UTStarcom Holdings Corp (UTSI) 2003 Q3 法說會逐字稿

Good afternoon. My name is Brandy and I will be your conference facilitator today. At this time I would like to welcome everyone to the UTStarcom third quarter 2003 earnings conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one, on your telephone key pad. If you would like to withdraw your question, press star, then the number two, on your telephone key pad. Thank you. Ms. Kamieniecki, you may begin your conference.

Thank you. Good afternoon. And welcome to UTStarcom 2003 third quarter earnings conference call. I'm pleased to introduce our CEO Hong Lu and our CFO Mike Sophie who will host the call.

Hong will begin by providing an overview and key highlights for the quarter. Then he will turn the call over to Mike who will give a detailed financial review of the company and provide first-time guidance for 2004. In addition, as part of our program to continually introduce some of the knowledgeable and experienced members of the management team to the financial community, we will then have some strategic comments from Jerry Soloway our Senior Vice President of engineering on areas of focus for the Company in 2004. Jerry has been with UTStarcom since 1998 and spent 29 years in several executive positions with Bell Labs. Jerry holds a Ph.D. in electrical engineering from Poly Technical Institute in New York and we are pleased to have him on the call today.

Afterwards we'll turn the call over for Q&A. Before we begin the call, I would like to remind everyone that some of the information given today constitute forward-looking statements. Actual results could deliver materially from our current expectations. To understand the risks that could call results to differ, please refer to the risk factors identified in our latest annual report on Form 10-K and our quarterly reports on Form 10-Q which are filed with the Securities and Exchange Commission. With that, I will turn the call over to Hong. Hong?

Thank you. Good afternoon. Thanks for joining us today. I am happy to announce to our shareholders another quarter of record results for UTStarcom. We have achieved our goal to create a global multibillion dollar telecommunications company. There are four key components that enable our success. One, continued innovation and market leadership in telecom technology. Two, the ability to capitalize on the tremendous opportunity in growth on a global basis. Number three, sustained growth in mainland China in both PAS and other product lines. Finally, a consistent record of a strong financial performance.

First our financial success. Once again, UTStarcom delivered a record quarter in both revenue and profits based on continued strong demand for our product. In addition, inventory came down, while revenue grew significantly. Inventory returns were up and DSOs hit another all-time low. We are also cash flow positive for the quarter. Finally, our bookings remain strong for the quarter and our visibility now extends well into 2004. We believe these are the significant achievements for the Company.

Now I would like to highlight some examples of UTStarcom's strength in China. During the quarter, we added a record 4.2 million subscribers to UTStarcom PAS network, a 30% sequential increase over Q2. By the end of Q3, our total PAS subscribers in China reached 6.7 million. Our market share represents about 60% of the total 28 million PAS subscribers in China at the end of the quarter.

PAS continues to be the key revenue driver for both China Telecom and China netcom, representing over 58% of the total fixed line in China in July and August, compared to approximately 43% in the first half of 2003. The market potential to serve new PAS subscribers is growing. It is estimated there will be more than 30 million PAS subscribers in China by the end of 2003, an enormous increase from the 12 million at the end of 2002. This is also significantly higher than the initial 2003 estimate of 25 million subscribers. So subscriber numbers are expected to surpass 50 million by the end of 2004.

DSL is also key to the growth in China. This quarter we signed a contract with China Telecom and China Netcom for more than 200,000 lines in our DSLAM equipment. In 2003 we have shipped over 800,000 IP DSLAM ports rank us number 1 in IP DSLAM market share and among the leaders in total DSLAM shipments in China.

According to industry statistics, DSL subscribers in China will grow to more than 7 million at the end of 2003 and over 40 million by 2006. This equates to a new opportunity for UTStarcom.

Also in China, we had approximately 100 engineers now working on our newest product line, the NetRing family of optical products. We shipped more than 800 optical notes to China Telecom and China Netcom this quarter and they're gaining traction. We're very enthusiastic about our new product line and we will provide more information in coming months.

Finally, we are partnering with operator to prepare for full-scale 3G trials with the first trial planned for early 2004. We have had excellent results in the first two lab trials and have successfully completed uninterrupted tests with several other 3G vendors.

In addition, UTStarcom will be showcasing a live demonstration of the complete end-to-end 3G solution at the 3G Expo show in Beijing in three months. This is an excellent opportunity to see the full scope of our 3G solutions. We hope you will be able to join us at the show. Again, despite the hype from some telecom equipment vendors, it is important to know that we do not believe that 3G license will be awarded until the second half of 2004. Significant commercial contracts and cap ex spending on 3G will not happen until 2005 at the earliest. Nevertheless, UTStarcom will be the major supplier for 3G infrastructure when licences are awarded. While operator will target 3G to subscribers in major urban centers, they will deploy PAS to satisfy the vast majority of the market in China. This is the major distinction.

We want everyone to understand 3G and PAS service, they serve two different market segments with a significant cost difference between them. Operators will initially roll out only in strategic hot spots and they will continue to market PAS to the majority of the population. Over the next 10 to 20 years, 400 million people in China will move from farms to cities. This is a target market for PAS service. PAS will remain an important service for the long-term because the strength of the subscriber demand and the revenue and the profit it provides to the carriers.

Outside of Mainland China, UTStarcom continued to make significant progress in Japan. Our customer (inaudible) reached more than 2 million DSL subscribers as of December, adding over 400,000 subscribers in China, it continues to hold number one market share in Japan. UTStarcom plans to launch service using DSLAM and other key systems. We will be working with (inaudible) to launch other value added services using UTStarcom platforms.

India will continue to approximately 25 to 35 million in revenue in 2003 and will be one of the Company's largest markets in 2004. We are very enthusiastic about the progress we have made and the further potential in the Indian market. UTStarcom has continued to ship to (inaudible) building product to the (inaudible) and support their fiber network.

