UTStarcom Holdings Corp (UTSI) 2004 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the UTStarcom first-quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS). Please limit questions to two per caller. Thank you. At this time, I would like to turn the call over to Mr. Mike Sophie, sir you may begin.

Thank you. Good afternoon, and welcome to UTStarcom's first-quarter 2004 earnings conference call. I am Mike Sophie. I am pleased to host today's call with our CEO, Hong Lu. Hong will begin the call this afternoon by discussing UTStarcom's strategic vision and long-term outlook. Then he will turn the call over to me and I will discuss highlights and provide a detailed financial review of Q1 2004 and update guidance for 2004. Afterwards, we will open the call for Q&A. Before we continue, I'd like to remind everyone that some of the information we will 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 reports on Form 10-Q and current reports on Form 8-K, which are filed with the Securities and Exchange Commission. With that, I will turn the call over to Hong. Hong?

Thank you, Mike. Good afternoon, and thanks for joining us today. I am happy to announce today the best first-quarter financial performance in UTStarcom's history. We generated record Q1 revenues and earnings. Mike will go through a detailed financial reviews of the first-quarter results and give revised guidance later in the call and I would like to focus my discussion and the vision of the long-term growth I have for UTStarcom.

Last quarter, I talked with you about UTStarcom's goal of becoming a $10 billion company over the next five years. To meet this 10 billion goal, we have, in the last several quarters, broadened our technology base of our product lines and our global reach through organic growth, strategic partners and M&A activity. Let me put our achievement into perspective. We now expect 35 to 40 percent of our revenue in 2005 to come from outside of China. That means approximately 1.2 billion in 2005 revenue will come from outside China, this compared to 5 to 600 million in 2004.

We have expanded our market through a number of strategic investments that began with the CommWorks and continue aggressively in Q1. We further expect that approximately 35 to 40 percent of 2005 revenue will be generated from our non-PAS product lines, including CDMA and 3G products. New wireline and optical broadband products, this translates approximately 1.2 billion in revenue from non-PAS products in 2005, both inside and outside China. We truly are a full-solution global telecommunications provider.

Our focus for growth continued to follow three key trends -- one wireless, two, broadband, and number three is IP. I will begin with wireless. UTStarcom now offers PAS CDMA 2000, W-CDMA, TD-CDMA and TD-SCDMA solutions. We can now offer most of operators in the world a cross-competitive comprehensive wireless solution, covering a wide range of frequencies, licensing and applications. Here are some specifics. In Q1, we announced over 500 million in PAS contracts in China. Total PAS subscribers on UTStarcom's network surpass 26 million in the first quarter of 2004, an increase of 5 million from the end of last year. China is expected to add 30 to 35 million new PAS subscribers in 2004. We expect to maintain approximately 60 percent of the market share for infrastructure and greater than 50 percent for handsets. That translates into 18 to 21 million new subscribers utilizing UTStarcom's PAS infrastructure and handsets. Outside of China, we are currently deploying PAS technology in Southeast Asia, Latin America and Africa, and will continue to expand PAS deployments in those and other markets in the world going forward.

We are also making significant progress in 3G. Products, partnership and acquisition announcements last month have just started our 3G sales in China and beyond. We also have introduced our moving media 3G product lines, providing W-CDMA, TD-CDMA and TD-SCDMA access to the 3G networks. On March 31, UTStarcom successfully launched its phase one 3G field trial with China Netcom in baking. So far, we have received wide recognition from both China Netcom and the MII for outstanding preparation and operation of our 3G trial. In addition, UTStarcom is actively working with China Telecom and China Netcom on their 3G RF planning, and we are currently working on projects in over 20 cities in six provinces. We announced the licensing agreement with a QUALCOMM and IP wireless for CDMA, W-CDMA and a TDD version of CDMA technology. From 2005, we expect the QUALCOMM and IP wireless relationship to generate more than 200 million in revenue outside of China.

