UTStarcom Holdings Corp (UTSI) 2002 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the UTStarcom Fourth Quarter and Full Year 2002, Conference call. At this time, all lines are in a listen-only mode. Later, there will be a question and answer session with instructions being given at that time. If you should require assistance during today's conference, please press zero followed by star and then an operator will assist you offline. I would like to remind you that today's conference is being recorded and I would no like to turn the call over to Ms. Chesha Kamieniecki. Please go ahead.

Thank you good afternoon and welcome to UTStarcom's fourth quarter and full year 2002 earnings conference call. I am pleased to present Hong Lu our President, and CEO; and Mike Sophie our CFO who will host this call and provide an update on company's business and progress. In addition, we have David Robison, our Vice President-- President of International Sales as a special guest on this call, who will provide an update on our business outside Mainland China.

Some of the information that we will discuss during this call constitutes forward-looking statements. Actual results could differ material from our current expectations. To understand the risk that could cause results to differ, please refer to the risk factors identified in our latest annual report on form 10-K and quarterly report on form 10-Q filed with the Securities and Exchange Commission. Please also refer to today's earnings press release for detailed disclosure on pro forma versus reported result. Finally, we would like to limit the length of today's call to one hour. We are happy to take questions after our prepared statements in the time we have allotted. As a courtesy to others, please limit your questions to two during the Q&A session. With that I would like to turn the call over to Mike Sophie. Mike.

Thank you, Chesha. Good afternoon everybody.

Once again, we closed the fourth quarter and year with record revenues and profits. We see continued strength in 2003 and we will also be raising guidance going forward. UTStarcom has made significant progress towards realizing the goals we had outlined to investment community throughout the year. These goals include achieving unmatched financial performance, establishing a significant global presence and expanding our technology leadership. Achieving unmatched financial performance is a key goal that differentiates us in this sector.

In the 12 consecutive quarters, we have exceeded street estimates, and we are again raising guidance for the third quarter and full year 2003. Our balance sheet is equally impressive. We see year-ending records in both positive cash flow from operations and account receivable collections. Finally, our bookings in China and globally continue to be extremely strong. Our year-ending backlog came in $605m up 67% from year-end 2001.

We also made significant progress in our second goal of becoming a leading global provider of telecommunications solutions. We have received initial purchase orders and begun shipments against the large contracts in India to report (ph) our next generation wireline systems throughout the country. In addition, we are continuing trails of our PAS systems with MTNL and two other private operations (ph) in India. We believe that we will ship in excess of $100m worth equipment in India in 2003.

In Japan, we signed additional contracts worth $100m for IPDSLAM product. Working with Vietnam Post & Telecommunications, we launched iPAS service in the two largest cities in Vietnam. We are now discussing expansions to additional cities.

Finally, we may strides towards our third major goal of being a technology and product leader. In the second and third quarters, our DSLAM product was named number two in worldwide market share. UTStarcom is also named number one in worldwide Softswitch deployment. The Government of China has chosen us to conduct research in the Softswitch technology on their behalf and our 3G development continue on schedule and the result in our 3G field trials Shanghai and Shingin are excellent thus far.

We believe we have established a credible track record of delivering unstated goals and we will highlight further benchmarks throughout the call today.

Now, I would like to make some specific comments on our fourth quarter financial results. Sales for the fourth quarter were $301.1m, an increase of 53% year-over-year and 13% sequentially. Full year 2002 sales were $981.8m, an increase of 57% year-over-year. Increasing demand for our wireless PAS (ph) and IP-based PAS products continue to drive our strong revenue growth. In Q4, PAS and IP-based PAS systems accounted for approximately 47% of sales. PAS handsets accounted for another 40% of sales, while 13% of sales came from wireline products.

With regard to our target of global diversification, revenues from inside Mainland China represented approximately 85% of total revenues for the fourth quarter and 84% for the full year as compared with 90% in 2001. Pro forma gross margin dollars for the fourth quarter increased to $101.1m coming in as targeted at 34% of sales. Gross margin dollars for full year 2002, were $345.5m or 35% of sales compared with 36% in 2001.

As we discussed in our third quarter conference call, our sales mix has a heavy impact on overall gross margin percentage. For example handset sales increased as we projected to 40% of revenues in Q4 as compared to 38% in Q3, and 36% in Q2 of this year. This increase is a direct result of the continued popularity of PAS. As a reference, handsets were approximately 38% of our revenues in 2002 versus 30% in 2001. Typically higher than anticipated subscriber good, such as we experienced in 2001, result in overall increase in handset revenues.

A key point I want to make is that while this growth may have an overall impact on gross margins, as a percentage, the net impact in UTStarcom is higher revenues than projected, higher growth margin dollars and increased profitability. We have successfully been able to maintain our handset margins around 25% and our infrastructure margins about 40% and are very pleased with overall profitability. Pro forma SG&A expenses fourth quarter were $28.3m were 9% of sales. This compared to $20.3m or 10% of sales in last year's fourth quarter. The increase in absolute dollars could be primarily attributed to an increase in overall business levels and our expanded activities outside the Mainland China. Pro forma Research and Development spending for the fourth quarter was $22.1m or 7% of sales. This compares to $16.5m or 8% of sales in the fourth quarter of 2001. We added about 350 R&D engineers during 2002 while maintaining cost as percentage of sales at 9%. About half of our R&D staff is developing next generation products focused on our SoftSwitch IP platform. The other half continues to develop and upgrade our PAS systems in handsets in our broadband wire line and wireless products.

Pro forma operating income both in dollars and at a percentage of revenue continue to increase in Q4. Expense control policies and leverage from increased revenues resulted in an overall improvement to UTStarcom's operating income. Pro forma operating income was $50.7m or 17% of sales for the fourth quarter 2002. This compares to Pro form operating income of $32.2m or 16% of sales in the fourth quarter 2001.

