UTStarcom Holdings Corp (UTSI) 2002 Q2 法說會逐字稿

Ladies and Gentlemen, thank you for standing by, and welcome to the UTStarcom second quarter 2002 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question and answer session and instructions will be given at that time, and if you should require assistance during the call, please depress "0" followed by "*" and an operator will assist you offline. As a reminder, this conference is being recorded and a replay information will be given out at the conclusion of the call. I would now like to turn the conference over to the CFO, Mr. Michael Sophie. Please go ahead, sir.

Okay, thank you. Good afternoon, Ying Wu, our CEO, and I welcome you to the UTStarcom second quarter 2002 Earning's Conference Call. Once again, we had a record quarter with the highest quarterly revenues and profits in our company's history, and we're pleased today to provide you with an update on the company's business and progress. Some of the information that we'll discuss during this call constitutes forward-looking statements. Actual results could differ materially from our current expectations. To understand the risks that could cause results to differ, please differ the risk factors identified in our latest registration statement on form S-3 and reports on Form 10-K and quarterly reports on the form 10-Q filed with the Securities and Exchange Commission. UTStarcom continues to deliver exceptional performance in these difficult times for telecom equipment providers. We believe our continued success is driven by some unique factors. First, our focus on China where there's still tremendous subscriber growth with 20 to 25 million fixed and 55 million mobile subscribers additions projected for this year. Second, our rapid expansion in the markets outside Mainland China and our transformation into a global telecom provider. Our international revenues are growing at over 100 percent this year. The revenues outside Mainland China are anticipated to grow from revenues of 60 million, representing 10 percent of last year's revenues to an excess of 120 million or 15 to 20 percent of our revenues for 2002. Thirdly, our technology and products are designed to support today's networks but at the same time allow operators to migrate to next generation networks with the best cost-performance benefits for the operator and end user. We have tried throughout the quarter and year to outline achievements that you could expect to see in tracking our progress; some of these achievements include continued strong finance performance.

Q2 2002 marks are our tenth consecutive quarter of exceeding street estimates and raising guidance going forward. In fact, Q2 has been the strongest quarter in our company's history. Another achievement we outlined -- increasing our presence to markets outside Mainland China as we achieved milestones in our strategy to become a global telecom player. For example, this quarter we announced our first contract in Vietnam, valued approximately $20 million to deploy our IP based pass in Ho Chi Minh and Hanoi. Shipments of our DSLAM products in Japan and AN-2000 products in India and other markets continued successfully. Additionally, our past trial with MTNL in India and trial agreements with two additional leading private operators in India continued successfully. And as the final key achievement, I'll highlight strength of our technology. Our 3G development continued unscheduled with excellent initial results on our phase I MTNL trial. We also announced that we will begin 3G field trials in four key cities in China, Beijing, Shanghai, Hangzhou and Zhejiang. mSwitch, our SoftSwitch product line is on track. We look forward to discussions on our customer employments in the Class 4 and Class 5 environment later this year, and our broadband product offerings continue to expand with both our IP-DSLAM and video cell. We believe we have been and we'll continue to be successful in each of these areas and ask you to be conscious of these achievements throughout the call today. On this call, I'll talk about our second quarter financial results, provide updated guidance, and then turn the call over to Huang, who will discuss the business and some of the company's strategic objectives, and after that, we'll open the call for questions. Starting with the income statement. Sales for the second quarter increased to 231.5 million compared to 140 million in the second quarter of 2001, an increase of 65.3 percent year-over-year and 26 percent sequentially over Q1 of this year. Year-to-date sales increased to 415.2 million as compared to 259.2 million in the first half of 2001, an increase of 60.2 percent year-over-year.

Our revenue growth was driven broadly across our product lines with continued strong demand for our wireless PAS and IP based PAS products and our wire line IP DSLAM. Subscriber growth on PAS systems and our handsets sales remained very strong in Q2. And for the quarter, PAS and IP based PAS equipment accounted for 40.6 percent of our sales. PAS handsets accounted for 36.2 percent of our sales and the balance of 23. 2 percent consisted primarily of our wireline products. Revenues from inside Mainland China represented approximately 79 percent of total revenues for the quarter while international revenues were approximately 20 percent of our total revenue for the quarter. Gross margin dollars for the second quarter were 85.9 million and came in at 37.1 percent of sales. This compares to gross margin of 35.6 percent of sales for the second quarter of 2001 and 35.6 percent of sales for the first quarter of 2002. System sales -- both wireline and wireless -- continue to run margins between 40 and 50 percent, and handset margins continue to improve and now are about 20 percent. SG&A expenses excluding stock compensation expense for the quarter were 29.3 million or 12.7 percent of sales, consistent with our target model. The increase in absolute dollars as compared to last year can be attributed to our increased bookings and sales versus a year ago and expanded activities both inside and outside of Mainland China this year as compared to last. Research and Development spending excluding stock compensation expense for the quarter was 21.1 million or 9.1 percent of sales, which is also right on target with our business model. Approximately, 50 percent of our R&D staffing continues to be directed at development of next generation products focused around our IP SoftSwitch platform. The balance is directed at continuing development and upgrades to our PAS systems and handsets in our broadband wireline and wireless products.

