UTStarcom Holdings Corp (UTSI) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, good afternoon or good evening and welcome to today's UTStarcom First Quarter 2003 Earnings Release. Now, at this point all phone lines are muted or in a listen-only mode. After the presentation today there'll be opportunities for questions and the instructions will be given at that time. Should you require assistance during earnings release you may reach an AT&T operator by pressing "0" then "star" on your phone keypad. As a reminder today's call is being recorded for replay purposes and that information will be given out at the conclusion of today's release. Well, with that being said here is our opening remarks with UTStarcom's Investor Relations Manager, Ms. Chesha Kamieniecki. Please go ahead, ma'am.

Thank you. Good afternoon and welcome to UTStarcom's first quarter 2003 earnings conference call. I'm pleased to introduce our CEO, Hong Lu, and our CFO, Michael Sophie, who will host today's call. Hong Lu will begin the call this afternoon by providing an overview of key business performance for the quarter. Then, he will turn the call over to Mike, who'll give a detail financial review of the company. Afterward, we will turn the call over for Q&A.

Before we begin the call, I would like to remind everyone that some of the information we'll discuss today constitute forward-looking statement. Actual result could differ materially from our current expectation. 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 in our quarterly report on Form 10-Q, which are filed with the Securities and Exchange Commission. With that, I'll turn the call over to Hong. Hong?

Thank you Chesha. Good afternoon and thanks for joining us today. I am pleased to share with you our strong performance of our first quarter of 2003. I'll focus today on our four key highlights of the quarter. Our continued financial success and second, our global expansion within China and beyond, and third is our technology leadership, and fourth, sustainability for the long-term growth.

First, I will like to discuss our financial success. We have just had the best quality quarterly performance in our company's history. Demand for our product continued to exceed our expectation. In our last six months, the company has experienced a major set-up in a level of the business, more than we have ever anticipated. The company had never before seen such a demand in growth. This is translating into a significant higher revenue and profitability. We have had record result of the quarter being our guidance and our estimates with the revenue of $330.5m and EPS of 33 cents. The company also has the tremendous visibility based on our years worth of a backlog in order flow. The next three quarters are now in place.

Because of the business has been so great, we have a rating in our guidance for the second time this year. Mike will explain this later.

The second highlight of this quarter is that we have continue to expand our presence around the globe both in China and beyond. China remains the largest, fastest growing telecom market in the world, with a major ten-years organization plan underway. About 1.8 million of subscribers were added UTStarcom PAS networks, upgrading our total number of the subscriber to 9.3 million at the end of the Q1. This represents approximately 61% of the total 15 million PAS subscribers in China at the end of March. We also began our first major shipment of our IP-DSLAM equipment to China Telecom in Gergeum (ph) province. Finally we announce our first IP-DSLAM contract with China Netcom.

We've also made significant progress on our expansion goals outside of Mainland China. Revenue from market outside of the Mainland China were $63.5m in Q1 '03 that's compared to $16.5m in Q1 2002. In Japan, the company announce another 100 million in contract in Q1 for IP-DSLAM. Our customer Yahoo! BB has more than 2 million subscribers as of the March and of course the number one market share in Japan. About half a million more subscribers per months are signing under DSL in Japan.

Business is also strong in India. We had a deliver on 100 million plus contract with the Reliance, which aim at connected 1.7 million buildings to the fiber backbone over the next three years using our fiber setup building wall-mounted cabinet. In addition, UTStarcom has secured contract with the all major operators in India and we expect it to make more announcement for both wire and wire-line products in the coming month. India will be our second largest market beginning in 2004 and we're very enthusiastic about these potentials. As it currently had only 3.3% teledensity rate.

Vietnam is another success story, we launched iPAS in Ho Chi Minh City in Hanoi in December and January with the Vietnam Postal and Telecommunications. Deployment's going very well and we're looking for additional contract for expansion in both cities as well as in several other cities. But Vietnam could generate $100m in revenues in next couple of years.

Finally CommWorks is very important to our global growth. Acquisition of a strategic asset is expected to close in late Q2. CommWorks immediately gives us a much larger global footprint in a trustful market. In addition, its global customer support organization provide significant opportunity to generate new services contract and new revenues. CommWorks had a complimentary product set, sale schemes and channels. The company's activity in North America and Europe while UTStarcom has traditionally focused in the Asian Pacific region. In addition, CommWorks has 17 of the top 20 service providers in the world, as customers including AT&T, Verizon and Sprint.

Third, this quarter we enhanced our position as a technology leader for both wire-line and wireless access, as well as the switching solutions. We continue to sustain number one and number two market share in all of the product lines. All of our products are designed specifically to meet the demand of the market today. And allow our customers to migrated next generation service going forward. While we don't have products for long term services and revenue potential, we're cost effective to deploy as a single initial services. For example, our IP-DSLAM platform is unique to the market, because it is scales to the functionality to meet customers need. It currently offer regular eight MB services one is our premium 12 and 16 MB services. And now including voice of IP and TBO over IP, video streaming over the couple of functionalities. We are planning to introduce 24MB services later in 2003.

PAS offers a innovative solution to address on top market demand providing service all the way from basic voice to 64K value added data services on the same platform. Low cost PAS services complement premier services available to 3G.

Finally, this quarter we continue to lay the foundation of the sustainability and long term growth in our business. For example, the company's technologies are conceived to satisfy today's needs, but it's also able to layer an additional service and a functionality such as 3G. And a triple play of voice video and data. We also have a captive [ph] install base of a rapid growing carrier such as China Telecom, China Netcom, Reliance, Yahoo! BB and Cable Wireless. Our focus is on the growth market, globally and technologically. DSL on the worldwide basis it's going to explode. China alone will go from 2 million subscriber reported at the end of 2002 to between 5 million to 6 million at the end of 2003. In addition, China will create 10,000 new series over the next 10 years having all the infrastructure they require. India with the population of 1.1 billion and only 35 million phone lines is a market that's getting ready to explode.

All of the above factors led to the long term sustainable growth. Another example of our long-term sustainable growth can be seen in today's announcement of our first contract to deploy our IP-based PAS systems in the city of Beijing. This illustrates the broad consumer acceptance of the PAS in China and the carrier continue to invest in PAS for the long term as the best way for them to increase their subscriber numbers, and revenue and profitability. In mid-2003 Beijing is just at the very beginning of the deployment plan for PAS. This speaks that Beijing believes that PAS will meet the needs of their subscribers for the long-term.

In closing, I hope you can see that it as an exciting quarter UTStarcom. Our financial performance, global expansion, technology leadership and a sustainability are indicator of our strong performance. I look forward to assuring more progress in those areas in the quarters to come. Well, Mike.

