The significant events of the last month (sale of the building, outsourcing, new CFO, SEC/DOJ resolutions, new board members, new investors, new CEO) are major changes no matter how you look at it. However, the stock is still stuck in the low $2 range. I think this will dramatically improve as the operations coming from these changes improve and institutional investors cross off negatives that prevent them from coming in.
It is not shocking to see posters on the message boards are still quite negative at this stage. However, one of the few positive posters, "Shadow" (who was accused of being "arrogant") stated:
"Don't mean to be arrogant. Just tired of guys posting how they want instant results from corporate management now. This company is clearly in the midst of a complete reorganization with outsourcing of products and reduction in head count from 8000 to 2000 or less. Products eliminated, sections sold off, legal issues resolved. What a mess it has been. So, we are, I hope, near the end of a multi-year debacle. What difference does another 3 months make in waiting to see the results? If you believe in the company's products and broadly outlined business plan, then 3 more months doesn't really matter. If you don't, why would you want to continue to own the stock?
Looking back on all the things that have happened, I am just happy the company is still in business and has IMHO a good chance of doing very well in the next few years. I never expected the company to have the problems it has had. Apparently, neither did management but every time they turned around there was another problem...accounting, bribery, insider trading, unexpected more rapid decline in PAS with premature terminaition, etc. etc. etc. You may think in that environment, CEO should still have been able to increase sales. What if the chips you need for your need PON products are delayed by 2 years? What if your largest customers become biased against you because you are a "foreigner"? Tigre points to Baidu as a foreign company successful in China. True, but where is the Huawei and ZTE in their industry that they had to compete against? I never pump the stock.....if people want to buy, fine, sell, fine, none of business. I just try to find things that apply to company. Some of them were really bad, like when MII decided only 3 companies would be allowed to provide DSL in China, and UTSI was one of the odd men out. Told to take back all of its already delivered DSL even. That is one of the reasons I think UTSI could never be considered indigenous to China, no matter what. ZTE, Huawei and Alcalu (ASB) are already considered indigenous and there is just not room for a fourth, at least in the telecom industry. Hope it is different for cable industry, but no guarantee. Risk remains high, but reward if UTSI is successful, will also be high. That is the nature of speculative investments. Have a nice evening. Shadow"
My response is the following:
Shadow,
Most shareholders actually share your sentiment despite a few negative posters on the MB. Most institutional shareholders have stayed put or added during the last 2-3 years. UT markets are intact but have not ramped up even in the last 2 years where management expected/hoped it would. The difference over the last year is that management has been aggressive in cutting costs, putting in flexibility/liquidity in the company to withstand the tough credit environment/competition. I think they are where we wanted them to be 2-3 years ago, which is to be in position to take advantage of any ramp in various sectors in their markets. Here is an article on China Telecom expanding iptv trials.
http://www.iptv-news.com/iptv_news/february_2010/china_telecom_moves_closer_to_expanding_iptv_trials
Five years since their win in iptv and iptv is still at this "early" stage. That is just one of many product lines/customers that have not yet come in. PTN is another that has been delayed or just started. About a year ago, I was just hoping for a small window of outperformance to make UT more salable but the recent events show they are positioning themselves for a more stable future (which doesn't have to involve a sale). That said, on a personal note, all of my buys above $1 for the last year have been traded but now bought yesterday at $2.12 for the longer term. I think there are a lot of issues still at UT with regards to institutional investors getting introduced to the stock. There is still the remaining internal controls/ongoing concern stamp on their company that should be resolved soon. There is the lack of profitability that prevents institutions from buying. Thre is the low/non-marginable share price, etc. etc. However, I have more confidence that it will be resolved in the longs favor over the following quarters and the big reward will come just as people feel the most frustrated (maybe now). I agree with you on the big potential rewards and think UT can reach $6-8 (maybe more) in the next 8 quarters as the issues get resolved, better quarterly performance come in and institutions see the potential in their markets. I'll get more aggessive in trading in the $3 range when the volume should be in the 2-3 million shares. Right now, its all noise with little volume and its accumulation (a few thousand shares) based strictly when certain longs get frustrated and decide to give away shares after so long.
Have a good rest of the week.
Wednesday, February 3, 2010
Friday, January 8, 2010
Argentina and Latin America - Interview with Diego Martinez
Last month, Diego Martinez did an interview with BNAmericas.
http://www.bnamericas.com/news/telecommunications/UTStarcom_eyes_IPTV_opportunities_in_2010
"IP networking solutions provider UTStarcom is expecting to see a boom in IPTV deployments in 2010, Diego Martinez, Americas VP and general manager for UTStarcom, told BNamericas."
Argentina - "Argentina has finally approved a law that allows the cooperatives to apply for a broadcast license. The bigger incumbents can't deliver those services, but we believe they want to participate in the value chain considering the restrictions they may have," Martinez said.
Brazil - "With respect to Brazil, we do expect the PL29 [bill to allow telcos to offer the full range of channels rather than only video on demand (VOD)] to move and to be approved by the beginning of 2010. That will open a whole set of opportunities in the country, and we believe we're well positioned as a recognized brand in IPTV," the executive added.
Here is another article on their trial in Argentina (a month earlier).
http://www.nextvlatam.com/nota.aspx?idcontenido=1135&ididioma=2
Dario Oliver, Manager of Telpin, told NexTV Latam that IPTV trials were being carried out with an UTStarcom platform, but the purchase decision had not been taken yet. Regarding the platform's functioning, the executive assured that tests were being carried out without inconveniencies and that the last mile might take place with WiFi or PLC. "We are evaluating the network scope taking into account the need to reach homes with 12 Mbps. We have not decided how the installation in the client's house will be carried out. PLC and WiFi are the two alternatives we are analyzing since UTP wiring would be too expensive and slow", he considered.