We have also sold our (inaudible) product to every major carrier in India including MTNL and BSL and two incumbent national carriers. We are also selling to the key independent carriers such as TaTa and Baharti. Vietnam is another expansion market. We are receiving final acceptance to our initial deployment in Hanoi and Ho Chi Minh City. We have also received contracts each of those cities and expect contracts in additional cities. We believe that Vietnam could generate a hundred million in revenue in the next few years. We announced our first African contract with (inaudible) and Afrikaans this quarter, as well as partnership with NEC Corp. multi media broadband in Brazil.

We have made significant progress in both Latin American and Africa. Finally, we have fully integrated the business and European market are progressing well. We expect to generate revenue of approximately 50 million in those regions this year with a formal CommWorks product lines. Opportunity in the U.S. and Europe could represent over 100 million in 2004. AT&T, Sprint, and Verizon are amongst our largest companies in North America. We are pleased with the progress we are making on the international front and are on plan with our efforts to expand business outside of China. (inaudible) strength of the demonstration of our technology platforms. All of our infrastructure products are standardized across an IP core network. They're designed to meet customers needs and to migration to Next Generation services going forward. Jerry will expand on this important distinction in his comments. These successes are the foundation of the sustained long-term growth.

Our five-year target is to grow to a $10 billion company. The combination of our leading customer bases and continued financial strength and superior technology will ensure that we meet that goal. In closing, you can see that it has been an exciting quarter for UTStarcom. I look forward to share more progress with the company in the quarters to come. Now I will turn the call over to Mike.

Thank you, Hong. Let me begin this discussion by saying that the Company has essentially doubled in size over the past year, and yet we are able to meet increased customer demands and continue to run the business consistently and optimally.

In the quarter, we had record revenues and earnings. We also generated positive cash flow and strengthened the balance sheet.

Now I'd like to make some specific comments on our quirk financial results. -- third quarter financial results. As a result of the continued strong demand for our core products, this quarter was another record quarter for UTStarcom. Revenue increased 44% sequentially from Q2, our backlog increased sequentially, and we now have backlog in place through Q1 2004. Our revenues exceeded the guidance we gave in July by over 79 million, a tremendous indication of the strength of the PAS subscriber growth which continued to exceed our expectations and drove substantial incremental handset revenues. Subscriber growth is the key metric to focus on as this is what ultimately drives both handset and infrastructure spending.

Sales for the third quarter increased to 584.4 million compared to 265.5 million in the third quarter of 2002, an increase of 120% year over year. For the quarter, PAS infrastructure accounted for 33% of our sales and PAS handsets accounted for 57% of our sales. The balance of 10% consisted primarily of our wire line products.

Gross margins came in at 32%, which is in line with the preliminary results we gave on October 1st. Mixed changes can impact gross margins as a percentage of sales. Handsets increased from 46% of sales in Q2 to 57% of sales in the current quarter, while at the same time wire line products declined as percentage from approximately 20% in Q2 to 10% in the current quarter. It is important to note that this mixed change was the result of incremental sales opportunities for the company, delivering higher revenues and profits and not as a result of losing higher profit business to lower.

Our operating expenses of 105.3 million were in line with growth and guidance for the quarter. SG&A expense as a percentage of sales was 10% for the quarter, in line with projections and reflects our continued global expansion. R&D expense as a percentage of sales was 8% for the quarter, in line with our projections as well. Income tax expense for the third quarter was consistent with our effective income tax rate of 25%. Net income for the third quarter was 59.1 million or 46 cents per share, exceeding both our original guidance of 42 to 43 cents given in July and the preliminary results given on October 1st.

We are pleased with our improving level of profitability as it is driven by demand for our products and significantly higher revenues. As I move to comment on the balance sheet, I would like to highlight the continued improvement in the balance sheet metrics. Even as the Company is growing extremely fast, we were able to generate positive cash flow and significantly increase our inventory turns and lower our DSOs. Cash and short-term investments at the end of the third quarter was 441.4 million as compared to 281.3 million at the end of the second quarter. This increase in cash can be mainly attributed to the continued high levels of profitability, strong collections, and reduction in our inventory levels at the end of the third quarter.

During the quarter, we collected 622.3 million in cash, which is reflected in both receivables and deferred revenues. We were cash flow positive for the third quarter and generated 162.6 million from operations. This also makes us cash flow positive from operations for the entire year-to-date of approximately 3 million. We expect to continue to be cash flow positive in Q4.

Accounts receivable day sales outstanding came in at an all-time low of 48 days for the third quarter, as compared to 58 days at the end of Q2 (quarter) As targeted inventory levels came down in the quarter to 979.8 million as a result of the increased utilization of contract manufacturers and working with our vendors on materials management.

Inventory turns came in at 1.5 as compared to 1.1 in Q2. 72% of our inventory at the end of the third quarter was already deployed in the field at customer locations pending final acceptance. This continues to give us tremendous visibility into revenues in future quarters. We are targeting the following for inventories going forward. A significant portion of our inventory that is at customer locations will achieve final acceptance in Q4 2003 and Q1 2004, driving profits and revenues. Inventories will continue to stay consistent at this level or come down slightly in Q4 and inventory turns should continue to move towards two as revenues continue to increase. For 2004 we plan continued neferts inventory turnover and our target for 2004 is three.

The Company reported deferred revenue of 544.7 million for the third quarter, consistent with Q2 levels. These balances primarily represent cash the Company has collected from customers but not yet recognized as revenue. You can see by looking at the balance sheet UTStarcom is able to successfully manage the growth in the business and generate positive cash through collections from our customers.

2003 guidance. We continue to see strength and growing demand across all product lines, both in Mainland China and globally, and are therefore once again bringing up our full-year 2003 earnings and revenue guidance. For the fourth quarter of 2003, we estimate our revenues will be in the range of 635 to 640 million.

