Sunday, August 31, 2008

Weekly recap - CFO Barton Retires

The stock closed at $3.26, down 10 cents or 3%. The stock is down 7 straight weeks and has lost $2.31/share or about 42%. The markets were also lower this week with the DOW/S&P losing about .78% and the Nasdaq 2%. The week's major news was the resignation of CFO Fran Barton and Senior VP international sales and marketing David King. Here are other news/commentary.

UT named #1 broadband infrastructure company in India - For the 2nd year in a row, UT was named by Voice& Data as the #1 broadband infrastructure company in India. Accoring to the PR, the number of broadband users has doubled from April 2007 to June 2008 to 4.38m. The target of reaching 20m users by 2010 shows that the India broadband market continues to be a good source of revenue for UTStarcom. The key for UT will be improving margins in that business unit. The position in broadband and iptv that UT has built over the last few years should hopefully start to benefit in the years to come.

China Netcom earnings - Both CT & CN reported earnings recently. Here is a PR from CN for their earnings. Here are some itmes related to UT.

-The Company reported a decline in total capital expenditure of 10.7% year-on-year to RMB 7,527 million. In particular, investment in the businesses of fixed-line and PHS only accounted for 4.4% of the total, down 13.2 percentage points compared to the same period last year.

-As of June 30, 2008, we had 108,510 thousand local access subscribers, 2,310 thousand less
than at the end of 2007. Of this number, fixed-line subscribers declined by 1,499 thousand, while PHS subscribers declined by 811 thousand.

-We are working to upgrade the “Family 1+” from bundled services to household-oriented multimedia information services. In May, 2008, we launched a family gateway, which offered comprehensive information services to “Family 1+” customers, combining simultaneous access to the internet through various PCs, wireless internet access, family video monitoring and IPTV services.
By the end of the first half of 2008, there were 9,971 thousand “Family 1+” subscribers. Penetration rate among broadband subscribers for the “Family 1+” service was 36%.

-We believe that, after the 2008 Beijing Olympic Games, the high-quality broadband network established during the Olympic Games as well as the broadband consumption habit developed during the Olympic Games, will lead to a fast and sustainable growth in the innovative business and thus help catalyze the Company’s strategic transformation.

-I read in the WSJ that CT was planning to add about 8m broadband subscribers per year for the next 4 years.

China IPTV procurement list- China Telecom (NYSA: CHA; 0728.HK) has announced the winning lists of equipment manufacturers that provincial branches should use for IPTV 2.0 platform and terminal equipment procurement. The winning manufacturers were split into three areas: systems platforms, standard-definition terminals and high-definition terminals.

China IPTV subscriber count as of Q2- There were 1.708 million subscribers of IPTV (Internet Protocol TV) service in the China market at the end of the second quarter of 2008, growing by 396,000 or 30.2% on quarter and by 132.1% on year, according to China-based consulting company Analysys International.
The exceptionally large growth in IPTV user base was due to the increased demand attributable to the Beijing 2008 Olympic Games, Analysys pointed out.

UT has maintained its market share (about 2x compared to ZTE) and the growth in China continues at a slow but steady pace (from 736k to 840k to 1m to 1.31m the last few quarters).

Barton's retirement package- Reviewing the two 8K filings regarding Bartons retention agreement/retirement package, it does seem Barton was good atleast with his own financials. When the $10m/4 year retention agreement was disclosed last November 30, 2007, the first installment was already given in November 2007. Thus, in just 9 months since the "four" year retention agreement was disclosed, Barton was able to collect two installments or 50% from a dollar standpoint. Even better for Mr. Barton, because the stock declined by nearly 50% from the June highs, he was able to receive nearly 877k shares for this year's installment. If the stock had maintained the mid $5 to $6 level and Barton continued to stay on till atleast November, he would only receive 400-500k shares. Projecting into Nov 30, 2009. If the stock hits $12, he would only receive 200k shares. If by Nov 30, 2010, the stock hits $20 (ok maybe wishful thinking), he would only receive a little over 100k. In any case, Barton has retired and hopefully the company can withstand his retirement and somehow manage to pull it together and continue their stellar run for shareholders :-)

Have a good rest of the Labor Day weekend everyone.

Saturday, August 30, 2008

Tenure and Resignation of Fran Barton

CFO Fran Barton is retiring effective August 31, 2008. This was unusual in that there was no transition period (atleast not that the street was aware of). Fran was hired by UTStarcom to be its CFO effective September 2005. Then CFO Mike Sophie focused on the COO spot after Fran Barton's hiring. From the company PR, "I believe that Fran's background represents an optimal fit for the needs of our finance organization as we go through the restructuring and diversification initiatives," said Mike Sophie, chief operating officer at UTStarcom, "His appointment will allow me to focus on the operating aspects of these initiatives. Fran and I will work closely toward disciplined execution of UTStarcom's strategy and timely attainment of the company's goals, including a return to sustainable revenue growth and profitability."

I want to highlight the positives and negatives of Fran Barton's tenure and provide some commentary.


I will take the positives from the November 30, 2007 8K filing discussing Fran Barton's retention agreement.

"The Compensation Committee approved the Retention Agreement after taking into consideration: (i) Mr. Barton's performance during a challenging year, including completing the Company's previously disclosed stock option and historical sales contract investigations, bringing the Company current in its SEC filings and improving the Company's Section 404 compliance process; (ii) the critical nature of Mr. Barton's current and future role in light of anticipated management transitions in fiscal year 2008; and (iii) increasing competition in the market for experienced financial professionals. "

The balance sheet is also better due to asset/investment/none-core business unit sales.


1. There was not one single profitable operating quarter during Fran Barton's tenure.
1a. Write downs and poor contracts (such as in India) and bloated expenses added to the decline in PAS to contribute to the money losing quarters.
2. Predictions of profitability for (a) early 2007 (given in late 2005), (b) early 2008 (given in August 2007), and (c) early 2009 or late 2008 (given in late 2007) did not come close.
3. The material weaknesses identified have not been fully resolved (the last I heard there were 3 outstanding).
4. "Legacy" expenses from accounting to legal still continue to date.
5. ARP accounting systems are not fully in place as of yet.
6. The stock price has declined from around $8 (already down from the $30s/40s the previous year in 2004) to the low $3 level in 3 years.


Barton started out with a base salary of $500k that was increased to $750k. At the end of November, 2007 (after the shareholder meeting when the price was sub $3 no less), shareholders received news of the retention agreement.

"The Retention Agreement provides that the Company will provide a retention incentive to Mr. Barton with a total value of $10,000,000 (the "Retention Incentive"), consisting of a combination of restricted stock, RSUs, performance shares and performance units (together, "Equity") to be granted under the Plan and/or cash, in the sole discretion of the Compensation Committee. Each installment of the Retention Incentive will be awarded in a combination of Equity, in the Committee's sole discretion, up to the annual maximum amounts permitted under the Plan after taking into account Mr. Barton's focal awards for each particular year. The first installment was awarded effective November 30, 2007 (see below), and the remaining installments are expected to be awarded each January thereafter. Because of limits on the maximum amount of Equity that can be granted to an individual in any calendar year under the Plan, the Company expects that the Retention Incentive will be awarded over a number of years, so that as much of the Retention Incentive can be awarded under the Plan as possible. The first installment of the Retention Incentive will vest as to $2,500,000 in value on November 30, 2007, and the remaining installments will vest as to $2,500,000 in value on each November 30 thereafter until the full $10,000,000 in value has vested. For purposes of determining the vested value, the value of Equity to vest will be based on the Fair Market Value (as defined in the Plan) of the Company's common stock on the applicable date of grant."

Resignation Agreement:

Fran Barton will receive $380k and accelerated vesting of the $2.5m retention bonus that was going to vest in November 2008. So, Fran effectively collected half of the $10m in retention bonus.


As a shareholder in the company, it is hard for me to even say "thank you" for Fran Barton's services due to the negatives I outlined above. During the March 17 meeting that some shareholders had with management, I openly questioned management and lead director Thomas Toy about management compensation and highlighted specifically Fran Barton's compensation. Tom basically defended the compensation/retention agreement based on the "positives" noted on the 8k. At that time, the management/board made it seem Barton had the blue print plan to return the company to sustainable profitability and growth (See my March 2008 postings to review our meeting).

