The stock closed 2008 at $1.85, off 90 cents or 33% for the year. While the number was in line with the markets, this was disappointing since the stock has been on a downtrend for years and had been in the $5s as late as July, when it was up over 100% for the year. For those investors left in UT, the hope is that the recent round of opex cuts will finally bring the company to profitability and that its overall revenue has hit an inflection point.
India IPTV - There were some IPTV news from BSNL but related to Smart Digivision. UT management has been upbeat on India iptv hypint their market share but it seems there is also other options out there.
http://timesofindia.indiatimes.com/Business/BSNL_offers_IPTV_services/articleshow/3920544.cms
ZTE/Huawei Growth in 2009 - Both ZTE and Huawei are still positive on growth for 2009. Based on 3G licenses being finally issued and continue expansion overseas, it looks like both will acheive revenue growth even in a tough 2009. http://www.lightreading.com/document.asp?doc_id=169567 "The Chinese government estimates that the country's mobile carriers will spend around $29 billion on 3G-related capex next year. " UT will try to make up lost PAS handset sales with some CDMA handset sales in China.
2009 Estimates for UT - Fellow shareholder Shadow puts forth his estimates for 2009, http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=156943&mid=156976&tof=9&rt=2&frt=2&off=1 He writes:
So, let's take a look at possible overall sales increase for 2009. Using data from 10Q's and transcribed quarterly conference calls, bookings for non-PCD obtained were $150 million in Q1, $188 million in Q2, $175 million in Q3 and $189 million in Q4 (estimated using book to bill of 1.1 and sales of $172 million obtained by subtracting Korea PCD sales of $53 million from total sales estimate of $225 million given by company). So, total bookings in 2008 should be about $702 million and I assume all of these bookings will be taken as sales in 2008. Many of these bookings represent initial sales for multiyear contracts and that is why Peter Blackmore is confident bookings in 2009 will be an additional 10+%. I assume none of the bookings are for PAS infrastructure which had sales of approximately $210 million in 2008. Assuming a drop of 33% in these sales for 2009 still leaves an additional $140 million of sales for 2009. So total sales estimate for 2009 now would be $702 million + $140 million = $842 million which represents a 28% gain ($185 million) over 2008 core sales. With gross margins of 31% these added sales will result in another $57 million of gross profit, putting the company in a position of becoming profitable depending on taxes and other one time losses, write-offs, etc. I have assumed PAS handset sales for 2009 were included in the booking contracts and they are presumed to decline in 2009 but those sales would be replaced by sales of other core products. Non-PAS handset sales in China are not included in the above data and could be significant. UTSI was one of many companies that was awarded a contract for the recent CMMB handsets bought by SARFT for the initial launch of those mobile TV networks in China.http://www.cn-c114.net/578/a372930.html
The core assumptions in Shadow's estimates are the following:
1. Core PAS infra bookings were logged years ago. Only PAS handsets are included in new bookings in 2008.
2. Most bookings in 2008 will result in 2009 revenues.
3. PAS infra sales will drop 1/3 in 2009.
4. Non-PAS handsets not included in his estimates.
5. Gross margins of 31%.
I've already given my "guestimates" so will just comment on Shadow's main assumptions. I generally agree (or atleast hope) that #1 is correct and that most bookings in 2008 does not include PAS infra. However, I don't think most bookings in 2008 will convert to 2009 sales as management has consistently stated the multi-year nature of some of the contracts. I think PAS infra will drop less than 1/3 in 2009. Overall, from #1-3, my estimates are in the $700m+ range rather then Shadow's $840m. I did add non-PAS handset (outside China) to bring revenue in the $800m range but don't know the size of non-PAS handset sales in China (a big wildcard). Also, 31% GMs seems very high to assume. Overall, the two main questions are the PAS infra backlog (and if it is included in 2008 bookings) and how well CDMA sales in China will perform (enough only to make up PAS handset sales loss or much more?).
I have yet to break down 2008 company performance line item by line item (from expectations in 2007) but the stock declined 33% and the company did not reach revenue/expense metrics targetted so obviously it was a disappointment. The question (or hope) is will the divestitures, opex cuts, focus/wins on iptv/ngn/broadband result in the long awaited sustainable profitability/business model or just too little too late (as fellow shareholder Tigre writes below).
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=156922&mid=156946&tof=16&rt=2&frt=2&off=1
Have a good week/year everyone.
Sunday, January 4, 2009
Wednesday, December 31, 2008
Improving Technicals
First of all, Happy New Year to everyone. I think its fair to say, it was a very tough year for the market and another disappointing year for UT. In the next couple of days, I will post on the negative and positive events for UT and recap some of the predictions/expectations shareholders had at the start of the year. For the last few weeks/months, I've been looking at UTs chart and tracking the 50 day SMA. The stock had been under the 50-day for months now but is showing some flattening out pattern and "threatening" to break above the 50-day:-)
http://finance.yahoo.com/q/ta?s=UTSI&t=2y&l=on&z=l&q=l&p=m50&a=&c=
If you pull a 2-year chart, the stock was under the 50-day from the start of 2007 all the way to September 2007 until it broke above the 50-day and had a brief spike to $5 in late 2007. Around May of this year, the stock made its major move for the year doubling from under $3 to just under $6 staying above the 50-day. Once it broke down, however, it has been all downhill. Several attempts at crossing above the 50-day at the $3.5 and $2.5 level failed. If the stock can closed above the 50-day for a few days, that may be a good sign that it can move to the 200-day average in the $3-3.5 level in early 2009. And IF it breaks the 200 day to the upside, .......(ok I'm getting a little ahead of myself :-)
Have a good year everyone!
http://finance.yahoo.com/q/ta?s=UTSI&t=2y&l=on&z=l&q=l&p=m50&a=&c=
If you pull a 2-year chart, the stock was under the 50-day from the start of 2007 all the way to September 2007 until it broke above the 50-day and had a brief spike to $5 in late 2007. Around May of this year, the stock made its major move for the year doubling from under $3 to just under $6 staying above the 50-day. Once it broke down, however, it has been all downhill. Several attempts at crossing above the 50-day at the $3.5 and $2.5 level failed. If the stock can closed above the 50-day for a few days, that may be a good sign that it can move to the 200-day average in the $3-3.5 level in early 2009. And IF it breaks the 200 day to the upside, .......(ok I'm getting a little ahead of myself :-)
Have a good year everyone!