---------------------------------------------------------------------------------
UT continues to stick with the playbook of broadband/ngn and then iptv. While most of the business is in China, India, and Japan, UT continues to put their stakes in other parts of the world (despite the restructuring). That strategy was appealing to investors for the last few years but the opex was just too high to wait for revenues to ramp (while seeing the PAS declines). The lowered expense base make these new developments much more interesting as the seeds start to bloom.
http://www.bnamericas.com/news/telecommunications/UTStarcom_eyes_IPTV_opportunities_in_2010
"IP networking solutions provider UTStarcom is expecting to see a boom in IPTV deployments in 2010, Diego Martinez, Americas VP and general manager for UTStarcom, told BNamericas."
Argentina - "Argentina has finally approved a law that allows the cooperatives to apply for a broadcast license. The bigger incumbents can't deliver those services, but we believe they want to participate in the value chain considering the restrictions they may have," Martinez said.
Brazil - "With respect to Brazil, we do expect the PL29 [bill to allow telcos to offer the full range of channels rather than only video on demand (VOD)] to move and to be approved by the beginning of 2010. That will open a whole set of opportunities in the country, and we believe we're well positioned as a recognized brand in IPTV," the executive added.
Here is another article on their trial in Argentina (a month earlier).
http://www.nextvlatam.com/nota.aspx?idcontenido=1135&ididioma=2
Dario Oliver, Manager of Telpin, told NexTV Latam that IPTV trials were being carried out with an UTStarcom platform, but the purchase decision had not been taken yet. Regarding the platform's functioning, the executive assured that tests were being carried out without inconveniencies and that the last mile might take place with WiFi or PLC. "We are evaluating the network scope taking into account the need to reach homes with 12 Mbps. We have not decided how the installation in the client's house will be carried out. PLC and WiFi are the two alternatives we are analyzing since UTP wiring would be too expensive and slow", he considered.
---------------------------------------------------------------------------------
UT continues to stick with the playbook of broadband/ngn and then iptv. While most of the business is in China, India, and Japan, UT continues to put their stakes in other parts of the world (despite the restructuring). That strategy was appealing to investors for the last few years but the opex was just too high to wait for revenues to ramp (while seeing the PAS declines). The lowered expense base make these new developments much more interesting as the seeds start to bloom.
Monday, December 28, 2009
Building Sale
After selling their property, UTStarcom will lease back part of the facility.
"The Company will lease back 70,000 sqm gross floor area ("GFA") aboveground and 12,000 sqm GFA belowground of the property for a period of 6 years at a rate of RMB 2.5, 3.0 and 3.2 (approximately US $0.37, $0.44, $0.47, respectively) per sqm per day for years 1-2, 3-4 and 5-6, respectively, of the leaseback period for the aboveground space; and for RMB 25 (approximately US $3.66) per sqm per month for the underground space for the full leaseback period.
The Company may terminate the Agreement for any reason prior to the transfer of the title to the property upon repayment of all amounts paid to the Company by the Buyer and payment by the Company to the Buyer of an additional RMB 50 million (approximately US $7.3 million)."
http://biz.yahoo.com/e/091224/utsi8-k.html
One poster wrote that this is a very bad deal for UTStarcom.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=te&bn=27187&tid=162353&mid=162353&tof=5&frt=2#162353
My response is in italics.....
Tim, I admire you willingness to look for positives in this situation, but I totally disagree about your assessment of the deal. I believe it is very bad. Here are my reasons:
Johnny, Nothing to admire really. Your points are very easy to disagree with and management is just going by a very rational playbook (not going to give them genius status either).
First, the property was sold below book value. I did not expect them to get $760M – after all the local government was not likely to allow a US company to profit from speculation in Chinese land. However, given the property value, I expected they will get the full book value. It turns out that we have to take an impairment charge.
1. Book Value? You can talk all about what something is worth but if you cannot sell it or make use of it effectively, then its not worth what it says on some book. A lot of bashers looked at the property as zero since they could not monetize it. Now you and others think this is much more. As I've mentioned, anyone can step up and pay $7.3m and take over the deal if it was such a great deal. I say its a fair deal for both sides (win/win as both got what they needed out of the deal).
Second, the leaseback price is much higher than it should be. I expected it to be about $3M/year. A typical amount of yearly rent in undistorted markets is about 1/15th of the purchase price. In case of this transaction, that would be $9.3M for the entire building. Since UT leases only about a third of the building, I consider $3.1M to be reasonable. Selling the property some 80% below market value, the seller should be able to negotiate reasonable (as defined above) leaseback terms, because he has the option of walking away from the deal and denying the buyer the arbitrage profit (unless it is a sale of desperation as please_buy_while_I_sell suggested). The buyer still has 2/3 of the building to be leased out at the market rate and gets to profit from arbitrage when he eventually sells the property. Very generous terms for the buyer, with much lower leaseback payments.
2. Do you really think anybody would spend $140m and only expect to get back $3m/year in lease. We're not talking about liquid US treasuries here either (and those yield higher than 3/140). Again, the only reason UT was even able to monetize it is because they were willing to lease it back and give the buyers cash flow for a certain number of years.
Third, and most important, it adds $11.4M to yearly expenses (average over 6 years). At gross margin in upper 20s, UT will need approximately $40M in extra sales just to pay the rent. I just don’t see them bringing in those sales.
3. For UT, spending $11m/year is not too much considering how much they were spending in the US in rents (that they have cancelled already and shifted operations to China). The amount is probably less if they tried to borrow the money outright. How many people would lend at close to "book value" anyway and there is no comparable building for sale/lease there. UT gets $131m in cash during a very difficult credit environment. Most endowments or funds can make 7-10% with no problem.
