Cash balance at the end of the year

With the revenue shortfall for the year and the strategic investment in Stage Smart, here is an estimate of the cash balance @ the end of the year.

The projected revenue is down to $270m-$280m (say $275m).
Q1 & Q2 revenues combined was $154m, which leaves $121m for the last 2 quarters. The deferred revenue left at the end of the June quarter was $141.5m. It was about a total of $182m that was supposed to be recognized in 2 years. So, lets say $50m more to be recognized this last 2 quarters. That leaves only $71.5m of revenue. At 25% GMs, you have about $18m in gross profits.

Lets say OPEX is a full $60m the last 2 quarters and not the $50m they are projecting. That is a cash shortfall of $42m. Add the $20m for the Stage Smart investment and you will lose $62m from the cash balance.

The cash balance of $308m will be augmented by $36.6m from the new investment + another $8M if the last option is exercised.

So, you have ($308+36.6+8-62)m or roughly $290m left in cash. They have $34m more in restricted cash.

In summary, the cash is going lower as the company still does not have the revenues to support it and as the investment in Stage Smart shows, it will also spend for acquisitions. As it stands, by the end of the year, it will still have substantial cash. The cash burn will lessen if the revenue shortfall is due to a pushout and they can reduce their opex further. But more importantly, can they utilize this still sizable amount of money (around $300m) + the credit line early in the year to build a sustainable profitable business.

Delays have cost UT shareholders

A shareholder commented in the yahoo MB that "it will take some time, if indeed it can be done, to bring this company back from the brink that Blackmore led it to."

I am looking for incremental improvements in the following items on the call that should have been accomplished already.

1. China investment deal. Announced in Feb, even at the end of JUNE, we've heard (not from UT) in an article of approval from China and to be closing soon but still nothing.

2. BSNL-India Phase III - Initially should have been Q3 2009 (Q4 at the latest) and still no concrete update from the company.

3. Bookings - Even during the entire downturn the last two years, management was guiding to 50% bookings growth and then to double digit growth and then to just "good" bookings and then finally last quarter to booking way less than one.

4. OPEX - Even the latest restructuring should have been done before the end of Q4 last year and now revised to the end of Q2 but in Q1, the opex was still nowhere close to the target.

5. Transparency - Also should be improving but book to bill #s, iptv subscriber #s, # of trials, status of GEPON/GPON, PDSN, relationships in Latin America, Britain, Europe, etc - there is nothing. So, this is going the other way too.

I'm all for waiting but certain things should show incremental improvement or been completed already. The price at these levels is a joke for their assets, stated market positions, and projected growth of their markets but why is it still here and why hasn't someone made a higher offer by now?

So, the low price (that we longs feel) is directly related to incredible poor performance in such a way that all the "potential/cash/tech assets" that we longs talk about is easily negated by the incredible unresolved items up to now and the lack of even incremental improvements as I listed above. If they had resolved some of those items way before this year, the investment price would not even be close to $2.2.....That price may have been acceptable LAST June 2009 but not this Feb. 2010 and certainly not right now.

Shareholders deserve much more even at this stage.

UTs revenue decline

The following are UTs sales by country in Q1 for 2009 and then 2010.

China - $51.2m; $40m
US - $41.2m; $3.45m
Japan - $6.5m; $11.1m
Philippines - $.8m; $12.7m
Other - $19.5m; $13.6m

Of the $40m in China sales this past quarter, about half was deferred revenue so the actual revenue was down to around $20m in sales in China. At the peak of UTs growth, annual sales reached $2b so quarterly sales in China reached $500m or so. Going down to $20m is a staggering drop that shows the company has never recovered and until now, we don't know if it has bottomed. While Peter Blackmore, as CEO, is to blame overall, I wonder what China Sales and Marketing and Services SVP Charles Mah has contributed. The guy was hired in Novermber 2008 and now more than a year later, the sales have continued to deteriorate. Last quarter, Blackmore mentioned the book to bill was way below 1 signaling no signs of a turnaround.