Sunday, December 21, 2008
Corporate Restructuring and 2009 Cash Flow Impact
"UTStarcom, Inc. (Nasdaq: UTSI - News) today announced a series of corporate initiatives that are expected to reduce its annualized operating expenses by more than 25% or greater than $100 million. The majority of these measures will have been initiated by the end of January 2009 and a significant portion of the savings will be recognized in the first half of 2009."
http://biz.yahoo.com/prnews/081218/aqth003.html?.v=72
The above link provides a detailed PR/info on the restructuring. Listening to the call, there were some additional info so I will just summarize the Four point savings initiative.
Non-core businesses - The Korean based handset manufacturing that supplies handsets to PCD in non-Chinese (mainly North American) markets will be closed down by June 2009. The company will take a $6m cash charge and write off $4m in assets. This is expected to save the company $40m/year in OPEX. Two thirds of the workforce is already gone at this time and enable this division to be cash flow positive in Q1/Q2 (last two quarters). The Customs Solutions Business will be disbanded by end of Q1 2009 and result in savings of $10m/year. Certain parts of the operation will be merged with the Multimedia Communications Business Unit.
Commentary: At the beginning of the year, the CSBU was supposed to be a high margin business that was supposed to show strong revenue growth. I had high hopes for a sale but this was not to be. Also, the opex for the business unit was supposed to be around $10m/quarter (according to Barton during one of the previous quarter earnings call). So, it looks like the majority of the business is still intact. The Korea handset manufacturing business turned out to be a major disappointment the last two years. Not only did revenues go down steadily (as we recently just found out) but gross profits were very small. It makes you wonder (again) why they carried this business for so long.
Global 10% Reduction in Workforce - The company ended the quarter with a little over 5000 employees. The company plans to reduce an additional 465 employees on top of the employees let go as part of the non-core business wind downs/merge. Overall, about 15% or 750 employees will be reduced by mid 2009. The reduction in US employees will be completed this week while the Chinese employee reduction to be completed in January. This will result in yearly savings of $30-35m and cost the company $8m in cash charges to be taken in Q4.
Streamline of Backoffice Operations - Details and charges for consolidating operations into China are not yet finalized. The timing will be the during the first three quarters of 2009. This will result in the rest of the savings.
One-time savings, bonuses, and salary structure - The company will shutdown operations for a week during the year end. Non-executive BOD will not take their cash retainers for 2008, executives (VP level/up) will not take cash bonuses for 2008, and certain salary througout the company will be frozen (no increases).
Impact on cash balance and cash flows for 2009 - After announcing the 15-20% opex target reduction during the last earnings call, I estimated some numbers based on previous bookings, gross margins, etc. http://utstarcom-stocknews.blogspot.com/2008/11/2009-outlook.html Here is an exerpt of what I estimated:
2009 projections - It will be imprecise to estimate 2009 revenues based on bookings because of the timing issues but that is all we can go on at this stage. I will use the book to bill ratios for the core portion and estimate around $140m for the handset division. That yields (0.8*246m + 155m + 184m + 1.2*146m) + $140m = $711m in core bookings + $140m in handsets for around $850m. Again, each quarter could yield new contracts and ramping of iptv but this is my best guestimate for now. 2008 revenues (using the midpt of Q4 2008 guidance) will come in around $836m so 2009 will see little if any revenue growth. At 25% GMs, gross profits will only be $213m. This quarter's GMs of 32% was due to NGN performance and projections for Q4 are down to low 20s. The revenue for 2009 could be higher if internal handsets does better but then GMs will be lower so for now, I will go with $213m in gross profits and OPEX of $320m. That scenario could be highly optimistic if OPEX is higher or revenue lower due to CSBU divestiture. So, that is an loss of $107m. Add in $20m for taxes/options and another $23m for contingencies (higher opex/lower revenue/margins) and it can add up quickly to a $150m cash burn for 2009 (ouch!).
The company will end 2008 with about $291m + $24m in escrow in cash/short term securities. At the end of 2009, that could easily be down to $165m in net cash heading into 2010 (or about $1.32/share).
In light of new information, here is my current best guesstimate: My overall revenue estimate for the company (not including the Korean handset business) was $711m. Half a year of handset sales is around $70m (since the division will be shut down by mid 2009). I will assign 27% GMs to the core business and 5% GMs to the handset part. That will yield gross profits of $711m*.27 + $70m*.05 = $195m. Expenses for the 2nd half of 2009 will be down to $70m/quarter. However, expenses in Q1/Q2 may still be around $80m and $75m respectively. So, opex for 2009 could still be $295m for a loss of $100m (not including taxes and the usual other GAAP charges). Of course, this may be conservative since the handset sales may be larger since it is being wound down and I didn't add sales in the 2nd half of the year for the Chinese market.
Based on previous Q4 cash burn, we expected the company to have $291m+24m in net cash reamining ($315m). There is a $14m cash charge in Q4 so net cash will be around $301m by the end of 2008. If we subtract $100m in losses for 2009 + $20m taxes/options + $20m (China consolidation charges), the company will be left with $161m by the end of 2009. That is $4m less than what I estimated previously.
After reading the PR and listening to the call, my initial reaction is slightly positive. By the end of 2009, the quarterly opex will be less than $70m/quarter (compared to the initial 15-20% cuts announced). However, the positives were outweighed by the fact there is still no signs of revenue ramp that will close the gap to profitability. I'm hoping this time, my guesstimates are conservative and that there is material revenue ramp and margin improvements. Some people are more positive thinking profitability may be in Q2/Q3 of 2009 and cash flows much better than I have laid out. However, after four years in the stock and watching the company be behind the curve and throwing out bad surprises very often, I'd like to see good results and trends before getting even slightly optimistic.
