The company has built up certain expectations by announcing it will provide additional steps it would take to accelerate the timeline to profitability at the end of the month (next week). Here are a few items that the company could discuss, some of which are from shareholder "wish lists".
Discarding the rest of the handset division - The company has been touting iptv, ngn, and broadband as their future. However, the bulk of their revenues has been from PAS (infra/handsets) and PCD (resale/Korean design/CDMA in China). The company is winding the Korean handset operations and selling remaining inventory. The company has been enamored with handsets for years now and are planning to replace PAS handset sales with CDMA sales in China. However, is this a good idea? Their Hangzhou building was supposed to be used for manufacturing 10s of millions of handsets. The problem now is that competition is very stiff and margins are tight in the handset market. Bidders for handset tenders are more than 10 suppliers so the previous PAS handet success cannot be translated here. We've seen how little gross profits are in handsets and the inventory/working capital headaches. As a side note, here is an article regarding ZTE and their US expansion. http://www.forbes.com/global/2009/0525/058-china-telecom-zte-man-in-dallas.html?partner=yahoomag ZTE has a solid base of revenues/profits and can "experiment" with new markets. UT cannot afford these anymore. The article highlights the previously mentioned $15b line of credit and ZTEs climb into the elite companies.
Move the rest of US operations to China - There was a time when UT was planning to expand in North America via PCD and selling networking gear to their handset customers but this clearly did not work out. The move to China has started and they should move the rest as soon as possible. The lease committments should also be winding down on properties and the accounting expense (just to outside firm was $11.5m) is too much. A lot more savings can be squeezed out and efficiency will be improved by moving operations to where customers are.
Starent negotiations/Sale of PSDN - The litigation with Starent that has been dragging on for years seems like it might be resolved via the courts early next year (according to Starent). Both sides obviously state they have a good case but both sides are spending money in legal fees and uncertainties (mostly for Starent) don't help either company. UT has recently announced some wins in PSDN in China (grabbing 40% of the last tender beating out Cisco/Starent). Starent is valued at $1.4B and wants to expand into China. It makes sense for a settlement and even for Starent to buy UTs PSDN assets or atleast forge a partnership that will save both companies development/marketing costs and help each other in various markets.
Monetizing the Hangzhou building - A lot of the operational decisions obviously impact this building. UT is using the building as collateral for credit lines and as an asset to transfer their cash out of China (see my previous posting). However, the company can do more by seeking out a buyer and leasing back the part of the building they can use. If UT unloads the handset part of the business to a local Chinese manufacturer, they could also lease out the building/equipment.
Executive/Board changes/being "more Chinese" - The company desparately needs a major change in the makeup of the board and the leadership team. How many companies that primarily get their revenues from China have a non-Chinese board/leadership team? The compensation of individual board members are MORE than a lot of Chinese CEO's that have larger revenue/market caps than UT. The company has to announce steps that show they can compete with other Chinese companies in China.
Listing in Shanghai/Hong Kong markets - A US listing doesn't bring the company additional capital and costs the company in expenses. They need to be able to tap the Chinese markets for a source of capital and get Chinese institutional investors. This in turn will bring added influence in the Chinese markets.
Investing in China - For the hundreds of millions spent over the years in R&D/overseas expansion, we don't hear the company buying startups and smaller companies in China. The company's main investment success was Gemdale, a real estate company in China. The company should use their presence in China to buy startups over the years and integrate them into the company rather than more expansion overseas and internal spending. The China markets went up from 1k to 6k level and UT did not fully participate (in fact selling off an early investment in Softbank that yielded Alibaba, which I think Tigre estimated at half a billion).
The above is just a sampling that I came up with and some of the more technical shareholders can probably add more but the bottom line is the company needs to do something significant. The performance the last few years is beyond shame at this point. As I've mentioned previously, the board should have been completely turned over by now but the same (#@%#$$@) are still in place (pardon the jamming of the keys).
I'll end this posting by again reminding people to vote their shares against the company backed proposals and have a good Memorial Day weekend to everyone.
Saturday, May 23, 2009
Sunday, May 17, 2009
Company info and future steps
At the end of the month, the company will provide information regarding "accelerating" the timeline to profitability which the company has recently stated to be "sometime" in 2010. The current opex target is for around $60m/quarter by the end of 2009. Presumably, this information might involve cost cuts, restructuring, outsourcing and maybe closing certain operations. I wanted to check some figures in the 2008 yearly 10-K and gain some additional insights into the company. There is only one official analyst following the company now and little institutional interest in the company. The operational performance has (not surprisingly) depressed the stock but even with the latest "surge" and decrease in tangible book value, the shares still only trade for half book.
1. Cash in China - "At December 31, 2008 we had cash and cash equivalents of $309.6 million, of which $200.8 million was held by our subsidiaries in China. The amount of cash available for transfer from the China subsidiaries for use by our non-China subsidiaries is limited both by the liquidity needs of the subsidiaries in China and by Chinese-government mandated limitations including currency exchange controls on transfers of funds outside of China." "As a result of these and other restrictions under PRC laws and regulations, our China subsidiaries are restricted in their ability to transfer a portion of their net assets to the U.S. parent; such restricted portion amounted to approximately $186.1 million, or 40% of our total consolidated net assets as of December 31, 2008. We believe we have sufficient non-cash assets available to meet the above reserved net assets in China restriction; such that none of our cash balances are legally restricted from transfer."
The restrictions in transferring cash out of China has always been a point of contention but it is clear that they have enough non-cash assets that pulling cash out of China is not a major issue. Moving part of their US operations back to China will reduce capital needs outside of China as well.
2. Credit Lines - At December 31, 2008, we had approximately $219.0 million available for future borrowings on this China credit facility, of which an aggregate of $146.6 million remained available for general working capital purposes and $72.4 million remained available in support of letters of credit and corporate guarantees. This China line of credit expires in the third quarter of 2009. In January 2009, we entered into a second credit facility in China for an additional $58.5 million of available credit which expires in December 2009.
The credit facility in China is supported partially by the Hangzhou facility but its also clear they have a good chunk of credit facility within China.
3. China Piggy Bank - Our China subsidiaries paid an aggregate $150 million in dividends to our U.S. parent company during the year ended December 31, 2007 and another $100 million in February 2008. While these cash transfers are offset and eliminated in preparing our consolidated cash flow statements, they have been a principal source of funding of our non-China operations during the periods in which they were made. In February 2009, our China subsidiaries paid an additional $50 million in dividends to our U.S. parent company, and additional cash dividends from our China based subsidiaries to the U.S. parent company may be necessary to fund our non-China cash requirements in 2009.
Pulling an additional $50m in February seems like a lot. Cash usage in Q1 was only $12m.
4. Global Footprint - The headquarters for our China operations are located in Hangzhou. In 2001, we purchased the rights to use 49 acres of land located in Zhejiang Science and Technology Industry Garden of Hangzhou Hi-tech Industry Development Zone and have built a 2.7 million square foot facility on this site. The facility was occupied in October 2004 and is used for manufacturing operations, research and development and administrative offices. At the end of 2008, approximately two-thirds of the facility was being utilized.