Thank you Hong. Now, I'd like to make some specific comments on our first quarter financial results. This first quarter was another record quarter for UTStarcom and in fact for the first time in the company's history our Q1 revenues exceeded our prior years Q4 revenues. This is the direct result of the enormous ramp up in business we have seen in the last year quarters. Normally we experience reduction in revenues in our first quarter reflecting both worldwide telecom patterns, as well as the anticipated slow down in business in China as a results of the Chinese New Year, national holidays.

However, the demand for product is being so strong in the last few months bringing the company to the entirely new level of business activity. Our revenues exceeded the guidance we gave in March by over $15m. This is attributable to the continued significant demand for our products. Sales for the first quarter were $330.5m, a sequential increase of 9.8% over Q4 2002, and 80% year-over-year. We came into the quarter with backlog of $605m and we announced contract totaling over $350m during the first quarter. In addition, our book to bill ratio during the quarter was approximately 2. This all leads to a tremendous amount of visibility and we now have backlog in place for the rest of the year.

Increasing demand across all of our product lines continue to drive our strong revenue growth. There is broad acceptance of our product worldwide. Our business continues to be much stronger then we anticipated. In Q1 PAS and IP-based PAS systems accounted for approximately 38% of sales. PAS handset accounted for another 42% of sales, while 20% of sales came from our wire-line products. With regard to our target of global diversification revenues from outside Mainland China represented approximately 19% of total revenues for the first quarter, as compared with 9% in the first quarter of 2002. Gross margins came in at 34.1% of sale, which is at the high-end of our previous guidance target range for Q1. Despite the fact that the handsets went even larger percentage of sales than we had anticipated. We have been able to improve our margins due to cost.

Our operating expense are in line with our growth and were $66.4m for the first quarter compared to $43.4m in the first quarter of 2002. Philosophically we try to expand our expenses only after we have confident in achieving meaningful revenues and profits. Operating expense were in line with our overall expense and in lined with our target percentage of revenues. We recorded an end process R&D expense of $1.3m during the first quarter related to the acquisition of assets, intellectual property of an optical transmission equipment provider in China. The consideration was $250,000 in cash and $6m in shares -- $6m worth of shares. The acquisition will further expand and enhance our solutions in broadband and wireless infrastructure. We'll expand on this more in future quarters.

Net interest and other income expense for the quarter was income of $4.5m, compared to income of $1.1m for the first quarter of 2002. The increase was primarily due to an investment credit refund of $3.8m in the quarter from the local Chinese finance bureau related to the investment we made in our Hangzhou (ph) facility. Income tax expense for the first quarter totaled $12.4m, compared to $4.5m in last years first quarter. Our effective income tax rate is 25%, which is at the high end of our range at 20% to 25%. This increase in our tax rate is due to primarily to the fact that we have more of our revenues attributed to higher tax rate jurisdictions, as we expand our business globally. We calculate the tax rate for the whole year based on forecast net income and take into account projected revenue in higher tax jurisdictions. Our CommWorks acquisition and the increased activity outside Mainland China are some of the drivers.

Net income for the first quarter was $37.3m, or 33 cents per share versus our guidance of 27 cents. Without the investment refund, earnings per share would have been 31 cents per share. This compares with net income of $17.5m or 15 cents per share in Q1 2002. Clearly, the increase in profit is driven by strong demand for our products and significant higher revenues. Before I get into discussion of the balance-sheet, I believe there was a lot of confusion of the Q4 call regarded to the increase in our inventory. And as our inventory has again increased significantly, I want to make sure that everyone is perfectly clear that the rise in inventory is a part of the positive signal as it is a direct inflection of the extraordinary strong demand we're seeing for our products.

To understand our balance sheet it is extremely important to understand the company's business cycle. For that we'll drives the metrics on the balance-sheet. When we receive an order from a customer to announce a contract, we're not speaking of the frame contracts, our blanket contracts were delivery within 12 months window. We only recognize revenue on these contracts, when we receive or recall final acceptance certificate. Typically, when we receive an order and China, we're required to ship and install the parts within 30 to 60 days. And if we're unable to ship within 30 to 60 days, we are at risk of losing the contract to our competitors. When we ship the product it does not sit in a warehouse or customer premises. We immediately deploy the systems in the field and the customer begins service signing up subscribers and starts collecting revenues.

During this time we're conscious of the cash, we're collecting cash from the customer, which is reflected on the deferred revenue line. The deferred revenue line is made up of cash that we received from customer, but because we've not yet recognized revenue, it setup as a liability on the balance sheet. After the product is been deployed and the customer runs the final acceptance cycle, it can run between and a 90 and a 180 days. During this cycle they're making certain that systems that are stable, that it'll meet all the specs we promised and that there is good network coverage.

At the end of this final acceptance the customer gives us a final acceptance certificate and this is the point we recognize revenue, converting inventory into cost of goods and book the accounts receivable. Therefore the inventory on the balance sheet represents both inventory that we have at our factories, but also for which we have already been deployed in the field against contracts. In fact 73% of our inventories at customer locations at the end of Q1 pending final acceptance. So this actually is giving us tremendous visibility into the next couple of quarters of revenues and profits.

In addition, we have a history of no inventory being returned and we have always gained our final acceptance under deployment. Our cash and short-term investment balance in the Q1 was $604m, as compared to $339m at the end of the fourth quarter of 2002, an increase of about $265m during the quarter mainly as a result of our convertible debt offering in March. Operating cash flow for Q1 was negative $91m. Our operating cash flow may vary from quarter to quarter. However, we expect to be operating cash flow positive for the entire year 2003. During the quarter, we issued $402.5m in convertible debt notes. We received net proceeds of $347.6m after deducting funds used to purchase the call option and expenses and fees related to the offering.

Some key cash advance which we anticipate in Q2 include the following; we're targeting to collect over $600m in cash from our customers in the quarter both for receivables and customer advances. On April 5, we completed the repurchase of 8m shares from SoftBank for $$139.6m inclusive of fees and late in quarter, we anticipate completing the acquisition of CommWorks for $100m and cash pending government approval. We continued to improve year-over-year comparisons for accounts receivable, day sales outstanding, which came in at 70 days for the first quarter of 2003 as compared to 101 days for the first quarter in 2002. We expect the seasonal pattern of DSOs to continue. Q1 is anticipated to come in the highest with sequential improvements throughout the year.

