Wednesday, December 15, 2010
Monday, December 13, 2010
Yellowstone: In addition, as of the date of printing of this Proxy Statement, we are considering an engagement letter with Yellowstone pursuant to which Yellowstone will act as a strategic consultant to the Company and any of its subsidiaries, divisions or legal/organizational units to assist the Company in establishing or expanding strategic partnerships, joint ventures, acquisitions and the Company's business in Asia consistent with the Company's goals. The terms of the engagement letter and the fees payable thereunder are currently being negotiated; however, it is contemplated that we will pay Yellowstone a monthly fee of US$20,000 and certain success fees upon the successful completion of a specific transaction as proposed by Yellowstone and approved by the Company generally based upon a varying percentage of the transaction deal size, with certain exceptions. We will also reimburse Yellowstone's reasonable expenses incurred in connection with the services.
Softbank: Softbank Corp. is an affiliate of Softbank America, Inc., which holds approximately 9.7% of our common stock. During 2009, we recognized aggregate revenue of $28 million (includes $5 million in sales to NEC Networks & System Integration Corp., Japan Electronic Computer Co. Ltd., Nippon Telecom Sales KK and Oki Electric Industry Co., Ltd. for which Softbank Corp. was the ultimate customer) with respect to sales to affiliates of Softbank Corp., including (i) sales of telecommunications equipment to Softbank BB, (ii) sales of equipment and services to Softbank Telecom Co., Ltd, a wholly owned subsidiary of Softbank Corp. and (iii) sales of equipment to BB Cable, an affiliate of Softbank Corp. Our Audit Committee has reviewed and approved the transaction with Softbank Corp.
In addition, as of the date of printing of this Proxy Statement, we, through a wholly owned subsidiary, are finalizing an agreement with ZTE (H.K) Limited ("ZTE"), a company incorporated in Hong Kong (the "ZTE Agreement"). Pursuant to the ZTE Agreement, we will agree to form a special purpose company incorporated in Hong Kong with ZTE (the "HK SPV") for the purpose of making and holding an investment in a high speed mobile data communication service business affiliated with Softbank Corp. (the "Softbank Affiliate"). We will agree to pay 176,000,000 Japanese yen (approximately US$2.17 million) for 35% of the equity of the HK SPV and provide a loan of 595,000,000 Japanese yen (approximately US$ 7.32 million) to the HK SPV. ZTE will agree to pay 327,000,000 Japanese yen (approximately US$4.03 million) for 65% of the equity of the HK SPV and provide a loan of 1,105,000,000 Japanese yen (approximately US$13.60 million) to the HK SPV. The
U.S dollar equivalents are based on the exchange rate of 81.105 Japanese yen per U.S. dollar. The HK SPV plans to use the paid-in capital and shareholder loans to invest in the Softbank Affiliate. Our Audit Committee has reviewed and approved the transaction.
Depending on the side of spending you are on, the above is either going to be positive or negative on paper. This is a company that has cash as its strongest asset. If it can use it well to transform the company, then I am all for it as a transformation and turnaround is what we are looking for. The Yellowstone fee is minimal to what they have been paying their managers and resulting performance. On the flip side, spending for the sake of spending would obviously be negative.
The joint venture with ZTE (which ZTE is this?) seems interesting and could contribute right away to the relationship with Softbank and potentially boost company revenue in Japan much faster.
The amount of revenue and bookings are not enough at this stage to support their expenses so the company has to decide how long to keep up that expense base or act more aggressively to generate more revenue. For them to a player in the iptv/telecom-cable infra in 3 major countries no less, I would think they have to generate significantly more revenue and be aggressive for growth (and thus my vote for continued investments).
Wednesday, December 8, 2010
"A report by the iChina Research Center, says that the Three Network Convergence related market will reach RMB 688 billion over the next three years, of which, RMB 249 billion will be spent on migration and construction of infrastructure for both telecom and cable networks, set-top boxes and content management and media service platforms, with the remaining RMB 439 billion generated through content demand and media consumption."
So, about $30B over 3 years will be spent. From the same UT PR,
"IPTV subscribers in China will be about 7 million by the end of this year and 10 million by the end of 2011."
"According to Lmtw.com, China Telecom had 5.36 mln IPTV subscribers as of August 2010, accounting for over 82% of national IPTV users."
According to recent Chinese articles, UTs share is over 2m subscribers and 33%, which is consistent with the overall numbers so by end of 2011, it could be 3m+ users.
From same article above, Shanghai has another tender and results should have just come out.....
National IPTV network status:
"According to the statement, the platform network has already joined with sub-networks of radio and television organizations in five pilot regions in Sichuan, Hubei, Beijing, Shenzhen and Shandong."
Key statement there was Radio as UT acquired Stagesmart and deal with Cristar. Also, UT has already mentioned winning some cities in the pilot.
China Telecom investing CNY15B ($2B) in EPON in 2011.....whats UT share?
In Japan with Softbank, see this interesting article...
Softbank Proposes Fiber Broadband Highway for Japan
Statement of Jack Lu in the earnings CC,
"Finally, for our broadband business in Japan as we shared on the last call that we passed all of soft SOFTBANK BB’s quality control test. We have already started to receive purchase orders from the clients for our key end technology in Tokyo, Osaka and Nagoya. As a result, we expect a sizable increase in 2011 once this initial rollout proves themselves."
"So, while we continue to cultivate the telecom space with pure equipment based sales, you can see that the opportunity in China in with three network convergence is significant, and I see it as my job to ensure UTStarcom and its investors win a significant portion of the upside."
UT PR on Q3 accomplishments:
"the Company won a project with Jinan City's Cable Network as the exclusive broadband solution provider"
"the Company won IPTV projects with operators in Sichuan (already announced), Hubei (new), Henan (new) and Shenzhen (new)"
(Good wins that are the same cities to the pilot cities of the National network cities)
"the Company expanded a previously established revenue sharing relationship with South Media Interactive Co., Ltd, the interactive business unit of South Media Group, to add HDTV options to their IDTV offering, be responsible for the development of interactive products and provide operational support services to the platform "
"the Company announced a strategic partnership with a company controlled by a national level broadcaster to provide technology and operational support for Internet TV service in China and abroad"
Unfortunate to see the stock doing so poorly in light of the bull market and year-end rally....The street (or atleast some investors) may finally be giving up on the company/stock as it pushed the price below the investor buy in price and way below cash ($338m + $34m more in restricted cash = $372m or about $2.4 in total cash).
Anyway, the above shows the market for their products are healthy and growing. The key as always is the amount of share they can win and how fast.
If you are a bagholder like myself, atleast you should know what you've got and what the "hope" is.....
Thursday, October 28, 2010
The projected revenue is down to $270m-$280m (say $275m).
Q1 & Q2 revenues combined was $154m, which leaves $121m for the last 2 quarters. The deferred revenue left at the end of the June quarter was $141.5m. It was about a total of $182m that was supposed to be recognized in 2 years. So, lets say $50m more to be recognized this last 2 quarters. That leaves only $71.5m of revenue. At 25% GMs, you have about $18m in gross profits.
Lets say OPEX is a full $60m the last 2 quarters and not the $50m they are projecting. That is a cash shortfall of $42m. Add the $20m for the Stage Smart investment and you will lose $62m from the cash balance.
The cash balance of $308m will be augmented by $36.6m from the new investment + another $8M if the last option is exercised.
So, you have ($308+36.6+8-62)m or roughly $290m left in cash. They have $34m more in restricted cash.
In summary, the cash is going lower as the company still does not have the revenues to support it and as the investment in Stage Smart shows, it will also spend for acquisitions. As it stands, by the end of the year, it will still have substantial cash. The cash burn will lessen if the revenue shortfall is due to a pushout and they can reduce their opex further. But more importantly, can they utilize this still sizable amount of money (around $300m) + the credit line early in the year to build a sustainable profitable business.
Monday, August 2, 2010
I am looking for incremental improvements in the following items on the call that should have been accomplished already.
1. China investment deal. Announced in Feb, even at the end of JUNE, we've heard (not from UT) in an article of approval from China and to be closing soon but still nothing.
2. BSNL-India Phase III - Initially should have been Q3 2009 (Q4 at the latest) and still no concrete update from the company.