Income tax expense for the second quarter totaled 6.6 million compared to 4 million in last year's second quarter for an effective tax rate of 20 percent, consistent with our guidance and business model. And our pro forma net income for the quarter, excluding non-cash charges for stock compensation, amortization of intangible assets, in-process research and development and investment impairment losses was 28.2 million or 24 cents per share, compared to 15.4 million or 15 cents per share for the second quarter of 2001. The better-than-expected results were driven primarily by higher revenues reflecting strong customer demand. Year-to-date pro forma net income was 48 million or 41 cents per share as compared to 28.5 million or 27 cents per share for the first half of 2001. As I transition to the balance sheet, I want to say that we are not only very pleased with our solid profitability and revenue growth but also with the strength of our balance sheet. As of June 30, our cash and short-term investment balances remain extremely strong and were 402.8 million. Cash flow from operations was positive at 59.7 million in Q2 and 55.5 million year-to-date. Accounts receivable day sales outstanding have also improved sequentially and year-over-year and were 89 days for the quarter as compared to 120 days at the end of Q2 2001 and 101 days at the end of Q1 2002. This significant decrease represents a continued exceptional job by the team in collecting cash. Forward looking, we anticipate the DSOs will continue to see year-over-year an improvement throughout 2002 and should range between 85 and 115 days. In Q2, our inventory increased to 269.9 million and inventory turns improved to 2.3 as compared to 2.0 at the end of the first quarter. At the end of the second quarter, approximately 56 percent of our inventories at customer locations. We continue to be very conservative with our revenue recognition policy in which we recognize revenue and convert inventory into cost of goods sold as we obtain final customer acceptance of our products.

As a result, the product at our customer locations, for which we have not yet received final acceptance remains, there in inventory and continues to drive increasing visibility into future quarter's revenue and profits. Inventory turns are targeted to continue to improve throughout the year approaching three by year-end. Guidance going forward: We continue to strengthen growing demand for our products both inside and outside Mainland China, and our visibility continues to increase. We now have approximately 100 percent of Q3 in backlog and are 50 to 70 percent booked for Q4 and are, in fact, putting backlog in place for 2003. We are again raising our revenue guidance. For the third quarter of 2002, we anticipate revenues to be in the range of 240 to 245 million. Sequential revenue growth for Q4 should be approximately 7 to 9 percent, and as you build your models, we're also raising our guidance for a total 2002 to range between 900 and 925 million, up from the 850 to 880 million given on the Q1 call. The guidance for 2002 revenue breakdown is as follows: Revenues from Mainland China should approximate 80 to 85 percent of our revenues and outside of Mainland China should approximate 15 to 20 percent. By product type, the 2002 revenue breakdown is targeted at wireline systems; 10 to 20 percent reflecting growth in broadband IP DSLAM; our handsets should run 30 to 40 percent, reflecting increasing subscriber demand throughout China; and our internally designed and China-manufactured family of handsets. On wireless systems, 40 to 50 percent reflecting that continued expansion and new deployment of PAS, an IP based PAS networks both inside and outside of Mainland China. And our gross margin as a percentage of revenue for 2002 are targeted at an average between 36 and 38 percent. SG&A should trend up very slightly in absolute dollars, each of the next two quarters. Our target model is to draw an SG&A at 11 to 13 percent for 2002, and our R&D should also trend up very slightly in absolute dollars, each of the next two quarters. And our target is to run R&D at 8 to 10 percent for 2002. Interest and other income and expense -- we're guiding to approximately 1 million per quarter, reflecting lower bank borrowings and the company's strong cash flow. Minority interest and equity income has guided to zero in Q3 and Q4, as we have now purchased by minority, interest of our JV subsidiaries in China, and now own 100 percent. Tax -- our pro forma tax rate for 2002 should continue to approximate 20 percent. On earnings per share, we are also raising our guidance for earnings for 2002. Pro forma earnings per share guidance for Q3 is targeted between 27 and 28 cents, and for the full year 2002, earnings should range between 99 and $1.00, up from our previous guidance of 96 to 99 cents. For 2003, we'll provide formal guidance on the next earnings call, which will be scheduled for October. We continue to target a long-term growth rate of 20 to 30 percent and Q1 will continue to be our seasonally weak quarter reflecting telecom carnage worldwide as well as the Chinese New Year. In addition, starting in 2003, we will only provide reported results per US GAAP and no longer prepare pro forma results. This decision is based on the fact that there is a relatively small difference between our reported GAAP and pro forma net income due in part to recent changes in accounting principles such as SFAS-142, in which goodwill is no longer being amortized. In translating our traditional pro forma forward-looking guidance, the reported results approximately 3 million per quarter of net income would be a good estimate to account for items such as deferred stock, compensation, amortization of intangibles with finite life, and impairment of investments.

We believe that discontinuing pro forma reporting effective in 2003 will provide increased clarity and meaningful comparisons of our financial statements with our peers in the broad market. To close this discussion, once again we're extremely pleased with our financial performance. We had an outstanding second quarter with record revenue, profits and bookings. We have continued to add new customers and deployed new products worldwide. The balance sheet remains extremely strong, reflecting our ability to manage cash flow as we grow the company. And forward - looking, we anticipate continued top line growth and profitability and to have increased guidance. Now I'd like to turn the call over to Huang to discuss the business and strategic developments.

