Thursday, January 31, 2008

DRAFT Letter to Management

During the upcoming shareholder meeting, I would like to discuss the letter I am planning to send on behalf of the group. Please read and comment during the shareholder meeting.

Dear Sirs,

Being a long time shareholder, I have seen the tremendous potential of the technology and markets that UTStarcom is involved with. However, this has not translated into a profitable company and has resulted in a collapse in the share price over the last few years. Recently, I have formed an exploratory group to discuss ways to unlock and enhance shareholder value. I realize that this is also the stated goal of management and the Board of Directors. While management has outlined specific turnaround targets and a commitment to profitability by late 2008/early 2009, there are too many unresolved issues and no major results as of yet. From discussions with fellow shareholders (both retail/institution), there are numerous items to be concerned with such as:

-Viability of sustainable profitability in light of the current bloated expense structure.
-The company has not taken concrete steps to defend the stock price.
-Management has continued to increase their own compensation during this time.
-Management has ignored investor suggestions in meeting with shareholders/discussion of alternatives to resolve the convertible bond.
-The company has not given updates on important issues such as the sale of investments, resolution of the convertible bond, information on OEMs, and other cash saving/generating measures that it has discussed over two months ago.

The shareholders appreciate the information provided in the last earnings call but need tangible results. Based on the company’s history of underperformance, weak internal controls, miscellaneous write downs, missing estimates wildly and other catastrophic bad news, it has become necessary to form this exploratory group in order to track management’s progress, to instill a sense of urgency to management and enhance shareholder value.

Currently, the exploratory group has received inquiries from people representing about 20.5 million shares or 18.5% of the total outstanding shares. The fact that a significant number of shareholders have shown interest in a very short period shows the frustration of the shareholders and their demand for management/company to perform. On Saturday, Feb. 2, 2008, we held the group’s first shareholder meeting. The results of the meeting were to develop the group’s initiatives and plan a path forward.

The goal of this group is to simply to unlock/enhance shareholder value. There are two basic plans or phases to achieve this goal.

“Plan A”: Pro-actively “support” and monitor the management during this turnaround phase. This involves:

· Organizing and maintaining retail/institutional shareholder base to discuss the progress of the company.

· Communicating as a group with management through emails.

· Meeting with management (as needed) to discuss various issues such as compensation, operating expenses, profitability and other strategic initiatives.

· Using the resources of the group to disseminate information to the group’s members and other (existing/potential) shareholders. (via blog/email base, letter campaign to other news organizations such as Businessweek, Lightreading, gathering of information in China/other parts of the world)

· Reinforce sense of urgency to management/BOD by being prepared to implement “Plan B” quickly.

“Plan B”: Seek change in management and/or a sale of the company. This involves:

· Meeting with management/BOD to discuss sale of company.

· Letter campaign to other institutional shareholders to join this group (activist group at this point)

· Proposing management changes and putting up slate of directors that will make significant operational changes or seek a sale of the company.

· Court potential suitors for the company.

The exploratory group is in process of filing paperwork and formalizing the group to be in proper compliance with SEC rules on disclosure. It is also actively courting the other hundred or so institutional shareholders that may wish to join the group.

For the upcoming earnings call, the group expects the management to resolve the convertible bond in a way that benefits the existing shareholders (no dilution) as it has mentioned previously, impose strict expense controls/discipline, significantly improve cash generation/reduce cash burn, and accelerate the timeframe for profitability. The current hope of the exploratory group is that the initiatives under Plan A will be sufficient to achieve its goal. To that end we would like to meet with management after this upcoming earnings call to discuss specific issues that will lead to enhanced shareholder value.

We look forward to hearing from management and meeting with them in Alameda after the earnings call and quarterly filings are completed.

Wednesday, January 30, 2008

Shareholder Conference Information and Agenda

We will be holding the shareholder conference call this Saturday, Feb. 2, 2008 (10AM Pacific/1PM ET). I have emailed the call-in number to shareholders that have expressed interest in joining the group. If you have not received the number, send me an email so I can put you on the list. Here is the agenda for the conference call.

Log In - As you log in to the call, give your name (first name/screen name is fine). I will check you off so I know who is on the call.


Introduction – I will reiterate and expand on the goal and possible initiatives that the group can take up.


Message to management – I am planning to send an email to management prior to this critical Q4 earnings call to convey the shareholder’s concern and issues we want management to address. I will draft the email and post prior to the shareholder meeting.


Views from larger shareholders/institutions – I will call on shareholders by first name/screen name to discuss their positions on UTStarcom. Shareholders can identify themselves and the institutions they represent and how many shares they own/represent (if they want). They will have the opportunity to discuss why they own the stock, what their major concerns, strengths of the company, what their outlook for the company, what they think the steps this group should take going forward, etc. If you own 100k shares or more, please be prepared to contribute and express your views. If you prefer to just listen, just say pass. I hope I am not slighting the shareholders with less holdings but I want to let the larger shareholders have their say first since they have “earned” it painfully.


Open Q&A from the rest of the shareholders – After the larger shareholders have had a chance to speak, I would like to give all the other shareholders a chance to bring up topics that have not been touched upon or want to discuss further. Just for protocol, please identify yourself by first name/screen name and disclose as much/little as you are comfortable with.


Pathforward – We will conclude the shareholder conference call by listing items that we can do going forward.