In Q1, our inventory increased to $794.5m. As a result, the significant growth in our business continued extremely strong customer demand for our products. As I mentioned earlier, our book to bill ratio is approximately 2 for the quarter. The vast majority of our net inventory of approximately 73% at the customer locations again sign contracts. Going forward, we anticipate the following with our inventory. The $579m of inventory that is currently in customer locations will achieve final acceptance in Q2 and Q3, driving revenues and profits. The strength of the business will continue to drive our purchases going forward. If business exceeds our current expectations, inventory could go higher, which would translate directly to higher revenues and profit guidance in the future. We are looking for inventory returns to move back above two in the second half of the year.

Prepaid expenses increased to $87m compared with $47m at the end of Q4 2002. This increase is directly related to the VAT or Value Added Tax, associated with our inventory purchases and will be recovered as we recognized sales on the inventory in quarters two and three. Customer advances included in deferred revenue increased to $243.6m from $156.3m at the end of Q4. Helping to find our inventory growth and reflecting strong customer demand for the products. This balances represent cash as I mentioned earlier we've collected from customers, which have not yet recognized as revenue. As you can see, by looking at the balance sheet, we're able to successfully manage the growth of the business and increasing inventories by ability to effectively to collect cash from our customers.

Guidance going forward. We continue to see strength in growing demand across all the product lines both inside and outside of China. We're again raising our revenue guidance on our core business for both Q2 and full year 2003. We expect to close CommWorks acquisition late in the second quarter, but do not expect to be able to recognize any CommWorks revenues in quarter two. For the second quarter of 2003, we estimate our revenue should be in the range of $380m to $390m. Sequential revenue growth for Q2 through Q4 should be approximately 15% each quarter. Revenues from the CommWorks acquisition should be approximately $25m in Q3 and $25 to 30m in Q4.

For full year, we're also raising our revenue guidance to approximately $1.65b to $1.7b, an increase approximately 65% over 2002, a significant increase to the $1.4b guidance we gave in March. In 2003, we expect about 80% of the revenues will come from mainland China and the other 20% will come from our global markets. Major market outside of mainland China include Japan, India, South East Asia and Latin America.

We've also broken out anticipated 2000 revenue by product type. Wire-line Systems, for example, represents about 20% of sales, this reflected extremely strong growth in broadband ADSL, next-generation digital carriers, metro applications, voice-over-IP gateways and Class 4 and 5 softswitches. Handsets will account approximately 40% to 45% of revenues reflecting strong subscriber demand throughout China. Due to the continued expansion deployments of PAS Networks in China and the global markets, total revenue from wireless systems will be approximately 40%. Each of the above metrics can fluctuate with plus or minus 5%.

Our targets for gross margins as a percentage of revenue for Q1 was approximately 33% to 34%. And when anticipate margins will improve slightly, perhaps the half percent - 1% sequentially each quarter throughout 2003. Given Q1 margins exceeded our target, we anticipate Q2 remained consistent with Q1. Plus or minus a few tenths of a percent with slight sequential improvements in Q3 and Q4. For the full year 2003, our target for gross margins as a percent of revenue is between 34% and 35%. Throughout the balance of the year, we anticipate SG&A to increase in dollars each quarter and our target model to our SG&A is between 11% and 13% for 2003. As with sales, general and administration expenses, we also expect R&D to increase in absolute dollars sequentially throughout the year. We expect R&D to run about 8% to 10% for the sales in 2003.

Other income and expense should be a few hundred thousand per quarter reflecting current lower interest rates; and we may get additional refunds in the future but are not building that into our guidance. Our effective tax rate for 2003 should be approximately 25% and earnings per share based on the continuous strength of our core business, we're also raising our guidance. As mentioned earlier, we anticipate closing CommWorks acquisition late in Q2; and we anticipated financial impact at CommWorks is again no revenue for the quarter, in-process R&D and operating expenses of $10m to $12m. In Q3 and Q4, we're looking for breakeven earnings per share in Q3 in 1 to 2 cents accretive in Q4.

As a result, financial guidance from the company including the CommWorks acquisition is as follows. Q2 again revenues $380m to $390m and earnings per share 29 to 30 cents inclusive of the negative 9 cents charge for CommWorks. In full year 2003, revenues at $1.65b to $1.7b and arranged per share of $1.50 to $1.51.

I'd like to close the financial discussion by saying once again how extremely pleased we're all with our financial performance. We had another outstanding quarter with record revenues, profits and visibility well through Q4. We have continued to add new customers to deploy new products worldwide. Our balance sheet remains extremely strong as we continue to grow the company. And going forward, we anticipate continued top line growth profitability.

Now before I turn over to the Q&A session, I'd like to take a moment to address two recent issues that have caused concern among our investors. First is the issue of SARS and what potential impact would be on the company. The answer to that question is we do not expect any impact of SARS on the company's operations or performance. As a large global company, we have taken the necessary precautions asking our employees to eliminate any unnecessary travel between Asia and United States and to take extra care when traveling. This is also a reflection of the wartime climate as well as any health concerns. Furthermore, we have in place in China a comprehensive and extremely experienced management team who we are in constant contact with. We're extremely confident of our ability to continue the robust operations and sales we're experiencing. We continue to sign new contracts to deliver on our current backlog.

In addition, last Monday, there was an erroneous report in the Beijing Morning Post, which stated that WCDMA 3D testing in China was complete. It further report that lists were compiled ranking performance in those tests and indicated preferential treatment for those companies that ranked higher. The MII Regulatory Authority confirmed on Tuesday that this report was completely false. The trials have not yet been completed, and there are no and will be no list compiled. We're extremely enthusiastic about our performance in the 3G trials as well as very confident in our position to sell 3G when it comes to commercial deployment, which we will believe will continue to be in the 2005-2006 timeframe.

Now, I'd like to open to the call for questions and answers.

Certainly. And ladies and gentlemen, then, as you just heard it, if you do have any questions or comments, we do invite you to queue up at this time. Just press the "1" on your touchtone phone. Now, you will hear a tone indicating that you've been placed in queue. And just press the no to remove yourselves from the queue by pressing the "pound" key now. An important point here is if you try to queue before hearing this announcement, we ask that you'd re-queue at this time by pressing the "1" on your touchtone phone. And one moment, please, for our first question. And representing CIVS Word Markets we go to the line of Dale Pfau. Please go head.

Hi guys. It's Earl, I am in for Dale. Congratulations on a great quarter.

Thank you.

One thing I want to ask Hong, with regards to Beijing, could you give us a little bit more color as to kind of what is happening now in the major cities. In the past, we were under the assumptions that we weren't going to see PAS being deployed in areas like Beijing or Shanghai. Has that completely turned our and are we going to see now more wide scale deployment completely into the core of Beijing?

Well, this is a very important indication that Beijing structure has been open up. In a past we have been very much astro-nautical to the largest cities but since then towards the end of a last year, we have a large -- we were largely going into the bigger cities. In fact, we were signing a Toong Cheeng[ph] - it's in a western portion of China. This is the largest city in the world with a 31 million population so it is the indicating, it is much largest city than in Beijing.

