Thursday, July 23, 2009

Chinese 3G Investment, IPTV phone, and Ericsson

China's 3G investment - "China's top three telecommunication operators, China Telecom, China Mobile and China Unicom, invested 80 billion yuan to boost the third-generation (3G) network so far this year, the Ministry of Industry and Information Technology said Wednesday." "The ministry expected the three operators would invest 170 billion yuan (24.87 billion U.S dollars) in 3G network construction this year. "

So far, subscriber numbers for 3G has been low. "According to the article, China's 3 mobile operators have targeted 50 million 3G subscribers by the end of this year. But since the issuance of 3G licenses in Jan 7 this year, subscribers of all kinds have not reached 3 m under the most optimistic estimate. Of that total, more than a million use 3G cards or 3G laptops. Among the handset users, .74m are on China Mobile's TD-SCDMA network by the end of May, including users acquired during early trials and during the Olympics last year when free give-aways and other promotions were in place. There are only .1+ m users on China Telecom's 3G service. China Unicom now aims for .2m users for its WCDMA service by the end of Oct. In stark contrast, the total population of mobile subs in China is 600m right now. Average monthly uptake in mobile subs in Q1 this year is 9.6m in China. Clearly, the initial growth of 3G has not lived up to market potential and expectation. "

The 3G handsets cost $300-450 so they are not cheap.

UT's mobile iptv- UTStarcom, Inc. (Nasdaq: UTSI) has been selected as the only technology supplier for the first Mobile Television (TV) system across Hainan province, driven by China Telecom's (NYSE: CHA) Hainan branch. This is the first large-scale Mobile TV system in China to adopt UTStarcom's end-to-end RollingStream(R) platform. The deployment is scheduled to go live on May 17, 2009, as an extension of the existing Internet Protocol Television (IPTV) service that Hainan Telecom and UTStarcom have been delivering since 2006.

CMMB- Shanghai. May 20. INTERFAX-CHINA - China's three telecom operators are accelerating their plans to roll out mobile TV services in order to gain ground in the forthcoming 3G era, with China Mobile the favorite to win among both analysts and consumers.

Although the 3G networks deployed by operators have the potential to provide streaming TV services, all three operators plan to rely mainly on the China-developed China Multimedia Mobile Broadcasting (CMMB) mobile TV standard to deliver their mobile TV services to both their 2G and 3G customers.

On May 19, China Mobile became the first telecom operator to sign a deal with China Satellite Mobile Broadcasting Co. Ltd. (CSMB), the national operator of CMMB, allowing China Mobile's CMMB-enabled handsets to access the CMMB network, according to Shen Hongbin, general manager of TiMi Technology Co. Ltd., a chip manufacturer and the developer of CMMB.

Commentary: It is interesting that UTStarcom, known for its low cost PAS handsets, has now switched gears targetting the higher end handset market and focusing on iptv. While the market is not large compared to the overall 600m mobile/handset market in China, investments by operators in 3G, iptv, and their goal to increase overall revenue could make UTs startegy pay off. The number of handset suppliers number in the 30s but UT can leverage their advantage in iptv to carve a nice market share in iptv enabled handsets. Handsets using CMMB (see above) will be competition but UT can offer more from their iptv system. Also, note that May starting dates are very close. This is a nice consumer product that UT can build on (and they have 1.32m iptv subscribers to market the handsets to already).

Ericsson- Back in 2006 (and maybe earlier), Ericsson was discussed as a potential buyer of UTStarcom. Ericsson has been a major acquirer and has targetted IPTV as one of its important areas of growth. Ericsson has acquired other companies since such as Redback Networks but its expansion hunger continues. The company is projected to spend $25B in R&D over 5 years and recently made inroads in China (I've discussed their India business previously).

"Recently, L.M. Ericsson (ERIC) (Analyst Report) received fiber-to-the home (FTTH) equipment contracts from all of China Mobile, China Unicom, and China Telecom. Ericsson’s GPON (Gigabit Passive Optical Network) technology will be used for high-speed internet access and high-definition IPTV services in 9 Chinese provinces."

Here is a note on Ericsson's IPTV strategy: "Ericsson characterized the existing IPTV systems as First Generation and stated that its conversations with IPTV operators indicate that they have strong concerns about the ability of these systems to scale. Ericsson told me that it thinks that many of these systems will top out at 500 thousand IPTV subscribers. It expects that moving to a second genreation of IPTV systems will create major opportunities for it."

