Expenses

From the Q1 earnings call early this year,

Robert Galtman - Jeffries & Co.
Looking at the targets a little bit, I know with the OpEx target in particular, you mentioned that would look to bring OpEx down to $110 during the second half. I think last quarter you had maybe mentioned below $110 each quarter in the second half. Can you just give us some clarification around that? Is that $110 maybe later in Q4? Or would that be both in Q3, Q4 as well?

Fran Barton
Well, we’ll target it for Q3. I think Q4 we should certainly be there. We’re not stopping at $110, and so the language we may have used was at $110 or just under $110 or whatever, so it’s not intended to be over $110. Its $110 or under. But we will hold the expectation for now at $110. As we get a couple of these one-timers behind us, we can start operating at that level shortly. So we will try for Q3, but we will certainly be there for Q4.
=============================================

The sale of PCD/MSBU added savings of $15m/quarter so that by Q4, expenses should be around $95m/quarter. Management has been saying that they will get to profitability with revenue growth with slight decrease in expenses. A fellow shareholder Tigre brought up a good point that expenses should go up as revenue ramp. Because the company is protecting R&D at around $40m/quarter, most of the expense discussion will center on SG&A. Lets look at some factors that indicate it should continue to go down even with the revenue ramp.

1. Fixed costs? - The company's $130m or so revenue shortfall for 2008 announced a few weeks ago didn't result in opex reductions. So, the correlation is more with bookings and not revenue. Blackmore had indicated keeping expenses up in the 2nd half to ramp bookings for 2009.

2. PAS/handset slowdown - Shouldn't expenses for PAS go down as revenue go down? Same with internal handsets, specially if they move design operations from Korea to China?

3. Marketing costs/Trials costs- Back in early 2007 when the company was promoting itself, it mentioned 40 or so iptv field trials. I'm sure there were a lot of NGN trials as well. After all of these trials and now commercial wins (with showcase projects), shouldn't this be going down as well? By partnering with local distributors, shouldn't expenses go down as well?

4. Ramp of iptv/ngn with existing networks- With the bugs of the iptv system being configured and other content/regulatory issue being worked out, we are now tracking the number of subscribers for each country/region. As the subscribers ramp/acceptance granted, UT is able to generate revenue with the existing costs in place. I posted early today regarding the small $1m revenue by Sri Lanka Telecom for the initial network. As subscribers get on board, UT will get bench mark payments for the network, and then the STB to follow. Additional capacity/services/maintenance revenue will then follow. In some respects, the ngn and broadband revenues also come after a period of acceptance.

My conclussion is that opex should and could drop significantly more from $95m/quarter even as revenue ramp. Cultivating a smaller number of larger clients that will buy multiple products would also focus expenses more efficiently. This is what we heard in the shareholder meeting as well but have yet to see the synergies and impact of outsouring/partnering and focusing on smaller base of clients as of yet. The bulk of the expense savings have been with the divestitures, elimination of legacy costs, the initial headcount reduction.

Blackmore's target expense metrics are nowhere close to being achieved. The revenue potential is there but there is also questions with timing. I do see potential to cut more of the $55m SG&A costs. Cutting expense is really the way to protect against the uncertainties in this market and NOT by inefficiently relying on cash at hand.

Cash generation was a big theme earlier this year. Gross margins have yet to improve. Asset sales have helped but expenses are just too high. A restructuring would burn more cash and save "only" $5m/quarter. Why are they still spending $55m/quarter for SG&A anyway?

One final thought - on their building that was appraised at $180m. Now that they have all of this cash, there doesn't seem to be any progress/urgency on the building except some small tennants.

I continue to hope for the revenue and bookings ramp but there seems to be too much expenses and inefficiencies in resource use. They did save on Barton retiring (forgot about that savings :-) but Blackmore needs to address the expenses well during the next call. Each dollar saved is $4 in revenue it doesn't have to account for. What kinds of returns are they looking for their $324m in net cash??? They also seem to have a ton of advisors that have not yielded overall shareholder value or good returns on their resources.

I'd like to end in a nicer note that atleast its not like AIG or Washington Mutual and that atleast the company is in good shape balance sheet wise (I have to give them credit that as fast as they can spend the money the last 3+ money losing years, they also find a way to generate cash). If they just improve operational performance, they would stand out in this market specially going into 2009. Can you imagine if this thing actually works out.

Have a good night.

Weekly recap - Stock bounce

After nine straight weeks of stock price decline, UT stock closed at $3.41, up 54 cents or 18.8% for the week. In a very volatile week of trading where the DOW was down as much as 8% late in the week, UT recoverd all loses for the last 6 weeks. It is still down around 27% previous to earnings in early August. The DOW ended the week with a monster two day rally but still closed slightly down for the week.