3. Bookings - Even during the entire downturn the last two years, management was guiding to 50% bookings growth and then to double digit growth and then to just "good" bookings and then finally last quarter to booking way less than one.
4. OPEX - Even the latest restructuring should have been done before the end of Q4 last year and now revised to the end of Q2 but in Q1, the opex was still nowhere close to the target.
5. Transparency - Also should be improving but book to bill #s, iptv subscriber #s, # of trials, status of GEPON/GPON, PDSN, relationships in Latin America, Britain, Europe, etc - there is nothing. So, this is going the other way too.
I'm all for waiting but certain things should show incremental improvement or been completed already. The price at these levels is a joke for their assets, stated market positions, and projected growth of their markets but why is it still here and why hasn't someone made a higher offer by now?
So, the low price (that we longs feel) is directly related to incredible poor performance in such a way that all the "potential/cash/tech assets" that we longs talk about is easily negated by the incredible unresolved items up to now and the lack of even incremental improvements as I listed above. If they had resolved some of those items way before this year, the investment price would not even be close to $2.2.....That price may have been acceptable LAST June 2009 but not this Feb. 2010 and certainly not right now.
Shareholders deserve much more even at this stage.
China - $51.2m; $40m
US - $41.2m; $3.45m
Japan - $6.5m; $11.1m
Philippines - $.8m; $12.7m
Other - $19.5m; $13.6m
Of the $40m in China sales this past quarter, about half was deferred revenue so the actual revenue was down to around $20m in sales in China. At the peak of UTs growth, annual sales reached $2b so quarterly sales in China reached $500m or so. Going down to $20m is a staggering drop that shows the company has never recovered and until now, we don't know if it has bottomed. While Peter Blackmore, as CEO, is to blame overall, I wonder what China Sales and Marketing and Services SVP Charles Mah has contributed. The guy was hired in Novermber 2008 and now more than a year later, the sales have continued to deteriorate. Last quarter, Blackmore mentioned the book to bill was way below 1 signaling no signs of a turnaround.
With the guidance provided last quarter of similar revenues (including the deferred revenue), the company is still not close to any upturn in revenue, which at this stage is what investors really care about. Lets review the breakeven revenue of $85m/quarter (assuming the company even gets to the stated OPEX goal, which is another area they have been very slow to completing). The new COO (future CEO) mentioned getting to profitability in a year (from the February interview he gave in China.
From a geographical standpoint, here is what I estimate they should achieve for breakeven. I will group it into 3 areas for now, China, India and Japan+others. My estimate is for the following breakdown:
China (60%) - $51m/quarter
India (25%) - $22m/quarter
Japan/others (15%) - $12m/quarter
Not counting deferred revenue, the company should get to the $51m revenue level, which is a stagerring 150% growth from the current levels. The move to China, turnover of entire management to China, new board members/investors warrant the company to atleast get to 60% revenue in China (or else whats the point?). The company has talked about the new cable (iptv) revenue model, further growth in iptv, digital/interactive TV, NGB, TN opportunites and even GPON but no numbers or little information is provided.
The revenues in India and Japan/others are doable even right now if there are no delays in India and in a yearly total, should be quite doable even with just 1 large contract. Japan seems to have bottom a year ago as well and the base is still quite low. Another way to increase revenue is to use their cash to purchase businesses for external growth but in any situation, the revenue has to be increased.
So, it really comes down to China to stabilize the revenue base and in fact the need to increase it significantly from the current $20m/quarter level. I like that the company has put its focus in China but the revenue has simply continued to deteriorate and until there are bookings/wins to show it will go up, then there is no reason investors will support the stock other than sporadic speculative buys. On a more positive note, the overall US/China market seems to be moving away from a double dip and focusing on a better 2nd half of the year. As mentioned in the last quarterly comment, that should help UT stock as the company finishes their restructuring but in order to have sustainable gains and material stock support, it needs substantial revenue growth going forward. Absent this, the stock will continue in lackluster trading ranges with little volume.
Saturday, July 10, 2010
Here is an article that shows there is still a current "ban" on Chinese companies in India...
"India competes with China the wrong way " http://www.cn-c114.net/583/a522716.html
Although India has publicly assured that it is not banning Chinese telecom products, a recent Indian media report revealed that its government has a blacklist, which actually bars 25 Chinese telecom manufacturers in the name of security precautions.
Last month, UT CEO Peter Blackmore mentioned in an interview in India that they will have a local outsourcing manufacturer in place in India by Q3. There is also a glimmer of hope that eventually, the Indian situation will have to be resolved soon.
Mukherjee said Reliance Communications and other major operators have the underlying passive and transport infrastructure ready to deploy 3G, which will involve a relatively painless overlay. "It will be rolled out very quickly... the electronics will come fairly quickly from China," stated the Reliance Communications president, who is obviously confident that the current barriers to sourcing network technology from Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) will soon be broken down. (See No Respite for Chinese Vendors and BSNL Blocks Huawei, ZTE Bids.)
"The speculation is that the leading operators will roll out their first-phase 3G services any time between September and December. The rollout and service launch won't take much time," added Mukherjee.
He believes there is an addressable broadband services market of 850 million people in India, so current broadband penetration, with only around 10 million fixed (mostly DSL) and wireless (mostly BSNL and MTNL's initial 3G) broadband users, is very low.
The company seems to be headed in the right direction but the unresolved issues in India and uncertainty in future value of UTs share of the businesses in these large markets keep a cap on the stock for now.
Monday, June 14, 2010
In other news, Peter Blackmore has been giving some interviews in India and looks like they have gotten a local joint venture partner and plans to manufacture in India as early as Q3.
"While UTStarcom has already identified an Indian joint venture partner, Israel-based Alvarion is charting out its plans."
Speaking to Business Line, Mr Peter Blackmore, UTStarcom's Global CEO and President, said, “We had already made plans to manufacture in India, we are now accelerating these plans. Once we do that, we would have largely addressed the security problems. We want to comply with the Indian laws and if we set up a manufacturing here, then the debate is over.”
"The US-based company, which will soon shift its operational headquarters to China, plans to start production with an Indian partner in the third quarter.
Mr Blackmore did not reveal the name of the partner or the investment details."
Tuesday, June 8, 2010
Looks like there is some kind of investor presentation in June......Looks like they are still looking to close the Chinese investment and BSNL deal in the near term.
Saturday, May 29, 2010
Here are the topics we discussed and relevant information provided.
Building Lease - The company formally closed the building sale and started the lease this week. I asked Peter if the lease would be accounted for as regular OPEX or some other one time charge on another line item. The lease would be part of the OPEX and included within the $25m/quarter or lower quarterly expense target.
Restructuring - I talked with Peter with regards to the still very high OPEX reported in Q1 (about $10m in R&D and $30m in SG&A). Peter mentioned they are still on track to bring this to less than $25m by Q3. I was skeptical about this and asked Peter how they can bring this down by then. Peter reiterated the 300 people that left in Q1, the additional people leaving in Q2 and the outsourcing transition that were all mentioned previously. He added that the new Newnet deal would basically remove their direct involvement/expenses for North/Latin America (including personnel and facility leases).
India Security issue (short term) - I asked Peter what the current situation in India and how has it affected business there (aside from BSNL phase III) and to comment on the Bharti iptv deal they said they had for Q1. Peter mentioned that the security issue did not apply to iptv and that the Chinese President was meeting with Indian officials in the near term and he could provide more updates in a couple of weeks as he is going to India right after the Memorial day break. Peter added that this security issue affects everybody (even non-Chinese companies) and that it was mainly directed at Huawei/ZTE. He said UT has very good local people on the ground and that they were well-connected.
India Security issue (long term) - I pointed out that ZTE/Huawei were planning to manufacture in India and potentially spinoff or list in the Indian stock exchange. Does UT have a longer term solution or developing one? Peter mentioned they are well aware of the manufacturing issue and the need for technology transfer and that they are looking at long term solutions.
Beijing E-town investment - I asked Peter how the move in headquarters affected their facility in Hangzhou, UTs commitment of $2.3B in revenue over 5 years (how doable), benefits to UT, etc. Peter mentioned that they currently have 100 people in Beijing and that it will only impact those people. The R&D people will stay in the Hangzhou facility. The $2.3B was arrived at by Yellowstone capital and Peter mentioned the length of time allowed them to ramp up to it. He said IF iptv ramps up, then it is "easy" to accomplish. The move to Beijing as a headquarters is strategic in that all the regulatory agencies are in Beijing (SARFT for ex.) and would have a "halo" effect in their operations all over China.