Feel free to disagree.
Can the property go up? Sure. Can UT borrow against it? Sure. Can UT lease the other parts of the building? Sure. However, none of those are a certainty. Cash is a certainty. Flexibility/liquidity is a certainty. With the additional cash/working capital, they have also increased the ceiling for amount of contracts they can go after. Without the sale, they had a much lower ability to win additional contracts simply because of their working capital. UT is reducing their overall risk profile (lowering expense structure, selecting better contracts, building up cash) in very uncertain times. The liquidity/monetization is really a no brainer excellent move for UT at this stage.
Ultimately, UT core business has to show growth and profits. This sale (as part of a series of moves over the last couple of years) puts the focus on the business/operation side where they will have simplified/resolved the following metrics:
1. $350m revenue (high 20s GMs) breakeven point.
2. Less than $100m in OPEX.
3. More than $300m in cash.
4. Operations back in China.
5. Targetted markets/clients in China, Japan, and India.
They have really put themselves in a highly flexible/liquid position as compared to just a year ago when they were dependent on PAS/PCD.
Have a good rest of the holidays everyone!
"The Company will lease back 70,000 sqm gross floor area ("GFA") aboveground and 12,000 sqm GFA belowground of the property for a period of 6 years at a rate of RMB 2.5, 3.0 and 3.2 (approximately US $0.37, $0.44, $0.47, respectively) per sqm per day for years 1-2, 3-4 and 5-6, respectively, of the leaseback period for the aboveground space; and for RMB 25 (approximately US $3.66) per sqm per month for the underground space for the full leaseback period.
The Company may terminate the Agreement for any reason prior to the transfer of the title to the property upon repayment of all amounts paid to the Company by the Buyer and payment by the Company to the Buyer of an additional RMB 50 million (approximately US $7.3 million)."
http://biz.yahoo.com/e/091224/utsi8-k.html
One poster wrote that this is a very bad deal for UTStarcom.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=te&bn=27187&tid=162353&mid=162353&tof=5&frt=2#162353
My response is in italics.....
Tim, I admire you willingness to look for positives in this situation, but I totally disagree about your assessment of the deal. I believe it is very bad. Here are my reasons:
Johnny, Nothing to admire really. Your points are very easy to disagree with and management is just going by a very rational playbook (not going to give them genius status either).
First, the property was sold below book value. I did not expect them to get $760M – after all the local government was not likely to allow a US company to profit from speculation in Chinese land. However, given the property value, I expected they will get the full book value. It turns out that we have to take an impairment charge.
1. Book Value? You can talk all about what something is worth but if you cannot sell it or make use of it effectively, then its not worth what it says on some book. A lot of bashers looked at the property as zero since they could not monetize it. Now you and others think this is much more. As I've mentioned, anyone can step up and pay $7.3m and take over the deal if it was such a great deal. I say its a fair deal for both sides (win/win as both got what they needed out of the deal).
Second, the leaseback price is much higher than it should be. I expected it to be about $3M/year. A typical amount of yearly rent in undistorted markets is about 1/15th of the purchase price. In case of this transaction, that would be $9.3M for the entire building. Since UT leases only about a third of the building, I consider $3.1M to be reasonable. Selling the property some 80% below market value, the seller should be able to negotiate reasonable (as defined above) leaseback terms, because he has the option of walking away from the deal and denying the buyer the arbitrage profit (unless it is a sale of desperation as please_buy_while_I_sell suggested). The buyer still has 2/3 of the building to be leased out at the market rate and gets to profit from arbitrage when he eventually sells the property. Very generous terms for the buyer, with much lower leaseback payments.
2. Do you really think anybody would spend $140m and only expect to get back $3m/year in lease. We're not talking about liquid US treasuries here either (and those yield higher than 3/140). Again, the only reason UT was even able to monetize it is because they were willing to lease it back and give the buyers cash flow for a certain number of years.
Third, and most important, it adds $11.4M to yearly expenses (average over 6 years). At gross margin in upper 20s, UT will need approximately $40M in extra sales just to pay the rent. I just don’t see them bringing in those sales.
3. For UT, spending $11m/year is not too much considering how much they were spending in the US in rents (that they have cancelled already and shifted operations to China). The amount is probably less if they tried to borrow the money outright. How many people would lend at close to "book value" anyway and there is no comparable building for sale/lease there. UT gets $131m in cash during a very difficult credit environment. Most endowments or funds can make 7-10% with no problem.
Feel free to disagree.
Can the property go up? Sure. Can UT borrow against it? Sure. Can UT lease the other parts of the building? Sure. However, none of those are a certainty. Cash is a certainty. Flexibility/liquidity is a certainty. With the additional cash/working capital, they have also increased the ceiling for amount of contracts they can go after. Without the sale, they had a much lower ability to win additional contracts simply because of their working capital. UT is reducing their overall risk profile (lowering expense structure, selecting better contracts, building up cash) in very uncertain times. The liquidity/monetization is really a no brainer excellent move for UT at this stage.
Ultimately, UT core business has to show growth and profits. This sale (as part of a series of moves over the last couple of years) puts the focus on the business/operation side where they will have simplified/resolved the following metrics:
1. $350m revenue (high 20s GMs) breakeven point.
2. Less than $100m in OPEX.
3. More than $300m in cash.
4. Operations back in China.
5. Targetted markets/clients in China, Japan, and India.
They have really put themselves in a highly flexible/liquid position as compared to just a year ago when they were dependent on PAS/PCD.
Have a good rest of the holidays everyone!