I am allocating up to 2 hours for the conference call depending on how the discussions proceed. If there are items that will require more time, you can contact me separately and I will summarize in the blog (as appropriate). As I’ve mentioned previously, all options will be considered. I am just a retail shareholder bringing this group together. The initiatives I have put forward are just a start and I can only take it so far. I expect to get the assistance from the “membership” to take this to the next level (with a more formal structure for example). I look forward to talking with my fellow UTStarcom shareholders this Saturday. We currently have over 22.5m shares that are represented or 18.5% of the total but would definitely welcome more shareholders to join. This is everyone’s opportunity to be heard and participate. If you have not “joined” in and want to listen in or participate, just send me an email.

Sunday, January 27, 2008

Exploratory group goal and initiatives to achieve this goal

The goal of this group is to simply to unlock/enhance shareholder value. There are two basic plans or phases to achieve this goal.

“Plan A”: Pro-actively “support” and monitor the management during this turnaround phase. This involves:
· Organizing and maintaining retail/institutional shareholder base to discuss the progress of the company.
· Communicating as a group with management through emails.
· Meeting with management (as needed) to discuss various issues such as compensation, operating expenses, profitability and other strategic initiatives.
· Using the resources of the group to disseminate information to the group’s members and other (existing/potential) shareholders. (via blog/email base, letter campaign to other news organizations such as Businessweek, Lightreading, gathering of information in China/other parts of the world)
· Reinforce sense of urgency to management/BOD by being prepared to implement “Plan B” quickly.

“Plan B”: Seek change in management and/or a sale of the company. This involves:
· Meeting with management/BOD to discuss sale of company.
· Letter campaign to other institutional shareholders to join this group (activist group at this point)
· Proposing management changes and putting up slate of directors that will make significant operational changes or seek a sale of the company.
· Court potential suitors for the company.

During the upcoming shareholder conference call, I will provide some additional details to the above initiatives but these are broadly the initiatives that are typical in these types of cases. I would like to receive input from the other shareholders during the meeting but basically present this to other shareholders now to clarify the intent of this group.

Wednesday, January 23, 2008

Exploratory group to enhance share holder value

Over the last few weeks and since I started this blog, I have been contacting other shareholders in order to gauge sentiment about the company and management's turnaround strategy. While it is too early to evaluate the impact of the turnaround plan, I believe this is the proper time to organize an "exploratory group" to enhance shareholder value and track the progress of the company. Currently, just on the few shareholders I have talked with, we have about 1.2 million shares or 1%. In addition, a large overseas fund manager whom I met at the shareholder meeting disclosed having about 10%. This manager has sent information to support his holdings and I don't have any reason to doubt his position. In any case, with so much at stake and a lot of value left in the company, we would like to invite other shareholders to "join" our group. There are no major committments except to participate and discuss the company's progress.

The first "event" I am planning for the group is a conference call to be held within 2 weeks and prior to the Q4 earnings. As you know, this upcoming earnings call will be critical with respect to the convertible bond and the outlook for 2008. This shareholder conference call will be an opportunity for interaction with other shareholders and for us to draft a document to send to management on items they should address at the shareholder meeting.

I understand that shareholders (retail/institutional) will have different goals and expectations. Some want immediate actions from the company. Some are willing to give the company time to work out this current turnaround. However, we are all currently in the same boat with little good options. It is imperative that the company produces tangible results very quickly and throughout 2008.

Again, I invite all interested shareholders whether you have 1k shares or an institutional holder. If you want a voice, this is your opportunity to be proactive with your investment. You can email me at tim_94305@yahoo.com if interested.

Tuesday, January 22, 2008

Feds fund rate cut by 3/4% to 3.5% and UT goes down 9% to an all-time closing low

The market makes a lot of sense, right?



One of the major weaknesses of UT as a company has been management. For some reason or another, it has been "behind" the curve regarding managing the PAS downturn, anticipating the rise of 3G, iptv, and cutting costs or selling assets (divisions and/or holdings). But, it may be catching a break at an opportune time here in dealing with the convertible bond. Consider:



-Over the last few months, the feds funds rate has gone down from 5.25% down to 3.5%. In addition, further rate cuts are expected. Despite the negative percerptions on what rate the company can get, the sharp drop in the fed funds rate, slowing economy, and expectations of further cuts will allow the company to negotiate a lower short or long term deal.



-Efficient use of capital. The convertible coming due has forced the company to transfer funds from China that were earning 2%. The company paid $22 million in additional interest in 2007 just for being late in filing on top of the regular interest payments.



-Appreciation of investments. Gemdale and Infinera were less than $5m at the start of 2007 and was close to $90-100m at the end of 2007. The fact that the CB is coming due has forced the company to sell at relative highs.



-Falling dollar/appreciating currencies outside US. Since the debt is in dollars, the company has been able to take advantage of the currency appreciation the last few years and will continue to do so if they get additional bridge loans as revenues from outside the US will pay for any new loans denominated in dollars.



-Slowing worldwide outlook will help PAS extend its life. Pas revenues are still very critical to UT and delays in spending/implenting 3G rollouts can only extend the life of PAS.



-Cost cutting/2008 cash flow outlook. In a few weeks, UT will discuss q4 2007 results and present 2008 projections. The street will watch for signficant improvements in cash flows for 2008. The head count reduction completed in q4 will start having an impact in q1 2008. The lack of investigation costs related to the options/China contracts/interest payments should help signficantly. Blackmore mentioned signing one Asian OEM and in talks with others. He talked about cost savings of $50m or more from inventory management. If there was any time that management needs to present a good outlook, this is it.