Pro forma net interest and other income expense for the fourth quarter 2002 was an expense of $2.3m compared to income of $1m in the fourth quarter of 2001. The change is primarily due to continued lower overall interest rates as well as foreign exchange charges of $3.1m in the fourth quarter as a result of the stronger Yen to Dollar ratio. Income tax expense for the fourth quarter totaled $8.5m compared to $6.3m in last years fourth quarter. For the full year 2002 income tax expense totaled $27.3m compared to $19.8m last year. Our effective Income Tax rate is around 20%.

Pro forma net income for the fourth quarter was $39.6m or $0.36 per share versus our guidance of $0.33 to $0.34. This compares with Pro forma net income of $27.2m or $0.24 per share in Q4 2001. For the full year pro forma net income was a $121.3m $1.06 per share as compared to $77.8m or $0.72 per share in 2001. Reported Q4 earnings per share came in at $0.30 versus $0.14 in Q4 2001. A increase of a 114%. Full year reported earnings per share was $0.94 compared with $0.52 in 2001. An increase of 80%.

As I move to discuss from the balance sheet I want to highlight how pleased we are with our strong profitability and revenue growth and also with the strength of our balance sheet in positive cash flow from operations.

Our cash and short-term investment balance at the end of 2002 with $349m. I am extremely pleased to report that we closed the quarter and year cash flow positive from operations. This is quite an accomplishment given our high levels of revenue growth.

Positive operating cash flow was $30.7m for the fourth quarter and a $167.1m for the full year 2002. We also made strategic use of some of our cash in 2002 to retire approximately $70m in debt throughout the year, to buy back $72m worth of stock in August, and to spend $39m in CAPEX for our new facility in Hangzhou which we believe will contribute even higher revenue and profits in the future.

Accounts receivable day sales outstanding improved year over year and was 66 days for the fourth quarter with compared to 88 for the fourth quarter up in 2001.

We expect the seasonal pattern of DSOs to continue. Q1 is anticipated to come in higher with sequential improvement throughout the year. DSO's throughout 2003 should range between 90 and 65 days. In Q4 inventory increased to $424.7m and inventory turns were 2.3. This compares to turns of 2.4 of a Q4 2001. The vast majority of our inventory approximately 66% is at customer locations.

This compares to approximately 55% at Q3 2002. This increase is the result of extremely strong customer demand for our products and in fact one of the key challenges is to increase our supply fast enough. As a policy we continue to recognize revenue and convert inventory into cost of goods sold only after we obtained final customer acceptance of our products.

Deferred revenue increased to a $164m from $108m at the end of Q3, again reflecting strong customer demand for our products. These balances represent cash we have collected from our customers for which we have not yet recognized revenue is being used to fund the growth in inventories.

I am extremely pleased report that we ended 2002 with the record backlog of $605m. This backlog compares favorably to our backlog $360.7m, at year-end 2001. And gives us tremendous visibility for 2003. We tried to be extremely conservative in reporting backlog as we are with the rest of our numbers. We have factored down the backlogs from many contracts that we believe may not be realized within a 12-month window. Our year-end backlog breaks down by product as 23% Wire line infrastructure 73% wireless infrastructure and only 4% handsets. We continue to see strength and growing demands across all product lines both inside and outside of Mainland China.

We are again raising our revenue guidance. For the first quarter of 2003, we estimate revenues in the range of $265m to $275m. Sequential revenue growth for Q2 through Q4 should be approximately 10% to 14% quarter. We are also raising our revenue guidance for full year 2003 to be $1.325b an increase of 35% over 2002 and significant increase compared to the $1.275b guidance we gave during our third quarter conference call.

We also anticipate that we will see a higher percentage of revenues from sales outside of Mainland China. In 2003 we expect about 75% revenues will come from Mainland China and the other 25% will come from our global market. Major markets outside mainland China include Japan, India, Southeast Asia and Latin America.

We've also broken our anticipated revenues by product type. Wire line systems, for example represent about 20% to 25% of sales. This reflects extremely strong growth in broadband ADSL, DLC, Metro applications, Voice over IP gateways. Class 4, 5 SoftSwitches.

Handsets will account for about 35% to 40% of revenues reflecting strong subscriber demand through out China and due to our continuous expansion and deployment of PAS in China and global markets, total revenues from wireless systems were approximately 40% to 45%. Our target for gross margins as a percentage for revenue for Q1 is approximately 33% to 34%. We expect margins will improve slightly perhaps 0.5% to 1.0% sequentially each quarter throughout 2003. For all of 2003 our target for gross margins as a percentage of revenue between 34% and 35%.

SG&A in Q1 should start at around 12% of sales. From Q2 through Q4 we expect SG&A to increase in dollars but decrease slightly as a percentage of sales.

Our target model is to run SG&A to 11% to 13% for 2003.

R&D should start Q1 at around 11% of sales from Q2 through Q4 we expect R&D to increase in absolute dollars but decrease it's percentage of sales. We expect R&D to run 8% to 10% of sales for 2003. Other income and expense should be of few hundred thousand per quarter reflecting current lower interest rates, potential foreign exchange and impairment charges.

Our effective tax rate for 2003 should be approximately 20%. We are also raising our earnings per share guidance for 2003. Please remember that our earnings per share guidance for 2003 will only be on a reported basis. Going forward we will no longer provide pro forma comparison. Today's, earnings release include a detail historical reference comparing pro forma to reported numbers. So, all models can be adjusted accordingly. Our earnings per share guidance for Q1 is between $0.23 and $0.24, up from our previous guidance of $0.22 to $0.23.

