The stock closed at $1.5, losing 9 cents or 5.7%. The markets were also down with the DOW, S&P, and Nasdaq losing 2.5, 2, and 3.4% respectively. The stock volume was down to the 200k level last week and the stock down another 19% this year alone. There has been no news from the company since the restructuring announcement. I did a quick scan of some websites/message board for related news.
Lu interview - Sharholder Techbroker posted the link to Lu's interview. http://translate.google.com/translate?prev=_t&hl=en&ie=UTF-8&u=http%3A%2F%2Fit.sohu.com%2F20090108%2Fn261641698.shtml&sl=zh-CN&tl=en&history_state0=
My initial comment: The success of PAS gave UT so much funds that they invested in various MAJOR projects from end to end iptv solution to 3G (total package - see above components) and even to the convergence of mobile, broadband, and fixed line, etc, etc. They have abandoned the WCDMA specific 3G products but have retained core parts to build new products/components for TDSCDMA such as softswitch (thats what I read into the Lu interview). Currently, they are focused on the terminals and iptv/broadband/ngn but not necessarily the mobile/wireless segment. But now that licenses have been issued, they can better focus their tech advantages to build new products aside from just terminals/handsets.
In the interview, it looks like Just in Time is using UT's Rolling Stream iptv solution.
Inida Mobile/broadband growth - India's mobile operators activated a staggering 10.81 million new lines during December 2008, taking the total number of wireless connections in the country to 346.89 million at the end of last year, according to new figures from the Telecom Regulatory Authority of India (TRAI) . http://www.unstrung.com/document.asp?doc_id=170862
The country's fixed line base continues to shrink, though: The number of fixed line connections in India fell by 150,000 during December 2008, finishing the year at 37.9 million. The number of fixed broadband connections grew, though, by 170,000 to 5.45 million.
Aksh Interview - http://www.lightreading.com/tv/tv_popup.asp?doc_id=170754 Good interview regarding iptv developments.
China IPTV policy breakthroughs - The Chinese IPTV market will see a number of further policy breakthroughs in 2009, according to Chinese consultancy firm CCID Consulting, following a rapid growth in the number of IPTV subscribers during 2008, when the number shot up 100% year-one-year.
The promotion of free and bundling marketing by operators has meant that IPTV subscribers have appeared in Shanghai, Zhejiang, Fujian and Guangdong, according to CCID Consulting, with around 700,000 subscribers in Shanghai alone at the end of last year. The consulting firm adds that the rapid subscriber growth has driven the development of the IPTV equipment market, although many telecom operators have found it difficult to make a profit from IPTV, with many promotions remaining at the free and low price promotion stage. http://www.iptv-news.com/iptv_news/january_09/chinese_iptv_market_to_see_policy_breakthroughs_in_2009
Microsoft IPTV in China Cable - Microsoft recorded three IPTV firsts today: the first cable operator customer for its Mediaroom platform; the breakthrough into the TV-over-broadband market in China; and the first deployment of the new Anytime capabilities that were announced last week at 2009 International CES in Las Vegas. (See Microsoft's Promise: TV Anytime You Want It.) http://www.lightreading.com/document.asp?doc_id=170207&site=cdn
While UT disclosed it won a cable customer in China for their iptv system, this Microsoft news shows the technology lead that UT has built over the last few years has eroded.
From the above links/information, there are obvious positives to the markets for UT products but also heavy competition for the few growth areas in today's recessionary environment. The heavy investments that UT was able to make due to their success in PAS in iptv, 3G, broadband/ngn, etc has not brought signficiant revenue and has led to losses the last 4 years. There is no doubt that they still retain good technology, maintained/grown tier 1/2 operators, and positioned themselves for growth. The balance sheet is good enough to weather this recession but expenses that have been significantly reduced are still high compared to expected revenues. At a certain point, they cannot cut more without having their competition over-run them and that will be the end game. At a certain point, they have to show significant growth that will get them to profitability. Judging from Lu's inteview and management's "optimism" over the last year or two, they still believe they are a major player and can be competitive/successful. The stock/markets don't reflect that confidence.
For me personally, at this stage, there is little to lose ($1.5 shareprice/market cap under net cash) and am rolling the dice that the valuation is ridiculous for what the company has invested, their current cash/technology/assets/markets/contracts/position. I guess thats better than investing in some of these banks :-) BTW, it looks like the markets are hanging near the November lows but holding so far (Dow was in the high 7k range all last week). With the negative headline news regarding layoffs, bank failures, etc, it seems only a matter of time that the lows will have to be tested.
Have a good weekend everyone.
Saturday, January 24, 2009
Saturday, January 17, 2009
Weekly recap - Slow start to the new year
The markets and UT stock initially exploded out the gate in the new year but has made a complete reversal with the DOW, Nasdaq, and S&P now down 5.6, 3, and 5.8% respectively. UT had been up as much as 18% at $2.18 but now down 26 cents or 14%. UTs Q4 has closed so there is not much news as shareholders await for the results in Feb. Here are a few highlights (lowlights) from other company news.