In summary, Barton has been presented with a much better environment than 6 months ago. Some have been by design as UT hired Blackmore, implemented cost cuts, and took a lot of the write-offs/spending in 2007. Others have been by chance (luck) as investments went up, the economy is slowing down and rates being cut. They have sufficient funds to pay most if not all of the convertible bond and could get a bridge loan or even a longer term loan for much better rates. The debtors know this is a company that will pay their debt back (and more!). Barton has collected some serious compensation for terrible work in my opinion. He is now presented with an almost slam dunk situation to deal with the CB to the shareholders best interest (as if he had to say that in public-unbelievable). In any case, todays drop to $2.57 is ridiculous indeed. I picked up a token 3k shares for $2.62 in defiance of this madness :-) I expect a major earnings run coming up....hopefully.

Saturday, January 19, 2008

Barrons article on Comcast

http://online.barrons.com/article/SB120058257204297773.html

If you haven't read the previous post, I suggest reading that one first for some context before preoceeding to this Barron's article.

Friday, January 18, 2008

The bear case against UTStarcom

It is always constructive to evaluate the negative as well as the positive issues for companies that you owns shares in or those you are thinking of buying. Here are the negatives for UTStarcom (for those with a weak heart and don't want to read anything negative about the company, you can and are advised strongly to skip this post now).

Weak operational results - Did I just say weak? Maybe collapse is a better word for this. All data are from the recent Q3 2007 filings (no need to go very far to dig up this kind of performance). For the 3rd quarter, broadband infra revenues declined from $50.7m to 42m yoy. Wireless infra (PAS) declined from 110.3m to 67.7m. In addition, GMs declined significantly. For the gross margins, I will use the latest 9 month comparisson. Broadband infra GMs went down from 18% to 7%. Wireless infra went down from 48 to 36%. Handsets (PAS) declined from 93.1m to 59.2m for the 3 months yoy. GMs moved up slightly but that is a huge drop in PAS handset revenue. The only bright spot was the PCD which had increasing revenues and gross margins but did anyone buy UTStarcom for the PCD business unit and its perpetual low margins and even tougher competition?

IPTV growth - This is the main growth driver for the future and by late 2007, the company had 600k live users. However, they have been developing iptv for years and have spent hundreds of millions over the years. Net revenue recognized so far was a pitiful $80m of the $240m in contracts signed. It takes anywhere from 6 months to 12 months to recognize revenue for any given project. Gross margins are in the 40s but only for the core equipment. Set top boxes have GMs under 20% and comprise the bulk of the per user iptv revenues the company expects. There is also no guarantee that clients will use UT STBs. Deployments in China, UTs biggest potential markets have been slow and projections for the "inflection" point/significant increase in orders have been consistently pushed back year after year.

Expenses - UTs iptv growth could be considered exponential and they are one of the top providers already. However, when compared with the amount of revenue/profits it brings compared to their expenses, the numbers do not currently justify the costs over the years. The company has projected to cut costs from $130m to $115m per quarter. The problem is their gross profits are in the $70-90m range. For a company that has been unprofitable since Q2 2005, facing rapid/steep declines in its PAS cash cow and an upcoming convertible bond due in March, it is seems their bloated cost structure is not their priority over the last 2 years.

Liquidity/Convertible Bond - A $275m convertible bond comes up in March. Its kind of an important issue specially when the entire market cap of the company is $350m and almost a third of the shares have been shorted. They have enough money to pay it off in theory but most of it is in China. Working capital has diminished significantly and expected to decline more with the recent operational performance. The company does expect to have sufficient working capital for the next 12 months. Thats always good to hear. Shareholders are reduced to waiting for them to liquidate precious investments that have luckily gone up. Of course, they need to transfer more cash from China.

Competition - In their largest core market China, they have two of the fastest growing, very well capitalized locally developed competitors in ZTE and Huawei. Those two compete in every core product category in China and abroad. Overseas, they face incumbent or much larger competitors in Ericsson, Cisco, Alcatel-Lucent, Nokia-Siemens, and others.

India and international expansion - This has been a "bright" spot with revenues increasing significantly but at numerous write offs of significant amounts and very low initial margin contracts. From the most recent 9 months, China revenues have declined from $595m to $390m. This should be offset by international revenue outside China, right? Japan, with much higher gross margins, delivered $54.7m, down from $116m in the same 9 month period in 2006. What happened to their relationship with Softbank? Revenue from "Others" declined from $117m to $103m. Of course, these were in 2007 and 2008 has added bookings and contracts to be recognized, but they have been talking about replacing China revenue with overseas revenue since 2004 (and probably much earlier). Most of the lost revenues have so far been made up from the PCD group, which they had to acquire for $165m (plust debt) and then susbsequently miss most margin targets for this business unit. In addition to buying assets, they took on the resale business for certain parts of the world from Pantech Curitel. This is only for 3 years and the company had to write off inventory from this deal.

The cost of the filings - An additional 20000 manhours were spent in performing investigations and refiling the previous 7 years of results. In addition, in order to avoid being in default with the CB, they had to pay an additional $22m just in 2007 to satisfy the bondholders so that UT would not be in default. Let me repeat that number again. $22m! The company would have to sell about $400m from the PCD just to recoup that amount. Thats on top of the regular bond interest of $16m year after year. The company does get 2% on most of their half a billion worth of cash sitting in safe Chinese banks. They have not touched most of these funds for collateral purposes. Thats a good example of the "low" cost of doing business in China. The company per Barton is very proud of the recently filed SEC report displaying all the gory details of the additional CB interest and Nasdaq filings. Its like re-enacting a horror show over and over again. It will send chills up your body when you read those. At every step of the way, we investors thought the company MUST be close to filing. They could not possibly be so incompetent as to pay millions in additional interest, could they?