The author commented: "There is no question that Ericsson is late to the IPTV party. Its acquisition of Tandberg clearly gives it a strong presence in the market but not as a full service provider.It will be interesting to see if its view of the market will pan out. Personally, I think it will be much more difficult for Ericsson, or any other large full service system supplier, to break into the market at this time. "

Today, Ericsson threw its hat in the bidding for Nortel's CDMA/LTE assets. "The Swedish giant confirmed Thursday morning that it is "going to participate in the auction for Nortel's CDMA and LTE access" assets, and confirmed it had submitted an initial pre-auction bid by the end-of-Tuesday deadline, but did not disclose any further details."

Ericsson+UT still makes sense.

IPTV and its related revenue streams (handsets, mobile/fixed infra, advertising/digital signage/commerce/education, etc) are still in the very early stage. UTs wins in India, Taiwan, and China have barely scratched the surface and some are just going live now. Thats both frustrating and shows the potential growth in the future.......

Saturday, July 11, 2009

Focus on Blackmore and China

The biggest news for UT during the first half of the year was the restructuring that took place taking their employee count from the mid-4000 level to under 2000. This will result in an OPEX run-rate of less than $100m going into 2010.

Let me highlight a few metrics from the Q1 report:

IPTV slowdown - Total subscriber for UT only increased by 50k in Q1.
China revenue - Total revenue of $50m and this included some handsets/PAS.
Softbank/Japan revenue - $6m.
India/others - $20m

About a year ago, UTs quarterly OPEX still hovered around $120-130m. The company sold "non-core" businesses and closed/merged others but basically the revenue lost was mainly from handsets/PAS and show that the previous year's "investments" and the company's projections of the ramp in growth of non-PAS/non-handset businesses was way off.

Here are a couple of articles showing the growth in ZTE/Huawei over the years as well as expected growth in the China telecom market in the next few years.

"Huawei and ZTE benefit from the fact that the Chinese government holds stakes in dozens of local phone companies. It is not surprising that these telcos increasingly buy much of their infrastructure from homegrown companies. Financially, China's telecom suppliers also benefit (like some struggling U.S. companies today) from tax rebates and R&D grants. But what really irks rivals are the government's low- to no-interest "loans" that needn't be repaid, and the deep discounts local companies get on the energy and raw materials they purchase from other Chinese companies. According to public filings, this year ZTE received a credit line from the government of nearly $15 billion. Beijing bestowed $10 billion on Huawei in 2004."

"If the Pyramid team's projections are accurate, China Mobile is on course for annual revenues of more than $110 billion in 2014, up from nearly $70 billion in 2009.

China Mobile's position will be underpinned by a 7.4 percent compound annual growth rate (CAGR) in mobile subscriptions that, Pyramid's analysts estimate, will see the Chinese mobile market hitting the 1 billion subscriber milestone in 2012, and reaching 1.1 billion in 2014, when the mobile penetration rate will hit 80 percent, compared with 52 percent at the end of 2008."

Ericsson Scores GPON Wins in China -


I talked with shareholders this week, some of whom had conversations with Peter Blackmore. The discussions centered on similar long time issues but also on how well position UT is to compete in the China market. Blackmore's tenure started when the stock was in the mid $5s and while he has simplified the company and reduced OPEX, there are major issues on credibility and ability to ramp up "core" revenues (or even bookings at this stage). This is an important issue because the center of growth in the telecom world will still be China/India. Does UT have a viable wireless strategy? It gave up on 3G/WCDMA, wimax, and now most of its handset plans. Its main strength from a technological point of view is iptv and broadband (GEPON/TN).

From the same article above,

"Both operators have already been offering packages using various combinations of voice, data, and IPTV services, and now with the new line of services acquired, they can offer quadruple plays at an attractive price point to high-end users," notes Yu.

Indeed, both telcos have been rolling out fiber aggressively since 2007 and continue to do so. Pyramid predicts that FTTH will increase at a CAGR of 104 percent between 2009 and 2014, taking the number of users from 1.5 million to 50.8 million.

The number of UT employees even after the restructuring will still be around 2000. This is still much more than other companies such as Sonus, Infinera, Starent, Sigma Designs, etc.

I had campaigned recently to remove Lu because of the performance of the company over the last few years and if Blackmore was on the ballot, I would have campaigned to remove him as well. Its all about performance after all.