But at this time the Beijing is very significant is to tell us that this is going to be that the trend that is going to be able to going to almost all the key cities as long as the operator in China Telecom over the China Netcom. I feel it is a - we will be able to get the investment banking and within the timeframe that was given by the headquarters. So this is a very good indication as well as the regulatory risk has been concern to a lot of investors in the past has been taking a way in a vast way has been pretty much gone. So that's a how important the importance of announcement that we've made today for the Beijing -- the success of our contract,

In terms of I guess interpreting what the MII is now stating. Are we to interpret this is -- that they are giving the green light then officially from the MII that is okay for Netcom and for others to deploy the process from now in these largest cities?

I think there is a statement coming out from ex-minister Wu, before he stepped down last month. He is saying that they are encouraging but they are not also -- or they are not encouraging nor they're stopping anybody to do any service in the present, anywhere else's. So that is the indication already been very openly stated. So, therefore it is all active operator to decide if they wanted to go into that particular city or not. So pretty much, it is up to the each operator's decision.

Okay, great. And then, Mike, just a quick question again on your guidance for Q2 for the EPS. You stated 29 cents to 30 cents and that's inclusive of 9 cents charge for CommWorks?

Correct.

Okay. And then as we look into some of the DSLAM products and into Japan. At this point with Yahoo! broadband being the number one supplier over there, are there opportunities for some of the -- for other competitors to use your product or are you pretty much going specifically alive with Yahoo! over there?

For the DSLAM we're pretty much alliance with Yahoo BB, but there were many different products that has been very much we're working very closely with our strategic partners; and that is including some of equipment providers as well as the operators that they're going to be using our equipments, particularly with the CommWorks that they have been historically supplying to the KDDI. And that will also open up a much better opportunity for us in Japan as well.

Great. And just one final question. Mike, you said you were cash flow negative by $91m in Q1, and you're going to be positive for the year. Are we expecting that Q2 is also going to be cash negative or you're going to be kind of in the breakeven area?

From operations - we'd anticipate positive cash flow from operations in Q2.

Okay.

However, I did want to point out that there were some financial things, such as the acquisition of CommWorks, and then they are unable to fix the combination of the stock buyback took place.

Right. Great. Thank you.

And thank you Mr. Pfau. And representing CSFB, let's go to Tim Long now for our next question. Please go ahead.

Thank you. Few questions if I could, just on the backlog number and the bookings. Two book to bills are really, really strong here. Mike could you just give us a sense on either may be on a geographic basis and by product basis, the complexion, either your current backlog or the orders in the quarter. Are we seeing most of the strength coming from China with the regulatory changes?

And a second question maybe for Hong. Since you are -- you haven't closed CommWorks yet, but you're including it in numbers here. Should we read in for that there may be -- you're already identifying some cross selling opportunities? Or maybe if you can touch on if anything has developed on the cross sell side there?

Yes. Let me take the bookings and backlogs discussion first. In the current quarter, the big up-tick was clearly in China drove that volume bookings in quarter one. We've got lot in our pipeline internationally as well for Q2 that we're extremely positive on. So again we're seeing on a global basis with some absolute numbers, when I talk about the book to bill ratio at around 2 was largely driven by China.

In breaking down the backlog, currently the wire-line business is a little over a 10% of our backlog. The PAS business is -- I would tell you -- let me use the way back into getting handsets, the handsets are little over between 10% to 15% of our backlog. We continue to run 40% within the balance of the wireless.

Okay. Now. As far as the CommWorks cross selling -- it has been so far have been quite exciting opportunities. Of course, we're now allowed to gun-jumping opportunities wise, but we have been seeing a lot of cost selling opportunities all over the places. And we particularly very excited with the North Americas. And as you know that there's a lot of current incumbent operators or RBox. They are not in a position to work with any new vendors and that also I keep this a very good inroad, into that positions to introducing our products. And we have already identified lot of this opportunities. But at this moment again without getting into too ahead a start, we really cannot allow us to do that so we will have to very careful about that.

Okay. Just one other question for me on the handset margin side. Mike, you mentioned growth margins were at top end of the range due to some cost measures. Were handset gross margins up sequentially? And could you just comment on the impact of both new competition as well as maybe tight supply and tight component ordering on gross margins per handsets going forward? Thanks.

On the margins on the handsets. The handsets margins were up very slightly Q1 over Q4 just a little about the 25%. On the cost reduction - what we talked about is if you remember in Q3 of last year, we saw very tough pricing environment on the wireless infrastructure. And then we said that that's stabilized in Q4. It has continued to look fairly stable during in Q1. So the cost reduction that we worked on is working through and kicking in. And we'll see most of them benefits at the second half of the week. But we are just seeing some benefits here in the first half of the year.

I think, Tim, I want to go back to your previous question about the cross selling opportunities in the guidance in Q2, Q3, Q4, because we may have misinterpreted that. The CommWorks guidance that we gave was based on the due diligence we did in the core business. We are not planning any cross selling opportunities into the guidance we're giving. So the strength you saw is only up-tick was in our core based business. And then Hong do you want to...

Yes. I think it makes sense.

What kind of interest the impact of tight supply or either on your ability to price more aggressively or cost of components for you?

Yes. Regarding the -- we are short of some critical components. In fact, we probably could even had more revenue in the quarter if we would have had more of the key components coming specifically with handsets. So, what we're seeing is an environment where the handsets are very stable, no price pressure on the handsets whatsoever. And, we have an opportunity to continue to work with supplied chains to bring our revenues up even further.

Yes. I think, to add to that, we also have significant delivery pressure from infrastructure side as well. In other words, if we could have more product coming in that particular quarter, we would have been able to deliver more. So we are expecting nevertheless the shortage of our infrastructure portion of the components will be resolved in our Q2.

Thanks a lot.

And thank you, Mr. Long. Representing Merrill Lynch, we have question from Tien Yu Sieh. Please go ahead.

Hi. Great quarter. I guess, couple of questions in sense of just going forward for execution. Could you clarify how the handset mix itself is evolving around? I was out in Shee On [ph] a couple of weeks back. I noticed that the handset offering seems to have actually improved. And, I am just wondering at what point you feel an impact on the ASP there?

And secondly, just want to talk or understand what your take is, on how China Telecom and China Netcom are selling the PAS service? Has there been any change that you observe in the strategy? Clearly they're putting out a lot of infrastructure now. The sort of ball is in their court now to sell that through. What are your thoughts of that?