Once again, we are raising full-year 2003 revenue to be in the range of 1.96 to 1.97 billion, representing a nearly doubling of revenues from 2002 and compared to the 1.93 to 1.94 billion of revenue guidance we gave on October 1st. China should account for approximately 84% of 2003 revenues. Subscriber demand for PAS has continued to increase all year, exceeding our expectations.

As Hong mentioned earlier, we anticipate strong subscriber growth to continue, with year end PAS subscribers projected to come in at above 30 million. As a result handsets should remain consistent with this quarter. Due to the continued expansion and deployment of PAS networks in China and in the global markets, total revenue from wireless systems will be around 32% in Q4. Wire line revenues are projected to contribute 12% in Q4. Included in this guidance we are also anticipating a significant ramp in wire line revenues from India in the fourth quarter. Due to changing market conditions, each of the above metrics can fluctuate plus or minus 5%.

Gross margins. Given the continued upside in handsets and ramping revenues in India, our gross margins for the fourth quarter of 2003 are anticipated to range between 30 and 32%. In Q4, we anticipate expanding SG&A to continue to capitalize on global opportunities in line with revenue growth and run between 9 and 10% of revenues. We expect R&D to be flat or to increase very slightly in dollars and to run around 7% of sales. As a reminder, we have over 2200 R&D engineers world wide. Much of our R&D staffing is in China and India where we are attaining tremendous efficiencies of cost.

Other income should be approximately 1 million in the fourth quarter and joint venture minority interest should run approximately 1 to 2 million in expense for Q4. Our effective tax rate for 2003 should continue to be approximately 25%. Our share account is anticipated to remain relatively flat at around 132 million shares on an if converted before diluted basis. GAAP earnings per share guidance for the fourth quarter 2003 is targeted at 50 cents and full-year 2003 GAAP earnings per share should range from $1.61 to $1.62, exceeding previous guidance given on October 1st of $1.59 to $1.60.

In discussing the guidance for 2004, I would like to begin by saying that we are extremely proud of the growth we have achieved at our current level of revenues and profits, or at least one year ahead of what we had anticipated last year at this time. This is driven by a strong economy and strong customer demand in China, increasing recognition and footprint in other key global markets, and the continuing evolution of our technology and solutions to meet the needs of the Next Generation networks.

Our philosophy on guidance will continue to be conservative. Our 2004 guidance includes the following assumptions, which give us much confidence in these projected results. We anticipate entering 2004 with approximately two quarters in backlog. The PAS subscriber growth rate is anticipated to continue to be strong, going from 30 million at the end of 2003 to surpass 50 million in 2004. This will drive incremental handset and infrastructure spending in China.

World wide, DSL sub growth is expected to be in excess of 50% globally, with the fastest growth in areas in Asia where UTStarcom is particularly strong. World wide DSL subs are anticipated to grow from 68 million at the end of 2003 to around 104 million by the end of 2004. Q1 2004 revenues should range between 570 and 580 million, reflecting the seasonality associated with world wide telecom patterns and the Chinese New Year. Quarterly sequential growth from Q2 through Q4 should be approximately 6 to 8%. Q1 earnings per share should range from 35 to 36 cents on a GAAP basis.

Full-year 2004 guidance is as follows. Revenues should be in the range of 2.4 to 2.5 billion, a growth rate of approximately 25 to 27%. GAAP net income guidance for 2004 is 250 to 260 million, also growing between 25 to 27% year over year. Full-year 2004 GAAP EPS should be in the range of $1.92 to $1.95, a growth rate of approximately 20% and a reflection of the higher share count. Revenues from Mainland China are anticipated at approximately 75 to 80% of total revenues in 2004, as compared to 84% in 2003. The growth rate of sales in China are expected to be around 20% in 2004. Revenues from outside Mainland China are anticipated to be approximately 20 to 25% of total revenues with a growth rate of approximately 85% over 2003.

As UTStarcom continues to expand as a global supplier. Key markets will include Japan, which should contribute between 100 and 150 million, India, which should contribute approximately 100 million; Latin America, which should contribute close to 90 million; North America and Europe combined, which should contribute between 100 and 150 million; and the rest of the world, which should contribute about 100 million.

In total we expect international revenues between 500 and 600 million in 2004. By product type, the 2004 revenue breakdown is targeted as follows: wire line systems should be approximately 15% of revenues, reflecting continued growth in both broadband digital carriers and broadband IP DSLAM with a growth rate of approximately 40% over 2003. Handsets should be approximately 55%, reflecting continued strong subscriber demand throughout China and on a global basis, representing a growth rate of approximately 30% over 2003. Wireless systems will be approximately 30%, reflecting continued expansion and new deployments of PAS networks, both inside and outside of Mainland China, representing a growth rate of approximately 20% over 2003. Gross margins for 2004 should range between 30 and 32% due to continued strong PAS subscriber and handset growth, a significant ramp in India, and reflective of continued world wide competitive and pricing trends in telecom. SG&A should trend up slightly in absolute dollars each quarter. Our target is to run SG&A at 9% to 10% of sales in 2004. -- should trend up in sleet quarters and our target is to run R&D at 7 to 9% in 2004. Our tax rate for 2004 should range from 22 to 24%.

We had another outstanding quarter with record revenues and profits, with visibility now into Q2 2004. We have continued to add new customers, deploy new products world wide. Our balance sheet remains strong as we continue to grow our Company. Going forward, we anticipate continued top-line growth and profitability, with business indicators in our markets positive, and we are enthusiastic about the anticipated growth in 2004.

To put 2004 guidance into perspective, I'd like to close with a few highlights. The Company has essentially achieved 2 billion in revenue and is still projecting both top-line and income growth of 20 to 25%. This compares with a global telecom cap ex that is anticipated to be flat or decline slightly. I would like to turn the call over to Jerry to discuss areas of strategic focus in 2004.

