.cellular-news.com/story/31057.php
ZTE - "ZTE USA, the United States subsidiary to Chinese company ZTE, today announced that MetroPCS has signed an agreement to purchase ZTE’s CDMA PCS and AWS handsets. The agreement marks the company’s first handset customer in the United States."
ZTE and Huawei both want to get into the North American market and have often been mentioned as potential bidders for Motorola's handset division although the size of Motorola may preclude that.
http://telephonyonline.com/wireless/news/zte_handsets_USA_121907/
UTStarcom - 2007 sales of the PCD was at $1.664 billion, up from $1.34 billion in 2006 and $1.37 billion in 2005. The company shipped 2.8 million units and had record quarterly revenues in Q4 2007 of $560m and 6.2% GMs. Profit margins in 2005 and 2006 had been 4 and 3% respectively while it improved to 6% in 2007. For 2008, revenue is expected to be 1.74 billion and bring in gross profits of about $104m (up from $94m). The margins doubled from 2006 to 2007 due to higher average selling prices and large inventory write downs in 2006. Overall, the company shipped 1.5m units more in 2007 compared to 2006.
Impact of PCD to UTs bottom line - In 2007, the PCD made up 67% of the company's overall revenue and 30% of gross profits so even though it is "none-core", it has become a vital part of the company. About 35% of the revenue come from internally designed hand sets, up from 10% just a few years ago. At the same ratio, revenue from internal designed handsets will be 608m and 1130m for the resale component. If the company was to keep the internally designed portion and sell the "resale" portion, revenues will still be about $1.5 billion. We don't know what the exact margins for each division but assuming 12% GMs for the internal handset portion, the resale part will have GMs of 2.8%. Profit breakdown will be $73m and $31m.
Valuation - For the entire PCD, I am estimating it could be worth about $500m (higher revenue multiple from the Lenovo sale) due to its North American customers, increasing revenue and average unit selling prices. The division is very profitable and would be an attractive acquisition. From previous discussions, it is very difficult to get into the North American market and establish good relationship with the Verizons etc. The company has also mentioned it is on its 3rd generation of handsets and see continued growth. Based on gross profit breakdown, the separate portions could be worth $350m and $150m (5x gross profit) respectively. If the company keeps the internal design portion and hit their target of 25% of revenue for SG&A and R&D, that would be about $400m in yearly expenses (based on $1.6b of revenue in 2009 without the resale portion of PCD). That would average out to $100m/quarter. The company is targetting to get under $110m by Q4 of 2008.
Impact on 2009 earnings - Using some rough numbers at this point, the company could have $2.8b in sales and overall GMs of 16% (using Q1 GM). That would yield $450m in gross profits and yield to about breakeven if the company reduces expenses to under $110m per quarter (add in stockbased expenses/taxes). The company could sell other none-core assets to raise cash or take in massive cash from a sale of PCD but it would impact earnings in 2009 as the other business units will not be close to making up for the loss gross profits (obviously). Either way, expenses need to go down and a sale of none-core assets is expected. We'll keep up with the news with Huawei and Motorola (and other handset news) but in general the PCD is a valuable asset that can be sold to raise significant amount of cash or maintain their enormous quarterly expenses until the core business units can become profitable on their own.
http://utstarcom-stocknews.blogspot.com/2007/12/motorola-palm-and-uts-pcd.html
Overall, worldwide handsets are set to grow again in 2008 but not everyone is doing well. The industry is fragmented and consolidation is ripe with Nokia leading the market and approaching 40% market share. In addition to Motorola seeking to sell its division, the following developments have taken place.
Lenovo - "PC maker Lenovo Group said yesterday (Feb 2008) it will offload its handset business for $100 million to a group of private equity firms to boost profitability."
http://english.peopledaily.com.cn/90001/90776/90884/6349259.html
"Lenovo's handsets were sold primarily in China, accounting for $108 million in revenue during the quarter ended on Dec. 31, 2007. That figure represented 2.4 percent of the company's total sales during that period. During the quarter, the company reported that handset shipments declined by 31 percent compared to the previous year."