With the guidance provided last quarter of similar revenues (including the deferred revenue), the company is still not close to any upturn in revenue, which at this stage is what investors really care about. Lets review the breakeven revenue of $85m/quarter (assuming the company even gets to the stated OPEX goal, which is another area they have been very slow to completing). The new COO (future CEO) mentioned getting to profitability in a year (from the February interview he gave in China.

http://translate.google.com/translate?js=y&prev=_t&hl=en&ie=UTF-8&layout=1&eotf=1&u=http%3A%2F%2Fwww.lmtw.com%2FUT%2Frep%2F201004%2F56163.html&sl=zh-CN&tl=en

From a geographical standpoint, here is what I estimate they should achieve for breakeven. I will group it into 3 areas for now, China, India and Japan+others. My estimate is for the following breakdown:

China (60%) - $51m/quarter
India (25%) - $22m/quarter
Japan/others (15%) - $12m/quarter

Not counting deferred revenue, the company should get to the $51m revenue level, which is a stagerring 150% growth from the current levels. The move to China, turnover of entire management to China, new board members/investors warrant the company to atleast get to 60% revenue in China (or else whats the point?). The company has talked about the new cable (iptv) revenue model, further growth in iptv, digital/interactive TV, NGB, TN opportunites and even GPON but no numbers or little information is provided.

The revenues in India and Japan/others are doable even right now if there are no delays in India and in a yearly total, should be quite doable even with just 1 large contract. Japan seems to have bottom a year ago as well and the base is still quite low. Another way to increase revenue is to use their cash to purchase businesses for external growth but in any situation, the revenue has to be increased.

So, it really comes down to China to stabilize the revenue base and in fact the need to increase it significantly from the current $20m/quarter level. I like that the company has put its focus in China but the revenue has simply continued to deteriorate and until there are bookings/wins to show it will go up, then there is no reason investors will support the stock other than sporadic speculative buys. On a more positive note, the overall US/China market seems to be moving away from a double dip and focusing on a better 2nd half of the year. As mentioned in the last quarterly comment, that should help UT stock as the company finishes their restructuring but in order to have sustainable gains and material stock support, it needs substantial revenue growth going forward. Absent this, the stock will continue in lackluster trading ranges with little volume.

India and China front

While UT has had some tangible news coming out from China regarding credit lines, completion of the Beijing investment deal and agreements on interactive TV, there has been little news on the Indian security situation.

Here is an article that shows there is still a current "ban" on Chinese companies in India...

"India competes with China the wrong way " http://www.cn-c114.net/583/a522716.html

Although India has publicly assured that it is not banning Chinese telecom products, a recent Indian media report revealed that its government has a blacklist, which actually bars 25 Chinese telecom manufacturers in the name of security precautions.

Last month, UT CEO Peter Blackmore mentioned in an interview in India that they will have a local outsourcing manufacturer in place in India by Q3. There is also a glimmer of hope that eventually, the Indian situation will have to be resolved soon.

http://www.lightreading.com/document.asp?doc_id=194192&

Mukherjee said Reliance Communications and other major operators have the underlying passive and transport infrastructure ready to deploy 3G, which will involve a relatively painless overlay. "It will be rolled out very quickly... the electronics will come fairly quickly from China," stated the Reliance Communications president, who is obviously confident that the current barriers to sourcing network technology from Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) will soon be broken down. (See No Respite for Chinese Vendors and BSNL Blocks Huawei, ZTE Bids.)

"The speculation is that the leading operators will roll out their first-phase 3G services any time between September and December. The rollout and service launch won't take much time," added Mukherjee.

He believes there is an addressable broadband services market of 850 million people in India, so current broadband penetration, with only around 10 million fixed (mostly DSL) and wireless (mostly BSNL and MTNL's initial 3G) broadband users, is very low.
---------------------------------------------------

The company seems to be headed in the right direction but the unresolved issues in India and uncertainty in future value of UTs share of the businesses in these large markets keep a cap on the stock for now.