Full year 2003 earnings should range between a $1.26 and $1.27 up from our previous guidance range of a $1.18 to a $1.22. This represents increase of 35% over reported $0.94 for full year 2002. I would like to close the discussion by saying once again how extremely pleased we are with our financial performance. We had another outstanding quarter and year with record revenue, profits and backlog. We have continued to add new customers, deployed new products worldwide. Our balance sheet remains extremely strong reflecting our ability to generate positive operating cash flow as we grew our company. Going forward, we anticipate continued top line growth and profitability with business indicators in our markets.

Now I would like to turn the call over to Hong who will discuss the business and strategic developments for UTStarcom.

Thank you Mike, I would like to welcome everyone to our fourth quarter and full year 2002 conference call.

By our accounts, 2002 has been the most successful year in UTStarcom history both financially as well as the growth in our overall business, in product development, acceptance and operations. I believe that 2003 will be even more successful year for UTStarcom and I will give you update on key business indicators throughout the call.

As we move into 2003, I would like to take a moment to emphasize two key points that most people do not understand about our company. Our ability to grow outside of Mainland China and the strength of our technology and the product portfolio while historically we are focusing our shares in Mainland China, we have successfully began the transition to becoming a global telecommunication providers.

We are capitalizing on significant opportunity among the world for both wireline and wireless solutions. As Mike mentioned, we generated $157m or 16% of our revenue outside of Mainland China in 2002 and expects that 50% of our revenue will come from outside of Mainland China by 2006. We believe this transition to becoming a global provider is extremely meaningful while evaluating the future success of the company.

An equally important factor for UTStarcom's future success is the strength of its technology and the diversity of its product portfolio. We are very much of total solution providers with strong technology and market leadership in broadband, digital web carriers, soft switches and transmission equipments. This trend serves as a strategic advantage for the company and will enable us to grow into all markets. Now we will discuss our regional markets worldwide, begin with China.

Although, the world wide economy faced a very difficult environment in 2002, China continued its rapid growth in all major economic areas. According to China's States statistic bureau, the annual GDP increased 8% over 2001and reached a record 1.2t in 2002. China, also, attracted more than 50b in direct foreign capital investments surpassing the United States to become the number one country worldwide utilizing foreign capital. China continued to forecast, at least, 7% GDP growth in the next few years. A continuing, strong economy in China is a key to UTStarcoms to continue prosperity in future years.

Now, let's move on the discussion in the Telecom industry in China. While there was a continuous structure reform during 2002, the industries still maintained a high growth rate. Several, major events in 2002 changed the competitive landscape in China, significantly. In January 2002, China Unicom officially launches CDMA systems. In May, China Mobile launches GPRS services and in the second half of the year, it began to actively promote its SMS, MMS and other value added services. Also in May, the government officially split the fixed line operator, China telecom, into two independent entities. China Telecom in the south, and China Netcom in the north. These companies are now competitors in fixed line services business, the first such competition in China's history.

In November, China Telecom completed its initial public offering in both Hong Kong and New York, rising around 1.3billion in cash. Clearly, the Chinese government is becoming less involved in the business activities of its Telecom operators. The market, itself, and the respective operator will dictate the movement of the market. We firmly believe that the Telecom services market will only become more competitive and consumer driven. We also believe that this environment is optimal for the success of the UTStarcom. Our innovative cost effective products for operators and end user will provide us with a long term, sustainable growth in a Chinese market. According to the statistics provided by the MII, by December 31st 2002, the total number of telephone users in China reached 421m; an addition of 95m users from 2001.

Fixed line subscribers reached 214m, an addition of 34m, based on this calculation, [Inaudible] contributed 23% of overall fixed line additions in China in 2002. Cellular subscribers reached 2007m (ph) , an addition of 61m users, from 2001. Based on these numbers, China is already the largest telecommunication market in the world, however, in relation to its population of 1.3b citizen it's fixedline kind of density is only 16.8% and their mobile kind of density is 16.1%. This is a very low sort of density relative to the rest of the developed world. There is still a huge market for both basic [Inaudible] and valued-added data services in China. It has been forecasted by China MII that they will add approximately 33m fixedline and 52m mobile users in 2003. China is becoming an early adaptor of the most event (ph) telecom technologies and services such as MMS, GPRX, and broadband DSL.

These continued to be, however, a large, a very large segment of the lower-to-middle income consumer who paid careful attention to cost effective services. Our product portfolio is designed to best satisfy those kind of a mixed market demand as operator become conscious about their capital spending, we believed our solution or even better positions vis-a- vis the competition. In 2002, operated in China reduced a total capital spending by about 20% compared to 2001. Decreases occurred mainly in traditional transmission and switching segments while there was excellent increase in spending on our accessory where UTStarcom operates. Looking forward in 2003, we anticipated that total CAPEX spending will be flat to 2002 level. Operating will focused that investment on a product such as our wireline, wireless, and broadband system that can generate an immediate subscriber growth an increase traffic revenue and profit. This focus is beneficial for UTStarcom as we designed all of our product to increase subscriber growth in revenue and to provide quick return on investment.

In the fourth quarter of 2002 our PAS system achieved record success in China, making a strongest quarter in the company's history due to aggressive operator deployment and there is strong consumer demand. At the end of the year, there was 7.5m PAS subscribers on UTStarcom systems throughout the China a net increase of 137% year-over-year. UTStarcom is installed under construction PAS and iPAS system capacities in China reached 22.2m. Among the numerous cities we added during the year, multiple cities such as [Inaudible] ,Taipei have reached over 0.5m of active subscribers. We estimated that total number of PAS subscriber in China including subscriber served by the competitors surpassed 12m by the year-end and that [Inaudible] and under construction system capacity is about 35m. UTStarcom will enjoy the market share of more than 60% of system equipment and better than 65% of handsets. We believe that one of the key reasons that more operator are deploying our PAS systems lies in the maturity, functionality, and reliability. Our selling points including our IP based core network, that greater variety and the features of our handsets and our unique expertise and extends in offering value-added data services. We have been and continue to be very aggressive in our handsets strategy [Inaudible] .

