UTStarcom: We’re Not the Cheapest

UTStarcom Inc. (Nasdaq: UTSIE) held its analyst day in New York yesterday, recapping its strategy to improve its recently shaky financial results and plans for growth in the future.

CEO Hong Lu outlined his vision for the company, which is making the transition from dependence on limited-mobility personal access system (PAS) revenues in China to a more diversified company selling mobile handsets in the Americas and broadband equipment (IP DSLAM, IPTV, GPON) globally (see China's 'Big Three' Eye IPTV).

In a bit of irony, Lu said that one of the biggest problems in business continues to be pricing pressure -- but he cited it as coming from European vendors, rather than the Chinese equipment players.

In response to questions about pricing pressure from the likes of Huawei Technologies Co. Ltd., Lu said that UTStarcom is still seeing lots of European competition, particular in the Indian market. Siemens AG (NYSE: SI; Frankfurt: SIE) is offering a discount "well over 10 percent" below UTStarcom, according to Lu, and Ericsson AB (Nasdaq: ERICY) is undercutting both UTStarcom and Huawei.

Today, one day after the presentations, UTStarcom shares rose about 3 percent in midday trading; they are down about 85 percent from their peak in 2003.

Many of the analysts' questions centered around the financial position of the company, which has suffered a blow to its profitability since the fourth quarter 2004 as it faces a declining PAS market and tries to integrate its newly acquired Audiovox mobile handset business.

The answers from a nervous-sounding CFO, Mike Sophie, were that UTStarcom should be operating cashflow neutral this year and that if necessary it has access to $955 million worth of bank credit should it need extra cash to tide it over. UTStarcom is not, however, thinking about buying back any of its shares (which are down 70 percent since the start of the year) or any of its bonds (which have halved since the beginning of the year). The reason: The firm is "currently in possession of price-sensitive information related to their restructuring plans which is not in the public domain”.

UTStarcom announced a restructuring plan with its first-quarter results on May 5. This included a headcount reduction of 1,400 employees (17 percent of its workforce) and a charge of $20 million to $25 million to be taken in its second quarter 2005. If UTStarcom now feels the restructuring charge would be significantly different, it would need to disclose this before making any open market purchases of its shares or debt.

UTStarcom's CTO, Bill Huang, highlighted IPTV and Gigabit Ethernet passive optical networking (GEPON) as two of the technologies whose growth should offset any future decline in PAS revenues. UTStarcom has 42 IPTV trials going on in China (two of which have over more than 10,000 subs) and contracts worth more than $100 million. UTStarcom also has IPTV trials and installations under way in North America, including DSSI in Florida. Huang expects to share the Chinese IPTV market evenly with Huawei although he believes Huawei is six to 12 months behind UTStarcom in this niche and lacks an end-to-end solution (no set-top box).

Internationally, the UTStarcom execs see Alcatel (NYSE: ALA; Paris: CGEP:PA) and Microsoft Corp. (Nasdaq: MSFT) as the main competition, although they believe Microsoft's middleware is still not carrier class. In terms of the pricing of IPTV, Huang asserts this has fallen from $1,500 per video stream a few years ago to around $150 today and will eventually fall to $50. Huang also let slip that Microsoft has set a standard price of $40 per sub for its middleware solution.

In the Gigabit passive optical networking (GPON) market, Huang does not see the Japanese being cost competitive outside their home market and believes the Korean and U.S. startups in this segment lack the scale to compete internationally. Huawei was again cited as the main threat in GPON, although UTStarcom sees Huawei as 12 months behind them in this technology.

— James Crawshaw, Contributing Analyst, Light Reading Insider China's Big Three Take On the World is available as part of an annual subscription (12 monthly issues) to Light Reading Insider, priced at $1,350. Individual reports are available for $900. To subscribe, please visit: www.lightreading.com/insider.