Thank you Mike. I'd like to welcome everyone to our second quarter conference call. As Mike mentioned, this quarter marked another record of UTStarcom in terms of financial performance and was extremely strong in the growth in our overall business in Mainland China and outside global market as well. I'm pleased to give you the update on our business and key indicators throughout the call. According to China National Bureau of Statistics released on July 15th, the economy in the first two quarters of 2002 continued its rapid growth. GDD growth in the first quarter was 7.6 percent and the second quarter growth rate improved to 8 percent. China as a economy, in general, continues to be stable and fast growing. As of June 30th, China's trade surplus has reached 13.4 billion. As a result, even though in general, there has been a slowing in China's total telecom CAPEX spending, we see that purchasing power of the consumer continued to grow, helping to provide demand of the telecommunications services and market opportunities for us this year and into the future. With regard to the telecomm industries, as of the June 30th, 2002, the total number of telecomm subscribers in China reached 374 million, an addition of 51 million subscribers in the first six months of the year. Fixed line subscribers reached 198 million with addition of 19.9 million new subscribers. Mobile subscribers reached 176 million with addition of 31 million new subscribers. On average, there were 8.7 million new subscribers added each month. There were 3.3 million fixed line addition each month, which is higher than the average of 2.9 million fixed line subscribers added in 2001. The growth in subscriber number that China continued to achieve highlights China, as a best growth market for telecommunications, a core market of our focus.

: We see the success of PAS as one of the key reasons for this continued growth in subscriber in China. On May 16th, China Telecom and China Netcom group officially held their respective opening ceremony in Beijing. This marked another important milestone in the deployment of China telecom industries. Both China Telecom and China Netcom have started the foundation of their liaison office in each other's territory for the preparation for the future business. We believe, as the market becomes more open in the access arena, the demand for our wireless and wireline access systems will increase. As ourPAS and IP based PAS system can provide operators with a much shorter period of deployment and much faster return on investment than the deploy of the traditional cupper line. The deployment of our PAS and IP based PAS systems continued to be very strong in the third quarter -- [and around] this quarter. At June 30th, the total number of subscribers on China Telecom and China Netcom's PAS networks reached 9 million, an increase of approximately 3.5 million from December 31st 2001. At this rate of a growth, the total number of PAS users in China will easily surpass 12 million by the end of 2002, and [while] due to its accelerating popularity, competing in the PAS market is increasing fears.

: We believe UTStarcom continues to maintain approximately 55 to 60 percent market share of PAS systems and the handsets numbers. As of June 30th 2002, the total installed system capacity of UTStarcom's PAS and IP based systems reached 8.1 million in addition as a result of the multiple success in several important markets. The number of [SCDs] in the PAS that have been deployed has increased to 268 in Q2 as compared to 237 at the end of Q1. As we've disclosed in our first quarter conference call, we have begun to ship our handsets into our competitors' networks; this has helped increase of a total demand of our handsets throughout second quarter. In the first half of the 2002, we've shipped approximately 2.2 million handsets, including those shipped into our competitors' network. This compared to 1.7 million handsets shipped for the entire year in 2001. In an effort to continually enhance and upgrade our PAS offering, we'll aggressively promote the PAS business in several areas during the third quarter. Beginning with expanded deploy of our new 500 [mini] web based stations, which has been proven very effective and efficient in coverage and the network quality. We'll use the base station to complement our existing low power base station systems to increase capacity and optimize existing network. We'll also launch multiple new handsets to the market ranging from high-end, high functionalities models to the low price model. Finally, we're now working with our customers to offer value added service in the big cites including, among others, Guangdong, Hangzhou, Huizhou, Zhejiang and [Jouhai].

These cities will serve as a regional center to provide the [C-Mode] value added service to the nearby areas. C-Mode is similar to the [I-Mode] application in Japan. With regard to our 3G deployment in China, as we successfully pass the first phase of [NT net trials], this gave us much credibility going into the Phase II field trials, which are due in beginning in October this year. At the same time, we've started the construction of the 3G trial systems in four major cities in China. Our first trial in [Chan-Chan] has already expanded its scale from a single-base station to three-base stations, and now cover as much bigger areas in Chan-Chan high-tech economic town. The R&D trial system in Shanghai, Beijing, and Hangzhou will be up and running by the end of 2002. As there has been a delay in the worldwide 3G deployment, we believe the operator in China had begun to pay more attention to the possibility of the combination of 3G networks and IP based next generation networks. This has helped [indiscernible] 3G platform to gain more interest, as our 3G solution is already based on our latest 3GPP standard. And our core network is already based on IP protocol. We have now widely partnered with other industry's leader in 3G business deployment incorporation in the area of wireless, handsets, services and applications and etc. These relationships helped us build strong alliance networks and ability to better deploy and then provide products to the customers. With regard to our mSwitch platform which we plan to deploy as both as a mobile switch and in a fixed line environment as a class 4 and class 5 switch. We now have various trial contracts with the several operators, which include CNC, China Telecom and China Satellite. We will utilize our mSwitch systems to offer local access, long-distance [IP found voice BPN] and many other value added services to the operators. We see the softswitch technology as alternatively replacing today's TDM based switch in a much more cost effective and service-rich basis to the operator. These trial systems will serve as an important reference for gaining further commercial systems. All the major operators in China are now actively testing the softswitch technology and we are working with their international softswitch consortium to hold its second forum in China during the third quarter to promote the deployment of the softswitch technologies. We also continue our planned focus on growing our business outside of Mainland China to become a leading global telecommunication providers. In Taiwan, the success of our PAS offering continues to grow. This is in a market that already has close to 100 percent cellular penetration, our customer feature now has over 300 -- 300 -- 10,000 subscribers in a greater type A, and it is in process of expanding this existing capacity to one million lines, the success that feature has achieved with our PAS product offering has been largely driven by 64 Kb [indiscernible] capabilities and mobile contents we offer to the customers. To that end, we receive [indiscernible] of approximately 11 million during the quarter to execute this expansion plan.