As we see our handsets as a key strategic competitive advantage. In 2002, we ship approximately 6.5m handsets compared 2.3m shipped in 2001. We introduced 6 new handsets model expanding our full spectrum of the price range and the functionality including our high-end 718U a full color handset that takes full advantage of our value-added service or vast platform. In 2003, we planned to introduce at least 10 more handset models including several low-cost models and several models that have advanced vast functionality, colored screen and camera attachment.

In the first half of 2003, we will also introduce a high-end dual mould (ph) PAS GSM handsets, which we believe can open up a significant portion of the market to PAS. The market for our vast platform has been very strong in Taiwan and it has also gained a significant momentum in China in Q4. We largely attribute the success to broader content offering and the launch of new handsets such as 718U. According to the statistic from Shan (ph) , which was first heading in Mainland China to launch the vast platform in early 2002, usage time per month's increase more than 500% during Q4. The average amount of time online heard users was 201 minutes per month. The spread-up [Inaudible] at telecom in May into two entity provides turn us, UTStarcom with a very good opportunity to further expand our market presence in both northern and southern China.

Each group began establishing business branches in the other territories. In the second half of 2002, China Telecom and China Netcom each announced major projects to build it's own national back-home network to operations each other's market. China telecom has opened a branch office in Northern Heber province and Netcom has finished the establishment April ventral (ph) level business branches in the town. After this business complete construction of their respective back-home network, we anticipated they would invest heavily in local extras throughout wireline, wireless and the new next generation technology to effectively and competitively reach consumers. During the ITU Hong Kong Telecom exhibition Mr. Woo of the MII, reiterate that they have no intermittent plan to issue 3G license as 3G is still considered nation technology and there is a lack of commercially available handsets. Legally, large-scale commercial deployment of 3G will not occur until late 2004 or early 2005. During this period, we will continue to enhance our 3G capabilities in our PAS systems and sharing the operator who utilize PAS networks [Inaudible] some multiple-tier of service to offer their customers. At this time I would like to turn the call over to David Robison, our Vice President of international sales who will give you an update and progress and outlook for our global markets.

In 2002, UTStarcom established a significant global footprint with contracts in deployment in several new countries. During the last year, our international sales generated approximately $157m or 16% of revenues, an increase of a 161% over 2001. Our goal is to grow sale outside Mainland China to 50% of revenue by the end of year 2006. Our sales in Japan continued to gain significant momentum. In early 2003, we announced that BB Technologies awarded us an additional contract valued more than $100m for our third class IP DSLAM, which will support Yahoo BB's ADSL service. YahooBB is the leading provider of broadband service in Japan and has already deployed more than a $130m for the UTStarcom's IP DSLAM equipment. YahooBB's broadband network now has about 1.7m subscribers and the company added more than 200,000 subscribers in December alone.

In addition, more than 700,000 broadband subscribers use YahooBB's extremely successful Voice Over IP service. YahooBB has surpassed both NTT East and NTT West to become the number one broadband service provider in Japan. UTStarcom is also pursuing many other opportunities in Japan. We anticipate that business in Japan will remain very strong through 2003 and into the coming years, and they will gain significant additional customers and contracts. In Taiwan, Bitel's PAS network is expanding rapidly. The cumulative number of past subscribers has risen from a 160,000 at the end of 2001 to more than a half a million today. And Bitel is signing up on average 1200 subscribers a day. The average revenue per user is between $17 and $21 per month, which is comparable to the mobile systems in Taiwan. Based on the initial success, Bitel has announced that it will expand its coverage into the southern part of Taiwan and then into central region. Bitel has also used the PAS systems to attract corporate customers such as departmental stores, hospitals, manufacturing companies by providing lower communication expenses and superior voice and data functions.

Two other key events occurred in the Pacific region in 2002. Eastern Broadband Telecom in Taiwan completed initial deployment of our wireline broadband AN2000 system with ADSL functionality. In addition, we made initial shipments of our wireline AN2000 systems into Thailand. UTStarcom is also seeing success in India. As Mike mentioned earlier, we have begun shipments of our new AN FTTB platform carrier-class solution that delivers fiber-based services directly to the customer premises. We are currently working diligently with our customer on the timing and the details of their deployment plans and hope to share those plans with you as soon as we are able to. India's population is approximately 1.1b people with a teledensity rate of under 5%. We see a tremendous opportunity for growth for our products in India. We expect to further penetrate India's private telecommunication sector and will introduce AN2000-based ADSL services, as well as our SoftSwitch products to India. We have relationships with every major operator, and we feel extremely confident about our competitive position in the market. In addition, we continue on track with PAS trials with MTNL and two private operators in India and expect to announce commercial deployment in the coming quarters.

In early January, we announced the official launch of service for our first iPAS wireless system in Vietnam. Vietnam Post and telecommunications - VNPT the largest telecommunication service provider in Vietnam activated citywide iPAS-based city phone service in Hanoi, Vietnam's capital on December 19th 2002. VNPT will also launch services in Hoh Chi Minh City this month. Following these initial rollouts VNPT and the Vietnam's Ministry of communications anticipated deploying iPAS in multiple cities nationwide. In addition to the initial voice and value added services such as voice mail call porting, City phone will soon include other voice and data services such SMS, MMS, music download and even internet access as speeds up to 64 kbps.

