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UTStarcom Stung by Softbank

What was supposed to be an IPTV coup for UTStarcom Inc. (Nasdaq: UTSI) has turned into a disaster, at least for one quarter, and a 22 percent drop in stock value, at least for one day.

Yesterday, UTStarcom announced its earnings for the third quarter, which ended Sept. 30, will be missing $40 million expected from Softbank BB Corp. The news blemishes an otherwise sweet deal announced in July for mVision, UTStarcom's IPTV offering, to be included in the Yahoo!BB broadband service. (See UTStarcom Warns on Q3 and Softbank Focuses on UTStarcom's mVision.)

UTStarcom now says third-quarter revenues will be $620 million to $640 million compared to the previously forecast $660 million to $680 million. Likewise, gross margins will sink, falling between 9 and 11 percent compared with an expected 15 to 18 percent, UTStarcom officials said.

Keep in mind, too, that the original forecast was considered a disappointment, being $100 million lower than analysts had hoped. It came with projected third-quarter losses of 35 to 40 cents per share and a plan to add 440 layoffs to the 960 already completed. (See UTStarcom Unloads Q3 Warning.)

Investors took the news about as well as one could expect: UTStarcom stock pancaked in after-hours trading yesterday, falling $1.70 (22.22%) to $5.95.

In a conference call with analysts, CEO Hong Lu noted that mVision is shipping and that Softbank is happy with it. It's just that the product is new and complex, and UTStarcom is having trouble wrestling features promised to Softbank. The problem lies in "some of the features that we, in an agreement, have not fulfilled," he said.

UTStarcom officials hope -- but can't guarantee -- that the missed Softbank revenues will resurface in the fourth quarter.

But wait, there's more. An internal review revealed some of UTStarcom's operating units may be worth less than their book values. That means goodwill writeoffs could be in UTStarcom's future, officials said.

Goodwill writeoffs can be brutal, as JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) found during the steepest phase of its post-bubble come-down. As the company's many acquisitions lost their value, JDSU had to write off literally tens of billions of dollars. (See Sizing Up JDSU's Massive Loss.)

Finally, UTStarcom said the SEC has launched an inquiry of the company. While such matters have become more common as U.S. companies struggle to comply with Sarbanes-Oxley requirements, it's not the first visit the feds have paid UTStarcom. Accounting deficiencies discovered last year led to the restatement of some earnings figures. (See UTStarcom Accounts for Errors and UTStarcom Files 2004 10-K.)

Naturally, UTStarcom wouldn't disclose much here.

"We're really not going to be able to comment on that right now. We're fully cooperating and we'll just have to let it play its course," said Francis Barton, UTStarcom's recently appointed CFO. (See New CFO Scores at UTStarcom.)

Bad news aside, UTStarcom claims its IPTV efforts are growing nicely; Lu noted the company has "discussed two expansion contracts" with Softbank and says more than 11,000 IPTV users have signed up in Japan.

And UTStarcom has its sights on expanding mVision's reach. "We expect to launch our first commercial network [win] in the U.S. in the fourth quarter and have recently signed a contract for a pay trial in India," Lu said.

— Craig Matsumoto, Senior Editor, Light Reading

Pete Baldwin 12/5/2012 | 2:58:25 AM
re: UTStarcom Stung by Softbank Which is more worrisome -- the delay in delivering features to Softbank, or the potential goodwill writeoffs?
paolo.franzoi 12/5/2012 | 2:58:24 AM
re: UTStarcom Stung by Softbank
None of those are the worrying factors:

1 - UT's big business has been PAS systems. These are in decline in China.

2 - UT's business in Japan is based on Softbank (which owns a chunk of UT). Anybody believe they would win without that?

3 - The rumblings are that the EPON deployment of Yahoo BB is essentially stalled.

4 - The Handset business that they will get is a nice little niche but the main suppliers will not be supplanted by UT.

So, this is at the moment a shrinking business with no obvious turn around plan. If on top of that, there are other financial issues it will not help them in financial circles.

seven
deauxfaux 12/5/2012 | 2:58:12 AM
re: UTStarcom Stung by Softbank UTSI/YBB is at NTT's mercy as far as fiber provisioning goes. When was the last time you heard NTT and Fast in the same sentence? Better yet, when was the last time you heard NTT, fast & "help out a chinese competitor" in the same sentence?
kentishman 12/5/2012 | 2:58:11 AM
re: UTStarcom Stung by Softbank This seems similar to the situation that existed for Nortel at the end of the Dot Com boom. Many new operators supported by VC funds all in collusion with Nortel Finanace.

As a result no real competiton on product placement. Will people never learn the lessons of history. (of course if they had the Dot Com boom wouldn't have happened in thev first place).
deauxfaux 12/5/2012 | 2:58:10 AM
re: UTStarcom Stung by Softbank Masayoshi Son = Yahoo Broadband

Masayoshi Son personally owns 15% of UTSI, Softbank owns 15% of UTSI. Son resigned from UTSI's board a year or two ago.
paolo.franzoi 12/5/2012 | 2:58:09 AM
re: UTStarcom Stung by Softbank
DF,

I thought bought one of the alternate carriers in Japan to allow them to have an infrastructure to build onto.

Wait, is the darling of the BB world having problems with competition??!!??

seven
deauxfaux 12/5/2012 | 2:58:07 AM
re: UTStarcom Stung by Softbank 7

I haven't heard that one, although I have heard that YBBare investing in their own infrastructure for fiber rollouts and provisioning. You may very well be right, but I haven't heard it yet.

sounds like too little too late to me
bahjii 12/5/2012 | 2:58:03 AM
re: UTStarcom Stung by Softbank Softbank acquired Japan Telecom and its nationwide network last year for $3bn.

www.lightreading.com/document....

Bahjii
deauxfaux 12/5/2012 | 2:58:03 AM
re: UTStarcom Stung by Softbank Thanks for the post. It sure hasn't seemed to make much of a difference in their deployments
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