Here is a quick note from BWS:
UTStarcom (UTSI- Buy Rating) provided details on the restructuring plan that the Company has already started to implement. The Company will discontinue manufacturing handsets out of South Korea for the North American market, which will lead to closing the operations by the middle of 2009. UTSI would also reduce their headcount throughout the Company and start to relocate some jobs from their headquarters in California to their operations in China. The process will cost UTSI $18 million, $14 million of which is in cash, but would allow the Company to save approximately $100 million annually in operating expense. The removal of the handset business from the income statement would reduce revenues by approximately $160 million annually, but the revenues were being generated at an operating loss. Our new model continues to reflect UTSI achieving profitability in second quarter 2009, but the losses until that time would be significantly smaller. Cash preservation could provide a lift to UTSI shares after the Company announces fourth quarter results in February. The restructuring makes UTSI a simple story to understand: a company providing equipment for IPTV, broadband, and next generation networks. The Company did not provide an update to guidance. We are keeping our revenue assumptions for the rest of the Company unchanged by only removing the revenues associated to South Korea’s operations.
Meeting with management - I am hoping to schedule a meeting with management next year to discuss outlooks and just do a general Q&A like the one we had in March. I am still very much invested in the company as are a lot of fund managers I have talked to recently. So, I am hoping the recent opex cuts will lead to the elusive sustainable profitability that we have been waiting for although there are a lot of questions that I have (as you can imagine).
I am off for the rest of the year (its been a good work year but terrible year in the markets and UT) and off to Disneyland next week! Hoping that everyone can take some time off and enjoy the holidays safely.
http://biz.yahoo.com/prnews/081218/aqth003.html?.v=72
The above link provides a detailed PR/info on the restructuring. Listening to the call, there were some additional info so I will just summarize the Four point savings initiative.
Non-core businesses - The Korean based handset manufacturing that supplies handsets to PCD in non-Chinese (mainly North American) markets will be closed down by June 2009. The company will take a $6m cash charge and write off $4m in assets. This is expected to save the company $40m/year in OPEX. Two thirds of the workforce is already gone at this time and enable this division to be cash flow positive in Q1/Q2 (last two quarters). The Customs Solutions Business will be disbanded by end of Q1 2009 and result in savings of $10m/year. Certain parts of the operation will be merged with the Multimedia Communications Business Unit.
Commentary: At the beginning of the year, the CSBU was supposed to be a high margin business that was supposed to show strong revenue growth. I had high hopes for a sale but this was not to be. Also, the opex for the business unit was supposed to be around $10m/quarter (according to Barton during one of the previous quarter earnings call). So, it looks like the majority of the business is still intact. The Korea handset manufacturing business turned out to be a major disappointment the last two years. Not only did revenues go down steadily (as we recently just found out) but gross profits were very small. It makes you wonder (again) why they carried this business for so long.
Global 10% Reduction in Workforce - The company ended the quarter with a little over 5000 employees. The company plans to reduce an additional 465 employees on top of the employees let go as part of the non-core business wind downs/merge. Overall, about 15% or 750 employees will be reduced by mid 2009. The reduction in US employees will be completed this week while the Chinese employee reduction to be completed in January. This will result in yearly savings of $30-35m and cost the company $8m in cash charges to be taken in Q4.
Streamline of Backoffice Operations - Details and charges for consolidating operations into China are not yet finalized. The timing will be the during the first three quarters of 2009. This will result in the rest of the savings.
One-time savings, bonuses, and salary structure - The company will shutdown operations for a week during the year end. Non-executive BOD will not take their cash retainers for 2008, executives (VP level/up) will not take cash bonuses for 2008, and certain salary througout the company will be frozen (no increases).
Impact on cash balance and cash flows for 2009 - After announcing the 15-20% opex target reduction during the last earnings call, I estimated some numbers based on previous bookings, gross margins, etc. http://utstarcom-stocknews.blogspot.com/2008/11/2009-outlook.html Here is an exerpt of what I estimated:
2009 projections - It will be imprecise to estimate 2009 revenues based on bookings because of the timing issues but that is all we can go on at this stage. I will use the book to bill ratios for the core portion and estimate around $140m for the handset division. That yields (0.8*246m + 155m + 184m + 1.2*146m) + $140m = $711m in core bookings + $140m in handsets for around $850m. Again, each quarter could yield new contracts and ramping of iptv but this is my best guestimate for now. 2008 revenues (using the midpt of Q4 2008 guidance) will come in around $836m so 2009 will see little if any revenue growth. At 25% GMs, gross profits will only be $213m. This quarter's GMs of 32% was due to NGN performance and projections for Q4 are down to low 20s. The revenue for 2009 could be higher if internal handsets does better but then GMs will be lower so for now, I will go with $213m in gross profits and OPEX of $320m. That scenario could be highly optimistic if OPEX is higher or revenue lower due to CSBU divestiture. So, that is an loss of $107m. Add in $20m for taxes/options and another $23m for contingencies (higher opex/lower revenue/margins) and it can add up quickly to a $150m cash burn for 2009 (ouch!).
The company will end 2008 with about $291m + $24m in escrow in cash/short term securities. At the end of 2009, that could easily be down to $165m in net cash heading into 2010 (or about $1.32/share).
In light of new information, here is my current best guesstimate: My overall revenue estimate for the company (not including the Korean handset business) was $711m. Half a year of handset sales is around $70m (since the division will be shut down by mid 2009). I will assign 27% GMs to the core business and 5% GMs to the handset part. That will yield gross profits of $711m*.27 + $70m*.05 = $195m. Expenses for the 2nd half of 2009 will be down to $70m/quarter. However, expenses in Q1/Q2 may still be around $80m and $75m respectively. So, opex for 2009 could still be $295m for a loss of $100m (not including taxes and the usual other GAAP charges). Of course, this may be conservative since the handset sales may be larger since it is being wound down and I didn't add sales in the 2nd half of the year for the Chinese market.
Based on previous Q4 cash burn, we expected the company to have $291m+24m in net cash reamining ($315m). There is a $14m cash charge in Q4 so net cash will be around $301m by the end of 2008. If we subtract $100m in losses for 2009 + $20m taxes/options + $20m (China consolidation charges), the company will be left with $161m by the end of 2009. That is $4m less than what I estimated previously.