Strategic Alternative Study - Covered well in my recent posts but what where the chances of an outside entity buying the company with the issues it was facing in late 2006 and 2007. They did get rid of their Chinese CEO and co-founder Ying Wu, which was suppose to take over as CEO just in early 2007. Its always nice to add some additional news like when Apple CEO Steve Jobs says, BTW,....For UT, it was no sale of the company, no detailed explanation, and BTW, Ying Wu is out. All at a time, when all we shareholders wanted was the filings to be done and to get some information on the performance of the company. For a publicly held company, you would think they may share some preliminary information with the public. Over a year of silence went by until the stock had lost 70% in value and 90% in just a few years.

Intangible Assets - In a SEC filing, the company put out a note saying it is essential that key management personnel be retained and that performance would be impacted if they were to leave. Huh?!? BTW, I know that wasn't the intangible assets you were thinking of. Rather than talk about the $2/share and $4 billion 2005 guidance, or the strength of iptv and 3G (and its subsequent writing off the entire WCDMA group), the 2007 and early 2008 cash/Gaap profits forecasted, we can talk about their salary (tied to other $2.5b companies no less but that inclused PCD if you are keeping track), raises, bonuses, and retention bonuses. Lets not.

Future forecasts - A new future CEO in Peter Blackmore was announced in 2007. Wait, wasn't Wu going to be the new CEO as announced in 2006. How about a "constant quarter by quarter improvement" forcasted by then new CFO Fran Barton 2 years ago. Supposedely, they were getting improved accounting systems and supply chain management thingamajigs implemented 2 years ago. I guess they forgot to tell Blackmore they have been working on tightening the controls for a while. Don't want Blackmore to look silly, do we? or to reinvent the wheel (maybe they do). Head count and cost reductions. Been there and done that. Good to see they are still lowering costs and waiting for revs to catch up. There is now a sense of urgency and a committment from Peter Blackmore. That sounds good and new. One thing that is new for sure is the new 52 week lows that we saw continuously flash before our eyes in 2007. If the next few quarters don't go according to the sense of urgency plan, I guess they could always cut more costs, fire somebody (or maybe promote somebody first ala Sophie), announce another strategic study (thats always good for a few bucks on the stock price and this time they will have current filings to make it more credible). Heck, it may be better to just announce more investigations to delay results for another year if results are really going to be bad again.

Is there a siliver lining to all of this? Definitely, read most other posts on this blog. Just wanted to remind longs that with valuations this low comes real drama and excitement with this company. For new/potential longs, just wanted to let you in on the fun. I do recommend buying based on the accumulated knowledge you will gain on what to look for in a good investment (think about that one for a while), and you may even gain significantly if this is the start of a major turnaround. If this is not enough excitement for you, you can always just do what most sensible UT longs have done............Give up. Hell no,........ double down :-)

BTW, this post may not have been fully endorsed by the blog creator or written with the clearest of minds or may have just been a bad dream. Now, back to your regular local programming and count down to the NEXT "earnings" report.

Tuesday, January 15, 2008

IPTV penetration rates

At the end of 2006, Merrill Lynch took a stab at UTs iptv market potential in China alone.

"Assuming 10% penetration of the approximately 80+mn urban households in China in the next 5 years, with UTSI capturing a maximum market share of 50% only gives 4mn subs on UTSI equipment. At an estimated revenue of $200 persub (including backend CPE and subscriber STB), the revenue opportunity translates into up to $160mn in annual sales for UTSI. We estimate gross margins would range from 40% for CPE to <20%>90% TV householdpenetration in China and more significantly, projections for almost 50mn broadband internet subscribers in China at the end of 2006 and about 60mn at the end of 2007. However, these numbers do not take into account that some of the connections may not have the necessary infrastructure to carry higher bandwidth IPTV signals, or likely competition from digital TV rollout by cable operators.In the mid to longer term, we believe that the potential Chinese IPTV market is could be between 30-60mn households. Even if UTSI’s market share was only 30% and blended gross margins were only ~25%, the potential margin contribution to UTSI could still be up to 2 – 4x higher than our conservative baseline scenario above."

An article from lightreading highlighted the top 10 iptv operators and their current number of subscribers.

http://www.lightreading.com/document.asp?doc_id=142594

It is worth noting that "In addition, we have only included service providers that have provided us directly with IPTV subscriber data. So while we believe that China Netcom Corp. Ltd. (NYSE: CN - message board; Hong Kong: 0906) and Japan's Softbank BB Corp. likely merit a place in our Top 10, we won't be adding them until we have sourced data directly from those operators, which haven't yet responded to our requests. "

Here is a table of the top 10 operators, the number of subscribers, broadband lines, and iptv penetration rates.

http://www.lightreading.com/document.asp?doc_id=142594&page_number=1&table_number=2

For those that have been following the last couple of years from UTs initial 5k deployment in Shanghai to now, you have read about iptv's potential. However, this has not translated into overall profits for UT. For longs like myself, I have put my faith in UTs system and the markets in developing countries. From the table, China Telecom has 310k subscribers. China Telecom and China Netcom basically split the country in providing fixed line (and PAS deployments). From the last update, UT already had 380k subscribers in China alone and over 600k worldwide. From the table, CT has a 35 million broadband subscriber base. CN probably has comparable numbers. The key take away from the table however is the 0.9% penetration rates for CT. All other operators have a 9 to 78% penetration rate. As mentioned earlier, this does not include CN and Softbank and guess who provides the iptv equipment to them. So, overall, the iptv market in China right now has 70m broadband lines with an 0.9% penetration rate.

