Wednesday, August 12, 2009


In the June restructuring call, Peter mentioned hiring a real estate company to sell their Hangzhou property. It is interesting but probably not surprising that this company is Gemdale. Here is a chart of Gemdale the past 3 years (split adjusted).

UT sold their Gemdale shares between 15-20Y back in late 2007 netting about $90m. The stock actually got to a low of 3+Y and now trades at about 17Y.

The property is on the books for around $160m and another shareholder (Techbroker) talked about the rising property values in China and an estimated $300m for the land alone.

The company is projected to end the year with net cash of over $200m and to break even next year. Working capital needs (credit lines) are much lower than before but so is their available credit. The building could be use for collateral (and it will be if certain threshold amounts are used up per the last quarterly filing) so I'm not sure what they would need a major cash influx for. Peter did mention the upcoming Phase III BSNL contract so that they may use the funds for that contract. Anyway, that sale will take some time as Peter mentioned but its interesting that he mentioned it again this last call.

Saturday, August 8, 2009


Here is a 6 month chart with the 20 and 50 day overlay.,m20&a=&c=

The initial cross back at 90 cents was a prelude to a nice run to $2.43, close to the November 2008 highs.

Now, the stock sits right at the 50 day with the 20 day trending up and coming up fast. I had commented in the past about the 20 day moving average. The stock was comfortably above the 20 day on its run up but broke down around the $2 area, subsequently reaching $1.35, which interestingly enough was the launch from the low $1 range. For trading, the 20 day is a farily good indicator and you should be long as it is above that. The bears had a nice attack early Friday but failed to bring it down. A few weeks ago, the 50 day was around $1.8 and $1.83/1.84 was the high just after the shareholder meeting. Now, that it has gone down slightly, the breakout point is here. Next week could be the long overdue breakout as the stock is incredibly cheap.

Just some gibberish technicals for traders out there. I'd like to see more volume for more confirmation from a technical standpoint. I'll post more on the earnings call later this weekend.

Thursday, August 6, 2009

Q2 2009 Report

Here are notes I took from the conference call.

The company highlighted the cash balance at the end of the quarter at $276m. Cash usage in the first half of $38m. "Good" progress in the restructuring with 1100 cuts in June and July. Further cuts in Q3 and completed in Q4. In Q4, manufacturing will be outsourced.

Bookings - No book to bill or numbers given. Peter had mentioned to detail this and instead not even book to bill was given. Peter mentioned good demand in iptv and expected to have good bookings in 2nd half based on sales channels. Again, no hard numbers, which is disappointing.

Q2 Revenue was $80m, which consisted of no Korea based handset revenue so mostly "core" revenue. I am confused why there was no handset revenue and yet some final inventory sales in Q3. Margins were negative due to several charges highlighted in the PR. Stripping out these charges, the GMs were about 20% (breakdown later).

Wins in the Quarter - IPTV expansion contract with China Telecom in provinces including Fujian, Hainan, Shanghai and Zhejiang. IPTV win with CCTV in Hunan. PDSN expansion contract in 10 provinces (35% market leader ahead of Cisco/Starent and the Chinese competitors). Some milestones included the mobile IPTV win, start of upgrade of STB from version 1.0 to 2.0 (software upgrade), "Dual SP" upgrade for CT (not sure what that is), IP Signage/advertising, Pilot project for SMIC for intertactive TV/"ITV" cable solution. Some new entertainment features implemented in IPTV for India. No subscriber update count for

Broadband - MSAN win with PLDT, BSNL/Bharti, continued product evaluations with Softbank with initial pilot orders for their TN product. Commercially deployed GEPON in 25 cities in 11 provinces in China. Advance negotiations in Q4 for BSNL Phase III contract to be awarded in late Q3, probably in Q4. Got professional service contracts with CT and China Unicom (multi-year contracts that can further relationships).

Recap restructuring progress and summaring focus on IP products.

The Q2 charge of $28m was for the 1850 people already let go (1100 people) and the ones identified. A smaller charge in Q3 for the rest. While the charge is taken, cash will be used in Q3/Q4 as mentioned previously.

Mentioned monetizing the Hangzhou building (nothing new).

Viraj talked about the business unit breakdown.

MCBU (IPTV/NGN) - $39m revenue and 31% gross margin. Later learned first India iptv revenue finally realized this quarter.

Broadband - $14m and 5% GMs. Lower revenue due to exit of lower margin business (note: Revenue from Phase I/II not recognized although cash is collected).

Services - $14m and 39% GMs.

Handsets - $13m (negative GMS - Most in China/no Korea designed handsets).

Peter talked about rest of 2009... talked about Hong Lu's contribution and wishes him luck in his new role (not sure if anything really changed there). Board is seeking to add people with expertise in the local markets (thats been discussed so often before and very late in this regard).