BWS upgrade - From my Schwab alerts: BWS Financial upgraded UTStarcom (Nasdaq: UTSI) from Hold to Buy and maintains their $4.50 price target, citing valuation. The firm notes UTStarcom "shares have been battered since the Company announced second quarter results to a point where the stock is trading under projected cash value at the end of 2008. UTSI had $2.20 per share in cash at the end of the second quarter. The sale of the PCD business and the cash burn for the second half of 2008 should translate into UTSI having approximately $2.65 per share in cash at the end of the year."

NGN trials in Israel - Sep. 14--Taldor Group (TASE: TALD) has decided not to delay the trial of Bezeq The Israeli Telecommunication Co. Ltd.'s (TASE: BEZQ) next-generation network (NGN) at this time. Taldor is the representative of UT Starcom Inc. (Nasdaq: UTSI), whose equipment Bezeq will use for its NGN.
http://www.tradingmarkets.com/.site/news/Stock%20News/1879951/
Hopefully, this will result in actual contract(s) and revenue and not just wasted expenses.

India broadband/iptv - The discussions mainly between Shadow & Tigre regarding iptv in India continued this week with Shadow defending his 400k iptv subscriber target for UT in India in 2009 and Tigre saying its impossible. UT has basically said it has won 5 of 6 commercial contracts in India and has over 80% market share. It has 75% of wireline broadband and 34% of the broadband market (whatever that means). Anyway, India is critical for UT to showcase their core products much like Japan was a few years ago. If you have time to read this interesting back and forth, here is the link http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=155429&mid=155429&tof=4&frt=1

ZTE iptv market share in Shanghai - The article cited by Tigre indicates ZTE has a higher market share than UT. http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=155573&mid=155573&tof=35&frt=1 UT has indicated it has 62% of the iptv market in China, twice the number of any competitor. Market share will remain a hot issue during the next few years but the question is really when China iptv will ramp quickly. Recent iptv set top box orders indicate the market growth continues at a steady/slightly increasing pace. The Sigma Design earnings call also show iptv worldwide growth remains robust.

Nortel - I wrote a little bit about Nortel's 2008 revenue shortfall in my mid-week blog posting. There are no less than 4 articles in lightreading discussing the shortfall, asset sales, restructuring, and other outlook for Nortel. Nortel is trying to sell its growing carrier ethernet and optical networking division, part of its core businesses. Here is an excerpt: "Hubbard estimates that Nortel had a 3 percent share of a $533 million Carrier Ethernet Switch and Router (CESR) market for the quarter ending in June. The CESR market is likely to be about $2.1 billion in 2008, compared to $1.9 billion in 2007. So it's a growing area, but also very competitive, with 21 equipment vendors in the space, he notes. " http://www.lightreading.com/document.asp?doc_id=164054 I just wanted to highlight its market share and the heavy competition. Nortel overall company gross margins are in the 42-43% while UT is in the 25-27%. Without internal handsets, UT gross margins are in the 30s with some businesses in the 40s. While UT has to compete with ZTE and Huawei, it does maintain some good market share (see above) in certain areas and can stay competitive with their lower gross margins. They just have to pick their spots and control expenses.

Stock price, relative views - During the week when the stock was near its lows, I posted "its the stock price, stupid." I wrote, "Each member of management and the board has to ask themselves if they are even aware that a sub $5 stock for this company is unacceptable. You then have shareholders so beaten down that they are second guessing themselves if they should sell a $5 bill for $2.5. Unbelievable! Then, you have management/board PAY their consultants to decide whethere it is better to put the cash under the mattress or buy the stock at half book. I know they are "constantly" evaluating the market and the situation but this is just stupid."

First, I understand we are in a bear market but each individual/entity looks at the stock price differently. Some people will look at their cost basis like the world revolves around them and measure company performance base on that basis. The board back in 2006 decided to do a strategic study because they felt the stock (at $6/7) was undervalued. Some people need the cash and no matter what the price will sell. When Peter Blackmore joined the company, the stock was in the mid $5s, but his bonus/shares were granted at $3.2. Some shareholders bought in $30s-40s and think the performance has been terrible every since. The shareholder equity/book value is around $600m or $5/share but the company continues to lose money. The company has been spending more than $40m/quarter in R&D the last 5+ years so that must be worth something? In any case, what is the threshold for UT management/board? I had mentioned the $5/share price in the post just based on book value/shareholder equity as a starting point where there has to be a sense of major urgency. Some will talk about profitability. Period. The problem is the stock/underperformance by the company has been going on for so long that some people start to think its acceptable. The company's investor relations rep Barry Hutton joined the company when the stock was at its all-time lows $2.2-2.3 so how in the world is he going to feel what shareholders "feel". He probably thinks the stock is a star performer. Has he paid $30, 20, 10, or even $4 for the stock with his hard earned money and based on company projections and talk? Its gotten so bad this week that people were jumping from UT to AIG or maybe Lehman the previous week as a "chance"/lottery ticket to get their money back quickly.

