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WIKI ANALYSIS
Corporate Profile and Strategy
Based in Alameda, California, UTStarcom, Inc., (UTSI), is a leading supplier of wireless and wireline networking equipment. Approximately half of its revenue is derived from the PAS (Personal Access Systems) , which is a limited mobility wireless technology offering voice, data, and value-added services through its manufactured handsets. The company operates in three business divisions, namely, the Personal Communications Division (PCD), the Broadband Division and the Wireless Division. UTStarcom entered the cellular handset market with the recent purchase of Audiovox's cellular business. Furthermore, the company launched its Rollingstream product line for IPTV (television over the Internet).
Investment Thesis
Weak Financial Position: The general trend of UTStarcom's financials has not been impressive as fiscal 2006 revenue declined significantly year-over-year. We do not find any meaningful growth drivers for the company at least over the near future. UTStarcom is expected to remain in a negative earnings position until 2010. Also, on a consolidated level, we are skeptical about its earnings power as gross margin and net income remain at significantly lower levels when compared to other telecom equipment manufacturers. Although the company has a positive net cash balance, losses stemming over a lengthy time horizon may generate considerable risk related to its liquidity position.
Competitive PAS Market: Although we expect UTStarcom to retain its PAS industry leadership, the company's handset business is witnessing increased competition, not only from major players, including Putian Lingyuan, ZTE, and Alcatel/Lucent, but also from smaller, local brands present in China. Lack of constructive regulatory requirements for entry into the Personal Handy-phone System (PHS) market have led to the emergence of new small-scale players whose phone designs are compatible with the PAS network and pose a threat to the company's handset business. Some of these competitors enjoy brand awareness, manufacturing skills, and deeper access to the market. This has impacted market share and eroded margins.
Risky Growth Strategy: The company has projected IPTV solutions as its new growth catalyst. However, this market is already very competitive with larger players, such as Alcatel-Lucent, Nokia-Siemens, Ericsson, Nortel etc. UTStarcom is not likely to generate any meaningful revenue before mid-2008. The mid-to-high-end wireless handset market, another growth area for the company, is also witnessing intense competition due to the emergence of new technology standards. The optical transportation market is also saturated with vendors including Tellabs, JDS Uniphase to name a few. We remain cautious regarding the historic revenue volatility of UTStarcom and believe that the company remains in a weak position in most of its new strategic business segments. Moreover, UTStarcom focuses much of its core business in China. As a result, there exists an additional dimension of risk, including currency, regulatory and accounting control.
Inadequate Restructuring Initiative: Recently UTStarcom announced intentions to reduce headcount by approximately 700, or 11% of its total workforce particularly in the USA and China, by the end of fiscal 2007. The company will take a charge of approximately $10 million in the fourth quarter of 2007. This workforce reduction is likely to reduce annual expenses by approximately $21 million (previously stated target was cost reductions of $10 million - $15 million per quarter). It is not clear how the company will achieve its improved targeted costs synergies while expanding its business prospects.
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