During the quarter, we began our first commercial PAS network in the United States in associations with Stellar Communications. This first deployment will be in [Inaudible] Kentucky and is anticipated to be launched in the first half of 2003. In addition, UTStarcom began shipping its IP DSLAM products to Cable & Wireless in Panama City, Panama. This marks the first major deployment of IP-based DSLAM access network solution in the Central America region, as well as our first contract with Cable & Wireless, one of the world's leading global communication providers. We also believe that we are well positioned to sell our AN2000 platform in our past systems throughout the world. We are increasingly seeing PAS being universally recognized by global service providers for its functionality, cost effectiveness to an important segment of the consumer market. Finally, we'll continue to work and expand our worldwide market presence throughout our many regional sales of this. We firmly believe that UTStarcom has established a strong track record of delivering unique integrated cost-effective solutions that increase our customers' revenues and profits.

And now I would like to move on to the discussion of our R&D initiatives. We continued invest in and grow our R&D during 2002. We grew our R&D staff by about 30% during the year from a little over 1,000 engineers at the beginning of 2002, to more than 1350 at the end of December. Our investment strategy on R&D front as not changed materially, as we continue to see the same trend dominating our industries. These trends can be summarized as the migration from narrowband to the broadband in wireline from TDM or the circuit switching to IP-based packet switching network and from wireline telephony to wireless access and 3G mobile communication networks.

In addition, we've increased our investments on key application areas. We have developed a complete suite of value added services for PAS including short messaging services, multimedia messaging services, location services, information services, and Internet access. These applications are widely deployed in China, Taiwan, and now in Vietnam. In broadband, we believe video service delivery over Broadband IP network is on the verge of dramatic expansion. We expect to deploying a video streaming and delivery system projected by mid 2003 video streaming was extremely build on [Inaudible] broadband infrastructure, an area where we already strong having a firmly taking over the number two spot globally for DSLAM shipment. We are also investing other last [Inaudible] technologies such as video cell prior to the ethernet all of which we believe at the place in gaining access to the subscribers. With the migrate iPAS into the m-Switch, a platform that provides both passive fencing in class 4, and class 5 Softswitch capabilities.

Most PAS network now been deployed is based on this advance technology, but m-Switch has also successfully passed China Telecom Softswitch. We expect to start deploying mSwitch for wireline Softswitch application is in our own signaling gateway and media gateways including [Inaudible] AN-2000 a new version of our AN-2000. We have continued to demonstrate leadership with our 3G program. We currently have a trial networking operation in Shanghai, Beijing, and Shingin. Later this year, we will be able to demonstrate PAS IP telephony and 3G. We have also [Inaudible] to add capabilities such as integrated splitters G.SH. DSL AN-16-24 mb/sec ADSL and gigabit- aviation to our market leading IP DSLAM. By adding IP ADSL to our AN-2000 multi-service platform we get career option of carrying voice over SDH and data over IP or carrying everything over IP. We have also introduced layer 2 and layer 3 IP switches including models with the fiber and VDSL interfaces in addition to Ethernet. All these capabilities will be part of our Broadband video over IP strategy. We expect to continue to grow our R&D staff and broaden our product lines during 2003. As we execute on our overall technology by vision. From operation as standpoint of view, we continued to expand our streamline, our manufacturing facilities. We continued to progress on our new facility in Hong Jo that will be operational around the end of 2003 and serve as a strategic operational hub in the South East China.

We also continue make a significant progress in reaching cost-- reducing cost in 2002. For example by implementing a local manufacturing, we reduced a cost of our pay stations by 30%. which we are able to reduce cost in other 30% throughout the broad level. We design new futures and economical scale. Other cost reduction program are also underway as the volume of handsets we manufacture increases, we realized cost saving through economic -- economies out scale, we also began to design more handset model in house following the wide success of our low-cost 700 new models. And finally, the many new low-cost chip sets now on the market gives us additional cost savings. We have [Inaudible] to you the cost reduction plan that increased a new ADSL car design AN-2000 FXX board with the low cost chipsets in large capacities [Inaudible] and the gateway [Inaudible] significantly reduce our deployment cost. As a conclusion-- as to concludes our discussion I would like to reiterate that we had a very busy and successful fourth quarter and full year. Once again we exceeded our financial projections and I have raised guidance going forward. I believe that 2003 will be an even more successful year for UTStarcom and look into the future with great confidence. Now I like to open for a call for the questions operator.

Yes. Ladies and gentleman, If you would like to ask a question, please press one on your telephone keypad. You will hear a tone indicating that you have been placed queue and you may remove yourself from queue at any time by pressing the pound key. We also ask that if you are using a speakerphone that you please pick up your handset before pressing the numbers. Our first question comes from Tim Long with CSFB. Please go ahead.

Thank you. If I could just get a clarification first Mike. Could you just clarify again the reason for the other interest expense item and then basically the two questions may be for Hong. Number one, can you just talk a little bit about the changes in the competitive environment in China. We already saw some announcements from some competitors in the past infrastructure side namely GTE. Could you also just talk about what you are seeing out of [Inaudible] and any change in the locals on the past side and then the second question is if you could just give us an update on some of the newer products or is there any sense when soft switches as a stand alone product or CDMA infrastructure or some other access products could become meaningful in the grand scheme of revenues? Thank you.

Okay. Thanks Tim. I am going to take your interest, and another incoming question, what I want to do is just we, you know - there was an article that went on during conference call from Reuters and what they have confused is our (ph) pro forma versus reported comparison. So I just want to bring this to everybody's attention is that we will talk with Reuters since we finished the call here and try to have them clarify the news article, but I just want to make it very clear the guidance that we have provided of the Q3 calls as $0.33 or $0.34 pro forma as you all know it came in at $0.36 and what they are comparing is the first call pro forma numbers versus our reported. So again we will clarify that. But always it is disappointing given such a successful quarter we have Reuters do that. So I just wanted to bring that to everybody's attention. Tim, regarding your question on other income expense, when I take that as a total topic here, we had an impairment charges against our investments. This is in our reported numbers and as you guys look out our earnings release you will see that broken out and the impairment charge was 4.4 m. Then , what we have got is that we did not break out and call [Inaudible] a. It is in our reported results. We took a 3.1 m charge in the quarter that is in our performing numbers and foreign exchange [Inaudible] We buy a quite bit of products from Japan that you have nominated in yen current, so those numbers whether it goes up or down is always in our other income expense number and this is the part that we want to go to, just reported numbers going forward so there actually can be no confusion on our results.