It does seem odd that now Barton has retired, management is confident that the executives left behind can fill Fran Barton's role with "seamless transition". I had emailed Peter Blackmore late Thursday and he explained the departures as simply for personal reasons and that he was confident in the team that they had. Blackmore wanted to discuss it personally but we did not hook up the following day. I have been a constant critic of Fran Barton even before blogging and did not feel he deserved the compensation for the performance. Now that the turnaround is well underway, it seems less likely he would contribute. I did not get an impression Barton was well in-tuned with the technology and would forget certain numbers even during planned CCs. During the few times I had personal contact with Fran, he seemed very nice/professional and well liked by the other employees. However, this is the business world where performance is the metric which we measure the CFO and not likeability. In that measure, Fran Barton did not fulfill the goal when he was hired to return the company to growth and profitability. The balance sheet seems better with all the asset sales but shareholder equity has also gone down. Nor did the shareprice (already low at the time when Fran Barton joined) go up.

In summary, I enjoyed the minimal conversations I had with Fran but think it is a positive impact to the company/share holders that he retired. I guess it was "nice" for Fran's reputation that the street react negatively for a day to Fran Barton's departure but that just reinforced my belief that in the short term that the street has mispriced the stock badly.

I want to end this post wishing Fran Barton good luck but does he really need it or UT shareholders still facing the ongoing soap opera that is UTStarcom......all potential, valuation, and little results. As we think about Fran's tenure, we shareholders still cling to the hope that management/board can "work closely toward disciplined execution of UTStarcom's strategy and timely attainment of the company's goals, including a return to sustainable revenue growth and profitability." When did we hear that one before? Or are we shareholders just a bunch of short term traders with no patience. Right...give us a break. Really, please give us a break :-)

Sunday, August 24, 2008

Weekly recap - Management needs to act.

The stock closed the week at $3.36, down 10 cents or 3%. The markets rallied hard on Friday to pare losses. For the week, Nasdaq lost 1.5%, DOW .27%, and S&P .46%. The stock has now closed lower the last six consecutive weeks, dropping from $5.57 on July 7 for a loss of $2.21 or 40%. Technically, the stock is weak, trading below the 50 day ($4.8 or so) and the 200 day ($3.6 or so). There were no specific PRs from the company so I'd just like to discuss a couple of items.

IPTV - One of the disappointments during the last earnings call update is the iptv subscriber numbers. The company only added around 100k subscribers to reach 956k and mostly in China (Shanghai). Fellow shareholder Shadowdoc99 posted on the slow developments in iptv in China. Hopefully, the olympics will accelerate the growth in China, which is the main growth driver for UTs iptv in the near term (6 to 12 months).

Shadow also discussed some developements that could help UT in India regarding iptv system storage clauses: The Information and Broadcasting Ministry in India, based on recommendation by TRAI, has mandated that all IPTV carriers make available up to 90 days of stored broadcasts for subscribers. Reliance is going to have conniptions over this requirement as they have signed on with Microsoft for IPTV and cannot meet this requirement without huge capex for storage. In fact, only UTSI's system can meet this requirement economically and so it seems India is standardizing on UTSI's IPTV system.

This blog has a lot of good information on the latest iptv news in India,

It seems like the regulations in India are very favorable to UT's iptv system and that UT is well positioned in India. The problem now is that broadband uptake and iptv ramp is still very slow and overal iptv numbers are around 10k. Compared to the contract capacity that UT has signed with Aksh (with MTNL, BSNL), Bharti Airtel, Goa, and Sri Lanka numbering potentially over 2 million subscribers over the next 2 to 3 years, the current number is very disappointing to say the least.

The situation is not much different in other parts of the world, such as in Taiwan and Brazil, where UT has announced contract wins. The numbers are very small (about 5 to 10k live subscribers). The Taiwan contract for example was for an initial 20k UT set top boxes and targettied 500k within 2 years. That contract was announced in December of 2007 so it has been very slow as well. Recently, management has indicated some optimism there and from the China olympics but we'll just have to see how it plays out.

Share Buy Back and investor confidence - I've posted a couple of times on this the past week and shareholders have sent emails to management. The developments from the earnings call (revenue shortfall, cash losses) are very frustrating to shareholders. The company is reaching out to the investment community (roadshows, analyst day meetings, earnings call/shareholder meetings, webinars, etc) at a time when the company's performance does not seem to be improving (and in some respect deteriorating). As an existing shareholder, I have to now question why management is spending time/effort/money to tell their story, reach out to NEW analysts/investors when they can't even appease the existing shareholder base/investment community and when they have yet to even come close to sustainable profitability. It doesn't make any sense to me. From Sophie to Barton to Blackmore, it seems like management has kept on promising profitability in the "next year" but have not delivered. Everyone is hesitant to cut costs to get to profitability because they want huge growth further down the line but where are the committments? Where is the balance? Where does shareprice and shareholders come to play? More frustrating, when it doesn't happen, there are more excuses. Can someone there really deliver? I really want to challenge management to respond to their existing shareholders and be accountable for what you are spewing out. Management needs to act and start delivering.

I continue to call on shareholders to email management to implement a share buyback for all the reasons I have posted on. Have a good rest of the weekend to everyone.

Saturday, August 23, 2008

Update on Stock Buyback

In response to shareholder's emails to management, a generic reply was sent back to shareholders.

Thank you for your recent e-mail to UTStarcom's management.

We have had a number of recent conversations with many investors during which we've heard a range of investor concerns and suggestions along with a great deal of excitement about our future. We appreciate this feedback and want to remind our investors that UTStarcom's management and board of directors regularly evaluate the company's priorities, including, but not limited to, possible uses of its existing cash balances.

We continue to be excited about the strategic plan we outlined in late 2007, the progress we've made thus far and the opportunities that are in front of us.

Thank you for your continued interest in and support of UTStarcom.

Mr. Barry Hutton
Senior Director, Investor Relations
UTStarcom, Inc.(510) 769-2807

Let me be clear from the very start that the "progress made thus far" has been significant but only when compared to the hole the company dug for itself. In terms of operating a company for profitability, it has been a disaster. The company's stance has been to focus on the long term turnaround and opportunities the company has (again, in the reply above, "excitement" was used"). I can't believe ANY shareholder is excited unless they sold out and rebought at these levels. The problem with management discussing the recent progress (last year) is to ignore the previous four years! Who is being short term? Shareholders or management. It is clear that shareholders have stuck with this company while management takes its time and "reacting" rather than being "proactive". All their consultants and executives have not made a dent or even get close to sustainable profitability.

The share price being up for the year is more an indication of the value the company had and NOT due to company performance. People that say they are doing well since the shares are up are simply idiots. Anyone looking at the company assets last year knows it is worth significantly more. The fact that the stock can move up close to the $6 level shows how little they have to do on the operational side of things to move the stock up.

The "hope" with "new" management rests with Peter Blackmore as the new CEO. This being Peter's first CEO role and with the low expectations, low share price, heavy assets/resources of the company showed that there was significant shareholder value that can be unlocked. Peter has discussed the company being a large startup and of course that was not the case. This shareholder group has consistently brought the history of underperformance in all the discussions we've had all the way back four years ago! Peter had a fresh start and another year to 18 months to perform and get to sustainable profitability. That time is running out and Peter should take responsibility for this.

Going back to the share buyback. People that say they need to think longer term and save cash either don't have a significant position or don't care about the company's performance. Even with the buildup for the $80m+ India Phase II contract and losses for the rest of the year, the company will have over $300m+ in net cash at the end of the year. That is about 70% of the current market cap! The CFO Fran Barton mentioned that he would not like to be involved in a company that just down sizes and not growing. Lets consider two cases. One, they do not grow (book business) the several hundred million they need to get to profitability. Are they then going to lose $300m+ next year in cash flow? Definitely not. So, they should cut costs and return funds to shareholders.

Case 2 is supposedely the one management is on, growing the company's core business significantly and ramping bookings and revenue. There was a good discussion on this by shareholders Tigre and Shadow (and I threw my two cents in). EVEN if they grow bookings by $100m/quarter next year and beyond, could they do a share buyback? Looking at the India Phase II contract for $80m+, that is probably at the extreme in terms of lower margins, longer DSOs and they only spent $60m in cash flows while funding all the material/hardware for this. How many building contractors can fund an entire buildings materials/equipment before the ink dries on the contract? Besides, most of their contracts will be much smaller, have higher GMs, quicker turnaround (lower DSOs), etc. This is a company with over $300m in net cash and probably more if they sell the CSBU and further reduce expenses. BTW, how long will they have "legacy" accounting, legal, and other expenses. They have been talking about this for 2 years. The company fights for a few million in gross profits and throw away so much in their "legacy" expenses. Anyway, back to funding the "growth". Don't forget the this is a company that owns their China building, worth about $180m. What is the problem in getting a $50m line of credit if they really need it? I am not a financial expert by any means but it is getting ridiculous when a company that has so many consultants and supposedely top-notch executives (not to mention a decade+ of operating in China) cannot find lines of credits when they have virtually no debt, huge NET cash, owns their properties, and planning to grow bookings 25 to 50% overall.

