Saturday, May 30, 2009


During downturns, the strong get stronger and the weak die off. UTs downturn has unfortunately culminated during the worse recession in decades. Peter Blackmore was brought in to buy the company some time, cut the fat and make the company a world-class operating company. Unfortunately, you also need to have a certain base revenue to build off from but instead, their cash cows from previous years (PAS, handsets, and Japan) have run out. The company continues to put a good spin on the viability of the business showing an upturn in core demand (from basically a very low base), strong cash position (from asset sales mainly), and their technology range of their products. However, to be a viable company, you will ultimately need to be profitable and have stable/growing revenues. More importantly, you need to have a strong leadership team/BOD in place that is compatible with the company's base of operations. UT does not. As I've said, I invested in the company because of its potential a few years ago to grow as China grew and more recently due to valuation and their "potential" rewards the technology could bring.

During the last couple of months, I have reversed my position from believing the company can become profitable and then selling itself to just selling itself as the best alternative to enhance shareholder value. The actions (or non-actions) by the board/management over the last couple of years and more recent business prospects have led to this conclussion, which is basically supported by the markets. This has not been an easy change for a lot of shareholders but we need to face reality and the opportunities the next few years may bring.

UT is making significant changes to their operations but at this late stage, it shows once again how behind the curve they are. Time and time again, they do not show the same level of urgency that shareholders or what the market/business situation dictates. The recent rumors of a sale of the entire company or parts of it may have finally been caused by the cost cuts the company has tried to implement. Chinese employees may have reached their breaking point as to seeing the highly compensated Western counterparts drain money from China and seeing how well the other Chinese competitors have done. Whatever the reason, I think the Western management/board have come to the realization that this is an unbearable situation for everyone.

Everywhere you look, companies in distress or disappointed with their stock price are making significant moves to position their company for the future. The wave of capital buildup has been unprecedented, from REITs such as Simon Property/Pro Logis doing secondaries, biotech company Elan selling part of itself to Bristol Myers, to Time Warner finally breaking off from AOL, and of course the financial/auto industry. Companies either grow or die off and unfortunately for UT, its the later.

The number of potential suitors for UT including Cisco, Juniper, Ericsson, Chinese or Indian companies are endless. The challenges UT faces to get to profitability are also endless. Shareholder patience is gone. Assets are intact for re-distribution to stronger entities. Confidence in UT business, management/board is very low and capital markets are shut off (basically). There is no other good reason to keep this entity going except for the benefit of a few people, which I can guarantee will have a tough time getting re-elected if nothing significant happens that benefit shareholders AND remaining employees.

Have a good weekend.

Thursday, May 28, 2009


The rumor of Cisco buying UT has been around for years. Recently, Techbroker (a shareholder who has been following UT for a while and who diligently scans the Chinese news regarding UT) posted the following link regarding a potential Cisco acquisition of UT.

Lets look at the reasons Cisco may acquire UT.

1. Previous working relationships - UTs Alameda office is near Cisco's home campus as well.

2. India - Cisco's CTO is Indian (also known as a visionary herself) and Cisco has made announcements year after year of their investments in India (a couple of billion on one article). Furthermore, the Indian government has security issues with working with Chinese companies so Cisco would be a more ideal acquirer.

3. Acquisition/Expansion - Cisco's acquisition of Scientific Atlanta for $6.9b, Linksys, Pure Digital shows they are willing to spend money to get closer to the consumer/home entertainment space. Pure Digital was bought for $590m.

4. Handsets - UT still has the handset capabilities and relationship with PCD. If Cisco wants to get into the handset space (they did have the "iphone" trademark), this would be a cheap way for Cisco to experiment and build a Cisco phone.

5. Telepresence - Cisco is into the video conferencing space and UT technology would compliment their products.

6. Networking - Again, UT/Cisco ip based products should be complementary and Cisco is looking to expand into new markets.

7. Tax losses - Cisco would be able to take advantage of UT losses in the US and overseas.

8. PSDN - UT announced winning 40% of the tender beating Cisco/Starent. The Starent lawsuit may be of value to Cisco as well. Blackmore and UT have a tendency to build up businesses for a potential sale (back in 2007 with the articles of how iptv was progressing, the Chinese profits, and lately with PCD and just recently the core business doing well).

