Sunday, March 22, 2009

Palm, ZTE, Cisco, Starent, Blackmore

Just some random thoughts on misc. topics.

Palm - Lets look at some numbers from Palm compared to UT. Palm is projected to lose $2.02/share and 71 cents/share compared to UTs $1.25 and 0.52/share losses. Tangible assets for Palm is negative $631m compared to a postive $466m. Palm market cap is $873m compared to $87m for UT. Palm just raised another $103m to make up for their 90m loss last quarter. It looks like their Pre phone will be a hit but will not result in a profitable company. UT competes with Huawei and ZTE while Palm competes with RIMM and Apple.

Palm stock hit a low of $1.14/share but has recovered to the the $8-9 level. Palm has about 38% of their shares short so there is no shortage of people betting they are overvalued. The main difference the last few months is the street's perception that Palm is on the mend while UT continues with business as usual. This has resulted with Palm getting a couple of hundred million more from an investor while UT institutional investors are mostly selling the stock even at these "low" prices.

ZTE - says it has secured a $15 billion line of credit from China Development Bank.

ZTE (Shenzhen: 000063; Hong Kong: 0763) defied the economic downturn in 2008 with a 27.4 percent increase in annual revenues to 44.3 billion Yuan Renminbi ($6.5 billion) and a near 33 percent rise in net profit to RMB1.66 billion ($243 million). (See ZTE Reports 2008.)

"Competitive and pricing pressure hit ZTE's infrastructure margins, though. In 2008, the gross margin on carrier network equipment sales was 35.8 percent, down from 39.6 percent in 2007.

But the gross margin for handset sales improved slightly, to 23.7 percent from 21.7 percent a year earlier, while the margin from software and services jumped to 30.3 percent from 16.7 percent in 2007. ZTE's overall gross margin for 2008 was 32.5 percent, down slightly from 2007's 32.7 percent.

ZTE ended 2008 with cash and cash equivalents of RMB11.3 billion ($1.66 billion)."

The last couple of articles shows the resources ZTE has and their progress the last couple of years. Its interesting to note the high margins from handsets that they get. One has to wonder if this is due to efficient operations and/or advantages to the large volumes. This is a "none-core" area for UT that management has to decide whether to compete in or choose to back away from. This is another tempting market specially with their "experience" in PAS/PCD but if its going to take years and years to generate any decent revenue, then why bother?

It also looks like ZTE actually makes money and has decent companywide gross margins. If they are giving away their equipment as some have suggested, how do they achieve their positive operating margins? This is another data point suggesting how inefficient UT is and how the management/operations are nowhere near their competitor's.

Cisco/SUN/IBM - Cisco buys Pure Digital for $590m and IBM is looking into SUN for about $8.5b or so. The large tech companies have a lot of cash and face the same stagnant world economy. It is natural that M&A will pick up. Shareholders in UT have speculated for years why it has not been bought out. It could be their products are not really that good or that Lu/board are not really serious in any M&A and just want the status quo. At these levels, shareholders do have the added "hope" it may really be too low for the competitors to ignore (such as in SUNs case).

Starent - Starent is growing and has a $1.2b market cap. Its revenues are in the $300m+ level and is being sued by UT. Back in 2003-2004, there was already talk of PAS peaking and the move by the company to diversify into other products. UT bought 3com's comworks division, which eventually yielded workers to form Starent. With all of UTs resources and products that it has developed, why could UT not produce "something" as successful as Starent did? All of the hundreds of millions the company has spent in R&D over the years have yielded little.

Blackmore - UT CEO has been with the company almost 2 years now. His contract (signed a few months before the stock markets peaked) was a hefty $750k/year with huge incentives and bonuses. Peter did convert the bonus into shares at $3.2 showing he too was intrigued by the US listing/management and China manufacturing combination like most shareholders. Peter was brought in to make the company a first class operating company (his words basically). Peter used the traditional outsourcing, more efficient supply chains, cuts, and others to reduce costs while waiting for revenues to ramp. His presence gave investors "hope" that he can turn around the company, make it focus and profitable. I really like Peter because he brought an operational background that shareholders felt was needed at the time (since the technology/revenues were not the main issues at the time).

At this juncture however, I have to bring up the question of whether Peter is still the right person for the job just as the company pondered whether Barton was really the right person for his job (don't really want to discuss Barton as it I could go on and on...again and makes my blood boil). There has always been the issue of who is in control with the founder Hong Lu still around. Why should shareholders pay two people CEO salaries/compensation fit for successful companies/much larger companies in a totally different era? At the very least, both Lu and Blackmore have to significantly reduce their compensations. Frankly, I don't care Blackmore has his contract (we can see what those contracts that AIG bonuses are based on). There should be a renegotiation on his contract. Period.

There is also the fundamental issues of Peter being a CEO. A CEO realizes the importance of the share price and growing the business. I'm not sure how many CEOs survive the job presiding over massive operating losses and share price losses of this magnitude. Also, if the company is done with the major cost cuts/operational issues, what is Peter's role? We know he has not been able to generate any meaningful revenue growth. He is a non-Chinese leading mainly Chinese executives and still their main/core market is China. He is not a marketing person either. I'm not advocating removing Peter because I don't think it could afford to pay him to leave either. Again, as a start, his salary/compensation have to be re-evaluated.

Executive search firm/compensation advisors - Do these firms have a clue on what they are doing? When an individual shareholder can see things are getting ridiculous and the board still continues with ridiculous behavior, one has to question the competency and/or agenda of the board. Why does this company have a heavily compensated non-Chinese CEO? Why is the board made up of non-Chinese (except for the founder who is bent on keeping control of the company at all costs) that have basically no "skin" in the game. Put a board with actual stakeholders and you'll see a difference in stock performance. Period.

I've talked with institutional holders over the last year and all are not "activists". Most are now waiting for some other institution to lead the way even though everyone is disappointed in the performance of the company/share price (what a shock). Anyway, I hear that there seems to be more serious discussions on actions from the company now that the stock is well below $1 (Really?).

At this stage, after watching the company for the last 4 years, I am indifferent from inaction or any appeasement actions from the company. We've seen that the company is not only one step behind but 3 or 4. Thats why every "positive" step they have taken has not yielded higher shareholder value or led the company closer to breakeven.

My biggest hope now is that there is action from institutional holders that all disappointed shareholders can rally behind and finally rid this company of people that don't produce any value for shareholders.

Have a good week everyone.