We also announced the acquisition of Hyundai Syscomm combined with the last week's announcement (technical difficulty) and. We now can deliver a complete tier one market-ready CDMA infrastructure solution. (technical difficulty) TeleSat's market-proven CDMA interfaces, through our IP core, through its Sonata product line, which has been shipping in the volume in many years. This solution positions us well with our existing key customers, including Sprint in the United States and Reliant Infocom in India. Anticipated shipment of equipment acquired from Hyundai Syscomm and Telos should be greater than 100 million outside of China in 2005.

Finally, we continue to lead in the market share for CDMA PDSN worldwide. Our expanded wireless position is still in growth for our handsets product line as well. We remain the dominant provider of PAS handsets in China, maintaining 60 percent market share in Q1 as verified by outside marketing services, GFK. We shipped approximately 4.5 million units in the first quarter. We believe no one has shipped more handsets in China than UTStarcom, including Nokia and Motorola, and this is the largest market of the handset sales in the world. We have already announced our first UMO (ph) PAS GSM handsets. Now we're seeing interest in UMO PAS CDMA and PAS W-CDMA solutions. We are also exploring a new opportunity for handsets.

Our combination -- on a combination of organic development, technology partnership and strategic acquisition has clearly brought in our competitive space in all aspects of our wireless business. Broadband is our next key growth area for UTStarcom. We continue to strengthen our broadband offerings, capitalizing on a trend towards higher speed and value-added services. We are the market share leader in IP DSLAM. IP DSLAM. In Q1, we added more than 330,000 lines of IP DSLAM in China. In total, UTStarcom has now deployed nearly 1.5 million lines of IP DSLAM in China. This highlights a significant shift for China away from ATN to IP based DSLAM networks. We announced our NetRing SDH product last fall, and we have been seeing a tremendous amount of demand of our optical solutions. Today, our NetRing product has been deployed in the networks of every operators in China, winning bids with the China Telecom, China Netcom, China Mobile, China Unicom and China Railcom. We will help customers migrate to higher speed by expanding beyond ADSL, introducing VDSL solution for copper-based networks and fiber-to-the-home solutions such as gigabit E-Palm (ph).

During the first quarter, we have been seeing tremendous amount of activities on the broadband front and in fact, many of our customers have specifically requested us to ramp our capacity in our broadband products. Therefore, we expect to generate in excess of 500 million in revenue from our broadband products in 2005. As for (ph) customers migrates to higher speed, we have a greater opportunity for cross-selling, complete value-added services solutions.

Higher speed drives sales to our media gateways (ph), streaming media switches, high speed back-end transport and set-top boxes that's afford (ph) triple play, voice, video and data services. We expect total wireline and value added service to account (ph) for approximately 1 billion of our revenue in 2005. Our growth in wireless and broadband continues to demonstrate the value of IP core platform. We continue to focus on and differentiate ourselves by delivering all of our product lines across a common core IP platform. UTStarcom's IP core provides carrier with a foundation for continued revenue and network expansion. Carriers that choose UTStarcom can create a common set of converged IP services and application that works across all type of access, wireless, wireline and optical. This allows operators to deploy Next Generation network to meet the increasing requirement of their customers in a scalable and cost-effective manner with a current (ph) building (ph) network management and OSS.

Putting all of these pieces together, we confidently reiterate our guidance of 5 to 6 million in revenue outside of China for 2004 and expect to nearly double that to approximately 1.2 billion in revenue in 2005 outside of China. We expect total company's revenue in 2005 to be greater than 3.5 billion.

Finally, I would like to discuss our perspective of our global telecom and how UTStarcom will succeed in this challenging market. In 2004, most projections indicate that global telecom CapEx will be flat. In this environment, UTStarcom is guiding to topline growth of 40 percent. We are clearly gaining marketshare around the world, at the same time, when investing heavily in the future. While other companies have been cutting headcounts, last year, we hired more than 950 engineers. In Q1 2004 alone, we added more than 100 engineers and we have expanded our R&D budget by more than 70 percent since Q1 2003. While UTStarcom is expanding, I believe both carrier and equipment suppliers will consolidate over the next couple of years. Competition and price pressure will continue to be fierce across the board. Our objective is to grow both revenue and profit and to finish 2004 as a stronger, more formidable, global equipment provider. We are not going to be constrained by gross margin as a percentage of the revenue. Many companies have good gross margins and still are not profitable. UTStarcom has been able to maintain net after-tax margin of 9 to 10 percent.