I could never get a price from the board that they were thinking of back in 2006. They had offers for the core business but obviously it was not good enough for them. However, now that they have cash and they are "excited" in the future outlook, they also don't seem to want to defend the stock. A few years ago, they posted the great revenue growth year after year. Now, they are proud of the head count reductions and expenses going down. Revenue growth/profitability? Those are "near term" goals. What is near term?

I "believe" the stock is a bargain under $5 but am warry the company/board has gotten used to subperformance of the company/stock. Fixing legacy problems have become "accomplishments". Lowering costs and reduced losses have become good performance. This week, Merrill Lynch sold itself to Bank Of America. Fellow shareholder techbroker wrote, is UT going to be a ML or a Lehman. I cling to the hope its going to be much much more but if the board let go in late 2006/early 2007, it would have been much better for shareholders. Instead, we continue to wait for profitability and dealing with the management/board who have set such a low performance bar for themselves (and they still can't clear it!).

Have a good rest of the week and hope the stock can make it two in a row this week.

Discussions with shareholders

I normally wait until the weekend to post but there were a lot of discussion points today from the market being down 5%, Nortel down 50%, short selling rules, conversations with shareholders, and UT down another 11.3%. Under this backdrop, I will give highlights on my conversations with shareholders and the Nortel shortfall.

Discussions with shareholders - I talked to 4 institutional shareholders today, with one giving me a recap with his discussions with Peter Blackmore yesterday. I had received an email reply from Barry Hutton discussing the company's stance on a buyback and he mentioned most shareholders are against it at this time (huh?). The institutions I talked with had shares from 500k, 700k+, 3.7m+, and over 15m+ (foreign investor that owns a few million and in touch with others). All have supported a share buyback and still do. I had heard from another shareholder that one institution that has around 4m that was in favor of a share buyback may be hesitant now due to the global financial instability (although they were in favor of it very recently-maybe they were talked out of it). In any case, this is in addition to the retail shareholders that probably number 15-17m that I believe support a share buyback as well. I feel like a politician doing a poll but I do want to see what shareholders think of a share buyback. I want to reiterate I am not for doing a buyback of such a size that would jeopardize the long term plans for the business but as tangible confidence boosting action that would be a good return for their "excess" cash.

Based on the presentation slides on the company's presentation in New York last week, the company will end the year with $324m in net cash after seeding an Indian contract and further losses in Q3/Q4. Amazingly, this is more than the current market cap as of closing today. The question becomes how much will the company spend again in 2009 in order to facilitate the growth they are targetting and accomodate their current cost structure (no further major restructuring or head count reduction is plan based on the presentation).

The company's credibility in projections have been terrible but here is my stab in the dark. $1.1b in revenue, 27% gross margins, and $380m in expenses. The higher revenue from this year is based on the "high" revenue target for 2009 in the slide. +2% gross margin is based on better mix of revenues from the core business (less from handsets), and expense based on $95m/quarter as legacy costs and more efficiencies are rung out. It should be $95m by Q4 already but the slides had it at $100m. Anyway, those numbers above still would result in $80m in losses. There are other items that could hurt cash flow such as taxes/options that will/can be offset by interest income, Yuan appreciation, proceeds from a CSBU sale, further outsourcing of handset business, lease of building, patent proceeds, etc.

Lets add $20m more in cash flow losses for contingencies for a total cash loss of $100m in 2009. I will not reduce this by $60m that was used for the India contract (assuming they carry this over quarter to quarter). The company will then end 2009 with net $224m with these assumptions. There is no more convertible bond, or options/China investigations, etc to worry about. Because of this, I think it is reasonable for the company to do a buyback. One institutional holder mentioned a buyback of up to $50m, spread over 6 to 12 months. In any case, I believe there is a lot of support for the buyback and shareholders should continue to bring this up with management. Shareholders discussed a lot of issues today such as India iptv subscribers, China iptv market share, naked short selling but as T. Boone Pickens mentiions, that misses the point. I say buyback, buyback, buyback!!! (ok wanted to say something like that since I keep seeing those commercials :-).

Discussion with Peter Blackmore - From the briefing I had, here were some highlights.