Company Financial Model - I asked Peter about the company's seemingly endeless restructuring and missed financial metrics they have set. I also asked Peter that once he leaves and becomes a shareholder, what metrics would he use to measure the company's performance. Peter mentioned interestingly that bookings would be important. I quickly reminded Peter they themselves haven't been giving any bookings information. I think he realized his ironic response and mentioned that due to the company's transformation they were not able to provide the numbers but to keep pushing the new management for bookings and that they should be able to provide it. I discussed other metrics such as iptv subscribers and he said they should provide more information on this in the future. I asked if they would be forever in the mode of missing targets and restructuring and he said it would be up to the new management to decide that in the future but as of now, there are no plans for further restructuring. That the company (due to revenue recognition of 6 to 9 months) was focused on bookings to drive revenue for 2011. I asked about the value of iptv/TN contracts trying to get more color on what it would take to achieve $350m in yearly revenue. How many large contracts do they need to go along with the smaller ones. No value of contracts given but it would probably take 2 large ones and that the most likely ones are BSNL phase III and Softbank TN.
TN - I asked about TN with regards to China Telecom/Unicom. Peter mentioned that China Telecom is evaluating their equipment and Unicom was well behind. Bharti is also a major potential but Softbank is the most likely major customer right now. He added that Softbank and China Mobile were the most progessive of the operators looking at the latest technology. Peter also highlighted their "enterprise" wins with utilities/etc, smaller current deals with BSNL, and Softbank. I asked Peter if they needed additional financing to land a major Softbank deal and he said no, that their cash position (specially after the building funds) now allowed them to do deals they could not before.
IPTV - I asked what metrics/data he could give that shows his confidence in iptv in general. No specific data except that STB demand for all providers have been very good. In India, I asked what the situation with each of their customers. Peter felt confident about their positions with each customer in India and that each one is expanding but pales to China in current demand. There is no new contracts under the new service type model yet but there were additional cable iptv wins since his last announcement. Peter could only point to the STB demand, the overall iptv growth projections, and government focus on promoting iptv. How big will the cable iptv market be? Are they going to be getting large contracts (like BSNL phase III or Softbank TN)? No, it will be similar to the telco iptv in establishing beachheads and growing from there.
Philippine Business - Just a random question from me since this was a large (over $10m in Q1) source of revenue. Peter mentioned that they don't have long term contracts but are constantly gaining business as PLDT (MSAN product) expands since they are the incumbent. I think this is really the key to other product/customer situations like TN with Softbank, BSNL broadband, China/India iptv, etc.
Confidence in the business/company - I suggested to Peter that shareholders were getting less confident (via the lowered stock price) and asked how he felt about the business/company in general. Peter mentioned that he was still very confident about the company prospects.
Comments: I think this was the most guarded Peter has been regarding our conversations, careful to not be overly optimistic and give out any data not material/public (which is understandable). I did not directly ask Peter about the closing of the Beijing investment group as I felt through the conversation it was a foregone conclussion that just takes time (as the Building closing showed). I would neither characterize that as positive or negative in the short term because there are very valid arguments for those wanting the company to operate as a successful ongoing concern and those that want the company sold due to the company's poor operating results and potential to continue the poor performance. So, for better or worse, I believe the deal is 99% going through. As for the BSNL Phase III, I believe that will also be done eventually but the current (short/long term) uncertainty in India is not good for the stock. The stock at these levels continue to project virtually little to no value to the business and trades way below cash as the company fails to provide any confidence to the market. While the market has been shaky as well, the company trading way below cash shows a very negative bias towards the company's prospects.
I continue to like the stock valuation from a long term view but as I mentioned in the Q1 posting, the company's weak bookings, late restructuring, market's shakiness and now negative bias towards small caps/Chinese stocks will keep UT down but better prospects in the 2nd half of the year should coincide with much better stock performance.
Have a good Memorial Day weekend to everyone.
Friday, May 21, 2010
On February 1, 2010, UTStarcom, Inc. (the “Company”) entered into an Agreement of Entry into the Zone (the “Campus Agreement”) with the Management Committee of Beijing Economic and Technology Development Zone (the “Zone”), an affiliate of Beijing E-town International Investment and Development Co., Ltd. (“BEIID”), pursuant to which the Company will move its operational headquarters to Beijing, China by forming a new wholly-owned subsidiary in the Zone (the “NewCo”), and authorizing the NewCo to be the Company’s new operational headquarters. After beginning production and generating tax revenue as provided in the Campus Agreement, the NewCo will be eligible to receive certain benefits and assistance from the Zone.
Why is it taking so long? The "PRC Approvals" ......
As a condition to the consummation of the Placement, the Investors must obtain the applicable authorizations, approvals or permits, especially, if applicable, from various government agencies of China, including, but not limited to, approvals and confirmations from the applicable levels of the National Development Reform Commission, State-owned Assets Supervision and Management Commission, the Ministry of Commerce, the National Development Reform Commission and State Administration of Foreign Exchange, that are required in connection with the lawful purchase of the Shares, and the purchase and procurement of the foreign exchange necessary for the payment of the Purchase Price pursuant to the Purchase Agreements.
UT will be getting the $25m in US dollars wired to them in the US. The other two "financial investors' - Ram and Shah will only be putting in their contributions once the Beijing investments are finalized.
UT Company description and product lineup:
UTStarcom is mainly engaged in the business of IP-based telecommunications with products and technologies covering areas including wireless, broadband, next generation networks and end-to-end networking, providing a variety of products and system solutions including TMRollingStream®IPTV and IP video information publishing solutions, Interactive iDTV, Mobile TV and OpticalXpressEPON system solutions that can be applied to broadcast and television industries, broadband integration and industry application solutions such as PTN/MSTP comprehensive solutions, NetRing next generation optical network systems, AN/iAN series new generation multi-service access platforms, EBox enterprise telecommunication systems, PDSN and CDMA,CMMB, TD-SCDMA and WiFi mobile phone terminals.
Seems like a good description so I added it so shareholders know where the revenues are going to come from.
UTStarcom is planning to set up a wholly foreign-owned enterprise (the “New WFOE”) in the Zone and authorize the New WFOE as its operational headquarters.
Here are the commitments of each of the "parties"....
II. Party A’s (Investor) support to Party B (UT).
1. As a newly registered foreign investment enterprise in the Mobile Silicon Valley Park, If New WFOE’s contracted foreign investment amount is more than US$15 million, then after it starts production and generating taxes within the first year from the date of its registration in the Zone, the New WFOE may apply for a financial support in an amount equal to 3% of the paid-in registered capital (as converted into RMB) up to a maximum amount of RMB 20 million.
2. As a newly introduced enterprise in the Mobile Silicon Valley Park, if the New WFOE leases the office facilities or real properties developed by the Head Company for its research, development and production, after it starts generating taxes, the New WFOE may apply for rent support. The term and amount of such support shall be based on the relevant encouraging policies of of Mobile Silicon Valley Park in Beijing Economic And Technology Development Zone (the “ Silicon Valley Encouraging Policies ”).
If the New WFOE meets both the conditions set forth in the subsections 1 and 2 above, it may choose to apply for only one of the two financial supports.
3. If the New WFOE qualifies for the support under the relevant provisions of thebn Management Measures for the Special Funds for Science and Innovation of Beijing Economic and Technology Development Zone , it may apply for the relevant monetary support.
4. The New WFOE may apply for the benefits of the support and financial encouragement policies applicable to the senior management and senior under the Silicon Valley Encouraging Policies.
5. As an enterprise registered in the Mobile Silicon Valley Park, the New WFOE may apply for the benefits of the relevant preferential policies according to the relevant Silicon Valley Encouraging Policies. Party A agrees to use its best efforts to help the New WFOE obtain the benefits of relevant preferential policies.
6. Party A may help Party B in developing markets in Beijing, coordinate with Party B regarding any issues relating to export credit, bank financing etc. and support Party B in obtaining the high-tech enterprise certificate.
7. Party A will render continuous support for the growth of Party B’s project, and provide high-quality services for the entry of Party B’s project into the Zone.