Saturday, December 5, 2009
UT's India Opportunity
While the primary focus is the overall company restructuring and "refocus" in China and Japan, the Indian market provides a lot of opportunity for UT in the coming years. The main revenue driver for UT has been the BSNL multi-play contracts (Phase I, II, and II extension). Here is a summary of the contract:
"The expansion will see UTStarcom deploying its B1000 multi-service access node (MSAN) solution across India to add approximately 475,000 ports of capacity to BSNL’s existing broadband network, enabling additional subscribers to experience triple-play services."
http://www.telecomtiger.com/fullstory.aspx?storyid=6214
Earlier in its first phase, UTStarcom deployed 1.3 million broadband subscriber lines for BSNL, with an additional 1.1 million broadband subscriber lines during the second phase.
UTs MSAN product was highlighted in the recent investor presentation as having MSAN services to over 27 million subscribers.
http://files.shareholder.com/downloads/UTSI/771583119x0x322559/c6305869-1a53-4779-80bf-e5b5e643e0de/UTStarcom%20Investor%20PPT%20-%20September%202009.pdf
Here is a recent article on UTs perspective on the India market reaching 100 million broadband users:
"At a recently held event, UTStarcom MD for South Asia, Mr. Vijay Yadav said that with the use of television as an end user device, the broadband subscriber base can be reached to 100 million subscribers by 2012. He also called for opening of the last mile to private players. According to him in next few years communication over video will take precedence to communication over voice and hence television offered the ideal mode for delivery of broadband services."
http://www.telecomtiger.com/fullstory.aspx?storyid=7760
Aside from the broadband opportunities (nearterm Phase III contract from BSNL), the ultimate payoff is when iptv can ramp.
Here is an article from Aksh raising $20m:
"Aksh OptiFibre said that it has receive approval from its board to raise $ 20 million in funds through the preferential route.
The company intends to utilize these funds towards the expansion of its IPTV and VoIP business verticals."
http://www.telecomtiger.com/fullstory.aspx?storyid=7304
India is a place where UT has relationships with the major state-owned and private carriers
(MTNL, Reliance, Bharti, BSNL and Tata). There is also a current trend towards favoring non-Chinese suppliers.
"Chinese companies not allowed in BSNL’s Rs 10,000 cr ($2 Billion) project for Defence, says report"
http://www.telecomtiger.com/PolicyNRegulation_fullstory.aspx?storyid=7912§ion=S174
The company has been particulary positive in India sparing it any cuts during this massive restructuring and Peter has mentioned the level playing field in India (or even advantageous to UT). The upcoming 3G license in India should also clear up spending plans.
"Union Communications Minister A Raja said on Thursday on the sidelines of the Indian Telecom event that the 3G auctions will happen on time as scheduled on January 14, 2010."
http://www.telecomtiger.com/3G_fullstory.aspx?storyid=7910§ion=S208
Side note: The win in Tiscali for UTs MSAN products give us shareholders some insights to the pricing as it was a $29.8m contract to be shared by UT and Infinera (interestingly a stock I had recently bought, which led me to finding out UT won a part of it). For Infinera, an 8 figure contract is a big deal. For UT, there isn't even a PR. Anyway, this contract should be completed by Q1 2010 per the article and UTs equipment goes ahead of Infinera.
http://www.lightreading.com/document.asp?doc_id=185447&f_src=lightreading_gnews
The near term company goal is to get to profitability in the 1st half of 2010. The much reduced cost base provides them a better position to select contracts and execute better while waiting for the iptv market to ramp. While the TN product is something new, opens doors and the initial wins will improve broadband revenue and margins, the major growth driver going forward will still be centered with iptv.
Have a good weekend everyone.
"The expansion will see UTStarcom deploying its B1000 multi-service access node (MSAN) solution across India to add approximately 475,000 ports of capacity to BSNL’s existing broadband network, enabling additional subscribers to experience triple-play services."
http://www.telecomtiger.com/fullstory.aspx?storyid=6214
Earlier in its first phase, UTStarcom deployed 1.3 million broadband subscriber lines for BSNL, with an additional 1.1 million broadband subscriber lines during the second phase.
UTs MSAN product was highlighted in the recent investor presentation as having MSAN services to over 27 million subscribers.
http://files.shareholder.com/downloads/UTSI/771583119x0x322559/c6305869-1a53-4779-80bf-e5b5e643e0de/UTStarcom%20Investor%20PPT%20-%20September%202009.pdf
Here is a recent article on UTs perspective on the India market reaching 100 million broadband users:
"At a recently held event, UTStarcom MD for South Asia, Mr. Vijay Yadav said that with the use of television as an end user device, the broadband subscriber base can be reached to 100 million subscribers by 2012. He also called for opening of the last mile to private players. According to him in next few years communication over video will take precedence to communication over voice and hence television offered the ideal mode for delivery of broadband services."
http://www.telecomtiger.com/fullstory.aspx?storyid=7760
Aside from the broadband opportunities (nearterm Phase III contract from BSNL), the ultimate payoff is when iptv can ramp.
Here is an article from Aksh raising $20m:
"Aksh OptiFibre said that it has receive approval from its board to raise $ 20 million in funds through the preferential route.
The company intends to utilize these funds towards the expansion of its IPTV and VoIP business verticals."
http://www.telecomtiger.com/fullstory.aspx?storyid=7304
India is a place where UT has relationships with the major state-owned and private carriers
(MTNL, Reliance, Bharti, BSNL and Tata). There is also a current trend towards favoring non-Chinese suppliers.
"Chinese companies not allowed in BSNL’s Rs 10,000 cr ($2 Billion) project for Defence, says report"
http://www.telecomtiger.com/PolicyNRegulation_fullstory.aspx?storyid=7912§ion=S174
The company has been particulary positive in India sparing it any cuts during this massive restructuring and Peter has mentioned the level playing field in India (or even advantageous to UT). The upcoming 3G license in India should also clear up spending plans.
