Monday, June 30, 2008

UTs PCD performance and valuation

Recently, there has been negative news in the handset industry. Sony Ericsson warned of falling mobile phone demand that will result in just a breakeven quarter and also warned of shipping delays during the quarter. Palm followed by reporting a quarterly loss of $43.4m. Motorola and Huawei are trying to sell and divest their handset business.

I have posted a few times regarding UTs Personal Communication Division. As we know, this has been classified as "none-core" and may be divested as well. Because of the significant profits/revenue that this brings to the company, some investors are concern that UTs PCD is going to be impacted as well. Lets look at the recent performance at Palm and from UTStarcom.

Palm Q4 performance - Total revenue was $296.2m compared to $401m from the year earlier quarter. The company lost $42m from a $17m profit. Smartphone sell through was 968k units, up 29% due to the Centro but its higher margin Treo line is slowing. Analysts expect the centro to peak in a couple of quarters and then Palm will really be in trouble. Gross margins are down to 25.3% and ASP for the smartphones (which make up the bulk of Palm sales) is down to $288.

UTs PCD Q1 performance - Total revenue was $431m, up from $288m in the same quarter in 2007. Gross margins increased from 5.8 to 7.6%. ASPs increased significantly to $209 and the company shipped 2 million units. Guidance for next quarter is $460-480m or sequential increase of about 9%. Book-to-bill actually went up to 1.3 from 1.2 despite the already 50% increase in revenue (amazing). Days sales outstanding (DSO) was down to 19 from 42 days.

Valuation - After dropping 18% in the last 2 days, Palm is still valued at $578m with an even higher enterprise value (due to its negative net cash of $120m). So, the enterprise value is closer to $700m even with the 18% drop. UT is projected to make over $1.8b in revenues and operating profits of $85m. What is UT's PCD worth?

Commentary - UTStarcom has designated the PCD as none-core and shareholders have been trying to put a valuation on it. Blackmore mentioned during the analyst day that they want to resolve their business unit lineup by the end of the year, so I believe all divestitures will happen within the next 6 months. While there are difficulties within the mobile phone space, the number of mobile phones is set to exceed 1 billion units with a 10% increase this year (this is not the automotive industry). Verizon's purchase of Alltel would also help UT. UT's lower ASP, lower gross margins and diversity in distributors are actually perfect in this environment as they take market share and act like the walmart of the cellphone space. In terms of valuation, it is still hard to put a number but could it be worth at least Palm's enterprise value of $700m? If so, that would exceed UTs current market cap [not including cash, building, and the core and (other non-core) businesses]. While the company has resolved a bunch of issues and there is improved bookings in the core businesses, I would attribute a good part of the stock run-up to the PCD business, which has been performing well. Based on its bookings, industry low returns (according to Blackmore in the last conference call), still low ASPs, it should continue to perform very well for the company.

PS. I added shares today partly because of the PCD valuation. I am still amazed the stock is at this level base on valuation alone. I'll post later in the week on valuation but I think you already see where I am going with this :-)

Saturday, June 28, 2008

Weekly recap - Bear Market/Shareholder Meeting

The stock closed the week at $5.55, down 32 cents or about 5.5%. The bigger news, however, was the record price for oil (reaching $143) and the continued decline in the overall markets (over 3 percent). The Dow, Nasdaq, and S&P are all down about 20% from their October 2007 highs and down 12-14% year to date.

News/highlights from the week include the following.

Most trusted in India - UTStarcom, Inc. (Nasdaq: UTSI - News) today announced that it has been named "Most Trusted Company" in India in the areas of Internet Protocol TV (IPTV) and broadband leadership by VARIndia. http://biz.yahoo.com/prnews/080623/aqm071.html?.v=50 Commentary: The company has won this two years in a row. My thoughts on this are more cynical due to the major losses the company suffered (and continues to suffer) in India. From the last earnings call, Barton explained the problematic Indian contract as follows: "“Why do you keep having these things happen?” You can imagine a contract which the terms are fixed, and you bid and accept the terms you are given.
And when there are features where it says what amounts to most favored nation pricing type terms. So if anybody comes up with a price for something we’ve got on our delivery list, that’s lower than we’ve been charging or we’re used to charging, we are obligated to honor that. And that type of language happens to us once in a while and we have to adjust, and that means we take an incremental loss." UT continues to pay up while we keep hearing about penalties and corruption charges on Huawei/ZTE in the hundreds of millions but who knows if it will be enforced. So, at the end, UT wins the most trusted company and management has been sensitive to the India situation saying they have learned a lot from it.

