Sunday, May 22, 2011

Q1 2011 Report Recap/commentary

The numbers from Q1 were not good. Revenue came it at only $61.3m and that included the PAS deferred revenue (about $23m/quarter for 2011). Expenses came in at $30.2m, and that led to a loss of $10.3m. Cash was also down by about $40m to $310.4m. Another negative was bookings came in at less than $40m, down from $52m in Q4. China revenue (not including PAS deferred) came in at just $10m for the quarter.

The company explained that the quarter had poor collections but it had resolved this already. It predicted Q2 would be around breakeven while also re-stating its committment/confidence for the full year 2011. However, the stock had "rallied" from the low $2s to the high $2s and was in the mid $2s going into the quarter call so obviously, there was some momentum/anticipation built in and the numbers were just too poor to hold the stock, not to mention the explanations were not clear during the call either. All in all, it was a very poorly run conference call by Jack Lu and the CFO Edmond Cheng. The two simply sounded like high school kids that were auditioning to be PR people (forget being executives) and for parts of the call, seem to be mumbling (hard to understand their english) and talking about useless numbers in the industry when more pertinent company information HAD to be discussed and explained. My advice on the English part is to just speak in Chinese and have an interpreter there to translate. It would atleast hide part of the amateurish sounding/lifeless words/feel from the call.

Ok, since everyone knows the bad numbers, lets look at some details closer and any positives going forward.

1. CASH- Even during the previous quarters, cash doesn't track closely with the operating numbers. The last quarters sudden increase of $14m came out of the blue and was a pleasant suprise so now that it suddenly drops is not fun but at the end of the day, will even out and still a major buffer for them to implement their turnaround plan.

2. Expenses - This quarter's expenses (w/out restructuring charges) gets it closer to the runrate below $100m/year and the revised lease terms provides a substantial yearly savings from the $10-15m range to just $2-3m.

3. Bookings - Q4 2010 yielded bookings of $52m, which was the highest in 2010. That was encouraging but Q1 2011 bookings of less than $40m was a let down. Is this just a "seasonal" drop where Q4 is normally stronger and Q1 is normally the weakest? Its possible but we'll have to see what Q2 brings. While Japan is encouraging, China is discouraging and their main focus is supposed to be in China.

4. ITV.CN - They gave some time line for trials (Q2) and revenue generation (Q3/Q4) and we now see the beta of the website so this is on target per their Stagesmart acquisition and filings for 2010 that this will launch in the 2nd half of 2011. Just a quick overview of the site, I like the TV channels with CCTV and the timeshift component. I don't particularly care for the movies as I think it will be the broadcast/news/local Chinese programming that will be the main features that will have overseas Chinese subscribe. The internet platform is good in that they won't have to negotiate with local cable/satellite providers in the US or other countries. It will just be able to offer it to anyone with a broadband/internet connection. Its too early to see the adoption of this but if successful, it will provide the company with a new identity, stable, and growing revenues that will have sustainability and more robust/scalable business.

5. Internet (cable) platform - The recent PR of the new internet platform and initial win with a cable company was encouraging but no discussion on contract size. Potentially, it could be large with all the cable companies there but again, like the, too early to see how successful it can become.

6. TN in Japan - Looks like the most positive but at the same time the lack of wins in China is a negative. We understand that the equipment business is competitive (and thus the platforms are the way to go) but we do expect a major uptick in sales in China as oppose to regressing with the "move" and emphasis in China.

The new products/businesses will add to the company's valuation but because it is a small part of it right now, there has to be substantial progress through the rest of the year in China. If not, then why still have close to 2k employees, most of it is in China?

The PR says they are still "committed" to breakeven in 2011. Even with PAS deferred revenue, there needs to be significant pickup in Q2-Q4 plus a material contribution from OSS. The credibility of the company is not good to begin with and now the poor Q1 call doesn't help. There are a lot more questions now AFTER the call than before it. The CEO/CFO officially have done only 2 calls and already their credibility and performance is in question.

I'll end with a positive comment that I like the new products ( platforms), the still substantial large cash position, the lower expense (revised building lease), improvement in Japan, potential India partner and overall large Chinese (and overseas Chinese market) but unless more positives come in and in a timely manner (and this is where credibility/execution comes in), the stock will remain in this $2 range and essentially the street will not care (volume low).

BTW, another shareholder/longtime poster Shadow had a good write up as well. He does make a more positive case from a business standpoint but a stock needs positive catalysts and some wow factor to get demand. Getting to breakeven is not exciting enough for the street. We need for example to have some buzz....need major growth (since its a low base) from China either from the equipment side or new products. Otherwise, there will be no demand/respect from the street.

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