So, what is it gentlemen? Case 1 or 2 or if its even worse than any of those, then go to a strategic alternative to sell the company. Judging by the conversations I have heard, it is Case 2 and the shareprice is too low and supposedely progress has been made to make selling out now ridiculous. So, either way you look at, a share buyback should be implemented or confidence in your basic competence or charge for looking after shareholder value is gone. Going to roadshows and making promises after years (let alone the 2nd half shortfall) of underdelivering is not a productive use of time/effort. Don't be idiots and be pro-active for once. I personally like the management team but you need to do the share buyback and look competent for once. Its hard for me to defend the company/stock when time after time, the company has not produced. There is still so much value and potential with the company but that cannot be the only fighting charge we hold on. Tangible actions on the shareprice has to occur. It should not be at these levels.

Have a good weekend.

Tuesday, August 19, 2008

Share buyback campaign

My fellow shareholders,

It has been a major disappointment to see the stock drop down to the low $3 level after reaching almost $6 this year. The company's management let shareholders down with this year's shortfall and cash flow metrics after repeatedely touting their turnaround plan in previous earnings calls, analyst day meetings, shareholders meetings, and webinars. It can be argued that some of the events were not in management's control. However, with the company's history over the last few years, these "good excuses/negative results" have become all too common and drive down investor confidence, whatever is left. Management has discussed (a lot) about getting to profitability and there are signs of operational improvements. It has improved the balance sheet and for the most part, I believe the company is in a much better situation this year compared to last year. However, the fact remains, there is a significant difference in the street's interpretation of the company's performance and outlook to what management is portraying. This is not due to a lack of effort from management's part either (with the numerous events/communications/projections). However, this latest set-back has eroded hard earned credibility built up over the last year. Let me repeat. It has eroded hard earned credibility built up over the last year. It will be hard for the company to gain back credibility unless it starts producing good operational results or doing something tangible (much more than just talk and projections).

Since last year, the shareholder group has discussed a share buyback with the management and with lead director Thomas Toy. It seems that everyone was in agreement that the shareprice is undervalued but there were always issues that prevented a share buyback such as resolving the convertible bond, reorganization, building up revenue, and other items. The Chief Financial Officier, Fran Barton, has mentioned that they cannot do a buyback unless they have "excess" cash. After the recent sale of the PCD, the company has amassed a net cash position of over $400m. Even after subtracting the cash flow losses for the remainder of the year, the company will still have over $300m in net cash. The company has also indicated that it may sell or merge the remaining none-core business, the CSBU, that can also generate cash or additional cost savings. With Barton's "conservatism" when getting bad news out, I think that cash is going to be even more by the end of the year. Revenue growth in the high double digits and bookings of 25-50% are predicted for 2009. This is also a company that has very little debt, has interest income, and owns their China building. In any case, unless there is something more horrendous that we shareholders do not know, the company has plenty of "excess" cash.

At this time, I am calling for the management/board to finally institute the long discussed share buyback to significantly reduce the float and enhance shareholder value. The last thing I want is that the "excess" cash sits in a bank making 1.9% while shareholders watch their holdings drop 40+% in the last few weeks and possibly more. An analogy would be shareholders starving NOW while management keeps all the food that shareholders own to begin with. I will contact institutions and management to campaign for a share buyback as this is the best use of excess cash. Period. I suggest that ALL shareholders send an email to the CEO Peter Blackmore and CFO Fran Barton to voice their support for a share buyback. This is simply a no brainer at this time and a major indication on whether the board is for shareholder value (and people we can continue to support). I and a lot of shareholders have been major supporters of the company for years but there comes a time when the company has to give something back to its own shareholders. This time, there are really no ifs ands or buts. Again, if you agree, send an email to management to voice your support for the share buyback.

Here are the emails:

Sunday, August 17, 2008

Weekly recap - No rebound

The stock closed at $3.46, down 2 cents or .57% for the week. This was disappointing in light of the strength in the Nasdaq (up over 1.5%) and the failure to bounce from a 27% decline last week. There were no announcements from the company but here are some discussion topics.

2008 Revenue shortfall quantified- Fellow shareholder shadowdoc99 refined his estimates and writes:

"Okay, Tim, thanks for your reply. Basically, I made the following mistakes in my estimate. First of all, I forgot to subtract the previously expected operating profit from the sold PCD division for H2 which would be about $16.5M ($63M for entire PCD division in 2007 minus $30M for UTSI supplied cell phones to PCD divided by 2 for H2 only). Secondly, I used gross margin of 36% for handsets instead of 22% or less and 15% for UTSI manufactured handsets instead of 10.7%. Not sure where I got the 15% figure from but the 10.7% figure was from 2007 and I couldn't find a number for 2008.

So, of the $40M in unexpected cash burn, $23.5M still needs to be explained ($40M - $16.5M = $23.5M) from a loss of $135M in sales. Using $31M in lost sales for PAS handsets at 22% margin gives gross loss of $6.82M; $15M sales loss of PAS infra at 45% margin gives gross loss of $6.75M; $89M lost sales of UTSI manufactured PCD handsets at 10.7% margin gives gross loss of $9.71M.

So, adding these all up we get total sales loss of $135M with gross operating loss of $23.1M which is close enough to the $23.5M. So, all in all not so bad. The PCD handset sales are down due to recession in the US and PAS handset sales are down due to recession in China plus the restructuring. These are short term events and will resolve as we go into 2009. The PAS infrastructure sale loss still bothers me. If it is simply postponed into 2009 because of revenue recognition due to the carrier reorganization, that is no problem. If it is a cancelled contract, why was it cancelled and can other long-term PAS contracts be cancelled? If this is a one-time event, it is a small amount and of minimal consequence. Judging by company's guidance that PAS declines in H2 of this year are not going to continue into 2009, I would guess this is either delayed revenue recognition or a singular problem that will not be repeated. "

I think this latest quantification is right on and shows that the "legacy" and handset part of the company are still a significant portion of the overall revenue stream of the company. While it seems these are short term issues, we need to pay as much attention to this as well as the growing core businesses.

PCD Sale, some final words- There has been some continued discussions on whether UT did the right thing by selling PCD when it was doing well and when the company's other businesses are still unprofitable. I had replied in favor of the sale to another shareholder this week, "The overall PCD was only netting 3 to 4% gross margins a couple of years ago and that figure included the higher margin UT design phones. Now, it has spiked to 6-8% with the higher priced/higher margin smart phones. I don't think it can be maintained though. Look at Palm ordering 5 million smart phones a few days ago from their Chinese supplier for 2009. Rimm is coming out with 3 or 4 smartphones in the sub $100 category. Apple's iphone is $199 (although with high monthlys). Average selling price is going down industry wise as these are commodity products. Even UTs own internal handset business is questionable since the margins are still low and volumes are not comparable to others (scale is definitely important). So, overall, I don't think it would have continued like that but I do hope it performs well enough for UT to collect as much of the $50m due end of 2010. If UT doesn't get a decent piece of the CDMA/GSM market in China as part of the restructuring, they might as well sell that one too and save on the expenses. As for inventory, that is definitely questionable as UT also had to take in a lot of invetory from Pantech-curitel before for the exclusive agreement. That burned up a lot of cash and led to low margins for what seems like forever."

Shanghai/Harbin iptv- Tigre writes, "Given the low monthly ARPU and the necessary cost of acquiring programmings and the need to share revenue with local broadcast and media partners, it is not easy to make a profit for CT/N on IPTV at this stage. As illustratged in the Harbin article, the lack of local contents has also limited the growth of IPTV in Harbin, despite content partnership with SMG which is based in Shanghai. Also, having an IPTV operating license hasn't prevented local SARFT from prohibiting Netcom's 20 yuan/month IPTV promotion, citing that the price is too low. This is not an issue in Shanghai as SMG is the local partner of CT there. So Shanghai has its unique characteristics (including higher income of residents and being an Olympics city) and we can not generalize the success in Shanghai and expect simple replication elsewhere in China."

IPTV has done well in Shanghai with expectations that iptv subscribers will reach 800k by year's end. Shanghai with 19m in population shows the potential growth of iptv in China but the different regulatory/content issues elsewhere prevent a full openning up of the China market that makes estimates/projections difficult.