The company eventually unloaded the division on March 31. I don't have a yearly revenue but extrapolating the quarterly revenue of $108m, it was probably around $400m/year but revenue was declining substantially and most if not all of the sales were in China. I also doubt if it was profitable.
http://www.pacificepoch.com/newsredirect/120576_0_1_0_C/
Huawei - "China's Huawei is reported to be considering selling a stake in its mobile phones division to foreign investors in exchange for access to the US market." "The company doesn't publicly release breakdowns of the revenues or profits of different divisions, but the sources told the newspaper that the division up for sale is profitable and that the sale isn't meant as an exit from the business. The company was recently reports as aiming to increase its handset production to 50 million units per year. Huawei currently outsources its handset manufacturing to Thailand based Cal-Comp Electronics and Singapore headquartered Flextronics."
http://www.cellular-news.com/story/31057.php
ZTE - "ZTE USA, the United States subsidiary to Chinese company ZTE, today announced that MetroPCS has signed an agreement to purchase ZTE’s CDMA PCS and AWS handsets. The agreement marks the company’s first handset customer in the United States."
ZTE and Huawei both want to get into the North American market and have often been mentioned as potential bidders for Motorola's handset division although the size of Motorola may preclude that.
http://telephonyonline.com/wireless/news/zte_handsets_USA_121907/
UTStarcom - 2007 sales of the PCD was at $1.664 billion, up from $1.34 billion in 2006 and $1.37 billion in 2005. The company shipped 2.8 million units and had record quarterly revenues in Q4 2007 of $560m and 6.2% GMs. Profit margins in 2005 and 2006 had been 4 and 3% respectively while it improved to 6% in 2007. For 2008, revenue is expected to be 1.74 billion and bring in gross profits of about $104m (up from $94m). The margins doubled from 2006 to 2007 due to higher average selling prices and large inventory write downs in 2006. Overall, the company shipped 1.5m units more in 2007 compared to 2006.
Impact of PCD to UTs bottom line - In 2007, the PCD made up 67% of the company's overall revenue and 30% of gross profits so even though it is "none-core", it has become a vital part of the company. About 35% of the revenue come from internally designed hand sets, up from 10% just a few years ago. At the same ratio, revenue from internal designed handsets will be 608m and 1130m for the resale component. If the company was to keep the internally designed portion and sell the "resale" portion, revenues will still be about $1.5 billion. We don't know what the exact margins for each division but assuming 12% GMs for the internal handset portion, the resale part will have GMs of 2.8%. Profit breakdown will be $73m and $31m.
Valuation - For the entire PCD, I am estimating it could be worth about $500m (higher revenue multiple from the Lenovo sale) due to its North American customers, increasing revenue and average unit selling prices. The division is very profitable and would be an attractive acquisition. From previous discussions, it is very difficult to get into the North American market and establish good relationship with the Verizons etc. The company has also mentioned it is on its 3rd generation of handsets and see continued growth. Based on gross profit breakdown, the separate portions could be worth $350m and $150m (5x gross profit) respectively. If the company keeps the internal design portion and hit their target of 25% of revenue for SG&A and R&D, that would be about $400m in yearly expenses (based on $1.6b of revenue in 2009 without the resale portion of PCD). That would average out to $100m/quarter. The company is targetting to get under $110m by Q4 of 2008.
Impact on 2009 earnings - Using some rough numbers at this point, the company could have $2.8b in sales and overall GMs of 16% (using Q1 GM). That would yield $450m in gross profits and yield to about breakeven if the company reduces expenses to under $110m per quarter (add in stockbased expenses/taxes). The company could sell other none-core assets to raise cash or take in massive cash from a sale of PCD but it would impact earnings in 2009 as the other business units will not be close to making up for the loss gross profits (obviously). Either way, expenses need to go down and a sale of none-core assets is expected. We'll keep up with the news with Huawei and Motorola (and other handset news) but in general the PCD is a valuable asset that can be sold to raise significant amount of cash or maintain their enormous quarterly expenses until the core business units can become profitable on their own.
Weekly recap - Stock traded above $4
The stock closed the week at $3.91, up around 18% for the week on the back of positive preannouncement from the company. The stock is still off about 60+ percent from the 2007 highs but up from the 2008 lows of $2.23.
Company preannounces positive Q1 results - See previous posting. The following describes the current situation properly,
"Since announcing our new corporate strategy in September 2007, we have made a good deal of progress," said Peter Blackmore, UTStarcom's president and chief operating officer. "These preliminary results reflect that progress, plus we benefited from some positive one time factors. There is still a lot of work to do in our turnaround, but we are on track with where we expected to be."