Okay Tim, I am answering your question about the competitive environment. Actually there is really not much of change and we still maintain our 60% market share in the infrastructure side and 65% or better in the handsets and you see the GTEs showed announcement. It is very natural that one province -- they don't usually wanted to just buy from single source so we do see some of their success in other cities. It is very, very anticipated, and we haven't really seen any differences and we still maintain very superior position on this business in China. Now your summation about the [Inaudible] side and I think that is more of handsets level and we do see some of other smaller companies coming in, but it is very insignificant. Again, it is required to have a very large scale of product planning, and we feel extremely pleased about our overall product portfolio as well as our line -- the line of our product that we have so that seems to be a intact and we are very, very pleased with our current situation in the competitive environment today. About the new products, which I am very, very excited is that we have been seeing lot more product such as a [Inaudible] gateway and that we also have seen the standard of our soft switch. Those are all becoming more the realities and we have real physical touch. And we do believe that in 2003 we will start recognizing those revenues and those are quite exciting events and so particularly with the wire line side we have very, very great product portfolio is coming out in the broad-band side and about the wireless side, we are extremely excited about the 3G, knowing what is happening in the market and the slow down with every operators it didn't affect China from the perspective of every other operators pace. But overall we didn't really see the significant market will come in until 2004 and 2005 and we will continue to develop our 3G and we have got a few trial units and we are one of very few company which has fuel trial sites in China and we have a credit confidence when the market comes and will be already to meet those market demands.

Thank you.

Sure.

Next we have Tim Luke with Lehman Brothers. Please go ahead. Mr. Luke, your line is open. And we move on to Dale Pfau with CIBC. Please go ahead.

Yes. Good afternoon, gentlemen. Nice performance. Couple of quick questions here. One, could you update us on what's going on with your initiatives in 3G wireless infrastructure and with the Chinese Government and number two, could you talk to us about -- I may have missed it, that you mentioned that it in your dialogue -- is any progress related to the use of your PAS system for the wireless local loop licenses in India? Thank you.

Okay. I will answer the first question about the 3G initiatives. The Chinese Government had initiated with -- the -- called MTNet trial and the last year they had done MTNet-1 and this year they are going to do a MTNet-2 trial, and we have successfully accomplished our MTNet-1 trial and which we have also resulted at -- have able to do a field trial in three major cities. And, this is one of a more out-sized than other competitors that are -- also are trying to deploy their 3G for a field trial at this moment, and one big difference is that we have with our 3G is that everybody else is -- they are using ATM as a solution and we were -- we are the only one working on our IP-based product and obviously, we have received a lot of interest from many other operators including NTT DoCoMo's and so forth, so we have a lot of a discussion about that.

Now, other than WCDMA, of course, you know that China has been pushing their own standard called TD-CDMA and we also have been aggressively moving towards that, and we are also working closely with the other strategic partners including Datang, and we are also initiating discussion with the Siemens under these shades, as well as. So [Inaudible] say that 3G that we are -- totally a strong believer, that it is inevitable for the 3G to come to replace the 2G. Now, this is something I wanted to distinguish - that the 3G -- the major (ph) , the key of the 3G is going to replacing the 2G and the PAS by itself is going to be standalone for expansion of their current existing of the replacement of the wireline applications. And, about your question about the India, maybe Dave can answer that.

Yeah. Currently in India, like we have stated we are doing trials with MTNL, one of the two large incumbent operators as well as two private operators in India on PAS. Our expectations are, over the next couple of quarters, we will be able to announce commercial deployments of PAS within India. If you look at the market and the telebands (ph) in India - where is that today? And, the relative number of wireline subscribers and the number of wireless -- we do see large potential for growth within all different areas of India, not only on a wireline side but on our PAS side, as well as we see it on a global basis, outside of India, you know, we are seeing demands for -- the way China has deployed PAS and how it works there to take it into its sector and into other parts of the world i.e., Latin America and places like that where the technology is a good set.

Great. Thank you.

And we will go back to the line of Mr. Tim Luke with Lehman Brothers. Please go ahead.

Thank you. Can you hear me now?

Yes.

Thank you. Congratulations on the quarter. Mike, you got to have give some numbers for handsets as a percentage of the revenues for last three quarters, and I was wondering what you have these with respect to wire line and the wireless infrastructure arena areas?

Yeah. Give me one second and I can give those numbers. Due you have a second question as that it seems (ph) ?

May be, the second thing, I guess would be, do you have a sense of -- to the extend you are able to give us a sense of how the gross margins in terms of ranges vary between those first three segments, so that we could get a sense of how that would look forward and then just with respect to your interest income and expense it looked like that [Inaudible] said it was foreign exchange charge of 3.1. Was there anything else in that, if it's into move, correct 2.3 to 6.7 of the negative item of the income statement, in terms of the other income line.

Okay, how to more importantly, how do we see going forward, I guess this is the question?

Okay. Instead (ph) of your sales mix question, on wire line products in 2001 to give you a -- for the back reference. It was about 9% of revenues and again, as we mentioned today was about 16% for the entire year for wire line by quarter, it was about 9% in Q1, 23% in Q2, 17% in Q3 and around 13% here in the fourth quarter. With regarding to gross margins, I think we have accustomly (ph) said and run is that the gross margins on the handsets of consumers [Inaudible] by 25% this year that compares with about 15% in 2001 and it was about 5% the year before that. So, they come up nicely and stabilized it in 25%. On the infrastructures side we consistently run margins at 40% profits for wire line as well as for wireless business and regarding the other income and expense line the two big charges and that would 3.1m charge after foreign exchange and then the other big charge with the impairment charge otherwise a little bit of rough $4m for the quarter and then it was offset obviously, with the positive interest income generated in the quarter. Guidance going forward, I think everything kind of nets off with what -- the way we were running the business -- where we see a few hundred K per quarter on a go forward basis of positive income.

