UTStarcom: Falling or Shooting Star?

| About: UTStarcom, Inc. (UTSI)

UTStarcom (NASDAQ:UTSI) is a company in transition. When looking at it, you really need to ask yourself what market leadership in the following markets should be worth:

  • IPTV market share leader in China.
  • IPTV market share leader in India.
  • Broadband market share leader in India.

Once most of its revenue came from the USA. Going forward, their major markets are likely to be China and India. UTSI has exited some businesses that were not working to focus on their core businesses that are strategically important. According to their SEC filings, they are:

  • Multimedia Communications-Focused on development and market opportunities in IPTV solutions and Wireless infrastructure technologies.
  • Broadband Infrastructure-Focused on our portfolio of broadband products.
  • Handsets-Focused on mobile phone business with continued focus on the PAS and CDMA handset market, as well as data cards markets.
  • Services-Focused on providing services and support of our Broadband Infrastructure and Multimedia Communications product lines.

The company recently said:

UTStarcom is the IPTV market share leader in both China and India.

UTStarcom's RollingStream® IPTV system provides customers with advanced video services such as interactive television, digital signage, mobile TV and distance learning programs. UTStarcom has announced IPTV deployments with Bharti Airtel, BSNL/Aksh, Mahanagar Telephone Nigam Ltd. (MTNL)/Aksh and United Telecoms Limited in India; China Unicom and China Telecom in China; Sri Lanka Telecom in Sri Lanka; Softbank in Japan, Brasil Telecom in Latin America and Markwell in Taiwan.

UTStarcom is the market share leader in India's broadband market.

UTStarcom's broadband solutions enable the deployment of IP-based, high-speed Internet, voice, data and multimedia services over wireline and optical networks for service providers such as Bharat Sanchar Nigam Ltd. (BSNL) and United Telecoms Ltd.

Plus they have just announced distribution arrangements in the South American market - another huge growth region. Although Zacks Reseach notes that regions like South America have entrenched competition:

Latin American markets have so far been served by financially sound companies like Thomason SA (NYSE:TMS), Microsoft (NASDAQ:MSFT), Motorola (MOT), Cisco Systems (NASDAQ:CSCO), Siemens AG (SI) and Tandberg.

I can believe it is sensible to exit some businesses to focus on businesses that are important to your core business strategy going forward. Unfortunately it makes it hard for me to get an accurate read on how the business is currently traveling, which is why I think this company is a bit of a gamble - and should carry a discount until future visibility improves - but if you can pick it up at the right price after allowing for that discount, why not?

Yahoo shows the company with

  • a market capitalization of $286 million
  • no debt.
  • $290 million in cash and short term investments on their balance sheet as at June 30th 2009.

So it looks to me that the amount I spend to buy a share today is covered by cash and short term investments. Since UTSI has no debt, it is sort of like everything else comes for "free".

So what could we get for free?

  • $170 million in real estate
    • The 10Q filed on August 7th with the SEC says "the estimated fair value for the Hangzhou facility to be approximately $170 million at June 30, 2009, or approximately $8 million greater than the carrying value."
  • IPTV market share leader in China.
  • IPTV market share leader in India.
  • Broadband market share leader in India.
  • Exposure to these verticals in other developing markets

So is UTStarcom a falling star or a shooting star? I placed my bet and bought some of their shares.

But there are a lot of reasons why you may bet the other way:

  • Why didn't the businesses they exited work?
  • If they couldn't get those businesses to work, why should we believe these will?
  • Changed structure of business makes it difficult to ascertain the company's likely performance going forward.
  • The company has lost a lot of money in the past, how do we know they will not do so in the future?

I was prepared to put those concerns aside because (to put it bluntly); with the market leadership positions the company says it holds in strategic verticals in massive markets like China and India, either this management team will make it work or somebody else will. I am betting that somebody else would be prepared to pay enough for these strategic positions to give shareholders a return on the company's current share price.

Which way are you going to bet?

Disclosure: Author holds a position in UTSI

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