We believe shareholders' value is driven by dominant market position, revenue growth and profitability. Let me repeat myself because I believe this is a very important point. I am driving my team for topline growth, profit growth and positive cash flow. We will continue to focus on these three key metrics and these are the metrics you should track.

In closing, by taking a creative approach at growth, UTStarcom has become the core solution telecom provider. Through organic growth, partnership and strategic mergers and acquisitions, we have expanded our technology products and global reach. Our Next Generation products can be sold to any carriers in the world, we are a healthy, growing, profitable company with a strong cash position. I'm confident we will achieve our goal of becoming a $10 billion company in the next five years. Now, I will turn the call over to Mike.

Thank you, Hong. Let me begin by giving some highlights for the first quarter of 2004. Sales increased 88 percent over Q1 2003. Net income increased nearly 47 percent over Q1 2003. Our balance sheet continues to strengthen with record Q1 collections of over 500 million. In addition, our inventory turns continue to improve as guided and came in at 2.3 for the quarter. During the quarter, we announced over 500 million in past contracts in China. In addition, we signed approximately 100 million in new contracts in our international markets in the quarter, including expansions in Japan, Vietnam and Taiwan, as well as new customers in North America, Latin America and Europe.

Now I would like to make some more detailed comments on our first-quarter financial results. And then I will give updated guidance for 2004. Sales for the first quarter were 622.3 million as compared to 330.5 million in the first quarter 2003, an increase of 88 percent year-over-year. This tremendous growth was driven by strong customer demand. In Q1, wireless infrastructure accounted for approximately 54 percent of sales. Handsets accounted for 38 percent of sales while 8 percent came from our wireline products. This overall revenue growth comes in spite of seasonality associated with handsets sales and lumpiness of international rollouts and is based on the strength of past infrastructure demand. Overall, nationwide PAS subscriber growth in China was 9 to 10 million in Q1 2004, and 5 million of these subs on our network. Utilization of UTStarcom PAS networks is now at 70 percent. We believe our universal expectations for continued strong PAS subscriber growth and with network capacity of 70 percent of utilization, it is clear subscriber growth will continue to drive both handsets and infrastructure sales.

Revenue from mainland China represented approximately 92 percent of total revenue for the quarter. Non-China revenues will contribute approximately 20 to 25 percent of total revenues for the year and the recognition of those revenues will be lumpy from quarter-to-quarter, tied to both customer roll-out schedules and timing of the final acceptance.

Gross margin dollars for the first quarter were 176 million compared with 112.7 million in Q1 2003, an increase of 56 percent. Gross margin as a percent came in as revised at 28 percent of sales. This decrease in gross margin percent as compared with Q4 2003 is primarily attributable to higher cost of goods on component purchases denominated in Yen as a result of the appreciation of the Yen versus the dollar. The Yen-denominated materials represent approximately 30 to 35 percent of our total cost of goods. In the fourth quarter 2003, the average Yen to dollar impact on cost of goods was approximately 115 to 1. And in the first quarter of 2004, the average Yen to dollar impact on cost of goods was approximately 109 to 1. In addition, competitive pressures brought handset margins in at 20 to 21 percent of sales and infrastructure gross margins came in at approximately 33 percent of sales. As Hong mentioned, we are not constrained by gross margin percent and focus more on growing revenues and net income, and at the same time, we are confident we will be able to improve gross margins later in the year. I will give specific margin guidance later in the call.

SG&A expenses for the first quarter were 66.9 million or 11 percent of sales as compared with 37.6 million or 12 percent of sales in Q1 2003. The increase in absolute dollars can be attributed to an increase in overall business levels versus first quarter 2003 and the increase over fourth quarter 2003 is primarily related to expanded sales activities and increased IT spending related to our worldwide Oracle conversion. Research and development spending for the first quarter was 45.7 million or 7 percent of sales as compared to 26.8 million or 8 percent of sales in Q1 2003. We continue to increase our R&D staffing in all of our facilities. The primary expansion has focused on China and India. We continue to achieve excellent leverage on our R&D staffing as 81 percent of our 2,342 engineers are based in China and India.