India IPTV - I just want to clarify again that UT has won 4 out of 5 India IPTV contracts but this includes Sri Lanka (the other 3 in the India region are MTNL, Bharti Airtel, and UTL). Brian Caskey mentioned at the analyst day that there is an additional win coming. http://www.ilocus.com/2008/06/opening_up_iptv_middleware_for.html Another clarification. There was an article that noted iptv being provided without broadband. This is simply not the case. The UT system is very robust due to content going over all ip so the UT iptv system will/can work with any end device (STB, cable, mobile, computer, etc) but will need broadband connections.

Interview with Peter Blackmore - For completeness, here is one of Peter's interview at the analyst day meeting. http://www.ilocus.com/2008/06/interview_with_peter_blackmore.html

Q1 2008 transcript - http://seekingalpha.com/article/82898-utstarcom-inc-q1-2008-earnings-call-transcript?source=yahoo&page=1

Sector weakness - Late in the week, sony-ericsson and palm had some negative news that hurt the overall tech space. I will post separately on this after the weekly recap.

Shareholder meeting - With the company providing periodic updates (filing on time), meeting with us shareholders (in March) and the webinars/analyst day events, communication has obviously improved. Coupled with the 100% increase in the stock price year to date, I have to admit I went in with "less than a sense of urgency". Don't get me wrong, I am still down on my UT investment but it is much better than the $2.31 price when we met with management back in March 17. The first thing I mentioned to fellow shareholders is that we keep meeting with the markets in turmoil! Hopefully, last Friday was the worse or close to the worse just like the March 17 date. Ok, on to the details of the meeting which is probably the only thing you care about :-)

I arrived at the meeting hoping to get something to eat since I haven't had lunch yet and so after greeting fellow shareholders, T. Toy, P. Blackmore, F. Barton, and B. Hutton, headed straight to the food spread. Normally, I would be "shy" on these events but with the social atmosphere, I was going for the food (he he). I got a few mushrooms on a stick (delicious), chicken wings, fancy sandwiches on small pita/french breads (don't really know what was in them but heck I was hungry) and took a seat at conference table and munched away during the presentation. There were about 6 shareholders (everyone except 1 I had met before, the new one could have been a short, he he, just kidding..don't really know but if I was short, why not go to the meeting?). There were also other directors (B. Ryan) and other UT executives (D. King) and their accountants/lawyers (about 20 or so other non-shareholders/employees). T. Toy asked why I and another shareholder was wearing "green". I replied that since the stock was up....He responded that hopefully, he doesn't see me in red.

So, basically, there were 3 shareholders in 2006, 11 in 2007, and 6 this year. Its not really like the Walmart or Berkshire Hathaway meetings but there are benefits to being one of the few shareholders who show up. The shareholder meeting was highlighted by the transition of the CEO position from Hong Lu to Peter Blackmore and to the contributions made by Hong Lu to the company he started back in 1991. T. Toy discussed meeting Hong Lu in 1993 in Hangzhou when they had 21 employees in a small room and seeing how it has grown to the company it is today. I applauded with everyone due to Hong Lu's accomplishment (well deserved but as a shareholder, it has not made me any money yet). I did enjoy these types of moments because Lu did spend a lifetime accomplishing something truly remarkable and this could actually still be the start of the company becoming an even bigger success compared to the PAS glory days.

Preliminary results of the proxy voting were given with all three company backed resolutions being approved by shareholders. I'm interested to see the actual numbers when they are published. Peter Blackmore was the only presenter and basically it was a repeat of the analyst day meeting (shortened) as he knew most of the shareholders already heard the presentation. After the presentation, as in the previous shareholder meeting, each shareholder was given an opportunity to ask questions. Since there were fewer of us there, we could ask more questions.

I focused on India iptv and discussing BSNL in particular. I also had a couple of follow up questions on broadband and TVs delivering iptv w/out a STB. David King (SVP of international sales and marketing) answered my questions and some of the questions of fellow shaerholders regarding the international markets. For me, the highlight of the meeting (aside from the mushrooms on a stick) was getting to hear David King and his clear explanations on UT challenges and opportunities. I really had a favorable feeling towards David (as I did the first time I met Peter Blackmore).