India manufacturing in Q3 & New Chinese Credit Lines

Looks like things are starting to move. On the back of closing the building sale, UT has obtained a 2Billion Yuan minimum credit line over 3 years, with a minimum of 1 Billion the very first year.

http://www.caijing.com.cn/2010-06-13/110459191.html

In other news, Peter Blackmore has been giving some interviews in India and looks like they have gotten a local joint venture partner and plans to manufacture in India as early as Q3.

http://www.cn-c114.net/577/a515215.html

"While UTStarcom has already identified an Indian joint venture partner, Israel-based Alvarion is charting out its plans."

Speaking to Business Line, Mr Peter Blackmore, UTStarcom's Global CEO and President, said, “We had already made plans to manufacture in India, we are now accelerating these plans. Once we do that, we would have largely addressed the security problems. We want to comply with the Indian laws and if we set up a manufacturing here, then the debate is over.”

"The US-based company, which will soon shift its operational headquarters to China, plans to start production with an Indian partner in the third quarter.
Mr Blackmore did not reveal the name of the partner or the investment details."

Investor presentation in June?

http://files.shareholder.com/downloads/UTSI/897918691x0x380206/09474f27-899d-4992-8ae2-68bb088b64ec/UTSI%20Investor%20Presentation%20-%20June%202010.pdf

Looks like there is some kind of investor presentation in June......Looks like they are still looking to close the Chinese investment and BSNL deal in the near term.

Conference Call with Peter Blackmore

I had a 45-minute conference call late Thursday with UTStarcom CEO Peter Blackmore. Peter was back from China this week in time for the US holidays and set to travel to India after the break.

Here are the topics we discussed and relevant information provided.

Building Lease - The company formally closed the building sale and started the lease this week. I asked Peter if the lease would be accounted for as regular OPEX or some other one time charge on another line item. The lease would be part of the OPEX and included within the $25m/quarter or lower quarterly expense target.

Restructuring - I talked with Peter with regards to the still very high OPEX reported in Q1 (about $10m in R&D and $30m in SG&A). Peter mentioned they are still on track to bring this to less than $25m by Q3. I was skeptical about this and asked Peter how they can bring this down by then. Peter reiterated the 300 people that left in Q1, the additional people leaving in Q2 and the outsourcing transition that were all mentioned previously. He added that the new Newnet deal would basically remove their direct involvement/expenses for North/Latin America (including personnel and facility leases).

India Security issue (short term) - I asked Peter what the current situation in India and how has it affected business there (aside from BSNL phase III) and to comment on the Bharti iptv deal they said they had for Q1. Peter mentioned that the security issue did not apply to iptv and that the Chinese President was meeting with Indian officials in the near term and he could provide more updates in a couple of weeks as he is going to India right after the Memorial day break. Peter added that this security issue affects everybody (even non-Chinese companies) and that it was mainly directed at Huawei/ZTE. He said UT has very good local people on the ground and that they were well-connected.

India Security issue (long term) - I pointed out that ZTE/Huawei were planning to manufacture in India and potentially spinoff or list in the Indian stock exchange. Does UT have a longer term solution or developing one? Peter mentioned they are well aware of the manufacturing issue and the need for technology transfer and that they are looking at long term solutions.

Beijing E-town investment - I asked Peter how the move in headquarters affected their facility in Hangzhou, UTs commitment of $2.3B in revenue over 5 years (how doable), benefits to UT, etc. Peter mentioned that they currently have 100 people in Beijing and that it will only impact those people. The R&D people will stay in the Hangzhou facility. The $2.3B was arrived at by Yellowstone capital and Peter mentioned the length of time allowed them to ramp up to it. He said IF iptv ramps up, then it is "easy" to accomplish. The move to Beijing as a headquarters is strategic in that all the regulatory agencies are in Beijing (SARFT for ex.) and would have a "halo" effect in their operations all over China.