UT IPTV growth- My last posting gave some projections of growth for UTs iptv business in 2009 based on growth in the last year, looking at global growth, projections, and strategic wins/uptake in UT markets. Obviously, this is just an estimate and there are many factors that can significantly increase/decrease this number and various events that can occur over the 2nd half of 2008 that could impact the market. I'll be interested to see what sigma designs says at the end of the month during the earnings call. There will also be another UT roadshow sometime in September and the impact of the olympics. Obviously, the bookings will be scrutinized during Q3 and the overall outlook from the company for 2009. Here is another recent article that discusses growth in iptv, specially in China.

August 12, 2008 - The number of IPTV subscriber worldwide will reach 53mn in 2009, according to new estimates from a report from UK research firm Companies and Markets, with the APAC region leading growth in terms of subscribers, service revenue, infrastructure and other metrics, thanks to high broadband penetration and a supportive regulatory framework.
Worldwide IPTV service revenue is predicted to reach US$38bn in 2009, with the Americas and Western Europe forecast to be the biggest markets in terms of revenue per user, according to the report, entitled "Global IPTV Market Analysis (2006-2010)". China is expected to be the future "IPTV dragon", thanks to its rapid urbanisation, fast-growing economy and expanding middle class, while the US is expected to be a more difficult market for IPTV due to high existing pay-TV penetration, and stiff price and service competition likely to come from "entrenched" operators of cable and satellite services.

Potential restructuring? - With continued losses projected for the next several quarters, uncertain PAS market, uncertain revenue growth from the core businesses, one analyst and some shareholders are speculating that the company will need to further restructure. UT 2008 revenues of $900m include only about $350m or so in core revenues (iptv, ngn, and broadband). A bulk is still in PAS infra/handsets, and GSM/CDMA handsets. Expenses are still around $380m yearly run rate with $160m or so in R&D. Parts of the R&D are linked to PAS/handsets but the bulk is in the core business. However, obviously, that is still way too high no matter how you look at it. So, is it time to cut further? At this time, I have to say no. The company will continue to cut expenses by selling/merging the CSBU into other business units, will reap further cost savings after all the "legacy" expenses are done (some additional IT, accounting, legal expenses to wrap up). The company has raised substantial cash (I don't agree with all the particulars in the stock sales, interest spending, etc) the past year and will end the year with a strong net cash position. The company's focus is on growth and have earned some time (not a lot) to show that bookings are strong and return to cash flow positive is near. Management stands by its goal of increasing revenue several hundred million and I can see how that can happen but timing is as usual tricky (its already missed Blackmore's initial sustainable expense ratio targets for late 2008/early 2009).

Stock buyback- When the company had over $600-700m in cash, it also had a lot of debt and net cash was lower than where it will end up the year. In fact, most companies with similar market caps don't have anywhere near the net cash the company has. The problem is the cash at hand is still "lower" and do we really want them to borrow at 10.9% or dilute the stock if they require more working capital? I want them to buy the stock at these lower prices but not to the point the company will get in trouble (obviously). I still think a limited buyback may not be bad and show confidence. The flip side is do they have good visibility in and when the iptv markets/core markets will open up? This is where management (Barton in particular) has to start earning their pay. If all you do is be very conservative and sell everything and raise huge cash and use uncertainty as an excuse for everything, then what are you there for. That is too extreme on one side. Management has to get a handle on the business to be more balance in addressing shareholder needs while positioning the company for growth. Creativity? I haven't seen it. Estimates? Way off on the downside and upside. I remain a shareholder because of the huge potential, valuation of the assets (technology/resources/cash/connections/customers etc.).

As a summary for the week, I am simply frustrated with the shareprice but think the company is close to realizing the growth in their core businesses soon (after years and years) and the stock is back to being an incredible value. It always seems darkest when the ...... Have a good weekend everybody. BTW, the olympics have been very exciting so far! Phelps...amazing skill, execution and luck.

Saturday, August 16, 2008

IPTV - potential $100m revenue growth in 2009

Over the last year, UTStarcom has provided subscriber numbers to track the growth in their iptv system in China and worldwide. I have kept tract with the following chart.

During the last earnings call, we learned that the global subsriber base for UT has increased to 956k, increasing by about 100k in the previous 3 months, mostly from China. Out of the total, China has about 670k, Japan about 250k, and the rest of the world less than 50k. Aside from China and Japan, the company has contracts in India (MTNL, Bharti Airtel, BSNL, Goa, Sri Lanka), Taiwan (Markwell cable), and Brazil.

Global IPTV subscribers and growth projections - I had posted previously on the state of iptv globally from the end of 2006.

The report, entitled “IPTV: The Killer Broadband Application”, forecasts that there will be nearly 60mn subscribers to IPTV services around the world by 2010, with a growth rate of over 500% expected during the next three years.

2011. - Worldwide IPTV subscribers to reach 72.6 million by 2011, says MRG. the subscriber

Recently, here were iptv growth rates from Q1 2007 to Q2 2008:

Iptv subscribers in various regions:

Region Q1 2007 Q1 2008
Europe 3,875,266 8,425,370
Asia Pacific 1,129,355 2,619,035
North America 850,601 2,258,601
South and East Asia 1,353,000 2,086,000
Latin America 2,300 11,183
Middle East & Africa 10,000 10,000
Total 7,220,522 15,410,189

While Europe has led the way, most projections have the APAC region leading the way in the next 2 years. Here is a recent article (June 2008) that I posted previously but is a good read specifically on UT markets in Asia. Here are some excerpts:

"The research firm notes that IPTV currently is deployed in seven Asian markets: China, Hong Kong, Malaysia, Singapore, South Korea, Taiwan and Thailand. Service introductions are anticipated in India and the Philippines later this year." UT management has discussed the NGN in the Philippines but not iptv. We still have not heard anything official out of Hong Kong except for the local news interview with a UTStarcom executive.

"In-Stat Research predicted that APAC's IPTV market would grow 80% annually through 2010, when revenue would hit $4.2 billion. China, Japan, India and South Korea are expected to account for most of the region's growth." Japan has been stalled for some time because of regulatory issues regarding multi-cast/time shifting that negate iptv/UTs advantage but it seems like there is some growth potential as well (definitely massive if regulations change).

"China is the untapped market with the potential to drive the Asian IPTV numbers through the roof. While current deployments are limited, future rollouts are planned in conjunction with upcoming global events.
"The growth of IPTV will remain modest for now and will take off only after 2008," says Serene Fong, broadband analyst for ABI Research. "Adoption will be boosted by major events, such as the Beijing Olympics in 2008 and then the 2010 World Expo in Shanghai." She adds that the Chinese government is backing IPTV because the technology is aligned with its long-term plan to unify broadband, Internet and telephony services. ABI projects that the IPTV subscriber base in China will surpass 23 million by 2012.
In her report, Fong warns, however, that there are bottlenecks in China that may restrict IPTV growth. These include a shortage of content and too much government regulation."

"A report from Pyramid Research forecasts 10 million Chinese subscribers by 2011"

Alcatel-Lucent's Schutte says China "is a difficult market to enter and do business in" because it is complex and involves competing IPTV technologies and standards deployed in different regions. Its clear that foreign companies will be shut out in the iptv market in China.

End of 2008- The company will probably end the year with around 1.2m subscribers, maybe a little more due to the olympics. This is about double the 600k that the company started with and consistent with global trends of about 100% growth. UT will probably have about 900k in China. At 62% of the China market, that puts total China iptv subscribers at around 1.5m. Sometimes, the numbers for China are inflated due to counting other iptv services that are not comparable so I will use UT's subscriber and market share numbers.

China Growth for 2009 and beyond- Lets say China doubles every year. It will have 3m by end of 2009, 6m by end of 2010, 12m by 2011, and 24m by 2012. That will be around the projections reported above. If UT gets 50% market share in China, they will increase their own subscriber base by 600k in 2009 (1.5m-900k), 1.5m in 2010(3m-1.5m), 3m in 2011 (6m-3m), and 6m in 2012 (12m-6m). Assuming STB revenue of $125/box and $40 for infra/service/maintenance, revenues could be $100m, $250m, $500m, and about $1b in the next few years. UT started the year with about 400k in China and will end the year with close to 900k so about double. The growth in China will probably exceed the 100% in the earlier years and UT will have a higher than 50% of the market. If we use those trends to fine tune the numbers, UT could have 1.8m-2m or more subscribers in China by the end of 2009. That is a growth of about 1m in 2009.

India - UT has been winning a lot of contracts, topped off by the recent win with BSNL in 20 cities.

