UTStarcom Holdings Corp (UTSI) 2003 Q4 法說會逐字稿

Good afternoon. My name is Derrick and I will be your conference facilitator. At this time I would like to welcome everyone to the UTStarcom Fourth Quarter and Full Year 2003 Earnings Conference Call. 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 keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. Thank you. Ms. Kimincky, you may begin your conference.

Thank you. Good afternoon and welcome to UTStarcom Fourth Quarter and full year 2003 earnings conference call. I’m pleased to introduce our CEO, Hong Lu and our CFO, Mike Sophie who will host today’s call. Hong will begin the call this afternoon by discussing UTStarcom’s strategic vision and long term outlook, then he’ll turn the call over to Mike who will discuss fourth quarter highlights and provide a detailed financial review of Q4 2003 and update guidance for 2004. Afterwards, we’ll open the call up for Q&A.

Before we begin the call, I’d like to remind everyone that some of the information we’ll discuss today constitutes forward-looking statements. Actual results could differ materially from our current expectations. To understand the risks that could cause results to differ, please refer to the risk factors identified in our latest annual report on Form 10-K, quarterly report on Form 10-Q, current reports on From 8-k which are filed with the Securities and Exchange Commission.

With that I’ll turn the call over to Hong. Hong?

Thank you Trisha. Good afternoon and thanks for joining us today. I’m happy to announce that this quarter marks the sixteenth quarter of record revenue and profitability for UTStarcom. As Trisha mentioned, Mike will review the Q4 and full year results in detail in few moments. Today, I would like to talk with you about UTStarcom’s long-term strategy for success. I would like to begin with a customer case-study in Honduras and describe how UTStarcom is parterning with them to expand their telecommunication network.

Last month, I met with Ricardo Maduro, the President of Honduras. I was there to offer the UTStarcom support for President’s telephony for all initiatives. The goal for the telephony for our program is to provide basis telephone services to all of the people of Honduras. Honduras is one of the least developed communication markets in Latin America but President Maduro believes this program serves a large purpose. He believes that basic telephone connectivity is the first step towards the economic and social reform. By improving the communication infrastructure and encouraging competition, President Maduro hopes to create new jobs and a new opportunity for his people.

Currently, in Honduras there are only a total of three hundred thousand six ninety-four for the population of nearly seven million. There is a long waiting list to get telephone services and people can wait for several years to get a new phone line. We are in the process of building an initial Pass network of a hundred and fifty thousand lines and expect it to reach capacity in one year. To me, the similarity between the communication market in Honduras today and the China market of five years ago are stricking.

When we introduce our PAS technology in China in 1998, we enabled the new class of users of a communication services. During the last five years the demand for the PAS services have been overwhelming. In 2003 alone, 23 million people signing up for the PAS services in China. The total number of PAS subscribers in China is now 35 million, 60% of whom are served by network powered by UTStarcom. PAS accounted for approximately 50% of all fixed line addition in 2003. This year, PAS is expected to be about 60% of 40-50 million fixed line subscribers addition plan.

But as the PAS expand to more users and provinces, there’s also a growing middle-class of consumers who want higher value services. In respond, we deployed our PAS value added services platform which delivers data, short messaging and multi-media messaging functionality. The total number of SMS users on UTStarcom PAS network had exceeded 8 million and these users send an average of 60 million short messages per month.

As of September 2003, China’s Ministry of Information Industry Mandate that all handsets sold in China must have SMS capabilities. In addition, we’re now deploying our platform and products to enable next wave of services in China video stream. Broadband internet access and voice over IP and we’re also preparing yet another way of new platforms that products we’re beginning our 3G trial in Beijing in the coming months.

Developing markets like in Honduras, our ideal target for UTStarcom IP-bases PAS technology. PASes are simpler and more cost effective to install than alternative wire line technologies. It delivers the services that consumer’s desire at a price that they can afford. It allows the telecom providers to make a profit even at our low rate of $5-$7 a month. Equally important once telecom providers have built an IP network for PAS they have made a foundation for the wide range of additional wire line and wireless services, including voice-over IP, Broadband, TV/IP and 3G. And while telecom industry has stagnated in United States over the last few years, the rest of the world is still in the early stage of telecom deployment.

Four billion of people or two thirds of the world population do not have access to basic telecommunication services. 50% of the Asian Pacific telecom infrastructure is currently under-developed. 25% of the Europe is still developing its communication infrastructures especially in Central European regions. And virually 100% of countries in Central and Latin Americas are developing markets according to an October 2003 reports by the industry research firm RHK. This situation represents a tremendous opportunity for UTStarcom.

While IP network technology is natural for developing markets, well established telecom markets are now being forced by economics to migrate to IP. We believe that telecom providers simply cannot be profitable in the low run by selling value at the services using ATM-based infrastructure established carrier has adopt chapping gross strategy of building out IP network for new users and new services.

Carriers were continued to maintained there existing ATM base network for the current Broadband subscribers, but as they extended their network to capture new subscribers and as they added new services to make a triple play which offers Broadband data, voice, and video-over IP established carrier are rapidly moving to a deploy more efficient IP technology.

UTStarcom is well positioned to capitalize on those trends in 2004 and beyond. Our strategy is straight-forward. First we will continue to extend our innovation in IP. We rank among the global leaders in IPD slam, media gateway and Softswitch products based on the strength of our technology and abduction by leading customers. Moreover, we have extended IP-based innovations to such technology as 3G and TV/IP. Our integrated IP technologies are designed to work together providing our customers with a natural growth past to the broader range of access-option and broader portfolio services. We can add new IP services incrementally to any of our platforms. That means we can continue to offer our customers higher value with a minimal incremental CapEx investment. We have proven that our platforms care to support entry level use of population to millions of the users cost effectively and are ready to deliver more advanced features when our customers are ready. By standardizing on IP we can advertise our development after across the range of a UTStarcom product. We also can take advantage of advancement in IP from our peers in telecom industry.