After reading the PR and listening to the call, my initial reaction is slightly positive. By the end of 2009, the quarterly opex will be less than $70m/quarter (compared to the initial 15-20% cuts announced). However, the positives were outweighed by the fact there is still no signs of revenue ramp that will close the gap to profitability. I'm hoping this time, my guesstimates are conservative and that there is material revenue ramp and margin improvements. Some people are more positive thinking profitability may be in Q2/Q3 of 2009 and cash flows much better than I have laid out. However, after four years in the stock and watching the company be behind the curve and throwing out bad surprises very often, I'd like to see good results and trends before getting even slightly optimistic.
Here is a quick note from BWS:
UTStarcom (UTSI- Buy Rating) provided details on the restructuring plan that the Company has already started to implement. The Company will discontinue manufacturing handsets out of South Korea for the North American market, which will lead to closing the operations by the middle of 2009. UTSI would also reduce their headcount throughout the Company and start to relocate some jobs from their headquarters in California to their operations in China. The process will cost UTSI $18 million, $14 million of which is in cash, but would allow the Company to save approximately $100 million annually in operating expense. The removal of the handset business from the income statement would reduce revenues by approximately $160 million annually, but the revenues were being generated at an operating loss. Our new model continues to reflect UTSI achieving profitability in second quarter 2009, but the losses until that time would be significantly smaller. Cash preservation could provide a lift to UTSI shares after the Company announces fourth quarter results in February. The restructuring makes UTSI a simple story to understand: a company providing equipment for IPTV, broadband, and next generation networks. The Company did not provide an update to guidance. We are keeping our revenue assumptions for the rest of the Company unchanged by only removing the revenues associated to South Korea’s operations.
Meeting with management - I am hoping to schedule a meeting with management next year to discuss outlooks and just do a general Q&A like the one we had in March. I am still very much invested in the company as are a lot of fund managers I have talked to recently. So, I am hoping the recent opex cuts will lead to the elusive sustainable profitability that we have been waiting for although there are a lot of questions that I have (as you can imagine).
I am off for the rest of the year (its been a good work year but terrible year in the markets and UT) and off to Disneyland next week! Hoping that everyone can take some time off and enjoy the holidays safely.
Sunday, December 7, 2008
Weekly Recap - Near Lows
The stock closed at $1.46, off 44 cents or 23% for the week. The markets recovered from the last week's early 7-9% drubbing to end the week down 2-3%. However, UT set a new all-time weekly low. The volume last week was above 1m shares every day so the stock clearly underperformed despite the announcement of the OPEX reduction conference call (on Dec. 18). Specific news was light so the big news was again the shareprice. The main discussion on the message boards was what is UT really worth and can management turn this around.
With morale already low for over a year (when the stock dropped below $5 and then $3), things turned even worse the last few months as the stock is now under $1.5. While the recent credit crunch is deeper than most could have forseen, UT's poor operational performance has been going on for years. The company has been targetting "near term profitability" for atleast 4 years with every management change and company strategic decision.
During the last year, there were glimmers of hope as the "new" management team cut expenses, disposed of none-core assets, paid the convertible, filed all the late financials, raised cash, and laid out the future technology/path of the company. Lets take a look at the balance sheet and see the tangible impact of those actions and see if the company can survive (at $1.46 share price, lower than even the car makers and other "insolvent" companies, its constructive to look at the numbers for survivability).
Balance Sheet - Net cash increased to $331m this quarter due to the sale of the PCD. Inventory was reduced from $570m to just $195m. Other current liabilities was reduced from $440m to around $290m. Inventory plus accounts receivables is close to payables. Tangible assets went down $50m from last quarter to $534m.
As noted in the past, the sale of the PCD brought liquidity, reduced inventory risk, and improve focus to the company. The inventory level is down to under $200m (and this includes the build up for the Phase II India contract). With the current market environment, the importance of being lean is even more important and I have to give management credit for executing the sale. There is a lot of work in the OPEX side that hopefully will be addressed in the December 18 call. Management underestimated the urgency of additional expense cuts even during the last year expecting revenue growth to get to their expense metrics targets (which I haven't heard anymore about). The market doesn't seem to be confident that the company can cut expenses enough and after years, its not surprising. However, the company is getting leaner (based on inventory/cash levels/expenses) and bookings for core businesses and target markets still provide plenty of hope/upside.
Have a good week to everyone.
With morale already low for over a year (when the stock dropped below $5 and then $3), things turned even worse the last few months as the stock is now under $1.5. While the recent credit crunch is deeper than most could have forseen, UT's poor operational performance has been going on for years. The company has been targetting "near term profitability" for atleast 4 years with every management change and company strategic decision.
During the last year, there were glimmers of hope as the "new" management team cut expenses, disposed of none-core assets, paid the convertible, filed all the late financials, raised cash, and laid out the future technology/path of the company. Lets take a look at the balance sheet and see the tangible impact of those actions and see if the company can survive (at $1.46 share price, lower than even the car makers and other "insolvent" companies, its constructive to look at the numbers for survivability).
Balance Sheet - Net cash increased to $331m this quarter due to the sale of the PCD. Inventory was reduced from $570m to just $195m. Other current liabilities was reduced from $440m to around $290m. Inventory plus accounts receivables is close to payables. Tangible assets went down $50m from last quarter to $534m.
As noted in the past, the sale of the PCD brought liquidity, reduced inventory risk, and improve focus to the company. The inventory level is down to under $200m (and this includes the build up for the Phase II India contract). With the current market environment, the importance of being lean is even more important and I have to give management credit for executing the sale. There is a lot of work in the OPEX side that hopefully will be addressed in the December 18 call. Management underestimated the urgency of additional expense cuts even during the last year expecting revenue growth to get to their expense metrics targets (which I haven't heard anymore about). The market doesn't seem to be confident that the company can cut expenses enough and after years, its not surprising. However, the company is getting leaner (based on inventory/cash levels/expenses) and bookings for core businesses and target markets still provide plenty of hope/upside.
Have a good week to everyone.
Sunday, November 30, 2008
Weekly Update - Rally?