9. China foothold - What a tremendous acquisition to pick up the iptv assets/contracts in China as well as the Hangzhou building and Chinese employees (with US-backed R&D based on Ying Wu's template from Bell Labs (Lucent))!

10. FMC/Wifi - Again these technologies may complement the Linksys division from Cisco (sorry, not a techy so others can explain the tech better).

11. IPTV - The crown jewel of UT can be bought for pennies on the dollar that UT invested in it.


UT has $2.4 in cash/$3.2 bookvalue but I think the above list makes it much more valuable to a Cisco. I think Cisco can offer $7/share with no problem at all. Thats only $600m in net cash which is nothing for Cisco. It may be difficult to imagine UT getting that premium but not if they were a private company right now. Why is Face Book worth $10B with $300m in revenues (if that) and losing money? Cisco has 5.77Billion outstanding shares. If Cisco offers 0.4 Cisco shares for every UT share, that would be only 50m Cisco shares (less if part of the offer is UTs cash).

In early 2007, UT was trading at $10 and the potential acquirers wanted only the core assets and UT balked. UT has continued developing their core assets and has gotten rid of non-core assets. Imagine going to other countries with a Cisco IPTV system. Thats credible and could go up against Microsoft. It makes too much sense for both sides. I think the question is when and how much.....

Have a good evening.

PS. For the last week or so, I have had little or no Chinese visitors to the blog...It could be the company is now blocking internet access and it is very tight lipped right now.

Saturday, May 23, 2009

Potential company announcements

The company has built up certain expectations by announcing it will provide additional steps it would take to accelerate the timeline to profitability at the end of the month (next week). Here are a few items that the company could discuss, some of which are from shareholder "wish lists".

Discarding the rest of the handset division - The company has been touting iptv, ngn, and broadband as their future. However, the bulk of their revenues has been from PAS (infra/handsets) and PCD (resale/Korean design/CDMA in China). The company is winding the Korean handset operations and selling remaining inventory. The company has been enamored with handsets for years now and are planning to replace PAS handset sales with CDMA sales in China. However, is this a good idea? Their Hangzhou building was supposed to be used for manufacturing 10s of millions of handsets. The problem now is that competition is very stiff and margins are tight in the handset market. Bidders for handset tenders are more than 10 suppliers so the previous PAS handet success cannot be translated here. We've seen how little gross profits are in handsets and the inventory/working capital headaches. As a side note, here is an article regarding ZTE and their US expansion. ZTE has a solid base of revenues/profits and can "experiment" with new markets. UT cannot afford these anymore. The article highlights the previously mentioned $15b line of credit and ZTEs climb into the elite companies.

Move the rest of US operations to China - There was a time when UT was planning to expand in North America via PCD and selling networking gear to their handset customers but this clearly did not work out. The move to China has started and they should move the rest as soon as possible. The lease committments should also be winding down on properties and the accounting expense (just to outside firm was $11.5m) is too much. A lot more savings can be squeezed out and efficiency will be improved by moving operations to where customers are.

Starent negotiations/Sale of PSDN - The litigation with Starent that has been dragging on for years seems like it might be resolved via the courts early next year (according to Starent). Both sides obviously state they have a good case but both sides are spending money in legal fees and uncertainties (mostly for Starent) don't help either company. UT has recently announced some wins in PSDN in China (grabbing 40% of the last tender beating out Cisco/Starent). Starent is valued at $1.4B and wants to expand into China. It makes sense for a settlement and even for Starent to buy UTs PSDN assets or atleast forge a partnership that will save both companies development/marketing costs and help each other in various markets.

Monetizing the Hangzhou building - A lot of the operational decisions obviously impact this building. UT is using the building as collateral for credit lines and as an asset to transfer their cash out of China (see my previous posting). However, the company can do more by seeking out a buyer and leasing back the part of the building they can use. If UT unloads the handset part of the business to a local Chinese manufacturer, they could also lease out the building/equipment.