We look at our old customers’ relationship as a long-term partnership, and we make a long-term commitment to local marketing. We work with our customers to tailor products to meet the specific market need, so that they can be assured of the offering services that the customer wants.

The strength and the longevities of our key customers relationship translating to repeat orders for UTStarcom. We have also made a commitment to invest in local R&D in large market. We currently have R&D centers in China, India and North America. Our international professional services group provides support and training for customers around the world. We have regional service support centers in China, India, North America, Mexico and Europe. We can leverage our success in China to capitalize on our high growth market.

At 85% of our 2003 base China provides a tremendous foundation for global expansion. Equally important China provides us with the potential business model that has been tested on the large scale and can easily duplicate in other regions.

Finally, we can build a strong financial foundation for the growth by taking a very conservative approach to fiscal management. While many tech…high-tech companies still follow the less stringent practice of pro-forma reporting UTStarcom just completed the first year of the GAAP-only reporting. We maintained a conservative revenue recognition policy. We have a backlog of more than $1b giving us a very good visibility into our anticipated revenue and earnings for 2004.

In addition, we’ve recently raised $475m in cash through the sales of the stock to Bank of America Securities. This amount adds to our year-end cash position and greatly strengthens our balance sheet. We now have an ample cash on hand to make the vents and the strategic opportunities that might come our way.

In closing, as I discussed last quarter, our five years target is to grow UT Starcom into a $10b company. We believe we have the right people, right products and the right strategy to reach the goal. We’ve established at UTStarcom as major multi-billion dollar global telecommunication company with the latest technology and the products that can be sold to any carriers in the world.

Now I will turn to the call over to Mike.

Thank you Hong. Let me begin by giving some highlights for Q4 and full year 2003. UTStarcom shipped 16.5m handsets in 2003, establishing us as the largest handset supplier in China. We believe that no other company shipped more handsets into the market in China in 2003 than UTStarcom, including Nokia and Motorola. This establishes UTStarcom as the major supplier on a global basis, with tremendous buying power.

In China the number of subscribers on UTStarcom task networks reached 21 million at the end of Q4, approximately 60% of the total 35 million task subscribers in China. YahooBB in Japan ended the year with more than 3.8 million subscribers, with their broadband service and approximately 3.3 million to their BB phone service.

In addition, we signed a $40m expansion contract with YahooBB in the quarter in preparation for their 46 meg service roll-out. Also during the quarter UTStarcom was selected by the MAI in China for a 3G WC&A field trials in Beijing with China Netcom. We also signed an expansion contract with Vitel to offer task services in southern Taiwan and a contract with Multifund to offer task services in Honduras. We also announced plans for strategic developments in North and South America and finally we once again have reported record financial results.

Now I’d like to make some specific comments on our fourth quarter and full year financial results. Sales for the fourth quarter were $643.6m as compared to $301.1m in the fourth quarter 2002, an increase of 114% year over year. Full year 2003 sales were $1.96b as compared to $981.8m at the end of 2002, an increase of 100% year over year. This tremendous growth was driven by strong demand across all product lines.

In Q4 wireless infrastructure accounted for approximately 41% of sales. Handsets accounted for 48% of sales while 11% of sales came from our wire line products. Revenue from mainland China represented approximately 87% of total revenue for the fourth quarter and 85% for the year. Gross margin dollars for the fourth quarter increased to $199.9m coming in as the targeted, at 31% of sales.

SGA expenses for the fourth quarter were $57.2m or 9% of sales. This compares to $28.5m or 10% of sales from last year’s fourth quarter. The increase in absolute dollars could be attributed to an increase in overall business levels.

Research and Development spending for the fourth quarter was $47.6m or 7% of sales, compared to spending of $22.7m or 8% of sales in the fourth quarter of 2002. In 2003 we almost doubled our R&D spending and added approximately 900 R&D engineers, primarily in China, which allowed us to maintain R&D as a percentage of sales at 8%. The focus of our R&D effort is on developing next generation products based on our IP Softswitch platform, 3G and broadband media gateways. In addition we continue to develop and upgrade our task systems and handsets and other wire line and wireless access products.

Operating income was $92m or 14% of sales for the fourth quarter. Net interest and other income and expense for the fourth quarter 2003 was expense of $2.5m compared to expense of $3.9m in the fourth quarter of 2002. During the quarter we incurred a foreign exchange charge of approximately $5.8m, it resulted the stronger Yen to Dollar ratio. However, this was partially offset by a Japanese consumption tax refund of approximately $3m.

Net interest income and expense for the quarter was income of $1.1m. Income tax expense for this fourth quarter totaled $22.1m. Full year 2003 income tax expense totaled $67.4m and our expected income tax rate was approximately 25%. Net income for the fourth quarter was $66.4m or 52 cents per share versus our guidance of 50 cents. This compares with net income of $33.9m or 30 cents per share in Q4 2002. For the full year net income was $202.3m or $1.64 per share, this compares to $107.9m or 94 cents per share in 2002.

With a transition from the income statement I want to highlight the strength of our balance sheet and positive cash flows from operations which compliments our strong P&L performance.

Our cash and short term investment balance at the end of 2003 was $422.6m. During the quarter we paid off approximately $23m in short-term debt associated with our lines of credit in China. We closed the quarter and year cash flow positive from operations. This is quite an accomplishment given our high level of revenue growth. Positive operating cash flow was $47.9m for the fourth quarter and $50.6m for the full year 2003. For the year we collected approximately $2.5b in cash from customers, which is half a billion greater than our 2003 revenues.