The stock closed the week at $1.90, up 43 cents of 29%. The markets were significantly higher with the DOW, S&P, and Nasdaq rising 9.7%, 12%, and 11% respectively. Other telecom/equipment providers rose as well. Sonus was up to $1.55 from $1.46. Alcatel-Lucent up to $2.14 from $1.86. Ericsson up to $7.12 from $5.82. 3com up to $2.01 from $1.53 (nice move) and Nortel up to 0.57 from 0.42. While the market is up nicely from late last week's bottoms, the situation has just gone from really ugly to slightly ugly :-) As a side note, my 401k peaked at about $150k early this year and now is not even six figures. Of course, I'll probably be working another 30 years so it has some time to recover :-) At the current price of $1.9, UT is down 85 cents or 31% for the year. While that is not too unusual in this market, UT had been up over 100% as late as July this year and down about 80% from early last year.
Asia IPTV - From eganameten, here is an article on iptv in Asia. http://www.variety.com/article/VR1117996507.html?categoryId=3427&cs=1 Even at this juncture, there are signs of a "slowdown" in worldwide iptv as Europe and places like Hong Kong have had a few years of very good growth. Sigma designs recently warned of slowing in iptv but in general, there should be very good growth for UT markets.
"In numerical terms, China is already a major IPTV player, with 2.2 million subscribers at the end of Q3 (China Telecom had 1.51 million, China Netcom 690,000), but content and licensing requirements so far prevent it becoming mass market. (So too, does the political capital previously expended on building major cable networks.)
IPTV licenses are not issued directly to telecom operators, which control the infrastructure, but rather to joint operations between telecom carriers and IPTV broadcasters. Further, they require three separate licenses from the Ministry of Industry and Information Technology and a fourth, an Internet culture business license, from the Ministry of Culture. And local telecom operators are only allowed to offer IPTV in cooperation with national IPTV license holders -- a China Telecom branch in Hubei Province was recently fined for breaching this rule."
China Telecom completes iptv upgrade in Shanghai - I got the text from an institutional holder....China Telecom completes upgrade to support 900,000 IPTV users in Shanghai Shanghai. November 26. INTERFAX-CHINA - China Telecom recently finished upgrading its IPTV (Internet Protocol Television) network in Shanghai to support up to 900,000 simultaneous users, domestic media reported onNov. 26. ZTE Corp., UTStarcom Inc. and Huawei Technologies won the tender to upgrade the network in different districts of Shanghai, Chinese IPTV industry portal Lmtw.com reported. The three companies were also selected to supply IPTV set-top boxes, along with two other domestic set-top box suppliers, namely Shenzhen Coship Electronics Co. Ltd. and Chengdu USEE Digital Technology Co. Ltd., the report said. "It is very likely that China Telecom will kick off a new round of IPTV network upgrades next year because the IPTV user base is expanding much faster than expected," Zhang Yanhong, an industry analyst and founder ofLmtw.com, told Interfax. The IPTV user base in Shanghai is expanding more rapidly than in any other Chinese city. As of Nov. 25, Shanghai had more than 700,000 IPTVusers, more than triple that recorded at the end of 2007. IPTV in Shanghai is jointly operated by China Telecom and Shanghai Media Group, the largest media group in the region.
Upcoming Conference Call - The cc to discuss OPEX reduction in December should help UT stock back to the $2+ level. At the current market cap of $240m, it assumes UT will lose an additional $60m in cash flow, the building/property are not worth anything, and technology which they have invested hundreds of millions + all client relationships are worth nothing. If nothing else, the rally we have shows there are tremendous values at the appropriate times.
Again, the rally was significant but looking at equity prices, it sure didn't feel "significant" after all the losses. One thing is certain. The equity markets will continue to be volatile and economic recovery projections (the ones I've read over the weekend) are still about a year away at the earliest. After over 4 years in this stock, it is depressing to see the current state of the stock even in this market. UT just failed to participate in the bull markets the last few years despite operating in the highest growth markets, having visionary CEOs/founders, and the contacts/relationships in Japan/China (Softbank/Son, Alibaba/Ma, etc). I continue to hold out hope that someone in that management/BOD can salvage/utilize the remaining resources to create a profitable/growing company that will yield good results for shareholders still remaining. If it doesn't happen, then hopefully, some shareholders will find the share price low enough to force management/BOD to act.
Have a good rest of the Thanksgiving weekend.
Asia IPTV - From eganameten, here is an article on iptv in Asia. http://www.variety.com/article/VR1117996507.html?categoryId=3427&cs=1 Even at this juncture, there are signs of a "slowdown" in worldwide iptv as Europe and places like Hong Kong have had a few years of very good growth. Sigma designs recently warned of slowing in iptv but in general, there should be very good growth for UT markets.
"In numerical terms, China is already a major IPTV player, with 2.2 million subscribers at the end of Q3 (China Telecom had 1.51 million, China Netcom 690,000), but content and licensing requirements so far prevent it becoming mass market. (So too, does the political capital previously expended on building major cable networks.)
IPTV licenses are not issued directly to telecom operators, which control the infrastructure, but rather to joint operations between telecom carriers and IPTV broadcasters. Further, they require three separate licenses from the Ministry of Industry and Information Technology and a fourth, an Internet culture business license, from the Ministry of Culture. And local telecom operators are only allowed to offer IPTV in cooperation with national IPTV license holders -- a China Telecom branch in Hubei Province was recently fined for breaching this rule."
China Telecom completes iptv upgrade in Shanghai - I got the text from an institutional holder....China Telecom completes upgrade to support 900,000 IPTV users in Shanghai Shanghai. November 26. INTERFAX-CHINA - China Telecom recently finished upgrading its IPTV (Internet Protocol Television) network in Shanghai to support up to 900,000 simultaneous users, domestic media reported onNov. 26. ZTE Corp., UTStarcom Inc. and Huawei Technologies won the tender to upgrade the network in different districts of Shanghai, Chinese IPTV industry portal Lmtw.com reported. The three companies were also selected to supply IPTV set-top boxes, along with two other domestic set-top box suppliers, namely Shenzhen Coship Electronics Co. Ltd. and Chengdu USEE Digital Technology Co. Ltd., the report said. "It is very likely that China Telecom will kick off a new round of IPTV network upgrades next year because the IPTV user base is expanding much faster than expected," Zhang Yanhong, an industry analyst and founder ofLmtw.com, told Interfax. The IPTV user base in Shanghai is expanding more rapidly than in any other Chinese city. As of Nov. 25, Shanghai had more than 700,000 IPTVusers, more than triple that recorded at the end of 2007. IPTV in Shanghai is jointly operated by China Telecom and Shanghai Media Group, the largest media group in the region.