August 6, 2008 - Indian firm Aksh Optifibre is planning to invest US$100mn in its joint venture with Bharat Sanchar Nigam Ltd (BSNL) to deploy IPTV services in 20 cities in the regions of Rajasthan, Jammu & Kashmir, Punjab, Haryana and Uttar Pradesh (west), according to local reports.
K S Choudhary, Managing Director of Aksh Optifibre, commented that the company is targeting a subscriber base of 500,000 in the next three years: "[IPTV] technology allows the use of internet, telephone and television at the same time... It's difficult to ascertain the business dynamics of this highly volatile segment. We already have more than 7,000 subscribers in New Delhi and Mumbai where we are offering iControl on broadband network of MTNL."Under the terms of its agreement with BSNL, Aksh Optifibre needs to have 10,000 IPTV subscribers within the next nine months across 20 cities, however it is reportedly confident that it can reach this number. Aksh concluded a GDR/FCCB issue of US$40mn in January of this year to finance the IPTV and VoIP services in Delhi and Mumbai.
On one hand, the subscriber number target for 3 years and dollar amount seem to be good but then they are only targetting 10k users in 9 months. UTs broadband phase I contract was for 900 cities so the 20 city iptv deployment is only a fraction of BSNL's footprint. MTNL, Bharti Airtel have similar growth targets but the current numbers show slow movements in India. You also have Goa, Sri Lanka, Taiwan with high growth targets from 100k to 500k but slow movements as well.

Brazil - UT has a win with Brazil telecom but again it is only for 10k users. It also won a FMC contract and is deploying it currently but how quickly the market accelerates is unknown.

Russia - UT is said to be working on a couple of contracts by year end and iptv could be one of them. This is another huge market (heck all of them are huge but timing is the key).

Latin America, Middle East, Eastern Europe - UT has had some success in PAS, NGN, broadband so iptv will also be a part in the future. Blackmore mentioned an update in Q3 regarding these other regions. Obviously, they are even behind the other countries/regions if wins have not even been announced yet.

UT revenues - As I mentioned in the last post, if $210m of the $315m total revenues for the MMCBU comes from PAS infra, then only $105m is expected for iptv/ngn. IPTV users will increase by about 600k users for UT. That is $75m in STB. Infra/service/maintenance have longer revenue recognition cycles. If we consider half will be recognized, that could be $12m. NGN is about $20m, maybe more if PAS infra is less.

2009 iptv growth for UT - If UT doubles their iptv subscriber base, they could end 2009 with about 2.5m subscribers. That is a growth of 1.25m (about 1m from China and 250k from outside China). IPTV revenues could be about $156m in STB and $50m in infra/service/maintenance for a total of about $200m.

Uncertainties and potential - Even with the growth in iptv in 2009, the number of iptv users in UT markets will be very small. Based on the continued opex for UT in the second half, management has indicated it will spend to further their markets in iptv, NGN, and broadband. The company had initially projected about $1.1b in revenue for 2008 at the start of the year and now is down to about $900m (numbers adjusted for PCD sale). The company needs to further cut costs while ramping revenues by several hundred million. It seems iptv can add about $100m for 2009. NGN and broadband will show good growth as well but definitely not enough to get to profitability in 2009. On the bright side, the company has built up a nice cash base (ending 2008 with over $300m in net cash), cutting expenses, and potentially selling additional assets (CSBU). More importantly, the iptv revenues (while still lumpy) has significant growth, strategic wins, and worldwide traction behind it.

Quantifying the shortfall

Fellow shareholder Shadow tried to quantify the $100m cash flow shortfall for 2008. Normally, I would just reply on the yahoo board but this is a good discussion so I will post my reply on the blog. Based on $60m in cash usage used in preparation of the phase II BSNL broadband contract, Shadow focused on the $40m cash shortfall as follows:

"I gathered some numbers together from UTSI's 10Q and Tim's blog with the following results. Handset sales (PAS plus China CDMA/GSM) in H1 2008 were around $93M and for year are expected to be $155M indicating H2 sales of only $62M or $31M per quarter. I previously estimated that H2 resulted in an unexpected cash loss of an additional $40M to Analyst Day estimates by management and a loss of $135M in sales (initial sales were to be $1.035B and were revised per Tim's Blog now down to $900M). If you assume H2 handset sales were to match H1 sales then lost sales of $31M are now predicted. At 36% gross margin this would account for gross profit loss of $11.2M in gross profit from this division. If you estimate PAS infrastructure sales loss/delayed recognition of $30M with margin of 45%, you get a loss of another $13.5M. Using the sales constraint above, $135M total sales lost in H2 - $31M (handset division) - $30M (PAS infrastructure) = $74M of lost sales of CDMA handsets due to lost PCD contract. This results in loss of $11.1M in gross profit since gross margins for this product were given to us at 15%. So, total lost gross profit with above assumtions would be $35.8M which is close enough to the $40M in lost cash to be an acceptable solution."

I had commented previously that I was surprised with the $755m in non-PCD revenue expected for 2008 that was in the Analyst Day meeting. Using the mid-range values given late last year, I had come up with $833m. The initial company target for 2008 for the terminals business unit was $210m with a 22% gross margin so the $155m number that Barton mentioned to me a week ago was responsible for the bulk of that. The increase in PCD revenue noted in the Analyst Day meeting made up for the lost TBU revenue but it was also a bad sign already that I should have pursued more. The second item was during the cc to discuss the PCD sale. We learned that the internal handset part of the PCD would have $280m in revenue as noted in the Analyst Day slides. However, Barton was hesitant in backing this number during the CC and only mentioned that it was in the $200m something range. Again, this was something that could have helped in identifying the revenue shortfall.

Anyway, back to Shadow's calculations. I think the PAS handset contribution revenue wise is a good estimate but the gross margin of 36% is on the high side as the company knew even at the beginning of the year that margins would be lower (hence overall 22% GMs). This may lead you to increase the PAS infrastructure contribution of the loss but a large part of the shortfall in cash flow stems from the PCD distribution sale. Also, the $60m+ in TBU sales left might even be less than what you are estimating. The company did not specifically mention PAS infra regarding the cash flow delta in the earning call except in the conversation I had and that was described as "some" so the $30m you estimated is probably on the high side. This is a good discussion because of the importance still of PAS as it still generates about $210m + $155m or $365m in revenue for the company (assuming those numbers are still correct for 2008). I am a little reassured during the conversation that Barton emphasized not to extrapolate the PAS handset declines into the future and that Barton spent time in emphasizing that the PAS infra have much longer time horizons. Blackmore added that the telecom merger impact should help past this short term pain.

MCBU insight - I was going to post on iptv subscribers/revenues and the above discussion is a good backdrop to the MCBUs revenue stream. At the start of the year, the estimate for the MCBU was $315m. Since PAS infra was at $210m, only $115m or so is left for iptv and NGN. This might be more if the PAS infra number that Barton gave me did not include the expected shortfall. I'll continue this on the next post.

In summary, management lost credibility in not identifying the shortfalls in the Analyst Day meeting/slides. Maybe they thought no one followed the company anyway. Maybe they got complacent since they were going to sell the PCD and generate a lot of cash. The 27% one day drop after the earnings call only emphasized that the company has to communicate guidance and manage expectations much better. I had already emphasized my frustration for the discussion I had with Barry Hutton when we were discussing the guidance given in the Q1 earnings call for Q2. I want to point out that our conversation was when the stock was well above $5. While most shareholders will agree with the company's focus on the long term, the company cannot dismiss a drop from almost $6 to $3.5. Can you imagine the uproar of Apple shareholders if the stock drop to $90 in the next two weeks due to some short term issues?

Sunday, August 10, 2008

Weekly recap - 27% stock decline!

The stock closed the week at $3.48, down $1.3 or 27%. To make matters worse for UT shareholders, the market was solidly in the black with the DOW up 3.5%. Earnings related news dominated the headlines this week but there were also plenty of UT related news provided by fellow shareholders (Bamboozled and Techbroker....yes, we shareholders got bamboozled this week, thats for sure). I had discussed the earnings recap and post earnings recap in the last two posts but here are other UT related news this week.

BSNL iptv contract for UT - This was a huge win for UTStarcom in India solidifying their already dominant position in the India region IPTV (previous wins with MTNL, Bharti Airtel, Goa, and Sri Lanka). Back in the shareholder meeting, the company mentioned that they were pushing their system through their partner Aksh Optifibre to other carriers and this was confirmed in the earnings call when Peter Blackmore alluded to the expansion of iptv in India with BSNL (through Aksh) in 20 Indian cities. Earlier in the week, here was a link posted by Bamboozled, "With this partnership, BSNL would help increase the reach of IPTV to six million homes,” said G.K Aggarwal, CGM (Rajasthan Circle) BSNL, while addressing a press conference here." "icontrol is a television connection that allows viewers to watch the programs at their convenience with more than 120 channels, and an extensive movie library with Hollywood and Bollywood titles at no extra cost" I had some discussion with fellow shareholders Tigre and Shadow regarding expansion of UTs iptv and one of the concerns in poorer countries was affordability and penetration of iptv due to its benefits. It really looks like that UT has worked out an ad based/multi-use model that works well in China, India, and Brazil. I cannot emphasize enough how huge this win with BSNL, the leading provider of broadband/fixed lines in India.