Accounts receivable day sales outstanding improved year over year and were 52 days for the fourth quarter as compared to 66 days for the fourth quarter in 2002. As targeted our inventory decreased in the fourth quarter to $816m. This decrease is a result of customer demand for our product and continued focus on inventory efficiency. Historically, our inventory has included inventoried factories, inventoried customer sites and inventoried customer sites under contracts. Effective December 31st, 2003 we’ll present inventory at customers’ sites under contracts as a separate line item called deffered costs/ inventories, to provide more visibility and clarification to our business. We are separating this equipment from inventory because we do not hold title or risk of loss, as these are transferred to the customer upon delivery of equipment. We will continue to recognize revenue and record cost of sales when final acceptance is received from the customer, and there is no impact to revenue or to the income statement. We will continue to calculate our inventory terms using our total inventory. Inventory turns improved significantly, number 2.0 for the quarter.

At year end 2003, deferred revenue was $503.6m as compared to $164.2m at the end of 2002. These balances primarily represent cash we have collected from our customers, which we have not yet recognized revenue. When we entered 2003 our record year end backlog of $1.06b. This backlog is an increase of 75% over backlog of $605.4m at the end of 2002 and gives us tremendous visibility for 2004. In addition handsets only represent approximately 11% of backlog but are typically between 40 – 50% of revenue due to the book and ship nature of handset sales. Therefore we expect significant additional handset bookings and revenues throughout 2004 which increases our confidence and our guidance.

We are conservative when reporting backlogs as we are with the rest of our numbers. We have factored down the backlog to remove any contracts for which we believe revenue may not be realized within a 12 month window. Our year-end backlog breaks down by product to 9% wire line infrastructure, 80% wireless infrastructure, and 11 % handset.

We continue to see strength and growing demand across all product lines both inside and outside of Mainland China. For the first quarter of 2004 we estimate revenues will be approximately $570m-$580m. This is consistent with the guidance we gave on the third quarter conference call in October and an increase of approximately 90% over the revenue for the first quarter of 2003. Sequential revenue growth for Q2 through Q4 should be approximately 7% each quarter and revenue guidance for full year 2004 should range from $2.5b – $2.55b, an increase of 27 – 30% over 2003.

We also anticipate that we will see a higher percentage of revenues from sales outside of Mainland China. In 2004 we expect approximately $2b of revenues will come from mainland China and the other $500m –$600m will come from our global markets. Major markets outside of Mainland China include Japan, Latin America, United States, Europe, India and South-East Asia.

We have broken anticipated 2004 revenues by product type. Wire line systems should represent approximately 15% of sales. This reflects strong growth in broad band ADSL, next generation digital carriers, metro applications, voice-over IP gateways, fast 4 -5 Softswitches and video streaming. Handsets will account for approximately 40% - 50% of revenues reflecting continued strong subscriber demand throughout China, growth and PAS outside of China and increased competition in the handset market. Due to continued expansion and deployment of PAS networks in China and global markets total revenues will be approximately 40%.

Our target for gross margins as a percentage of revenue in 2004 is approximately 30% - 32%. We expect margins will begin the year at the low end of the range and improve slightly each quarter throughout 2004. I would like to point out that many of our component purchases come from Japan and is denominated in Yen. The Yen has moved from approximately 120 to 1 in the first half of 2003 to below 110 to 1 at year end. This reduced gross margins approximately 1 percentage point in Q4 and is built into our guidance going forward.

SG&A in Q1 should be approximately 10% of sales. From Q2 through Q4 we expect SG&A to increase in dollars but remain relatively flat as a percentage of sales. Our target model is to run SG&A at 10% - 11% in 2004. R&D in Q1 should be approximately 8% of sales. From Q2 through Q4 we expect R&D to increase in absolute dollars but decrease slightly as a percentage of sales. We expect R&D to run at 7% - 8% of sales for 2003.

Other income expense in equity income and loss should typically be income of approximately $1m - $2m per quarter, reflecting interest income and expense, tax refunds and potential foreign exchange and impairment charges. In Q1 however, we are anticipating a higher than normal tax refund that should add approximately $7m in income. Our effective tax rate for 2004 should be approximately 20% - 25%. We anticipate an improvement in the tax rate compared to 2003.

GAAP, EPS guidance for Q1 is approximately 38 cents up from our previous guidance of 35 – 36 cents and inclusive of the dilution associated with the equity offering. Q2 GAAP EPS should be approximately 40 cents and full year 2004 earnings should range between $1.90 and $1.94 an increase from the guidance of $1.87 to $1.92 given in our press release on January 9th and inclusive of the dilution associated with the equity offering.

I’d like to close this discussion by once again saying how pleased we are with our financial performance. We had another outstanding quarter and year with record revenue, profits and backlog. We’ve continued to add new customers, deploy new products world wide, our balance sheet remain solid and reflects our ability to generate positive operating cash flow as we grow our company. Going forward we anticipate continued top line growth and profitability with positive indicators in our markets.

Now before I turn the call over to questions, I’d like to take a moment to address some recent investor inquiries. Equity offering. At January 9th we raised $475m in cash due to a stock sale to BiaBase(ph) Securities. This has raised investor concern about our cash need. As you can see with our financial results, the company was cash-flow positive for the quarter in full year from operations. We did not need to raise money to fund operations. This cash positions the company very strongly amongst our peers when approaching customers. In addition it will give the company flexibility to pursue strategic opportunities that will create value for our shareholders over the long term.

During the second half of 2003 we saw a lot of handsets new competitors enter the market. There’s between 2 to 3 dozen new vendors that announced their entrance into the PAS handset market and while this means more competition we believe UTStarcom can sustain market share above 50% for the following reasons. Brand name leader – UTStarcom is well known as the originator of PAS systems and handsets. We have a well recognized brand name as well as a long standing incumbent relationship with the operators to whom handsets are sold directly.