"Union Communications Minister A Raja said on Thursday on the sidelines of the Indian Telecom event that the 3G auctions will happen on time as scheduled on January 14, 2010."
http://www.telecomtiger.com/3G_fullstory.aspx?storyid=7910§ion=S208
Side note: The win in Tiscali for UTs MSAN products give us shareholders some insights to the pricing as it was a $29.8m contract to be shared by UT and Infinera (interestingly a stock I had recently bought, which led me to finding out UT won a part of it). For Infinera, an 8 figure contract is a big deal. For UT, there isn't even a PR. Anyway, this contract should be completed by Q1 2010 per the article and UTs equipment goes ahead of Infinera.
http://www.lightreading.com/document.asp?doc_id=185447&f_src=lightreading_gnews
The near term company goal is to get to profitability in the 1st half of 2010. The much reduced cost base provides them a better position to select contracts and execute better while waiting for the iptv market to ramp. While the TN product is something new, opens doors and the initial wins will improve broadband revenue and margins, the major growth driver going forward will still be centered with iptv.
Have a good weekend everyone.
Sunday, November 22, 2009
Q3 2009 CC Recap
The transcript from the Q3 2009 call can be found in the following link:
http://seekingalpha.com/article/171704-utstarcom-inc-q3-2009-earnings-call-transcript?source=yahoo
The live broadcast and SEC filings can be found in the company website. I have talked to some institutional investors that communicated with management and will add some "color" to the information provided in the call.
Q3 Results - Revenue came in at $71m with 34% gross margins. The GMs included a $6.5m benefit from reversing some handset writeoffs for PCD. Factoring that, GMs were in the mid 20s. The expenses were $58m (with $8.9 restructuring charge and $1.7m non-cash charge for divestiture of Korea based handset operations). I'll have much more on the expenses and restructuring later.
Business Units - MMCBU had revenue of $22m and 46% GMs; Broadband BU had $16m revenue and 22% GMs. Services had $17m in rev and 44% GMs; Handsets had $16m revenue and 21% GMs. The overall revenues ($71m) is still lighter than the $85m needed for breakeven but the margins are close to their target of high 20s. The margins for the MMCBU was lower than last year(with PAS) but seems higher than what I expect with iptv STB. The mix this quarter probably had more software/infra component than subscribers, which support the lowered expansion in subscriber count for 2009. The highlight of the quarter was the 22% GMs for the broadband unit as they managed the BSNL phase II contract well and gives added confidence that the Phase III contract will have decent margins (as long as they execute well). The services actually increased revenue (from $14m to $17m) and had very good margins. Handsets were down significantly from last year (that included much more PAS/PCD). The GMs of 21% benefitted from the $6.5m reverse of writeoff. The company is de-emphasizing this lower margin business unit except for handsets specifically sold with their mobile iptv system.
Broadband - Peter Blackmore expects the company to take in a significant order for the Phase III BSNL multi-play project this quarter. Part of the order will be this quarter and the 2nd part around April 2010. Peter mentioned on the call that execution of this contract is a key focus and this will affect the outsourcing transition and result in significant shipments in Q1 2010. Additional shipments in Q1 2010 will be driven by the Transport Network (TN) win with Softbank. Together with better execution of the BSNL project, the higher margins with the TN product will drive the margins for the broadband unit going forward. Peter mentioned the TN product as having good growth opportunity and a leadership product (also "exciting"). There was mention that they are actively bidding this product on a number of RFPs, notably China Mobile, where they are partnering with Nokia Siemens (NSN). The margins with Nokia Siemens will be lower but give them a better chance of winning part of the China Mobile tender and break in with China Mobile. NSN has been a major supplier to China Mobile but they don't have the TN product. Other partners of NSN such as Juniper do not have a competitive product as well.
Additional specifications/marketting materials on the TN product can be found in the UT website (this is additional items from what I linked to previously).
http://www.utstar.com/Document_Library/2009.pdf
Aside from the TN 703, 705, and 725 products, there is a 735 product with 240GB/s switching capacity not formally announced yet. IR has mentioned providing access to UT engineers for technical questions from the industry on the TN product.
In South America, Peter discussed the recently announced Logicalis sales agreement leading to projects in Argentina, Paraguay, Peru, and Chile for their IPDSLAM, MSAN, and GEPON products.
IPTV - Due to spending focus by Chinese carriers on 3G, iptv momentum in 2008 did not carry forward to 2009 although Peter believes there will be a return to significant iptv investment in 2010. There was a recent win with the Beijing SARFT and chosen as solution provider in 4 cities with (CCTV/Hunan). They were selected as a preferred vendor by China Telecom to deploy the new STB Standard 2.0 (this would allow them to compete for STB business with other iptv systems). Also, "And in Guangzhou, the capital of Guangzhou province recently launched the IDTV service, SMIC, the Southern Media Group and this is the revenue sharing model, we share in the advertising revenues, and we are expected to expand the service to other cities throughout the province."
Restructuring - The employee count is down to below 2700 by the end of October from around 4300 in June. The company will continue to reduce headcount in Q4 and Q1 2010 (probably 500 in Q4 and another 300 in Q1). SG&A for Q3 stood at $33m and R&D at $14m. The target model is around $11m SG&A and $14m R&D. Based on the 10Q, $35.143m of the announced "2009 restructuring" has been recorded but there is still $19.8m balance (cash to be paid out). For the 2008 restructuring, there is still a balance as well. So, for modeling cash and book value going forward, there is still $24m in cash to be spent on restructuring that have been charged to book value and another $5m to 10m in charges/cash to be added (to get to the $40-45m they announced back in June). The company is down to 1 building from 3 in Alameda and will probably maintain 30-40 employees in Alameda. The company "formally" announced in the call that they are looking into moving the HQ to China.