My next question was regarding the core business. I mentioned that I was comfortable with the current share price but was trying to project a higher valuation and that can only come with success in the core businesses. However, without PCD, the company is set to lose $130m. This seems to conflict with Blackmore's stated goals of achieving the cost base right by 2009. There were other questions as well and most of the answers were upbeat (as you can imagine, this is a shareholder meeting :-) The formal shareholder meeting ended about 2:30pm (from a 1PM start). The informal session lasted much shorter because there was a board meeting or some other meeting they had to attend to. I would have liked to hang around and ask a lot more questions since this was the shareholder meeting (not sure why they would schedule a meeting right after the shareholder meeting on a Friday?, maybe its the only time they are all together, who knows?). Anyway, its always good to attend these meetings and get a sense of how the company is performing and if its still a good investment.

My final word for the weekly recap is that UT is progressing in its turnaround. There is a ton of work to be done with the core businesses (obviously) but I remain optimistic that shareholders will continue to be rewarded going forward.

Saturday, June 21, 2008

Weekly recap - New 52 wk high

The stock closed the week at $5.87, up 41 cents or 7.5% for the week. The weekly performance included establishing a new 52 week high of $5.94 on Thursday and coming during a week where the S&P, Nasdaq, and DOW lost 3.1, 2, and 3.8 percent respectively this week. The stock is now up 113% for the year and 163% from the 52 wk low established just last March. With the upcoming shareholder meeting next week, month-end closing (window dressing), and potential market bounce, UT is set to break $6 and continue upwards.

News/highlights from the week include the following.

Sri Lanka Telecom IPTV contract - This was one of the four (out of five) iptv contracts won by UT in the India region. "SLT's IPTV deployment is designed to support approximately 100,000 subscribers in the next two years and will enable the company to provide video services to future subscribers over copper lines in the next three to four years." http://biz.yahoo.com/prnews/080617/aqtu035.html?.v=57 In terms of other potential iptv wins, there has not been a formal announcement for Hong Kong. The activities in Russia, Eastern Europe, Middle East, and South America for iptv/broadband/ngn should keep the pipeline of potential wins in iptv growing.

Wi-Lan lawsuit targets Rim, Motorola, and UTStarcom - "Wi-Lan said it has started litigation in the U.S. District Court for the Eastern District of Texas, Marshall Division, alleging that the companies' mobile devices and other equipment infringe Wi-Lan patents. It did not specify what damages or remedies it will seek under the legal action." http://www.reuters.com/article/marketsNews/idCAN2042612520080620?rpc=44 These kinds of lawsuits are more of a problem because Wi-Lan is just a patent shop and doesn't build anything (hard to counter sue them if they are not making anything). "Formerly a money-losing wireless equipment maker, Wi-Lan switched gears in 2006 to build a storehouse of patents through acquisition." I guess if all things fail for UT, it can also start suing other tech companies for patent infringement (like Starent).

India iptv developments/updates - The post(s) of the week go to canada3396 who posted about Aksh and its work with MTNL and now BSNL in providing iptv services.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=153334&mid=153334&tof=4&frt=1 The uptake in iptv subscribers in India is still slow (as expected) but there was an interesting news item showing UT controller/STB that can be used with cable systems. http://www.hellogiri.com/icontrol-iptv-by-mtnl-in-delhi-and-mumbai-cost-and-features/ (you can see the UT logo in the figure :-)

Schaeffer's Investment Report - As UT stock makes news highs for the year, other investors/traders start to take note of the company. http://www.schaeffersresearch.com/commentary/content/utstarcom+inc+utsi+-+a+turnaround+situation/trading_floor_blog.aspx?single=true&blogid=85415 Overall, the company is still a tightly held secret or even something most people would not even consider (considering its history of destroying shareholders). When the stock gets into the teens or higher, then it will be a must own, analysts will jump on the bandwagon, and indeces will add it (funds will then have to get in). That of course is still a long ways away but the potential is definitely there and its nice to dream about much higher prices.

Technology talk - For those technology buffs, Tigre and Shadow have their consistent inputs. Tigre discusses investments in China's home grown TD-SCDMA. Some companies are working towards 4G already. http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=153261&mid=153261&tof=33&frt=1 Shadow discusses some new technologies... http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=153267&mid=153285&tof=19&rt=2&frt=1&off=1 Shadow also corrected me about UT selling its wimax division. I had speculated last Monday that this has been sold as part of the MSBU but during the Analyst day meeting next morning, it seems that it was not part of the deal for divestitures.

Proxies - I hope everyone has had a chance to send in their proxies. If not, you can also do it on line. The shareholder group's suggestion would be to withhold votes to the directors but agree with the employee stock option exchange program. Now, that the stock is climbing, it is interesting to note if holders of options with $6-10 strike prices choose to reduce the number of options to get a slightly better strike price. In some weird way, it would be better if the stock had stayed under $5 and all the options exchanged (that would be better for current shareholders-less dilution in the future).