Technology and standards leadership – While GSM handsets have ready to go chip sets and off the shelf components, PAS technology uses unique chipsets technology and components that only a few suppliers can provide. We have an extremely strong relationship with the suppliers and are continually evolving the technology and standards, making it difficult for new entrants to keep up.

Full product family – We offer a comprehensive suite of handsets from inexpensive voice-only models all the way to full -featured color handsets with integrated camera and data capabilities. We are planning to roll out over 20 new models in 2004.

Services – We have established over 20 all service centers throughout China. These centers provide post-sales retail and repair services and operate a 24 hour hotline for consumers. We are the only company in China that currently has that.

Economies of Scale – We are currently the largest producers of handsets in China, allowing us to take advantage of economies of scale to drive the cost out of our handsets and make us more flexible in pricing. In addition, our established relationship with the component suppliers gives us a distinct advantage in pricing.

Region Licensing – As we reported this quarter, the NTS field trials in which we are participating in Beijing with China Netcom are slated to begin in the coming month. The field trials are expected to last anywhere between nine months to a year. It is our understanding from the MAI that licensing will not be awarded until after the completion of those trials. Now we would like to answer your questions and we’ll ask the operator to open the call. Operator.

At this time I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We’ll pause for a moment to compile the Q & A roster. Your first question comes from Sam May with Piper Jaffary.

Hi good afternoon Hong and Mike. I have one question to start off with and that is you didn’t talk anything about business opportunities in ’04 in Mexico. Should we anticipate seeing some business and would it be PAS or would it be IPD Slam and to what extent would it be a converged offering and the timing. I would appreciate a comment on that please, thanks.

Sure. Sam, thank you for your question and regarding the Mexican market that we are very, very positive about the market and although we are not in any position to making any announcement yet, we are very much anticipating that we’ll be soon be opened up to us for wire line broadband services first and we are also discussing some of the wireless or PAS side of the business but typically the PAS is more sensitive in terms of the frequencies that requires a lot more stringent requirements so PAS would be a little more difficult than a broadband but nevertheless we are discussing those PAS ability in the possibility potential market in not only the Mexico but throughout the South American market.

Okay and my final question is for, Mike, looking at the guidance - - the ETS guidance, you’ve taken it up but the revenue and the gross margin and the OpEx guidance really doesn’t look any different than it was. Is it fair to say that the increase in guidance is coming mostly out of a decrease in the tax rate? - - and is that pretty much just front end loaded or are you anticipating some lowered tax rates later in the year? Thanks.

Yeah. Regarding the guidance, you know, we did revise our guides just you know, a little over a week ago at the time we did the equity offering. We took our operating guidance up at that point in time. We increased revenues, operating margins and operating profits and we were at that time - - when we updated the guidance we pointed out that there would be a 10 cents diluted effect for the offering. So, I think we’ve continued to fine tune the guidance and we do believe it can increase slightly as we’ve done in today’s call and then as we go out through 2004, we will realize additional you know, operating efficiencies as well as additional tax efficiencies. We hope to be able to bring our guidance up further.

Yeah, but is it - - what’s the tax rate for the March quarter? - - is it more like a 22% rather than the 25%?

I’d say right now we’re targeting maybe a couple percentage points below the 25%.

And then 25%, the subsequent three quarters?

- - at this point we would guide for the entire year to keep the flat rate in between the 20% and 25% rate.

Okay. Alright, thanks. I’m done.

Okay. Thank you to you.

Your next question comes from Dale Farrell with CIBC World Market.

Yes, congratulations guys on keeping up the trend. A couple of questions on a clarification. Mike you mentioned a $7m refund in Q1 that’s going to hit the other income line?

Correct. Typically we’ve been getting between $2m and $3m a quarter in refunds. We think there could be a refund a minimum of $7m in the first quarter so we’re trying to provide that insight in our guidance.

And so that‘s also included in your 38 cents earnings estimate, correct?

Correct.

And, could you tell me what share count you are using for Q1 and Q2?

Well, we finished the current year with about 130 and so we are assuming that the offering will add 12 million and then if there is - - you know, potentially another million or so of stock options, exercises etc. in the quarter. So we could be looking at something between 140 and 145 million for share count calculation in Q1.

And then in Q2 it’s about the same as in or normal exercise?

In Q2 - - yeah, Q2, Q3 – 4, I would look for normal type of creeping based on stock option exercises in the quarter and also just to kind of retract, is if you remember our guidance was nearer to 34, 35 cents for the quarter. I think it’s been pointed out in the press release with the offering that’s at a two and a half cents or round about a 3 cents dilution and then obviously we’ve increased operating results as well as the tax refund and that’s why we are up to 38.

Okay, and then as we look forward across the year with your guidance on the gross margins if we get a firther skew toward infrastructure, I assume that would help - - your gross margins Mike?

Yes. Very much so, what we are seeing actually right now is - - the business is very [Indiscernible] as we pointed out in prior calls and we’re actually seeing a very strong upswing in infrastructural orders right now and in fact, you know, we - - you know as Hong will probably tell you shortly is - - we’re pushing to get at base stations. We could get - - we need more base stations - - and then obviously if they roll out the infrastructure we could think the - - subscriber numbers will continue to accelerate as well.

Hong, do you want to add anything to this?

Yeah. Dale, the market is - - once we have deployed a significant number of base stations, early part of last year and for Q3 and Q4 base station has been slowing down but while we’re adding a number of new subscribers and gradually we have successfully expanded capacities and extended it - - reach a geographical territory.

Results are that, as we have always said, 90% of our customers after they are first installed will give us repeat orders and that has - - coming in very positively toward the end of the last year and the beginning of this year. So, we are in the situation that we’re in the shortage of base station again. And so that is what we have been experiencing for the last several years. It’s the same situation. It’s happening just as we speak now.