We lease approximately 0.8 million square feet of property, of which 0.4 million square feet are properties in China and 0.2 million square feet are properties in North America. We maintain 31 sales and customer support offices in 21 countries covering the United States, Canada, Latin America, the Caribbean, Europe, the Middle East, India, and the Asia-Pacific region. We lease sales offices in 28 locations in China.
The global expansion and operations in the US has been a cash drain to the company and has not produced the desired revenue ramp. The company may announce further reductions in the US and other countries outside of China.
5. Japan Revenues/Non-China/US Revenues - Japan revenues were down again in 2008 from 70+m to $40.6m. The non-China/non-US/non-Japan revenues is $160.9m.
Japan has been a major disappointment, specially with Softbank as a major shareholder. From $400m+ in revenue to $40.6m ($38.3m from Softbank). The $160.9m revenue in other countries does not justify the investments there and the lost focus in China. The company has had enough time to decide which countries they will continue to invest in and which to abandon. Blackmore from the start talked about each business unit being profitable and/or cash flow positive. He needs to make additional tough choices when things don't pan out.
6. Carry Loss - As of December 31, 2008, the Company's U.S. federal net operating loss carryforwards were $213.8 million and expire in varying amounts between 2025 and 2028. As of December 31, 2008, state net operating loss carryforwards were $138.0 million and expire in varying amounts between 2010 and 2028. As of December 31, 2008, the Company also had net operating loss carryforwards ("NOLs") in China of approximately $217.2 million. The China net operating loss carryforwards will expire in varying amounts between 2010 and 2013. As of December 31, 2008, the Company had NOLs in countries other than the U.S. and China. These NOLs are approximately $87.2 million. The majority of the NOLs do not expire and can be carried forward indefinitely.
Even in China, the loss is significant. Depending on a particular country's tax laws, acquiring UT could provide some tax incentive but not as significant as had been discussed because of the breakdown in each country.
7. Hanghzhou Facility Valuation - Using the income capitalization approach, we determined the estimated fair value of the facility and related improvements at December 31, 2008 to be approximately $183.2 million, which exceeded its net book value by approximately $15.8 million. As a result, we concluded the headquarters for our China operations was not impaired.
The company has used the facility for its credit lines but this is still a huge asset to hold considering its value compared to the current market cap of the company.
8. Leased Space - Total (in millions) $ 19,245; Less than 1 year $ 10,854; 1-3 years $ 6,422; 3-5 years $ 1,969.
Moving operations fully to China will further reduce the expenses.
9. Accounts Receivable - 39% of receivable was from PCD at the end of the year.
This has come down since they took in about $40m from Q1. As they wind down operations in Q2, this will further simplify the balance sheet. Writing down assets and simplifying operations increases the odds of an outright sale of the company.
10. Accounting Firm Yearly Cost - $11.5m for the last couple of years.
I voted against renewing the accounting firm. At the very least, they should negotiate a lower price for fees. Spending $11.5m/year for the last two years is significant specially with the much lower revenue base and market cap. This is another reason why UTs expenses are out of line with revenues compared to other companies. The company has mentioned legal expenses, accounting expenses, etc as areas where they can further reduce cost but it this is a yearly event for the last 4 years. As a shareholder, I am blown away with their expenses compared to the performance. Being a US investor, I am used to high compensation for executives and general costs but I would also like to see performance.
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Overall Commentary:
The information above shows the massive resources the company had/has. It definitely is not a startup and shows the company never really developed a sustainable/profitable business plan. The company was given a huge windfall with PAS success and early capital from US markets but has squandered a lot of it. From the above, it seems clear they have much more costs they can cut but have ample liquidity to execute it (scary in itself). The company definitely has positives (or else none of us would still be interested in it) and is in a "unique" position as Blackmore puts it. While it seems long overdue that the company get ahead of the curve, their resources show why there is no sense of urgency. The sense of urgency has to come from investors fed up with the performance of the stock. Lu has basically led the company in the good times but clearly cannot lead the turnaround. Blackmore is a competent executive but may not be a good fit for the long term. The board ....well..
I voted against Hong Lu/Jeff Clarke. Your broker should send you information via mail/email to vote. Shareholders have until June 25, the day of the shareholder meeting (or a day before to be exact). I continue to believe in the valuation being that it is half book. The company hopefully will be serious in getting to profitability but we never know. The revenues for PAS/Japan are low but still material so there is possible further downside. Expense cuts clearly need to be lowered and maybe an outright move to China will be announced. Sale of certain technology/businesses need to be considered although it seems a lot is inter-related. Also, the market cap is low so the acquirer will probably want the entire company at this stage and it makes sense now that the balance sheet/operations are much cleaner.
The above points are good to keep in mind as things are announced and there is further discussion in the message boards.
Have a good week everyone.
1. Cash in China - "At December 31, 2008 we had cash and cash equivalents of $309.6 million, of which $200.8 million was held by our subsidiaries in China. The amount of cash available for transfer from the China subsidiaries for use by our non-China subsidiaries is limited both by the liquidity needs of the subsidiaries in China and by Chinese-government mandated limitations including currency exchange controls on transfers of funds outside of China." "As a result of these and other restrictions under PRC laws and regulations, our China subsidiaries are restricted in their ability to transfer a portion of their net assets to the U.S. parent; such restricted portion amounted to approximately $186.1 million, or 40% of our total consolidated net assets as of December 31, 2008. We believe we have sufficient non-cash assets available to meet the above reserved net assets in China restriction; such that none of our cash balances are legally restricted from transfer."
The restrictions in transferring cash out of China has always been a point of contention but it is clear that they have enough non-cash assets that pulling cash out of China is not a major issue. Moving part of their US operations back to China will reduce capital needs outside of China as well.
2. Credit Lines - At December 31, 2008, we had approximately $219.0 million available for future borrowings on this China credit facility, of which an aggregate of $146.6 million remained available for general working capital purposes and $72.4 million remained available in support of letters of credit and corporate guarantees. This China line of credit expires in the third quarter of 2009. In January 2009, we entered into a second credit facility in China for an additional $58.5 million of available credit which expires in December 2009.
The credit facility in China is supported partially by the Hangzhou facility but its also clear they have a good chunk of credit facility within China.
3. China Piggy Bank - Our China subsidiaries paid an aggregate $150 million in dividends to our U.S. parent company during the year ended December 31, 2007 and another $100 million in February 2008. While these cash transfers are offset and eliminated in preparing our consolidated cash flow statements, they have been a principal source of funding of our non-China operations during the periods in which they were made. In February 2009, our China subsidiaries paid an additional $50 million in dividends to our U.S. parent company, and additional cash dividends from our China based subsidiaries to the U.S. parent company may be necessary to fund our non-China cash requirements in 2009.
Pulling an additional $50m in February seems like a lot. Cash usage in Q1 was only $12m.
4. Global Footprint - The headquarters for our China operations are located in Hangzhou. In 2001, we purchased the rights to use 49 acres of land located in Zhejiang Science and Technology Industry Garden of Hangzhou Hi-tech Industry Development Zone and have built a 2.7 million square foot facility on this site. The facility was occupied in October 2004 and is used for manufacturing operations, research and development and administrative offices. At the end of 2008, approximately two-thirds of the facility was being utilized.