Thank you, Mike. I'm very glad to have this opportunity to discuss with you some of the R&D programs and directions at UTStarcom. We believe strongly in ensuring our products bring superior value by providing complete solutions that deliver what customers need to be successful in their businesses. We achieve this by developing a portfolio of innovative IP-based solutions designed specifically for the carrier market. We have continued to grow our R&D organization, and as Mike mentioned, we've surpassed over 2200 engineers at the end of the third quarter. We've had many notable project accomplishments this quarter, but I'd like to point out in particular that we've now achieved ISO certification at all of our R&D locations. As we look ahead, let me highlight just a few areas. We continue to keep our industry leading IP DSLAM ahead of the competition and expect to introduce ADSL rates of up to 50 megabits per second. For those at the trade show in Geneva last week, you may have seen the triple play solution on display in our booth. The HGTV running at 6 megabits a second were truly spectacular. I believe that we are the currently vendor to offer solutions for TV over IP and high-value media services. We provide an end-to-end triple play package that includes streaming servers, OSS, IPD slams and capability to support impec two and impec four and windows media. We have customer contracts to deploy pay trials for our video solution beginning in the next quarter. Also for voiceover IP we provide very high density media and signaling gateways and call service. We are seeing considerable interest in triple play applications in several regions such as Asia, India, and Latin America. Our new NetRing products deliver cost effective optimal grooming, aggregation, and back call from low end OC3 to high end 10 G.

We are already shipping into China and we are starting to gain traction in other markets. We are expanding our market-leading PDSN platform with two new products, making it by far the most comprehensive in the industry. PDSN is used to process data calls on CDMA networks.

The new total control 2000 offers an order of magnitude increase in capacity which will enable operators to deliver the significant increases in traffic being generated by advance services such as camera phones, push-to-talk, and PDA messaging. Finally, we continue to advance our PAS product offerings and maintain our competitive advantage over similar wireless technologies.

Some of the key advantages to the operators include, one, frequency and license. Each country may differ, but in most countries PAS freaktcies are generally available to operators and less expensive to acquire. Second, infrastructure. Our past deployments utilize a high core IP network ... Additional services in the future. The Pas infrastructure continues to have cost advantages over other technologies due to its low power radio technology and ability to support very high user density. As many of you may be aware, we can deploy in volume for under $50 per PAS subscriber. Third, handsets. We continue to advance our handset development and offer a greater variety of handsets to the end users. The basic voice handset is now selling under $50, while the high-end models will sell for hundreds of models providing integrated camera, etc. All new handset mod models support instant messaging which is popular these days.

There are many other projects ongoing, but let me conclude by saying that as we continue to grow our product line, we are pursuing aggressive cost reduction programs. We have always prided ourselves on the price performance of our products. In these days of increasing margin pressure, we will continue to provide cost-effective solutions that bring extra value to our customers. Now I'd like to turn the call back over to Mike.

Thank you, injure Jerry. Finally before I turn to the Q&A, I would like to take a moment to address recent investor questions. Stock split. In late July and early August our stock was trading in $40 range and we announced our intention to move forward with a two-for-one stock split. This required a two step process. Step one was increasing the total number of authorized shares to allow a split to occur. This was approved by the shareholders on September 24th. Step two would be for the board of directors to authorize a split.

Currently our stock is trading in the mid 30s, and we would like to see the stock appreciate before moving ahead with the split. We will continue to monitor the situation and have a desire to move forward as we believe a stock split reflects our optimism and positive outlook for the Company. We will update shareholders as the situation changes.

Shelf registration and offering. Also in July we filed a $500 million universal shelf registration. This has raised investor concerns on our need to raise cash. As you can see with the Q3 results, the Company was cash flow positive for the quarter and has over 440 million of cash on the balance sheet. We do not currently anticipate any need to raise money to fund operations. The shelf registration was filed to give the Company flexibility in the future if strategic opportunities presented themselves, that were in the best interests of the Company and our shareholders.

Finally, why we did not raise guidance on the September 25th call. We released our preliminary results on October 1st and some investors wanted to know why we didn't change our guidance on the conference call that we conducted September 25. On September 25th, we had a week left in the quarter to go and wanted to make sure that our numbers were in place and all final acceptances needed to recognize revenue were received. We are very aware that there are funds that have a vested short interest in the stock and have created and perpetuated rumors to support their short cause. UTStarcom does not want to be distracted from successfully running the business and being forced to respond to rumors and be forced to reannounce results on a time frame other than one in which we are comfortable.

We have established a track record on delivering on performance and knowledge of our markets. We will continue to run the business consistently and conservatively, as we believe it is ultimately the best for our customers and our shareholders. We welcome any questions you may have regarding China or any other aspects of our business. With that I would like to turn the call over to Q&A.

Operator, I have one correction. Earlier our total subscribers in China is 16.7 million instead of 6.7 million. I think I had made a mistake, so I just wanted to correct it, 16.7 million instead of 6.7. So, operator, can you open for the questions?

Yes, sir. At this time I would like to remind everyone, in order to ask a question, please press star, then the number one, on your telephone key paddle. We'll pause for -- key pad. We'll pause for a moment to compile the Q&A roster.

Your first question is from Dale Pfau of CIBC World Markets.

Afternoon, gentlemen.

Hi.

Nice quarter. A few questions here. First on your DSL product line and the outlook for next year. What percentage do you have right now of the DSL lines going into China. Can you talk about market share there and then give us some sort of estimate of whether you can maintain that share as the growth next year, and then I have another question.