Net interest and other income for the first quarter 2004 was 9.1 million compared to 4.5 million in the first quarter of 2003. As we indicated in our previous guidance for Q1, this increase is primarily attributable to a 7.8 million Chinese subsidy, which is given to local companies to encourage local investment in R&D and manufacturing. We also received a Japanese consumption tax refund of approximately 1.4 million. Additionally, we recorded a foreign exchange loss of 0.4 million and had net interest income of 0.3 million in the quarter.

Our effective income tax rate for the quarter was approximately 20 percent. Net income for the first quarter was 54.8 million or 40 cents per share versus our guidance of 38 cents. This compares with net income of 37.3 million or 33 cents per share in Q1 2003. We continue to be proud of our level of profitability, especially as these are GAAP, not pro forma numbers. This demonstrates our ability to effectively grow the company with long-term shareholder value in mind.

Transitioning from the income statement, I want to highlight the continued strengths of our balance sheet, which complements our strong P&L performance. Our cash and short-term investment balance at March 31 was approximately 766.3 million as compared to 422.6 million at December 31. This significant increase in cash is primarily due to our equity offering in January of 475 million. In addition to the offering, our cash collections from our customers was greater than 500 million for the quarter. We utilized a portion of this cash to participate in our newly announced stock repurchase program. During Q1 2004, we repurchased a total of approximately 2.6 million shares of common stock for an average price of $30.42 per share, for a total cash outflow of 78.2 million. Additionally, we incurred costs of 27.7 million associated with property, plant and equipment. Cash consumed in operations in the first quarter of 2004 was 27.3 million, which compares favorably to the 74.8 million consumed in the first quarter 2003. This was exceptional given the China's New Year holiday during the quarter. We continue to project positive cash flow from operations in 2004 in excess of 200 million. The cash on our balance sheet is available for strategic opportunities.

Accounts receivable increased from 368.9 million at December 31 to 432.5 million at March 31. Accounts Receivable days sales outstanding were 63 days for the first quarter. Although up from our all-time low of 52 days in Q4, this compares favorably to the 70 days for the first quarter in 2003, and we are continuing to achieve our target of keeping our DSOs in the 60's.

Total inventory decreased as we continue to focus on efficiencies and improving our inventory turns. Inventory of customer sites under contracts or deferred cost/inventories decreased from 559 million at December 31 to 426.2 million at March 31. While inventories at factories and at customer sites without contracts did increase from 257 million at December 31 to 318.1 million at March 31, we are currently in the process of signing significant additional infrastructure contracts and have put inventory in place to quickly support our customers. Inventory turns improved again and were 2.3 for the quarter, and we continue to target turns of three or better by year-end.

At March 31, 2004, customer advances were 302.2 million as compared to 458.7 million at December 31. At March 31, deferred revenue was 57.2 million as compared to 45 million at December 31. Customer advances represent cash deposits we have received from our customers for orders that we have not yet received final acceptance. Customer advances should scale with inventory levels at customer locations.

Guidance going forward, we continue to see growth across product lines both inside and outside mainland China. Our revised baseline guidance for 2004, before acquisitions, would have been 2.7 billion in revenues and $1.95 GAAP earnings per share. Our revised guidance post acquisitions for 2004 is as follows -- 2.75 billion in revenues and $1.85 GAAP earnings per share. The EPS impact is due to M&A-related charges taken in the second quarter and increased R&D spending in both second quarter and third quarters. As we proved last year with the CommWorks acquisition, we also believe these acquisitions will be accretive in the second full quarter of ownership, which is Q4 2004. And as mentioned earlier, these acquisitions will drive significant accretion in 2005. For the second quarter of 2004, we estimate revenues will be approximately 650 to 660 million and sequential revenue growth for Q3 and Q4 should be approximately 7 percent each quarter. Full-year 2004 guidance is approximately 2.75 billion, which is an increase of 40 percent over 2003. We expect in excess of 2.1 billion of revenues will come from mainland China and the other 5 to 600 billion will come from our global markets. Major markets outside of mainland China include Japan, Latin America, United States, Europe, India and Southeast Asia.