We lease approximately 0.8 million square feet of property, of which 0.4 million square feet are properties in China and 0.2 million square feet are properties in North America. We maintain 31 sales and customer support offices in 21 countries covering the United States, Canada, Latin America, the Caribbean, Europe, the Middle East, India, and the Asia-Pacific region. We lease sales offices in 28 locations in China.
The global expansion and operations in the US has been a cash drain to the company and has not produced the desired revenue ramp. The company may announce further reductions in the US and other countries outside of China.
5. Japan Revenues/Non-China/US Revenues - Japan revenues were down again in 2008 from 70+m to $40.6m. The non-China/non-US/non-Japan revenues is $160.9m.
Japan has been a major disappointment, specially with Softbank as a major shareholder. From $400m+ in revenue to $40.6m ($38.3m from Softbank). The $160.9m revenue in other countries does not justify the investments there and the lost focus in China. The company has had enough time to decide which countries they will continue to invest in and which to abandon. Blackmore from the start talked about each business unit being profitable and/or cash flow positive. He needs to make additional tough choices when things don't pan out.
6. Carry Loss - As of December 31, 2008, the Company's U.S. federal net operating loss carryforwards were $213.8 million and expire in varying amounts between 2025 and 2028. As of December 31, 2008, state net operating loss carryforwards were $138.0 million and expire in varying amounts between 2010 and 2028. As of December 31, 2008, the Company also had net operating loss carryforwards ("NOLs") in China of approximately $217.2 million. The China net operating loss carryforwards will expire in varying amounts between 2010 and 2013. As of December 31, 2008, the Company had NOLs in countries other than the U.S. and China. These NOLs are approximately $87.2 million. The majority of the NOLs do not expire and can be carried forward indefinitely.
Even in China, the loss is significant. Depending on a particular country's tax laws, acquiring UT could provide some tax incentive but not as significant as had been discussed because of the breakdown in each country.
7. Hanghzhou Facility Valuation - Using the income capitalization approach, we determined the estimated fair value of the facility and related improvements at December 31, 2008 to be approximately $183.2 million, which exceeded its net book value by approximately $15.8 million. As a result, we concluded the headquarters for our China operations was not impaired.
The company has used the facility for its credit lines but this is still a huge asset to hold considering its value compared to the current market cap of the company.
8. Leased Space - Total (in millions) $ 19,245; Less than 1 year $ 10,854; 1-3 years $ 6,422; 3-5 years $ 1,969.
Moving operations fully to China will further reduce the expenses.
9. Accounts Receivable - 39% of receivable was from PCD at the end of the year.
This has come down since they took in about $40m from Q1. As they wind down operations in Q2, this will further simplify the balance sheet. Writing down assets and simplifying operations increases the odds of an outright sale of the company.
10. Accounting Firm Yearly Cost - $11.5m for the last couple of years.
I voted against renewing the accounting firm. At the very least, they should negotiate a lower price for fees. Spending $11.5m/year for the last two years is significant specially with the much lower revenue base and market cap. This is another reason why UTs expenses are out of line with revenues compared to other companies. The company has mentioned legal expenses, accounting expenses, etc as areas where they can further reduce cost but it this is a yearly event for the last 4 years. As a shareholder, I am blown away with their expenses compared to the performance. Being a US investor, I am used to high compensation for executives and general costs but I would also like to see performance.
----------------------------------------------------------------------------------------
Overall Commentary:
The information above shows the massive resources the company had/has. It definitely is not a startup and shows the company never really developed a sustainable/profitable business plan. The company was given a huge windfall with PAS success and early capital from US markets but has squandered a lot of it. From the above, it seems clear they have much more costs they can cut but have ample liquidity to execute it (scary in itself). The company definitely has positives (or else none of us would still be interested in it) and is in a "unique" position as Blackmore puts it. While it seems long overdue that the company get ahead of the curve, their resources show why there is no sense of urgency. The sense of urgency has to come from investors fed up with the performance of the stock. Lu has basically led the company in the good times but clearly cannot lead the turnaround. Blackmore is a competent executive but may not be a good fit for the long term. The board ....well..
I voted against Hong Lu/Jeff Clarke. Your broker should send you information via mail/email to vote. Shareholders have until June 25, the day of the shareholder meeting (or a day before to be exact). I continue to believe in the valuation being that it is half book. The company hopefully will be serious in getting to profitability but we never know. The revenues for PAS/Japan are low but still material so there is possible further downside. Expense cuts clearly need to be lowered and maybe an outright move to China will be announced. Sale of certain technology/businesses need to be considered although it seems a lot is inter-related. Also, the market cap is low so the acquirer will probably want the entire company at this stage and it makes sense now that the balance sheet/operations are much cleaner.
The above points are good to keep in mind as things are announced and there is further discussion in the message boards.
Have a good week everyone.
Saturday, May 9, 2009
Q1 2009 Earnings Call
Revenues and earnings missed already lowered guidance for Q1. The book to bill was 1.2 on core products but what does that consist of and what is the overall dollar amount?
Here are a sampling of words used in the call...successful, pleased, ahead of internal expectations, continued progress, as expected, significant step, highlights, strong demand, strong position.
Then the reality of "actual and real" charges and losses sets in and instead of providing guidance for Q2 and the rest of the year, Peter mentions that there will be a call at the end of the month to discuss initiatives. Peter states that they had initially targetted ending the year with an opex run rate of $60m/quarter and be profitable "sometime" in 2010. But I guess that wasn't good enough with management, the board, and surprise ....investors. They are "evaluating" initiatives to "accelerate" the above.
Peter made a few key points around this announcement of evaluating initiatives:
1. Demand for key products in China/India continue to be good. (I KNOW I've heard that somewhere before)
2. This demand is consistent with internal projections as shown in the Q1 bookings and Q2 is tracking accordingly. (Very frightening if the bookings are so low dollar amount and it is tracking or above their projections)
3. Expense reductions "well ahead of time frame" (Again, sounds good if the time frame is 2005!)
4. The above gives them confidence in executing on the new initiatives to be announced (maybe the initiatives are like their bonus metrics that they can scale them with a broken foot)
5. Cash levels of $301m (and not a peep of a buyback.....amazing)
EVEN for this company, the call was bizarre and we've seen a lot during the last 4 years!
Other fun facts. The company added a monster 50k iptv subscribers to get to 1.32m subscribers and Taiwan just went live in April 2009. Great...wait..Is that the same contract announced in December .......of 2007! There were also "recycled" contracts from Yemen, Philippines, cable iptv, digital signage (4.8k units....thats 4800 and not 4.8m or 480k but 4.8k units....m or k, its just fine print).
Anyway, the $301m in cash + another $10m coming from the PCD escrow may be "enough" of a buffer for the rest of the year.....maybe.
I'm hoping that this soap opera ends with a buyout and soon. The insiders have a ton of options/shares and their golden parachutes. Does Lu really want to be voted out and face shareholders this June? Maybe all their experience selling non-core assets and the entire company back in 2006/2007 have someone saying how much for the rest of the company now? Didn't the board give as a reason that buyers in 2006/2007 only wanted the "core" buisiness? If that was attractive then, well at $1.64, maybe they are more attractive.
BTW, spending $11m (thats in American dollars) a year for accounting is reasonable (maybe for a $1b company and not a $200m company!)....NOT.