I will take that question. DSL in China so far we have a little bit over 10% and our target is reaching 20% before the end of this year, and the likelihood that we believe more operators throughout the world are shifting from a current ATM-based to IP-based, so we have significant momentum. In fact we have been talking to many operators that have been wanting to know how are we doing on IP-based DSLAM, and definitely they would benefit from that operation.

We recently saw a report coming out of Shanghai that looks like PAS is going to be deployed aggressively in Shanghai, probably with some sort of aggressive all-you-can-eat tariffing plan in Shanghai. Have you heard this? Is your equipment in Shanghai? And can you give us any idea of what you expect that to do competitively for the rest of the country in terms of PAS?

First of all, I think PAS has been deployed in the suburbs of Shanghai, and that has already been in service for many quarters. And we did hear some of those rumors, but from operator to operator, they have their own services, and some of the services are extremely successful. And all-you-can-eat type of services we have seen, but we have not seen how successful they have been so far.

And one other comment as we move forward into late next year when maybe we get the 3G licences awarded, you made an illusion to -- you thought you were in an excellent position for an award of 3G equipment. Is this primarily with your two major customers right now and could you speculate on when we might see -- how quickly after the award of the 3G licences could we actually see infrastructure contracts?

We do believe that 3G contracts are going to come in the latter part of next year, 2004, and with that, we don't see any significant revenue, meaningful revenue, until the earliest by 2005. And as we said, we are very well positioned in both China Telecom and China Netcom by offering a Softswitch base PAS and that's going to put us in a unique position to deploy our 3G services. So we have targeted in those two customers at around 20% of market in equipment.

Great, thank you very much.

Sure.

Your next question is from Sam May of Piper Jaffrey.

Good afternoon, and Jerry, welcome to the call. I have questions on guidance because you were talking about 25 to 27% top-bottom line. If you take the low end of '03 at $1.61, that implies 201 to 205 but your guidance is $1.92 to $1.95. Can you tell me what you're thinking there in terms of -- there is clearly a discrepancy there.

Thank you for asking for the clarification because this is an important thing I want everyone to realize. Top line income is growing 20 to 25% but we did the convertible bond so we're doing an if-converted methodology which kicked in at the end of '02, which kicked in an additional 16.9 million shares. For the entire year 2004 we're going to have to include the entire share count where we only have that as a partial year in the current year. Earnings will grow around 20, 22%, even though net income is growing 20 to 25%.

Second question, your forecast for GAAP EPS for Q1 is 35 to 36 cents. That implies a fairly significant ramp throughout the quarters -- ramp throughout the quarters, something over 60 cents to get to the $1.92, the low end of the range. Are you anticipating a gross margin below 30% for Q1?

No, we don't anticipate the gross margin in any quarter going below 30%. We do see it fluctuating throughout the year between 30 and 32%. Probably Q1, given that it's the normal dip in overall revenues, heavily concentrated with handsets in India is probably at the lower end of the range. I would tell you later in the year we would move towards the higher end of the range. That would be the way I'd kind of play that out.

Okay. And Reliance, you're going to recognize revenue, if you haven't already in the quarter from Reliance, and that's going to weigh on margins. Is that -- Jerry, what's the outlook for margins on the Reliance product back half or during '04?

Sam, I'll take that because it's a margin question. We're looking at Reliance margins coming in comparable to the overall corporate averages. Now, initially -- and then we want to ramp it up overtime. Whereas hitting corporate averages is below what we'd normally run for infrastructure initially.

Okay. And final question, yahoo Japan services. You touched on it a little bit, but are we going to see a converged product traveling over your equipment? What's that look like, Hong?

Oh, yeah, we have already been using some of the traffic through our equipment as we speak, and we are talking more of future delivery when they have more than 50 Meg DSLAM solutions, then triple play application will also be using our equipment as well.

What's your best guess on the timing of those rollouts?

We start seeing some of those beginning of next year. Maybe that would be more of a trial basis and towards full deployment in the latter part of next year.

All right. Thanks. I'll let someone else go on.

Your next question is from Tim Long, Banc of America Securities.

A few questions, if I could. Mike, could you give us a sense, either on the consigned inventory or the backlog or I'm sure they're fairly similar, just a complexion of the product mix there, maybe what percent of that is handsets, and then also, Mike, if you could just touch on the differences between handsets shipped and recognized as revenues, whether you could talk about that in the quarter or so far year-to-date, and then I have a follow-up for Hong.

Let me kind of work at it this way. If we take a look at handsets as a percentage of the total inventory that's been deployed at customer locations, it's about 10% of that inventory. If you take a look at handsets in our total backlog, it's slightly under 20%. So I think we've addressed it that way.

What everybody is probably aware of but let me clarify, the way we recognize revenue on handsets, if we're shipping handsets into a network where we have not yet achieved final acceptance, we defer revenue on those until the final infrastructure gets the final acceptance and it recognition both revenues. If handsets are being shipped into a customer where they've already given us the final acceptance on the infrastructure, we will recognize handset revenues upon shipment. So there typically is an element of book-and-ship business in assets on the quarter. Does that answer your question, Tim?

Yeah, that does. And then just for Hong on the 3G front, to touch on two things there. It looks like the tone has changed a little bit. Could you just talk about maybe why you feel less optimistic about the timing? Is this coming from government or from the operators? And why are you feeling a little bit more optimistic about UTStarcom being one of the largest suppliers? Is that coming again from trials or conversations with operators? If you could clarify that, that would be helpful.

Sure. Well, we've always been very optimistic that our product can be used through China Telecom and China Netcom, but as far as your first question in 2004, given the license, that was always what we have said since the beginning of this year, that we do not expect any license to be awarded until the middle of next year. Now we see that is slightly behind maybe to the third quarter or so, and so we see that has been delayed a little bit. And that is probably -- one of the major reasons is that there's really no successful deployment of 3G, and the Chinese government is really not pushing that into -- awarded to any operators.