III. Party B’s Commitments
Party B agrees to make the following commitments:
1. Party B commits to initiate the application process for the incorporation of the New WFOE in the Zone within one month after the closing of the investment by Beijing Yizhuang International Investment and Development Corporation in Party B and register or move its operational headquarters in or to the Zone within three months following the completion of all procedures of various governmental approvals, registrations and filings related to the formation and funding of the New WFOE. The registered capital of the project shall reach US$15 million by the end of the six months after Party B completes the registration of the New WFOE.
2. Party B commits that, after establishing its operational headquarters in the Zone and approximately 5 years of such date (and shall take reasonable measures to ensure that such date is no later than the end of 2015), its accumulated sales revenue contribution to the Zone will reach approximately US$2.3 billion, and its accumulated paid taxes will reach approximately US$34.5 million (limited to various national and local taxes excluding customs duties).
3. Party B commits that its operation term in the Zone shall be no less than six (6) years from the date of registration.
This looks like a very complex process in nailing down the agreements with getting all the PRC (Peoples Republic of China) Approvals (thats why they had to extend the time period 30-days and may need to do it again soon) as well as the substantial support/commitments of each party. It also looks like the company is commiting to atleast $2.3B (or about 460m in revenue) out of that economic zone in the next 5 years.
This is interesting as their lease on their Hangzhou building is now very flexible (they can pay it off to move out completely).
I'm in the process of setting up a call with Peter Blackmore next week and might get to discuss the China deal and these various commitments. It would be a nice change to get major contracts and a sustainable base of business for the next few years and this move/agreement provides the opportunities for it. We'll see.
Have a good weekend.
Saturday, May 8, 2010
While UT CEO Peter Blackmore mentioned on the call that they are pushing hard to nail down the significant BSNL Phase III contract, the security issues in India have delayed this contract for a couple of quarters now.
The security issue in India is mostly directed at Huawei (see article).
"However, the Indian security agencies - IB and RAW - are convinced that Huawei is part of Chinese spy network. They have cited its links with PLA as evidence against it.
However, the bigger embarrassment for the Chinese officials may be the issue of corrupt practices that Huawei officials are allegedly involved in India. Corruption is a serious issue in China and officials involved in corruption are executed."
Blackmore has mentioned on the call that the company understands the seriousness of this issue in India. With analysts/investors, he mentioned potentially partnering with a local Indian company down the road but now is going back to India this month. At this stage, the longterm potential benefits of the Beijing investment group is having a short term negative impact on the company via the BSNL phase III contract being delayed.
The net effect is obviously negative as nothing was clarified. The overall 6-7% market drop this week, very low Q1 bookings, still high opex on top of the unresolved Beijing investment/BSNL phase III contract lead to a further 23% decline this week and an overall 30+% decline in just the last two weeks.
With all the uncertainties/negatives mentioned above, most institutional investors stayed on the sidelines after the quarterly update. However, it has now become a compelling buy again for traders and those that want to play either a (market) bounce or short term resolution of the above items or longer term accumulation.
Tuesday, May 4, 2010
1. Revenue - $81m; GMs 34% (Higher GMs due to TN products)
2. OPEX - $46m ($30m SG&A; $10m in R&D); Q2 much lower as 300 employees left in Q1; Still on target to achieving $100m opex run-rate by Q3 as outsourcing gets done in Q2 and employee headcount goes below 1800. Still high....seems like a lot of people took advantage of staying as long as possible...must be additional farewell gift from UT. This is a net negative.
3. Cash - $235m (includes $14m from the building). An additional $56m in escrow in April and the balance of $63m with a bank guarantee and should be in by Q2. Losing $30m is a net negative tied to higher OPEX still.
4. BDA investment - Closing in Q2
5. Building - Title transfer already accepted. Buyer has paid taxes...will close in weeks. Positive as there were questions why this was taking so long. Looks like a done deal.
6. New CFO and General Counsel completes management team. Negative as confusing to see a new CFO with high salary/compensation replacing the previous CFO that only stayed a few months.
7. General buisiness discussion - Company focused on IPTV/broadband and China/India/Japan. What happened to NGN?
Leading iptv in China/India (good STB demand in China); Mentioned again the industry projection of >15m in iptv subscribers in China compared to 4m now. Neutral as projections look good but no specifics to UT.
8. Presentation to CCDM (cable industry) - Company products got good reviews. Same with EPON-EOC which they won an award.
9. Misc. IPTV wins in Q1 - Best TV, Shanghai expansion, China Mobile Research, CT Fujian province, Bharti. The Bharti is interesting as atleast they were not banned in India for iptv.
10. India - 30% market share in broadband; company aware of security issue and as a US based company governed by US laws, will comply with Indian government needs. I think Blackmore could have discussed this more and better.
11. BSNL phase III - Still pushing hard for significant contract by Q2. Sees potential to join mobile market in India via for optical TN products. Specific target in broadband in India and Softbank. Very positive as deal is not cancelled and looks like good prospects for TN in general and India market a plus. The stock has declined from about 40 cents due to the market selloff and concerns in India.
12. Book to Bill - Well below 1. Blackmore says this is unacceptable. Very negative in the short-term. I will see if I can get clarification on what well below 1 is. If BSNL phase III is excluded, bookings of $60m/quarter would still add to about >$350m run-rate (w/out PAS deferred revenues). So, .75 book to bill would not be bad. 0.5 would mean only $40m and that would not be good - and would need to be made up.
13. Business units - MMCBU - $42m with 38% GMs ($21m deferred with 35% GMs); BB - $35m with 28% GMs (MSAN/GEPON/TN). Slight positive as margins for broadband is good. Revenue (w/out deferred) is about neutral from the run-rate for this year. What happened to services?
14. Handset - $4m with 39% GMs (one time help).
15. Annualized goals still >$350m revenue (incl. deferred revenue of approx. $100m).
16. Q2 Rev - Similar to Q1 with high 20s GM.
17. Summary - Focus on growth since company is now simplified....
Commentary - Largest negative was the low book to bill, with the high opex a close second. India concerns alleviated for now but we'll see when it closes. Other positives include TN revenues rolling in as well as building closing/investment group on track. The stock could be vulnerable as the recent stock movement has been down and the market is taking a breather. On the other hand, the company looks like it will resolve the remaining restructuring, outsourcing, building sale, investment group....items within this quarter and opex should significantly be lower in Q2 and finally reach the mid 20s by Q3. In this quarter, despite the deferred revenue being recognized, the book value still went down to around $1.85 from $1.96 due to mostly the high opex. Depending on the mix in Q2, the book value could go down just a little more and may start going up in Q3. Cash is at $235m...Add $119m for the rest of the building and $48.5m from the investors and they will have $402.5m ($2.65/share in cash using 150m shares) minus any restructuring outlays/cash usage in Q2.
I think the stock bottom the rest of the year will be in Q2 and will trend up for the rest of the year in accordance with the better operating quarters ahead.
Sunday, May 2, 2010
The knee-jerk reaction from posters on the message board is to spin-off UTs India operation. That UT should indegenize with respect to India. That it should move all hardware and software manufacturing to India.
Lets look at some current facts....
UT in India - 1. UT is the most trusted vendor in broadband/iptv for 3 years in a row. http://www.ciol.com/Technology/Networking/News-Reports/UTStarcom-wins-8th-VARIndia-award/251109128144/0/
Why didn't a pure non-Chinese company like Ericsson or Alcatel win these awards? Is all the effort that UT put in with their India operations out the door due to the new Chinese board members?
2. UTs director for South Asia/India Vijay Yadav leads a team of about 125-150 in India that was not affected by the recent restructuring. Mr. Yadav seems to be well connected/intune with the India market. http://www.telecomtiger.com/fullstory.aspx?storyid=6353
3. "We are also working to increase India’s contribution to the global operations of UTStarcom. For example we already have extension of our Global R&D team of BB based in Gurgaon, India, and the Escalation Centre for Asia Pacific is also based out of Gurgaon. This year we have established Centre of Excellence for IPTV in Gurgaon, India, and over the coming years we hope to contribute more to the global IPTV product line of UTStarcom from India." http://asia.tmcnet.com/topics/india/articles/44293-utstarcom-discusses-indias-growing-broadband-market.htm
So, I assume that atleast the software interface and network management are performed by Indians already and not Chinese workers, which is basically the requirement of the Indian government for security clearance.
