Can UTStarcom regain its shine‾

Olga Kharif
20 Dec 2006

The shooting star that was UTStarcom has lost a lot of shine lately. Once known for annually doubling sales and profits, the telecommunications equipment maker dipped into the red in 2005 and has remained there.
UTStarcom long has specialized in equipment for a wireless technology that's used in China and Japan but is being overtaken by rival systems. And its recent pronouncements read like a litany of woe. In November, the gear maker said it's reviewing methods of granting equities and it has delayed filing quarterly results"”a move that could trigger a debt default in January. Nasdaq had threatened to delist it. And after the company's chief executive said he'd be leaving, his replacement announced that he wouldn't be taking the position after all. UTStarcom hired Merrill Lynch to explore 'strategic alternatives to enhance shareholder value.'
That's not all UTStarcom is doing to spark a turnaround, though. The company plans to clarify its CEO situation in the next two weeks, says Brian Caskey, vice-president of global marketing. 'The company is cognizant we need to do something very quickly,' he says. One possibility is that longtime CEO Hong Lu, who was planning to step down at the end of the year, will stay on.

Attractive target

More important, UTStarcom is gaining traction in IPTV, or Internet protocol TV, a technology that allows for streaming TV channels over the Internet, in growing markets such as China, India, and Japan. The company boasts 90% market share in IPTV in China, which is expected to have some 20 million paying IPTV customers by 2010, up from 250,000 users today, says Albert Lin, an analyst at American Technology Research. On Dec. 13, Lin released a report predicting that UTStarcom's revenue growth and gross margins will pick up in coming months. UTStarcom may finally turn profitable again by the end of 2007, Lin says.
It doesn't hurt that UTStarcom has established relationships with local carriers and content providers such as Shanghai Media Group, ties that are likely to keep UTStarcom in the lead for a while, says Lin. In 2007, UTStarcom also expects to become the largest provider of broadband and IPTV equipment in India, where seven operators are testing or deploying its gear, up from three just six months ago, says Caskey.
All that could make UTStarcom an attractive acquisition target in the coming months. Rivals like Cisco, Alcatel-Lucent, and Nortel have yet to grab a substantial foothold in IPTV in Asia. And one of them"”or a private equity fund"”could make a play for UTStarcom before long, acquiring it or taking it private, analysts say. Cisco, expected to redouble efforts in IPTV in 2007, has already demonstrated its interest in the Chinese market by acquiring dozens of local companies. Most recently, on Dec. 13, it purchased an interest in China Communications Services, a telecom support services outfit.

Potential suitors

But Alcatel, which recently gobbled up fellow gear maker Lucent, may be the front-runner. 'Culturally, Alcatel is more likely to do it,' Lin believes. 'It's already decided it's critical to be of large size.' Alcatel-Lucent, Cisco, and Nortel won't comment on acquisition rumors. But Ken Couch, director of marketing for Nortel's video solutions group, admits his company, which is concentrating on North America and Europe, is consciously staying out of the Asian IPTV market: 'Asia typically has a very different set of requirements to penetrate that market,' he says.

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