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It was in 2009 that UTStarcom decided to sell off most of its other businesses and focus on IPTV, which it was increasingly becoming the market leader for throughout Asia.  
 
This week the company turned its back on IPTV, acting as if it had become a failure in a single quarter, or at least for the public company, and it chose to sell off the IPTV arm to become a private business, and giving it a $20 million handshake to send it on its way, complete with the current CEO, Jack Lu, who will leave the public entity and run the new private IPTV arm.  
 
As far as customers are concerned UTStarcom is unlikely to change very much, while within the public company it has picked up a number of plum IPTV contracts over the past two years in China and across the Asia Pacific.  
 
At the end of 2011, in figures announced in March, everything was rosy in the garden, UTStarcom had revenues up 10% to $320.6 million, the year’s profits were up 62.8% to $114.3 million  
 
But today the company has told investors that IPTV was costing it an arm and a leg, and that by taking it away, it was doing the rest of the business plenty of good, and likely to bring it higher margins. We reported UTStarcom back in July 2008 selling off its US handset distribution business, to an AIG Venture Capital subsidiary for $240 million.  
 
After this deal it will still have some hardware businesses, but we assume that IPTV will take the middleware, DSLAMS and Media Gateways, leaving it with OSS software its Softswitch range and telco optical transports, as well as a services business which plans, deploys and supports telco networks. The IPTV business is centered on its RollingStream standards-based system which offers a CMS, its own DRM, set top and cloud middleware, an operational support system (OSS) as well as VoD storage and streaming servers.  
 
An ex-director William Wong will take over the reins as CEO and says that the business will be back to usual in a single quarter. Clearly it is the IPTV business that was eating the cash, and the impression you get is one where Lu was treating the IPTV business as his pet project, and starving the other assets.  
 
To us this looks like a classic case of needing a product refresh, in the same way that Microsoft Mediaroom needs one, 7 or 8 years after the product was specified, and the company not wanting to pay for it. The future needs adaptive streaming and multiscreen, with cloud search and recommendation, as we have been saying for the past year about all IPTV players.  
 
Today this is all reflected in a share price that values it just over $1, when it’s highest share price for the past three years was just under $3. Today its market capitalization is a mere $165 million.  
 
The decision to do all of this came from a strategy committee reporting to the Board which was led by independent directors, so it looks like something had to be done about the CEO and his pet project. The divestiture will cut UTStarcom's expenses by $17 million a year the company said, but didn’t mention how much revenue would go. Lu was given credit for turning the company around after six years of losses.  
 
UTStarcom will divest the IPTV business, transferring all assets, liabilities and managerial duties to a new ownership team headed by Lu and purchase a $20 million convertible bond, that will be convertible into 33% of the new IPTV business's common stock in five years. We imagine the idea is to turn its fortune around, take it public and UTStarcom might benefit from the valuation of that 33%. The balance sheet is also improved, the company says, because it removes  
customer advances and accrued service costs associated with the IPTV business.  
 
The new standalone IPTV business will enter into a brand licensing arrangement with UTStarcom so it can still use some part of the name and the transaction is expected to close by the end of August. Recent deals for UTStarcom include IPTV deals with Sri Lanka Telecom; in Hainan and Chongqing in China, along with two China Telecom provincial IPTV contracts, all during 2012. 

Courtesy Rethink Research