In addition, we fully anticipated further expansion of the network in terms of both capacity and geography -- and geographically and service enhancement, which include [indiscernible] to Japan and eventually to Mainland China as well. Also in Taiwan, our customer Eastern Broadband Telecom has continued the deployment of our wireline AN-2000 product offering both voice and ADHL services with a total installed base of approximately 100,000 lines today. In Japan during the second quarter, we made additional shipment and recognized approximately 45 million of the revenue from our IPD slam offering to our customer BB technology and supporting of the Yahoo BB in Japan. After June 30th, the service provider Yahoo BB had 650,000 subscribers on the network. As Mike noted in Vietnam, we signed the very first contract to supply our IP-based PAS solution to the incumbent operator VNPT for an initial deployment of over a 100,000 subscriber of the combined capacity in Hanoi and Ho Chi Ming cities. This first contract is an amount of 20 million and is expected to officially launch in early September 2002. We're also currently working on contracts for deployment of the several new cities, as well as expansion in existing deployments. We anticipate that eventual launch of the value of added service into the network as well. Nevertheless -- needless to say, we're very proud of our accomplishment in Vietnam and believe they mark just the beginning of the opportunity in the country. We believe this opportunity as it expands could easily reach over a 100 million in business in the next few years. India is another market where we have made significant initial progress and seek great potential. It is important to realize though that market would take time to cultivate. During the second quarter HFCL, our India manufacturing licensee shipped 30,000 lines of AN-2000 products to MTNL and 215,000 line to the VSNL. Accumulative today, HFCL has shipped approximately 330,000 lines to those two operators. Hughes Telecom and Shyam Telelink, both private sector operators have complete installation of the combined total 40,000 lines of AN-2000 shipped from our [Han Jo] China plant, and both Hughes and Shyam have recently purchased further expansion quantity of AN-2000. A controlling state in Hughes has recently been purchased by Tata Teleservice. At the end of the second quarter our PAS wireless access system was deployed and commercially launched by MTNL in a five square kilometer area of New Delhi under the marketing name, extended caller service or ECS. ECS is tariffed at the parity with an MTNL wireline service and is positioned as a neighborhood cordless telephone alternative to the wireline services. The Delhi PAS deployment is a 5,000 user capacity trial network and offer the potential of MTNL to purchase and expand the network in the fourth quarter. MTNL views pass as a value added service with which to obtain and expand its customer base in the face of increasing private sector competition and also mitigate the shortage of the [indiscernible] in certain operation areas.

Our New Delhi sales and support team continue to focus on service and existing customer expansion of our customer base for both AN-2000 and PAS. We are in frequent contract and discussion with all the public and private sectors' basic service operators. In addition, we are working with Indian standard bodies to set the technical standard agenda in India to take advantage of our low cost, high capacity PAS systems and also our AN-2000 IB the broadband IP based [indiscernible]. We have received many questions on the recent regulatory policy decision regarding limited mobility service in India. On July 8, the telecom regulator -- regulatory authority of India decided to allow state-owned fix line operator to offer wireline local loop services at the discount rate to settle the services. This price structure is 410 cents per month with an outgoing call charged of approximately one cent per minute and compared to GSN fees of approximately $6.4 per month and a charge for both incoming and outgoing call of approximately 4 cents per minute. Meanwhile, the GSN lobby has filed a log sheet with the Supreme Court of India challenging the legality of a limited mobility service, and they are said to make their decision on July 19. It is widely believed that the Supreme Court will uphold the government's decision to allow the deployment of the wireless local loop service by fix line operators throughout India. Given the amount of money that has already been spent by both public and private sectors. In the event that Supreme Court does the unexpected and declare limited mobility illegal, we stand to gain tremendously as our PAS service has been classified as the extended cordless service which is [indiscernible] on par with our fix line services which is slightly lower than that of limited mobility rate and also does not fall into the category being challenged. We will continue to monitor this duration but believe that given the desire to the increased tele density in India, UTStarcom is well positioned to benefit greatly. In the rest of the world we continue to receive order for AN-2000 family of our product in small quantities in the region such as former Soviet Union and Mediterranean.

And we also have staff and expand our reach into a new market such as Indonesia, Thailand, and Central America and Latin America region. We see some very good near term opportunity for each of those product offering in each of those regions. Moving on to R&D initiatives, we have continued to grow our R&D resources. At the end of Q2 we had 1,159 people in R&D overall as compared to 1038 at the end of 2001. We are continuing to invest in the deployment of a new wireline and wireless product, which are designed to meet the demand of the fast telecommunication technology in market around the world. Our design effort has been focused in emerging trends such as migrating our narrowband to the broadband in wireline, PDM or circuit switch to IP-based packet network and from wireline telephone to wireless access and 3G mobile communication networks. As an indication during the quarter, we have seen much broader acceptance by operators in China of our softswitch platform in both wire and wireless application. Finally, we have sizable shipment to Japan of our IPD slam. We have also continued to invest in our broadband product lines. For example, we expect to enter the trial this month in China of our new VDS offering. We feel we're extremely competitive in those areas. As I conclude our discussion, I would like to reiterate, that we had a very strong and productive second quarter, and I'm extremely pleased that both our progress and outlook. We once again exceeded estimates in the revenue and profit, and we're raising the guidance. We were 59 million cash flow positive from operation of the quarter. Strong booking and subscriber growth continue. Our business outside of Mainland China continue to grow and expand. Our R&D initiatives continue to pay and position us as technology leaders. Now, I will like to open to the questions. Operator.