As a side comment, Barry Hutton, UT IR left the company (last day was Friday). They still have offices in Rolling Meadows and in Miami for the Latin America/International sales force team.
An outsourcing vendor has been selected and a PR on it is coming.
Other items - Peter talked about adding new board members and the potential sale of their building in China but no new information on that front.
Company Credibility/always LATE - For years, I have been against the poor BOD and management. Unfortunately, this has continued during Peter Blackmore's tenure. Lets look at just some items that have been executed poorly or "late".
Divestitures of holdings such as Infinera, Gemdale, and even PCD.
Filings and accounting issues that added tens of millions in interest costs.
Last minute transfer of funds from China.
Restructuring and expense cuts time and again.
There is just a corporate culture of being behind the curve and acceptance of poor performance and no accountability. Up to now, I still cannot believe that Lu/Toy and the rest of the BOD are still there with no major changes.
Peter has done things that shareholders want such as the restructuring/focus on core products but he has been late again. I believe he is on the right track and will eventually get there but in the meantime, the company has racked up over $1B in negative retained earnings and the book value has plummeted from the $700m+ level to less than $300m in 3 years (despite the investment gains).
Book Value/Cash flows - Despite the above issues with the BOD/management, the company is incredibly cheap. As of Q3, the company had cash/short term investments of $241m and $296m in stockholder equity. For the next two quarters where losses are still projected and the restructuring is to be completed, lets evaluate the book value/cash. Cash usage for the restructuring will be $24m + $5-10m (for 2008/2009 restructuring). Cash usage for the losses in Q4 and Q1 (say $30m - just a guess). They will bring in $3.5m for the Starent settlement. So, by end of Q1 2010, cash can be down to the $180m level. Because $35m of the $40-45m has already been charged, shareholder equity will decrease by only $10m (upper range of restructuring remaining) - $3.5m (Starent gain) + $30m (Q4/Q1 loss). That will leave shareholder equity at $260m. For 2010, there will be over $100m deferred revenue to be recognized + cash generated from BSNL Phase III so both tangible book value and cash should not be reduced and may start turning upward. Again, this is just my evaluation of where the bottom in cash and shareholder equity will be ($180m and $260m). That compares to the $245m market cap the shares are trading at. So, they are trading above cash based on Q4/Q1 losses and restructuring cash expenditures. But the shares are trading lower than book value even incorporating the Q1/Q4 losses/restructuring charges.
The negatives offsetting the valuation is the BOD/management and their culture of underperforming. Have they done "good things"? Absolutely, such as selling investments, non-core businesses, cutting expenses massively, refocusing on China but they have ALWAYS been late and lateness comes with a price that shareholders have taken the bulk of the brunt.
Company status - There is a powerpoint presentation on the company website on a Sept 30 2009 roadshow.
http://files.shareholder.com/downloads/UTSI/771583119x0x322559/c6305869-1a53-4779-80bf-e5b5e643e0de/UTStarcom%20Investor%20PPT%20-%20September%202009.pdf
95% of the material is what has been posted/discussed in the past. However, it does show major operational differences from the years past and the current situation. The customer list is still broad and targetted at the high growth markets. The product line-up is sensible and there is a renewed focus in China (broadband and overall company basis). The company is emphasizing China, India, AND Japan again so there is a renewed traction in Japan with the TN product (margins emphasized). There are still major questions on whether the upside can justify the expenses of the last few years or even now (given their company culture). It is easy in the past to cite a lot of links to technology or worldwide growth in related sectors/products but for UT, it comes to are they in position with their current customers and products (and can they execute). I am not in this investment for the current management/BOD but for traction in their products with their current customers/geographic markets. I am also not for a quick sale based on declining cash/book value because as the above indicates, this is near the bottom (for now). In the next year or two, the company has to either show progress in adding to the tangible book value or there is no turnaround hope anymore.
A lot of the sentiments (above) are what shareholders have discussed but hopefully, it has been quantified a little bit more and provide some metrics to track for the next few quarters.
Have a good rest of the weekend.
http://seekingalpha.com/article/171704-utstarcom-inc-q3-2009-earnings-call-transcript?source=yahoo
The live broadcast and SEC filings can be found in the company website. I have talked to some institutional investors that communicated with management and will add some "color" to the information provided in the call.
Q3 Results - Revenue came in at $71m with 34% gross margins. The GMs included a $6.5m benefit from reversing some handset writeoffs for PCD. Factoring that, GMs were in the mid 20s. The expenses were $58m (with $8.9 restructuring charge and $1.7m non-cash charge for divestiture of Korea based handset operations). I'll have much more on the expenses and restructuring later.
Business Units - MMCBU had revenue of $22m and 46% GMs; Broadband BU had $16m revenue and 22% GMs. Services had $17m in rev and 44% GMs; Handsets had $16m revenue and 21% GMs. The overall revenues ($71m) is still lighter than the $85m needed for breakeven but the margins are close to their target of high 20s. The margins for the MMCBU was lower than last year(with PAS) but seems higher than what I expect with iptv STB. The mix this quarter probably had more software/infra component than subscribers, which support the lowered expansion in subscriber count for 2009. The highlight of the quarter was the 22% GMs for the broadband unit as they managed the BSNL phase II contract well and gives added confidence that the Phase III contract will have decent margins (as long as they execute well). The services actually increased revenue (from $14m to $17m) and had very good margins. Handsets were down significantly from last year (that included much more PAS/PCD). The GMs of 21% benefitted from the $6.5m reverse of writeoff. The company is de-emphasizing this lower margin business unit except for handsets specifically sold with their mobile iptv system.