As I said, we are on Softswitch basis and UTStarcom is the only Company using IP-based Softswitch in mobility environment on a massive scale, we're talking about tens of millions of subscribers. We're the only company that has it. And on that basis, we have already demonstrated we are able to join both current IP and 3G in the same platform. Therefore, it is very economical to our operators to deploy our PAS -- current PAS system with the future 3G; therefore, that's why we are very optimistic about customers will be using our systems.

Okay, thanks. A quick one for Mike. Will you be chairing book-to-bill this quarter?

We actually do not want to report book-to-bill every quarter. We did that, I know, as an exception in Q1 and Q2 of this year, but we were trying to put the context of the inventory build in relation to what's going on with the customers. The backlog was up sequentially in the quarter. We wanted to just go back to our normalized reporting metrics and we will be reporting our backlog here at year end and giving you quite a bit of detail around that.

Thank you.

Your next question is from Hasan Imam, Thomas Weisel Partners.

Hey guys, it's actually Mike DeMichelle for Hasan. Question on India, previously you had talked about India being your second largest market next year, and I think with some of the numbers you gave, Mike, it's kind of tied with a couple of other places like, you know, the rest of world, North America, and Japan, you know, all around the 100 million at the low end. Has anything changed there? Are the deployments slower than you previously thought or are the other areas bigger than you thought previously?

I think there's both. Other market has really been growing positively, particularly the South American market we have seen coming up significantly, as well as North America and Europe, we also get some traction. So that is what we have been seeing more than we have anticipated.

On the other hand, we have -- by offering our services, we realize that the current deployment speed has been slower than we have originally anticipated, but it's still going to be able to achieve a hundred million or so of what we have anticipated. It is still going to be very, very significant. So to answer your question, we have been seeing some little lower than we had anticipated in India and other markets that we know are picking up at the same time.

Okay. Great. Just real quick on the CommWorks portion. I'm assuming the CommWorks is kind of the North America and Europe, you know, round 100 to 150 million. So is the expectations for the CommWorks business basically, you know, flattish to up 50%, because I think you were at a 25 million run rate a quarter last quarter?

As Hong had mentioned the integration has gone extremely well and we continue to be very excited and believe that worked out very well for the Company. You're right, we're looking at growth that is a combination of as well as in 2004 is the time frame we start to realize some of the cross-selling benefits where they can through their channels sell some of the our existing products.

Okay. So the high-end up, it would be up as much as 50%?

Yeah, I think the current equipment, we do see a significant upside, particularly with PDSN, CDMA, their success and 2.0 success. Also, we have seen tremendous cross-sales opportunity that, because of their current sales team, enable us to bring in a lot more opportunity and open up more doors in those operators that we wouldn't have a chance to sell before. That's why we're extremely pleased with the CommWorks acquisition.

Great. Thanks a lot, guys.

Your next question is from Joe Noel, Pacific Growth Equities.

A couple of questions here. One is on the land line equipment versus other, we had 20% in Q2 and we're at 10% and I think you said 12% for Q4. But we have India producing some good revenues in Q4, which is land line. Does that not imply that the Chinese portion of land line would be significantly down? That's the first question.

Well, we continue to ship both of Q3 and Q4, we have been shipping continuously on land line, including our ADSL and such, and we are expecting to ship a similar amount of volume in Q4 in China as well. But if you remember that our overall dollar amount of -- overall revenue has actually grown, and in the meantime, our percentage has also grown. So we haven't seen any slowdown in our shipment in volume. In fact it will be increased from a percentage point of view as well as dollar amount.

I think also, you know, a lot of the wire line shipments have been going into Japan for the Yahoo! BB and there was a bit of a roll-off in shipments there in Q3. We are seeing an uptick as we come into Q4, but as Hong said, the overall business is growing at a high level. Year over year we project our wire line business growing and we're anticipating a ^ growth in 2004.

Joe, I want to go back to an earlier question on book-to-bill. I don't want to come across as trying to avoid that question. We do want to stay consistent with reporting metrics, and I want to be clear, our a backlog was higher at the end of Q3 than Q2, which implies a book-to-bill of one or greater. We don't want to get locked into reporting that number every quarter.

Second question-Can you give us color on how fast the inventory levels are going to come down over the next couple of quarters?

I wouldn't look for a huge decrease in inventories. The guidance I am trying to give is at these levels or slight declines. Then with the ramping revenues, the inventory turns will move towards two at the end of Q4. As we go into next year, you know, we'll monitor the inventory with the growth in the business and we want to hit three by the end of the year in terms of inventory turnover.

Great, I understand. Thank you.

Your next question is from William Bao Bean, Deutsche Bank Securities - HK.

Going back to handsets. I'm curious as to whether you see the opportunity or the risk of handset inventory buildup in Q4. I guess you recognize I had a little troubling modeling this in the past. You recognize on a sell-in basis -- can you give a rough breakdown as to at this point you know what percentage of your PAS contracts are being recognized, final acceptance, or have already seen final acceptance versus what doesn't have final acceptance at this point? Just walk me through how I should be tracking your handset recognition here.

Well, the handset revenue recognition, if I understand your question, is a combination of handsets that are booked and shipped directly to a customer within the quarter and then there's a portion that's linked to achieving final acceptance on infrastructure. And it's hard to give you an exact number because that's going to vary from city to city, whether the customer's brand new infrastructure deployment or whether it's an existing deployment and just driving additional sub growth. So, yeah, other than just saying 50-50, I wouldn't know how to give you a more precise number because it is going to vary from quarter to quarter.

The handsets, though, when you look at the channel and if you're asking that question as well, you talked about inventory buildup, we're very careful with the handsets. We look at our customers on a city-by-city basis, we know exactly how many subscribers they're getting, we monitor how many handsets we're ship to the customers, and the customers are China Telecom and China Netcom, the carriers themselves. We try to not allow a buildup. We try to keep the inventory to no more than two weeks is a ballpark number we would allow a customer to have at any one point in time.