Nortel bankruptcy - With deteriorating performance and huge debt loads, Nortel "rewarded" long time shareholders/employees with a New year's present by filing for bankruptcy. http://www.reuters.com/article/topNews/idUSTRE50C7RV20090114?feedType=RSS&feedName=topNews Six months ago, I lost money in Nortel buying in the $7 range and quickly unloading in the $6 range right after their earnings call. A couple of months before that, their management team was very upbeat in their analyst meeting projecting 4% operating margins and low single digit revenue growth. Their highly paid CEO Mike Z (from GE six sigma or whatever management crap the business people are learning) has even one upped UT performance by now filing for bankruptcy. My main frustration however was not shorting the crap out of Nortel after the earnings call six months ago. Their CEO seriosuly sounded like a football jock that has his head cut off. Talk about a true cave man. While UT balance sheet is very good compared to Nortel, the company continues to lose a lot of money and shareholders should continue to be concerned about management's actions/inactions. Nortel has $2.4 Billion in cash and around $10b in revenue. And they filed for bankruptcy and won't even pay employees that recently signed termination contracts. It is sad when management continues to get hefty salaries while shareholders get nada.........BTW, there seems to be existing employees that have started a Facebook site for Nortel called, "I still believe".......sheesh. http://www.allaboutnortel.com/
Sonus Networks - Another outstanding telecom equipment provider that has shareholders interests at heart - NOT. Their stock is down to $1.38, down from $4-5 range this year and $8s just last year. They have recently cut more costs but have actually given 25% shareholder Legatum a couple of board seats. Really nice of them. Good luck to Legatum and other shareholders. Atleast, they will have a say on trying to turn around another "great" management team.
Citigroup/Bank of America - These companies traded in the $50 range in 2007 and now at $3.5 (C) and $7 (BAC) showing how great managers US companies really do have. Does it take all these business degrees and "experience" to run these companies to the ground? And how about the management/BOD at Sandisk, Yahoo, Take Two and other companies that have amazingly received mega buyout premiums the last year and walked away! Really amazing....
Palm - On a brighter note, Palm's turnaround has had significant traction. They had hired former Apple Podfather John Rubinstein and he has managed to introduce a new operating system and new products. Previous rumors of Apple buying Palm is resurfacing as well with Jobs health and synergies of the two companies. Palm stock has gone from $9 to $1 back to $8 in less than six months! I tip my hat to Mr. Rubinstein for achieving their turnaround since he was hired in 2007. Wasn't that the year UT failed to sell itself and hired Blackmore. Yup, UTs turnaround from 2004 continues as the stock languishes in the $1s and management continues to promise a near term goal of returning the company to profitability.
With no good options, I'm still a believer (at $1.59) just like Nortel shareholders believed to the very end. Hope this one ends up better. Sad.
Have a good weekend everyone.
Nortel bankruptcy - With deteriorating performance and huge debt loads, Nortel "rewarded" long time shareholders/employees with a New year's present by filing for bankruptcy. http://www.reuters.com/article/topNews/idUSTRE50C7RV20090114?feedType=RSS&feedName=topNews Six months ago, I lost money in Nortel buying in the $7 range and quickly unloading in the $6 range right after their earnings call. A couple of months before that, their management team was very upbeat in their analyst meeting projecting 4% operating margins and low single digit revenue growth. Their highly paid CEO Mike Z (from GE six sigma or whatever management crap the business people are learning) has even one upped UT performance by now filing for bankruptcy. My main frustration however was not shorting the crap out of Nortel after the earnings call six months ago. Their CEO seriosuly sounded like a football jock that has his head cut off. Talk about a true cave man. While UT balance sheet is very good compared to Nortel, the company continues to lose a lot of money and shareholders should continue to be concerned about management's actions/inactions. Nortel has $2.4 Billion in cash and around $10b in revenue. And they filed for bankruptcy and won't even pay employees that recently signed termination contracts. It is sad when management continues to get hefty salaries while shareholders get nada.........BTW, there seems to be existing employees that have started a Facebook site for Nortel called, "I still believe".......sheesh. http://www.allaboutnortel.com/
Sonus Networks - Another outstanding telecom equipment provider that has shareholders interests at heart - NOT. Their stock is down to $1.38, down from $4-5 range this year and $8s just last year. They have recently cut more costs but have actually given 25% shareholder Legatum a couple of board seats. Really nice of them. Good luck to Legatum and other shareholders. Atleast, they will have a say on trying to turn around another "great" management team.
Citigroup/Bank of America - These companies traded in the $50 range in 2007 and now at $3.5 (C) and $7 (BAC) showing how great managers US companies really do have. Does it take all these business degrees and "experience" to run these companies to the ground? And how about the management/BOD at Sandisk, Yahoo, Take Two and other companies that have amazingly received mega buyout premiums the last year and walked away! Really amazing....