Postings this week - There has been a pickup of postings on the yahoo board due to the new highs and the outperformance. My suggestion is to take a break from posting or overthinking the situation. The stock/company is clearly in turnaround mode, it clearly has value (safest stock at $3.75 :-) and now the stock technicals are very good. Keep up the postings with good content but there really isn't much value saying the stock is outperforming 10x or the shorts are going to boost the stock to $100. Lets have some class and keep the garbage out of the message boards so that its easier to find the good information.

I am going to have my root canal permanently filled (and capped) later today but it should be much easier than the impacted teeth extraction I had last week. Have a good weekend to everyone. By the way, some of the shareholders going to next week's shareholder meeting will meet earlier (for lunch), let me know if you are interested in joining us. I hope there will be more than 11 shareholders for this year's shareholder meeting.

Sunday, June 15, 2008

Weekly recap - Analyst Day

The stock closed the week at $5.46, losing 7 cents or 1.3%. The markets were mixed after a torrid rally on Friday. Here are some of the UT related news for the week.

Short interest - As of May 27, 2008, short interest rose 5.3m or about 25% to 25.56m. During this period, shares pulled back to the mid $4 level and have subsequently rallied to the mid $5s. Since the report is 2 weeks delayed, the short interest level may have gone right back down during this rally. We'll check back on this in a couple of weeks but it is worth tracking because of the huge increase and the corresponding price increase.

Divestiture of MSBU - See Monday's posting on this. On the following day during the analyst day meeting, management mentioned that MSBU had $30+ million in revenue and operating expenses of about $20m/year. I was contacted by an "unverified source" that mentioned revenues were higher than the $30m and that the business unit was profitable. In any case, it is good that management is following through on their stated goals of reducing opex and focusing on the best opportunities.

New China Executives - Aside from Peter Blackmore formally becoming the CEO in July, a couple of other promotions in China. Ying Wu's brother (just kidding), Robert Wu will be the China CEO and Manfred Loong will be the China COO. I am Chinese myself but selecting "Manfred" as your name :-) Seriously, good luck to both of them and thanks to Hong Lu for stabilizing the China situation during the last year.

Analyst Day meeting on June 10, 2008 - I posted on this as well yesterday but would encourage people to listen to it in its entirety. The company website has put together all the conference/update calls dating back to Aug. 1, 2007 (when the stock price was about to break $3 for the first time). That collection of calls can also be seen as the Peter Blackmore-turnaround era and started the flow of information to shareholders once again after about a year of silence from the company. Very nice website and resource for shareholders. As I mentioned, it now gives investors a "fair chance" of evaluating their position and making an informed decision (which was something that was taken away during that period of silence from the company - something you know I have been bitter about).

PCD - Another comment I wanted to make about the Analyst Day meeting was the lack of discussion on the PCD side during the presentation. In fact, the company made it a point of modeling the company without PCD. While I understand the company's focus is on iptv, ngn, and broadband (something we investors would like for the future and something the company has an advantage in technology and can differentiate themselves), why wasn't there a major presentation of the PCD??? The PCD currently makes up $1.8+B of the $2.5+B of revenues expected for 2008. It has an operating profit of $86m! I have been focused on the valuation and shareholder enhancement and in order to attract attention to the company, PCD has to be front and center at this stage. As I mentioned on yesterday's posting, will I be excited that the core business is losing gobs of money, currently only growing 10%, and won't be profitable for 2 or 3 years? Why not have P. Christopher (head of PCD) do a presentation on the growth of PCD, margin improvements, clients, products, market share growth, comparisons with Motorola, etc. What about impact of Verizon buying Alltel?

I know its the analysts job to highlight valuation but put up a chart showing value of real estate, net cash position, projected value of PCD, revenue of core businesses, p/s, etc. Believe me, I "appreciate" the honesty of the difficulties in iptv at this stage and lowering costs, etc but in an Analyst Day meeting, you have to highlight the current strengths (and that is not the management/BOD but the PCD and valuation). As I mentioned, I cringed about the continued losses projected for 2008 and the model without the PCD ($130m loss!). The people asking questions about the PCD and growth potential of iptv (and ngn) and others were people who already OWNED significant chunks of UT (he he). They actually did a better job in trying to pull out the good information. Seriously, I already know there are good engineers and products (I would hope so if you are spending the kind of money the company has for years and years) but I want to see PERFORMANCE. Why not show their net cash position as a percentage of market cap and compare it to other companies? Why not bang the heads of people on PCD and its potential value? Its great to show their customers are benefitting but what about shareholders? Its nice to know they customers will get a payback after two short years. We shareholders know the customers have been benefiting and we have been suffering.