Okay. Tien, for about the handsets, the first question and particularly in Shee On [ph]. We do see a -- we're introducing quite a bit of a new product line in the Q1. Particularly with the very attractive -- the IMO-like application in the -- we would be using a handsets in what we* call it version 6-1A. And also we have a very nice color 7-1A has been seeing a lot of attraction because of our vast value-added services introduction in Shee On [ph]. And therefore there is a lot of more higher-end product has been moved in our Q1.

So the product mix-wise, we have seen that Q1 to uptake more higher end product than the lower end. And again as Mike has said that we are pretty much selling everything we can build in our handset size. And so the trucks are right up at our warehouse at the moment we finish it. Even in the morning, at like 2 o'clock in the morning, the truck will come in and just haul it out. So I do say that environment that we are seeing in a very high demonstration of our handsets.

Now relating to your -- the China Telecom and China Netcom really have not changed their stands of how they view the PAS. In fact, if you ask anyone, those operator will just that this is the year of the PAS. They really this is the first year that they really putting a lot of emphasis in the PAS and everybody is busy to rolling out of the systems. And so I think the environment is extremely positive to the PAS. Obviously we are biggest beneficiary but other equipment providers are also benefiting from that.

Thank you. And if you could elaborate a little bit. We've heard about how some of the GSM providers, some of the CMA providers, obviously a different market segment are fighting amongst themselves with subsidies, with locally managed tariff plans. There has been some talk about how may be the thick line tariff might that revised up. Although, I doubt that will be very hard for China to do that. Can you comment as to, whether or not what sort of handset subsidies might be being offered by China Telecom or China Netcom that you are seeing in the local level? Any cover in to that respect, for example?

Yes it is, I can help a little on that is -- we cant look at the basic economic of what's being offered. And we think PAS again is the most cost-effective solution of world today, to get out basic voice and data services. We talk about we can offer a low-cost handset for around $50, and we can then migrate to multi-hundred dollar handsets if that's what the customer want. On the infrastructure side again we will be able to drive our cost structure down we can offer the infrastructure for under $6 a sub and still maintain our profitability.

So our customer which is the carrier was able to offer a complete solution for approaching the $100 per sub, which infrastructure plus the handset. So they can get very fast paybacks. Now historically we've not seen subsidies needed to drive the growth in PAS. In fact, we're still not seeing that. We have heard about special programs being offered in China, firstly in Guangzhou. There are some very aggressive programs been offered by China mobile on the GSM side as well as Unicom. But even when look at their most aggressive pricing plan there's still roughly a 3 times price advantage of PAS.

And the PAS operator should be get their payback typically in 2 years. An example is US dollar equivalent for 100 minutes. You know, when you look fixed rate plus for cost per minute, I think it's roughly around $13 dollars for China mobile, $11.95 for Unicom. And PAS would be only $3.65 US equivalent for a 100-minute call. So you can see its very compelling to the consumer and that's what driving the growth. But the same time, the operators, because our cost is so low get a payback rate quickly and that's very profitable to them.

Now, when you ask about the, how we compare with the other operators and GSMs and CDMAs. But, first of all, we are really trying to attract different market segments. I think everybody -- I have been probably preaching for so long and repeating myself -- 80% of our PAS users do not own cellular. They don't own China mobile nor the Unicom's. And that is our primary market. There is a overlapping of 20%, of course they were own both cellular and our PAS, but that's a smaller percentage of it. So we're still addressing to the mass market who really cannot afford. And with a Mike will be giving you the most severe environment that we have been recognizing is still 3 times cheaper to use ours versus the cellular environment.

And, also you have mentioned about or you asked about subsidies primarily China Telecom and Netcom. And they really are not really giving away but they are adding some, the number of minutes of the phone talking time alone with the phones. So that is some sort of subsides that they have been offering. And this is sort of a promotion and depends on what type of promotion they doing in each region. But we haven't really seen that is the primary reason that we're selling. It is really after the usage time is that lot more important to the most of the individual users.

Now we are not including any of the prepaid cost. If we had the prepaid cost, prepaid is way out of the whack and they are much more expensive. So if anybody who want to have a prepaid customers base it's in our cost will be at least 5 to 10 times cheaper.

Thank you very much.

Okay and thank you Mr. Sieh. And with seven participants in queue, let's go to William Bean now with Deutsche Bank, please go ahead.

Hi, guys, a couple of quick questions. Could you give us update on the rollout in India? Any difficulties there? And secondly in terms of the long term saturation for PHS, do you have a sense of where that's going to fall? And then finally any change to long term guidance? You've been talking about 20% to 30% over the long term this year. I guess you are expecting to gross 65%. Any change to the long term guidance? Thanks.

Okay. I'll take the first two questions. One is the Indian Market. Now we've been -- we have stated earlier that we have start delivering our product to Reliance [ph]. And this is the first shipping was made and against first order and now we've been shipped to their warehouse and their [indiscernible] in the process. Some of them already are to the customer size to the buildings.

And again this is a fiber to the building. And then we have a wall-mounted product that we've designed specifically for their application. And this has been a star shipping towards the end of last year in December and that we continue ship out in January, February and the March. And we're about to ship complete our first shipment in April. Now as far as the deployment basis, the Reliance has been going into many different services including the wireless.

Now we're serving into the wild line fabric application . So they have been overwhelmed with the loudest portion, so therefore, they have been slowing down a little bit in their deployment in the wire line for the Q1, but we were asked to prepare to start getting into the second phase. In fact we've already received the second shipment right after our shipment for the first one. We are now start into the shipping in Q2 where we start shipping into the new order basis that we'd just received and continue towards the end of the year, we're expecting to have a very aggressive plan coming in from Reliance.

On the other side of the office, from Ambanis [ph], from Tata, from BSNL, MTNL, we continue to see a very strong interest in our products. Now the one difference between China and India is that Indian's BSNL, MTNL, it's a government owned company they will really take a very long time to go through their process -- bidding process in order to give us any future orders. But private sectors Tata and Ambanis that we see that they are much faster and we have been started shipping a lot of equipment for them to test it and we have a started receiving repeat orders. So, we are extremely excited about the market in India.

The past saturation that you are pointing it out, we still believe this is still the beginning of our past. And, if you look at the market, again, we are really targeting for the 80% of our customers who cannot afford, and that has a population penetration that we will see is a 50% of the total China population. Now, while we have been very conservative, what we are trying to do is to replace every single wire line and currently a ready print to a household, it is more than 200 millions of them and at the end of last year we had about 12.5 million, and by the end of this year the most recent statistic shows that we expected to do 25 million.