Despite the bad performance over the last few years, I actually feel more optimistic now because the cost base (whether it was by choice or forced on the company) has been reset to realistic revenue projections without hoping for a major ramp. Investors are correct to bash management and point to focusing on their own compensation/job security. The flip side is they took a major hit by doing the last restructuring. They are maintaining a net cash balance larger than anytime during the last 4-5 years and the OPEX will be down to the lowest level.

Like most shareholders, I am frustrated with the stock price and the indifference the company seems to have on it. However, I have to look at the base assets/numbers/growth projections of their markets. I believe that Softbank will increase their orders materially in the coming years. I believe that the iptv/fiber market in China (alone) should be able to grow materially and produce sustained profits. I believe there will be significant demand-driven growth in the coming years that will reward the company that has reset their cost base to 1/5th the expenses it had in 2008. Ultimately, this will power the stock price much higher.

Will this happen overnight.......No. The company has to show by bookings and growth of their core business that even this current target expense is realistic/optimal. One last note. The volume the last couple of days has been the lowest ever showing a wait and see attitude from investors. The price has also declined as the market has gone down 4 weeks in a row. Without news from the company, it doesn't seem the stock can gain traction but I do like the way the first half has played out for UT.

Have a good weekend.

Friday, July 3, 2009

2009 Shareholder Meeting Recap

I attended the shareholder meeting on June 25 at UTs Alameda office. Aside from myself, there was only one other shareholder that attended (last year there were about 10 shareholders). Peter Blackmore, Viraj Patel, Thomas Toy, Luis Dominguez, Susan Marsch, and Hong Lu were present (among others).

The meeting had three main components: Voting results, Prepared remarks from the CEO, and Q&A.

Voting results – Both directors and PricewaterhourseCoopers were re-elected/ratified. No details were given.

Prepared Remarks from the CEO – Peter Blackmore gave a brief overview of the company discussing the divestiture/closing of PCD and other non-core businesses, significant cash position, and fundamental change to the company simplifying its operations. He discussed the company’s market leadership in the China iptv market, specifically iptv signage. He talked about leveraging the company’s R&D to specific markets. Peter highlighted the India broadband market talking about the potential 200m broadband users, adding even if it was just half of that, it will be a huge market and UT is in good position. He mentioned the limited broadband market in China (position in China is not strong). There are also good opportunities with Softbank. As a recap, they had outsourced manufacturing and consolidated back office functions in China and targeting less than $100m in yearly operating expenses.

Q&A (Since there were only the two of us and the other shareholder had only one question, I had an opportunity to ask multiple questions as time permitted)

1. I first commented that for the last 4-5 years the company has not had an operating profit. Even when Barton was hired in 2005, the company’s near term goals then was to return the company to sustainable profitability. However, every year, the company falls short and does a restructuring. My question was directed to the board and asked if there is a point (limitation) to this cycle (especially in light of the latest significant cuts) that the company is better off sold or partner with other companies. I mentioned that the street is obviously concerned with the magnitude of the cuts and the company’s ability to operate.

Peter, being on the BOD, answered that their goal was to return to profitability as fast as possible and they had sufficient resources still. They could always ramp up in the future if needed and their R&D was targeted (as mentioned in the presentation). Thomas Toy added that the company is always willing to consider outside offers and mentioned there are not many companies in Silicon Valley that has 2000 employees.

As a follow-up, I asked if they were confident that they have more than enough resources and can operate with 2000 people, then why didn’t they make the cuts to 2000 people last year? (After all, we did meet with them last year talking about cost cuts). Peter mentioned the revenue projections for 2009 was off and we proceeded to the next question.

2. The second question came from the other shareholder and dealt with the company’s material weaknesses and ongoing concern from their auditors. Blackmore mentioned that they will end the year with a strong cash position and a pointed to the business model to get to profitability as addressing (hopefully) the ongoing concern. Regarding the material weakness, he mentioned there were still two that Viraj Patel is in charge of resolving.

3. My second question was addressed to Hong Lu. Since Peter was the CEO and the company had hired a China CEO as well, what, IF ANY, was Hong Lu’s day to day role? Hong mentioned that he was Executive chairman so he was still part of the management team. He is based in China, meets with customers, and continues to plan the company’s strategy. He added that he gets up early everyday and works with Peter very well. I followed up by saying that other shareholders I’ve talked to want him to be around since he is the founder and probably knows the company better than anyone BUT the issue here is there are two high priced executives acting as CEOs. I added that I would love to have 10 more people but this company simply cannot afford the cost. Hong responded by saying they are constantly looking into executive pay and that if shareholders were not happy, they obviously have a vote.