Executive/Board changes/being "more Chinese" - The company desparately needs a major change in the makeup of the board and the leadership team. How many companies that primarily get their revenues from China have a non-Chinese board/leadership team? The compensation of individual board members are MORE than a lot of Chinese CEO's that have larger revenue/market caps than UT. The company has to announce steps that show they can compete with other Chinese companies in China.

Listing in Shanghai/Hong Kong markets - A US listing doesn't bring the company additional capital and costs the company in expenses. They need to be able to tap the Chinese markets for a source of capital and get Chinese institutional investors. This in turn will bring added influence in the Chinese markets.

Investing in China - For the hundreds of millions spent over the years in R&D/overseas expansion, we don't hear the company buying startups and smaller companies in China. The company's main investment success was Gemdale, a real estate company in China. The company should use their presence in China to buy startups over the years and integrate them into the company rather than more expansion overseas and internal spending. The China markets went up from 1k to 6k level and UT did not fully participate (in fact selling off an early investment in Softbank that yielded Alibaba, which I think Tigre estimated at half a billion).

The above is just a sampling that I came up with and some of the more technical shareholders can probably add more but the bottom line is the company needs to do something significant. The performance the last few years is beyond shame at this point. As I've mentioned previously, the board should have been completely turned over by now but the same (#@%#$$@) are still in place (pardon the jamming of the keys).

I'll end this posting by again reminding people to vote their shares against the company backed proposals and have a good Memorial Day weekend to everyone.

Sunday, May 17, 2009

Company info and future steps

At the end of the month, the company will provide information regarding "accelerating" the timeline to profitability which the company has recently stated to be "sometime" in 2010. The current opex target is for around $60m/quarter by the end of 2009. Presumably, this information might involve cost cuts, restructuring, outsourcing and maybe closing certain operations. I wanted to check some figures in the 2008 yearly 10-K and gain some additional insights into the company. There is only one official analyst following the company now and little institutional interest in the company. The operational performance has (not surprisingly) depressed the stock but even with the latest "surge" and decrease in tangible book value, the shares still only trade for half book.

1. Cash in China - "At December 31, 2008 we had cash and cash equivalents of $309.6 million, of which $200.8 million was held by our subsidiaries in China. The amount of cash available for transfer from the China subsidiaries for use by our non-China subsidiaries is limited both by the liquidity needs of the subsidiaries in China and by Chinese-government mandated limitations including currency exchange controls on transfers of funds outside of China." "As a result of these and other restrictions under PRC laws and regulations, our China subsidiaries are restricted in their ability to transfer a portion of their net assets to the U.S. parent; such restricted portion amounted to approximately $186.1 million, or 40% of our total consolidated net assets as of December 31, 2008. We believe we have sufficient non-cash assets available to meet the above reserved net assets in China restriction; such that none of our cash balances are legally restricted from transfer."

The restrictions in transferring cash out of China has always been a point of contention but it is clear that they have enough non-cash assets that pulling cash out of China is not a major issue. Moving part of their US operations back to China will reduce capital needs outside of China as well.

2. Credit Lines - At December 31, 2008, we had approximately $219.0 million available for future borrowings on this China credit facility, of which an aggregate of $146.6 million remained available for general working capital purposes and $72.4 million remained available in support of letters of credit and corporate guarantees. This China line of credit expires in the third quarter of 2009. In January 2009, we entered into a second credit facility in China for an additional $58.5 million of available credit which expires in December 2009.

The credit facility in China is supported partially by the Hangzhou facility but its also clear they have a good chunk of credit facility within China.

3. China Piggy Bank - Our China subsidiaries paid an aggregate $150 million in dividends to our U.S. parent company during the year ended December 31, 2007 and another $100 million in February 2008. While these cash transfers are offset and eliminated in preparing our consolidated cash flow statements, they have been a principal source of funding of our non-China operations during the periods in which they were made. In February 2009, our China subsidiaries paid an additional $50 million in dividends to our U.S. parent company, and additional cash dividends from our China based subsidiaries to the U.S. parent company may be necessary to fund our non-China cash requirements in 2009.

Pulling an additional $50m in February seems like a lot. Cash usage in Q1 was only $12m.