We've also broken unanticipated 2004 revenues by product type. Wireline systems should represent approximately 15 percent of sales. This reflects strong growth in the broadband ADSL, metro applications, voice-over IP gateways, Class 4/5 softswitches and video streaming. Handsets will account for approximately 40 percent of revenues, reflecting continued strong subscriber demand throughout China, growth in PAS outside of China and increased competition in the handset market. Due to continued expansion and deployments of PAS networks in China and global markets, total revenue from wireless systems will be approximately 45 percent.

Gross margin guidance -- we believe the primary focus should be on revenue, net income and cash flow and our internal decision criteria is maintaining profitable growth. To provide guidance for your models, our current projections are as follows -- we see Q2 gross margin percent consistent with Q1 levels in the 27 to 28 percent range, and Q3 gross margins should increase slightly to 29 to 30 percent and we should see further improvement in Q4 to 30 to 31 percent. Our confidence in improved margin percent is driven by the following factors -- one, Yen versus the dollar has stabilized and improved from lows of 105, 106 to the dollar; two, we continue to drive costs out of our handset. We are introducing internally designed ASICS in Q3 that will significantly reduce costs and exposure to Yen. Three, infrastructure pricing on PAS is stable and contracts we are currently signing will be recognized as revenue in Q3 and Q4 with higher margins. Four, our revenues outside of China continue to ramp and typically have better margins than contracts in China. And fifth, longer-term and not in our guidance, we believe the RMB will float relative to the dollar, resulting in improved revenues, margins and profits.

SG&A in Q2 through Q4 should increase each quarter in dollars but remain relatively flat as a percentage of sales at roughly 9 percent. Our target model is to run SG&A at 9 percent for 2004. Acquisitions are driving incremental SG&A spending between 1 and 2 million each quarter in Q2, Q3 and Q4. R&D in Q2 through Q4 should increase in absolute dollars but decrease slightly as a percentage of sales. We expect R&D to run at 7 to 8 percent of sales for 2004. The acquisition will drive incremental R&D spending of approximately 4 million each quarter in Q2, Q3 and Q4. We are also expecting onetime acquisition related charges for in-process R&D of approximately 5 million in the second quarter.

Other income and expense and equity income and loss should typically be income of approximately 1 to 2 million per quarter, reflecting interest income and expense, tax refunds and potential foreign exchange and impairment charges. Our effective tax rate for 2004 should be approximately 20 percent.

GAAP EPS guidance for Q2 is approximately 33 cents, which is inclusive of the acquisition-related charges. Full-year 2004 earnings should be approximately $1.85, inclusive of acquisition-related charges. As I mentioned earlier, we are also targeting positive cash flow from operations for 2004 in excess of 200 million.

I'd like to close this discussion by reiterating Hong's vision of growth for UTStarcom and the current market environment. We see a year in which global CapEx spending is flat and UTStarcom is guiding to 40 percent topline growth and increasing profits. UTStarcom is gaining marketshare globally and anticipate revenues between 500 and 600 million outside of China. We also expect to see continued consolidation of both the carrier and vendor level, and believe UTStarcom will exit 2004 a significantly larger and more formidable company.

Now before I turn the call over to questions, I'd like to take a moment to address some recent investor inquiries. Softbank currently holds approximately 14 million shares or approximately 12 percent of the total diluted shares outstanding. Softbank's lockup will expire on May first, and as such, we have received questions as to their intentions regarding the ownership. Softbank has improved their cash situation in the past year and currently has approximately 3 billion in cash. In fact, Softbank has specifically stated to us they have no intention of selling shares in the near term.

3G, we have received quite a few phone calls regarding 3G in China, which was accentuated by yesterday's articles in the media on China canceling 3G plans. We believe the situation is as follows -- we have always said that PAS would continue for many years and gives operators the best return on investment. Our contacts in China Telecom and China Netcom continue to validate this. Two, 3G on a global basis is not proven to make money for the operators and China is in no hurry to deploy 3G. And finally, we believe 3G though will inevitably be rolled and that UTStarcom is well positioned to support the operators when this happens. Now we'd like to answer your questions and I will ask the operator to open the call for questions.

