Sunday, July 6, 2008

Weekly recap - Stock pullback

The stock closed the shortened July 4th week at $4.6, down 95 cents or 17%. The week was highlighted by the sale of the Personal Communications Division (PCD). The markets continued to make new lows last week as oil made new highs nearing $150/barrel. News/highlights from the week include the following.

Divestiture of PCD - I covered the details in a previous blog post. In the larger picture, the divestiture means that profitability will be pushed back but liquidity improved significantly. Interestingly, this is one of the few cases that a $5+ stock gains $2/share in cash for a sale and then loses $1/share in the stock price. Overall, my feeling is that it is better that the company gets the sale out of the way now and can focus on sustainable profitability of the core businesses.

Cash generation - With the sale of the MSBU and the PCD, the company currently has over $400m in cash. Coupled with the cash position, UT will move forward the rest of the year with better Q3 and Q4 performances due to the backended core revenues being recognized. Also, it should generate cash from the cash (both from interest, receiving and not paying interest and even appreciation in the Yuan), ip patent licensing/sale (approximately $2m), and leasing the Hangzhou building. I also posted on the cash/asset base. CFO Fran Barton discussed previously that they should be able to do something "clever" with excess cash" if they have excess cash. We'll see.

Operating Expense (OPEX) - I posted a spreadsheet showing the historical opex ratios for the company and estimated ratios for the remaining quarters in 2008. In the last couple of years, I used 35 and 36% for the internal PCD revenues. These were unit volumes but I did not have dollar amounts. In any case, it shows that Blackmore's target metrics are still a ways off in yearly terms. Certain quarters like the upcoming Q3 and Q4 will be much better but it is not an indication of a trend because of the backended nature of the core revenue recognition. One thing that you cannot see from the raw figures is that the allocation of expenses is more focused as the non-core businesses are divested and "legacy" costs are being phased out. The core revenues are STILL declining which is not encouraging but bookings are turning around signficantly as well as the strategic wins we are seeing. The company discussed doubling their bets on fewer areas, which now has credibility due to the asset sales/strategic wins. Finally, the last major non-core business to be potentially divested is the Customs Solutions Business Unit (CSBU). From the last earnings call, Barton discussed OPEX on various non-core businesses. Here is a quote: "PCD varies around G&A of around let’s call it, $10 million a quarter. If that went that way that’s a number. If we looked at the IPCDMA business, I think it’s around $6 million or so per quarter. If we went that way, the custom’s business unit is probably, I don’t know, another $10 million a quarter or something like that. So those ranges, $6 to $10 for three different business units that are currently designated as non-core." Reading that again last night surprised me as I thought that business unit had revenues of only about $40m/year but was set to be profitable. I will try to clarify that from IR but it seems like signficiant expenses for that unit. Barton mentioned that by Q4, expenses should be under $110m (maybe in Q3 but surely in Q4 is how he has been phrasing it). Anyway, if you subtract the expenses from the MSBU, PCD, and CSBU, that could be under $85m/quarter? We will hear about the revenue ramp later this year but OPEX is definitely coming down (from about $135m/quarter) and liquidity is definitely fantastic.

GEPON - Shadowdoc99 posted on the growth of fibre in China (in particular). During the last year, Hong Lu has been in China stabilizing the situation with Wu's departure and drumming up business for broadband in particular. The latest update in the last earnings call from Lu: "Moving on to broadband, we’re very pleased to be beating and are breaking through in our GEPON business in China. For example, we’re working with the China Telecom for GEPON contracts in the Jiangsu, Zhejiang, and Fujian provinces. We’re also looking at the expansion contract with the China Telecom for gigabit EPON in Ningxia Province and are planning the trial with the Hunan Province and Jiangxi Province. With China Netcom, we are expanding our GEPON business in the Heilongjiang, Shandong and Hunan provinces. We are pursuing enterprise opportunity for gigabit EPON and have won a small, but important contract with China’s State Administration of Radio, Film and TV in the Vinan Province."

Thanks to Shadow for highlighting broadband in China. For some reason, my thoughts on GEPON was still back at the March 17 meeting when UT was still in the bidding process. I wrote then "As far as the other news of UT being shut out or not in the top suppliers for a recent gepon contract in China, management mentioned UT working to be a 3rd or 4th supplier. These are not big contracts and are usually divided among about four suppliers." Based on Lu's Q1 update and recent news that Shadow provided, there is tangible progress for UTs broadband and GEPON in China. Its funny that we as shareholders got excited about UT back in 2005 when they got a 5k subscriber iptv win in Shanghai and now with actual wins in GEPON and millions of lines being installed in China, this is not even front and center anymore. Even though, UT market share will not be as big in GEPON as in IPTV, UT will definitely gets it share of GEPON contracts due to its technology and the carriers wanting to diversify and give parts to various suppliers. Hong Lu again commented on the shareholder meeting that bottom line, fixed line carriers in China and worldwide are under siege with ARPUs going down and need to spend money to increase it.

BSNL iptv - I had a couple of back and forth posts with Shadow on whether the 4 India iptv wins included BSNL. I was fairly sure it did not because we had discussed it with management atleast on the March 17 meeting but I was concern since BSNL had been trialing and having various soft launches of iptv without UT officially announcing a contract win. So, this was one of my questions in the shareholder meeting. David King pointed out that they are working with Aksh as we know and that BSNL is working with Aksh. Here is a link that Shadow has provided.
I think its safe to assume that UT will win atleast part (if not all) of BSNL iptv going forward. The iptv ramp in India is definitely slow right now but strategically, UT has probably won 5 of 6 (Caskey mentioned another India win-probably BSNL was coming) and very well positioned to cross selling broadband, iptv, and ngn in India (which the company has pointed out many times). We should get news about this and maybe Hong Kong in the coming weeks/months.

BWS note - After the Analyst Day meeting, here was a note from BWS...

Q2 Earnings - During the call on the PCD sale, Barton mentioned the earnings call to be in a couple of weeks and Blackmore mentioned at the end of the month. That would be "early" compared to the previous earnings call from the past year. In any case, it is also interesting that some new analysts (one from GS) were calling in. Upcoming roadshows in the second half of this year show that UT management wants to tell their story.

I'll end the series of postings this July 4th weekend by looking back at the last year. Last year at this time, the company had just mentioned that nothing has resulted from the strategic study, they had fired Ying Wu, had just hired a new CEO, Lu had to go to China basically to stabilize the situation, had no timeframe for filing their delayed financials or results from the options investigations. Shareholders have yet to hear about the China investigations, more interest payments, and net cash dropping to $150m. The company would also be in the midst of about 6 quarters of burning $40-50m per quarter. The stock price then was $5-6. Fast forward to today. The company is one year in their turnaround, Blackmore has transitioned to the CEO spot, CB has been paid with no dilution, headcount has been slashed, SEC/China investigations are complete, material weakness and DOJ issues almost complete, iptv wins are quite impressive, ngn/broadband bookings doing very well, multiple divestitures and about $450m net cash in place. Current stock price $4.6.

The big negatives are profitability has not occurred and PAS is still in decline. PAS is becoming smaller and smaller but it is still in decline. The good thing is that distractions are out of the way and management has basically put growth front and center (while still cutting expenses and improving margins). Everything considered, the company is in a MUCH better position now. The stock may continue to go down (who knows in this crazy market) but I am just a little bullish this last week and going forward :-)

Have a good rest of the weekend to everyone.