4. Global Footprint - The headquarters for our China operations are located in Hangzhou. In 2001, we purchased the rights to use 49 acres of land located in Zhejiang Science and Technology Industry Garden of Hangzhou Hi-tech Industry Development Zone and have built a 2.7 million square foot facility on this site. The facility was occupied in October 2004 and is used for manufacturing operations, research and development and administrative offices. At the end of 2008, approximately two-thirds of the facility was being utilized.
We lease approximately 0.8 million square feet of property, of which 0.4 million square feet are properties in China and 0.2 million square feet are properties in North America. We maintain 31 sales and customer support offices in 21 countries covering the United States, Canada, Latin America, the Caribbean, Europe, the Middle East, India, and the Asia-Pacific region. We lease sales offices in 28 locations in China.

The global expansion and operations in the US has been a cash drain to the company and has not produced the desired revenue ramp. The company may announce further reductions in the US and other countries outside of China.

5. Japan Revenues/Non-China/US Revenues - Japan revenues were down again in 2008 from 70+m to $40.6m. The non-China/non-US/non-Japan revenues is $160.9m.

Japan has been a major disappointment, specially with Softbank as a major shareholder. From $400m+ in revenue to $40.6m ($38.3m from Softbank). The $160.9m revenue in other countries does not justify the investments there and the lost focus in China. The company has had enough time to decide which countries they will continue to invest in and which to abandon. Blackmore from the start talked about each business unit being profitable and/or cash flow positive. He needs to make additional tough choices when things don't pan out.

6. Carry Loss - As of December 31, 2008, the Company's U.S. federal net operating loss carryforwards were $213.8 million and expire in varying amounts between 2025 and 2028. As of December 31, 2008, state net operating loss carryforwards were $138.0 million and expire in varying amounts between 2010 and 2028. As of December 31, 2008, the Company also had net operating loss carryforwards ("NOLs") in China of approximately $217.2 million. The China net operating loss carryforwards will expire in varying amounts between 2010 and 2013. As of December 31, 2008, the Company had NOLs in countries other than the U.S. and China. These NOLs are approximately $87.2 million. The majority of the NOLs do not expire and can be carried forward indefinitely.

Even in China, the loss is significant. Depending on a particular country's tax laws, acquiring UT could provide some tax incentive but not as significant as had been discussed because of the breakdown in each country.

7. Hanghzhou Facility Valuation - Using the income capitalization approach, we determined the estimated fair value of the facility and related improvements at December 31, 2008 to be approximately $183.2 million, which exceeded its net book value by approximately $15.8 million. As a result, we concluded the headquarters for our China operations was not impaired.

The company has used the facility for its credit lines but this is still a huge asset to hold considering its value compared to the current market cap of the company.

8. Leased Space - Total (in millions) $ 19,245; Less than 1 year $ 10,854; 1-3 years $ 6,422; 3-5 years $ 1,969.

Moving operations fully to China will further reduce the expenses.

9. Accounts Receivable - 39% of receivable was from PCD at the end of the year.

This has come down since they took in about $40m from Q1. As they wind down operations in Q2, this will further simplify the balance sheet. Writing down assets and simplifying operations increases the odds of an outright sale of the company.

10. Accounting Firm Yearly Cost - $11.5m for the last couple of years.

I voted against renewing the accounting firm. At the very least, they should negotiate a lower price for fees. Spending $11.5m/year for the last two years is significant specially with the much lower revenue base and market cap. This is another reason why UTs expenses are out of line with revenues compared to other companies. The company has mentioned legal expenses, accounting expenses, etc as areas where they can further reduce cost but it this is a yearly event for the last 4 years. As a shareholder, I am blown away with their expenses compared to the performance. Being a US investor, I am used to high compensation for executives and general costs but I would also like to see performance.

Overall Commentary:

The information above shows the massive resources the company had/has. It definitely is not a startup and shows the company never really developed a sustainable/profitable business plan. The company was given a huge windfall with PAS success and early capital from US markets but has squandered a lot of it. From the above, it seems clear they have much more costs they can cut but have ample liquidity to execute it (scary in itself). The company definitely has positives (or else none of us would still be interested in it) and is in a "unique" position as Blackmore puts it. While it seems long overdue that the company get ahead of the curve, their resources show why there is no sense of urgency. The sense of urgency has to come from investors fed up with the performance of the stock. Lu has basically led the company in the good times but clearly cannot lead the turnaround. Blackmore is a competent executive but may not be a good fit for the long term. The board ....well..