And one final question. How much do you have in revenues for 3G equipment in your forecast or if it’s not in your forecast, what is kind of potential revenues could we see this year? Thanks.

We are not expecting any 3G revenue this year. We are expecting a lot of trials this year - - and if it’s a successful trial, it would definitely lead into our future revenues., but none of - - official deployment will not start until, the earliest - - I would say early next year. So, we are not expecting anything.

In the meantime, this is going to be a very interesting trial in Beijing. What we are trying to do is to show the existing our IPAS platform to integrate it into our 3G products. So we have been continuously - - to say our IPAS users can migrate into a 3G platform - - is just about ready to demonstrate and once that has been successfully demonstrated, we will have a lot more customers wanting to follow.

Thank you.

Sure. Thanks Dale.

Your next question comes from Tim Long with Bank of America’s Securities.

Thank you a few quick ones for Mike and then one for Hong if I could. Mike first, is the $200m contracted? Could you just let us know if that was in the reported backlog number or not or any of that was? And then secondly, if you could just talk about the gross margin ticking down despite the shift towards lower percent of revenues and debt. So, maybe if you could talk about what caused sequential gross margin decline, if it was pricing pressure in one of those business or some unique event?

And then Hong, if you could just talk about India and update us on the outlook for both fixed line and the PAS and maybe touch on what the revenue contribution was from India in Q4 or in 2003. Thank you.

Okay. Thanks Tim. To the first question regarding the $200m signing that was announced a couple of weeks ago, that is in addition to the year-end backlog. So, that was not included in the year-end backlog, so it’s bookings that will show up in our Q1 numbers and then I think we also pointed out that we would be diluting that equipment relatively quickly.

So, - - and also is - - I made that comment earlier about bookings, you know and the percentages in our backlog of handsets, - - that $200m was for infrastructure, not handsets. So, there should be additional handset orders as well.

Gross margin percent coming down slightly - - there is really two contributors to that, one is the yen-to-dollar, as I pointed out. That cost us a little over a percentage point on gross margins. So, that’s certainly in the numbers that’s also affected our guidance. The second thing is even though handsets came down slightly as a percent in the quarter, the margins on the handsets have come down a few percentage points as well.

And as we’ve talked about, there is quite a bit more competition, we’re still able at this point to maintain our margins right around 25%. We are feeling that we’ll be able to maintain market share above 50% and in spite of the competition, we think we’ll keep the margins on the handsets above 20% as well. But there was a couple of percentage points lost on the handsets from a larger point of view.

And Tim, about India. We are very - - looking forward to have more products shipping to India in 2004 versus last year and predominantly were the India - - our next generation DLC and the broadband XDSL type of the products.

By saying that, we also see the opportunity in our PAS products. Currently, we are working with the Japanese government to work with the Indian government to - - penetrating into those areas that have very low service or the underserved areas and this is something we are very hopeful that - - both Japanese government and Indian government will be putting some programs together and we are driving that process while speak and - - well anyway - - So by saying that, India will not only have reliance as our key customers. We have Tata [ph] and Bahardy’s [ph] and BSNL, MTNL, all of them are now our customers.

So, we still have a very high hope in India. It’s taking a little longer than we have anticipated but this year we expect that in 2004 - - we are targeting for more than $50m at this moment.

Okay. Thank you.

Thanks Tim.

Your next question comes from Hasan Imam with Thomas Weisel Partners.

Yeah. Thank you. I have a couple of questions. First of all, Mike, why did gross margins fall 1% even though handsets increases a percent or decreased a percentage of sales?

Okay, again, - - a couple contributors to the gross margin dropping a percent. One is the yen-to-dollar, as I had pointed out. The yen was definitely weaker and we buy a lot of components and so that impacted our gross margins a little over 1 percentage point. The second thing is we lost several percentage points on the handset margins. Even though handsets as percent came of our total business came down slightly with the increased competition you know we do see price pressures. So the other margins dropped a couple percentage points on the handsets, which impacted our overall gross margin. And I think as I commented when Tim was asking just want be very clear that we are still maintaining our gross margin to this point right around 25% on the handsets and we think no matter how tough the competition gets that we will be able to maintain market share above 50% and we don’t see any scenario where our gross margin on handsets will drop below the low 20s as a percentage of profitability.

Ok, thanks and how many handsets were sold in total if you could break that out between China and non-China?

This problem is predominantly only in China. We had just start shipping into Vietnam and some parts of the South America at this moment. So last year was not meaningful numbers. We will see at this year we’ll expect a lot higher percentage only in the outside of mainland China, but I would still say a 95% will be in China at this moment.

Ok thanks. And last question in terms of path infrastructure this year it looks you’re still guiding for significant growth, what’s the primary growth here? Is it non-China or is it really capacity exhaust related, would have thought that with the big deployments in all three particularly in cities with plus 100,000 population you would see a softening in wireless infrastructure deployment this year?

I think it’s both. We are looking at China to be -- have a steady change in growth and that has been apparent during the Q4 and beginning of this year. We see the extremely strong demand for our products. As I will repeat it again that every product that we deploy within 9 months that we will get expansion orders. That has been constantly that we have been witnessing that. So China will continue to come and that will be expand for a wider geographical areas as well as adding the capacity within areas. For instance Beijing we are adding more capacities right now, we have deployed, but we are adding more capacities. But internationally as well that we are seeing a lot of South American markets that we have been seeing a lot of interest and now after we clear the frequency issues such as in Honduras then we will be able to ad a lot more aggressively. In other countries our aggression to give us that go ahead signs to do so as well. But we have to be extremely careful that frequency typically will take longer time to get approved.

And as well as the expansion in our Taiwan market that outside a Taipei, we’ll go into the southern part of the second largest city in Taiwan called Guoshun [ph] and Vietnam market that they have told us once we’ve reached certain areas of hundred thousands subscribers we are expecting to expand to new cities on top of expansion of current cities. So that’s the various reasons that we are adding more for infrastructures.