So, it is a very, very still a small amount and we expect it to have lot more in China. Now, from the other international side of the market, we are seeing a tremendous interest in South America, continuation interest in South East Asia, in Vietnam, Thailand, Indonesia, and also in those regions that we haven't seen; on Taiwan as well. Those regions we have been seeing a lot of interest and we continue to see a lot of potential expansion or the new deployment in those areas. So, I believe this is just the beginning. And, I would probably say we continue to believe the past is to a replacement of the current fixed line operators in order to have them to deploy more cost-effective ways to the future and we see that kind of professionalism.

It doesn't only stop in South East Asia as well as in South America, even in North America we see a lot of them demanding those kind of applications too.

So, again William to address your long-term guidance-type question. You were -- obviously as we continue to grow the company to where we are worth, we are running up against the law of larger numbers, to bigger and bigger, it definitely gets, you know, the harder and harder it is to keep that same percent. However, it is hard to mention the addressable market for passes extremely large [indiscernible] , you know, that he has mentioned the opportunities in Asia, Latin America, the Broadband and [indiscernible] market on a global basis is very encouraging. On a longer term, additional IT products, 3-G offerings will all come into play. So, I think at this point we still want to stay conservative with something like a 20% to 25% growth rate, longer term. But we will give specific'04 guidance comes up this September call.

Great, and this is quick follow-up if I may. Could you just talk a little bit about the plans for a dual mode handset, do you have a new time in terms of one that will ship. And, could you just comment on handset replacement demand. Are you any. Thanks?

Sure. The dual mode, we have a couple of programs going, so we have two different teams working on dual mode, and the first product would be coming out from our team one, then they would be coming out targeted in towards the end of Q2 or the beginning of Q3, and team two that we're working on is currently expected to beginning of the Q4, we're coming out with the two different types of dual mode handsets.

The replacement market?

The replacement market, we see a non-significant amount, but a lot of people, they have seen, that more attractive phone coming out. So, the older areas, like the Seoul and Hangzhou areas, we see more people are more interested in to replacement products. But, it's not a very significant amount yet.

Do you have any follow-ups Mr. Bean.

I know that, thanks. That's great, thanks a lot.

Okay. You're welcome, sir. And lets go to Tim Luke now, with Lehman Brothers, please go ahead.

Thanks. I just want to clarify Mike, you were saying, that you - 100% [indiscernible] for the balance of the year. For the guidance numbers that you just gave, I think you said the next three quarters? How should we interpret that?

Well, I think the way is, I have told you, as we mentioned, we normally don't give a book to bill or backlog number until year-end. But since the demand has been so strong, that we think, we wanted to be open in Q1, that our book to bill approximately two. The orders have continued to come in here in the first part of Q2, so you know we are extremely competent now. In all honesty, if you guys will remember, a year ago, when we talked about visibility, on the quarterly -- you used to always say -- we came in at the quarter with a 100% of backlog for the current quarter and 50% to 70% of backlog for the quarter after that. So clearly we pushed much further out. Yes, I think we would like to a back more towards maybe a couple of quarters, opposed to sitting here today with three quarters in backlog.

And just to clarify my -- your assumptions therefore, where do you see the PAS the total subscriber numbers ending this year, given this momentum? And where do you see PAS sub numbers ending for '04, and just as an example you have a range, just a broad range?

Yes. I think, the 25 million has been our consensus, a number that we have been giving out, since last year. We think this 25 million is a rather conservative size of the numbers. There's a definitely an upside, and continuation of 2004, we see that the trend will continue with the same rate if not slightly higher than in 2003.

So you think that it's a double into '04?

I think it was probably doubled with the little bit of a too aggressive, but I think it's definitely would be a -- definite growth compared to 2003.

And just to clarify on the inventory stuff -- you can you give a little bit of color on this the inventories went from $400m to almost $800m up 400 and the differed revenue went up $93m and then obviously you raised your revenue guidance by another $50m. Could you just -- I know in the past you'd said were though the increase in the inventories which comes around $370m would corresponds to the increase in the differed revenue plus the range increase in the revenue guidance.

But it looks like obviously it's higher and it is significantly high so could you give you give a bit more color on perhaps given the year obviously you have a very clear vision of what the revenue numbers are going to be for June, September and December in terms of your planning. Where do you think that the inventory numbers would be just in terms of a range? Do you think it will be like up again obviously in June just so that we have a little more comfort?

Let me answer that a little bit of couple of different ways. Regarding collections, we collected [ph] over $400m of cash from our customers in Q1 and that's a record in -- inside a -- even though we kept our factories working, still we would go to the customers and collect cash during the Chinese New Year. It's just something that the cultural is not normally done. Now we're looking at collections going up over $600m in Q2. So we are going to continue to bring a lot of cash in from the customers as we go into to the Q2 timeframe.

So, do you think that it'll be around, should we say $600m in inventory than in the second quarter or just give us some color for the range?

I was just talking about pure cash coming in. The demand has been extremely strong here even though we are not even full the first month here in Q2. So, I think we honestly want to watch this demand. But if the demand continues to come in and exceeds the expectations like it has, I could see us pushing the inventories up another couple of $100m but then we would have to bring our -- this is at a high end -- we'd have to bring our overall revenues to profitability or even higher.

Now we don't see that yet at this point so we don't want to commit to that or give that kind of guidance. If things are going to play out as we see then you would see it return to me least shift '02 to improve for the company. So we really got to make that call based on how the orders come in over the next month or so.

So it's the guidance that you're giving now, Mike, just to the [indiscernible] 100% perks [ph] and you given the range revenue for this year. What do you see now, what's the level that you just roughly the range for the inventory level. Should we assume not up $200m sequentially but up a $100m sequentially, should we assume flat?

If we...

This is where we one of surprise when we get a -- going forward.

Yes if we don't change our guidance the inventories are probably flat. If the inventories the demand builds then we will increase everything.

And flat again through the balance of the year based on what you see now?

No, because what happened is if remembering Q4 will we saw the huge up-tick in orders. The analogy I would like is, it's like a snake, you get this big wrap that's followed, it's working its way to the pipeline. So within 90 to 180 day, final acceptance cycle that's been running is that you can see we started to get a little bit of that up-tick here in Q1, you'll see significant revenue booked in Q2 and Q3 for the existing inventory.

Now Tim, let me follow the -- from a different perspective that I can explain to you. You know my -- bulk of my part of job -- bulk of time has been really spend and the latter part of last year and the beginning of this year and the first quarter in continuation into Q2 is to go and get more components in fact begging them to give us more components. So if you see that number of inventory that you've seen, you're saying $797m net, we do not have enough as we speak. I mean, that is the how much of a demand that we experiencing it and in fact we are not fulfilling any of those part of this at this moment we are not meeting our customer demand now.