Brazil iptv expansion - From UTs 2000 subscriber trial back in August 2005 to last December's initial 10k subscriber capacity contract in Brazil, it has been a very slow process. This last week or so, we heard about UTs fixed mobile convergence (FMC) solution being launched formally and now expansion of iptv. UT did not provide an update in Latin America (Blackmore will provide more updates in Q3) but we did get this link this week on Brazil iptv expansion. "Brasil Telecom (BrT) is preparing to expand the availability of its "Videon" IPTV service beyond the capital of Brasilia shortly, according to BrT's Network Engineering Director SebastiĆ£o Nacimento" The slow progress in iptv has been frustrating but it also shows the investments and "moat" that UT is building as it wins strategic contracts in key monster markets.

Impact of Beijing olympics on UTs iptv - When I talked with Peter Blackmore on Friday, he was much more upbeat than the earnings call (not surprising due to the revenue shortfall). Peter discussed the impact of the olympics would have on UTs iptv uptake in China. I myself watched the openning ceremony and today's tape delay of the US-China basketball game. It would be awesome if I could replay swimmer Michael Phelps 1st gold medal or a particular gymnastics event. That is what the over 1 million Chinese (mostly in Shanghai) are experiencing now! Here is a link that shows the record increase in iptv in China right now.

August 4, 2008 - Chinese telcos are receiving a record number of new subscribers to their IPTV services each day ahead of the Beijing Olympic Games next week, say reports in the Shanghai Morning Post. China Telecom is estimated to be receiving around 3,000 applications for IPTV services each day, thanks in part to a replay function that allows users to revisit programmes aired within the past 48 hours. Shanghai Telecom has also said that it will promote a new service during the Olympics that will enable viewers to watch different sporting events on different windows in the same screen. "To receive HDTV channels, broadband Internet users should meet specific conditions," said Shanghai Telecom official Feng Yaozhou. "So far about 300,000 Shanghai broadband Internet users are qualified to apply for the service." Shanghai Telecom reports that it currently has 510,000 IPTV subscribers, and expected to reach 800,000 by the end of the year.

In addition to iptv programming, here is a link of The Nine's game channel that will help promote iptv even more. "The Shanghai Branch of China Telecom ( CHA.NYSE; 0728.HK) announced that it would cooperate with The9 (NCTY. Nasdaq) to build a game channel on Interactive Personal TV (IPTV) in Shanghai." "The9 has provided four tailored games for this game channel in June this year. " Do not underestimate gaming in China....its huge.

More on the impact of the PCD sale - It seems that a lot of shareholders discussed this with Peter Blackmore after the price drop this week. So much so that Peter started our discussion by discussing this with me as well. I am a major proponent for getting to profitability as other shareholders but I was really happy to have the PCD sold so no explanation was really needed for me. This is not why shareholders bought into UTStarcom and for most of the time, it yielded gross margins of 2 to 4%. The company was able to get a reasonable price, keep its internal PCD contracts, and bring liquidity and focus to the company so I was happy. Obviously, there would be impact to the quarterly cash flows as the PCD was profitable but you have to love the fact the company is focused on their core business, which should be the main priority. As the company mentioned as well, the margins were hitting all-time highs of 7-8%, which would not be sustainable. Even their internal handsets already had a revenue shortfall. Peter also noted that this business which will be folded into the handset division (the one that makes PAS handsets and CDMA/GSM handsets to China) may also be divested or its design center be moved from Korea to China. The singular focus of divesting/reorganizing the business units show that management is executing and that business is not as usual (hard to say when the shareprice is near all-time lows but they have been performing).

Transport network product - I'm not a techy but Peter brought this up again during our discussion and said they had undergone more testing and is being used by Softbank and will be used in China. When Peter mentions certain things such as this product or potential monetization of the CSBU, I listen closely as it seems it will impact the company very soon.

Pricing of employee stock option and cash flow for 2009 - I forgot to touch on these subjects but hope they could give more color on this as soon as possible.

Summary - It was a very tough week for shareholders as the stock was hammered like the company was about to write down some auction rate securities (ARS) or collateral debt obligations (CDOs) or announced they are diluting their stock (heck even Merrill Lynch diluted their stock 38% and it went up!). I had been wary of the technicals the last couple of weeks and mentioned the possibility of going down to the 200 day MA. It was still hard to actually see it and even closed the gap from mid $3s. Someone wanted this to fall back hard and it did. However, in the longer term, I remain as bullish (probably more) due to the company's execution, focus, strong balance sheet and strategic position of their technology and markets.

Thanks for the shareholders who shared information this week. Unfortunately, there are much more discussions when the stock goes down. Have a good rest of the weekend and hoping for a MUCH better week for the stock :-)

Saturday, August 9, 2008

Post "Earnings Recap"

Based on the severe stock price decline on Thursday alone (27%) and the huge cash flow losses in Q3 and Q4, I decided to contact management to get some clarification and check if the long term thesis regarding the company is still intact. As you can imagine, the company would get a lot of calls from institutional investors/shareholders/analysts. The company scheduled 30 minute time blocks so that Peter Blackmore, Fran Barton, and Barry Hutton (individually or together) could respond to the interested parties. I got my share of phone calls Thursday morning as well and did not get back to Barry quickly enough so I was scheduled for Friday noontime. That worked out well as I was able to get feedback from other shareholders that had already talked with management and the digest the information. During my time block on Friday, I talked with all three (didn't expect Fran but having the CEO/CFO explaining/listening to your banter is always a treat for me). Anyway, here is what we (including other shareholders) found out.

2008 Revenue Shortfall - The 2008 projected earnings for the company (not including the PCD portion that they sold) was $1.035B ($755m core + $280m internal handset part of the PCD). This was reported in the June Analyst Day Meeting. Due to a loss contract in the internal part of the PCD, weakness in the PAS handset market and a little associated on the infrastructure side (due to the China telecomunications restructuring), 2008 company revenues will be around $900m instead of the $1.035B, or $130m less than expected. Because of this, all of my projections for Q4 breakeven to slightly profitable is out the window and instead of around $420m or so will come in at $290m-$300m. Note that analysts are even more bearish at consensus of around $240m-250m.

Impact of China Telecom Restructuring and PAS - I asked Peter if this was a two quarter or longer event and he responded that it should not be. Fran wanted to add that we should not extrapolate the sharp PAS handset declines (aside from normal declines) into 2009. On the earnings conference call, Barton made it a point to highlight PAS infrastructure has a longer contract period and subject to less fluctuations. For 2008, Barton mentioned PAS infrastructure is about $210m and handsets at $155m (about $20m or so of CDMA/GSM handsets sold in China are also lumped in this figure). For historical context and thinking about PAS impact in the future, those numbers are signficantly lower than the peak number of over $2b a few years ago but still represent about 1/3 the total company revenues for 2008.

Strong bookings growth in 2009 - Management will give more information on the 2009 financial model in the Q3 earnings call but did say that bookings growth for 2009 will be a very healthy 25 to 50%. I suggested that it might boost investor confidence to give more information on backlog/deferred revenue. While some of the contracts are multi-year, it would be nice to get information like when they reported having only booked $60m out of the $240m in iptv contracts a few quarters ago. Fran mentioned they will try to work on that part.

2009 Revenues - As mentioned, management will give more details about this in the Q3 call but other shareholders got indications the company is comfortable with high double digit revenue growth and one of the two analysts who downgraded UT has a $1.2B revenue target (per yahoo). That would indicate potential 2009 revenues in the $1.1 to $1.2B range. While not great considering that 2008 was projected to have $1.035B already, it is very healthy considering 2008 is down to $900m and factoring in PAS declines. Keep in mind though that these are only estimates and we know what can happen to those. Also, one analyst only has a $947m revenue target.