Broadband - Peter Blackmore expects the company to take in a significant order for the Phase III BSNL multi-play project this quarter. Part of the order will be this quarter and the 2nd part around April 2010. Peter mentioned on the call that execution of this contract is a key focus and this will affect the outsourcing transition and result in significant shipments in Q1 2010. Additional shipments in Q1 2010 will be driven by the Transport Network (TN) win with Softbank. Together with better execution of the BSNL project, the higher margins with the TN product will drive the margins for the broadband unit going forward. Peter mentioned the TN product as having good growth opportunity and a leadership product (also "exciting"). There was mention that they are actively bidding this product on a number of RFPs, notably China Mobile, where they are partnering with Nokia Siemens (NSN). The margins with Nokia Siemens will be lower but give them a better chance of winning part of the China Mobile tender and break in with China Mobile. NSN has been a major supplier to China Mobile but they don't have the TN product. Other partners of NSN such as Juniper do not have a competitive product as well.
Additional specifications/marketting materials on the TN product can be found in the UT website (this is additional items from what I linked to previously).
http://www.utstar.com/Document_Library/2009.pdf
Aside from the TN 703, 705, and 725 products, there is a 735 product with 240GB/s switching capacity not formally announced yet. IR has mentioned providing access to UT engineers for technical questions from the industry on the TN product.
In South America, Peter discussed the recently announced Logicalis sales agreement leading to projects in Argentina, Paraguay, Peru, and Chile for their IPDSLAM, MSAN, and GEPON products.
IPTV - Due to spending focus by Chinese carriers on 3G, iptv momentum in 2008 did not carry forward to 2009 although Peter believes there will be a return to significant iptv investment in 2010. There was a recent win with the Beijing SARFT and chosen as solution provider in 4 cities with (CCTV/Hunan). They were selected as a preferred vendor by China Telecom to deploy the new STB Standard 2.0 (this would allow them to compete for STB business with other iptv systems). Also, "And in Guangzhou, the capital of Guangzhou province recently launched the IDTV service, SMIC, the Southern Media Group and this is the revenue sharing model, we share in the advertising revenues, and we are expected to expand the service to other cities throughout the province."
Restructuring - The employee count is down to below 2700 by the end of October from around 4300 in June. The company will continue to reduce headcount in Q4 and Q1 2010 (probably 500 in Q4 and another 300 in Q1). SG&A for Q3 stood at $33m and R&D at $14m. The target model is around $11m SG&A and $14m R&D. Based on the 10Q, $35.143m of the announced "2009 restructuring" has been recorded but there is still $19.8m balance (cash to be paid out). For the 2008 restructuring, there is still a balance as well. So, for modeling cash and book value going forward, there is still $24m in cash to be spent on restructuring that have been charged to book value and another $5m to 10m in charges/cash to be added (to get to the $40-45m they announced back in June). The company is down to 1 building from 3 in Alameda and will probably maintain 30-40 employees in Alameda. The company "formally" announced in the call that they are looking into moving the HQ to China.
As a side comment, Barry Hutton, UT IR left the company (last day was Friday). They still have offices in Rolling Meadows and in Miami for the Latin America/International sales force team.
An outsourcing vendor has been selected and a PR on it is coming.
Other items - Peter talked about adding new board members and the potential sale of their building in China but no new information on that front.
Company Credibility/always LATE - For years, I have been against the poor BOD and management. Unfortunately, this has continued during Peter Blackmore's tenure. Lets look at just some items that have been executed poorly or "late".
Divestitures of holdings such as Infinera, Gemdale, and even PCD.
Filings and accounting issues that added tens of millions in interest costs.
Last minute transfer of funds from China.
Restructuring and expense cuts time and again.
There is just a corporate culture of being behind the curve and acceptance of poor performance and no accountability. Up to now, I still cannot believe that Lu/Toy and the rest of the BOD are still there with no major changes.
Peter has done things that shareholders want such as the restructuring/focus on core products but he has been late again. I believe he is on the right track and will eventually get there but in the meantime, the company has racked up over $1B in negative retained earnings and the book value has plummeted from the $700m+ level to less than $300m in 3 years (despite the investment gains).
Book Value/Cash flows - Despite the above issues with the BOD/management, the company is incredibly cheap. As of Q3, the company had cash/short term investments of $241m and $296m in stockholder equity. For the next two quarters where losses are still projected and the restructuring is to be completed, lets evaluate the book value/cash. Cash usage for the restructuring will be $24m + $5-10m (for 2008/2009 restructuring). Cash usage for the losses in Q4 and Q1 (say $30m - just a guess). They will bring in $3.5m for the Starent settlement. So, by end of Q1 2010, cash can be down to the $180m level. Because $35m of the $40-45m has already been charged, shareholder equity will decrease by only $10m (upper range of restructuring remaining) - $3.5m (Starent gain) + $30m (Q4/Q1 loss). That will leave shareholder equity at $260m. For 2010, there will be over $100m deferred revenue to be recognized + cash generated from BSNL Phase III so both tangible book value and cash should not be reduced and may start turning upward. Again, this is just my evaluation of where the bottom in cash and shareholder equity will be ($180m and $260m). That compares to the $245m market cap the shares are trading at. So, they are trading above cash based on Q4/Q1 losses and restructuring cash expenditures. But the shares are trading lower than book value even incorporating the Q1/Q4 losses/restructuring charges.