The Merrill analyst did a credible job in estimating the potential but conceded it is probably conservative. Broadband numbers will also keep growing in the next 5 years. The analyst also did not include models for India, Brazil, and Taiwan where UT has gotten major contracts, and the other 40 locations (such as in South America, Middle East, Eastern Europe) where UT has trials. In India, wins at MTNL and Bharti Airtel are for an initial 120k subscribers each with up to a million users. Taiwan and Brazil are for 10s of thousands with higher caps (Taiwan up to a million or two).

The wins in other countries are great but the near term growth/explosion (next year or two) will definitely come from China. In one sense, it is disappointing that the company is not yet profitable and the stock is under $3. However, if you look at the growth that lies ahead and the probability that they will be profitable in a few more quarters, this is an incredible situation.

BTW, there was also an article about BSNL's potential $10b ipo. UT has provided and deployed broadband lines to BSNL, the largest operator in India.

http://www.lightreading.com/document.asp?doc_id=143133

The push in broadband and relatively large iptv contracts that UT has won in India show that this is not a bad "secondary" market to ship iptv gear to.

Monday, January 14, 2008

UT Investments and ROI

During the last few weeks, I mostly recapped the 2007 company/stock performance and the 2008 hopes/expectations. For this post, I would like to address an "intangible asset" that most do not focus on but has benefited UT and I think can bring more value in the future. This is their ability to invest in companies in emerging countries and technologies.


Yahoo's Alibaba and EMC's VMware holdings are well publicized. For those that remember a while back, Apple's holding of ARM holdings allowed it to accumulate literally hundreds of millions during their critical turnaround phase. Another shareholder, Tigre, posted a detailed history of UTs joint holdings with Softbank that could have yielded $570m instead of $57m since they owned part of Alibaba. Its a very good read, which is why I wanted to archive it.


http://messages.finance.yahoo.com/Business_&_Finance/Investments/Stocks_(A_to_Z)/Stocks_U/threadview?bn=27187&tid=146053&mid=146076


UT invested in gemdale and infinera that are now worth about $100m and have become material that we actually track the day to day value of gemdale in Yuan (its back to 49 yuan btw:-). Another holding in Fiberxon was replaced with MRVC when they bought Fiberxon. From last quarter's filing,


"On July 1, 2007, Fiberxon, an investment in which the Company had a 7% ownership interest, completed a merger with MRV Communications ("MRV"), which is a publicly-traded company. In exchange for the Company's interest in Fiberxon, the Company was entitled to receive $1.5 million in cash, 1,519,365 shares of MRV common stock valued at approximately $4.5 million and deferred consideration of approximately $2.7 million. The deferred consideration becomes payable upon the completion of certain milestones and may be reduced by legitimate claims of MRV for certain matters related to the merger. In the third quarter of 2007, the Company was paid the cash consideration of $1.5 million and received 1,519,365 shares of MRV common stock and recognized a gain on investment of $2.9 million. The Company also recorded an unrealized loss of $0.7 million representing the change in fair value of the investment during the third quarter of 2007."


Here is a current PR from a MRV subsidiary that will have an ipo.


http://biz.yahoo.com/ap/071226/source_photonics_ipo.html?.v=1


The investment gains from the $57m a couple of years ago to todays gemdale/infinera/MRVC has shown that UT connections and doing business in emerging countries/technologies are valuable "assets" that needs to be kept up and pursued. Some could even say that UT failed to take advantage of the growth in these emerging markets by failing to partner with other Chinese companies and have losses in their investments in 3com (although they have a lawsuit with Starent and have some patents).


Overall, management continues to spend a lot of money in R&D, SG&A and are not getting a good ROI for the dollars spent. I am not saying that the company needs to become a mutual/hedge fund but they have connections/resources and can leverage their position to take advantage of unique opportunites not available to other foreign companies or even other funds. Management should do a much better job in evaluating the best use of their limited resource to get the best ROI. Other shareholders have been calling for a stock buyback. Obviously, the convertible bond is a priority but a stock buyback should be seriously considered and if management is to enhance shareholder value, they need to buy back some shares at these prices. This is another reason why the street is discounting the stock. Instead of giving the company credit for being in emerging markets and being in a position to take advantage of early trends and growth opportunities, the street looks at managements lack of pro-shareholder actions.


As a last commentary, Juniper's COO leaves the company and the stock tanks. Openwave's CFO leaves and the stock tanks. When Lu announced he was retiring, the stock doesn't do anything and people question why he is not leaving right away. When Sophie left, most people were relieved and wondered why he was even promoted to COO in the first place. If Barton leaves, he will receive a nice farewell gift to adequately compensate him for his poor forecasts and lack of communication for over a year. When the star player of a last place sports team leaves, everyone is relieved so that they can start the turnaround sooner and get rid of his/her salary. Why pay millions for bad management? I like Barton personally and have high hopes for Blackmore but the company and stock performance has been atrocious. During the shareholder meeting and recent CC, management made it a point to discuss shareholder value and to expect improvements. Drastic improvements are needed and I still have hope but we will just have to see.

