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    re: uec results (2003 is not yet assured) Hi jfc,

    As you may have guessed, I have decided to examine UEC's results in a bit more detail.


    RECURRENT REVENUE - A TALE OF 2 HALVES:

    In H1, UEC averaged recurrent revenue (ex-significant items) of $16.9m, or $2.82m per month.

    In H2, UEC averaged recurrent revenue of $19.9m (ex-significant), or $3.32m per month.

    Going into 2003, it has now slipped back to $3.0m (or below) (refer ASX, R05/02).


    FY02 REVENUE:

    Total revenue in FY02 was $44.7m, comprising:
    1)
    People Telecom exit, of $1.5m; and
    2)
    operations revenue, of $43.2m.

    Operations revenue, however, included $6.5m attributable to the Lucent settlement.

    So, core operations revenue (ex-significant items) was $36.7m.

    Item 1.23 of the Condensed Statements further breaks this down to the following:
    1)
    connection fees of $5.55m (vs $5.7m previously);
    2)
    service fees of $31.6m (vs $19.2m, previously); and
    3)
    broadband revenue of $6.05m (vs $4.1m, previously).

    But, when these figures are aggregated together, they come to $43.2m. Included in the service fees revenue, therefore, was the value of the Lucent settlement. Adjusted for this, service fees (ex-Lucent) we have $25.1m (vs, $19.2m, previously).


    ENDING 2002 ON A POSITIVE NOTE:

    All things considered, FY02 ended with the following monthly (raw) averages:
    1)
    connection fees of $460K per month (previously, $480K);
    2)
    service fees of $2.1m per month (previously, $1.6m); and
    3)
    broadband revenue of $500K, per month (previously, $350K).


    THE FORWARD OUTLOOK:

    With $86m in forward billings, spread over 450 new contracts, and with an average life of 30 months, the outlook going into FY03 is for:
    1)
    average recurrent revenue of $2.87m per month;
    2)
    average "whole-of-life" revenue of $191K per contract; and
    3)
    an FY03 revenue outlook of $34.5m (straight-line), or $41m (on a 60:40 split over the 15-30 month time interval). Average anticipated revenue for FY03 is, therefore, $38m.


    TARGETING NEW BUSINESS:

    If then UEC (on the basis of these averages) is going to get to its FY03 revenue target of $55 -60m (or $48 -53m, ex-WA exit), or a targeted range of $50m for the year, then:
    1)
    UEC must win ~$40m in new order business in FY03 (and which is brought to account during FY03); and
    2)
    assuming a staggered approach to winning new business, and the subsequent lead time involved in generally bringing a customer up to connection, and beyond, UEC would need to target new business at close to double this rate (ie: $80m in new business for FY03).

    Looking at this a bit more closely:
    1)
    connection fees will need to average $500K per month;
    2)
    broadband revenue, $700K, per month; and
    3)
    service fees, $2.8m - $3.2m per month,
    ...
    in order for UEC to meet its now stated FY03 revenue targets.

    However, by UEC's own admission, FY03 is not off to a great start, as recurrent revenue ending 2002 was averaging $3.32m, but going into 2003, appears to have strayed back to ~$3m:
    ....
    "Excluding connection fee revenue, recurring revenue going into 2003 is ~$3m a month and is expected to increase to more than $4m a month by the end of the year" (ASX/R 05/02).

    A figure which is "~$3m" suggests a figure below, not above, $3.0m.

    So, if UEC has, in recent times, gone backwards, but expects to again gather momentum as the year progresses (ie: towards, or above $4.0m on a monthly run rate basis), then just how does UEC expect to secure "targeted revenue of between $55m and $60m for the year" without:
    1)
    bringing the WA network exit to account in 2003 (instead of in 2002, when the deal was announced, and presumably, done);
    2)
    changing its policy on the timing of revenue recognition; and /or
    3)
    without further asset sales taking place?

    Simply put, ~3 into >4 translates to a figure closer to the $44m mark (for an overall monthly average of $3.7m), with service fees averaging ~$2.5m per month, going forward.


    EXAMINING THE OPEX PROFILE:

    According to Item 1.26, FY02 OPEX ended the year @$34m, or $2.85m per month.