Company Financial Model - I asked Peter about the company's seemingly endeless restructuring and missed financial metrics they have set. I also asked Peter that once he leaves and becomes a shareholder, what metrics would he use to measure the company's performance. Peter mentioned interestingly that bookings would be important. I quickly reminded Peter they themselves haven't been giving any bookings information. I think he realized his ironic response and mentioned that due to the company's transformation they were not able to provide the numbers but to keep pushing the new management for bookings and that they should be able to provide it. I discussed other metrics such as iptv subscribers and he said they should provide more information on this in the future. I asked if they would be forever in the mode of missing targets and restructuring and he said it would be up to the new management to decide that in the future but as of now, there are no plans for further restructuring. That the company (due to revenue recognition of 6 to 9 months) was focused on bookings to drive revenue for 2011. I asked about the value of iptv/TN contracts trying to get more color on what it would take to achieve $350m in yearly revenue. How many large contracts do they need to go along with the smaller ones. No value of contracts given but it would probably take 2 large ones and that the most likely ones are BSNL phase III and Softbank TN.

TN - I asked about TN with regards to China Telecom/Unicom. Peter mentioned that China Telecom is evaluating their equipment and Unicom was well behind. Bharti is also a major potential but Softbank is the most likely major customer right now. He added that Softbank and China Mobile were the most progessive of the operators looking at the latest technology. Peter also highlighted their "enterprise" wins with utilities/etc, smaller current deals with BSNL, and Softbank. I asked Peter if they needed additional financing to land a major Softbank deal and he said no, that their cash position (specially after the building funds) now allowed them to do deals they could not before.

IPTV - I asked what metrics/data he could give that shows his confidence in iptv in general. No specific data except that STB demand for all providers have been very good. In India, I asked what the situation with each of their customers. Peter felt confident about their positions with each customer in India and that each one is expanding but pales to China in current demand. There is no new contracts under the new service type model yet but there were additional cable iptv wins since his last announcement. Peter could only point to the STB demand, the overall iptv growth projections, and government focus on promoting iptv. How big will the cable iptv market be? Are they going to be getting large contracts (like BSNL phase III or Softbank TN)? No, it will be similar to the telco iptv in establishing beachheads and growing from there.

Philippine Business - Just a random question from me since this was a large (over $10m in Q1) source of revenue. Peter mentioned that they don't have long term contracts but are constantly gaining business as PLDT (MSAN product) expands since they are the incumbent. I think this is really the key to other product/customer situations like TN with Softbank, BSNL broadband, China/India iptv, etc.

Confidence in the business/company - I suggested to Peter that shareholders were getting less confident (via the lowered stock price) and asked how he felt about the business/company in general. Peter mentioned that he was still very confident about the company prospects.

Comments: I think this was the most guarded Peter has been regarding our conversations, careful to not be overly optimistic and give out any data not material/public (which is understandable). I did not directly ask Peter about the closing of the Beijing investment group as I felt through the conversation it was a foregone conclussion that just takes time (as the Building closing showed). I would neither characterize that as positive or negative in the short term because there are very valid arguments for those wanting the company to operate as a successful ongoing concern and those that want the company sold due to the company's poor operating results and potential to continue the poor performance. So, for better or worse, I believe the deal is 99% going through. As for the BSNL Phase III, I believe that will also be done eventually but the current (short/long term) uncertainty in India is not good for the stock. The stock at these levels continue to project virtually little to no value to the business and trades way below cash as the company fails to provide any confidence to the market. While the market has been shaky as well, the company trading way below cash shows a very negative bias towards the company's prospects.

I continue to like the stock valuation from a long term view but as I mentioned in the Q1 posting, the company's weak bookings, late restructuring, market's shakiness and now negative bias towards small caps/Chinese stocks will keep UT down but better prospects in the 2nd half of the year should coincide with much better stock performance.

Have a good Memorial Day weekend to everyone.