Ok, so the soap opera continues and another event is scheduled at the end of the month. I hope Lu can get more support than the boards 7m shares and Softbanks 14m. For his sake, because thats nowhere close to being elected -- unless of course, the $11m in fees the accounting firm is getting has a little part for ballot tallying :-) (BTW, I wonder how Peter is voting?.....maybe Peter should vote with us shareholders unless he wants to be voted out next year....by Lu)
Seriously, the operational route is getting to the end of the line and the best way to extract shareholder value is by calling Goldman and saying get what you can (if you haven't figured it out by now, GS is very good in deals :-) ($13b extracted from the insolvent AIG via tax payers..nice)(Advise/suggestion to company....get Goldman on your side - give them whatever they want. Rename your company UTStracom-Goldman or better yet GoldmanStarcom or maybe just Goldman-networking....
Finally, I am a UT shareholder and I hope to get your vote.......in voting against Hong Lu.
Have a good weekend.
Here are a sampling of words used in the call...successful, pleased, ahead of internal expectations, continued progress, as expected, significant step, highlights, strong demand, strong position.
Then the reality of "actual and real" charges and losses sets in and instead of providing guidance for Q2 and the rest of the year, Peter mentions that there will be a call at the end of the month to discuss initiatives. Peter states that they had initially targetted ending the year with an opex run rate of $60m/quarter and be profitable "sometime" in 2010. But I guess that wasn't good enough with management, the board, and surprise ....investors. They are "evaluating" initiatives to "accelerate" the above.
Peter made a few key points around this announcement of evaluating initiatives:
1. Demand for key products in China/India continue to be good. (I KNOW I've heard that somewhere before)
2. This demand is consistent with internal projections as shown in the Q1 bookings and Q2 is tracking accordingly. (Very frightening if the bookings are so low dollar amount and it is tracking or above their projections)
3. Expense reductions "well ahead of time frame" (Again, sounds good if the time frame is 2005!)
4. The above gives them confidence in executing on the new initiatives to be announced (maybe the initiatives are like their bonus metrics that they can scale them with a broken foot)
5. Cash levels of $301m (and not a peep of a buyback.....amazing)
EVEN for this company, the call was bizarre and we've seen a lot during the last 4 years!
Other fun facts. The company added a monster 50k iptv subscribers to get to 1.32m subscribers and Taiwan just went live in April 2009. Great...wait..Is that the same contract announced in December .......of 2007! There were also "recycled" contracts from Yemen, Philippines, cable iptv, digital signage (4.8k units....thats 4800 and not 4.8m or 480k but 4.8k units....m or k, its just fine print).
Anyway, the $301m in cash + another $10m coming from the PCD escrow may be "enough" of a buffer for the rest of the year.....maybe.
I'm hoping that this soap opera ends with a buyout and soon. The insiders have a ton of options/shares and their golden parachutes. Does Lu really want to be voted out and face shareholders this June? Maybe all their experience selling non-core assets and the entire company back in 2006/2007 have someone saying how much for the rest of the company now? Didn't the board give as a reason that buyers in 2006/2007 only wanted the "core" buisiness? If that was attractive then, well at $1.64, maybe they are more attractive.
BTW, spending $11m (thats in American dollars) a year for accounting is reasonable (maybe for a $1b company and not a $200m company!)....NOT.
Ok, so the soap opera continues and another event is scheduled at the end of the month. I hope Lu can get more support than the boards 7m shares and Softbanks 14m. For his sake, because thats nowhere close to being elected -- unless of course, the $11m in fees the accounting firm is getting has a little part for ballot tallying :-) (BTW, I wonder how Peter is voting?.....maybe Peter should vote with us shareholders unless he wants to be voted out next year....by Lu)
Seriously, the operational route is getting to the end of the line and the best way to extract shareholder value is by calling Goldman and saying get what you can (if you haven't figured it out by now, GS is very good in deals :-) ($13b extracted from the insolvent AIG via tax payers..nice)(Advise/suggestion to company....get Goldman on your side - give them whatever they want. Rename your company UTStracom-Goldman or better yet GoldmanStarcom or maybe just Goldman-networking....
Finally, I am a UT shareholder and I hope to get your vote.......in voting against Hong Lu.
Have a good weekend.
Thursday, May 7, 2009
Imminent Sale of the Company?
Got off the phone from a major shareholder and his take is the company may finally be for sale.
There are many many reasons why the company is worth more being sold than the company can operationally work itself to at this stage. Peter, the leadership/BOD in Alameda are not really suited to fight it out in China/India and elsewhere. They all still have significant share holdings that would make it worth it for them to sell (even at $5-6. That sale price now compared to 2007 is equivalent to $10 or more in terms of the overall stock markets so its not the worse end result for shareholders.)
The other probabilities. Business is even WORSE than it really is and they have to cut more. So, they will drop another revenue bomb to go along with the cuts.
Another possibility is really to accelerate profitability. Although this is the context/reason for the wait, it seems odd. Is Peter, at his age, willing to fight it out a few more years traveling to China once a month and risking not even getting what they can at this stage? A lot of their compensation is in stock so even with their salary, it makes sense.
On the buyers side, you have Huawei with $30b in revenue so I guess they HAVE to expand. UT building would be valuable to Huawei and ZTE. Patents that they have can be used as leverage against Western competitors and would be very valuable. Ericsson has a yearly R&D of $5B. Cisco is investing a ton in China/India. Even Starent has a $1.4B market cap and R&D in the $30+m/quarter. They NEED to diversify out of North America.
A week or two ago, there was also about 300 hits on the blog mostly from China. That never happens. Maybe there are rumblings of a sale. More job cuts may not be palatable to the Chinese government and they would push for a purchase from ZTE/Huawei. Both have huge resources and could easily buy out UT.
Anyway, its speculation and while the company had internal issues in late 2006, it has resolved those issues and sold other non-core assets. The technology is still very good and the contracts/customers should be appealing to competitors. I posted a couple of years ago that ultimately UT would be sold but I was hoping for double digits. At this stage, with the intense competition, down world markets, and revenue ramp not occuring, this makes too much sense.
There are many many reasons why the company is worth more being sold than the company can operationally work itself to at this stage. Peter, the leadership/BOD in Alameda are not really suited to fight it out in China/India and elsewhere. They all still have significant share holdings that would make it worth it for them to sell (even at $5-6. That sale price now compared to 2007 is equivalent to $10 or more in terms of the overall stock markets so its not the worse end result for shareholders.)
The other probabilities. Business is even WORSE than it really is and they have to cut more. So, they will drop another revenue bomb to go along with the cuts.
Another possibility is really to accelerate profitability. Although this is the context/reason for the wait, it seems odd. Is Peter, at his age, willing to fight it out a few more years traveling to China once a month and risking not even getting what they can at this stage? A lot of their compensation is in stock so even with their salary, it makes sense.
On the buyers side, you have Huawei with $30b in revenue so I guess they HAVE to expand. UT building would be valuable to Huawei and ZTE. Patents that they have can be used as leverage against Western competitors and would be very valuable. Ericsson has a yearly R&D of $5B. Cisco is investing a ton in China/India. Even Starent has a $1.4B market cap and R&D in the $30+m/quarter. They NEED to diversify out of North America.