Impact of world economy slowdown - Aside from the shortfall in 2008, there is no other pushouts or further weakness seen. This may change and the company has yet to finalize 2009 guidance but the markets/tech areas they are targetting must be ok for Peter to be confident. Again, its "guidance" and take management's word at your risk but it was a good question to ask in light of the Nortel shortfall and the worldwide slowdown.

Insider buys/Share buybacks - Ongoing discussions and nothing until Q3 earnings call at the earliest. The word I am getting is Peter wants to buy some shares but prevented from doing so due to his tax sale earlier. Again, hearsay...and nothing tangible.

There were numerous other topics such as Japan, Fran Barton's compensation, CFO replacements as well as D.King's replacement, etc and nothing surprising. In general, people feel good after talking with Peter. Credibility over the last few years have been bad and it seems Peter realizes this shortfall was brutal.

Nortel - Read the announcement for Nortel and its a nightmare for their shareholders. They are planning restructuring, their CDMA business has not bottomed, their future 4G business will be divested, they need to raise cash, they borrowed at over 11% previously, they need to overhaul company expenses/decide with are core/none-core. Basically, UT in this light, is way ahead!

I'll end this post by saying shareholders have to stay united and not stand for poor stock/company performance. I want to reiterate again and again that we cannot stand for performance like what we went through under Fran Barton's tenure (Lu was the CEO but I'll use that period for benchmark). As I replied to Peter, he needs to reverse the following:

1. No profitable quarters.
2. Numerous failed guidance for profitability
3. Declining share price
4. Increased compensation
5. Little or no credibility

I will continue to discuss issues with retail/institutional holders such as candidates for the board of directors, faith of current directors and their performance over the years (from the collapse of the shareprice, failed strategic study, and the latest being F. Barton's tenure/compensation). If there are shareholders (retail/institution) that have ideas or just want to join the "group", email them to me at tim_94305@yahoo.com.

Have a good night everyone.

Weekly recap - Under $3

The stock closed at $2.87, down 26 cents or 8.3%. Early in the week, the markets were focused mainly on the government bailout of Fannie Mae and Freddie Mac. Late in the week, the markets shifted the attention to Lehman, Washington Mutual, and Merrill Lynch. The markets did manage to close the week slightly up.

Brasil Telecom contract - "Brasil Telecom, one of Brazil's leading wireless and fixed-line communications providers and incumbent telecom operators, will utilize UTStarcom's mSwitch solution to enable fixed-line connectivity with GSM platforms for call continuity between the two networks using a single wireless device. The FMC solution enables Brasil Telecom to extend its current cellular coverage area indoors using the new Voice Continuity Call (VCC) handover between cellular and WiFi networks." http://biz.yahoo.com/prnews/080910/aqw060.html?.v=65 This seems like a huge technological win with a major carrier that UT has been working on for years. It would have been nice to know the contract amount and what the market potentials are. It does show UT continues to be at the leading edge technologically and the strategic wins continue.

India IPTV market - Shareholders Tigre and Shadow discussed the iptv developments in India. http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=155429&mid=155429&tof=29&frt=1 The size of the iptv market in India was projected to be 2 to 3m in 5 years. On the recent presentation slide, UT noted that Aksh alone was targetting 1m in 3 years.

Short interest - The short interest went down by about 1m from 23.6m to 22.6m at the end of August. Average daily volume is down to 832k shares, with the days to cover increasing to 27 days (highest in a year, maybe ever).

September road show presentation - Shareholder Shadow provided a link to the presentation and discussed some of the highlights. http://files.shareholder.com/downloads/UTSI/233497028x0x233340/69022b6e-0c64-4805-9b54-d795276263f1/InvestorPresentation_September%202008.pdf

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=155452&mid=155483&tof=4&rt=2&frt=1&off=1

Stock price - The stock has pulled back for 9 straight weeks bringing down the market cap to about $360m, which is around the cash position for the company. I wrote an email to Peter Blackmore and copied the shareholders in the group. It basically outlines more frustration from shareholders and questions the role of the CEO. While the company has resolved previous legacy issues, improved liquidity and won some strategic contracts, shareholders are still faced with all-time low share prices. Management continues to have major credibility issues with failed profitability forecasts year after year. The frustration is even larger when you consider the disproportionate share of the sacrifice shareholders bear. Management continues to get outsized compensation/bonuses (are there any salary cuts or no bonuses?), employees get to reprice their options, executives get more shares and performance is not every tied to the share price or basic profitability.