Phase II of BSNL (India) Broadband contract - This contract will be in excess of $80m+ but will not have the 30% GMs that Barton discussed other India contracts yielded this year. Peter mentioned that the company "had" to take this contract after Phase I. He did indicate it will still be profitable. The company will use up around $60m to purchase hardware for this contract in Q3 since they want to execute this without a glitch. One my questions was regarding potential cash burn to build a facility in India (we had heard something related to this in 2007 when they were ramping India contracts). This was a concern I had but Peter mentioned that they already had a logistics center that would assemble the products shipped from China.

China building lease - While at it, I asked about any updates on leasing space in the China building. They are looking to sublease currently to smaller tenants to establish price but nothing material.

Q3 book to bill - Q3 revenue will be around $180m but the company already mentioned that the Phase II India BSNL broadband contract will be booked in Q3. The number will definitely be higher than 1.0 but now that the recognized revenue will be low (compared to Q2), it should be. More importantly, the Q3 and Q4 bookings should be very strong to show good growth for 2009 and beyond.

Share buy back/strategic options - With the frustrations of shareholders, you can imagine this was discussed a lot. Other shareholders who brought up the share buy back got the indication that management will look into it but they are more focused on building the business for the growth phase. I myself did not bring this up anymore but did bring up the strategic options. I generally feel the stock price is ridiculously low anyway. With all the issues the company had back in 2006, the company felt the stock ($6-7) was undervalued and decided to try to sell the company. At the peak of that study, the stock hit almost $11, with an enterprise value closer to $1b. Now that they have resolved most legacy issues, streamlined operations, built up cash, and won significant strateigc contracts, the enterprise value is around $100m+ or so (even adjusting for the cash flow losses in the 2nd half). Anyway, I just wanted to point that out since Blackmore and Barton are also board members. Other shareholders have indicated that management response has been it would not make sense to do it when the price is at $5, let alone $3+. For the record, I believe in much higher valuations myself but the board/management (which has more information than we do) has to continuously think about shareholder value/share price and what the market is saying to them. My conspiracy theory is that management wants a lower stock price just to price the employee options and after that, we are really all in the same boat.

CSBU - Blackmore mentioned this in the earnings conference call that parts or all can be monetized and other parts that don't will be rolled over to MMCBU and broadband. Some shareholders also verified the $30-40m in expense savings if this was sold and got more confidence it will be sold in the near term as the company is bent on driving expenses lower. In the Analyst day meeting, Peter also mentioned all the none-core businesses will be resolved by the end of the year. Also, they are winding down their expenses for legal costs and reorganization so my spider senses tell me it will be sold fairly quickly (before the end of Q3).

Credibility - No doubt the management team took a major hit on this one and shareholders suffered. You can either give in and say this is the same UTStarcom and ignore all the progress that has been made or say this is one mis-step out of 20 good (and some very good) things that have happened (remember the non-dilutive resolution of the convertible bond, all the filings, sale of investements/assets, all contract wins, cost cuts, communication with the investing community, etc). I for one think that management is doing a fairly good job and have been defending the company/stock this last couple of days.

Cash flow for 2008 - The major bear point has been the company cannot make a profit and burns a lot of cash. The company got lucky with some investments and now have sold PCD to fund more cash burning. This is the same company that will push shareholders to their knees and shorts are right on the mark. One large institutional shareholder asked me on Thursday morning why I was not livid and that the company should be sold, blah blah blah. The way I look at the situation is based on the following. In 2006, the company actually generated $60m or so in positive cash flow while losing $1/share in the bottom line. In 2008, the company operations will lose $139m (without PCD, based on the Analyst day numbers) but guided to neutral cash flows for 2008 at the start of the year. Now that the cash flow loss is at $100m, every body is upset. Is this reasonable? Lets take a closer look. With part of the gemdale/infinera gains coming in Q1, the company was projecting neutral cash flows despite the operational losses. Out of the $100m in cash flow loss, $60m can be directly attributed to the hardware buildup for the Phase II BSNL contract. Part of it will be the loss of PCD gross profits for the 2nd half of the year (normally the strongest part of the year), and finally part of it is due to the 2008 revenue shortfall. After receiving all $240m from the PCD sale, the company should have about $465m. The $160m or so in cash flow losses will result in the company ending the year with about $305m. My previous projections taking into account PCD sale loss and positives from having the PCD cash was $386m. That is a difference of about $81m. $60m was for the buildup for the BSNL contract so essentially about $21m was due to the revenue shortfall. Is that commensurate with the recent price drop from the mid $5s less than a month ago? In the large scheme of things, is the short fall in the core businesses or will impact 2009 and beyond? Are people buying the stock based on the cash?

2009 cash flows - Currently, one of the analysts has a 47 cent operational loss in 2009 or say $58m. Cash flow can fluctuate a lot from the P/L but as we've seen in 2006, it could be positive despite operational losses. In Q3 2008 alone, the company will spend $60m that will become receivables in 2009. In Q4 2008, the company will have smaller losses (due to higher revenue and lower expenses than in Q3) so part of the $50m cash flow losses will be a benefit to the payables/receivables category. So, for those trying to extrapolate major cash flow losses into 2009, I just do not see it. With a potential sale of the CSBU and its corresponding expense reduction, that would further bolster the $305m in cash on hand. Add to that minimal interest payments, increased interest on their cash, continued benefit of yuan rising, and cash should be very solid. They SHOULD generate cash in 2009.

2010 and assets - With bookings growth in 2009 in the order of 25-50%, margin improvements, ramp of iptv in China/worldwide and further expense cuts, 2010 should be solidly in the black operationally. Cash position that could grow in 2009 (due to sale of CSBU and other things I just highlighted could also be boosted by up to $50m by the end of 2010). Add in the $30m in restricted funds, $25m in other long term investments, and their buildings $180-220m), and... This really reminds me of the situation with Apple computer where it went down from $60 in 2000 to $12 in 2002 (trading at cash/assets) and now at $340 (split adjusted).

Summary - As a long term shareholder with this company (I am a trader on other companies), I have to look at the entire situation. Everyone has their own position and if they want to sell, I tell them to go ahead. I personally have added and built my position (not all the way yet to what I want but over 70k now) and am hurting looking at the paper losses. The way I look at it, the stock will be much higher in a year or two and that anything in the $5 level is a no brainer.

I will still post a weekly recap but felt I needed to do a post "earnings recap" because of the additional information the last couple of days. Its really brutal right now but am even more confident that this has a bright future for shareholders. Have a great weekend. (BTW, there were over 350 hits in the blog on Thursday alone, it was down to about 20-30 recently - lots of interest with this company :-)

Wednesday, August 6, 2008

Q2 2008 Earnings Recap

The company reported Q2 2008 "Earnings" today and provided guidance/information on Q3 and Q4. Only Peter Blackmore and Fran Barton hosted the call. In summary, Q2 provided upside on revenue, opex, and cash flow. However, this will impact Q3 pretty hard. Q4 should have very strong revenue and will probably show a profit (per my calculation) but negative cash flows will also impact Q4 hard as the company pours money into their growth plans.

Q2 revenue came in at $633m with $449m in PCD sales. OPEX was down to $113m. Cash usage was expected to be negative $97m came in at $37m. Cash at the end of Q2 was $255m with only $29m in debt for a net cash position of $226m. This does not include the $240m from the PCD sale ($216m received immediately and $24m in escrow). The company could also receive up to $50m more at the end of 2010 depending on the performance of the PCD.

CSBU - While the PCD and MSBU were divested, Blackmore mentioned that parts of the CSBU will be monetized and part will be rolled into the broadband and MMCBU. This will result in further opex savings.

BSNL IPTV - The company continued their stanglehold in the India market by winning BSNL (through Aksh) that will result in deployments in 20 Indian cities almost immediately. This is not a huge revenue generator now but a very key strategic win.

China Telecom restructuring - This continues to impact UT as PAS handset revenue/GMs go down. In the mid to longer term, Blackmore commented the restructuring will definitely help the company.

IPTV update - Total live subscribers as of June 30 has reached 956k with 62% of the China market (twice the nearest competitor).

Tiscali - Acceptance was received.

Brasil Telecom - UT finalizing arranements for one of the first fixed mobile convergence (FMC) solutions in the world.

Interactive advertising - As mentioned previously in a PR, UT system will be deployed in 14 cities with 3600 concurrent streams.

Broadband - Phase 1 of the large Indian broadband contract has gone through 100% validation and in now in acceptance phase. Advance purchase order for phase 2 of the contract will result in a greater than $80m contract for UT that will be booked in Q3.

GEPON - Wins in 5 cities with CT/CN shows some traction with GEPON.

Transport (Packet) Network Product - Discussed in the analyst day meeting, this product has achieved some milestone testing with various carriers.

Barton discussed the numbers for each business units.