Blackmore spends more than 50% in China (and another 20% travelling is my guess)

NO 3rd quarter guidance due to the restructuring.

Reiterated 2010 business model of $350m in revenue, high 20s GMs and under $100m in opex. This will be added to by deferred revenue from the India contracts.

Q&A - Broadband GMs of 5% this quarter (whats up with that anyway when they talked about 20% last year). How can they achieve the higher company GMs with such a low broadband GM. This was an excellent question and Peter had a reasonable answer. Peter is expecting their TN product with Softbank to have much higher margins and contribute more revenue. The margins from BSNL is the low one but others in India (Bharti, Tata, Reliance) have larger GMs. Other Asian broadband contracts are much higher. GEPON contracts will be selected so that margins can be optimized (they will not go after every tender out there). Peter talked about India iptv mostly starting this year and still at the very early stages.

Peter discussed iptv pricing and said their infrastructure products are made of mostly 3rd party equipment and their software (which gives them higher margins). STB has GMs in the teens and cost $50. The upgrade coming up will be mostly software upgrades.

Not a lot of questions but Peter mentioned having discussions with Shareholders tomorrow. I should get additional feedback tomorrow after those talks.

Commentary - It wasn't a pretty quarter. The negatives included no detailed info on bookings, no iptv subscriber count, no announcement of the partner, no Q3 guidance. The positives included the company has ample cash with $276m. Subtract $45m for restructuring and you have $231m. OPEX for this quarter without restructuring was about $43m ($16m in R&D and $27m in SG&A). Weren't they targetting to get OPEX under $60m by Q4 when they talked with investors at the end of Feb. Core revenue of $80m was not bad with half in MCBU. Without PAS, it shows IPTV is doing well with the business unit having 31% GMs. So, OPEX for Q3/Q4 should rapidly going down as well. Any more writedowns in Q3/Q4? Handsets are mostly gone so...There are still those Phase I/II payments at about $25m/quarter so cash balance by the end of the year should be well over $200m. By early 2010, OPEX will be down to under $25m/quarter. Peter talked AGAIN about exceeding the breakeven revenue and bookings expected to do well in the 2nd half. The book value is down to about $2.55/share and projected to go lower. I anticipate the stock to edge closer and fill the gap to the book value and ultimately exceed it as it gets closer to 2010 and bookings are clarified. For now, the negative quarterly reports dominate the headlines and the company doesn't use any funds in defense of the stock price. Peter has done a good job in the expense cuts (which we have been asking for a LONG time) and there is progress in the "core business". The credibility is low as again they chose NOT to give color to bookings, guidance, etc.

Saturday, August 1, 2009

Product Lineup

While the company has addressed one side of the business equation to profitability by targetting a lowered expense rate under $100m/year, the bookings/revenue side doesn't show clarity even after years of churning out products. The most reliable/consistent revenue source came from PAS infra/handsets and their PCD handsets. Both of those areas are winding down to almost zero. PAS peaked around 2004 and the search for new revenue streams started way before that. Big investments and hope in 3G (WCDMA), Wimax, Softbank, and handsets failed/disappointed badly. A $2.5B revenue company at one point, UT has scaled back drastically and positioned itself to break even with $350m in yearly revenues. How doable is this? What products do they have? Over the last few years, there are various products thrown out that gave hope. The size of the markets were large but consistency of revenue and wins were lacking. Here is a smattering of products that the company is relying on to generate revenue in the future.

IPTV Infra (Basic) - By all accounts, this business has done well ramping to a subscriber base of 1.32m mostly in China. The problem is that UT has invested so much in their end-to-end system that the revenue generated so far has not justified the cost. Blackmore mentioned last year, “Our view is that these two product areas, NGN and IPTV are at the beginning of their life cycles and bookings can ramp fast. We are very pleased with the momentum they are gaining in their respective markets and believe the revenue for each of these product lines can grow in excess of 80% in 2008.” Its interesting that now, Blackmore makes the point that IPTV/NGN softswitch are mature in terms of their investments.

IPTV (cable) - The initial win was with Markwell in Taiwan. That was announced back in December of 2007 and just went "live" this year. Other cable wins in China were recent as well.

(translated) The tender was finalized before the Spring Festival, UT Starcom to become the project's platform and terminal equipment provider, and the South together with the media for the city of Canton 800,000 cable provides the platform and equipment. 其互动电视业务将与广东的省网现有单向数字电视业务紧密关联。 Its interactive television business will be with the Guangdong provincial network of existing one-way digital TV business closely related. 互动电视业务建立在单向数字电视业务基础上,依托同一HFC网络进行传输。 Interactive TV business set up in a one-way digital television business, based on relying on the same HFC networks. 而双向机顶盒需同时承载互动电视业务和单向数字电视业务。 And two-way set-top box is required to carry a one-way interactive television services and digital television business.