Certainly. Ladies and gentleman, if you wish to ask a question, please depress the "1" on your touchtone phone at this time. You will hear a tone indicating that you have been placed in a queue and you may remove yourself from the queue any time by depressing the "#" key. If you are on a speakerphone, please pick up your handset before pressing the number. And our first question comes from the line of Tim Long with Credit Suisse First Boston. Please go ahead.

Thank you, few questions if I could -- Huang, could you talk -- you mentioned the competition coming in PAS, since it's grown so much. Could you give us some color on the handset market particularly? Who do you expect to see -- has any one made any inroads, and what do you think that can do to pricing and margin for PAS handsets? And while on that topic, do you expect any competitors to join on the infrastructure side with Lucent and DTE? And then, I'll have a few clarifications from Mike.

Okay. Well, about the question on the handset. We see [Qusera], who is a Japanese manufacturer, continue to ship their product to both Lucent and DTE. DTE is a public company in China -- a local company. And they have been continuing to expand that line of product lines, but we still see our product has a lot more many advantages over theirs. So we feel very comfortable about that. And the good news is that our user will have a more variety of choices. So that will actually positively influence the market. So they will have more choices now than ever before. And about the system size, we see that both Lucent and DTE has been extremely aggressive into this market as well. So we see our market has been getting a lot more competitive than before.

And I think, Tim, you'd asked a little bit about pricing pressure and margins. You know as a broad [indiscernible], I will tell you, you'll probably see about 20 percent price erosion on an annual basis, which is pretty consistent with what we've seen for the last, you know, year or so. And obviously, we will need to just continue to work our cost reduction and specifically one of the things we can do is the 500-milliwatt base station. We'll do the same thing there that we did for the rest of the product line and move to a CKD and build inside China, which will take a tremendous amount of cost out.

If I, maybe, expand that a little bit. So the price is not the only way to compete. Obviously, everybody is trying to differentiate themselves from the others. But in particular, what we have been doing is that we're the only company today that has the local manufacture of a base station in the handsets, and we also have a value-added team which is equivalent to the [IML] application and again we do have some migration path; but whoever buys our iPAS -- our IP based or iPAS product, they will be able to migrate to the 3G, which are compatible systems.

Okay. And then just Mike, if you -- quick ones to you. Can you just give us a sense whether gross margins for handsets in the quarter were up versus Q1, and whether or not there is any Vietnam revenues in the quarter?

: Michael Sophie: Okay. [indiscernible] on the gross margins for the handset. They are up slightly, but what we don't want to do is change our guidance on overall gross margins for the handsets. And again, we've always, you know, said this that we see it as a very price elastic market in China. The income level there are obviously much lower than Japan or Europe or the US. And so at least we think 20-25 percent margins and those will stabilize. With regards to Vietnam, we have not recognized any revenue for Vietnam; what we're targeting there is that it will be the fourth quarter or Q1 is when we will recognize the revenue of that contract. It will go into the service in the late Q3 -- beginning of Q4; but, as you know, we don't recognize the evidence until we get a final acceptance.

Okay just a last question if I could. It sounds like the trials in India are coming along. Is there any opportunity there? Are we definitely going to see this as 100 percent UTStarcom business or could it wind up being more the model of the fixed line business where you have a local Indian partner or has that decision been finalized at this point?

We continue to work with an incumbent operator, which is VSNL and MTNL, who will continue to use our existing partners to sell our AN-2000. But other than AN-2000, such as IP [indiscernible] as well as the PAS and the SoftSwitch, we have decided to go directly into the private sector as well as those incumbent operators.

34:58 Tim Long: Okay, thank you.

Sure.

Thanks Tim.

Thank you, and our next question comes from the line of Sam May with Piper Jaffray. Please go ahead.

Hi. Good afternoon Huang and Mike, and congratulations on a great quarter and a very good presentation of the data. It's clear -- very clear. Huang, I know, you went to India last week. I want to ask you just a quick question on the [ruling] expected very shortly on wireless local with the limited mobility. You said during the conference call, if they are -- if they are denied that, that would be positive. What if [indiscernible] local mobility is allowed? What's the opportunity for UTStarcom in that scenario?

Well, we will have additional competitors from that point of view which is a CDMA systems. So we will not be the only supplier, which is -- I think, to us, we have additional competitors in the market; but we're getting used to all this competition environment. In the event, if they deny, then we will be able to [indiscernible] differentiate from the limited mobility to the extended cordless services, which are quite different, and we - at this moment, we're the only one offering the service.

Would you agree that you would still have a price advantage on limited mobility -- they have opted for limited mobility because of the [indiscernible] the tariff difference?