Best post of the week - This definitely goes to Salisburygo for his minute by minute summary of the Analyst Day meeting. Most people don't have the time to listen in specially 3 hours during the work day and he did an excellent job conveying the main points (although biased, he he). Get a life Salisburygo! (he he)

The company mentioned there are more road shows to come this year and as a shareholder I do appreciate the information and sense the company has confidence for better performance down the road. I want to give the management credit for the recent increased in share price but it is really way too early to celebrate so I remain an optimistic critic of management and the board. Happy Fathers Day to all the fathers out there. I've got reservations at the Black Angus tonight (woo hoo). After the tooth extraction I had last Monday, its going to be good eating tonight.

Saturday, June 14, 2008

Analyst Day, June 10, 2008 - Commentary

I listened to the 3-hour recording last night and re-listened to the Q&A portion again this morning so that I can properly evaluate all the information provided (and there was a lot). Rather than repeating every single piece of information, I'll discuss some topics and provide more commentary than usual.

Management/BOD - The analyst day was well attended with independent directors T. Toy, J. Clark, and B. Ryan attending. Company executives including P. Blackmore, F. Barton, H. Lu, B. Caskey, and D. King gave presentations. A "panel" of China executives were asked questions to further give insight into the company and its technology. Towards the end, Peter Blackmore commented about the strength of the management team. As a shareholder that has been following the company for the last four years, I can only say that the management team/BOD has ranged from poor to borderline criminal. Thats really the only conclusion I can make since the stock has plummeted from the $40s to $2, the numerous whiplash in strategic directions, the lack of communication/financials and the SEC/DOJ investigations and personal fines some of the executives have had to pay. While Barton discussed improvements from 2007 to 2008, I was wondering to myself would any new investors or the street support a company losing $75m that still cannot get the cost base right after more than 3 years in the RED. I was actually embarassed from owning shares in the company with such horrible numbers. I was wondering what the BOD and management were thinking when seeing those numbers. I understand why they did show the numbers and I own the shares for the valuation but just seemed very weird trying to impress "new faces" with the performance and issues going forward. Maybe the new faces where shorts or maybe people were there for the free lunch :-)

Peter Blackmore as CEO - Since he started, Peter has expressed his enthusiasm for the company's technology, their target markets, their R&D/manufacturing base and all the positives investors like myself bought into the company 4 years ago. The difference is that Peter came in basically when the stock was in a free fall and during his tenure was mostly under $3. I have on ocassion said that a cave man should be able to enhance shareholder value. Having said that, I have liked Peter since meeting him in the shareholder meeting last November and through all the subsequent conference calls, he has managed to explain their strategy and focus. What I heard yesterday though was still little progress to get to core profitability.

Major questions - Listening to the presentation, I started questioning whether (even NOW) the company has a plan to make money or can make money in the future. Its fascinating to hear the "talented" executives and the great technology (Passive Transport Network) that is atleast 1 year ahead of the competition and how great the payback rate for the carriers. However, at the end of the day, can the company receive more money than it spends? During my discussion with Hamed Khorsand (BWS Financial), he mentioned one of the major problems of UTStarcom is that carriers simply want multi-vendor suppliers. UT has had a history of great technology but difficulty in breaking in with Tier 1 carriers for their suite of products. As I posted previously, a lot of technology was devloped 5-10 years ago (look at technology supplied to Softbank). The company continues to spend for a wide variety of technology that may or may not gain traction. Obviously, as a tech company, they have to roll the dice on some of these but they have done a poor job in converting these to revenue. The type of carriers they tend to win now are 2nd tier carriers who are "taking a chance" with their technology. Most of the sucesses/wins they showed were in 2007-2008. When talking about their iptv end-to-end system, they noted they had to developed the entire platform because no one had it then. While the engineers/R&D may be first rate, it doesn't do shareholders a lot when management/BOD cannot control the budget and forecast properly. Being an engineer (Ph.D in geomechanics), I can only imagine how incredible the technology is so when Barton "models" the budget with or without PCD, it makes me cringe whether he can even get that right. Anyway, being a technology company and investing in one is difficult but is even more difficult when management has done a poor job.