Before this week's announcement, there has been a lot of progress in settling lingering issues such as the delayed financials, options/China investigations, strategic direction of the company, control of the company, convertible bond overhang, internal control issues, communication with the investment community. However, there has been little signs of operational improvements with the company losing 40-50 cents/quarter and burning a lot of cash. As Blackmore mentioned in the PR, there is now tangible effects of the improvements showing up. Again, it is hard to get overly excited about certain contract wins when we investors don't know the value. Everthing up to this point has been "strategic" and "have faith". Remember, the company expenses have not gone down materially at over $120m so it is "expected" that they will win contracts. This weeks announcement do show their cash generation steps are working improving cash to $305m and lowering debt to $36m. Gross margins were guided up from 13% to 15-16%. This is significant because revenues also were guided up to $580-590m from $500-520m. Its not easy to move GMs up 300 basis points when the bulk of revenue comes from the low margin PCD.
I am definitely upbeat due to the stock price gains but this is off all-time low base. It is encouraging that management is more cautious and see this turnaround in the proper context. Just last week, Brian Caskey mentioned the 3 million iptv capacity as not very large and this week Blackmore citing progress but saying much more work needs to be done. Obviously, there has to be progress in expense reduction, sale of none-core assets, and maximizing their return on investment. The last item I touched upon on the last post regarding a share buy back. The company is not in the real-estate or investement banking/trading business so it should buy back shares at the current low prices.
Triple Play contract in GOA, India - "The end-to-end network will provide more than 100,000 subscribers in Goa with high-speed access to several new services including broadcast-quality IPTV and e-Governance applications." http://biz.yahoo.com/prnews/080508/aqth036.html?.v=57
Post of week - This one goes to Tigre for his recap of the significance of the GOA win. "Today's triple-play contract in Goa, following previously announced GEPON contract in that Indian state, billed today as "first deployment of IPTV, GEPON and NGN solutions on a single network," is a great illustration of the new sales approach adopted by UTSI to bundle broadband, NGN softswitch, and IPTV in one potent package to enhance the appeal of its products to potential customers, and thus gain more revenue and overall corporate margin as a result."
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151975&mid=151975&tof=9&frt=1
Price targets and analyst/institutional actions - Tigre adds, "Who knows, I might even have to raise my target stock price for end of this year, but I'd wait a bit for more signs that Blackmore can execute the strategy that he has put in place. " For the record, Tigre has a $5 target at the end of the year or early next year and I have a $10 target. At the end of the year, we'll see who can sell their crystal ball :-)
"So, my current end of the year target assuming they get to profitability is $8-9. I'll round up the target to $10 with the shorts giving it a $1 premium :-) Most of the analysts agree that the downside is limited (as also shown above) but are wary of the profitability/timing (hence the discount). As an investor/trader, we have to look at risk/rewards and it is looking like the biggest risk is opportunity cost. Of course, in this current market, the opportunity cost is not too great (unless you are shorting). The above is why I and most longs are sticking with this company. Because if management can get their act together, the stock should move significantly higher from here." http://utstarcom-stocknews.blogspot.com/2008/01/current-liquidity-and-2008-year-end.html
Except for BWS, most price targets are in the $3-3.5 range. S&P had a $11 price target early in 2007 and now has a $3.5 price target. As the stock goes up and the quarterly results start to show tangible progress, the stock price targets will start to go up.
Earnings report and cc on May 15 - It is nice to see the company back in a somewhat regular reporting cycle and investors can gauge their progress in the turnaround. The upcoming call will be close to the 1-yr anniversary (end of May 2007) when the company made the announcement to do nothing from the strategic study they started in 2006 (and once again implied they can do better by changing course - lets hope they stay committed/focused on the current track and get the stock price up). It will also be the last major opportunity for the company to communicate prior to the shareholder meeting in June (and Blackmore's transition to CEO). In a future post, I'll put out some topics that hopefully management will go over. Sometimes, management talks about certain items in one CC and then there are no more updates (such as the one signed OEM, selling/licening of patents, selling of none-core assets, stock buy back, etc).
Shareholder meeting - This is still at the end of June but people should plan to go. During Ford Motor's meeting only 56 people attended! For UT, it was 3 people in 2006 and about 11 in 2007. You will get a chance to ask some questions and meet management. I encourage people to go to have more confidence in the company. Those people that went on March 17 during the market lows probably got more confidence in holding their shares or even adding. So, there are "benefits" to going (yes, venting is a good benefit as well :-). Otherwise, you'll have to rely on my reporting and crystal ball, which hasn't been the best the last few years but my technicians say they have fixed the bugs for the last 3 years and should work fine now :-)
Have a great rest of the weekend and Happy Mothers Day to all mothers out there.