Palm - On a brighter note, Palm's turnaround has had significant traction. They had hired former Apple Podfather John Rubinstein and he has managed to introduce a new operating system and new products. Previous rumors of Apple buying Palm is resurfacing as well with Jobs health and synergies of the two companies. Palm stock has gone from $9 to $1 back to $8 in less than six months! I tip my hat to Mr. Rubinstein for achieving their turnaround since he was hired in 2007. Wasn't that the year UT failed to sell itself and hired Blackmore. Yup, UTs turnaround from 2004 continues as the stock languishes in the $1s and management continues to promise a near term goal of returning the company to profitability.
With no good options, I'm still a believer (at $1.59) just like Nortel shareholders believed to the very end. Hope this one ends up better. Sad.
Have a good weekend everyone.
Tuesday, January 6, 2009
Revised 2009 Estimates
I talked with Barry Hutton today and got some clarification on the bookings for 2008 with regards to the PAS infra. Book to bill for PAS infra was around 0.2 for 2008. PAS handsets were around 1.0. This shows the rapid decline in PAS infra orders but does highlight the bookings in other areas finally replacing PAS in a material way.
Previously, I had estimated around $711m in core bookings (without CDMA handsets) based on the previous 4 quarters in bookings and PCD information provided by the company. If we assume that PAS infra had sales of around $180m in 2008, bookings would be around $36m. Subtracting this from $711m would result in $675m in bookings that I will use to estimate 2009 revenues. I will use a 25% reduction in PAS infra revenue to be recognized in 2009 but this has to be added to the $675m. So, $675m+0.75*$180m = $810m. CDMA hanset sales of $35m/quarter could continue until mid June and I will assume will be replaced with China CDMA sales. That will add $140m in revenues resulting in around $950m. I will use 27% GMs for the non-CDMA handset/non infra PAS GMs, 45% for PAS infra, 5 and 10% GMs for the CDMA handset sales outside/inside China. Gross profit estimates are now $675m*.27 + $135m*.45 + $70m*.05 + $70m*.1 = $254m in gross profits.
I had previously estimated $295m in opex for 2009 so the operating loss could be around $40m for the year, much less than my previous worse case scenarios. There are a lot of variables above so take the estimate with a grain of salt and you can do your own model with different GMs, different revenues for handsets, factor in some revenue may be multi-year, etc.
What the above shows is the company NOT being profitable in 2009. While "everyone" already assumes this, it shows the miscalculations that even "new" management has to face up to now. On the positive side, cash burn will probably be limited and give the company additional time to build up bookings in non-PAS areas.
Here's to waiting another year for sustainable profitability. BTW, thanks to Tigre/Shadow (I just caught up reading their gazillion postings) for discussing the technical issues and potential markets for UT. Talking to another investor the last couple of days, there is no question its been frustrating seeing the losses year after year (not to mention the stock price) but with a negative enterprise value, growing core businesses, little market cap, there still seems a lot of potential for this old dog.....Transport network product, Russia, iptv, China handset market, worldwide iptv growth, etc etc.......Have a good evening.
Previously, I had estimated around $711m in core bookings (without CDMA handsets) based on the previous 4 quarters in bookings and PCD information provided by the company. If we assume that PAS infra had sales of around $180m in 2008, bookings would be around $36m. Subtracting this from $711m would result in $675m in bookings that I will use to estimate 2009 revenues. I will use a 25% reduction in PAS infra revenue to be recognized in 2009 but this has to be added to the $675m. So, $675m+0.75*$180m = $810m. CDMA hanset sales of $35m/quarter could continue until mid June and I will assume will be replaced with China CDMA sales. That will add $140m in revenues resulting in around $950m. I will use 27% GMs for the non-CDMA handset/non infra PAS GMs, 45% for PAS infra, 5 and 10% GMs for the CDMA handset sales outside/inside China. Gross profit estimates are now $675m*.27 + $135m*.45 + $70m*.05 + $70m*.1 = $254m in gross profits.
I had previously estimated $295m in opex for 2009 so the operating loss could be around $40m for the year, much less than my previous worse case scenarios. There are a lot of variables above so take the estimate with a grain of salt and you can do your own model with different GMs, different revenues for handsets, factor in some revenue may be multi-year, etc.
What the above shows is the company NOT being profitable in 2009. While "everyone" already assumes this, it shows the miscalculations that even "new" management has to face up to now. On the positive side, cash burn will probably be limited and give the company additional time to build up bookings in non-PAS areas.
Here's to waiting another year for sustainable profitability. BTW, thanks to Tigre/Shadow (I just caught up reading their gazillion postings) for discussing the technical issues and potential markets for UT. Talking to another investor the last couple of days, there is no question its been frustrating seeing the losses year after year (not to mention the stock price) but with a negative enterprise value, growing core businesses, little market cap, there still seems a lot of potential for this old dog.....Transport network product, Russia, iptv, China handset market, worldwide iptv growth, etc etc.......Have a good evening.
Sunday, January 4, 2009
Weekly Recap - 33% loss for 2008
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.
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.
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.
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