Here we go again with UTStarcom
For this quarter, the sales forecast is dropping by about $40 million (from a midpoint of $670 million to a midpoint of $630 million) because of delayed product revenue recognition. Readers might recall a similar problem back in January of this year, though the products and customers involved were different.
This time around, the culprit is a delayed payment of $40 million from Softbank Broadband for the mVision Internet protocol TV (IPTV) product. Management blamed the recognition issue in part on the complexity of the product and the resulting inability to complete all elements of the contract. Management made sure to mention that it was the first commercial deployment of very complex technology, presumably to absolve itself of the miss.
Here's the thing, though -- the execs knew it was complex and the first of its kind a quarter ago when they first gave guidance. Managers are supposed to execute, not make excuses, and this is a company that has built up a pretty lengthy list of excuses for underperformance in a relatively short period of time. All that said, I highly doubt that UTStarcom is going to get stiffed -- after all, the customer owns 12% of its stock.
If that were the only problem in the quarter, it wouldn't be a big deal. But there's more.
Gross margin guidance is also heading lower -- a midpoint of 10% versus a prior estimated midpoint of about 16.5%. Margins will be hurt by the absence of the high-margin Softbank revenue, but also by increased warranty reserves for broadband products. Hmmm, higher product warranty reserves -- is this a product-quality issue, or just a correction of what might have been too-low estimates in the past?
Additionally, the company said it is facing potential asset impairment charges in some or all of its operating units. In other words, some percentage of the goodwill, intangible assets, deferred tax assets, and property/plant/equipment on the balance sheet is worth just about bupkis. That's not an uncommon problem -- especially for companies performing like UTStarcom has been -- but the good news is that goodwill and intangibles aren't a huge percentage of their assets.
Last but not least, management announced that the Securities and Exchange Commission had decided to launch a formal inquiry into the company's past financial disclosures. Let's be honest here: Is anybody really surprised by this? How often do you see a stock lose so much value in a year without an SEC investigation? Not often.
Experience tells me that there are still going to be defenders of the faith at UTStarcom, and I know I'm going to hear versions of "you're just short" from some shareholders. So be it. I'm not short these shares, though looking at the drop from more than $20 to less than $6 per share, I wish I had been.
Is there still hope here? Sure. The company thinks it will produce positive operating cash flow for the quarter, and there's certainly still some demand for the company's products (though whether that's profitable demand is a whole other kettle of fish). Nevertheless, I don't know how anybody could trust present management to deliver the kind of sustained long-term performance that makes for a real market winner.
For more on the sad tale of Starcom:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