China Telecom Consolidation - I appreciated Hong Lu discussing this and giving his opinion. Lu mentioned that this has been a long, long time coming, is very complex, and chaotic. He mentioned China executives meeting every day because of the complexity and that there may be remorse from China Netcom for overpaying for China Unicom assets. Lu mentioned that there is a monopoly in fixed line (which the company is strong in) but that cable providers may get in the future. It would be costly for China Netcom/Unicom to convert PAS subscribers to CDMA subscribers. There are currently 84m PAS live subscribers compared to less than 30m CDMA subscribers. He anticipates losing 1/3 of PAS subscribers over time but operators will try to maintain the rest. There are current advantages to PAS on the data side and that China Unicom would probably use existing PAS base stations to promote data investments. The China Unicom side is more aggressive than the China Netcom side.

IPTV - This is the main core focus for the company going forward. Lu discussed that in Japan, it was hurt by regulations preventing iptv broadcast of terrestrial TV. If allowed, iptv would take off in Japan. In China, only 10 cities currently have iptv in some regulated form. In Shanghai alone, iptv is expanding by 40k/month or 500k/year. While it is now building, the explosion has not started yet. One executive commented that most people over estimate technology adoption in the next 2 years and under estimate the 10-year adoption. Just like NGN, iptv will have critical mass due to limited revenue generating capabilities on the less interacitve/less robust offerings. This is really the big hope for UTStarcom investors, that the significant revenue increase will come sooner rather than later (when other technology or other issues may overcome their advantage).

IPTV, NGN, Broadband - Brian Caskey defended the companies main core businesses. Capex growth from 2008-2012 for each is expected to be $16B, 17B, and 43B (or 19, 24, and 17%) respectively. The real question is how much can UT capture and what should they spend to get those revenues.

UT Business Units, financial models, and "targets" - Barton discussed financial numbers with and without PCD. Early projections for PCD was for a 4.5% revenue increase for 2008. Now, its up to almost 10%, from $1.664b in 2007 to initial 2008 estimate of $1.739b to now $1.825b. Margin is expected to be 6.9% and OPEX to be $40m. That is an operating profit of $86m. That alone probably makes up a significant reason for the stock run-up. The flip side is that the other core businesses are still nowhere close to management's stated target metrics. For the first time, we received information on the company's "core" business including $280m of UT products sold to the PCD. Early this year, initial guidance for core business (without PCD) was about $838m. Now, it is ($1.035b-$280m+$33m) about $790m. The first number is the stated 2008 "target" in the presentation for core revs, the $280m is the internally designed handsets, the $33m is an estimate of the MSBU. This may be totally off but it seems like some core revenue was delayed or pushed back to 2009. There was little core in the Q1 results so the rest of 2008 should still be ok. The larger picture is can the company make money without the PCD. There was a question on what the breakeven revenue if PCD was sold. By the end of the year, OPEX will be around $105m/quarter. Lets annualize this for 2009 so its $420m. If we take out $40m for PCD, then its $380m. Assuming an additional $5m in cost improvements/quarter in 2009, then you get down to $360m.

For $360m capex, you will need $1.33b and $1.2b for 27 and 30% GMs
For $380m capex, you will need $1.41b and $1.267b for 27 and 30% GMs
For $400m (including tax/stock comp), you will need $1.48b and $1.33b for 27 and 30% GMs.

Currently, they have only $1.035b in revenues w/out PCD (which include the $280m in internally designed handsets) with a overall GM of 27.2%.

Candidly, Peter Blackmore mentioned needing to improve sales by "several hundred million" and Barton hoping to target 5 to 10% GM more than OPEX so about 30 to 35%. But those could be 2+ years from now.

Revenues w/out PCD for 2008 will drop by 4% due to 16% drop in PAS and sale of none-core assets.

Revenues without PAS & PCD is projected to go up 10% this year and core infra bookings will go up 50% from 2007 to 2008. Barton cautioned that some of the bookings will be over a few years.

There is definitely a roadmap to satisfying the metrics Blackmore set up for SG&A and R&D but its hard to see it being achieved in 2009. Of course, those are without PCD, which this year alone is set to have $86m in operating profits.

There is probably some stuff I missed but the company is out of the woods (which the stock price has reflected) but nowhere near where longtime investors can be happy about. There is still significant value to unlock (see PCD) but operationally, not surprised that analysts are not upgrading or getting too excited about the company. The company has just finished changing/improving/or close to setting up their systems for ERP, CRM, BID and others. Blackmore is still pushing for improvements in the supply chain (need more scale and better forecasting for infra side; handset side has been outsourced).