A week or two ago, there was also about 300 hits on the blog mostly from China. That never happens. Maybe there are rumblings of a sale. More job cuts may not be palatable to the Chinese government and they would push for a purchase from ZTE/Huawei. Both have huge resources and could easily buy out UT.
Anyway, its speculation and while the company had internal issues in late 2006, it has resolved those issues and sold other non-core assets. The technology is still very good and the contracts/customers should be appealing to competitors. I posted a couple of years ago that ultimately UT would be sold but I was hoping for double digits. At this stage, with the intense competition, down world markets, and revenue ramp not occuring, this makes too much sense.
Saturday, May 2, 2009
Voting against Lu
Required Vote
Each director must be elected by a majority of the votes cast, meaning that the number of shares entitled to vote on the election of directors and represented in person or by proxy at the Annual Meeting casting their vote "FOR" a director must exceed the number of votes "AGAINST" a director. Abstention votes with respect to the election of directors will be counted for purposes of determining the presence or absence of a quorum at the Annual Meeting but will have no other legal effect upon election of directors. You may not cumulate your votes for the election of directors. If a nominee for director fails to receive the required number of votes for election, he or she is required to tender his or her resignation to the Board. In such a case, the Nominating and Corporate Governance Committee of the Board has the option of accepting or declining such resignation, considering any factors that the Committee deems relevant.
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Given the performance of the company and the stock price, it is obvious that Hong Lu should not be re-elected. The fact that the current board is recommending his re-election is further proof that the entire board doesn't have "outside" shareholder's best interest and are determined to maintain the status quo of high management/board compensation and poor company/share price performance. Despite this clarity to remove Lu, it will be an uphill climb due to the number of shares the insiders hold. Softbank alone has about 15m shares. Nevertheless, I am hoping to rally "outside" shareholders to vote against Lu. I am hoping the new rule of majority votes will help. I am hoping that Wu, Huang, Barton, and other former executives may actually care about the share price and vote against Lu. I am hoping that the retail shareholder base that is more significant now and the current institutional holders are so fed up that they actually take some time to vote.
Last week, there was an unusually high amount of visits to the blog from China. I and all the long-term shareholders would be open to any suggestions coming from China to improve company performance and board/management accountability.
If you still own shares, this is one of the few outlets to have your voice heard. There are still a huge number of shares out there and I encourage all the shareholders to vote against the re-election of Lu.
Have a good weekend.
Each director must be elected by a majority of the votes cast, meaning that the number of shares entitled to vote on the election of directors and represented in person or by proxy at the Annual Meeting casting their vote "FOR" a director must exceed the number of votes "AGAINST" a director. Abstention votes with respect to the election of directors will be counted for purposes of determining the presence or absence of a quorum at the Annual Meeting but will have no other legal effect upon election of directors. You may not cumulate your votes for the election of directors. If a nominee for director fails to receive the required number of votes for election, he or she is required to tender his or her resignation to the Board. In such a case, the Nominating and Corporate Governance Committee of the Board has the option of accepting or declining such resignation, considering any factors that the Committee deems relevant.
---------------------------------------------------------------------------------------------
Given the performance of the company and the stock price, it is obvious that Hong Lu should not be re-elected. The fact that the current board is recommending his re-election is further proof that the entire board doesn't have "outside" shareholder's best interest and are determined to maintain the status quo of high management/board compensation and poor company/share price performance. Despite this clarity to remove Lu, it will be an uphill climb due to the number of shares the insiders hold. Softbank alone has about 15m shares. Nevertheless, I am hoping to rally "outside" shareholders to vote against Lu. I am hoping the new rule of majority votes will help. I am hoping that Wu, Huang, Barton, and other former executives may actually care about the share price and vote against Lu. I am hoping that the retail shareholder base that is more significant now and the current institutional holders are so fed up that they actually take some time to vote.
Last week, there was an unusually high amount of visits to the blog from China. I and all the long-term shareholders would be open to any suggestions coming from China to improve company performance and board/management accountability.
If you still own shares, this is one of the few outlets to have your voice heard. There are still a huge number of shares out there and I encourage all the shareholders to vote against the re-election of Lu.
Have a good weekend.
Sunday, April 26, 2009
Shareholder hopes & dreams - Sad realities
Why did I and other longs invest in this company and some have continued to hold on to shares? I was banking on the growth in China. UTStarcom was one of the few growing telecommunications provider 5-6 years ago and their rapid growth, US listing, and potential for becoming the Chinese version of Cisco was very tempting at the time. The monumental collapse can be attributed to some major strategic mistakes such as investing in WCDMA instead of the home grown TDSCDMA, spending massively on R&D/marketting in overseas markets that had well-placed local providers and/or had regulations that would prevent adoption of the technology at the time. The company's main revenue/profit source in China and Japan (Softbank) also deteriorated significantly in the last 4 years while all the other ventures/revenue source could not come close to addressing the PAS/Japan losses despite the company's efforts to reduced overall spending.
The "growth" that investors hope to see can actually be seen in Huawei and ZTE! http://www.lightreading.com/document.asp?doc_id=175673&
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=ts&bn=27187&tid=158749&mid=158750&tof=12&rt=1&frt=1&off=1
Peter Blackmore, who came in 20 months ago mentioned being impressed by the combination of Western management/US listing/markets as well as the low cost base of operations in China. The problem is that UTStarcom is competing against ZTE/Huawei in China where UT is disadvantaged (previously by not being a true Chinese company and now also by scale due to years of losses). Outside of China, it is competing against well-entrenched global providers with huge scale and credibility of having revenues 20-100x UT has.
I listened to the Analyst Day meeting held in June 2008 and was reinforced again that it is not the technology that is the issue but management/other external factors that may prevent UT from ever becoming profitable and eventually sold/go down. Brian Caskey mentioned some of these technologies have been developed since 2000-2001. Peter Blackmore mentioned that they had too many technology and had a cost problem.
While Peter can articulate the problems and fix certain operational issues in the company, he has to deal with a company headed by now Chairman Hong Lu and lead independent director Thomas Toy, both with UT performance history that would have them removed already. They are not even well liked as Ying Wu was by the employees/customers. Being non-Chinese, Peter is also disadvantaged when the company's base of operation and main market is China! So, the current leadership situation at UT is tremendously bad for shareholders.
Peter understands that high gross margins and profits are the key to turning the valuation of the company around. He has focused the company on broadband, iptv, and ngn. Lets discuss whether the company's products/deployments are commoditized or not. The company focuses on all IP type products, which in turns brings customer protection on their investments. That is good for the customers BUT not good for shareholders/UT. There are "few" true non-commoditized platforms/products that will do well for a long period of time such as Apple's iphone or Mircrosoft's operating software. The one high margin product/business that UT has is IPTV. When UT wins a contract for a certain region, it has a hold for that period. The company makes the correct argument that bundling ngn/broadband can reap added savings and make the systems work more efficiently and thus a better value proposition. However, there are other major factors such as vendor financing or worse State-backed financing that UT cannot compete. It cannot compete on scale and therefore we see the results of no large wins in any of their technology segments that they offer. Even the key strategic wins have not taken off.