On the recent presentation slides, shareholders hear the improved performance, financial positions, and guidance for the future. That is all great but year after year, there are more excuses for the missed guidance. The "recent" tenure of Fran Barton showed the company's poor operational performance, outsize compensation, board's failed decision making abilities, and the waste of resources and destruction of shareholder wealth. Unbelievably, the company will have its highest net cash position (around $324m at the end of the year) even after seeding a future contract $60m and burning more cash through the end of the year. All of this with the stock at all time lows. I am by no means a financial guru (I did invest in this company after all) and do not know all the interal forecasts and company operation. However, I believe a stock buyback or other tangible direct actions by the company should be done at this stage (aside from just more guidance). Management/board compensation reduction etc should be implemented. Management relies on consultants and has had plenty of discussions with the board. Could a share buyback or compensation reduction be any worse than years and years of failed strategy/execution that has landed shareholders at this state. I could go on and on but I'll end it here for now. Rather than pour over the recent presentation slides or hope for good "guidance", I believe investors should switch their thinking to planning for significant management scrutiny and board accountability. Final thought on the strength and experience of the management team. Are you kidding me? I have PhD from Stanford but if I don't produce or show results, what good is that?

This recent missed estimates, stock crash, and lack of management intervention can be summed up in one shareholder's (Flipocrat) word: Disgraceful.

Have a good weekend.

Weekly recap - Stock slide continues

The stock closed at $3.13, down 13 cents or 4% for the week, the eight consecutive week UT stock has declined. The markets were also significantly lower from 3 to 4.7% this week as the markets return to bear market levels. Here are the UT related news for the week.

UT & Aksh power BSNL iptv for 20 Indian cities - This was already widely reported previously but the official PR came out this week. http://biz.yahoo.com/prnews/080902/aqtu017.html?.v=70

UT issues documents for employee options exchange - A 159 page document (no I didn't read it all) indicates that the option price will be at the closing on Oct, 1, 2008. There are 7.25m options with strike prices from $6-25+ that can be exchanged. Here is the exchange ratio for various options prices.

$6-10; 1.9 for 1
$10.01-15; 3.8 for 1
$15.01-20; 5.2 for 1
$20.01-25; 8.2 for 1
$25.01+; 9.2 for 1

If all options get exchanged, the number of options will drop to the 2.5-3m range. The options will vest 50% after 1 year and the rest 2 years from Oct. 1, 2008. If each option cost 50 cents for example, that would be worth $1.25-1.5m. I don't believe this is significant considering Barton's retention agreement alone was $2m/year.

Dell selling factories/Nokia revenue shortfall - Not too related but Dell is also trying to outsource their manufacturing to be more efficient while Nokia's shortfall show the competitive nature in the handset/smartphone market. UT's sale of the PCD at the height of their profitability was good timing/management. The sale brought liquidity, lowered working capital requirement, preserved internal handset contracts, and reduces operational risk for that business unit.

Russia conference - Shadow posted that UT was a major sponsor of an iptv conference in Russia. We have heard back in the shareholder meeting that UT was working on a couple of contracts in Russia and Brian Caskey made a trip there so there is some progress for potential contracts. http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_U/threadview?bn=27187&tid=155269&mid=155269

UT stock non-marginable - Last week, Etrade made UT stock non-marginable and that is before the stock even dropped below $3. If UT goes below $3, then other brokers will enforce margin requirements for UT putting more pressure on the stock. I knew we should have had a reverse stock split (just kidding.......no nasty emails/postings please :-)

Philippine NGN contracts - Top Philippine carrier PLDT plans to spend substantially on a next generation network (NGN) technology for its telephone service nationwide as it expects revenue to reach hundreds million of pesos in five years.
The company will spend 4.3 billion pesos ($93 million), which includes an incremental investment of 3.9 billion pesos ($84.2 million) for over five years, according to documents it filed with the National Telecommunications. Its existing investment in the proposed areas amounted to 464.01 million pesos ($10 million).
The company will finance its fresh investment through internally generated funds.
http://www.telecomasia.net/article.php?type=article&id_article=10183
There is no official PR from UT but this should be their contract (at about 17m/year for 5 years). So far, that first contract was for $10m (if this article is correct). It seems these NGN contracts are in the $10-20m range and have good expansion potential. Almost all UT competitors are also focusing on NGN but UT seems to have a bunch of wins in this area (Argentina, Taiwan, Brazil, Jersey, Philippines, etc).

India Broadband - Just a side note to last week's PR on India broadband. UT indicated it was the top broadband provider in India with 75% market share. Currently, there are only 4.5m broadband lines and the country is targetting 20m by 2010. Even with the Phase II contract with BSNL (around $80m+), there should be signficant contracts ahead in India if the country will come anywhere close to the 20m target. During my last 2 emails with Blackmore the last few weeks, he had just come back from Japan and Brazil respectively. Unless he was there on vacation, there might be some good developments in those two countries.

