SEC, Justice Department probes make it hot for UTStarcom
Some investors remain confident despite turmoil
By Barbara Grady, BUSINESS WRITER
06/09/2006 02:53:44 AM PDT
ALAMEDA-BASED UTStarcom Inc. is treading some very turbulent waters right now. It is under investigation by the U.S. Securities and Exchange Commission and the Justice Department on allegations that two agents of its overseas joint ventures tried to bribe government officials. An internal investigation by its board audit committee determined that it must restate almost three years of earnings — 2003, 2004 and three quarters of 2005.
Its founder and chief executive, Hong Liang Lu, will resign at year end, though largely as a gesture to satisfy investors that troubles are over. And the Nasdaq has threatened to delist its stock if the company does not submit its first-quarter financial results by Thursday.
The wireless communications equipment company said it will meet that deadline. But can it pull through all this turmoil? Its stock is languishing around $6 a share, down from its 52-week high of $9.25 a share on Nov. 15.
Analysts are mixed on the prospects. Although their average rating on the stock is a hold or the equivalent, according to Thomson One Analytics, some see it as a real buy opportunity, given the cutting-edge technology UTStarcom produces.
Albert Lin of American Technology Research has a "buy" rating, for instance.
"The stock is a reasonable — albeit volatile and speculative in nature — bet based on the idea that the investment world is looking for IP video equipment exposure and UTSI remains one of the few companies with meaningful exposure via large (telephone network) clients," Lin said.
"We are surprised that the shares are under such pressure," Lin said. He explained that management has openly discussed the investigations with analysts and that the restatements amount to an insignificant sum.
This month, UTStarcom determined about $50 million in revenues and $12 million in net income would be subtracted from the two years plus three quarters of results. Several analysts noted that $50 million is small compared with the $7 billion collected in revenue over that time.
UTStarcom is a pioneer in two technologies the world seems increasingly interested in: Voice-over-IP telephony and wireless communications.
It develops and manufactures wireless Internet-based communications, including handsets for various wireless systems including WiFi, Internet-based (IP) wireless telephony and IP television. Around the world, 10 million lines of UTStarcom communications gear provide telecommunications service to end users. It is the largest provider of wireless communications in China, where its PAS wireless telephone system increased the percentage of Chinese citizens who have access to telecommunications. Its Internet-based DSL systems recently hit 1 million users in Europe. Its handsets are selling popularly in the United States through such major cellular companies as Verizon, Cingular, Sprint Nextel and Vonage. And it is one of the first companies in the world to have IP-TV or Internet-based streaming television systems up and running.
Chesha Kamieniecki, director of investor relations at UTStarcom, said the events that led to the investigations were the result of the company "growing so fast" that it did not have time to put in place adequate controls in its inventory and sales recognition procedures.
Fueled by PAS telephone growth in China, UTStarcom rapidly increased profits from 2000 through 2003, when its net income topped $200 million. But investors became concerned that the company couldn't maintain its breakneck growth. UTStarcom's shares, which reached $42.25 in January 2004, began to decline, falling below $10 in 2005 — a year in which the company posted a $487 million loss amid a restructuring.
Much of the loss was because of a sudden drop in sales of its PAS system. "It was a maturing market, and then operators wanted to conserve some (capital expenditure) dollars for 3G networks," Kamieniecki said, referring to third-generation wireless networks coming on the market that carriers in China wanted to deploy.
UTStarcom started diversifying both in products and geography to lighten its dependence on China. It expanded into Latin America, India and other Asian countries. In 2003,
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UTStarcom received 86 percent of its revenue from China. By last year, that was reduced to 32 percent. During that period, U.S. sales, boosted by its Audiovox acquisition, went from 2 percent of total revenues to nearly half, according to the company's annual report. UTStarcom also began to aggressively develop and sell other IP-based technologies including IP TV.
A year ago, before news of the investigations broke open, UTStarcom was getting many accolades. Fortune magazine named it one of its Most Admired Companies for 2005. Forbes listed it as one of the 25 fastest growing technology companies in 2005.
UTStarcom first informed investors of some of these troubles last October. In one day in October, the stock lost almost a third its value when UTStarcom issued a statement that its third-quarter revenues and earnings would be lower than previously expected and that the SEC was beginning a "formal inquiry" into aspects of the company's financial disclosures.
Then, in December, the U.S. Justice Department informed the company that it was looking into allegations that an agent of its Mongolia joint venture had offered payments to government officials. In spring, the audit committee of UTStarcom's board launched an investigation. Then, in April, an allegation of attempts to bribe government officials was made about a UTStarcom agent in India. Those investigations are still unresolved.
UTStarcom's 2005 annual report, filed only this month, states that all the internal procedures were examined by a "forensic accounting" firm and consulting firm Deloitte and lists pages of details where the accountants and company management determined closer financial controls should be put in place.
Chairman and CEO Hong Lu announced he will resign as CEO on Dec. 31 and be replaced by UTStarcom's number two guy, Ying Wu, who is vice chairman and executive vice president as well as CEO of UTStarcom China — which has been the bulk of UTStarcom's business. Like Hong Lu, Ying Wu is a technology visionary; he founded Starcom Inc., which merged with Hong Lu's Unitech Telecom in 1995 to become UTStarcom.
"I believe that now is the right time for me to pass the company's leadership to a new management team who will take UTStarcom to the next stage," Hong Lu stated when he announced his resignation. Hong Lu, a graduate of the University of California, Berkeley, would not be interviewed for this story.
"One of Hong's focuses has been accountability. This is him putting his money where his mouth is," Kamieniecki said of Hong Lu's resignation. "He still very much believes in the the company and thinks it is time to give it a fresh start." In addition, Chief Operating Officer Mike Sophie resigned last month.
Analyst Michael Burton of ThinkEquity Partners said that news of the various SEC and audit committee investigations are already "built into" the stock price and analysts' ratings on the stock. He said the $50 million revenue restatement is small when spread over almost three years.
"This was mainly an embarrassment to the company and not meaningful to the company's prior-period results," Burton said.
The change of top executives also adds some uncertainty but isn't shocking, he said. "Anytime you have a management transition then, of course, there is some uncertainty. However, Hong is staying pretty close to the company," Burton said. He'll stay CEO until Dec. 31 and then "he'll remain a consultant."
Apparently, at least some investors remain confident in UTStarcom. One investor writing in a Yahoo Finance blog said, "Keep in mind this is a $3 billion (in annual revenues) company. No Mickey Mouse company. Only place to go is up." |