Last thing Hong, has the up tick of SMS for subscribers been meaningful? Has that been a driver of capacity exhaust?

I’ sorry can you ask one more time (inaudible)

The uptake for SMS.

Oh the SMS is a very, very encouraging. Now the earlier handsets that we were selling in China did not have SMS capabilities and this year we are planning to add about 30 million SMS messaging services in, I mean messaging handsets into the market, so our anticipation of the SMS user would be from current 8 million users to all the way to about another 20 million plus. So including ours and others I would say by the end of this year we were expected have a half of the total users or maybe about 35 million plus minors, that users will have SMS. And that’s becoming a very significant profit generation for the operators.

Ok thank you very much.

Sure.

Your next question from Mike Enjin [ph] Credit Suisse First Boston

Ok thank you. Now Hong, it would be very helpful to get an update on the geographic composition of the back log either just China and non-China and to the extent you can give an update on 2004, your international revenues -- just how that sort of makes the books, you gave a guidance on that on the Q3 call, just want to see if there was an update to that guidance.

Yes. The way I broke the back log down is about 83% of the back log is in China, 17% of our back log is outside of China. So those should give you some pretty hard numbers that way. And as we looked at our guidance going forward you know again very large market opportunities we’re looking at is Latin America. I think we’ve said publicly that we’re looking for around $100m in Latin America this coming year. North America perhaps another 100 million in that market. Japan should continue strong, you know very large number going in excess of 100 million for next year. India we believe will ramp at this point we’d say 50 million to 100 million. We just have to see how fast they roll their networks out there. Those will be the large markets.

Great, thank you and I apologize if you said this on the call. Did you give what Q4 CapEx was?

No I didn’t, but I could give you that number. I think total Q4 CapEx for the company, sorry…47 million.

And did you give cash flow from operations?

Cash flows from operations was $48m positive in the quarter and $51m for the year.

Great and just one last question. Hong, it would be helpful just to get an update on the DSL market in China and just sort of how much of an impact the wire line business in China is going to have on your revenues this year.

We are expecting to double of our, the Dslam [ph] market, I mean the shipment in China. In China expected to grow very quickly in our, the Dslam deployment. The broadband services is going to be very significant. And we have being seeing a lot of – the voice over IP gateway and the next generation network products, and as well as the optical side. So outside of the path in those regions that we are seeing a very positive response from the market. And overall market we are growing in China will be about 20% compared with that at this year bit with a much bigger price.

Alright thank you.

Sure

Thanks Mike.

Your next question comes from Tim Luke with Lehman Brothers

Thanks I was wondering if both of you, if you had the book to bills for the quarter? Roughly how that stood?

Recurring book to bill as we mentioned on the last quarter that we’re not going report book to bill on a quarterly basis. We will report back log on an annual basis and we will also report the bigger contracts throughout the quarter and always try to give you guys a chance for visibility as we guide forward. I think our book to bill worked to be in excess of 1.2 for the year and you know that year end backlog number is a little over a billion, (inaudible).

Okay, so that’s a yearly number but not a quarterly number.

Right

Is this how you say it was around 1 or slightly greater than 1?

I think we’ve said all we were going about that. We just really don’t want to down the path of reporting back log and book to bill every quarter. Contract can be very lumpy we don’t want t get into a situation where we feel like we might have to make concessions in the quarter because we’re going to report a number. What we have found is you know we don’t make concessions at the end of quarters we get a very strong booking flow if business is strong and it’s the right way to run the business.

Tim if you can appreciate it that order doesn’t come in every quarter. It come in very large in one and not as good as the others but as a whole you have to see an image more longer perspective way and we don’t want to just giving the wrong guidance or the wrong anticipation for the business how we do it.

Just in terms of the mix. In the fourth quarter it looked like with the extra competition, the handset business will move the lower sequentially while the infrastructure business had a very strong sequential improvement and obviously wire line was up as well. When you look at the mix in the first quarter, should we look at the competition and think its going to be a similar percentage or how would see that in terms of the mix?

Yeah I think the mix that we had guided to is around 15% for wire line, 40-50% handsets and the balance obviously being wireless infrastructures. And then you know that what could through some lumpiness into that is obviously the timing of book and ship business on handsets. We also always have final acceptances and so we want to continue to obviously very conservative there. So that was the kind of the numbers I would use knowing also there could be plus and minus you know some you know maybe 5 percentage points depending on how the business plays out. But we’re in a cycle right now where we’re seeing a tremendous amount of infrastructural orders as Hong pointed out. You guys saw the signing, we’ve got other contracts that you haven’t seen announced yet. We’re pushing very hard to get a lot of base stations and then as we’re able to achieve the final acceptance obviously we will report revenue for those.

And lastly just on as you look at the 3G trials you obviously have the trial with Netcom, how do you see the landscape in terms of where you feel most, sort of best positioned as it were with respect to 3G opportunities given? You had a relationship with Telecom, relationship with Netcom and then the other guys?

3G we were selected, were given in Beijing other than ourselves and just another company is a Nokia, so we will have to put our system and their system together and we’re working extremely closely to make sure both parties are working extremely hard to make it happen. And obviously once they---they have only select very few cities to do, so once we have done that and everybody else can see our system would be a very well effectively to work against with the many other companies. I mean in other words with 3G with all the standards and it’s coming very, very shortly. We’re expecting it anywhere between the March time and April time, we’ll be able to start showing the real active trial that’s taking place in Beijing and so I welcome everybody to come and take a look and it’s going to be a dynamite show.

Thank you very much.

Sure, thanks Tim.

Your next question comes from Steve Koffler with Wachovia Securities.

