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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

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