Saturday, January 12, 2008

Wu Interview - UTs Strategic Alternative Study

On Jan 4, 2008, there was an interview with former UT founder and China CEO Ying Wu that discussed Wu leading an outside group purchasing the company for “double the price”. Here is the link provided by a fellow shareholder Johnheppy.

http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_U/threadview?bn=27187&tid=148518&mid=148518

Further discussion on this topic from the yahoo message boards can be found here.

http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_U/threadview?bn=27187&tid=148523&mid=148523

For some background, we go all the way back to May 10, 2006, the day UT announced that Lu was going to step down at the end of 2006 and hand reins to Ying Wu.

http://www.lightreading.com/document.asp?doc_id=94592

At that time, the share price of UT was $7.25-7.5. A quote at that time:
' I think Hong Lu lost credibility with investors a long time ago, and now it appears the board has lost faith too," writes Light Reading Insider analyst James Crawshaw in an email commenting on Lu's departure. "I am surprised he is staying as CEO until the end of the year. I guess this is to give the impression of a smooth handover to Ying Wu, but he is likely to be a bit of a lame duck."

On Oct. 11, 2006, UT announced it had hired Merrill Lynch to explore strategic options.

http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/10-11-2006/0004449986&EDATE=

"Our Board of Directors and management team believe that the inherent
value of the company and its opportunities are not reflected in our current
share price," said Hong Lu, Chairman and Chief Executive Officer of
UTStarcom, Inc. "We believe the engagement of Merrill Lynch will help us to
carefully examine a range of short and long-term alternatives."

At that time, the price was at $9.74. The increase from earlier in the year boggled some analysts at the time as fundamentals did not improve significantly although we now know net cash increased to about $300m by end of 2006. In any case, news about the potential sale was the main reason it drove the price to the $10-11 range from the $6-7 range. Because the stock price had traded in the $30s-40s and there were even insider buying in the $14-15 range in late 2004 (that drove it to the low $20s), it was not ridiculous that the board/management felt it was undervalued at $7. After the news of the potential sale, analysts put a potential $15 take out price. In early Feb 2007, the price reached $10.32 as funds felt that the value could be unlocked as well.

Going back to Lu stepping down and the appointment of Wu to head the strategic alternative study, it seems that Wu not only wanted to take over as CEO but to radically change the strategic path of the company. Wu was in favor of focusing on the China operations which were more profitable and less on the international markets where UT did not have a good foothold. From the recent filings to the SEC of the last 5 quarters, UT continued and increased spending on international markets (specifically India) to capture broadband/iptv growth abroad. The continued spending has taken a toll in the balance sheet and caused serious strategic discrepancies with Wus vision. Wu, who is the largest shareholder, with over 4 million shares obviously did not want the continued spending and losses that has now resulted in a sub $3 stock price.

From the shareholder meeting and the poll conducted in this blog before it, the number one question on shareholder’s mind was what were the details of the strategic study. This was a question we asked to management. The response was that there were offers for parts of the company but none that made sense or they felt would close because of the financial environment at the time. Based on this recent interview, Wu could have made an offer for parts of the company but we don’t know for what parts and how the deal would have been structured. The money losing operations, high operating costs, and investigations at that time would not be conducive to just selling “parts” of the company, specially the profitable and attractive assets.

Management did not divulge what parts or how much was offered as you would expect. I then had a follow up question to Director Toy asking what price was the board/management looking at when it went in to explore strategic options. Obviously, their statement that the current share price at that time ($9.74) did not reflect the inherent value meant they were looking for closer to $12-15 or higher. To my fellow shareholders, I tried and prodded but could not get a target price. Toy avoided the question by saying they were looking at a combination of price/possibility of closing that made sense. Nevertheless, S&P at the time had $11 price targets based on their sum of the parts (and now down to $3.5, a discount to their existing sum of the parts).

I could continue with shareholder equity and does the stock deserve to trade at this price but you can read previous postings on that. I do think management/BOD has done such a poor job in running the company to the ground and mismanaging the strategic study/Wu situation that it does deserve a discount on the current assets (not to mention they are not yet profitable and have huge cash burns). Saying that, I have to be forward thinking and the existing shareholders have paid a dear price for the path management has taken which have yielded some significant wins in India, China, Brazil, Taiwan, Philippines, Chile, Pakistan, etc.

Nawar has outlined some good comments on why Wu did this interview (see link above) and UT could undergo further strategic studies/cost cuts if this current plan doesn’t pan out. However, management is definitely under the gun to produce and produce FAST. Management has not taken any salary cuts and have increased their bonuses and salary. Blackmore has come in as an outsider and seems to be doing a good job but the impact has not been reflected in the balance sheets yet. A new forecast of profitability by end of this year/early next year (with commitment to boot) and a sense of urgency supposedly drives this company now. Existing/long time holders have little good choices at this stage. There is still tremendous value and the potential for a buyout or turnaround are very possible. The Wu interview shows another dimension to hold shares or add at this price range. Wu sold PAS and generated billions of revenue/profits to the operators and to the company. He has emphasized iptv has resolved major hurdles and worldwide numbers, deregulation, pricing models, etc are proving the trend is a massive implementation with UT sure to capture the growth.

I would like to reiterate that Blackmore’s message of working under a sense of urgency is way too late and it should be working under “shame” at this stage. If these guys still cannot turn it around by the China Olympics year, they really have to just sell the company and turn it to some cavemen that can.

Thursday, January 10, 2008

Current liquidity and 2008 year end price target

In previous posts, I discussed how difficult it is to come up with one price target specially with UT being unprofitable and the timing of iptv/other revenues. That being said, here is my attempt at the current liquidity situation (since the CB is upcoming) and a year end target if they get to profitability.

Gemdale stock is back up to 48 yuan (or $6.6) :-)
Lets say, they have sold 40% at 43 yuan ($5.9). That would yield 14.5million*.4*5.9= $34m. The rest is worth 14.5*.6*6.6= $57.4m for a total of $91.4m. Infinera should have brought in between $10-20m depending on the price. They should have gotten closer to the $20m but lets say $15m. That is still $106m. Back to overall liquidity I posted previously with the updated Gemdale/Infinera amounts.