Right. But Mike you are suggesting you collect another $600m in cash in the coming quarter. If guiding on $380m, you said about $400m, so that would imply you think around $200m possible reduction in the inventory level. But obviously you are thinking -- obviously you are very conservative with the guidance may be?

No Tim that cash (ph). The cash is going to be -- go both to receivables as well as to just a lot of customer advances.

Right. Okay.

So the inventory goes down to recognize revenue converting the inventory to cost of goods. So there's two separate pieces of the transaction even though they are tightly coupled.

Okay. Well. [indiscernible].

Also you know I think you said we only increased guidance 50, we went into the year, our guidance was 1.3.

No just for the quarter. I think [indiscernible] consensus number for the June quarter was somewhere like $340m or something like that.

Okay I misunderstood you.

Tim, also please understand our product has been -- the nature of the way that we do the businesses is where we shift a product and recognizing it so in another words we know pretty much how long will it take to have our customer to prove the final acceptance before they were accepted. So you know we pretty much understand how long does it take. So therefore we do see it -- it doesn't happen like if we ship it. If we -- our businesses is that once and get out of the -- going out of our factory we can recognize the revenue than that will be a totally different story.

Okay. Congratulations on the order growth and the backlog. Thank you very much.

Thank you.

Okay and thank you Mr. Lu. Now, let's go to Smith Barney's T. C. Robillard now for our next question. Please go ahead.

Thank you. Just a -- actually just a couple of quick questions. Hong, on the other operators in India, you said you are shipping kind of some trial products to Bharti (ph)and TATA, is that also kind of DSLAM wire-line style products or are we seeing any kind of PAS wireless ship?

Just now we are shipping wire-line and that we have a discussion with the wireless as well. So, we do anticipated some of those wireless trial. But, right now we have already shipped wire-line trial and we are already receiving not the trial order but the repeat orders now for the wire-line.

Okay. And in terms of, you said you guys have just finished, kind of, your first kind of round of shipment to Reliance and you said you started or received, kind of a second shipment order. Is that all still part of that $100m or is this kind of an additional follow-up contract?

Now, this is a part of a first contract that we received from Reliance. So this our -- we just finished our shipments and then they already asked us to give them the second shipment in Q2.

Okay. Mike, just real quick, can you give us idea how ASPs on the handset side were in the quarter?

They were actually stable up slightly because we did some newer, high-end models. Right now, there is definitely shortage of handsets at the operators to get out to their customers. And so we are not seeing any price pressure on the handsets whatsoever.

Is that sequentially or year on year?

Sequentially. Q1 versus Q4.

Okay. And then, just my last question. Hong, can you give us an idea in terms of -- you've made a comment earlier when you were talking about the to move the PAS into the big cities, you said kind of the operators are really making their decisions continually on what their payback time is. Is there any difference in terms of the payback, in terms of deploying a PAS network in a large city versus, kind of, a smaller city that's historically been done? I mean it would -- obviously, you need more infrastructure, more radios but there also seem to be kind of a bigger opportunity more for customers to put on there. Just trying to get an idea of kind -- if there is any difference on kind of the payback metric?

Yes. In general, the larger city would take a longer time and the shorter -- I think the smaller city would take a shorter time. The matter of fact is that there is a smaller city that older -- the promotions and everything else is kind of be on much smaller scale. And typically, the smaller cities, the higher the penetration rate as well. Another ways are, if we're going to serve 50-thousand population area, they would be able to get there in much shorter time versus if we have to deploy 0.5m or 1m the return rates is slightly lower.

Okay. Great. Great quarter guys. Thanks.

Sure

Thank you.

Okay and thank you. And next in queue is Andy Schopick with Nutmeg Securities. Please go ahead.

Thank you. Mike, first a clarification, you mentioned an investment credit or tax credit refund, could you clarify what that was and where that is in the P&L?

Yes. It's an investment credit refund that were given from the local investment bureau in Hangzhou and that's really I guess maybe the best way to describe it. It's kind of like - it's other income. It's -- kind of it's gift. It's a gift back from China for investments overtime in the facility there.

This is an interest in other income.

Correct. It's $3.8m in the other income line. If you tax effective it and run it through the EPS, that's why I wanted to be very clear that our EPS was 33 cents reported. If we back that out because it was a one time event EPS would be 31 cents.

Okay. And I am curious to ask you about the conditions under which iPAS as opposed to traditional PAS installations are being deployed now, is there a point at which really new deployments will be increasingly iPAS, can you talk to that?

Yes. Sure. It is true both of our -- in fact almost 100% our iPAS has been deployed in the newer cities, and we do have statistics shows the entire revenue -- I mean 35% of our total revenue is been deployed in iPAS and PAS is only 3%. So if you can see that difference. It's very small and PAS typically for the expansion for existing customers size they want to just expand their system, and we will give them the PAS solutions. And -- but a lot of our operators is just without any hesitation, iPAS is lot more cost effective for their future growth.

So virtually the new deployment are predominantly going to be iPAS now?

Yes, that will vary -- I think 100% it's very close to 100% of all new sales are in iPAS.

Okay. Thanks.

Sure.

And next let's go to the new our next line of Jason Tsai with Think Equity Partners. Please go head.

Hi guys. Great quarter. Just a few questions here, you guys had a touch upon the -- you guys were having hard time getting a hold of some components on the handsets, so can you give us a sense of what components those were?

Sure. We have particularly in shortage of BBIC or it's Broad Band IC chip from Toshiba, and we do have significant shortage on our RFIC from Sony. We just - they are just maxing out with their capacity at this moment.

Okay. Are you guys going to -- are you guys looking for second sources on these products?

Absolutely. We're aggressively looking for them and -- yes.

Okay. Next question I guess you guys have been saying the book to bill is two for this quarter. What was the last quarter and kind of what's the usual trend for book the bill? Just we've the sense of -- what two is relative to from previous quarters?

Well, it depends on quarter-to-quarter. You know I have to go back and look at honestly. I don't want to wing it to give you that the answer. You know it could be -- we have -- most of our quarter above one ever since we've gone public. And that's why we have been able to beat results and can raise guidance. I would probably tell you most of that was maybe 1.1 or maybe 1.3, 1.4 historically.

Okay.

What we saw at the end of Q4, the businesses went to a whole level and you know in Q1, it's just really exceeded our expectations here.

Okay. And moving on to just the handset side again. You said the ASPs were up slightly sequentially, what are you expecting for the year? I am sure if you guys covered that or not?

We don't cover those. But depends on the mix of the product. We're continuing to coming up with that newer product. And the introduction of the newer product that we've very wide -- wide variety of it, but it's almost slated to the higher end because we're introducing more of the value added services product. At the same time we're also introducing a lower end too. So I'd probably say that we're not seeing any of this slow down for selling prices at this moment.