Can you give us an update on the breakdown between handsets that are sold direct through your partners, China telecom and China Netcom and outside that channel.

Roughly about 80% is direct and 20% to distributors.

How does that differ from, say, six months ago?

It probably didn't change much.

Okay. And just finally, could you give us a rundown on the competition that you're seeing within China on the Pas infrastructure and handsets? The numbers that I've gotten in terms of market cap share vary widely, if you could give us an update there?

Hong Lu; I'm sorry?

Getting inputs on market share from a variety of sources is moving around a bit so he wants to know our market share and how the competitive landscape plays out.

We are very pleased with our current market position at the moment. The good news is a lot more companies are coming out as far as selling more handsets, that really has the Pas systems throughout, that means a lot more people are happy to come in and a lot more users are receptive to the services which will be giving a much bigger market potential for us and at the same time we still maintain our very strong position and we have always said we have over 70% of market share in handsets and that has not been changed from Q1 to Q3, and we still see our strong position continuing through this quarter as well.

Okay, great. Just the last one, you spoke about handsets shipped in Q1 and Q2. Can you give us a sense of where you'll be in Q4?

I'm sorry, could you repeat the question, please?

Can you give us a sense of how many handsets you think you will ship in Q4?

Yeah, we -- let me give you a little history on the handsets also for everybody so very a data point and we'll be happy to talk about Q4 Q4 projections. In Q1 we shipped about 3 million handsets. Second quarter, significant ramp to about 4.5. Q3 as we know was about 5 million handset shipments and we're looking at about 5.5 million of handsets in the fourth quarter. For the year we're looking at about 18 million of handsets.

When you compare that with last year, calendar year '02, we shipped about 6.5 million. You're seeing almost a tripling in handsets year over year and that's a reflection of adoption of PAS country-wide in China and the growth in subscribers and it's worked out tremendously and it's very popular.

Thanks a lot, guys.

Your next question is from Reginal King, WR Hambrecht & Co.

Great, thank you. Hong, I was hoping that you might help me understand the ADSL product a little better. I know that you said on the call that you think had deployed in Japan. Are there any other regions you're targeting in the near term, and you are in trials with any customers outside Japan?

Oh, sure. We are also very successful in China. As we said, we have more than 800,000 ports being shipped the first three quarters. As we speak, we are shipping our product to Taiwan, Thailand, India, South America, and we have very actively pursued in some parts of Europe, so we are expecting it will become alive next year throughout other parts of the world.

Great. And then on the products that you're with a combined company here targeting in North America and Europe, can you help me understand -- I would imagine it's the DLCs and soft switching products but please correct me if I'm wrong and help me understand that. Secondly, can you give me a little guidance on what your strongest customer relationships are (inaudible) integration in North America and Europe.

We have actually continued to sell our CommWorks equipment, which is PDSN, and as everybody knows, SDMA's success on their faster data throughout the entire region in North America with a push to talk as well as video phones and the camera phones and so forth has been really increased use of the data, and because of that, our business has really jumped up and we're expecting a very, very robust business getting into 2004. As well as we have a lot of continuation of our services in the our last part of the business we have inherited. That is also going forward and unified messages as well. Those are the units that we have been getting from but as I said earlier the cross-selling opportunities, such as the opportunity to sell our DSLAM as well as our -- the optical equipment and many other products that we are building in China, including soft switches and trunking gateways and such has been getting a lot of attention into our current -- the customer bases that CommWorks is enjoying right now.

And, Hong, would you say that the strongest customer relationships there are the ones that you mention --

Well, more in Europe than actually North America. I mean, North America, as we have pointed out, we are in Verizon, Sprint, AT&T, and Bell South, Old Tel, and all are very active customers of ours now.

Great. Thank you.

Your next question is from Stephen Koffler, Wachovia Securities.

Sorry I had to get on kind of late but I don't think you've covered this specifically related to the handsets, so I gather you're guiding at 2004 revenues will be about 50% handsets; correct?

Yes.

Okay. So just sort of playing around with the numbers, based on what you've told us on Q4 '03, you know, let's see the handset dollar shipments is about 1.2 billion, give or take. That would be about roughly 20% growth, maybe a little more in revenues.

The subscriber growth next year, at least from this point through the end of 04 date, should be a lot more than that ('04), so I'm wondering, what are your assumptions relative to market share and pricing that impact the growth rate?

Are you assuming that these new entrants will have some success and are you assuming that you'll see SPs come down substantially and how would you reflect that into the growth rate you're implying?

Let me take part of that question and I'll let Hong take more business trend aspect of it. You know, we certainly are looking for nice growth in subscribers next year in China, just recapping, going from 30 million to something north of 50 million. Handset revenue guidance we're looking for roughly a 30% growth in handset revenues year over year, so I think we're showing a very nice increase in handset revenues as well as overall company growth, given our size.

Part of what we're doing also when we give our guidance is we look at our backlog, we're looking at our pipeline and all the trends out there and we do try to be conservative in the financial guidance. We try to provide factoring into the overall numbers. That's in there as well when you take a look at how we build up our guidance.

Steve, also, you said that subscribers are going to grow significantly. Well, we anticipate from north of 30 million current subscribers at the end of the year to north of 350 million, so it is -- north of 50 million, so it is -- we are pretty much -- the increase percentage is the revenue growth as well. I think there's not much of a change from that perspective.

Okay, thanks.

Thanks, Steve.

Your next question is from Tim Luke of Lehman Brothers.

Thank you. Thank you, Mike, for the detail on the revenue mix for the fourth quarter. I was wondering whether we should expect the mix to be fairly similar in the first quarter which you provided some top-line numbers and bottom-line numbers for or whether there will be some adjustments to the mix in the first quarter?