The negatives offsetting the valuation is the BOD/management and their culture of underperforming. Have they done "good things"? Absolutely, such as selling investments, non-core businesses, cutting expenses massively, refocusing on China but they have ALWAYS been late and lateness comes with a price that shareholders have taken the bulk of the brunt.
Company status - There is a powerpoint presentation on the company website on a Sept 30 2009 roadshow.
http://files.shareholder.com/downloads/UTSI/771583119x0x322559/c6305869-1a53-4779-80bf-e5b5e643e0de/UTStarcom%20Investor%20PPT%20-%20September%202009.pdf
95% of the material is what has been posted/discussed in the past. However, it does show major operational differences from the years past and the current situation. The customer list is still broad and targetted at the high growth markets. The product line-up is sensible and there is a renewed focus in China (broadband and overall company basis). The company is emphasizing China, India, AND Japan again so there is a renewed traction in Japan with the TN product (margins emphasized). There are still major questions on whether the upside can justify the expenses of the last few years or even now (given their company culture). It is easy in the past to cite a lot of links to technology or worldwide growth in related sectors/products but for UT, it comes to are they in position with their current customers and products (and can they execute). I am not in this investment for the current management/BOD but for traction in their products with their current customers/geographic markets. I am also not for a quick sale based on declining cash/book value because as the above indicates, this is near the bottom (for now). In the next year or two, the company has to either show progress in adding to the tangible book value or there is no turnaround hope anymore.
A lot of the sentiments (above) are what shareholders have discussed but hopefully, it has been quantified a little bit more and provide some metrics to track for the next few quarters.
Have a good rest of the weekend.
Tuesday, November 17, 2009
Institutional Holdings/Activity
The following link shows institutional activity as of the end of the 3rd quarter (9/30/09).
http://www.nasdaq.com/asp/Holdings.asp?symbol=utsi&selected=utsi
Shah Capital, the #1 UT holder, increased their position by over 1m to around 7.5m shares. It is interesting to note that they are concentrated on China and their #1 holding is a major winner this year, China Yucha, Intl LTD (CYD). That holding alone is worth around $36m! For each $1 that CYD goes up, thats a $2m gain, enough to fund buying a million shares of UT every quarter.
I don't know what Shah's intentions are but I hope they use it to motivate the board/management to think about shareholder value for once. In addition, with the low volume, low share price, and their major wins this year, Shah could literally have a ball with UT stock. I would not bet against these guys.
http://www.nasdaq.com/asp/Holdings.asp?symbol=utsi&selected=utsi
Shah Capital, the #1 UT holder, increased their position by over 1m to around 7.5m shares. It is interesting to note that they are concentrated on China and their #1 holding is a major winner this year, China Yucha, Intl LTD (CYD). That holding alone is worth around $36m! For each $1 that CYD goes up, thats a $2m gain, enough to fund buying a million shares of UT every quarter.
I don't know what Shah's intentions are but I hope they use it to motivate the board/management to think about shareholder value for once. In addition, with the low volume, low share price, and their major wins this year, Shah could literally have a ball with UT stock. I would not bet against these guys.
Friday, November 6, 2009
NSN partnership
UT announced on yesterday's Q3 2009 earnings call a partnership with Nokia-Siemens.
"We are bidding this product actively in a number of current RFPs. Most notably, we are pursuing the China Mobile tender, which is already gone out to RFP stage, and we are doing this through a joint partnership with a new partner we have in China, Nokia-Siemens."
There will be some institutional calls today with management and I've fed some of my questions to them and one of them is the NSN relationship. Why do they need them for the China mobile TN bid when they won the other contracts without anyone else? Is this a case where the RFP stipulates some added requirements that UT cannot fulfill and highlights UTs weakness or lack of experience.
How is the partnership with NSN structured? Does it mean NSN/UT will team up in NSN's backyard in the future, thereby giving UT another outlet to sell their products. NSN is a huge entity with 64000 people and they are planning to cut 6-7k to save $700m/year. They are looking to partners/acquisitions to drive their strategy going forward.
So, UT is partially adressing the "scale" issues by partnering/signing sales agreements (DESCA/Logicalis). Ultimately, if this NSN partnership works out well, NSN could just acquire UT seeing UT's cheaper labor workforce in China and the technology/client base they have is more cost efficient.
I was out during yesterday's call and will post a summary of the Q3 2009 call this weekend. That will include some information/clarifications from institutional calls today.
BTW, there was NO one asking questions yesterday. UT has become irrelevant and something the management/BOD is responsible for.
"We are bidding this product actively in a number of current RFPs. Most notably, we are pursuing the China Mobile tender, which is already gone out to RFP stage, and we are doing this through a joint partnership with a new partner we have in China, Nokia-Siemens."
There will be some institutional calls today with management and I've fed some of my questions to them and one of them is the NSN relationship. Why do they need them for the China mobile TN bid when they won the other contracts without anyone else? Is this a case where the RFP stipulates some added requirements that UT cannot fulfill and highlights UTs weakness or lack of experience.
How is the partnership with NSN structured? Does it mean NSN/UT will team up in NSN's backyard in the future, thereby giving UT another outlet to sell their products. NSN is a huge entity with 64000 people and they are planning to cut 6-7k to save $700m/year. They are looking to partners/acquisitions to drive their strategy going forward.
So, UT is partially adressing the "scale" issues by partnering/signing sales agreements (DESCA/Logicalis). Ultimately, if this NSN partnership works out well, NSN could just acquire UT seeing UT's cheaper labor workforce in China and the technology/client base they have is more cost efficient.
I was out during yesterday's call and will post a summary of the Q3 2009 call this weekend. That will include some information/clarifications from institutional calls today.
BTW, there was NO one asking questions yesterday. UT has become irrelevant and something the management/BOD is responsible for.
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