Company makeup - UT is listed as a US company with still mostly non-Chinese investors. In fact, the largest holder is Shah Capital, headed by an Indian. It is interesting to note that the investment deal that brought Chinese investors included Shah Capital.
At this time, the China market with 90% of the employees and potential for their revenues are much more important than India and Japan. Japan is not a major issue due to Softbank as a major shareholder as well as Lu's connections there. The arguments for UT not truly being a Chinese company works the other way as well in India. IF it is critical to indegenize UT further, Shah will definitely have input.
Outsourcing - UT has considered opening a manufacturing plant in India but recently went with outsourcing firm Sanmina.
How important is the hardware manufacturing compared to the software? If it is, UT having outsourced its manufacturing will have an easier time to move manufacturing to India if necessary as they don't do it themselves anyway. In any case, Sanmina is not a Chinese company.
Partners/Joint Ventures - Should UT spinoff or move software/hardware manufacturing everywhere they decide to do business and there is a security concern (which is probably every government). Of course not. UT has shown it will partner in Latin America and even in individual bids in China (with NSN). UT also partnered with IBM in India before.
Value - What would a spinoff be worth? Until recently, the street valued UT at book value and even now less than cash on hand. The business in India is simply not worth spinning off at this stage. Can a local Indian company develop iptv and compete with UT like ZTE and Huawei in China. No, UT spent a decade and hundreds of millions on their iptv system.
Summary - As a shareholder, I obviously want UT to succeed in their venture in India. So do the board and other large institutional investors. Is it better to be indegenous with respect to India? Of course, but to what extent? Just as Huawei has to decide to what extent they will do so, UT management/board has to decide as well. I just don't think a spinoff makes sense at this time for several reasons, one important factor being how this security issue is really implemented by the Indian government and how it impacts companies like Huawei/ZTE. The company was already planning to add an Indian board member and the local management/team that they have put in place/previous "accomplishments" show they know their way around the local Indian market. If this situation is really hampering them in India, then I would expect the leadership to take additional steps.
Saturday, May 1, 2010
Heres a video of the opening ceremony of the Shanghai World Expo with fireworks along the river and showcasing the world's largest LED screen.
Tuesday, April 27, 2010
Granted, Tellabs' quarter is signficantly better than UT's previous quarters but the detail of information provided gives a shareholder a good feel for their business. Tellabs provided discussions on
1. Number of customers, trials, and info for specific products
"Revenue for all three data products Tellabs 8600, 8800, and 9100, increased both year-over-year and sequentially."
"During the quarter, 23 new customers placed orders for the Tellabs 8600 and 8800, primarily for Tellabs mobile backhaul solution, and this was done all over the world.
"We continue to work with customers and now increased number of trials to 18"
2. Gross margin discussions and influences
3. Guidance for next quarter/current year and how it has changed from their last discussion
Analysts on the call? Look at their lineup...
Jim Suva – Citigroup
Vivek Arya – Banc of America/Merrill Lynch
Ehud Gelblum – Morgan Stanley
Nikos Theodosopoulos – UBS
Rod Hall – JP Morgan
Michael Genovese – Soleil - Elevate Research, Inc.
Jeff Kvaal – Barclays Capital
George Notter – Jefferies & Co.
Simon Leopold – Morgan, Keegan & Company, Inc.
Chandan Sarkar – Auriga U.S.A
Larry Harris – C.L. King & Associates, Inc.
Todd Koffman – Raymond James
As a shareholder, we obviously want info on bookings, guidance, customers, trials, margins, product performances, etc etc. While we get sporadic info from a product or segment, it is very inconsistent and does not portray a unified picture.
NGN - We get 4 or 5 customers from Latin America to Europe in one call and then nothing.
PDSN - We get 40% of a particular tender (China) in one call and then nothing.
GEPON - There were trials in 20 province (China) in one call and then nothing.
IPTV - No subscriber info provided in over a year.
PTN - Supposedely lots of trials but only a couple of wins. Almost the entire Tellabs call was devoted to the mobile internet and their transport/backhaul equipment. UT has major carriers/customers in China, India, and Japan and there is very little material/substantial information on their 700 series of products as it pertains to their customers/traction. Tellabs backhaul equipment is used in literally hundreds of customers (240, from the call). UTs PTN products can be used for aggregation of 3G/4G systems as well as legacy networks. It can be used for mobile backhaul. There are tons of technical literature in their website but as an investor, who cares if you don't read about it elsewhere or what traction it has gotten?
From all indications, the growth in iptv, mobile internet, broadband capacity is just ramping up and have years of tremendous growth ahead. Can UT participate? They seemed to have the products, more focus, new investors, raised capital but can they sell their products. So far, they have not and can't convince even analysts to show up for the calls! Analysts have been burned so bad so I don't blame them either. Yes, they have done a lot of the hard lifting. But, good operational results have yet to materialize. That makes it even more essential for the company to discuss more information. The company should atleast start building their credibility by being more transparent, wrapping up the legacy items that they have been discussing for over a year, and discussing the business in more detail.
Monday, April 26, 2010
This recent article also mentions the # of cable subscribers in China.
"Meanwhile, other platforms continue to dominate the Chinese pay-TV market: there were an estimated 174mn cable TV subscribers in China by the end of 2009, including 65mn digital cable TV customers (up 190,000 from the previous year)."
Here is a link to the earlier article a month ago.
"Several drivers are expected to push IPTV growth in China between now and 2014, including Beijing's continuing advancement of its triple-play convergence policy, the ongoing competition between telcos and broadcast operators to dominate their own territories, and the strategy among operators to bundle wireline and wireless broadband with IPTV services."
Commentary: Thats a LOT of cable subscribers.......UT mentioned in the last call of winning 6 iptv cable contracts but those were just providing the equipment (old business model) and not including the vendor financing/service model. If UT can execute, maintain their iptv market share, grab material cable subscribers, it already would be a very good year. If something comes in the next few years that will make iptv a "must have" add on, then its lights out.
The company is releasing Q1 results on May 4, 2010. Lets see if they provide updates on the iptv markets in China and if there are any tangible developments with their new investors in Beijing.
Sunday, April 25, 2010
Cash - This is clearly a major strongpoint for the company. It has $267m at the end of 2009 with another $130m from the building and $48m from new investors. There are still significant restructuring payments to be made but the company should have around a net $400m going forward. Companies from Ciena, to Adobe to Microsoft have been raising cash for potential acquisitions (or funding acquisitions and repleneshing their cash positions). Because of UTs poor operational history and low stock price, it was vital for them to raise cash before asset prices (PCD/building) go down or the markets turn against them. UT has indicated it may do some small acquisitions in the internet gaming area but nothing large. The indicated use for UTs cash horde is to get additional loans and show the company's stability and using it to finance new business.
Management - The new management emphasize their Chinese backgrounds but they also have international experience (education/previous positions). Focusing on China is a priority but having international experience for their other markets is still very critical.
US listing - I think it is still important for UT to be listed in the US markets as their filings can be more trusted. It can also lead to further capital raising down the road as performance improves. The company has over a Billion dollars in losses that could be used by an acquirer in the future to offset future taxes as well. Century Tel's acquistion of Quest had a potential $1.7b in tax savings.
Outsourcing/Sale of the building - Besides the cash raised from the building sale, the oursourcing deal provides more flexibility to the company. The company can reduce headcount and focus on their core business of developing higher margin IP products (software mostly). Companies like Dell, Sony, etc are discarding high price manufacturing plants and going more into outsourcing.
Inventory - UTs inventory in the last quarter was down to $72.3m, down from $167m, $187m, and $161m the previous 3 quarters. Inventory has been an issue with UT in terms of writing down inventory and requiring higher working capital. The new outsourcing deal will also alleviate inventory issues (working capital freed up).
Margins - UTs decision to move away from handsets/smartphones will increase margins from the teens to the high 20s/30 range. This is still below industry averages (Huawei at 39+%). The company's iptv (software portion) already has very high margins as was evident from the MCBU's 50% GMs last quarter. It also generated about $40m in revenues from a software upgrade. PAS deferred revenue has about a 33% GMs (and low Phase 1/2 BSNL GMs) so UTs target of high 20s/30 GMs for 2010 is not relying on the deferred revenue to increase GMs but on new revenue having higher overall margins (from PTN and iptv). As the entire industry is focused on services and recurring revenues, it is good that UT's new focus on the cable iptv industry will be on financing the equipment and collecting fees/services revenue. This will provide higher margins as well as a more dedicated customer.