(OPERATOR INSTRUCTIONS). Dale Pfau, CIBC World Markets.

Just a couple of quick comments. You made a lot of commentary about your handset market shares remaining relatively stable with 60 percent and your PAS infrastructure share remaining relatively stable over the course of the year. What gives you confidence in that? And then could you comment on what you think your shares are heading into next year and the competitive pressures in pricing on infrastructure in particular?

Okay. First of all, from our most recent -- the research firm -- the outside research firm indicated that we have over 60 percent, in fact 61 percent to be exact. And the reason is that we have more product lines than anyone else's and we have been introducing the more than 20 handset model from a low end, middle end and high-end products throughout market -- that segment. And on top of that, we have a very strong infrastructure business and usually infrastructure business will give us a tremendous advantage when we deal with our customers for instance, we will put the promotion togethers and such. So therefore, we have been enjoying a very large marketshare in both the handsets and the infrastructures. And we have a very confident position because we are buying more components than everyone else's, therefore, we believe our cost to manufacture them is at the very, very advantaged position than any other competitors we have in the market.

And on infrastructure?

The infrastructure pricing, I am sorry the question was?

The question was, what we see on the structure pricing environment throughout the year.

The infrastructure pricing -- we're seeing stabilizing and obviously customers always want us to see what we can do to improve their operational side as well. But we have been enjoying the -- compared to handsets, we only have three vendors, including ours, and we pretty much have -- territory-wise, that we have a pretty much very, very clear defined. And therefore, if we can introduce our cost reduction in infrastructure and that will help us to increase our margin. Therefore, when Mike was saying about towards the second Q2, Q3 and Q4, our margin will be increasing, is because we have been seeing -- we can take advantage of cost reduction and our price will be pretty much stabilized, therefore, we will see that margin increase.

Great. Thank you.

Hasan Imam, Thomas Weisel Partners.

Yes, thank you. Congrats on a good quarter.

Thank you.

A few questions, first of all on the Telos guidance of 50 million in '04 and 100 million in '05, is all of that the non-China? And can you give us some indication how you arrive at that number? Is that based on backlog, contracts or some internal projections? And then what are your expectations of revenue back from the Hyundai assets? Is that going to be primarily indirect?

Let me start out and then we will have Hong add some more color here. When we gave the guidance, it's combined guidance for both Telos and the Hyundai Syscomm acquisition. And what we've done is we've created a newly -- form what we'll be calling our CDMA division that's going to be headed up by Jack Mar, who was the CEO of the Telos operation. What we did with both of these, these were asset acquisitions, and so what we are doing is we're buying the assets, also kind of road mapping with our internal development plans. And our projections are coming from our conversations with customers that we have relationships with, as well as some of the customers they have relationships with in a more combined fuller strategy of complete solutions to the customers.

Is there some firm contracts backing that up?

Hasan, we actually, from a company's strategy point of view, we do not want to buy any company who does not have the foreseeable future revenue. So we do have a lot of potential in the -- potential customers. And as we have stated it in the North America, we have actively talking to Sprint. In India, we've been talking to Reliance actively. And those are all of those potentials that we have been talking about. And on top of that, we have been talking to many others -- opportunity throughout the markets in Far East, Asia as well as in Middle Eastern countries and 450 MHz CDMA is a very high demand in the eastern block market, and etc. So those are all very, very active. And we are very, very comfortable that we will be able to generate some revenue in this second half of the year and into 2005.

Got it. And then one other question on your contract renewed (ph) Versatile -- that was pretty significant in a sense that it was from a known European entity. Do you view that as more of a technology validation and toehold in Europe? Or is there meaningful revenue driver going forward going forward?

I think you'll see a lot more activities in our European markets as well. And Versatile is a very good indication. And the reason that we have been really winning the business is because we have really preaching the triple play and with the videos and data and the voice combined, and we have actually really won our business because of our IP-based solutions. So I think a lot more companies will be wakening up and giving us a lot more orders; and you can probably expect a lot more orders coming from those outside of the China market.