Blackmore does seem to understand the bottom line although he is understandably enthused by the company's (and his own) situation (as I said, his timing is better than most investors :-). In terms of the shareprice, I have been pounding the table under $3 but not so much above $5 (obviously). The company needs to show more progress in divestitures, expense control, and revenue recognition before the next leg up. My end of the year targets still stand because I believe they can beat estimates and divestitures will be finalized by the end of the year (as Blackmore mentioned). I am in for the value but not necessarily the management/BOD. Credibility has to be earned and the good communication is a good start but operational performance is really the key. Asset/investment sales are "easy" ways to unlock value but to regain the lost shareholder wealth will take markets opening up and continued/sustained discipline and execution.

Monday, June 9, 2008

Sale of Mobile Solutions Business Unit (MSBU)

The company divested its MSBU to private equity firm OpenGate Capital for an undisclosed amount. http://biz.yahoo.com/prnews/080609/aqm115.html?.v=45

The MSBU had been lumped with the Customs Solutions Business Unit (CSBU) into the "others" category and designated as none-core by the company. Here are some background information that I had written on previous postings.

Customs Solutions Business Unit (CSBU) - Mostly includes technogy acquired from 3coms Commworks unit. This includes IP-based messaging and transaction products. Revenue is expected to double to $40m with GMs above 50%. This unit is also expected to be profitable in 2008. Blackmore mentioned some of the "none-core" assets are becoming very attractive and this along with the PCD definitely fits the bill. What is this business unit worth alone? The company paid $100m to 3com a few years ago and has finally gotten this to profitability this year and growing very fast. This alone could be worth close to $80m-$100m if sold (based on 2-2.5x revenue for this type of business - check Starent/Infinera for valuations).

Mobile Solutions Business Unit (MSBU) - This includes the moving media 9000 and supports IPCDMA, GSM solutions. Growth is in the 30% and gross margins in the 40s in 2008. UTs wimax gear is formally the Moving Media 9000 and its part of the Mobile Solutions Business Unit (MSBU).

Revenue for MSBU - On the Q4 call, Barton gave preliminary 2008 guidance breaking down CSBU to have about $40m in revenue. However, Barton forgot to give guidance for the MSBU. Thats why there was a discrepancy on the individual business units revenue (at the midrange of each business units, it added to 2.544 B) versus the 2.577 B overall revenue (at 4.5% revenue growth, mid range of 3-6% over 2007 revenue). The "others" had $42m in revenue for 2007. If CSBU had $20m, then MSBU had $22m. At 30% growth, MSBU would have about 30m in revenue for 2008 (which would also account for the discrepancy between adding the individual business units estimate and the overall estimates for 2008).

Commentary - The MSBU was not expected to be profitable compared to the CSBU but as management mentioned, it would be good to be able to divest this without shutting it down (to maintain support for customers who buy other UT products). It is disappointing that they could not get more traction with wimax but it does show management's committment to focusing on their best/most profitable opportunities.

"UTStarcom will retain the PDSN operations and will work with Star Solutions as an OEM provider" I am not sure how much the opex will go down (Barton did mentioned $6m/quarter) but because it was not profitable, it should help the drive to overall profitability.

Saturday, June 7, 2008

Weekly recap - nearing 52 wk high

The stock continued its rise this week despite the downturn in overall markets. UT stock closed at $5.53, up 0.73 cents or 15% on above average volume. The stock has now doubled year to date and up 148% from the all-time low of $2.23 set on March 17, 2007. On my last post, I listed down possible reasons for the rise. Aside from the analyst meeting next week, there were no other direct PRs from the company. Some of the related news that I read over the week were the following:

PAS roaming - Techbroker posted a link on CT planning PAS roaming throughout the country. http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadview?m=tm&bn=27187&tid=152715&mid=152715&tof=34&frt=1 PAS roaming has been discussed for years and there were already some unofficial usage previously but now that the telecom consolidation has been set, PAS roaming could become more "official" and help promote and extend PAS revenue streams.

Icahn names price for Yahoo/Microsoft merger - Its amazing that Icahn can become so frustrated after buying his yahoo stake for $25 with the sole purpose of scalping a quick $9/share. If I was a yahoo shareholder, I would side with Icahn only because I think yahoo would be hard pressed to get to $35 on their own in the next few years. The thought of communicating with an Icahn (or someone else) regarding UTStarcom entered the minds of a lot of frustrated UT investors early this year but it was simply not the right time even when the stock was in the $2s.

Proxy statement - I've talked to some shareholders and my recommendation would be to withold votes for the two directors but agree to the employee option repricing.