Upcoming Conference Call - The cc to discuss OPEX reduction in December should help UT stock back to the $2+ level. At the current market cap of $240m, it assumes UT will lose an additional $60m in cash flow, the building/property are not worth anything, and technology which they have invested hundreds of millions + all client relationships are worth nothing. If nothing else, the rally we have shows there are tremendous values at the appropriate times.
Again, the rally was significant but looking at equity prices, it sure didn't feel "significant" after all the losses. One thing is certain. The equity markets will continue to be volatile and economic recovery projections (the ones I've read over the weekend) are still about a year away at the earliest. After over 4 years in this stock, it is depressing to see the current state of the stock even in this market. UT just failed to participate in the bull markets the last few years despite operating in the highest growth markets, having visionary CEOs/founders, and the contacts/relationships in Japan/China (Softbank/Son, Alibaba/Ma, etc). I continue to hold out hope that someone in that management/BOD can salvage/utilize the remaining resources to create a profitable/growing company that will yield good results for shareholders still remaining. If it doesn't happen, then hopefully, some shareholders will find the share price low enough to force management/BOD to act.
Have a good rest of the Thanksgiving weekend.
Sunday, November 23, 2008
Weekly Recap - Really Ugly
The stock closed at $1.47, down from $1.98 the last two weeks. I didn't post a weekly recap last week so this I'll reflect the last two week's declines. The stock was down 51 cents or 26%. The markets were significantly lower as well with declines of 16%, 10%, and 14% for the Nasdaq, DOW, and S&P respectively. Those numbers even reflected the last minute rebound late Friday of 5 to 6% for the markets. It is really ugly. UT stock hit an all-time low of $1.35 on Thursday and Friday and at the current price of $1.47 has a market cap less than $180m. So, what do I do this week.....Yup, buy more UT at $1.65, $1.51, $1.46, and $1.35 (about 15k shares total). Obviously, I consider this a good bargain but in this market, it can go down some more.
NGN webinar - Nothing significantly new that I could tell but they did mention some overall numbers. Bookings growth for the core was 25% in 2008. Thats definitely good growth but off a low base from 2007. As we've seen, the declines in PAS and handsets in 2008 were too much for core revenue to absorb. Revenues from a geographical standpoint is as follows 50% China, 20% India, 15% US (handsets), and 15% others. As my last post indicated, I was really surprised/disappointed about the non-PAS handset sales declining by about half in revenue from early 2007. Again in the last earnings call, Peter did mention introducing a bunch of new CDMA handsets into the China markets. That could really help revenue going forward. The handset margins are not great but better than some broadband margins. With the telecom consolidation in China, UT handset sales (non-PAS) might finally do well. I reviewed the transcript from last quarter and they did mention 10%+ bookings growth in 2009. On top of the growth in bookings for the core in 2008, the drastically reduced PAS bookings in 2008 and declines/or lack of PAS bookings in 2009, this number may be very good. One last note on NGN, Blackmore/Casky did a good job in explaining the benefits of NGN to the carriers in terms of the savings and competitive positions the customers would have. In this environment, I think this will encourage more carriers to implement UT systems for Class 5 replacements. Again, nothing really new but the recent wins/progress in NGN is encouraging.
OPEX cuts/cash flow - The 15 to 20% target for opex cuts for "early 2009" is definitely needed and welcome news. There is serious concern about UT's cash burn so I hope this can be implemented ASAP. There will be a December call to update us on this issue. Cash flow for 2008 was also impacted significantly by the Phase 2 broadband contract. In order for India to come anywhere close to their 2010 broadband target of 20m users, there should be more contracts coming in 2009 and based on lessons learn from Phase I, it should be much better for UT in terms of GMs and cash flow.
Inida IPTV update - Looks like Aksh is accelerating roll out to additional cities in the next few weeks. http://dth-iptv-radio.blogspot.com/search/label/MTNL%20IPTV They are targetting 70k users by the end of the financial year (not sure when that is). Also, they are going to target the 4m broadband users of MTNL and the 6m broadband users for BSNL in 20 cities.
IPTV estimates - Updated estimates for worldwide iptv users. http://www.iptv-news.com/content/view/2554/64/ China iptv users are projected to reach over 10m by 2013, which is lower than earlier projections. Growth for 2008 worldwide is about 100% which bodes well for lagging regions/areas (most of UTs target markets such as India, China, Latin America, etc). Also, UT has ancillary revenue from iptv advertising unit, surveilance etc. I'm not sure if they are including cable/iptv in the estimates.
Market valuations - Just some stock price of companies in the sector....Sonus $1.46, Alcatel-Lucent $1.86, Ericsson $5.82, 3com $1.53, and Nortel $0.42. Transmetta was recently bought for around $300m (slightly above their cash value). Some shareholders are suing due to the low share price. In this market, I would think there would be more consolidation but it hasn't happened so far. This could really help in pricing, market valuations, etc.
Have a good rest of the weekend and new week to everyone. It doesn't look like the market has found the bottom yet and year-end tax selling may just be starting. Did I mention...really ugly.
NGN webinar - Nothing significantly new that I could tell but they did mention some overall numbers. Bookings growth for the core was 25% in 2008. Thats definitely good growth but off a low base from 2007. As we've seen, the declines in PAS and handsets in 2008 were too much for core revenue to absorb. Revenues from a geographical standpoint is as follows 50% China, 20% India, 15% US (handsets), and 15% others. As my last post indicated, I was really surprised/disappointed about the non-PAS handset sales declining by about half in revenue from early 2007. Again in the last earnings call, Peter did mention introducing a bunch of new CDMA handsets into the China markets. That could really help revenue going forward. The handset margins are not great but better than some broadband margins. With the telecom consolidation in China, UT handset sales (non-PAS) might finally do well. I reviewed the transcript from last quarter and they did mention 10%+ bookings growth in 2009. On top of the growth in bookings for the core in 2008, the drastically reduced PAS bookings in 2008 and declines/or lack of PAS bookings in 2009, this number may be very good. One last note on NGN, Blackmore/Casky did a good job in explaining the benefits of NGN to the carriers in terms of the savings and competitive positions the customers would have. In this environment, I think this will encourage more carriers to implement UT systems for Class 5 replacements. Again, nothing really new but the recent wins/progress in NGN is encouraging.