Hi Hong. Hi Mike. Couple of questions, first I’d like to go to your opening remarks on and I know you’re not providing guidance anything beyond ’04 and everything but when you finished off by saying you want to build hopefully I heard you correctly you have some kind of goal to build UTSI into a $10b company over five year period did I hear you correctly?

Yes.

Okay just ran out a few numbers there off of the ’04 guidance we have, you know, that means something like 40% growth or close to it, starting in ’05 and I know you’re---it wasn’t the kind of comment that you meant to be extrapolated quite in that way but if you’re thinking about that kind of opportunity is it possible that---- well I guess the way they ask it is why wouldn’t you see some acceleration to those levels? Or what could create acceleration to those levels in 2004?

Maybe I can help a little bit and then let Hong add a little bit to that. I think that you know the first thing is Hong and I actually were talking the last couple weeks when we had the final numbers for the current year and we’re just thinking that the company---you know it was just yesterday we were getting ready for the IPO off of our 1999 numbers. And in 1999 we’d just finished a $187m a year, those were the numbers that we actually used for the IPO and we were kind of thinking gosh I don’t know that either one of us could have envisioned growing the company ten times in just a few years, or if we’d certainly had told the investment community that this is what we were going to accomplish I think everybody would’ve thrown us out of their rooms. So kind of what Hong is doing with his 10 billion is he’s throwing out a visionary statement of what he’d like us to strive to, we certainly are very excited about the growth of the company and that again coming back to why we want to put this strategic cash on the balance sheet, but I think we’ve provided our finance guidance, we need to be conservative, I think we need to be provide something that we have a high degree of confidence in and then if more organic opportunities come in or M&A opportunities come in over the next several years we can grow the company even better.

I just wanted to remind Steve that so far we have acquired one of the only major serious M&A activities was CommWorks and that has been extremely successful and that opens up a lot of opportunities for us in both the North America and the European market. But on those are something we are definitely looking into not only our own growth but as a great deal of opportunities out there as well. We’re not trying to grow the company with the sake of acquisition by any means but we wanted to make sure that our company from all of our infrastructure in terms of administration and engineering and controls are all ready to become a $10b company. We just want to make sure that our companies are prepared for that.

Okay couple of other nitty gritty questions then. On mix shift I don’t remember exactly what you’d said about wire line contribution you for on the guidance, but it sounds like it’s---correct me if I’m wrong it sounds like it’s suppose to be coming in a lower percentage than you had earlier had thought is that correct?

No again on all the guidance, it’s going to be plus or minus some percentage points I think specifically in wire line business I would tell you there’s more up side to the percent that we’re guiding to than downside.

Well probably percentage, my point of view may have some differences but definitely from a over all dollar amount we’re growing, maybe I said too quickly say no but I think we are growing in terms of the dollar amount definitely is growing.

Okay but is this---I would think there’s some combination here of Paths and China just continuing to come in stronger but also is there reason to think that Japan might be slowing down either now or in the near future?

Japan has been slowing down towards the second half of the year, they have been adding in the past quarter million, now down to 150 and now they’re waiting for another catalyst to grow. We believe that catalyst could be a streaming technology. Once the streaming technology comes in it will very possibly grow again. Overall Japan’s household penetration is only 25% versus Korea’s 70% plus or close to 75%, so from that perspective Japan has a lot more room to grow and we really do are searching for what is another catalyst and once we have find that out it will be a very fast grow.

Last question does aggressive pricing in the DSL market in China have anything to do with the gross margin? There was a lot of discussion in Q4 about Wiway [ph] pricing DSL very aggressively.

It’s very competitive for sure. I mean we’re seeing that market and we are despite that very competitive market, we have shipped over one million Deslam (ph) in China, but all of our Deslam is focused into the IP base and a lot of China is still going ATM, so it’s hard for us to compare why are the others or with everyone else’s, we are more focused only into the IP side. And the market is tough and we’re keeping up with it by designing more efficiently and to make sure that we keep up with our competition.

Okay but does it affect gross margin?

Not really because it’s not a large enough percentage of our business Steve so clearly the pricing is coming down but the lion share of our DSL shipment has been into Japan and if you take a look of the overall wire line business I think was roughly right around 11% . It wouldn’t affect the overall gross margins. The biggest impact on gross margins was clearly the yen to the dollar and also the fact that we’ve seen competition on the hand set side, where we lost several percentage points of profitability on handsets.

Thanks.

Sure.

Your next question Jason Sye [ph] with Think Equity Partners.

Hey guys just a couple of questions here again on the handset side. Did you talk about whether you’ve deployed the GSM taks handset yet? And then I have a couple other follow ups as well.

Not yet the GSM handset we have to get the final approval from the government and we haven’t got the official go ahead from the government yet.

Okay got it. And Mike I’m not sure you whether you went over this and I missed it but did you go over what handset ASP’s or units were in the fourth quarter?

No we didn’t break that out what we did say is that total shipments for the year of 16.5 and what we, hold on wait …

I think our entire year of SP is about $65.

Okay $65 and where do you see that going in 2004?

Well we’re introducing many more different product lines and so the mix, we don’t really see the lot of the differentiation from that maybe in a range of 60-65 range.

For the year?

Yes.

Okay.

Yeah, the – as Hong points out as more and more users are wanting a higher end model with more data features, short messaging, reducing the color, the integrated camera so what we’re seeing is people that have been on the system for a while and with the income growing there’s demand for higher end services at the same time we’ve seen it continued strong influx at the low end. I think we’ve talked in the past about this movement of 400 million people from over the next 10 years to 20 years from the country side into the cities and being a lower income and wanting the lower end type phones. You’ve got both those dynamics affecting the ASPs.