David King - Joins Acision as COO. David was at the shareholder meeting in June and discussed the Russia/India developments and the company's better focus on efficiencies and drive in new markets. I had a positive impression of David and liked the way he described the iptv markets in India and their better operational practices (cutting excess personnel/partnering, etc) so i didn't see his departure as a firing. However, he did have valid personal reasons for leaving and thats that. The company will find replacements and move on.

China Telecom earnings - Last week, I had notes some information regarding China Netcom's earnings pertaining to UT. This week, here are some notes from China Telecom.

In the first half of 2008, access lines in service decreased by 5.44 million to 214.9 million. PAS subscribers were 51.99 million with a net decrease of 6.06 million.

In the first half of ‘08, broadband subscribers increased 4.3 million to 39.95 million, an increase of 12.1% from the end of last year.

Fourth, to improve cost effectiveness, we implement stringent control on PAS handset subsidies and tilt investment towards profitable business and customer segments.

Fifth, maintenance CapEx on PAS to ensure normal operation declined by 88.4% from last year, accounting for a decrease of 3.4 percentage points of total investment to 0.5%.

Broadband growth in China continues to be impressive and will fuel iptv demand in the future but PAS has fallen off significantly, which is good in a way because its impact will be lessen on UT going forward.

China iptv - Last week, I noted the continued, steady growth in China (about 30% sequential growth). This one is about a week old as well. http://www.iptv-news.com/content/view/2267/64/ The headline is "China Telecom has shortlisted 11 companies to supply 574,000 IPTV set-top boxes, comprising 536,000 standard-definition and 38,000 high-definition units." It has ZTE benefitting the most and that "ZTE is thought to currently hold the largest market share of China's IPTV system and terminal market, and has supplied systems and terminals in a number of regions, including the provinces of Shaanxi, Jiangsu and Guangdong, as well as Beijing and Shanghai." At the very least, the iptv deployments remain healthy. UT should get its share.

BSNL iptv over 100 cities - Before the ink on UT's PR for 20 BSNL cities, they are already talking about 100 cities :-) http://dth-iptv-radio.blogspot.com/search/label/BSNL%20IPTV Subscriber target when the 20 BSNL cities was discussed was only about 10k in 9 months. Now, it is up to 100k by March 2009. The website also has a lot of postings on MTNL, Bharti, and other iptv news. It seems like there are a lot of iptv issues that have just been resolved very recently (the last few weeks) and has led to increased deployments. In that article, they talked about bringing iptv to 1/4 of the 82 million cable homes. The cost of iptv is about $4.5/month. Thats less than the cost of a DVR in the U.S. with plenty of added features. Another article in the website talks about 1m India iptv subscribers by 2011 (see section on Bharti iptv). With wins with Bharti, BSNL, MTNL, Goa, and Sri Lanka, the future for UT iptv in India is shaping up. The breakout could be in cable systems and in China but steady growth, which we anticipated since last year, is only beginning right now. Shadow's prediction of 400k in India doesn't look too ridiculous to me. I was looking for 50-100k in India but it might be closer to 200-300k.

IPTV, NGN, Broadband, Russia, India, China, Brazil, etc, etc, etc. - For the last few years, it has been mostly promises, trials, and strategic contract wins. The revenue has yet to come close to their expenses. The company has put in hundreds of millions in R&D the last few years to seed their technology and position. There is still some ways to go but the news I am reading indicate massive adoption/potential is teasingly close. I hate this company!!!!!!!! :-)

Have a good weekend everyone and lets hope UT breaks the 8 week losing streak.

Weekly recap - CFO Barton Retires

The stock closed at $3.26, down 10 cents or 3%. The stock is down 7 straight weeks and has lost $2.31/share or about 42%. The markets were also lower this week with the DOW/S&P losing about .78% and the Nasdaq 2%. The week's major news was the resignation of CFO Fran Barton and Senior VP international sales and marketing David King. Here are other news/commentary.

UT named #1 broadband infrastructure company in India - For the 2nd year in a row, UT was named by Voice& Data as the #1 broadband infrastructure company in India. Accoring to the PR, the number of broadband users has doubled from April 2007 to June 2008 to 4.38m. The target of reaching 20m users by 2010 shows that the India broadband market continues to be a good source of revenue for UTStarcom. The key for UT will be improving margins in that business unit. The position in broadband and iptv that UT has built over the last few years should hopefully start to benefit in the years to come.

China Netcom earnings - Both CT & CN reported earnings recently. Here is a PR from CN for their earnings. http://biz.yahoo.com/bw/080825/20080824005046.html?.v=1 Here are some itmes related to UT.

-The Company reported a decline in total capital expenditure of 10.7% year-on-year to RMB 7,527 million. In particular, investment in the businesses of fixed-line and PHS only accounted for 4.4% of the total, down 13.2 percentage points compared to the same period last year.

