Friday, July 4, 2008

Metrics after the PCD sale

The initial guidance for overall 2008 revenues was for an increase of 4.5% from 2.467b to 2.577b. From the Analyst Day slides, 2008 revenues are projected at 2.580b. No problem there or is there? Barton gave a business unit breakdown of expected revenues (I'm using midpt range values) and gross margins as follows:

MCBU $315m 37%
BBBU $180m 24%
TBU $210m 22%
CSBU $40m 70%
PCD $1739m 6.2%
Services $60m 35%
MSBU $33m 70% (The last one Barton forgot to mention in the target but consistent with overall guidance)
That adds up to $2.577b and 15% GMs total, which is the same as the overall numbers of a 4.5% growth in revenue and 15% GMs. In the Analyst Day slides, the numbers were for a 4.6% growth and 15% GMs).

Here is the discrepancy. Because of the strong performance by PCD, the figure in the Analyst Day slides show PCD at $1825m or a 9.7% gain rather than a 4.5% gain. Great, right? Maybe. Non-PCD revenue was projected at $755m ($1035m - $280m internal design) for a decrease of 4.3% from 2007 (thats according to the slide note). However, in 2007, I calculated Non-PCD revenue of $803m ($2.467b-1.664b). Based on the business unit target breakdown, I calculated a 2008 Non-PCD revenue of $838m! If we go with the 4.3% decrease in Non-PCD revenue (as noted in the slide), then the Non-PCD revenue should be $768m and not $755m.

IF somebody made a mistake on the slides and instead of a decrease of 4.3%, it was an increase of 4.3%, then it would be $837.5m ($803m * 1.043) or in line with the Non-PCD guidance from Barton when he discussed the individual business units. If Non-PCD revenue is $755m, then that would be a decrease of almost 6% and not 4.3%.

Q2 guidance - Revenue of $580-610m and overall GMs of 14% were provided for a gross profit of $83.3m. PCD revenue of $460-480m and PCD GMs of 6.5% were provided for a gross profit of $30.5m. Non-PCD revenue of $120-130m and GMs of 36% were provided for a gross profit of $45m. Does $30.5m + 45m add up to $83.3m? I don't know about UT's accounting systems but it sure does not look encouraging.

Q3 & Q4 2008 - Q1 Non-PCD booked was $155.3m ($586m total rev - $430.7m PCD rev). Q2 projection is for $120-130m (say $125m). So, the first half will have Non-PCD rev of only $280.3m. Nothing wrong with that and Barton could be very low balling Q2. IF 2008 Non-PCD rev is $755m, then the 2nd half should still have $474.7m of Non-PCD rev (I really need to have an accronym like NP for Non-PCD :-). Anyway, at 33% GMs, that would yield $156.6 in gross profits for the 2nd half or $78m/quarter. If the 2008 NP rev was $838m, then there would still be $557m. At 33% GMs, that would yield $184m in gross profits or $92m/quarter. Of course, I still need to back out MSBU but say quarterly OPEX was still $100m/quarter for comparisson. Then, you still have to add the gross profits from the internal part of the PCD. This gets a little complicated because if it is only $280m of the $1.825b, then its 15.5% of the total but 25% of the PCD revenue in Q1 was internal UT made. So, if 25% of the $430.7m (or $107m) is gone, there is only $172m ($280m-$107m) left or $57m/quarter. At 12% GMs, that is still $7m in quarterly gross profits.

Ok, back to the 2nd half quarters, IF NP was only $755m for the year (still including MSBU here), Q3 & Q4 would have gross profits of $78m+7m = $85m with a $100m expense or loss of $15m. If yearly NP was indeed $838m, then Q3 & Q4 would average $92m+7m = $99m or close to the $100m expense. In either case, you can see that the second half should have strong NP revenues and hence the neutral cash flows for the year.

Now, I was going to do a 2009 evaluation using $755m NP as a base case and add revenue increases to see how much cash burn the company would have in various scenarios but I'll pause for now (the discrepancy is huge on whether the slide note and numbers were a mistake!). Something to think about......

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