IPTV- During the Roth conference, UT reiterated their 44% market share in IPTV in China as well as projections for subscriber count to increase to 15m in China by 2011. While estimates have been way optimistic in the past, the Chinese government's push for triple play/convergence will definitely drive business the next few years. IPTV has always been the major hope for longterm shareholders as the potential markets in China, India, and elsewhere are projected to be huge and other sources of revenue (from broadband sales, advertising, gaming, education, software, etc) could become material as scale ramps up. We have seen a glimpse of the revenue/margins the company can have in Q4 based on the software upgrade for just over 1m subscribers. Let us not forget that the company's R&D has been focused on iptv for the most part of the last decade. It is still their most attractive asset for differentiation, getting high margins, and developing a loyal customer base.
PTN - With other broadband products that they have previously, this could have a very long cycle as it can also be used from the backoffice handling of 3G/4G wireless systems. I'm not an expert but this product should anchor the broadband business for years with higher than average margins.
Visibility - The visibility of UTs business has never been good. The backdrop of losing PAS business, relying on low margin handsets, having high opex and waiting for equipment sales has been a losing combination. The lowered expenses, inventory, outsourcing, control of financing, focus on iptv software, etc etc should improve visibility and allow the company to execute at a much higher level from the past.
Nothing is guaranteed and no guidance or tangible contracts have been provided but the above shows the company has been doing some signficant groundwork that will allow them to perform better. I am hopeful that their technology is still relevant and they are still in position to be a leader in certain segments/areas. Right now, I like their position but would like to hear more tangible news on progress from the starting points established above. I think they have a real opportunity to perform well and start regaining credbility from the street. There is always the chance of being acquired but I think they should really move forward and aggressively attack their market strengths right now (iptv-China, Softbank, India). Ciena, for example, has been aggressive and been rewarded. UT is now in a position to be on the offense. As a small company, they are disadvantaged from a longer term perspective but have certain niche advantage that they should use now. Shareholder value will be dictated in how quickly they can move now.
Institutional Interest/Short position - No signficant net movements on both front. Institutional holdings are around 50% while short position is in the 12m range. Volume has atleast moved from ridiculously low (300k/day) to above 1m lately. Both the institutional holdings can still increase significantly and the short position drop significantly. I think this will ultimately happen as the picture clarifies and shareholders will finally be rewarded.
Monday, April 5, 2010
I would say the company stock is still a lagger and just catching up with the market. But, why did it lag and why did it now catch up? During late last year, what metrics could we judge the company by? The only ones were the restructuring, outsourcing of the manufacturing, sale of the building, BSNL phase III, potential wins with China Mobile. There was no quarterly guidance, bookings, contracts, or anything much provided.
What did they accomplish? They failed on a lot of those above items above and hence the stock continued to lag. Even after the announcement of the Chinese investors, did the stock rally? No, it went down 15% below the price that investors were going to pay for the new stock.
What has led to this rally is the performance in Q4, info in the CC, and the Roth conference presentation.
1. The company did over $100m in revenues in Q4, had positive cash flows of $20m+, and w/out charges almost had a breakeven quarter.
2. The company gave details of the BSNL delay.
3. The company gave details on the closing of the building.
4. The company discussed when the investment group influx would close.
5. The company convinced new shareholders from the Roth conference and buyers emerged.
6. Clarification on deferred revenue (the mix composing mainly Phase 1 & 2 BSNL contracts, which would be replaced with higher margin Phase III revenues).
7. Ongoing progress with outsourcing/restructuring and that it would be completed in Q2 (not Q3 but some in Q1 and be completed by Q2).
8. Continued market share leadership in China IPTV (44%), new cable iptv deals, and the push by government to increase iptv subscribers (note the projections for double the iptv subscribers for 2010 and increasing to 2014 or so).
So, while the Chinese investors and new iptv/cable models (not contracts) are definitely welcome, it hasn't yielded anything tangible in the business. There have been no contracts and no loans to discuss as of yet.
The volume in the stock is still very low and has not had a breakout day (10-20x average daily volume) as of yet. I think it will come but the company has yet to even complete certain items listed above, not to mention any benefits from having new board members and the relationship with the Beijing government entity.
In any case, there is much to look forward to but until we get a significant upside volume breakout day and a break of the 7-year downtrend, the stock is just reflecting a rally from the recent quarterly update (which was also long overdue).
Will UT benefit from being a Chinese company? I hope so. I just want them to get their operational items in order (finish restructuring, get margins up, manage contracts/inventory better, etc) so that they are a "normal" company, let alone a Chinese company. If they can get to being a normal company, and then a normal Chinese company, then maybe we shareholders can still benefit from the 8-10% growth in China :-)
Sunday, April 4, 2010
In this post, I will focus on the long term downtrend of the stock. I could go all the way to the $80 range but I'll stick with the 7-year bear market back to 2003 or so. I've posted a chart for reference (you may need to adjust to plot the 7-year chart).
During the last few years, the stock has had a "run" from $5 to almost $11 and from $2.23 to $5.94. However, as we know, those runs were primarily based on sellout environments and not on company operational performance. The operational side has been so bad that it hasn't had an operating profit since 2005 (due to the large recognition from Softbank) so it was really 2004 since the last sustained profitable environment.
In the last post, I discussed some potential drivers for revenue/earnings growth as this is a crucial time for the stock. Looking at the chart, it is either just another rally in this (atleast) 7-year downtrend, or a true change in operational performance/consistency that longs are waiting for.
There are two Major resistance I see around the $3 area, one being the 7-year downtrend line and the other horizontal resistance from July 2007 to March 2008.
There can be a lot of further discussions on the company's fundamentals but at this juncture, the stock technicals are the main storyline. This would be a good time to sell if you had been waiting to take profits or cut losses. However, if it breaks $3, then, we will be in uncharted territory as the longterm stock decline will have been broken. At that point, I believe we will test the last high of $5.94 somewhere down the road. Regardless of whether it breaks it (or not; $3 level), there will be violent moves as the $3 level is a crucial resistance level.
Have a good week everyone.
Wednesday, March 31, 2010
The company's model is to have around $350m in revenues, high 20s GMs, and an OPEX under $100m per year. Blackmore has repeatedely mentioned that the cost targets should be achieved by the end of Q2 when the restructuring will be completed, outsourcing in place, and headcount down below 2000 (maybe around 1700). The company has also worked on improving GMs by getting out of the handset business, improving execution on the new BSNL contract, and relying on new products (line of TN products). During Q4, GMs were already at their target range including the deferred revenue (low broadband margins offset by higher pas/iptv margins). On a side note, Huawei's GMs for the last two years were around 40%.
So, in order to drive to profitability, revenue growth is a priority. The company is confident it can get there by Q3 due to the deferred revenue (and lower expenses by that time) but the bigger question is can it sustain it without deferred revenue. The fact is the company will always have deferred revenue just based on the nature of their contracts. Without the $100m in deferred revenue, they would still have $250m this year in "non-deferred" revenue. The company should be able to replace the deferred revenue with the upcoming Phase 3 contract.
Where is the company going to derive "additional" revenue? The company has also layed out that plan and its to do vendor financing to land larger deals. At first glance vendor financing has its drawbacks but done properly, this has a good chance of working. Why? First, other companies like Cisco/Huawei do it and still get very high margins. For their customers, the margins are not as important as getting financing! With $400m in cash, UT is now in a position to go to banks and get low interest loans and do vendor financing. The areas they will be targetting are iptv cable in China and Softbank (TN product/others).
Projections for iptv in China (telecom/cable) should be very healthy and broadband in India as well.
The number of IPTV subscribers in China will double this year to reach 8.5mn by the end of the year (up from 4.4mn in 2009), according to a new report from iSuppli.
"According to me (Vijay Yadav), within next three to five years broadband usage should reach a minimum of 100 m subscribers"
While UT has a good market share in broadband, the payoff will be in iptv and its related services once the number of broadband users expand in India. This will be another area where the additional cash will help going forward.