I voted against Hong Lu/Jeff Clarke. Your broker should send you information via mail/email to vote. Shareholders have until June 25, the day of the shareholder meeting (or a day before to be exact). I continue to believe in the valuation being that it is half book. The company hopefully will be serious in getting to profitability but we never know. The revenues for PAS/Japan are low but still material so there is possible further downside. Expense cuts clearly need to be lowered and maybe an outright move to China will be announced. Sale of certain technology/businesses need to be considered although it seems a lot is inter-related. Also, the market cap is low so the acquirer will probably want the entire company at this stage and it makes sense now that the balance sheet/operations are much cleaner.

The above points are good to keep in mind as things are announced and there is further discussion in the message boards.

Have a good week everyone.

Saturday, May 9, 2009

Q1 2009 Earnings Call

Revenues and earnings missed already lowered guidance for Q1. The book to bill was 1.2 on core products but what does that consist of and what is the overall dollar amount?

Here are a sampling of words used in the call...successful, pleased, ahead of internal expectations, continued progress, as expected, significant step, highlights, strong demand, strong position.

Then the reality of "actual and real" charges and losses sets in and instead of providing guidance for Q2 and the rest of the year, Peter mentions that there will be a call at the end of the month to discuss initiatives. Peter states that they had initially targetted ending the year with an opex run rate of $60m/quarter and be profitable "sometime" in 2010. But I guess that wasn't good enough with management, the board, and surprise ....investors. They are "evaluating" initiatives to "accelerate" the above.

Peter made a few key points around this announcement of evaluating initiatives:

1. Demand for key products in China/India continue to be good. (I KNOW I've heard that somewhere before)
2. This demand is consistent with internal projections as shown in the Q1 bookings and Q2 is tracking accordingly. (Very frightening if the bookings are so low dollar amount and it is tracking or above their projections)
3. Expense reductions "well ahead of time frame" (Again, sounds good if the time frame is 2005!)
4. The above gives them confidence in executing on the new initiatives to be announced (maybe the initiatives are like their bonus metrics that they can scale them with a broken foot)
5. Cash levels of $301m (and not a peep of a buyback.....amazing)

EVEN for this company, the call was bizarre and we've seen a lot during the last 4 years!

Other fun facts. The company added a monster 50k iptv subscribers to get to 1.32m subscribers and Taiwan just went live in April 2009. Great...wait..Is that the same contract announced in December .......of 2007! There were also "recycled" contracts from Yemen, Philippines, cable iptv, digital signage (4.8k units....thats 4800 and not 4.8m or 480k but 4.8k units....m or k, its just fine print).

Anyway, the $301m in cash + another $10m coming from the PCD escrow may be "enough" of a buffer for the rest of the year.....maybe.

I'm hoping that this soap opera ends with a buyout and soon. The insiders have a ton of options/shares and their golden parachutes. Does Lu really want to be voted out and face shareholders this June? Maybe all their experience selling non-core assets and the entire company back in 2006/2007 have someone saying how much for the rest of the company now? Didn't the board give as a reason that buyers in 2006/2007 only wanted the "core" buisiness? If that was attractive then, well at $1.64, maybe they are more attractive.

BTW, spending $11m (thats in American dollars) a year for accounting is reasonable (maybe for a $1b company and not a $200m company!)....NOT.

Ok, so the soap opera continues and another event is scheduled at the end of the month. I hope Lu can get more support than the boards 7m shares and Softbanks 14m. For his sake, because thats nowhere close to being elected -- unless of course, the $11m in fees the accounting firm is getting has a little part for ballot tallying :-) (BTW, I wonder how Peter is voting?.....maybe Peter should vote with us shareholders unless he wants to be voted out next Lu)

Seriously, the operational route is getting to the end of the line and the best way to extract shareholder value is by calling Goldman and saying get what you can (if you haven't figured it out by now, GS is very good in deals :-) ($13b extracted from the insolvent AIG via tax payers..nice)(Advise/suggestion to company....get Goldman on your side - give them whatever they want. Rename your company UTStracom-Goldman or better yet GoldmanStarcom or maybe just Goldman-networking....