Broadband - $36m from $38m. GMs were only 5% due to a $7m charge from foreign currency fluctuations in India. Without this, GMs would be 25%. Barton added that he is confident all other India contracts booked are profitable with margins in the 30%.

MMCBU - 17% growth from $63m to $74m. Growth in China iptv and NGN softswich more than made up for PAS infra. GMs fell to 39% from 44% due to higher mix of STB.

PCD - Revenue went from $358m to $449m with a 8.1% GM! That should help in the cummulative performance in the 3 years that will determine how much more of the $50m the company can get.

Handset business - Declined from $62m to $50m with GMs going from 36% to 14%. In the future, the internal design PCD part of the PCD (designed in Korea) will be lumped into this business unit.

Services - Increased from $11m to $16m with GMs increasing from 1% to 30%.

Other BU - This includes CSBU and MSBU. This increase from $6m to $9m.

Book to Bill - The book to bill excluding PCD was 1.0. This was projected to be around 1.5 but based on a much lower projected non-PCD revenue. Previously, the projected non-PCD revenue was $125m (mid pt) so it would be around $180m in bookings. The bookings actually came in at around $211m.

Q3 guidance - Guidance for Q3 is $170-190m in revenue with 25% GMs. OPEX will be above $100m (still includes some divestiture expenses).

Q4 remaining revenue - I had previously signficantly overestimated the internal handset division revenue, which actually works out better since more revenue is left for the remaining quarters. The company provided a breakdown of the internal PCD revenues as follows. Q1 had $586m in total revenue with $431m in PCD revs. There was only $35m in internal PCD revenue (not the over $100m I assumed). That makes the core + internal PCD revenue at $190m. For Q2, core revenue came in at $184m ($633m total - $449m PCD). Adding back the $56m in internal PCD revenue yields a revenue of $240m for Q2. For Q3, the company is projecting $180m (mid pt). So, Q4 should still have about $405m in revenue ($1.035b 2008 revenue in the analyst day meeting - $190m - $240m - $180m - $20m less revenue in internal PCD that was guided). At a 25% GMs and OPEX of say $95m, that would leave Q4 with a sligh profit.

Negative cash flows - The company started the year guiding for neutral cash flows. With aggresive collections in Q1 to prepare for the repayment of the CB and money from Gemdale/infinera (partially in Q1), the company had positive cash flow of $97m after Q1 despite the operating loss. Add Q2 loss of $37m in cash flow and the company still had $60m in positive cash flow. Q3 will see a huge $110m cash flow loss due to Q3 losses, prepartion for India contract, and Q4/2009 revenue ramp. Q4 which will be slightly profitable (by my calc) will also have negative $50m in cash flow that will result in the company having a negative $100m in cash flow for the year. Part of the additional cash flow loss was expected due to the sale of the PCD which generated $80m in operating profit, with a good part of it in the 2nd half. I would expect negative cash flows as well due to the huge operating losses but the neutral guidance for cash flow led me to believe that would come mostly from the Gemdale/infinera gains and inventory reduction. Barton explained Q3 cash flow losses fairly well and is reasonable if they are buying raw materials/etc for the big Q4 revenue. I am a surprised with the Q4 cash flow losses because the quarter should be slightly profitable. I will try to get more information on this as soon as possible.

Overall, I was happy with the Q2 bookings, strategic wins (specially the phase 2 $80m+ contract), and huge cash base. However, the huge cash drain in the second half is a disappointment specially since those are particularly strong quarters for the remaining business units. I was also disappointed by the Q&A portion, which didn't touch on the important aspects of the cash drain. One of the analysts from Baird was more concerned about iptv STB (probably with their coverage of Sigma Designs and not UT). Blackmore did mention he will provide more guidance in Q3 regarding 2009. Bookings in Q3 and Q4 have to be really strong to validate their growth strategy. The company will still end the year with over $300m+ in cash and I would hope that spending all the cash in Q3 and Q4 will set up for a strong 2009. We will see......

Tuesday, August 5, 2008

Earnings Preview

There are only two analysts listed in Yahoo that provide estimates for the company and today, the numbers were updated for one analyst that reflected the sale of the PCD. I will focus on Q3 estimates rather than Q2 numbers (that included the PCD). For Q3, the revenue estimate is a low of $215.8m and a high of $259.5m for an average of $237.6m.

By using the analyst day numbers of $1.035b in 2008 revenues ($755m core + $280m internal handset) and backing out Q1 & Q2 core and internal handset revenue, I estimate there are about $600m more in revenues to be recognized in Q3 & Q4. The estimates for Q3 suggest that more of that revenue will be recognized in Q4. The estimated loss of 29 cents also makes sense with the revenue estimates.

The potential negatives for the call tomorrow include:

1. Continued loss in Q3.
2. Guidance that is lower than consensus or the low of the estimates
3. Slow down in iptv implementation
4. Higher OPEX than $95m
5. Any write downs

The potential positives include:

1. Guidance that is higher than consensus
2. Good book to bill (previous guidance of 1.5 on the non-pcd)
3. Higher shareholder equity/book value due to sale of PCD/MSBU
4. New contract win announcements
5. Use of excess cash for share buy back or a special dividend

From the lists above, guidance for Q3 is going to be key in the short term. Q2 could come in better than expected and less revenue could be left for Q3/Q4. The range from $215m to $259m for Q3 is a wide range with only two analysts.

Overall, I am more bullish than bearish going into the call only because the Q3 revenue estimates don't seem too high and Q3 will include July and August that should see an uptick in China iptv/pas due to the olympics. If Q3 guidance is even lower than $237m, then there will be about $360m or more in revenue for Q4. That would yield a profitable Q4.

Another interesting number from today's updated estimates is the 2009 revenue estimates. The two estimates are for revenue of $1.2b and $1.29b. If 2008 revenue comes in at $1.035b, that would be revenue increases of 16% and 25% respectively and taking into account PAS. Looking at the 2nd half of 2008 numbers and 2009 makes me wish that the company still had the PCD profits! On the other hand, its nice to see that the company is more transparent at this stage and the focus is on the core business.

The recent price action has not been very encouraging but the company's execution over the last year has set the stage for much better performance the rest of 2008 and beyond.

Saturday, August 2, 2008

Weekly recap - Deteriorating technicals

The stock closed the week at $4.78, down 31 cents or 6%. The overall market was volatile as the DOW started the week down 200+, then ramped up 400+ and then ended the week overall slightly lower. The Nasdaq did a little better ending up for the week. Here are the UT related news from the past week and a preview of the upcoming week.

Settlement with Ying Wu - The final seperation agreement with Wu included an additional $100k payment and resolution on Wu's company car in China (he will pay $65k and keep the car-wonder what car he is driving?).

Nortel, Motorola and Sun Microsystems earnings - Some larger technology companies on the 5+ year or more turnaround plan had their earnings last week. While each company is different, I wanted to get an idea of the market environment (both business wise and the street reactions). As you can imagine, even the turnaround takes a long time and all three companies are still struggling to get their costs in line and their revenues/margins to grow. Investor/street reaction was as expected swift, rewarding Motorola and punishing Nortel and Sun.

UT Earnings Date - The date was finally announced last Thursday and the earnings call will be Wednesday, next week after hours. The time is actually early compared to previous quarters where they would wait until mid to end of the month the month after the quarter closes.

Earnings Preview - Guidance to Q2 was given but as I mentioned that was confusing. In a previous post, I write..."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." Expenses were also projected to be in the $120m+ range. Worse, cash flow will be negative $100m or so reversing last quarter's $90m+ in take. With the sale of the PCD and the previous guidance, I think the the street will focus more on the Q3 guidance and second half performance. Cash flows should be neutral as guided by Barton at the start of the year and reiterated throughout this year. By my calculation in a previous post (see July 4th weekend posts for all t he numbers/posts), the company should end the year with close to $386m in cash. Here is what I wrote previously for Q3 & Q4.

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. 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.

So, Q3 and Q4 performance should be decent with the backended core revenues. However, the more important thing will be bookings and revenue growth for 2009. Compared to the three companies I mentioned above, UT has signficant growth potentials and that drives my investment thesis on it (of course, its been that way for years :-)

Technicals - Unfortunately, the stock has broken down in the last week+. The 50 day moving average is $5.31. While there may be some support in the mid $4s (see July 4th week where it quickly bounced back), the next major support is the 200 day moving average, which is about $3.84 (from yahoo). While I am very bullish on the company/stock long term, I am cognizant of the technicals and what this market can do. There is still a huge short position and for the most part shorts have been right on with this market and UT.

Have a good weekend to everyone and good luck to UT and all shareholders on earnings week!