Revenue growth/impact to earnings - In order for the stock to move higher from here, it has to start generating revenue growth and profits (hard to imagine after all these years). The company has detailed certain time frames for the closing of the building sale/new investor shares. Once that is completed, they can focus on discussing getting their loans (if not already). At that point, it will be about execution as they have more control now of getting profitable contracts and can control their revenue/performance better. Every $100m in new revenue will represent a 30% increase from $350m and yield about $30m in additional gross profits (more if it is tilted to higher margin TN/iptv products and lower if its mostly broadband products). While $100m is large for this company, its not in the overall telecom world (as evidence by Huawei's $18.9 B and $21B revenue the last two years).
Back in 2008, the stock hit almost $6. Looking back, the company was in terrible footing. Without PCD, the company was losing $130m. It was still relying on $250-300m in PAS revenue and the major worldwide recession was still to hit. The company projected needing hundreds of millions in new revenue just to break even and their projections for 2009 was obviously off. This time, the projections could still be off but the much lowered expense by Q3, the existing revenue/deferred revenue, and potential for large revenue increases through vending financing make it more credible that they are on better footing (in terms of getting to sustainable profitability).
We will see if they can execute on their roadmap and start building some consistency/credibility/better performance. As UT CEO Peter Blackmore has said, the heavy lifting has been done and they just have to ride the wave in growth in China/India. Most investors are still cautious as they should due to the history of the company but I think the "ride" should be a lot better for investors going forward. So, how come we aren't at $6 yet :-)
Monday, March 29, 2010
"I would be very happy if someone could talk me out of these concerns, because I had looked to the last cc to address all of this, but heard nothing really useful, just more generalities."
I heard a bunch of useful things such as:
1. Restructuring to be completed by end of Q2.
2. OPEX yearly run-rate of less than $100m will be achieved by end of Q2. This includes factoring in rent.
3. On the Q&A, there was a question on profitability/cash flow and Peter answered that Q3 should be the breakeven/profitable point.
4. BSNL which is around $120m (from my talk with Peter and other inst. investors) should be signed in Q2.
5. IPTV demand is going well with STB orders picking up. The company mentioned they have 44% market share and a 3rd party estimate shows a major growth phase starting in 2010 continuing through 2014 in China.
6. Two areas that they will use their cash to boost revenue are IPTV cable and Softbank. Both are very credible as the company has strategic positions with both and have the cash/technology to determine their faith.
7. Beijing investment to close in April.
UTSTarcom CEO Peter Blackmore has been straightforward in what he wants to accomplish and how he is going to get there. The problem has been the execution, which has been poor and that has led to credibility issues but overall, they are doing what he has set out to do. With Q1 closing, there should be a lot of items to check off for the next couple of months and then they are at operationally where the company should be.
Sunday, March 21, 2010
The call ocurred a couple of days after the Roth Growth Conference and the company's own earnings call the previous week. While the conference was a "growth" conference, I had heard that the investors in this conference also looked at turnaround stories. I asked Peter how was the Roth conference? Peter met one on one with atleast 6 investors/institutions. The investor's biggest concern was about execution going forward. Peter reiterated a few times on our call that this was the right time to do these types of investor conferences as the company is mostly through with the heavy lifting. Are they planning more going forward? Yes. In the Roth conference, there was a question regarding growth and basically why it was worth investing in the company. Peter answered that the company's enterprise value was negative, almost all the heavy lifting was done and basically a disconnect with the stock price since they were in leading positions in China and India in certain areas.
I had commented to Peter that credibility was an issue up till now and that the few metrics we heard such as the BSNL project and the restructuring being completed last year were both delayed. He assumed responsibility for that but did not see it as a big delay in the big picture.
On a side note, my own thoughts on the conference was that it was interesting to see Peter try to sell the company to new investors ...almost like me trying to defend the company with the same line of reasoning. Nice to see him work but then again, its not a fair comparison since he has gotten paid and I and a lot of shareholders have not.
Ok, moving on....BSNL contract. Phase III has been delayed due to BSNL management change. How confident is he that they will lock this in? Are there other bidders? The Phase III contract is part of a master contract that included Phase I-III with UTStarcom is the sole supplier. BSNL needs the equipment badly so will have to order it soon. After Phase III, then its open bidding. The amount is around $120-130m. Its possible that BSNL will not sign it but not likely. I asked what the margins are? In the 20s. What are the payment terms? Better than Phase I and II. Peter explains that there are new accounting rules in India that will benefit all suppliers as the equipment/software (service?) are separated. On the Roth call, Peter talked about the 900 cities that they have serviced and the technical challenges they have overcome so the Phase III is just finalizing the contract, which he mentioned in the earnings call to be in Q2.
Deferred Revenue - Phase 1 and 2 BSNL was around $200m total and they have only started to recognize Phase 1. From the past, I think Phase 1 was to be recognized in the next 8 years? Phase II about $3.2m or $3.6m/quarter for the next 5 years. The rest of the deferred revenue is PAS and IPTV. I asked Peter if it would increase book value once they are recognized. I don't think I put this very clearly but Linda definitively cut in (thank you) and said it will increase it. But since margins for the bulk are not high, the impact is not significant.
Cash collection this last quarter - I was trying to get more color but basically just good cash management/collection as some products were accepted and they received further funds. Peter reminded me about the restructuring amount that was already booked but cash yet to be paid out. I mentioned that I think it was still $20-25m and moved on. Peter was more upbeat on the Roth call than the earnings call I believe. In the Roth call, he had time to break down the quarter as almost breakeven and discussed the cash in more detail for the new audience. In the earnings call Q&A, he mentioned that cash should mimick the P&L more closely in the coming quarters after the restructuring (I guess barring a large order and material buy).
IPTV/Cable - With previous products and lack of traction, why does the company think this route has a good chance to succeed? Why can't Huawei/ZTE get in as well? Peter mentioned the fragmented cable industry, their ties to SARFT, Huawei/ZTE have bigger clients in the telecom industry, UTs overall better IPTV product, and service model/revenue sharing (advertising) experience/first mover advantage with Southern Media cable as all reasons he thinks they can be successful. All 6 cable iptv wins were still the traditional equipment sales only as well as the Markwell (Taiwan) contract previously. I asked if this was a good model for the Philippines. Not at this time as that market is small.
MSAN in Tiscali - Good business with Tiscali but MSAN is an older product.
TN with China Mobile, what happened? - Technically, UT's product scored well and priced well but there are certain things out of their control and CM can give the contract to whom they like regardless of the scores.
TN in general - My reading into TN make it seems Alcatel, Huawei, ZTE, and others have been developing TN for as long as UT and UTs lead of 1 year mentioned in 2008 may be gone, so what are its advantage in the TN product. Peter mentioned the software/management part of it and that TN is still very early acceptance stage with a lot of carriers. I asked if the BSNL project had some TN products. It has some (but little)TN, mostly RPR and IPDSLAM. I asked what about Bharti since they have a lot of mobile subscribers. Peter mentioned thats one they are looking at and obviously Softbank.
Softbank/Vendor financing - Regarding a major optimism from Peter is their cash and the importance of it with talking with Chinese banks to get loans for vendor financing. I was concerned about this and asked Peter if this made sense and he basically said most of the large contracts/companies (the Ciscos/Huaweis) do the vendor financing. The loans are like zero percent that they can get and then do large contracts. Rather than $5 to $10m, they can do in the $100m range.
Board of Directors - When Peter leaves the company, he will leave the board and Jack Lu will take his place. That will give the board 4 new directors, leaving 3 (Lu, Toy, and Ryan) for continuity. There is no word on Lu and Toy. Peter mentioned Toy's wife as Chinese (not sure what/if any importance to the conversation). Lu is spending more time with new businesses/investements in LED. Peter feels good with the management/board when he leaves.
Stock sale - To pay for his RSUs. Thats a big chunck just to pay taxes on. He reiterated he has not sold anything execpt for those tax sales.
Bookings - I mentioned my disappointed in the last year was the lack of bookings after he himself mentioned using bookings as a metric early on. I think I discussed this previously with Barry as well and there was problems with what numbers to report due to the contract language and Peter in the Roth conference mentioned some reason....whatever it is, this is something the company needs to work out and be more transparent on.