Verizon's purchase of Alltel - UT supplies handsets to both companies. Verizon Wireless has 67.2 million subscribers and the combined company would have 80.4 million subscribers. From UTs website, UT supplies only 1 phone to Alltel but up to 16 to Verizon Wireless (not to mention the data cards/smart phones). Overall, this should be a positive to UTs personal communications division and could be another reason the stock went up this week.

I'll end the weekly posting by commenting on the stock price again. The stock has recently gone up seven straight days and people are wary of chasing the stock and are looking for resistance points. The fact of the matter is the upcoming quarters are going to be really good ones for the company and valuation is very reasonable even with the run-up. The quick earnings projections I have done a few posts ago show that estimates are very conservative and positive "surprises" are inevitable. Diverstitures, analyst and shareholder meetings are coming soon as well so any "pullback" should be relatively swift. On top of all the positive factors from the last post, you have the shares underowned and most of the main stream investment community will wait for a few quarters of confirmation. In short, its a good environment to be long the stock. In a few days, the 52 wk high will be under $6 and UT may indeed be at the 52 wk high. In this market, that would be an incredible achievement specially when the company is still working through a bunch of issues and not yet profitable.

Have a good rest of the weekend to everyone. Looking forward to the analyst meeting next week and possibly a 52 wk high.

Friday, June 6, 2008

Unstoppable

Thats one description for the stock the last 3 months. The day to day rise without gaps on both up and down days with increasing volume can only mean one thing.....Invasion! (Star Wars link there :-) I am not surprised that the stock is going up (after all, I've maintained a blog, formed a shareholder group, met with management, and even tried to go for a board seat). However I, just like other traders looking for an overall market pullback, thought UT would atleast pull back. It hasn't happened and now the price action suggests a major move upwards in the next few weeks. Lets list down some of the possible "reasons" for this move up (aside from there are more buyers than sellers):

1. Analyst meeting - UT has had so many negative things happen to it that having an analyst meeting at this juncture shows they have a very positive story to tell. This is not new to most shareholders and management had already indicated they would do so during the March 17 meeting (it is still amazingly coincidental that the meeting occurred during the market meltdown and UT hitting an all-time low of $2.23).

2. None-core divestitures - This has also long been expected and the increased external expenses (last quarter and this quarter), multiple statements of active discussions since November 2007 hint at divestitures coming very soon.

3. PAS revival - The recent positive PAS performance during the earthquake and hints of demand from their packet data (in Beijing and working on Shanghai), and renewed roaming suggests PAS decline is managable. The possibility of economic slowdown even in China may benefit PAS as 3G phones/base stations won't be cost effective in some locations.

4. Institutional purchases - It is possible that the stock is responding to shedding its penny stock label by busting through the $5 level. UT offers exposure to the iptv market, growing economies outside the US and Western Europe, and a recovering telecom sector where investments are needed to increase worker productivity. While the energy sector could be in a bubble, there is no doubt investments in broadband in India (for ex.) are very much needed and growing at a very fast sustainable clip.

5. Diversification - It has taken a long time for UT to diversify away from China and PAS and this was definitely NOT a smooth transformation but the company is actually growing their core revenues and PCD (which is not even core) has led the initial rebound.

6. Future IPTV revenue potential - Contract wins are increasing with the openning of the iptv market worldwide and UT is a significant player. The last quarter shows that most of the revenue has not even been booked!

7. Low price, low expectations, and high probability of good news - The stock is just now climbing up to All-time support low ($5.19) so its just 30 cents above. Expectations are still very low and my calculations and previous quarter performance show the company is now very conservative which allows a lot of room for positive "surprises".

8. Good balance sheet - I would have liked for them to have gotten more from Infinera/Gemdale, not spend all the added interest expenses, and even the massive amounts on the filings, investigations, internal controls but that is all completed. The company has a nice cash horde and in this environment, very comforting for shareholders not having to worry about dilutions or liquidity issues. So, the company went from the brink (perception anyway) to having a very good balance sheet.

9. Management has stocked up - I don't want to think negatively but I have to. Shareholders have taken the brunt of the sacrifice over the years and most have sold out for massive losses. Management gets more important during the turnaround and receive higher compensation and MORE options (because of the lower prices). Now that all the bonuses, and other compensation have been worked out (and even employees get to reprice their options), in some perverse way, you get the feeling we are now all on the same "boat".

10. Shorts - Facing massive losses month after month with all the above items facing them, shorts are fueling some of the move up.

There are probably others (TA, momentum, etc) but I just wanted to list some items. If I and other shareholders are correct, this is still the start of a very beautiful friendship (I think I mentioned that at $3, o well the stock was moving $2-3 a few years ago).