And just wanted to clarify with your earlier question on the GSM and PHS handset, we are expecting the government will give us a go ahead that we just not yet receive in the final acceptance approval from the government yet but from a company’s product wise we have submitted for the approval. So our handsets are ready for shipment once government gives us –

Okay and so you think that will happen in the first quarter?

We definitely hope so, but it may be taking some time for getting approval. But I think we’re very hopeful in the first half of the year.

Okay thanks a lot.

Sure.

Your next question comes from Frank Morsolow (ph) with First Albany.

Yes hi guys how are you doing. The question Mike, could you give me a revenue break down again because I’m sorry I missed it, for the quarter?

Yes, for Q4 the way the revenue broke down for the quarter was around 9% was – or 11% I’m sorry was the wire line business. We had our wireless infrastructure was a little over 35% and our wireless hand sets were about 48%.

Okay that’s great, and then on cash flows for the quarter. Last quarter you disclosed that you had sold some notes, you had sold some inventory. Anything like that in the cash from operations number in the quarter?

Yes first though let me clarify -- in Q3 what we did is we tried to take a step in more utilization of contracts manufacturing. So there was a one time event in Q3 where we transferred some of piece part image material to a contract manufacture because it had taken them a little bit longer to get up to speed and we didn’t want to run short of materials, we’ve continued to procure material.

So it was a one time event, no longer continued. Regarding the receivables we did have some questions about do we sell receivables and I want to draw the distinction – we’re not what I would call factoring receivables. We get paid two ways from our customers in China we get either directly cash or some times we’ll get commercial notes from the customer. And when we get a commercial note, it’s a very highly liquid instrument. And what we’re able to do is we were able to presents those notes to the bank and able to get the cash quicker to convert to a cash cycle.

So if we put it in perspective total year-to-date is there’s been about $299m of worth of notes that we presented earlier to the bank. And we took a $2.2m discount on those notes as we presented them. So as you can see you know it’s not factoring the receivables, it’s just presenting the notes slightly earlier to speed up the cash cycle.

Sure.

Specifically, in the fourth quarter I believe we presented $32m worth of notes for about $315,000 discount to the face value.

I’m sorry what was the discount again, $315,000?

Yes, $315,000.

That’s great, okay thanks very much.

Your next question comes from Larry Harris with Obpenhiemer [ph]

Yes thank you very much. A few weeks ago you announced a joint venture in the 3G area with Panasonic, Mashusta [ph] and I was wondering as the 3G trials goes forward in China and I assume at some point there will be an eventual deployment. Do you see yourselves forming alliances with other companies or in other areas to build your 3G technical expertise?

Yes our joint venture with Panasonic is because of their expertise in RSI and their experience with Ducamos [ph] and in fact Panasonic is the leader in that market share and deployed their base station of 3G in Japan. Now while we’re expecting fully -- what will be the important player in the 3G – with the operator future that they will be receiving the licenses that China Telecom and China NetCom and so the beauty about those two companies is that they currently have our I-pass and that can migrate our current I-pass into 3G very smoothly, which I’m going to repeat that we’re going to demonstrate that in Beijing in the next couple of months.

Now while we’re doing that we are also aggressively approaching other international operators to sell them our concept of IP base 3G as well. So we are actively talking to them. We’re selecting one or two other international for the trial as well and we are not announcing those as yet.

I understand thank you. And I apologize if this was already commented on or asked. You know any thoughts in terms of where we might go in terms of inventory turn over over the next several quarters?

Yeah Larry let me take your question on inventory and then operator maybe we could take one more question from who ever is queue up given that we’re running a little over an hour now. Regarding the inventory I think we communicate on the last conference call that we were targeting to bring our turns to 2 by the end of the year. As you can see by the financial results we achieved exactly what we said we had targeted. And we want to bring our inventory turns to 3 by the end of calendar year ’04. Now – and we still stand behind those targets.

Regarding within the quarter though Q1 with the seasonality there is a little bit dip in revenue. So I don’t think we will be looking at our turns necessarily improving a lot in Q1. We probably need to build some inventory – a little bit of inventory to support the strong infrastructure right now. And then when you see the revenues accelerating Q2, Q3 and Q4 I will anticipate a steady improvement of inventory turn over in those quarters. And again we’re going to try to hit the 3 by end of calendar year ’04.

Great, thank you.

Your final question comes from Walter Price with Resner [ph] RCM

Hi, yeah, I was wondering about the replacement market in paths with the SSMESS [ph]. Are you thinking that there is going to be significant replacement cycle that develops in 2004? And then just a clarification on the comment you just made. Does that mean that cash flow is going to be – operating cash flow is going to be negative in the first quarter?

Okay cash flow question I will ask Mike, I’ll differ to Mike and I’ll answer those replacement market. In 2004, we will see more replacing market than ever before because simply we will have accumulative of a $35m and some of the earlier user we believe that our path handsets, that will last a little longer than GSM hand sets. We believe our average user would be holding it out for a little over 2 years versus the normal GSM is a little over a year. And so for some of the earlier hand sets we believe that they will have about 5 or 6 million will come onto the market for replacement markets.

Yeah and Walter regarding the cash flow question if you look at the last 3 years typically in Q1 we do burn a little bit of cash. And then later in the year we are able to generate positive cash. So for the year we’re cash flow positive. As we go into ’04 I will anticipate the same type, I think we’ll probably burn a little bit of cash in the fourth quarter – sorry I mean Q1 here with a slight build of inventory, certainly not a huge use of cash. And then we do anticipate being cash flow positive from operation for the full calendar year in ’04.

I would just add to Mike’s comments we are expecting a more demanding our base stations so we are buying a little bit more inventory at this moment too.

Thank you.

Sure.

That concludes our conference call we thank you all for participating. And we’ll be doing our next call in April after the Q1 results.

Thank you.

Thank you for participating in today’s UT Starcom fourth quarter and full year 2003 conference call. You may now disconnect.