Company preannounces positive Q1 results - See previous posting. The following describes the current situation properly,
"Since announcing our new corporate strategy in September 2007, we have made a good deal of progress," said Peter Blackmore, UTStarcom's president and chief operating officer. "These preliminary results reflect that progress, plus we benefited from some positive one time factors. There is still a lot of work to do in our turnaround, but we are on track with where we expected to be."
Before this week's announcement, there has been a lot of progress in settling lingering issues such as the delayed financials, options/China investigations, strategic direction of the company, control of the company, convertible bond overhang, internal control issues, communication with the investment community. However, there has been little signs of operational improvements with the company losing 40-50 cents/quarter and burning a lot of cash. As Blackmore mentioned in the PR, there is now tangible effects of the improvements showing up. Again, it is hard to get overly excited about certain contract wins when we investors don't know the value. Everthing up to this point has been "strategic" and "have faith". Remember, the company expenses have not gone down materially at over $120m so it is "expected" that they will win contracts. This weeks announcement do show their cash generation steps are working improving cash to $305m and lowering debt to $36m. Gross margins were guided up from 13% to 15-16%. This is significant because revenues also were guided up to $580-590m from $500-520m. Its not easy to move GMs up 300 basis points when the bulk of revenue comes from the low margin PCD.
I am definitely upbeat due to the stock price gains but this is off all-time low base. It is encouraging that management is more cautious and see this turnaround in the proper context. Just last week, Brian Caskey mentioned the 3 million iptv capacity as not very large and this week Blackmore citing progress but saying much more work needs to be done. Obviously, there has to be progress in expense reduction, sale of none-core assets, and maximizing their return on investment. The last item I touched upon on the last post regarding a share buy back. The company is not in the real-estate or investement banking/trading business so it should buy back shares at the current low prices.
Triple Play contract in GOA, India - "The end-to-end network will provide more than 100,000 subscribers in Goa with high-speed access to several new services including broadcast-quality IPTV and e-Governance applications." http://biz.yahoo.com/prnews/080508/aqth036.html?.v=57
Post of week - This one goes to Tigre for his recap of the significance of the GOA win. "Today's triple-play contract in Goa, following previously announced GEPON contract in that Indian state, billed today as "first deployment of IPTV, GEPON and NGN solutions on a single network," is a great illustration of the new sales approach adopted by UTSI to bundle broadband, NGN softswitch, and IPTV in one potent package to enhance the appeal of its products to potential customers, and thus gain more revenue and overall corporate margin as a result."
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=151975&mid=151975&tof=9&frt=1
Price targets and analyst/institutional actions - Tigre adds, "Who knows, I might even have to raise my target stock price for end of this year, but I'd wait a bit for more signs that Blackmore can execute the strategy that he has put in place. " For the record, Tigre has a $5 target at the end of the year or early next year and I have a $10 target. At the end of the year, we'll see who can sell their crystal ball :-)
"So, my current end of the year target assuming they get to profitability is $8-9. I'll round up the target to $10 with the shorts giving it a $1 premium :-) Most of the analysts agree that the downside is limited (as also shown above) but are wary of the profitability/timing (hence the discount). As an investor/trader, we have to look at risk/rewards and it is looking like the biggest risk is opportunity cost. Of course, in this current market, the opportunity cost is not too great (unless you are shorting). The above is why I and most longs are sticking with this company. Because if management can get their act together, the stock should move significantly higher from here." http://utstarcom-stocknews.blogspot.com/2008/01/current-liquidity-and-2008-year-end.html
Except for BWS, most price targets are in the $3-3.5 range. S&P had a $11 price target early in 2007 and now has a $3.5 price target. As the stock goes up and the quarterly results start to show tangible progress, the stock price targets will start to go up.
Earnings report and cc on May 15 - It is nice to see the company back in a somewhat regular reporting cycle and investors can gauge their progress in the turnaround. The upcoming call will be close to the 1-yr anniversary (end of May 2007) when the company made the announcement to do nothing from the strategic study they started in 2006 (and once again implied they can do better by changing course - lets hope they stay committed/focused on the current track and get the stock price up). It will also be the last major opportunity for the company to communicate prior to the shareholder meeting in June (and Blackmore's transition to CEO). In a future post, I'll put out some topics that hopefully management will go over. Sometimes, management talks about certain items in one CC and then there are no more updates (such as the one signed OEM, selling/licening of patents, selling of none-core assets, stock buy back, etc).