Competitiveness in India - Is this going to be affected now that they are a Chinese company? Probably not in the next 2 to 3 years as they are a relatively small company. Peter reiterated their personnel in India and positions with the carriers there. There is much more in the Roth conference regarding India that people should listen to. Peter said in the conference that as they ride the wave of growth in India/China, that the overall growth of the company should take care of itself. (thats what I thought in 2004 when I first heard about the company).
OPEX - Still targetting under $100m yearly run-rate by Q3 (including building rents). I've heard from others that headcount should be around 1600 by the end of the restructuring. This includes 900 in R&D that are untouchable at this point, 150 in service, 150 in marketing.... In the Roth call, he emphasized investments in IPTV/optical broadband that have been protected through this restructuring and their main areas of growth.
The call lasted well over 30 minutes and I was the one that ended it. Just scanning the headlines tonight and saw Tiger Woods only granted a 5-minute interview so I guess I should feel privileged. Overall, I expressed my appreciation for the communication over the years and the work that he has done. I mentioned that his tenure will probably be judged long after he has left the company. He wished there was more "growth" at this stage before he left but that it was the proper time to do so.
Side note: Sorry for the late posting. I still haven't posted on the earnings/Roth call but getting swamp with some work/travels and nothing really much to talk about that isn't discussed in the message boards.
Have a good week ahead everyone!
Tuesday, February 23, 2010
"Set up in September 2007, Borqs is a leading mobile software developer. It developed OPhone OS operating system for China Mobile Ltd. (SEHK: 0941 and NYSE: CHL)'s TD-SCDMA mobile phones, mobile Microsoft platform Mobile Widget, cloud computing platform Big Cloud, as well as mobile Internet application services Mobee."
The company has "denied it"...
The company had $241m in cash/short term securities at the end of Q3 2009. With $130m (from the building) and $48.5m (from new investors) coming in, that would put their cash at about $420m. Cash flow will be impacted from the completion of their restructuring and additional losses but it will still have sizable cash levels. Cash flow from India Phase I, II, II extension have yet to be fully collected so cash levels could be higher than what I projected in the last post.
So, what to do with it? Some have speculated vendor financing to drive revenue up. Some have mentioned it could be wasted on low margin contracts that would not do much for profitability. Despite its very slow transformation and recovery, the company has shown it is trying to address the gross margin situation by discarding low margin operations, even the handset making business in China (except for the iptv handsets). It has formed partnerships in South America and Europe in the last 6 months or so and have newer products (TN) that will improve margins. The outsourcing deal adds to this focus on margins. If the lower margin products (broadband mostly) get them market share and continue to serve their existing/future customers, and enable them to upsell future higher margins products, then that is a practical strategy. In any case, the management does seem to get this and the actions support it.
Now, with new cash, the company can be more aggressive in acquiring pieces to get them into higher margin sectors (software/services) or solidify their product offerings in mobile advertising, iptv, cable, convergence (Analysts believe that UTStarcom is aiming with IPTV to replicate the success it had several years ago with smart phones and that it will benefit from China's recent move to integrate the telecom, broadcast and Internet networks.).
Wednesday, February 17, 2010
"As of Q3, the company had cash/short term investments of $241m and $296m in stockholder equity. For the next two quarters where losses are still projected and the restructuring is to be completed, lets evaluate the book value/cash. Cash usage for the restructuring will be $24m + $5-10m (for 2008/2009 restructuring). Cash usage for the losses in Q4 and Q1 (say $30m - just a guess). They will bring in $3.5m for the Starent settlement. So, by end of Q1 2010, cash can be down to the $180m level."
Due to the building sale and issuance of new stock, the company will receive an additional $130m + $48.5m = $178.5m. That will take cash after restructuring and additional losses due to unprofitable Q4 and Q1 to $358.5m. Lets round to $350m since there are settlement charges + bonuses/severance to Blackmore/Viraj. Divide this by 150m total shares, and you get $2.33/share in cash.
Book value is much less. The last estimate I had was around $260m in book value after Q1 2010. Factoring in the $35m of loss in the building and $48.5m in cash infusion would yield around $273.5m. Dividing by 150m total shares, and you get $1.82. This would be less if my loss estimates are worse than $30m for Q4/Q1. However, there is discussion that the deferred revenue could significantly add to the book value when it is recognized.
If there are $200m of PAS deferred revenue to be recognized at margins of 40%, that could add $80m to the book value and move the book value to about $2.35/share.
Ultimately, the cash and book value will not matter if the company becomes profitable or really fails to get any business traction. However, for the near term, the cash/book value of around $2.3s reflects a good cushion for buying shares in the $1.8-2.2 range (not to mention new investors paid $2.2/share).
It will be interesting to see what the company does with the more than $350m in cash and new relationships going forward.
Wednesday, February 3, 2010
It is not shocking to see posters on the message boards are still quite negative at this stage. However, one of the few positive posters, "Shadow" (who was accused of being "arrogant") stated:
"Don't mean to be arrogant. Just tired of guys posting how they want instant results from corporate management now. This company is clearly in the midst of a complete reorganization with outsourcing of products and reduction in head count from 8000 to 2000 or less. Products eliminated, sections sold off, legal issues resolved. What a mess it has been. So, we are, I hope, near the end of a multi-year debacle. What difference does another 3 months make in waiting to see the results? If you believe in the company's products and broadly outlined business plan, then 3 more months doesn't really matter. If you don't, why would you want to continue to own the stock?
Looking back on all the things that have happened, I am just happy the company is still in business and has IMHO a good chance of doing very well in the next few years. I never expected the company to have the problems it has had. Apparently, neither did management but every time they turned around there was another problem...accounting, bribery, insider trading, unexpected more rapid decline in PAS with premature terminaition, etc. etc. etc. You may think in that environment, CEO should still have been able to increase sales. What if the chips you need for your need PON products are delayed by 2 years? What if your largest customers become biased against you because you are a "foreigner"? Tigre points to Baidu as a foreign company successful in China. True, but where is the Huawei and ZTE in their industry that they had to compete against? I never pump the stock.....if people want to buy, fine, sell, fine, none of business. I just try to find things that apply to company. Some of them were really bad, like when MII decided only 3 companies would be allowed to provide DSL in China, and UTSI was one of the odd men out. Told to take back all of its already delivered DSL even. That is one of the reasons I think UTSI could never be considered indigenous to China, no matter what. ZTE, Huawei and Alcalu (ASB) are already considered indigenous and there is just not room for a fourth, at least in the telecom industry. Hope it is different for cable industry, but no guarantee. Risk remains high, but reward if UTSI is successful, will also be high. That is the nature of speculative investments. Have a nice evening. Shadow"
My response is the following:
Most shareholders actually share your sentiment despite a few negative posters on the MB. Most institutional shareholders have stayed put or added during the last 2-3 years. UT markets are intact but have not ramped up even in the last 2 years where management expected/hoped it would. The difference over the last year is that management has been aggressive in cutting costs, putting in flexibility/liquidity in the company to withstand the tough credit environment/competition. I think they are where we wanted them to be 2-3 years ago, which is to be in position to take advantage of any ramp in various sectors in their markets. Here is an article on China Telecom expanding iptv trials.
Five years since their win in iptv and iptv is still at this "early" stage. That is just one of many product lines/customers that have not yet come in. PTN is another that has been delayed or just started. About a year ago, I was just hoping for a small window of outperformance to make UT more salable but the recent events show they are positioning themselves for a more stable future (which doesn't have to involve a sale). That said, on a personal note, all of my buys above $1 for the last year have been traded but now bought yesterday at $2.12 for the longer term. I think there are a lot of issues still at UT with regards to institutional investors getting introduced to the stock. There is still the remaining internal controls/ongoing concern stamp on their company that should be resolved soon. There is the lack of profitability that prevents institutions from buying. Thre is the low/non-marginable share price, etc. etc. However, I have more confidence that it will be resolved in the longs favor over the following quarters and the big reward will come just as people feel the most frustrated (maybe now). I agree with you on the big potential rewards and think UT can reach $6-8 (maybe more) in the next 8 quarters as the issues get resolved, better quarterly performance come in and institutions see the potential in their markets. I'll get more aggessive in trading in the $3 range when the volume should be in the 2-3 million shares. Right now, its all noise with little volume and its accumulation (a few thousand shares) based strictly when certain longs get frustrated and decide to give away shares after so long.
Have a good rest of the week.