While the initial mis-steps by the company is understandable to an extent (dellusions of grandeur after hitting $2.5b in revenues in a short time gives the company some slack), not cutting costs more rapidly and the overseas expansion was not acceptable (the last 3-4 years). As far back as 2003, PAS was expected to peak in 2004. Failed ventures from WCDMA, Softbank, India, PCD, and other expansions are examples of the mis-steps. The company has not even settled their "identity" as of now.
Blackmore mentioned early in his tenure that UT was like a start up company. I commented that the company's huge cost base, lack of growth, internal issues made this statement false. The company had $40-50m in R&D that normal startups do not have. They still had $26m in the last quarter. The company has a LOT of resources to turn this around but unless they make fundmental changes in the leadership and their identity as a Chinese company, the street doesn't buy it (hence the weak rise in the stock price even during the latest rally). As an example of a "startup" doing all the right things is Starent. However, just like in Sigma Designs case, the larger competitors look at the growth/margins that they have and come swarming in. Eventually, Starent will go bust or be bought out.
Going back to their current strategies. There is the "wireless" backdoor plays such as FMC, PDSN, IPTV, handsets and their broadband/ngn technologies such as GEPON/transport network products. The problem again is that individually, it may not be a commoditized product and have certain differentiations but by the time there is any large scale implementation, it IS commoditized.
Because of the lost in scale and diminished resources, the company has a much higher hill to climb than even when Peter came on board. Yes, another growth wave can lift all boats and UT will benefit. The lower cost base will take some of the pressure off. The question for the board/shareholders is the missed opportunities of getting a much higher valuation just a couple of years ago. (http://utstarcom-stocknews.blogspot.com/2008/01/wu-interview-uts-strategic-alternative.html)
I realize the above items have been mentioned many times but it does reinforce the issues preventing the higher valuation of the company and that shareholders should continue to hold management/board to performance and structural change. Peter must produce results/changes and get to the core of the problems. If he can't, I have mentioned to him and the board to sell the company. I wonder if the company will have a 2009 Analyst Day meeting ?
BTW, Ford Motor has gone from $1 to $5 because it now increased sales estimates by 10k for the quarter and may be profitable in 2011. The street has no confidence in UT and whether or not UT management/board does something/anything will be telling.
Have a good rest of the weekend.
The "growth" that investors hope to see can actually be seen in Huawei and ZTE! http://www.lightreading.com/document.asp?doc_id=175673&
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=ts&bn=27187&tid=158749&mid=158750&tof=12&rt=1&frt=1&off=1
Peter Blackmore, who came in 20 months ago mentioned being impressed by the combination of Western management/US listing/markets as well as the low cost base of operations in China. The problem is that UTStarcom is competing against ZTE/Huawei in China where UT is disadvantaged (previously by not being a true Chinese company and now also by scale due to years of losses). Outside of China, it is competing against well-entrenched global providers with huge scale and credibility of having revenues 20-100x UT has.
I listened to the Analyst Day meeting held in June 2008 and was reinforced again that it is not the technology that is the issue but management/other external factors that may prevent UT from ever becoming profitable and eventually sold/go down. Brian Caskey mentioned some of these technologies have been developed since 2000-2001. Peter Blackmore mentioned that they had too many technology and had a cost problem.
While Peter can articulate the problems and fix certain operational issues in the company, he has to deal with a company headed by now Chairman Hong Lu and lead independent director Thomas Toy, both with UT performance history that would have them removed already. They are not even well liked as Ying Wu was by the employees/customers. Being non-Chinese, Peter is also disadvantaged when the company's base of operation and main market is China! So, the current leadership situation at UT is tremendously bad for shareholders.
Peter understands that high gross margins and profits are the key to turning the valuation of the company around. He has focused the company on broadband, iptv, and ngn. Lets discuss whether the company's products/deployments are commoditized or not. The company focuses on all IP type products, which in turns brings customer protection on their investments. That is good for the customers BUT not good for shareholders/UT. There are "few" true non-commoditized platforms/products that will do well for a long period of time such as Apple's iphone or Mircrosoft's operating software. The one high margin product/business that UT has is IPTV. When UT wins a contract for a certain region, it has a hold for that period. The company makes the correct argument that bundling ngn/broadband can reap added savings and make the systems work more efficiently and thus a better value proposition. However, there are other major factors such as vendor financing or worse State-backed financing that UT cannot compete. It cannot compete on scale and therefore we see the results of no large wins in any of their technology segments that they offer. Even the key strategic wins have not taken off.
While the initial mis-steps by the company is understandable to an extent (dellusions of grandeur after hitting $2.5b in revenues in a short time gives the company some slack), not cutting costs more rapidly and the overseas expansion was not acceptable (the last 3-4 years). As far back as 2003, PAS was expected to peak in 2004. Failed ventures from WCDMA, Softbank, India, PCD, and other expansions are examples of the mis-steps. The company has not even settled their "identity" as of now.
Blackmore mentioned early in his tenure that UT was like a start up company. I commented that the company's huge cost base, lack of growth, internal issues made this statement false. The company had $40-50m in R&D that normal startups do not have. They still had $26m in the last quarter. The company has a LOT of resources to turn this around but unless they make fundmental changes in the leadership and their identity as a Chinese company, the street doesn't buy it (hence the weak rise in the stock price even during the latest rally). As an example of a "startup" doing all the right things is Starent. However, just like in Sigma Designs case, the larger competitors look at the growth/margins that they have and come swarming in. Eventually, Starent will go bust or be bought out.
Going back to their current strategies. There is the "wireless" backdoor plays such as FMC, PDSN, IPTV, handsets and their broadband/ngn technologies such as GEPON/transport network products. The problem again is that individually, it may not be a commoditized product and have certain differentiations but by the time there is any large scale implementation, it IS commoditized.
Because of the lost in scale and diminished resources, the company has a much higher hill to climb than even when Peter came on board. Yes, another growth wave can lift all boats and UT will benefit. The lower cost base will take some of the pressure off. The question for the board/shareholders is the missed opportunities of getting a much higher valuation just a couple of years ago. (http://utstarcom-stocknews.blogspot.com/2008/01/wu-interview-uts-strategic-alternative.html)
I realize the above items have been mentioned many times but it does reinforce the issues preventing the higher valuation of the company and that shareholders should continue to hold management/board to performance and structural change. Peter must produce results/changes and get to the core of the problems. If he can't, I have mentioned to him and the board to sell the company. I wonder if the company will have a 2009 Analyst Day meeting ?
BTW, Ford Motor has gone from $1 to $5 because it now increased sales estimates by 10k for the quarter and may be profitable in 2011. The street has no confidence in UT and whether or not UT management/board does something/anything will be telling.
Have a good rest of the weekend.
Saturday, April 18, 2009
Conference Call with Peter Blackmore
I had a conference call with Barry Hutton and CEO Peter Blackmore this last Wednesday, April 15 at 12 noon (Pacific time). I appreciate them accomodating me at that time since I do have a day job. There was initial hesitancy on Barry's part to schedule the conference call since the quarter has closed and they were on the quiet period. I assured Barry that my intent was not to discuss the current quarter but just to go through topics related in 2008 and general issues. During these calls, its hard to stick to one topic (since they are all inter-related), get information that is not material, and yet useful. The call lasted 45 minutes. Here are the questions/comments that I had and Peter's response.