OPEX cuts/cash flow - The 15 to 20% target for opex cuts for "early 2009" is definitely needed and welcome news. There is serious concern about UT's cash burn so I hope this can be implemented ASAP. There will be a December call to update us on this issue. Cash flow for 2008 was also impacted significantly by the Phase 2 broadband contract. In order for India to come anywhere close to their 2010 broadband target of 20m users, there should be more contracts coming in 2009 and based on lessons learn from Phase I, it should be much better for UT in terms of GMs and cash flow.
Inida IPTV update - Looks like Aksh is accelerating roll out to additional cities in the next few weeks. http://dth-iptv-radio.blogspot.com/search/label/MTNL%20IPTV They are targetting 70k users by the end of the financial year (not sure when that is). Also, they are going to target the 4m broadband users of MTNL and the 6m broadband users for BSNL in 20 cities.
IPTV estimates - Updated estimates for worldwide iptv users. http://www.iptv-news.com/content/view/2554/64/ China iptv users are projected to reach over 10m by 2013, which is lower than earlier projections. Growth for 2008 worldwide is about 100% which bodes well for lagging regions/areas (most of UTs target markets such as India, China, Latin America, etc). Also, UT has ancillary revenue from iptv advertising unit, surveilance etc. I'm not sure if they are including cable/iptv in the estimates.
Market valuations - Just some stock price of companies in the sector....Sonus $1.46, Alcatel-Lucent $1.86, Ericsson $5.82, 3com $1.53, and Nortel $0.42. Transmetta was recently bought for around $300m (slightly above their cash value). Some shareholders are suing due to the low share price. In this market, I would think there would be more consolidation but it hasn't happened so far. This could really help in pricing, market valuations, etc.
Have a good rest of the weekend and new week to everyone. It doesn't look like the market has found the bottom yet and year-end tax selling may just be starting. Did I mention...really ugly.
Saturday, November 15, 2008
2009 Outlook
The company will discuss additional OPEX cuts later this quarter (in about a month) but I looked into the non-GAAP revenue provided by the company that separated out the PCD division sold and included the revenue sale into the PCD (basically the Korean designed CDMA handsets sold outside of China). I also noted the book to bill ratios provided during the last 4 quarters to generate some preliminary estimates for 2009.
Q1 2007 to Q3 2007 - Just for historical perspective, the non-PCD/non-Korean handset revenue for those 3 quarters were $188, 180, and 188m. The Korean handset division had revenues of $77, 70, and 60m. For this posting, I will designate the non-PCD/non-Korean handset as "core" and the Korean handset division as "handset".
Q4 2007 - This was a huge revenue quarter for PCD having generated revenue of $560m from Q3 of $458m. Overall book to bill only came in at 0.8. The core did have revenue of $246m while the handset continued to decline to $53m.
Q1 2008 - While book to bill came in at 1.2, PCD book to bill was 1.3 while non-PCD was only 1.0. Core revenue was down significantly to $155m and the handset revenue declined again to $35m.
Q2 2008 - Excluding PCD, book to bill was again 1.0. Core revenue did jump back to $184m and handsets back to $56m. Note however that some Q3 revenue was able to be recognized in Q2.
Q3 2008 - Core revenue came in at $146m while handsets at $35m. Note also that PAS (and other handsets in China) was $37m. That means infrastructure sales (iptv, ngn, broadband, PAS infra) was only $109m. Book to bill did increase to 1.2.
So, lets list the overall trends (some were apparent/some not so): The internal design handset division has been declining as well as PAS infra/handsets by around 50% from Q1 2007. So, the PCD performance was carried by the resale part. The current Korean handset portion is currently not cash flow positive and all the improvements we keep hearing about (they are in the 3rd or 4th generation of developing their internal handsets, etc) have not hit the bottom line and is basically pie in the sky. The "hope" is this will improve as they can penetrate the China markets and make up some PAS sales. However, the numbers don't give me confidence.
Core revenue (despite some improvements in iptv/ngn) has not quite closed the gap to the $180m+ range.
Bookings have not really grown yet. This quarter's 1.2 was a start but this was the lowest revenue of the core+handset group.
Next quarter's expected revenue of $225m was way off the analysts already lowered estimates of around $250m and investor expectations in the high $200m/low $300m during the seasonally strong Q4.
OPEX cuts of 15 to 20% is not only mandatory but is insufficient to get the company to profitability. During the Q2 earnings call, Blackmore mentioning divesting or merging the CSBU in 3 to 4 months (definitely by the end of the year). This will probably done prior to the update call discussing OPEX cuts. Fifteen to twenty percent would still yield expenses in the $77-83m range (say $320m yearly runrate IF implemented by Q1).
2009 projections - It will be imprecise to estimate 2009 revenues based on bookings because of the timing issues but that is all we can go on at this stage. I will use the book to bill ratios for the core portion and estimate around $140m for the handset division. That yields (0.8*246m + 155m + 184m + 1.2*146m) + $140m = $711m in core bookings + $140m in handsets for around $850m. Again, each quarter could yield new contracts and ramping of iptv but this is my best guestimate for now. 2008 revenues (using the midpt of Q4 2008 guidance) will come in around $836m so 2009 will see little if any revenue growth. At 25% GMs, gross profits will only be $213m. This quarter's GMs of 32% was due to NGN performance and projections for Q4 are down to low 20s. The revenue for 2009 could be higher if internal handsets does better but then GMs will be lower so for now, I will go with $213m in gross profits and OPEX of $320m. That scenario could be highly optimistic if OPEX is higher or revenue lower due to CSBU divestiture. So, that is an loss of $107m. Add in $20m for taxes/options and another $23m for contingencies (higher opex/lower revenue/margins) and it can add up quickly to a $150m cash burn for 2009 (ouch!).