Yes, we believe that even if they would be allowed, there will be two different type of the services and that there would be higher services. And the CDMA obviously -- if we have -- from our experience, in general, it is a more costly solution than our past solutions.

Okay. And then turning to Japan, you said 45 million is for the year -- your product would be [BB tech] Yahoo during that quarter. I believe that will come to 15 million in Q1. Is that correct?

That was 10 million in Q1. 14 in Q4 of last year, Sam.

And that was -- that's being drawn on this -- on a $100 million contract announcements. So we've got 45 million to go, I guess.

Well, there were some slight additions to the contract; but we really, you know, can't -- we haven't been given permission to release that yet.

Okay. Do you expect a sequential ramp-up in Q3 from that product segment?

Q3 will be a very, very big quarter force, and then we'll have to see what happens in Q4 and Q1.

All right. And one more question for Huang. China Telecom to the -- what do you -- what is, in your opinion, is the outlook for them getting a 3G or even possibly a 2G licence? There has been some talk about the CDMA network from Unicom being turned over to somebody else. Can you actually comment there, Huang?

Yes, we definitely do not believe that they will get any licence any time soon. And there is always a speculation going. With the most recent rumor that we were told that it could be earliest in some time next year and no sooner than mid of next year or maybe towards the end of next year would be likely the soonest possible that licence will be granted to China Telecom and China Netcom. But we also believe -- we don't believe that 2G licence will be given to anyone at this moment. And there is a -- as you said, there is a rumor that the CDMA rumor -- we think this is a very, very unlikely rumor at this moment.

Okay. One question on the balance sheet. Payables up 50 million, Mike. What's accounting for that?

The driver for that was really the purchases of the 500 milliwatt base station. It was the single largest line item, and we continue to work on our, you know, whole supply chain management; and we're able to negotiate longer payment terms and manage our cash more effectively.

Was that a surprise to you that you would have to pay up that much to get the 500-milliwatt platform going?

Pay up that much?

You would have such a large jump in payables as a result of having to buy so aggressively on 500-milliwatt.

No, we had good projections internally on what we thought the demand would be, and it was all built into our plan. I think what's the pleasant surprise is that not only we were able to collect enough of my customers, as we're able to continue to align our inventory and cash flows and work with our vendors as our partners. And so I think we saw a significant improvement there reflected on the accounts payable line.

Great. Thanks and a great job and thanks for raising the guidance.

Thank you.

Thank you, and our next question comes from the line of Dale Pfau with CIBC World Markets. Please go ahead.

Yes, this is Earl Lam for Dale. Congratulations, gentlemen, on a great quarter. Couple of questions, Mike, on the gross margins. How much of that is going to be driven sequentially in Q3 and Q4 because of the potential higher mix of your handsets sales -- there a mix within the handsets for higher mid-tier handsets that could drive that margin up as well?

Okay, Eril thanks for calling in here. Regarding the handsets, the guidance I had given coming into the year was that the handset margins would run between 30 and 40 percent and we felt all this for total sales. And at the same time, if you look, you know, historically two years ago, our handset margins were breakeven, we've brought those up over, you know, 15 percent by the end of last year and at the end of Q1, we are already above 20 percent. So, what [was] doing on the handsets, we think it will fluctuate between the 20 and 25 percent level, and it's predominantly driven by the low-end priced handsets, because again the majority of the applications in China is for [basic] voice. We do offer the full family all the way to the high end, but actually the lowest priced handset have the highest margins at this point of time for us.

Okay and then I'll be expecting then sequential improvement in your overall margins for both the third and fourth quarter?

We came in at 37 percent for Q2; for the year we're anticipating between 36 and 38 percent. So I think it's going to depend a little bit on how the exact sales mix fluctuates, how we come in, but I wouldn't look for an uptake in gross margins; I think we're right at the mid-point right now.

Okay, and then a couple of housekeeping questions. With regards to your total subs for China and then total line or capacity installed, could you go over those numbers again?

At the end of our year combined numbers, we have 9 million subscribers -- not only ours but the -- our competitors or other assistance. Combined, we have nine active users. And that's compared to a little over five million towards the end of the last year. So, it's [indiscernible] from the end of the last year has been grown more than 60 percent and it's a very, very strong growth, comparatively speaking.

And one final question, with regards to international sales, obviously, congratulations on the order out of Vietnam. Are we looking for also sequential growth out of your international sales as we continue to progress through Q3 and Q4?

Well at this moment, we see the Q2 number and Q3 and Q4 would be probably relatively flat due to -- we have a fairly large shipment to Yahoo BB, and in the meantime, we also will be expanding into other market but we have seen -- that would be probably where you expected to see for the rest of the year.

Yes, if I could just add a little bit on it, there is, you know, obviously a little bit of lumpiness on how the revenue is given the final acceptance. For example, the Vietnam contract that we talked about, 20 million, you know, whether that's in Q4 or Q1, can be driven on the final acceptance and so, you know, just a few days could make a difference on which quarter it drops in. But for the year, we are very comfortable that the total revenues outside of Mainland China will run between 15 and 20 percent.

Okay and are we getting any sense with regards to India as to what or which direction the Supreme Court -- looks like it might be leaning towards -- as we get close to the date when they are going to make their decision?

Yes, well this is a speculation that we believe the Supreme Court would support the fixed operators because they wanted to introduce more competition and what they will be doing is just ask cellular phones to reduce their services. Therefore, they would be able to make their services available to a bigger mass of the people.