Here is the last liquidity update after Q3,

"Our third quarter cash and short term investments totaled $644 million, an increase of $116 million from the second quarter of 2007. For this quarter, cash and short term investments include approximately $115 million of investments that were previously accounted for as long term equity investments."

From the $644m, lets back out the $115m from investments. We get $529m. From the July liquidity update, I believe UT had a total cash position of $550m (roughly) and $400m was in China. Short/long term debt was about $125m+$275m or $400m. So, net cash position was around $150m. I remember this was a drop from a $300m net cash position at the end of 2006.
Anyway, going back to the current situation. UT transferred $150m from China, which left $250m in China. Subtracting $250m from the $529m leaves us with $279m in the US. Obviously, they were maintaining about $125m for operations just in the US. However, they are also selling Gemdale/infinera. This is not quite $115m anymore. Lets say it is $106m. That would give them about $385m in the US. Q4 will eat into that somewhat but I need to review if they were planning on drawing down inventory to offset operational losses. Anyway, if they use up $40m in cash flow (round number), that would result in $345m left.

So, assuming UT is able to transfer funds from the sale of Gemdale to the US, it will have (after Q4) $345m in cash. It will also have $250m in China. But it still has short term + long term debt of $400m + the $50m it borrowed for Q3. If they pay off the $275m CB, they would still have a net $145m. Thats about the same amount as end of Q2. The losses in Q3/Q4 will be offset by the Gemdale/Infinera holdings. The main difference is that UT will be able to rid itself of the interest payments on the $275m loan.

At a minumum, UT will still have losses for the first three quarters of the year. At end of Q4 (which I conservatively assumed a cash burn of $40m), the company enterprise value will be about $200m at the current price. The PCD business that will generate about $1.7b at 6% GMs bringing in $100m in gross profits should be worth atleast $200m. So, all the rest is the street discount until the company gets to profitability.

Based on the low price, the street does not believe it will get to sustainable profitability in 3 or 4 quarters. If you believe the rest is atleast worth $300m, then that would assume the company burns $100m for the next 3 years. If the company gets to profitability at the end of this year or early 2009, then the "rest" of the business is being valued at only about $100m. On the other hand, if you believe the "rest" is worth atleast $700-800m (1x core revs), and the company gets to sustainable profitability by end of the year, then it should be atleast $5-6 higher.

So, my current end of the year target assuming they get to profitability is $8-9. I'll round up the target to $10 with the shorts giving it a $1 premium :-) Most of the analysts agree that the downside is limited (as also shown above) but are wary of the profitability/timing (hence the discount). As an investor/trader, we have to look at risk/rewards and it is looking like the biggest risk is opportunity cost. Of course, in this current market, the opportunity cost is not too great (unless you are shorting). The above is why I and most longs are sticking with this company. Because if management can get their act together, the stock should move significantly higher from here.

On the next post, I'll archive the Wu interview (posted by John) and discuss some thoughts on the ML strategic alternative study/Wu firing. That topic definitely deserves more discussion.

Friday, January 4, 2008

Turnaround and analyst price projections/outlook for UT

After the first week of trading in 2008, UT has gained 1 cent as the overall markets have performed very poorly. Its too early to comment on relative strength or any fundamental or technical changes but its nice to see anyway. There was an article about UT being a turnaround play that hasn't posted by Invest2bfree (nice screen name but for UT, its almost like being captured the last few years but thats another topic for discussion).

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=148571&mid=148571&tof=1&frt=2

Its a nice recap similar to the ones posted here and on the message boards. As Invest mentioned, its a fairly balanced account. This is the dilema that shareholder and analysts faces with UT. Analysts can only go with certain valuation metrics which unfortunately do not allow them to give multiple price targets. At most they can tweak their numbers to probable expenditures a few quarters out and revenues/margins from the signed contracts. However, UT is not Mircosoft or a Cisco where the revenue base is fairly consistent.
Yes, the numbers for 2008 are probably going to fall close to what some analysts are projecting. Heavier losses in Q1-Q2 and minor losses in Q3 and maybe a profit in Q4. The major unknown is the bookings and how the iptv/broadband markets open up specifically for UTs core markets. Wins in India, China, Brazil, and Taiwan just gives me confidence that the market is openning up AND UTs pricing model/technology is competitive. From all macro articles about broadband/iptv/emerging markets, I am confident those trends will be positive for UT. The uncertainty is the competitive landscape (which I just mentioned with the wins is reassuring to me).
Thats why its important to keep up with news for UT. Just looking at the profit/loss for the next 12 months doesn't do the potential and assets any justice. It takes more than 6 months to a year to start recognizing revenue from new contracts and trials itself are up to 1 to 2 years long! Thats in essence why I mention that shareholders have paid a lot to reach this position and why I felt the added losses in 2007 was actually a sign the company felt the markets openning up. Losses in 2006-2007 are not really wasted because of this.
In summary, analysts don't really have a clear picture what earnings/revs for 2009, 2010, and beyond. They slap their 5% growth projectipns and throw a couple of margin estimates and come up with valuations. That can work for other companies but definitely not UT. I don't fault them based on the history, management, and lack of visibility. But they can be WAY off as back in 2004 when UT just bought the PCD and estimates for company earnings were in the $2-2.5 range.
Blackmore mentioned that the "right" way to look at the progress is via bookings (hence they have started giving book to bill). Right now, its been mostly PCD growth but that is starting to change. Obviously, the street will look at a shorter more managable time horizon (as with the markets today dropping almost 4%).
So, take comments that the stock is dead money with a grain of salt. Right now dead money is better than collapsing money and the stock can turn around big when things get resolved. Thats why it would be nice to have some price target projections if certain things happen. There are tons of analysts that will do that for a company like Apple (for each iphone market they penetrate, etc etc). Since most analysts don't care anymore about UT, I guess most investors like you and me will just have to do their own research and come up with those scenarios for UT :-) Imagine that...