-As of June 30, 2008, we had 108,510 thousand local access subscribers, 2,310 thousand less
than at the end of 2007. Of this number, fixed-line subscribers declined by 1,499 thousand, while PHS subscribers declined by 811 thousand.

-We are working to upgrade the “Family 1+” from bundled services to household-oriented multimedia information services. In May, 2008, we launched a family gateway, which offered comprehensive information services to “Family 1+” customers, combining simultaneous access to the internet through various PCs, wireless internet access, family video monitoring and IPTV services.
By the end of the first half of 2008, there were 9,971 thousand “Family 1+” subscribers. Penetration rate among broadband subscribers for the “Family 1+” service was 36%.

-We believe that, after the 2008 Beijing Olympic Games, the high-quality broadband network established during the Olympic Games as well as the broadband consumption habit developed during the Olympic Games, will lead to a fast and sustainable growth in the innovative business and thus help catalyze the Company’s strategic transformation.

-I read in the WSJ that CT was planning to add about 8m broadband subscribers per year for the next 4 years.

China IPTV procurement list- China Telecom (NYSA: CHA; 0728.HK) has announced the winning lists of equipment manufacturers that provincial branches should use for IPTV 2.0 platform and terminal equipment procurement. The winning manufacturers were split into three areas: systems platforms, standard-definition terminals and high-definition terminals. http://www.marbridgeconsulting.com/marbridgedaily/2008-08-25/article/19055/china_telecom_announces_iptv_procurement_firms

China IPTV subscriber count as of Q2- There were 1.708 million subscribers of IPTV (Internet Protocol TV) service in the China market at the end of the second quarter of 2008, growing by 396,000 or 30.2% on quarter and by 132.1% on year, according to China-based consulting company Analysys International.
The exceptionally large growth in IPTV user base was due to the increased demand attributable to the Beijing 2008 Olympic Games, Analysys pointed out.
http://www.digitimes.com/systems/a20080829PR200.html

UT has maintained its market share (about 2x compared to ZTE) and the growth in China continues at a slow but steady pace (from 736k to 840k to 1m to 1.31m the last few quarters).

Barton's retirement package- Reviewing the two 8K filings regarding Bartons retention agreement/retirement package, it does seem Barton was good atleast with his own financials. When the $10m/4 year retention agreement was disclosed last November 30, 2007, the first installment was already given in November 2007. Thus, in just 9 months since the "four" year retention agreement was disclosed, Barton was able to collect two installments or 50% from a dollar standpoint. Even better for Mr. Barton, because the stock declined by nearly 50% from the June highs, he was able to receive nearly 877k shares for this year's installment. If the stock had maintained the mid $5 to $6 level and Barton continued to stay on till atleast November, he would only receive 400-500k shares. Projecting into Nov 30, 2009. If the stock hits $12, he would only receive 200k shares. If by Nov 30, 2010, the stock hits $20 (ok maybe wishful thinking), he would only receive a little over 100k. In any case, Barton has retired and hopefully the company can withstand his retirement and somehow manage to pull it together and continue their stellar run for shareholders :-)

Have a good rest of the Labor Day weekend everyone.

Tenure and Resignation of Fran Barton

CFO Fran Barton is retiring effective August 31, 2008.
http://biz.yahoo.com/prnews/080828/aqth069.html?.v=65 This was unusual in that there was no transition period (atleast not that the street was aware of). Fran was hired by UTStarcom to be its CFO effective September 2005. Then CFO Mike Sophie focused on the COO spot after Fran Barton's hiring. From the company PR, "I believe that Fran's background represents an optimal fit for the needs of our finance organization as we go through the restructuring and diversification initiatives," said Mike Sophie, chief operating officer at UTStarcom, "His appointment will allow me to focus on the operating aspects of these initiatives. Fran and I will work closely toward disciplined execution of UTStarcom's strategy and timely attainment of the company's goals, including a return to sustainable revenue growth and profitability."

http://sev.prnewswire.com/computer-electronics/20050802/SFTU10902082005-1.html

I want to highlight the positives and negatives of Fran Barton's tenure and provide some commentary.

Positives:

I will take the positives from the November 30, 2007 8K filing discussing Fran Barton's retention agreement.

"The Compensation Committee approved the Retention Agreement after taking into consideration: (i) Mr. Barton's performance during a challenging year, including completing the Company's previously disclosed stock option and historical sales contract investigations, bringing the Company current in its SEC filings and improving the Company's Section 404 compliance process; (ii) the critical nature of Mr. Barton's current and future role in light of anticipated management transitions in fiscal year 2008; and (iii) increasing competition in the market for experienced financial professionals. "

The balance sheet is also better due to asset/investment/none-core business unit sales.