And in terms of the gross margins for the two businesses as we look forward into '03. Do you see them staying at this kind of level of 25% [Inaudible] and 40% plus in the other area -- in the infrastructure area. How do you see that?

Yeah. That would be the guidance [Inaudible] given and so we take the blended, which is what I was trying to do in our guidance going forward, which takes both pieces -- all three pieces of the business and that's why we are giving guidance of 33% to 34% on advantage basis for Q1 and stepping up slightly sequentially this quarter.

Another question is a general question about [Inaudible] putting up a number of contracts that were there. Could you talk about -- is sort of the visibility in terms of the flow of the pipeline going forward for the -- to begin the --?

The visibility is thoroughly the best we'd ever experienced in our company's operation. It's a very very positive not only in china but internationally our task is to how quickly can we deliver those to meet the demand and to that's a quite a bit of challenge for us because that our customer is a very very demanding in terms how quickly can we give them, deliver products and that is also has been shown to our Q4 and only product this year is our -- that press releases and that shows you how much of orders that we have been receiving it and so, the visibility I'd always say is effective enough in our company's history.

Just one last clarification, Mike on the impairment features, remind us what that related to. Is that 2.1?

It's about 2.4 is exact number. We make strategic investments from time to time with partners for technology and products and so, we've got to take conserved approach in looking at those investments and valuations and so, we mark those two early things the appropriate market value is, I think it is the way market is reformed and companies are valued, no secret what's happened last couple of years. So, again we think we got those values pretty conservatively and what makes sense and that's what reflected us.

Thank you.

Thank you. And next we have Alan Hellawell with Lehman Brothers. Please go a head.

Thank you so, take the time from Tim. Congratulations guys. I just had three areas I wanted to touch on. But just if you got - just kind of, merged profile of TASSA (ph) or something that China Telecom and China Netcom have pursued with renewed vigor due to the delays in 3G licensing. Can you show with us any input from the government anecdote otherwise that either confirms or doesn't confirm that? And then may be I will follow on another two questions.

Okay. Well, Allan that 3G license that always has been anticipated that they were given out as soon as the earliest for the later product this year and maybe even in the early part of 2004 and then any of those licenses were given, then they will go through the trial period to make sure that it's going through the trials. So, 2004 will be a very much in doing the trial period and test out the equipments from the manufacturers and the real operation will be starting towards the end of 2004 and beginning 2005 and that has not really changed from anyway that we have been looking at it. So, that nothing has been changed from that perspective and I don't think, there are no change from that part but, from a PAS point of view, I want you to know that PAS is the extension of the wireline and I wanted to just pointing out clearly, is that -- if you were the wireline operators, the credit is no other method can allow the operator to deploy the newer customers faster and more cost effectively than our solutions. So, this is either they are going to get the 3G license, we don't see they'll have any impact on our PAS sites because they will have to continue to investing on to a wire line portion and it's much more cost effective than a wireline deployment today.

Okay. Great. Is it true that the mobile, the existing GSM, CDMA operators have appealed to the government given the low cost pointing PAS and if this is after a repricing of PAS or is that or any feedback on that?

Well, we heard a rumor here and there and that today, but even in the very early beginning of 1999 and that has been already been going to MIIs, but it's very clear that PAS system is the wireless access solution and has been granted by the government to operate. So, nothing has been really changed from that perspective. So, we really haven't seen any governments making one way or the other, they just say keep continue to run as it is. So, we have been sharing the rumor too many times and vice versa, we also heard the Cellular had also reduced their tariff and then getting fine. So, there are many way here in there, I think, there's a -- the incidence, but as a whole we really haven't seen any changes from those cellular as well as the fixed line, which is the PAS side has changed any kind of that all. So, nothing has been changed from that perspective.

I understand. Thanks. Be very quickly on last two questions. Do you know what the joint forecast for PAS [Inaudible] between China Telecom and China Netcom this year, you may have already mentioned that in fact?

No, I don't think that they are making any forecasts from that, but from what we have been seeing at the end of last year's 12m we are very confident that they will at least double that and to about 25m or so is what we have generally in the market.

Great. Thanks. And then just a last one regarding those 3G trials. Are you at a point where you can, kind of describe the number of base stations you are using or the number of users supported, data rates etc., and any feed back on that?

We have a multiple size and with the base station is just still a rather small. We have two or three base station in those sides. But data rate is 384k and support full motion of the videophones and everything that 3G can do in Japan. So, the NTT DoCoMo's, even their application can be applied to ours as well. So it's a full fledge of a demonstration.

Thank you very much.

Sure.

And our next question comes from T.C. Robillard with Salomon Smith Barney. Please go ahead.

Hi. Thank you. Actually Mike, just wanted to get, just touch more on the kind of the modeling side with the interest income, particularly because of the last two quarter I think we have seen investment impairment charges and as you had mentioned, its obviously a very difficult environment out there with respect to kind of evaluation of investment, I mean have you guy's written your investment down far enough where it's unlikely to see kind of another big charge,-- the reason why I am asking here is obviously now with you guys goings straight to GAAP earnings, obviously charges like this could have an impact on your bottom line interest rate, --where guidance's and consensus, So just wanted to try and get an idea of how we can try a little bit more accurate, so we don't surprised with one of those in the next couple of quarters.