Great, thank you and congratulations again, gentlemen.

Thank you.

Thank you and our next question comes from the line of Alan Howa with Lehman Brothers. Please go ahead.

Hi thanks. Two pretty disparate questions. The first one, any forecast or assumptions regarding the potential timing, potential contract size for the Softswitch trial with China Netcom, and China Telecom, and I think I mentioned China Satellite.

Yes. Well, this is still the trial. We really do not expect any meaningful revenue this year, but we may be able to see some small amount of the contract by beginning of the next year.

You are actually talking about smaller amount of contracts. That reveals that you have pretty strong confidence that you'll emerge from the trial period into some commercial relationship?

Absolutely yes.

Okay, and then last question on that is -- is it a multivendor trial or is it really just kind of a technology [verbatness] trial?

It's multivendor trials.

Okay, that's great. Second question, with increasing evidence of new local GSM calling plans which are priced on par with PAS service in a lot of these cities. In your discussions with China Telecom, is that going to put a curb on a lot of their growth assumptions for PAS in those cities?

Well, we are competing fairly fiercefully with those [city] is not yet the public company and they are still private. And basically, what their situation is that they have the capacity and they just want to try and to fill up the capacities. And obviously they are not a public unit in many reasons is because they are not qualified to be public due to they are not making that money. Now on the other hand, for those areas that they are having public services or the public company services areas, they are very very concerned about their [outlook] and we haven't seen those areas as being very competitive. They have -- they are not as aggressively competing with us in the past.

[indiscernible].

And I feel regards to China Telecom and Netcom in [Orifice] that you take a look at the total sub numbers, the fixed line sub numbers are growing extremely well, you know, as Huang cleared that they are over 3 million per month and more and more and your PAS is viewed as a more cost effective method [incorporated] to bring in new subs on to the network.

Sure. I guess my concern is that there are these new intercity GSM calling plans, obviously, they are probably not as big money maker for China Mobile or China Intercom, but I am just wondering whether it is going to challenge a lot of growth assumptions in those [JS] dominated cities?

Well, those are more competitive in those areas I will say, so they will be a -- recently, we do see some of those as competition. But again don't forget that we always try to differentiate ourselves, even if with those areas that a lot of Chinese citizens are very health conscious and we have clearly differentiated our services by telling everybody this is a [green following] services, which has a much less health hazard issues; now, it has been addressed more heavily than ever before and we'll be able to differentiate that from the others as well. And on top of that, we were telling everybody if they wanted to have data services, we are much more effective and are cost effective than current GPRS or GSM services today.

Sure. Thanks one -- and my last question. The companies represented that non-China sales tend to have a nice premium in terms of profitability. Now in places like Vietnam, India or Indonesia, what's the phenomenon by which contracts are more profitable there than in China?

Well, we probably -- it is too early to say because of -- that in China, we have active -- we have a free competitive so therefore we have a more -- a higher competition. In those areas, we tend to have much less competition, at least that we haven't seen Lucent to be active in those areas, so we are competing with the DTV's. And quite frankly that we have a much more visibility and we also have better migration path and more of a valid content at the resources, and that really [helped to] differentiate ourselves from the others. So, from that point of view, that we have been much more competitive compared to, I mean or we have a less competition in those areas at this moment. But because of the success in China, we have gained a lot of credibility. So we are very much looking forward to expand our business outside of Mainland China.

Thank you very much and congratulations.

Thank you.

Thank you and your next question comes from the line of Joe Noel from Pacific Growth Equities. Please go ahead.

Yes. Hi guys, just a couple of quick questions -- mainly for Huang. There's a lot published about tele-density in China. I don't see as much of a tele-density in India. I thought maybe you have a little bit of color you might be able to give us there and maybe that what the government is saying about increases, of course that could possibly affect your revenue there. And second part of the question is areas like the former Republics of the Soviet Union , Latin America, Indonesia -- can you give us any color as far as how you think those markets were developed for you, when you possibly see some meaningful revenues and things like that?

Okay. Well, for India -- for the fixed line, they have a 35 million accumulative numbers. So it is very close to what China is going to do for the entire year. This year it will be about what India's has been a cumulative number in the past and so -- and for the fixed line. For the wireless or the cellular phone, they have a seven million. So China is adding over five million per month. So you can see how low the teledensity is compared to China and pretty much of semi-equivalent of population in each countries. Therefore, we're very much looking forward to have a great deal of possibility in India. Now, clearly we've not seen India to be moving very aggressively or in the full speed compared to what's happening in China. So, we do anticipate it will take some time before it will be getting their speed up. And for the other regions of the market such as Indonesia or Russia or -- and Thailand and such and we have then actively discussed those areas. The opportunity are very real, and we also do expect a very successful business in Vietnam. And so those areas that we have very high expectation out of those markets, moving forward in the future.

Right and just last very quick question. What about the new the headquarters building and how's that going up?

Well, we have in New -- I mean in Hangzhou we are building a facility center. That will be done. I expect that toward the end of the next year, we're going to move every people in. Right now, we already have running out of the space, so we are scattered all over the place. Maybe we have about four or five buildings, and we are still running out of space at this moment.

Have you bought ground for the new building?

Yes, we bought the ground.

Okay. Thank you.

Sure.

Thank you and our next question comes from the line of T.C. Robillard from Salomon Smith Barney. Please go ahead.