Tuesday, January 1, 2008

Worse performing $5 stock in 2007

There is really no way to sugarcoat the fact that UT stock collapsed in 2007.

http://www.lightreading.com/document.asp?doc_id=141870&page_number=2

With vonage's 15% rise on the final day and ocean networks (whatever that is) last day move, it may have just given the crown to UT as worse performing $5 stock (at the start of the year). The stock started the year at $8.75 and closed at $2.75 wiping out $720m in market cap. There is only one metric that really counts for management/BOD performance and that is the stock price. There really is no reason for management/BOD to be getting any bonuses or raises based on the stock performance so you can see the company's compensation committee is a farce and the company's internal controls are still very weak. That alone should merit some discount to the companys book value. It is one thing for management to look at each other in the eye but I am wondering how the workers (specially those that got laid off) look at management.

I have been saying for a while that UT is just "trying to survive the current bull market" and that 2007 is atleast over. One final look at the 2007 stock price performance. Does it really deserve to be the worse stock of 2007? Well, sadly it does have a strong case. The company started the year with the expectation that it could be sold with road shows for the investment bankers in China early in the year and positive news clippings about the business and their core iptv products. However, by May, the company announced that there would be no sale and that Wu (the China head and cofounder) was leaving. In July, a NEW China investigations on top of the options investigations was announced. In addition, net cash that was hovering around $250m in 2006 was down to $150m. With the new investigations, "obviously" the filings that were already a year delayed would be delayed even more. With that comes additional interest payments on the convertible bond because they would potentially be in default. It was so bad that it was a milestone that the bondholders "accepted" the terms of the additional interest payments. This is with all their China funds earning less than 2% interest rates and the question of being able to even transfer funds out of China. With all of this backdrop, the stock which peaked in February at over $10 sank to under $3 in August. For most of this time, the only communication we shareholders got from management was a few scant PRs with no real detailed explanations.

The second half of 2008 (after July) was much better. The company had its first cc in over a year to discuss liquidity and performance of the various business units. I guess the 70% drop from February and 40% in 2 weeks was enough to actually make them "concern" about the stock price. Anyway, this started a series of cc (5 total) that culiminated in the filing of 5 quarters and made the company current. The stock rallied to over $5 in October in anticipation of the filing and the better news flow/communications from management. The problem was the results were REALLY bad with cash burns in the $40-50m/quarter. Add to that the subprime woes in the market and you had long funds in trouble and bailing on the stock. The stock has sinced gone back under $3 that resulted in its distinction as one of the worse (if not the worse) performing stock in 2007.

Despite all the mismanagement, the soap operas, the CB overhang, the short position, the current stock price, the company did have some positives that make me question if this should have been really the worse stock in 2007. Of course, I am long and want to throw in some positives but here they are anyway.

The company restated earnings for the last 7 years and filed the last 5 quarters and is now current with the SEC. This has "freed up" management to do their job and get the company turned around. Lu has been in China since July stabilizing the void caused by Wu's departure. Blackmore was hired in late June to be the COO and future CEO. Blackmore has gone on a traveling tour of the various operations in the company, held a strategic 9-week study of all the business units, organized the company into core/none-core business units, signed one OEM, cut headcount, laid out target financial metrics, and committed to profitability in 2009 (or late 2008). Obviously, some other management helped out in the processes. Barton has given updates on liquidity, transferred $150m from China, is in the process of selling Gemdale/Infinera (which both appreciated nicely this year and could still bring in almost $100m together).

Shareholder equity which stood at $770m at the end of 2006 is down to $700m at the end of Q3 2007. Not great but not catastrophic as the shareprice would indicate either. At the start of the year, UT probably had 200k iptv live users on their systems. It is now up to 600k last month. Major iptv wins/deployments in India, Brazil, Taiwan, and expansions in China (380k last mentioned) show the company's iptv system is cost/technologically superior. Regulatory improvements for iptv around the world will drive the growth even further in 2008. Broadband wins in India ($120m BSNL deal), and other wins in Gepon/ip survilance/optical show that there are new markets being entered and a more sustainable revenue base is starting to form.

So, as we enter 2008 (the upcoming China olympics year), there are tremendous hopes that the shareprice will rebound after the collapse in 2007. There are major milestones to look for as the CB needs to be resolved and cash burn/pas slowdown needs to be addressed. The stock is being discounted rightly or wrongly depending on your point of view but it is being discounted heavily. Whether we "believe" in management or not is a personal position view and the street will only respond to results going forward anyway. Overall, I am optimistic based on the data after July that the negatives are mostly in the past and the positives are mostly in the future. Obviously, we need to temper our enthusiasm based on managements previous performance, the multiyear stock technical downtrend, and the competition going forward.

Happy New Year to everyone in 2008. Here is hoping management gets their act together and brings a MAJOR turnaround to the stock price. Expectations are at all time lows (as with the stock price) so this is their chance to outperform significantly. Good luck to everyone with their trading/investing in 2008.