The company will end 2008 with about $291m + $24m in escrow in cash/short term securities. At the end of 2009, that could easily be down to $165m in net cash heading into 2010 (or about $1.32/share).
Optimistically, I have to say that there are a lot of things that can happen in the next 5 quarters such as bookings growth, even lowered expenses, higher margins, better market environment going into 2010. However, the above shows profitability not only being pushed out (once again after 4 years already) but that management is still behind the curve in their estimates/execution. Back in August 2007, they only had net $150m in cash. The 6 quarters of operational losses (+ 2009 operational losses) will be subsidized by the one time gains in investment sales and sale of the PCD.
The company also has around $200m in real estate, no debt and will generate some interest income. They have time that other companies do not but eventually, they will have to become profitable or sell out and get whatever they can for shareholders. As I said, a lot can change in the next 5 quarters and I will take a company with no debt, net cash of $165m, and profitable for 2010 (if that was the case) but thats a long ways off from here. The share price, current market environment, and years of underperformance should motivate management to have a sense of urgency but the numbers above show that even with the current opex cuts planned, it is not enough. The additional hundreds of millions in bookings/revenue that Peter was projecting that can ramp is nowhere in sight.
Have a good weekend everyone. Its really ugly in the markets and in UT stock but it could easily get worse. So, prepare for the worse and hope for the best.
Q1 2007 to Q3 2007 - Just for historical perspective, the non-PCD/non-Korean handset revenue for those 3 quarters were $188, 180, and 188m. The Korean handset division had revenues of $77, 70, and 60m. For this posting, I will designate the non-PCD/non-Korean handset as "core" and the Korean handset division as "handset".
Q4 2007 - This was a huge revenue quarter for PCD having generated revenue of $560m from Q3 of $458m. Overall book to bill only came in at 0.8. The core did have revenue of $246m while the handset continued to decline to $53m.
Q1 2008 - While book to bill came in at 1.2, PCD book to bill was 1.3 while non-PCD was only 1.0. Core revenue was down significantly to $155m and the handset revenue declined again to $35m.
Q2 2008 - Excluding PCD, book to bill was again 1.0. Core revenue did jump back to $184m and handsets back to $56m. Note however that some Q3 revenue was able to be recognized in Q2.
Q3 2008 - Core revenue came in at $146m while handsets at $35m. Note also that PAS (and other handsets in China) was $37m. That means infrastructure sales (iptv, ngn, broadband, PAS infra) was only $109m. Book to bill did increase to 1.2.
So, lets list the overall trends (some were apparent/some not so): The internal design handset division has been declining as well as PAS infra/handsets by around 50% from Q1 2007. So, the PCD performance was carried by the resale part. The current Korean handset portion is currently not cash flow positive and all the improvements we keep hearing about (they are in the 3rd or 4th generation of developing their internal handsets, etc) have not hit the bottom line and is basically pie in the sky. The "hope" is this will improve as they can penetrate the China markets and make up some PAS sales. However, the numbers don't give me confidence.
Core revenue (despite some improvements in iptv/ngn) has not quite closed the gap to the $180m+ range.
Bookings have not really grown yet. This quarter's 1.2 was a start but this was the lowest revenue of the core+handset group.
Next quarter's expected revenue of $225m was way off the analysts already lowered estimates of around $250m and investor expectations in the high $200m/low $300m during the seasonally strong Q4.
OPEX cuts of 15 to 20% is not only mandatory but is insufficient to get the company to profitability. During the Q2 earnings call, Blackmore mentioning divesting or merging the CSBU in 3 to 4 months (definitely by the end of the year). This will probably done prior to the update call discussing OPEX cuts. Fifteen to twenty percent would still yield expenses in the $77-83m range (say $320m yearly runrate IF implemented by Q1).
2009 projections - It will be imprecise to estimate 2009 revenues based on bookings because of the timing issues but that is all we can go on at this stage. I will use the book to bill ratios for the core portion and estimate around $140m for the handset division. That yields (0.8*246m + 155m + 184m + 1.2*146m) + $140m = $711m in core bookings + $140m in handsets for around $850m. Again, each quarter could yield new contracts and ramping of iptv but this is my best guestimate for now. 2008 revenues (using the midpt of Q4 2008 guidance) will come in around $836m so 2009 will see little if any revenue growth. At 25% GMs, gross profits will only be $213m. This quarter's GMs of 32% was due to NGN performance and projections for Q4 are down to low 20s. The revenue for 2009 could be higher if internal handsets does better but then GMs will be lower so for now, I will go with $213m in gross profits and OPEX of $320m. That scenario could be highly optimistic if OPEX is higher or revenue lower due to CSBU divestiture. So, that is an loss of $107m. Add in $20m for taxes/options and another $23m for contingencies (higher opex/lower revenue/margins) and it can add up quickly to a $150m cash burn for 2009 (ouch!).
The company will end 2008 with about $291m + $24m in escrow in cash/short term securities. At the end of 2009, that could easily be down to $165m in net cash heading into 2010 (or about $1.32/share).
Optimistically, I have to say that there are a lot of things that can happen in the next 5 quarters such as bookings growth, even lowered expenses, higher margins, better market environment going into 2010. However, the above shows profitability not only being pushed out (once again after 4 years already) but that management is still behind the curve in their estimates/execution. Back in August 2007, they only had net $150m in cash. The 6 quarters of operational losses (+ 2009 operational losses) will be subsidized by the one time gains in investment sales and sale of the PCD.
The company also has around $200m in real estate, no debt and will generate some interest income. They have time that other companies do not but eventually, they will have to become profitable or sell out and get whatever they can for shareholders. As I said, a lot can change in the next 5 quarters and I will take a company with no debt, net cash of $165m, and profitable for 2010 (if that was the case) but thats a long ways off from here. The share price, current market environment, and years of underperformance should motivate management to have a sense of urgency but the numbers above show that even with the current opex cuts planned, it is not enough. The additional hundreds of millions in bookings/revenue that Peter was projecting that can ramp is nowhere in sight.
Have a good weekend everyone. Its really ugly in the markets and in UT stock but it could easily get worse. So, prepare for the worse and hope for the best.
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