During previous meetings that we've had (March 2008, June 2008 Shareholder meeting) and conference calls, the company has constantly reiterated that their core business was doing well (bookings doing well), developing countries which were their target markets were either not affected or less affected, PAS declines and eventual shutdown were built in, and they were looking to ramp revenues by several hundred million, so what prompted the cutbacks at the end of the year and the revenue shortfall? Entering 2008, the estimate was for non-PCD revenues of $1.1 billion and it came in at $700m.
The perceived revenue shortfall in core revenues (not including PCD/internal) was around $100m (from the $700m+ to $600m). Bookings are doing well but certain revenue such as the India broadband contracts were not recognized in 2008 and won't even be recognized until end of 2009 at the earliest. Over two hundred million of revenue from Phase I & II have not been recognized. The cutbacks were part of the overall plan of getting more focus on the core IP businesses, general world recession at the end of 2008, and a new model of moving back to China.
Cash from those projects are being collected, right? Why not move earlier and move entirely to China? Also, why go into 2009 with a budget of losing $150m? (note: some of the questions might not be in order and Q&A is ongoing for 45 minutes and I didn't want to get bogged down on any single topic)
Cash is being collected from the India contract. It is "debatable" on whether to move entirely back to China but it was prudent to do so at this time for better cost control. Towards the end of the year, they were trying also to wind down some Chicago assets and it was a tough environment so decisions had to be made to consolidate or move stuff to China. The losses in 2009 are street estimates and they have only given estimates for Q1. (note: Cash flow could also be better than street P&L estimates would indicate due to the unrecognized revenue from the India broadband and another $10m in July from PCD - I forgot to ask more information on the potentially $50m more in payment due at the end of 2010).
Peter had mentioned he was on the job for 20 months, so I asked how he felt the turnaround plan was going and at what stage was he in that plan?
Peter mentioned he felt he had made the right moves towards the overall goal of streamlining the business into the core IP technologies and he reiterated the goal of getting to profitability. With hindsight, he says they could have done some things differently but gave examples such as selling the PCD and indicated they were fortunate at completing the deal when they did. They had cut a lot of costs out, sold non-core assets, improved the supply chain/sales/marketing, etc.
I commented it seems like for the last 4 years or so, the company has had one plan. Wait for non-PAS revenues to ramp and when it doesn't, the company does its annual cut backs.
Peter mentioned he can only comment on his 20 month term that they are working and executing (see above) to get to profitability and it takes a lot of work to do what they have done. He reiterated understanding the share price is so low ("its not even trading at cash") and the need to get to profitability. He says he is not waiting around for the next few quarters but actively taking more steps and will discuss it in a few weeks (I took that to mean in the next earnings call).
Leadership - Who is really in charge of the company? Is this turnaround plan your plan? Hong Lu is still very active in China and drawing CEO type pay.
Peter mentioned he knows where I am going with this since he read the blog or that people mentioned it to him. He understands having two "high priced executives". He mentioned that he is in control. The China executives all report to him. He is there once a month. Hong Lu is involved with PAS and is consulting because he was there during the transition from Wu and can speak Mandarin to the executives/customers. Ultimately, he (Peter) is in charge and lays out the plan but of course subject to board approval.
How is his relation to the board? I mentioned to him that I have followed a lot of other companies and whenever you have company and share price performance like in UTs case, there are major changes made. It also seems like the board is non-existant. How can they decide on a strategic option when they felt the stock was underpriced at $7 and not at $1.
Peter mentioned the board is very active and meets often. Again, he's been there for 20 months and can't comment previously but they are implementing his plan. He mentioned the stock is very low and that strategic options are discussed and they are open to it. He brought up the buyback and again reiterated they are not for a buyback because that is short term and they are trying to get to profitability, which is the best way to increase the stock price.
I mentioned that a buyback would show confidence and gave the underperformance of their stock even in the recent market rally. I forgot to mention that buying back stock at prices less than tangible book value is a very good investment in itself. Anyway, I think everyone agrees they need to improve operational performance and that the stock price at these levels is unacceptable.
I brought up Ying Wu asking is the difference between Wu and Lu too great that Wu could not be placed on the board?
Blackmore mentioned he did not think that would work out due to the falling out that happened years ago.
Switching gears, I mentioned that IPTV is the company's future. How is their competitive situation? ZTE recently got $15b in financing and both ZTE/Huawei seems to be catching up to them.
Huawei doesn't really have a competitive product and is trying to give it away. UT has spent significant R&D money and has continued to improve its system architecture. It has the most scalable and best system even when compared to Alcatel-Lucent/Microsoft, ZTE, others. Peter mentioned that ZTEs system actually failed during the Beijing olympics but was not publicized. In India, it is a "clean sweep" even though others are trying to get in. "Its not like UT has favored nation status or anything like that". UT still has the most market share in China. Peter mentioned that there will be a PR on mobile iptv tomorrow (Thursday) and that Markwell is about to go live (Seems that should have gone live way back since the initial Markwell PR in December 2007). Peter emphasized their penetration into cable, mobile iptv, digital signage/advertising, etc. Later in the conversation, Peter is still waiting for that "tipping point" and characterized that as "gold" when it happens. (damn, I hate when they get you excited :-)
I also asked if ZTE/Huawei were trying to copy their system (edge router, etc) and regarding their patents in iptv.
Peter mentioned that ZTE/Huawei could reverse engineer their system if they wanted to but are not so its a different system. They have good patent protection.
Even though I am not a techy, I asked about PDSN, GEPON, and overall markets in China (note: The Packet Data Serving Node, or PDSN, is a component of a CDMA2000 mobile network . It acts as the connection point between the Radio Access and IP networks. This component is responsible for managing PPP sessions between the mobile provider's core IP network and the mobile station).
Peter mentioned UT got 40% of the recent PDSN tender (as was already mentioned in the Q4 call). Competition came from Starent and Cisco. The market is not in the hundreds of millions but good wins for UT. Nothing new in GEPON but said they are behind in GEPON in China because Wu did not want to sell broadband in China before (publicly, this is one of reasons we've heard before about the disagreements between the founders). Peter mentioned that in other places like India, UT is ahead but did not do well initially with the Phase I broadband contract but doing better now.
I asked ,besides shareholders call them constantly, what keeps him up at night? After a brief laughter, I followed up what are his major concerns going forward?
Peter mentioned that as the company gets more focused, leaner, and smaller, he is worried about scale. That is why they are working with the NECs of the world to take on part of the load.
I ended the Q&A by saying I have been a believer since meeting him in November 2007 and for the most part his strategic moves have been what shareholders want. Revenue ramp has not come in and wished him and all of us the best.
Peter mentioned he truly appreciates the support and understands the share price is very low and they are working diligently to get to profitability.
Peter is very articulate, humble, and has a quiet confidence. I have often commented to other shareholders that say they are going to talk to him that they WILL feel good after talking to him. At the end of the day, its about performance but we shareholders do have to feel confident about the CEO leading the company. We still have to roll the dice but if I'm wrong about Peter and the company's prospects, atleast I feel that I've done what I can to get the best possible information for myself and other shareholders.
I want to thank all shareholders that have sent letters/emails to the management/board. Even when the stock was at $3 or $5, it is an uphill battle. I do feel that management spending 45 minutes with "us" is overall positive.