IPTV (digital signage, security) - There has been about 8 wins in digital signage and a couple in surveilance. Again, new revenue sources but size is small.

IPTV (mobile/iptv phones) - 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.

UT is now focusing handset efforts towards iptv. Given the general CDMA market's low margins, high working capital/inventory risks, charges even just recently, this is probably a good switch.

NGN/FMC - Blackmore mentions on one of last year's earnings call, “Focusing on our NGN solution, this is designed to support the growing number of advanced voice and data services as we see tremendous growth in Internet traffic and the end of life of traditional TDM switches. We’ve designed our mSwitch to allow the provision of next generation services but also significantly reducing operating expenses of current products. mSwitch supports multiple call types over all access technologies and currently supports over 60 million NGN customers globally. While PLDT is our largest network transformation project to date, our success there is winning us new customers worldwide. For example, last year a major European carrier, Tiscali in Italy asked us to supply them with our MSAN equipment. And just prior to year end, the carrier asked us to replace their entire TDM switching network with our softswitch. This is obviously a very key strategic decision for Tiscali and a very strategic win for us. We are currently implementing this project with them. In quarter four, we also won our first NGN softswitch in Taiwan. Other recent notable contracts include Brasil Telecom, where our softswitch is supporting applications for fixed mobile convergence and IPTV, with TOT in Thailand, and also recently Nextel in Argentina. It is clear that this technology is gaining momentum and we believe we have the best performing softswitch on the market.”

Broadband (India) - The main revenue(cash) source lately has been from the BSNL contract in India (Phase I/II). We've heard about the recent extension of Phase II and possibly Phase III by year's end. From all accounts, India broadband is a consistent revenue source (although margins are low).

GEPON- "UTStarcom Deploys Largest GEPON Network in the World for Japan's Softbank" That was in 2004!

Over the years, there were wins in Pakistan (Sept 2007)
, Goa in India (May 2007),

China (July 2008)...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."

Recently, Blackmore announced they were on the short list for 15 more provinces as they topped testing in 3 of 4 categories. Here is a recent article (June 12, 2009) on EPON in China..."World's larget EPON tender?"

8:55 AM -- China Unicom Ltd. (NYSE: CHU) is believed to have issued a tender for EPON equipment to support the rollout of 11 million high-speed fiber access broadband lines, according to a report from Interfax China.
If true, this is further evidence that China's EPON market is hotting up fast, and that Asia/Pacific's preference for EPON is ongoing, though China Telecom Corp. Ltd. (NYSE: CHA) is also checking out GPON's potential. (See China Telecom Uses AlcaLu's GPON.)
China Unicom is believed to have built out around 100,000 EPON lines so far, substantially less than China Telecom's 4 million lines at the close of 2008, according to Chinese vendor ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763). (See ZTE Secures $15B, Highlights R&D.)

PSDN - UT got 40% of the latest tender beating out Cisco/Starent. (The Packet Data Serving Node, or PDSN, is a component of a CDMA2000 mobile network . It acts as the connection point between the Radio Access and IP networks. This component is responsible for managing PPP sessions between the mobile provider's core IP network and the mobile station).

Transport Network (TN) - There has been build up of this product since last year on the analyst meeting. Recently, the company disclosed trials with Softbank and China Mobile to name a few. However, there has been no wins yet.


The company's investments in the above products have gone as far back as early this decade. As mentioned, PAS peaked back in 2004 so the company has thrown a lot of resources into various products and only now seeing some payoff. For years, investors have been telling the company to CUT costs because the revenues were not coming even though they had products (WCDMA trials went very well for example but 3G licenses were not issued until recently). So, now that the company has cut costs, there is concern about developing future products and maintaining customers. While management credibility is low and their performance is reflected in their stock (even today, it ranks as one of the worse performing US listed "China" stocks), I cannot argue with the cost cuts as I see their product line as being adequate. The timing of bookings and revenue are still questionable but initial wins and positions indicate there are enough products to support the new expense base. The company currently generates 80% of their revenue from 20 customers (compared to Starent having two customers make up 85% of revenue for example). The company's product line and depth of development over the years cannot be replicated with the current market cap. (I wonder what valuation they would get if they just become public with say $200m in cash, own their own building, have the above product line/customer wins, and projected to breakeven/become profitable in the near term).

It is a very unusual situation but the question remains can they convert the previous years investments/positions into bookings/revenues to become profitable and grow the business. One of the biggest negatives is their credibility/past performance and that is NOT easy to overcome after so many years so we will have to see.....

Have a good weekend.