Shareholder meeting - This is still at the end of June but people should plan to go. During Ford Motor's meeting only 56 people attended! For UT, it was 3 people in 2006 and about 11 in 2007. You will get a chance to ask some questions and meet management. I encourage people to go to have more confidence in the company. Those people that went on March 17 during the market lows probably got more confidence in holding their shares or even adding. So, there are "benefits" to going (yes, venting is a good benefit as well :-). Otherwise, you'll have to rely on my reporting and crystal ball, which hasn't been the best the last few years but my technicians say they have fixed the bugs for the last 3 years and should work fine now :-)
Have a great rest of the weekend and Happy Mothers Day to all mothers out there.
Thursday, May 8, 2008
Valuation and speculation regarding UTs cash
$305m in cash/securities and $36m in debt. That is a net cash of $269m for a company with a market cap of $476m. Thats 57% of the market cap in cash. Their real estate assets have been in the $200-220m all these years despite the significant rise in China real estate and the fact that commodities have significantly gone up (that translates to significantly higher building costs if one was to build the same building today!). Anyway, just the real estate and net cash/securities make up the market cap. The PCD (resale & internal designs) will generate over $100m in gross profits and about $60m in net profits. That may be worth close to half a billion (I still have to get on that post but there are a lot of examples that I am reading that indicate UTs PCD is worth around that amount). That doesn't even include iptv, broadband, PAS and NGN business units that form the core and are the future of the company (and how much R&D have they pumped in over the years?).
For this post however, I'd like to focus on the cash. With $305m in cash and little debt (and no more CB in the horizon), my speculation is that the company will announce a buyback and/or sell some none-core assets in the next earnings call. This is the perfect opportunity to make best use of the funds. The stock is still way undervalued. According to Thomas Toy, the company went into the ML strategic alternative study to unlock shareholder value when the board perceived the shares were undervalued (at $6-7 at the time). What more now that a lot of the issues have been dealt with and the company is in full turnaround mode and showing good progress in winning contracts (not so much on the expense side yet). Coupled with Barton's 6-7 point plan of cash generation (selling none-core assets, leasing the building, using OEMs, cutting head count, licensing/selling patents, improving efficiencies/GMs, etc), the company should be very comfortable using some of their cash horde to buy back shares.
In the past, the interest burden on the CB, uncertainties in their markets, and other issues have prevented them from buying back stock. Their cash mostly sat in Chinese banks making 2%. Nowadays, cash is king and they have signficant amount of it. With their guidance of getting their expenses in line within the next few quarters and getting back to breakeven, a stock buyback will also pave the way to supercharge earnings when there are earnings to talk about.
While other companies have to raise cash and reach out to some foreign states, paying 12-15% and getting discounted shareprice/convertibles to boot, you would think that UT can do something with their cash to get a decent return - and a stock buyback is a good start.
For this post however, I'd like to focus on the cash. With $305m in cash and little debt (and no more CB in the horizon), my speculation is that the company will announce a buyback and/or sell some none-core assets in the next earnings call. This is the perfect opportunity to make best use of the funds. The stock is still way undervalued. According to Thomas Toy, the company went into the ML strategic alternative study to unlock shareholder value when the board perceived the shares were undervalued (at $6-7 at the time). What more now that a lot of the issues have been dealt with and the company is in full turnaround mode and showing good progress in winning contracts (not so much on the expense side yet). Coupled with Barton's 6-7 point plan of cash generation (selling none-core assets, leasing the building, using OEMs, cutting head count, licensing/selling patents, improving efficiencies/GMs, etc), the company should be very comfortable using some of their cash horde to buy back shares.
In the past, the interest burden on the CB, uncertainties in their markets, and other issues have prevented them from buying back stock. Their cash mostly sat in Chinese banks making 2%. Nowadays, cash is king and they have signficant amount of it. With their guidance of getting their expenses in line within the next few quarters and getting back to breakeven, a stock buyback will also pave the way to supercharge earnings when there are earnings to talk about.
While other companies have to raise cash and reach out to some foreign states, paying 12-15% and getting discounted shareprice/convertibles to boot, you would think that UT can do something with their cash to get a decent return - and a stock buyback is a good start.
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