Finally, I am a UT shareholder and I hope to get your voting against Hong Lu.

Have a good weekend.

Thursday, May 7, 2009

Imminent Sale of the Company?

Got off the phone from a major shareholder and his take is the company may finally be for sale.

There are many many reasons why the company is worth more being sold than the company can operationally work itself to at this stage. Peter, the leadership/BOD in Alameda are not really suited to fight it out in China/India and elsewhere. They all still have significant share holdings that would make it worth it for them to sell (even at $5-6. That sale price now compared to 2007 is equivalent to $10 or more in terms of the overall stock markets so its not the worse end result for shareholders.)

The other probabilities. Business is even WORSE than it really is and they have to cut more. So, they will drop another revenue bomb to go along with the cuts.

Another possibility is really to accelerate profitability. Although this is the context/reason for the wait, it seems odd. Is Peter, at his age, willing to fight it out a few more years traveling to China once a month and risking not even getting what they can at this stage? A lot of their compensation is in stock so even with their salary, it makes sense.

On the buyers side, you have Huawei with $30b in revenue so I guess they HAVE to expand. UT building would be valuable to Huawei and ZTE. Patents that they have can be used as leverage against Western competitors and would be very valuable. Ericsson has a yearly R&D of $5B. Cisco is investing a ton in China/India. Even Starent has a $1.4B market cap and R&D in the $30+m/quarter. They NEED to diversify out of North America.

A week or two ago, there was also about 300 hits on the blog mostly from China. That never happens. Maybe there are rumblings of a sale. More job cuts may not be palatable to the Chinese government and they would push for a purchase from ZTE/Huawei. Both have huge resources and could easily buy out UT.

Anyway, its speculation and while the company had internal issues in late 2006, it has resolved those issues and sold other non-core assets. The technology is still very good and the contracts/customers should be appealing to competitors. I posted a couple of years ago that ultimately UT would be sold but I was hoping for double digits. At this stage, with the intense competition, down world markets, and revenue ramp not occuring, this makes too much sense.

Saturday, May 2, 2009

Voting against Lu

Required Vote
Each director must be elected by a majority of the votes cast, meaning that the number of shares entitled to vote on the election of directors and represented in person or by proxy at the Annual Meeting casting their vote "FOR" a director must exceed the number of votes "AGAINST" a director. Abstention votes with respect to the election of directors will be counted for purposes of determining the presence or absence of a quorum at the Annual Meeting but will have no other legal effect upon election of directors. You may not cumulate your votes for the election of directors. If a nominee for director fails to receive the required number of votes for election, he or she is required to tender his or her resignation to the Board. In such a case, the Nominating and Corporate Governance Committee of the Board has the option of accepting or declining such resignation, considering any factors that the Committee deems relevant.


Given the performance of the company and the stock price, it is obvious that Hong Lu should not be re-elected. The fact that the current board is recommending his re-election is further proof that the entire board doesn't have "outside" shareholder's best interest and are determined to maintain the status quo of high management/board compensation and poor company/share price performance. Despite this clarity to remove Lu, it will be an uphill climb due to the number of shares the insiders hold. Softbank alone has about 15m shares. Nevertheless, I am hoping to rally "outside" shareholders to vote against Lu. I am hoping the new rule of majority votes will help. I am hoping that Wu, Huang, Barton, and other former executives may actually care about the share price and vote against Lu. I am hoping that the retail shareholder base that is more significant now and the current institutional holders are so fed up that they actually take some time to vote.

Last week, there was an unusually high amount of visits to the blog from China. I and all the long-term shareholders would be open to any suggestions coming from China to improve company performance and board/management accountability.

If you still own shares, this is one of the few outlets to have your voice heard. There are still a huge number of shares out there and I encourage all the shareholders to vote against the re-election of Lu.

Have a good weekend.