We haven't provided exact breakdown in Q1 by itself. I tried to give some indications for total 2004. I think obviously we'd like to complete the quarter, look at the backlog, and fine-tune the guidance as we go into Q1. But I think, you know, sitting here today, taking a look at where we're finishing Q4 as well as what we're projecting for the end of the year, it's not going to be hugely different.

In guiding for a lower Q1 sequentially, would it be fair, though, to suggest that, because you have the New Year that the handset revenue would likely be flat to up in the March quarter while the systems might be lower? Is there any reason why the wire line business would be lower sequentially in the first quarter?

Well, I think, you know, based on trends we've seen historically, is that there's a lot of buying that takes place on handsets in the December quarter. I think this year -- the Chinese New Year I believe is in January, so a lot of the handsets will be sold in December that would be projected to be sold during the Chinese New Year in January. So I think Q4 will be a strong quarter. So a good percentage of the handsets are tied to infrastructure final acceptances. I don't know if I would project a huge change in mix in Q1 versus Q4 on handsets.

One of the things for Hong with respect to the guidance, I think you said you felt that the wireless system piece would be about 30% of the mix with PAS infrastructure up 20% year over year. Would you expect the China-based PAS infrastructure would be flat as part of that? Is that the way the numbers work?

Well, let me try to take on that, Tim. You know, if you can imagine the infrastructure built always from a wave, from what we built, gradually to expand. In other words, when you do the expansion in the city, they will have two types of expansion. One is the overall capacity expansion and the geological expansions. Now, what we have been seeing right now is we have been using up a lot of the capacity, so therefore, we do expect that there will be more capacity orders coming in Q4. Now, as a whole, we are projecting both from handsets and our infrastructure are growing. So what I wanted to say, that is, from a PAS growth of business, we are still seeing growth.

Mike, conventionally for the inventory dollars for the fourth quarter, you're suggesting that's going to be lower again?

Exactly, flat to slightly down.

Good. Okay. Thank you very much.

Operator, we've got a little over an hour, so maybe we could take one more question.

Yes, Sir. Your next question is from Eric Aisler .

Yes, hi, good afternoon. Just a quick question, your shareholders equity was at 793 at the end of the quarter and at the end of the year it was 766 and I wonder how you reconcile that with net income was up 136 million over the same period.

Are you looking at total stockholders' equity?

Yeah. 793 at the end of the quarter versus 766 at the end of the year. Only went up about 27 million.

Okay. We also did a stock buyback where we brought back 8 million shares during the year, so that's certainly impacting the shareholders equity account.

Okay, great. The other question I'm wondering can you provide any details on what the operators are seeing on their PAS networks as far as, you know, average revenue per customer, total minutes of use, churn, and, you know, cap ex per subscriber?

The current ARPU from our customers that we have been seeing, it's anywhere on average between $6 and $8 average U.S. per month and that seems to be pretty much we see universally throughout the region. So it's really in the range of about $6 to $8.

Any idea what the churn is like on that?

Churn, we see for -- well, I think an entire year, we are seeing the churn is less than 5%.

Okay. 5% per month?

No, no, no. A year.

Normally the mobile operators do report churn on a monthly basis, but our churn is so low, as Hong points out, that 5% on an annual basis, not a monthly basis.

Okay. Great. Thanks a lot.

Operator I think we've got one last question to come in.

Yes, sir. Your last question is from Ilia Grobosky of Fulcrum.

Hi guys. Thanks for letting me sneak in under the bell. I have actually two quick questions. One is If I look at the midpoint of your sequential 6 to 8% guidance, I actually go above the high end of your 2.4 to 2.5 billion for the year. I wanted to understand how you reconciled that, and the other question was about the inventory customer premise, but let's do that one first.

Again, I think we provided a range of 6 to 8% sequential growth and we provided a range as a starting point in Q1. Midpoint doesn't necessarily work out. I think we tried to be very precise on Q1 as a starting point with a tight range on revenue and earnings. We provided the ending point as well for the year for revenues and earnings. My guidance is to play within the parameters and I think the numbers will work out.

Which perameters should we focus more on, the sequential numbers or the yearly numbers?

I would definitely use the ending number for the year, and then you just have to play with the 6 to 8% each quarter, you know, again, I think we're trying to be as insightful as we can, sitting here at the end of September projecting for '04, but again we have good visibility. We should end the year with six months of backlog, we have good numbers on sub growth and other trends. We have most visibility that most people would have but we can't be exactly precise either.

Okay the other question is, when I look at your inventory at customer locations, that has now -- that's trended down this quarter about 11% sequentially. And I understand that overall inventories in the December quarter will be flat to down slightly. How do you see the number at the customer premise going in December? And should we read into that at all?

Well, let me comment. If you look at the inventory at customer locations at the end of Q3 versus the end of Q2, you're going to see an actual decrease in absolute dollars. 99% of that decrease was driven by handsets, so the infrastructure balance at customer locations is almost identical at the end of Q3 as compared to the end of Q2. Backlog was up sequentially, if you look at the deferred revenue, which is cash we're receiving from customers, is also very solid as well. Certainly our visibility has increased, it's not decreased in any way. At this point I'm reluctant to give an exact guidance on inventory customer locations at the end of Q4 because it's only going to be driven by how we receive the final acceptances, how much comes at the end of Q4 and how much we deploy, but I'm comfortable saying overall inventory would be flat to slightly down and percent at customer locations will stay pretty high.

Thanks a lot, guys.

Okay, operator, thank you very much.

Sir, do you have any closing remarks? You can go ahead.

I would like to thank everyone for joining our conference call. If you have any other questions, please let us know. And thank you very much.

Thank you.

Thank you for participating in today's teleconference. You may now all disconnect.