4. The next question was about the lack of revenue growth last year that led to the cuts at the end of the year and this year. Peter had talked about needing to ramp several hundred million to get to breakeven/profitability (without PCD and before PAS collapsed). I asked what those revenues he was expecting (what areas) and if those revenues are lost or just delayed. Peter answered that a major shortfall was the Korean designed handsets and that led to the winding down/shutdown. Peter also noted all areas in and outside China experienced a slowdown. I asked how the handset shortfall could be the main contributor since they kept on saying recently it had low margins anyway. How would that shortfall be the reason for closing a $130m profit gap anyway. Peter mentioned the lack of profit and loss was substantial if added up and again there was general slowdown in the world markets and hit all areas of operation.

5. Moving on to this year’s bookings. After the restructuring announcements, Peter had announced a breakeven point of $350m and that bookings in Q1 were good and Q2 was on track in China and ahead outside of China. I asked Peter that this doesn’t mean anything to investors as they don’t know what it means when the company says it has good bookings or tracking ahead? For all we know I said, your target is to lose $20m in 2010. Peter re-iterated their intention to get to profitability and that bookings were good in Q1 and Q2 but obviously they will have to wait for Q3/Q4. This is where it gets a little interesting. I said how can bookings in Q1 be good when core bookings were only about $65m. Annualized, this is only $260m, well below the $350m to breakeven. Peter was surprised and said that must be revenue and not bookings in Q1. I kind of looked at Barry to see if the numbers he gave was not correct. “I” tried to explain that the bookings in Q1 was $140m but half of that was in handsets so not part of the core (it was really weird since Peter was looking at Barry and there was some confusion). A day later, I was still trying to follow up with Barry and the resolution is they will try to give clearer information on Q2. I really hope so since it is the company directing investors to be patient and look at bookings and then still expect investors to guess and make assumptions on what a book to bill number applies to. Very confusing and unnecessary.

6. Next question was about the recent rumors about a Chinese handset maker/investor and that Merrill Lynch was hired. Peter mentioned that he doesn’t comment on rumors. I asked then if Merrill Lynch was recently hired. Again, they can’t comment only to say that Merrill Lynch is their ongoing advisor.

I could have asked a lot more questions but time was “up” and Peter mentioned if there were other questions, we could always schedule another call.

After the formal Q&A, I still had a chance to discuss certain topics as Blackmore, Lu, Toy, Dominguez, Barry, Viraj exchanged some small talk/greetings.

Share buy back – they are still against this. They commented the best thing for the stock is to get to profitability. I think most would agree BUT its hard when they haven’t been profitable in 5 years. I threw in a comment that they need to do some insider buying.

Peter mentioned that they can now (based on the restructured operations) get to profitability with just a little bit of core ramp. Isn’t this what shareholders had been asking for the last few years since the major ramp has not occurred.

IPTV- I mentioned that in Q1, China added 250k subscribers but UT added only 50k total (mostly in China but still low). Peter re-iterated they still had over 50% of the China iptv markets.

I asked Viraj Patel when the interim title goes away and he mentioned that we’ll see and they had a lot of work ahead of them first.

I missed asking Luis Dominguez anything.

The conversation with Toy was about a sale of the company but they can probably get a higher price if they get this thing turned around first.

In the parking lot, I even got to talk with Lu’s assistant and she was describing the sadness in seeing the company this way after the last few years. She mentioned how she understood shareholders losses as she bought stock in her employee account at $14 or higher as well. After I told her what I and other shareholders have lost, I think that ended that conversation. I reiterated my point that Lu has benefited from the company for years and needs to show leadership by sharing in some of the pain by cutting his salary significantly. Lu also has the most to gain from a higher share price.

BTW, this year’s food was also a disappointment. Just some cookies and drinks as compared to last year’s appetizers (budget cut?).

The above Q&A is obviously paraphrased but should capture the essence of the meeting. There really wasn’t anything materially new in terms of the operations of the company. I didn’t really expect anything new but wanted to share some of the investor’s concerns/questions with the board and other executives that are new or not aware of investor’s day to day issues. I’ll limit my comments to the above rather than make a big positive or negative statement. I won’t play psychologist and try to interpret various items/comments. It really comes down to performance and what they report anyway.

Have a great 4th of July weekend to everyone.