Yeah. That's why if you really look at the other income expense line -- if you take the three big things that could be in there would be interest income, obviously any potential effects, fluctuations going forward. Especially we buy a lot from Japan and the yen as well as impairment charge, I think if we net that altogether we feel pretty good about a couple of hundred k on a quarterly basis and at the same time we are very comfortable going to the GAAP basis and heaven forbid there was some thing larger in that line item than we anticipated. We feel that then our operating income has got to be high enough to offset that so we can set the guidance that we are giving you.

Okay and then if,--kind of looking at the really strong contract announcement you guy's had over the fourth quarter and actually in the first 21 days here in '03. The two strongest quarter already to date with respect to your contract announcement almost $300m in each and we are only third of the way through the first quarter, I was surprised to see that you guys with such really strong visibility actually only increased full year guidance by $50m, I would have expected to see a little more in those areas, can you just kind of touch on that?

Well, I think you always got to be,-- we try to be conservative every thing we do here and we are not going to lay out our best-case scenario. We are going to be very responsible. So, we are going to be conservative and bring guidance up contracts are as you rightly mentioned very strong but we are not going to reorganize revenue, we got a final acceptance from our customers we got to factor that into the cycle time and at the same time 35% year-over-year growth type number's which we are giving '03 versus '02, in this environment, I think it's pretty healthy and pretty aggressive.

So, they may be some of the contracts that you guys have announced recently that may actually end up a little more extended life than usual or you guys just being,-- I would have figured if you are guys really been conservative then probably would have kept a number as $50m doesn't really seems like much of a shift?

Well we have actually seen some of the announcement that we have to do, otherwise we would get still so some of that contracts that we have received and we are looking for the right timing to make announcement, but as far as business wise as Mike has mentioned that in this environment that we are very very confident that probably we are the one of the very few, if not the only one, to making this kind of a forecast and [Inaudible] growth. So, we are very pleased with this growth rate and I don't think any body would be very surprised we are growing more than 35%, I think it is a very significant from a last year and despite that CAPEX really has been down or flat from a last year and this year.

I think if you take a look at last years backlog numbers around $360m, you look at the 981 how the year came in, versus we are starting this year with $605m of backlog and we are talking of 1.325 the ratio aren't that far off and I think we do want to have some conservatism in the guidance given that we are only in Q1

Okay and then just the last question is Hong with respect to kind of the PAS opportunity as you mentioned it's an asset technology and it is considered that by China Telecom and China Netcom couple of questions with that, number one what percent off PAS additions over the last couple of quarters would be considered kind of primary line access and then secondly if were to be locking at China Telecom and China Netcom CAPEX budgets on a go forward basis as they eventually get a 3G license would PAS be sitting in kind of wire line budget or would they be considering part of the wire less budget?

Okay well depends on the areas in China,-- each city are different for at the beginning of the new cities they were first making a second line application instead of a primary line and for later stage when you do the expansion that they will be coming a more primary so that line of differentiating I really don't know. It's really depends on each cities, we see both are taking places simultaneously at any given time. And now as far as the our view from operators how we are going to differentiate if they have a 3G license, 3G license is got to be truly making a different charges and [Inaudible] the 3G line since the equipment wise they are totally get into the 3G license and 3G equipments and our PAS we continue to believe that they would be in the fixed line budget.

Okay great thanks guys

I think we have time for one more question.

Okay very good and that comes from the line of Carence Wailen with Piper Jaffray. Please go ahead.

Okay great and congratulation on the quarter I have a two quick questions. First is I know that the China currency is fixed but do you anticipate hedging your other foreign currencies for the rest of the Asia going forward, to avoid earning variations?

Yeah, the R&B which is the currency [Inaudible] primarily do business in China. That is the fixed exchange rate about 8.3, in this. There has been articles about is it going to fluctuate or not. And every thing that we breathe just said that it is not going to fluctuate. And if they would open up they will appreciate which would [Inaudible] quite favorable to TUT.com (ph) . With regarding to the other contract there is a denominated in almost 100% in US dollars around the world. So there is no need to spin exchange or contract on those. If we would take a contract from the sales point of view in another currency besides U.S dollars, yes we would enter into a hedge that point time. The reason you saw little bit of currency charge this quarter for the company is that, we are buying quite a bit of equipments. There is a huge ramp and demand. And so we have to buy lot of our products directly from Japan, which is denominated in Yen. And so what we do is, we do had a Yen denominated account in dollars to cover all those purchases as well as the company take a look at our accounts receivables that are denominated in Yen and have to [Inaudible] accordingly. We price in China where we are doing business we have to face those currencies in R&B and the customers are not going to allow us to change the contracts. The pricing on the contract just because the end of the dollar might change a little bit. So actually entering in to a contract at the time you win from the customer would [Inaudible] .

Okay thank you for the clarification, I think some people were little bit confused, when they saw that come up in the document without the explanation, but that is very helpful. Now I have a real quick second question. You have backlog of 605m, you are looking at 275 next quarter. Say there is an addition of 330 for the next three quarters, what is an approximate distribution of that? Is it heavily weighed in the June quarter? What's our booking for the June, are we talking about 50 to 75%? Thanks.

If you do ask me to breakdown the visibility on 2Q I think your question is our backlog actually probably extends well into Q3, but both the backlog down by product. If you remember I said that handsets were only about 5% of our entire backlog. We do believe that handsets alone between 35 and 40% of revenues in any quarter as well for the entire year. So we get a lot of book and ship handset business to be briefed and come and talk about the backlog number that we reported. For the backlog actually scales on out into 3Q and we have been the positive increase 50 to 70% book for the second quarter up. As Hong mentioned we have got more visibility now in the other half [Inaudible] but the top end of that range [Inaudible] better.

Thank you.

Okay and I think we have just about all the time then, thank you very much for listening in to UTStarcom 1Q earnings conference.

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