    In H1, OPEX was $16.2m, or $2.7m per month.

    In H2, OPEX was $17.8m in H2, or $3.0m per month (ie: up 11% period on period).

    Employee costs were $13.3m for the year (or $6.1m in H1, and $7.2m in H2, or $1.2m per month).

    Network services were $14.3m for the year (or $6.0m in H1, and $8.3m in H2, or $1.4m per month).

    Administration was $2.4m for the year (or $2.9m in H1 and a credit of $500K in H2), for a result which appears strange, on the surface, but which otherwise average $200K per month for the year.

    Occupancy costs were $2.5m for the year (or $1.0m in H1, and $1.5m in H2, or $250K per month).

    Management fees were $450K for the year (or $200K in H1, and $250K in H2, or $45K per month).

    "Other" was $1.0m for the year (or nil in H1, and $1.0m in H2, or $165K per month).

    Occupancy, Administration, and "Other" taken together, were $5.9m for the year (or $3.9m in H1, and $2.1m in H2, or $350K per month).

    Excluded from this equation was $7.237m relating to "the carrying amount of non-current assets" (and which is linked to UEC's Perth exit).

    In H2, therefore, UEC's OPEX profile was running at a monthly rate of $3.0m (ie: 1.2m+1.4m+45K+350K), depending upon what level of treatment is applied to the Administration and "Other" aberrations in H2 (vs H1). Adjusting for these in the wider sense. however, implies an OPEX run-rate above $3.0m (ie: closer to $3.25m).

    Back on 21/11, CFO Dawson stated in an Open Briefing that:
    "We estimate the $2.8 million cost base will increase by about 10 percent over the next 12 months as the company continues to grow its customer base".

    At that time, it appears that CFO Dawson was referring to the year to date run rate of ~$2.8m per month, vs the more accurate $3.0m rate actually achieved during H2.

    More recently, UEC has stated (ASX/R 0502) that OPEX will increase in FY03 by ~15%. This, however, is off the H2 OPEX base of $3.0 -$3.25m, as opposed to the $2.8m OPEX base that CFO Dawson was talking about on 21/11.

    That considered, UEC's forward looking OPEX in FY03 is likely to fall somewhere between $41.4m (on a $3.0m base), and $45m (on a $3.25m base). Going forward, the likely OPEX average will be $43m during FY03 (assuming base+15). But, if as is more likely, the actual OPEX increase for FY03 is above 15% (ie: due to greater employee costs, and network services' costs, associated with ramping up the business), then a final OPEX outcome for the year could approximate base+20, or somewhere between $43 -47m (or $45m, averaged).


    A FLAWED EBITDA OUTLOOK:

    Working backwards, if the EBITDA outlook is $17m, and if OPEX is $43m+, then FY03 revenue must be $60m+. However, on the basis of recurent revenue in H2/02, going into 2003, and on a forward outlook basis, it is hard to see how UEC will be able to get to its claimed mark of $55 -60m. More likely, therefore, will be a recurrent revenue result of ~$44m, plus the WA exit of $3.3m, for a full year result of ~$48m. With $43m+ in OPEX still out there, UEC will be lucky to make $5m in EBITDA in FY03.


    ANY SLICK ACCOUNTING OUT THERE?:

    In an element of slick accounting, UEC has included as part of H2/02 results $7.237m in costs associated with its WA exit, whilst delaying the booking of the reduced $3.3m in revenue to FY03. Inother words, costs in one year, revenue in the next (or vice versa).

    Far from being a profitable venture in 2003, UEC will owe much of its result to one-off revenue /expense treatments, whilst facing a rapidly increasing OPEX profile, coupled with an increased interest expense bill which (in FY03) will be based on maximum borrowings of between $55 -60m.

    With year end payables of $12.105m, vs cash of $629K, and receivables of $10.445m, it is likely that UEC increased its borrowings heavily during January, and into February, as there has been no guidance yet of UEC having received the $3.0m upfront payment associated with the WA exit.

    UEC, therefore, is in the position of being potentially asset and contract rich, but cash poor, with a negative Quick Ratio, and an increasing cash drain.

    The forward outlook, therefore, is unlikely to brighten all that much until Q3, or later.

    So much for an early 2003 recovery play.
 
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