So, you guys are probably looking for an even a slight up-tick for the year.

Probably -- I'd not probably say that probably as moving forward with current one, we've already seeing a significant increase on our ASP already.

Okay. Great. And then last question here. Softbank has 12% of shares left, senses any sense as from them as to or from you guys as to buying back more shares or buying out entire 12 position or any sense on kind of what Softbank is going to do with the rest of the ownership?

Well, I think that -- let us be very open as you know we have tried opportunistically overtime to go back and be able to buy shares when we felt they were undervalued and you know the position for the rest of our shareholders. And probably the most successful was most August when we were able to buy back those shares at $12. More recently, with the lock up expiring there was -- in March and with the April window coming up, it was seen to be the single biggest event on investor's mind. So that's why approach them and convince them to sell us additional shares and sign a lock up for one year. And all honesty we asked them -- we tried to get them to sell more shares, and they didn't want to us any more shares. So I am not sure I can add whole more value to that comment, but we did try to produce even more.

Okay. Great. Thanks a lot. Great quarter guys.

Thank you.

Thank you.

And thank you Mr. Tsai. Representing CIBC World Markets we've a follow-up question from Dale Pfau. Please go ahead.

Hi, guys. It's Earl Laum (ph)I am again. Mike, if you look at the -- on to past, Hong gave us kind of an estimate for'03 of about $25m. You know certainly significant growth in the '04. If we go onto the handsets side, there is couple of things I'd like to address, with regards to the components shortages, are these shortages primarily related to the types of phones that you guys are designing or are the shortages industry wide for all PAS handsets?

It's a throughout PAS handsets industry wide. I'd say, there's only a few company those are of chip sets and there's a more choices in the BBIC or the Base Band Chip then they have a more of the choices but RF is a much restricted. So therefore it is a combination of those two.

Okay. So, at this point everyone is seeing a problem across the board.

Yes. It's everybody.

Okay. If you look at 2002, can you give us an estimate of how many PAS phones you think were produced and shipped into the market place?

It's probably -- I am throwing out the number but I wanted to give you the range. I'll probably say, we have openly stated that we'd shipped 6.5 million. So with that in mind and we will say the market has about 8.5 to maybe 9 .

Okay. Then if you look at '03, have you given us an estimate of what you -- how many phones you think you're going to be able to ship given the current issues with the inventory that you think are going to be resolved out in the second quarter?

Well, we haven't given a specific number. I think with the way, I -- actually to calculate that would, as they were doing a little better than our 60% market share, 10% were doing better than in the handsets. And we feel, it's all mentioned earlier that going to at least 25 million subs in China is probably a conservative growth number.

Okay. And Mike, if you look at the handset, if the mix continues to shift more towards the high end, would you continue to see some margin improvement there or how could we characterize that then?

You know, I think -- may be it's a long answer but I think it's important to understand that there's two things going on. One is, we are introducing more higher end handsets to provide value added services. But also if you look at the big growth in China it's targeted for the middle part of the pyramid we always show with lower incomes. People don't really want to spend maybe $8 a month on a phone bill. So what we found is that there is a high at steep price elasticity curve.

If you can save $5 - $10 on a handset you literally drive illion of additional subs that want to sign up for networks. And then that drives incremental infrastructure sales as well. So the best example I can give you is we introduced for the very first time our low cost handset in the fourth quarter of 2001 and that point in time we introduced that model at $80 a handset, previously the handsets were selling for about a $100. However because we designed it for low cost even though the ASP went down, our margins actually improved quite a bit. So we're going to try to introduce higher end models, but also continuingly trying to drive cost out of our handsets and so we can introduce lower cost models. And again if price the elasticity curve stays the way it is, again there'll be millions and millions of people that sign up for that. So I don't want to get into that our ASPs on handsets necessarily are going to go up. We're very confident we can maintain the margins with a variety of handsets as well as low-end models.

Okay. And then one final question, the last quarter certainly like below the line there were some currency fluctuations, do we have it this quarter, are you anticipating any for the rest of the year?

Well, no, there was activity below. The only issue below line was the one time gain that we pointed out. For all of last year the FX was around $5m. I think it's pretty inconsequential on an annual basis. Just every thing lined up at end of year that made it look larger there in the fourth quarter. My guidance would be no unusual items on either FX or impairment. And from a company point of view, when we give guidance to the extent there was something out there, we feel like we have committed to an EPS number to the street. We're going to go out and deliver it.

Great. Thank you.

Okay and thank you very much Mr. Laum.

Well, I think we have over an hour. We won't have an extended Q&A today, but may be we take only one more question.

Very good and thank you sir. And next in queue than is Ilya Goresoskey [ph] with Bullpath Capital [ph]. Please go ahead.

Nice quarter guys. It's just a question on the competition between China Telecom and China Netcom out of region, if you can comment on any positive or negative effects on your business?

Okay. Now, we have only seen that taking place is in one [indiscernible] Ghengzhou province, it's right next to city of Shanghai. And that is the only area that we see there is some multiply - well actually both China Telecom and China Netcom offering the same services in one city China Telecom and China Netcom is offering the same services in one city. And so we have just started getting into that environment. So we really don't know how will that play out. And very clearly, in between the operators, that -- they also take if that's a competition in those areas.

The return on investment would be on longer-term basis as well. So will not seem to -- at this moment we don't seems to think that they will have a lot -- situation will take place in a lot of places, except for one area that they have a very weak operators and then I think it's going to potentially happen. But with everyone seeing the PAS is such an important strategic move, I think they're going to put more emphasis in that. But on the other hand we see there is a lot of potential in the wire-line side of the business and in competing with each others in those territories. Particularly with [indiscernible] of building type of application, we see a lot of interest in that type of products that we'll able to differentiate services from the current offer by each others in that territories.

And were there are any follow-ups?

No thanks.

Okay. Very good, and we thanks to Lu and Mr. Sophie. We'll now turn the call back to you for your closing remarks.

And thank you very much. I really -- we just wanted to appreciate everybody for participation and it's a great quarter. And if you have any other questions please don't hesitate to call us. Thank you very much.

And ladies and gentlemen your host is making today's conference available for [indiscernible] replays for one week now. It starts at 500 pm Pacific day light timing for the April 16th all the way through [indiscernible] April 23rd... Please access AT&T's executive replay service by dialing by 800-475-6701. At the voice prompt enter today conference ID of 681569. International participants you may access the replay as well by dialing 320-365-3844 again with the conference idea of 681569. Well, that does conclude our earnings release for this quarter. Thank you very much for your participation as well as for using AT&T's Executive Teleconference service. You may now disconnect.