During previous meetings that we've had (March 2008, June 2008 Shareholder meeting) and conference calls, the company has constantly reiterated that their core business was doing well (bookings doing well), developing countries which were their target markets were either not affected or less affected, PAS declines and eventual shutdown were built in, and they were looking to ramp revenues by several hundred million, so what prompted the cutbacks at the end of the year and the revenue shortfall? Entering 2008, the estimate was for non-PCD revenues of $1.1 billion and it came in at $700m.
The perceived revenue shortfall in core revenues (not including PCD/internal) was around $100m (from the $700m+ to $600m). Bookings are doing well but certain revenue such as the India broadband contracts were not recognized in 2008 and won't even be recognized until end of 2009 at the earliest. Over two hundred million of revenue from Phase I & II have not been recognized. The cutbacks were part of the overall plan of getting more focus on the core IP businesses, general world recession at the end of 2008, and a new model of moving back to China.
Cash from those projects are being collected, right? Why not move earlier and move entirely to China? Also, why go into 2009 with a budget of losing $150m? (note: some of the questions might not be in order and Q&A is ongoing for 45 minutes and I didn't want to get bogged down on any single topic)
Cash is being collected from the India contract. It is "debatable" on whether to move entirely back to China but it was prudent to do so at this time for better cost control. Towards the end of the year, they were trying also to wind down some Chicago assets and it was a tough environment so decisions had to be made to consolidate or move stuff to China. The losses in 2009 are street estimates and they have only given estimates for Q1. (note: Cash flow could also be better than street P&L estimates would indicate due to the unrecognized revenue from the India broadband and another $10m in July from PCD - I forgot to ask more information on the potentially $50m more in payment due at the end of 2010).
Peter had mentioned he was on the job for 20 months, so I asked how he felt the turnaround plan was going and at what stage was he in that plan?
Peter mentioned he felt he had made the right moves towards the overall goal of streamlining the business into the core IP technologies and he reiterated the goal of getting to profitability. With hindsight, he says they could have done some things differently but gave examples such as selling the PCD and indicated they were fortunate at completing the deal when they did. They had cut a lot of costs out, sold non-core assets, improved the supply chain/sales/marketing, etc.
I commented it seems like for the last 4 years or so, the company has had one plan. Wait for non-PAS revenues to ramp and when it doesn't, the company does its annual cut backs.
Peter mentioned he can only comment on his 20 month term that they are working and executing (see above) to get to profitability and it takes a lot of work to do what they have done. He reiterated understanding the share price is so low ("its not even trading at cash") and the need to get to profitability. He says he is not waiting around for the next few quarters but actively taking more steps and will discuss it in a few weeks (I took that to mean in the next earnings call).
Leadership - Who is really in charge of the company? Is this turnaround plan your plan? Hong Lu is still very active in China and drawing CEO type pay.
Peter mentioned he knows where I am going with this since he read the blog or that people mentioned it to him. He understands having two "high priced executives". He mentioned that he is in control. The China executives all report to him. He is there once a month. Hong Lu is involved with PAS and is consulting because he was there during the transition from Wu and can speak Mandarin to the executives/customers. Ultimately, he (Peter) is in charge and lays out the plan but of course subject to board approval.
How is his relation to the board? I mentioned to him that I have followed a lot of other companies and whenever you have company and share price performance like in UTs case, there are major changes made. It also seems like the board is non-existant. How can they decide on a strategic option when they felt the stock was underpriced at $7 and not at $1.
Peter mentioned the board is very active and meets often. Again, he's been there for 20 months and can't comment previously but they are implementing his plan. He mentioned the stock is very low and that strategic options are discussed and they are open to it. He brought up the buyback and again reiterated they are not for a buyback because that is short term and they are trying to get to profitability, which is the best way to increase the stock price.
I mentioned that a buyback would show confidence and gave the underperformance of their stock even in the recent market rally. I forgot to mention that buying back stock at prices less than tangible book value is a very good investment in itself. Anyway, I think everyone agrees they need to improve operational performance and that the stock price at these levels is unacceptable.
I brought up Ying Wu asking is the difference between Wu and Lu too great that Wu could not be placed on the board?
Blackmore mentioned he did not think that would work out due to the falling out that happened years ago.
Switching gears, I mentioned that IPTV is the company's future. How is their competitive situation? ZTE recently got $15b in financing and both ZTE/Huawei seems to be catching up to them.
Huawei doesn't really have a competitive product and is trying to give it away. UT has spent significant R&D money and has continued to improve its system architecture. It has the most scalable and best system even when compared to Alcatel-Lucent/Microsoft, ZTE, others. Peter mentioned that ZTEs system actually failed during the Beijing olympics but was not publicized. In India, it is a "clean sweep" even though others are trying to get in. "Its not like UT has favored nation status or anything like that". UT still has the most market share in China. Peter mentioned that there will be a PR on mobile iptv tomorrow (Thursday) and that Markwell is about to go live (Seems that should have gone live way back since the initial Markwell PR in December 2007). Peter emphasized their penetration into cable, mobile iptv, digital signage/advertising, etc. Later in the conversation, Peter is still waiting for that "tipping point" and characterized that as "gold" when it happens. (damn, I hate when they get you excited :-)
I also asked if ZTE/Huawei were trying to copy their system (edge router, etc) and regarding their patents in iptv.
Peter mentioned that ZTE/Huawei could reverse engineer their system if they wanted to but are not so its a different system. They have good patent protection.
Even though I am not a techy, I asked about PDSN, GEPON, and overall markets in China (note: The Packet Data Serving Node, or PDSN, is a component of a CDMA2000 mobile network . It acts as the connection point between the Radio Access and IP networks. This component is responsible for managing PPP sessions between the mobile provider's core IP network and the mobile station).
Peter mentioned UT got 40% of the recent PDSN tender (as was already mentioned in the Q4 call). Competition came from Starent and Cisco. The market is not in the hundreds of millions but good wins for UT. Nothing new in GEPON but said they are behind in GEPON in China because Wu did not want to sell broadband in China before (publicly, this is one of reasons we've heard before about the disagreements between the founders). Peter mentioned that in other places like India, UT is ahead but did not do well initially with the Phase I broadband contract but doing better now.
I asked ,besides shareholders call them constantly, what keeps him up at night? After a brief laughter, I followed up what are his major concerns going forward?
Peter mentioned that as the company gets more focused, leaner, and smaller, he is worried about scale. That is why they are working with the NECs of the world to take on part of the load.
I ended the Q&A by saying I have been a believer since meeting him in November 2007 and for the most part his strategic moves have been what shareholders want. Revenue ramp has not come in and wished him and all of us the best.
Peter mentioned he truly appreciates the support and understands the share price is very low and they are working diligently to get to profitability.
Peter is very articulate, humble, and has a quiet confidence. I have often commented to other shareholders that say they are going to talk to him that they WILL feel good after talking to him. At the end of the day, its about performance but we shareholders do have to feel confident about the CEO leading the company. We still have to roll the dice but if I'm wrong about Peter and the company's prospects, atleast I feel that I've done what I can to get the best possible information for myself and other shareholders.
I want to thank all shareholders that have sent letters/emails to the management/board. Even when the stock was at $3 or $5, it is an uphill battle. I do feel that management spending 45 minutes with "us" is overall positive.
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