Negatives:

1. There was not one single profitable operating quarter during Fran Barton's tenure.
1a. Write downs and poor contracts (such as in India) and bloated expenses added to the decline in PAS to contribute to the money losing quarters.
2. Predictions of profitability for (a) early 2007 (given in late 2005), (b) early 2008 (given in August 2007), and (c) early 2009 or late 2008 (given in late 2007) did not come close.
3. The material weaknesses identified have not been fully resolved (the last I heard there were 3 outstanding).
4. "Legacy" expenses from accounting to legal still continue to date.
5. ARP accounting systems are not fully in place as of yet.
6. The stock price has declined from around $8 (already down from the $30s/40s the previous year in 2004) to the low $3 level in 3 years.

Compensation:

Barton started out with a base salary of $500k that was increased to $750k. At the end of November, 2007 (after the shareholder meeting when the price was sub $3 no less), shareholders received news of the retention agreement.

"The Retention Agreement provides that the Company will provide a retention incentive to Mr. Barton with a total value of $10,000,000 (the "Retention Incentive"), consisting of a combination of restricted stock, RSUs, performance shares and performance units (together, "Equity") to be granted under the Plan and/or cash, in the sole discretion of the Compensation Committee. Each installment of the Retention Incentive will be awarded in a combination of Equity, in the Committee's sole discretion, up to the annual maximum amounts permitted under the Plan after taking into account Mr. Barton's focal awards for each particular year. The first installment was awarded effective November 30, 2007 (see below), and the remaining installments are expected to be awarded each January thereafter. Because of limits on the maximum amount of Equity that can be granted to an individual in any calendar year under the Plan, the Company expects that the Retention Incentive will be awarded over a number of years, so that as much of the Retention Incentive can be awarded under the Plan as possible. The first installment of the Retention Incentive will vest as to $2,500,000 in value on November 30, 2007, and the remaining installments will vest as to $2,500,000 in value on each November 30 thereafter until the full $10,000,000 in value has vested. For purposes of determining the vested value, the value of Equity to vest will be based on the Fair Market Value (as defined in the Plan) of the Company's common stock on the applicable date of grant."

Resignation Agreement:

Fran Barton will receive $380k and accelerated vesting of the $2.5m retention bonus that was going to vest in November 2008. So, Fran effectively collected half of the $10m in retention bonus.

Commentary:

As a shareholder in the company, it is hard for me to even say "thank you" for Fran Barton's services due to the negatives I outlined above. During the March 17 meeting that some shareholders had with management, I openly questioned management and lead director Thomas Toy about management compensation and highlighted specifically Fran Barton's compensation. Tom basically defended the compensation/retention agreement based on the "positives" noted on the 8k. At that time, the management/board made it seem Barton had the blue print plan to return the company to sustainable profitability and growth (See my March 2008 postings to review our meeting).

It does seem odd that now Barton has retired, management is confident that the executives left behind can fill Fran Barton's role with "seamless transition". I had emailed Peter Blackmore late Thursday and he explained the departures as simply for personal reasons and that he was confident in the team that they had. Blackmore wanted to discuss it personally but we did not hook up the following day. I have been a constant critic of Fran Barton even before blogging and did not feel he deserved the compensation for the performance. Now that the turnaround is well underway, it seems less likely he would contribute. I did not get an impression Barton was well in-tuned with the technology and would forget certain numbers even during planned CCs. During the few times I had personal contact with Fran, he seemed very nice/professional and well liked by the other employees. However, this is the business world where performance is the metric which we measure the CFO and not likeability. In that measure, Fran Barton did not fulfill the goal when he was hired to return the company to growth and profitability. The balance sheet seems better with all the asset sales but shareholder equity has also gone down. Nor did the shareprice (already low at the time when Fran Barton joined) go up.

In summary, I enjoyed the minimal conversations I had with Fran but think it is a positive impact to the company/share holders that he retired. I guess it was "nice" for Fran's reputation that the street react negatively for a day to Fran Barton's departure but that just reinforced my belief that in the short term that the street has mispriced the stock badly.

I want to end this post wishing Fran Barton good luck but does he really need it or UT shareholders still facing the ongoing soap opera that is UTStarcom......all potential, valuation, and little results. As we think about Fran's tenure, we shareholders still cling to the hope that management/board can "work closely toward disciplined execution of UTStarcom's strategy and timely attainment of the company's goals, including a return to sustainable revenue growth and profitability." When did we hear that one before? Or are we shareholders just a bunch of short term traders with no patience. Right...give us a break. Really, please give us a break :-)