Great thank you. Can you guys give us some indications obviously with kind of the contract in Japan kind of coming over the half, I mean, I know, you said that there's been some add-ons to it but with a large chunk of a kind of behind, the Vietnam contract kind of announced and starting to ramp. Can you gave us an idea of what's going to be kind of a driver for international sales as we go into next year, I mean, obviously some good success coming through 'O2? Is there a chance that those revenues actually decline year-on-year and you actually start to see kind of some re-acceleration through China, and then also if you guys can also touch on kind of some of the past appointments. Have you guys seen any interest with China Telecom for kind of past appointment as a primary line access service? Thanks.

Okay, now how the international market in Japan, we obviously not are only looking at the Yahoo BB but we are looking at into other customers and they are very interested in our solutions. And at this moment, we do see a Yahoo BB to be continuously to get their services moving and being successful. And so for international overall business, we have not seen anything. We're slowing down. In fact, we do expect the expansion or the growth will continue in our international arena. Now, in Japan from one account maybe we do anticipate that we have a very large contract coming in from Yahoo BB. So in the future maybe that amount will be getting smaller but overall we are [now] expecting to have more of the growth towards the future. And as far as the your second question on the past deployment as a primary - the services; now, we haven't really seen that as the primary services in the China yet, but there is a very high possibility in other countries that they will be using this as a primary solution to deploy the services. But it's at a very early stage and not really are worth of the comment at this moment; we don't know the viability at this moment for that. So, I think - did I answer the question?

Well, that was great. Thanks Huang.

Okay, thank you.

Thank you, and our last question comes from the line of Andy [Shopic] with [Matlic] Securities. Please go ahead.

Thank you very much and good afternoon. Mike, the first question I just wanted to ask you is, the management of the inventories of the handsets and what steps you are taking in an environment in which there rather seems to be some general excess supply to make sure that we don't get stuck with some [indiscernible] going forward?

Okay, either Huang or I could take that question but definitely I feel that -- I think what we were doing on the inventory management for the handset is basically we're keeping the week sales at a very, very low level of commitment. What I mean by that is that our customers will try to monitor this very closely. We keep their inventory or their purchase supply for less than 30 days. Then we also bring the next step in the chain is where we are having our factory and there we also try to keep our level of inventory less than 30 days as well. And now, the final step is when you go out to the vendor side of the equation, we have less than 3 months' worth of commitments out to our suppliers. So I think if you add that all up, we are seeing here with less than a five-month commitment on our total supply chain on handsets. At the same time, we are profitable on the handsets, and so we are watching the situation very closely. But I think the key is you got to keep your supply chain commitment low in the market as it moves forward.

Andy, I think probably it's worth mentioning. This PAS market obviously, we have [indiscernible] and also Asia as our competitors, but relatively speaking, we have a very few vendors into this market. And also we are the major supplier for system suppliers. So I think five months of commitment that Mike was saying is a very manageable risk at this moment.

Good. The other question I'd like to ask is about channel strategies for penetrating new geographies, countries such as Thailand, Indonesia, Latin America, Russia. Really, what you are going to have to do as an organization -- to put in place the kinds of people or resources in developing the channels to those markets. Secondly, whether or not you will sell in all cases in US dollars or in some cases, local currencies?

Okay. Now, about the channels, we are very focused in one market at a time. So, for instance so when we go into Taiwan, we will set up our local offices, and we will be really [stacking] up the people and make sure whoever buys our product, we will give him the best service available. So we start out with Taiwan. Then we have a second market in Japan. We also have a similar concept and now we have a success in Vietnam. We opened our office in Vietnam and then we will go into India -- we also have that kind of structures. On the other hand, some of the areas that we do not have that kind of infrastructures, we do work with our strategic partners and predominantly in those areas we work with NECs. They have been very, very good working partners with us. So they will be selling into some of the South Americas, Thailand and some of the Malaysia and -- which we don't have our infrastructures ready and we will work through them with a certain product lines. And now once we have our very -- we will gradually put one step at a time in those markets. So we've been so far focused in Asia and now we are moving toward more of a [indiscernible] or the Central America or Latin America areas. We believe that there is tremendous opportunity so we have opened up sales office in Miami. And once we have a very successful contract, then we will put our channel into the areas.

Regarding currencies, we -- the only place that we are not using US dollars is in Mainland China right now, which is R and D and as you [indiscernible] fixed exchange rate that does not fluctuate. As we go internationally, we are negotiating all those contracts in US dollars. Now, you will ask us a question, would we ever consider taking anything in non-US dollars. It's a possibility; we haven't done it to date. The only way we would do that is if we get a solid hedge on that contract, there will be no exposure to the company.

Great, thank you very much.

Okay, I think we have one last question.

We have -- I think that was the last question.

Oh, that was the last question, I think.

Yes.

Well, operator, I think we are done for the day.

Do you have any closing remarks?

Well, we really appreciate everybody to have participation and once again, we are extremely pleased with our -- both of our progress and outlook, and if you have additional questions, please give us a call. Thank you.

Thank you. Ladies and gentlemen, this conference will be available for replay after 5 o 'clock pm, Pacific Time, today through midnight Pacific Time on Tuesday, July 23rd. You may access the AT&T executive playback service at any time by dialing 1800-475-6701 and entering the access code of 644340. International participants dial area code 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844, access code of 644340. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.