Got it, thanks. And one last question for Mike, Mike, in your GAAP EPS guidance of $1.95 for stand-alone UTSI, does that include any onetime benefits? And then as you talked about 1.2 billion of revs coming from outside China, how does that impact your effective tax rate in calendar '05?

There's a couple questions there. One is on the $1.95. There's no unusual onetime charges would be built into the balance of the year. As we guided for Q1, there was a $7 million benefit that we guided to for Q1 and in fact it was realized. But going forward, no, there's nothing abnormal. Regarding the tax rate for calendar year 2005, you know, obviously we will have to dial that in. But I would expect it would stay within the 20 to 25 percent range. Much of our development is in markets such as India or China; and we can still take advantage from an intellectual property benefit that way even if the revenues are in other markets.

Great. Thank you.

William Baine (ph), Deutsche Bank. I'm sorry, that question has been withdrawn. Your next question comes from Joe Noel with Pacific Growth Equities.

A couple quick questions here. Let's see here, out of the 500 million outside China for the (technical difficulty), can you give any guesstimate as far as what's broadband, what is PAS? And also, the lines you installed in China for PAS, what percentage of that will you guess that would be of the total land lines installed?

The 500 million, I would say that we will be looking at bulk majority about 60, 70 percent will be coming from broadband side, and remaining will be coming from wireless. Predominately at this moment, we will receive more from our PAS business, including some of the handsets. And your question about the PAS in China?

Out of all the -- the stat that is often given out about of all the land lines installed in China, the percent that were PAS; and we've been kind of running between 50 and 70. Do you have any idea of how that changed for Q1?

The total -- he's asking of the total fixed line adds in China, what percent was on PAS?

So far this year, I think that we have been seeing more than 60 (ph) percent. In some areas, 80 percent. I will probably -- my rough sketch is about 60 percent-ish. And we expect that toward the second half of the year, will be even higher.

The last question is on floating the RMB. Do you have any special insight there? Or is that something you're just hoping for?

I think we just have to leave it very vague. We are not going to put it in our guidance, but we are pretty sure that will happen at some point in the future.

Okay great. Thanks a lot.

Mike Anjan (ph), Credit Suisse First Boston.

I just wanted to get an update on progress with Reliance in India and just some of the opportunities you're looking at in Latin America?

Okay. Our answer about Reliance -- well first of all, Reliance has been putting a lot of emphasis in their wireless movement. And we see that has been finally --- they have settled that. And now in other words, that they are more of going forward with the other services. So they have the first time officially announced their wireline business into the public. So we see a lot of activity will be coming off from the wireline in the forthcoming second half of the year, where we will see a lot more activities. And we are hoping that is going to be realized.

And from the Latin American market, we have not seen a lot of activities, and predominately in both IP DSLAM side and the PAS, I think it would be probably half and half at this moment. And so, we are still projecting our 2004 is more than $100 million coming off from Latin America world, and North American contributed another $100 million from North America.

Great, thanks. And has there been any change overall on that 500 to 600 million of international revenues? Has there been any other change in the kind of mix of that by geography from what you'd said last quarter?

No. I think the mixes is still hanging in there. I think Japan's a very big market for us, continues quite strong. As Hong mentioned, India is ramping, in fact, he talked a little bit about Reliance. We in fact just got notice of achieving final acceptance on significant deployments that we've done earlier. So you'll see those revenues in Q2. Latin America, as Hong talked about, we continue to be very optimistic about, and are signing contracts. I know there's been requests from the street to want to see more contract announcements. But the dilemma we're under is, if our customers don't want the announcements to be public, you know we've got to respect their wishes. But we think as the year progresses, you will continue to see an announcement here and an announcement there and your visibility on Latin America will be very clear. You know ,North America has been great for us. That's continued to ramp based on the channels that we got with the CommWorks acquisition. And then we talked a little bit about Europe a while ago. So again, we're very, very bullish on the growth on a global basis, and that's why we're coming on so strong with not only '04 but '05 guidance.

Thanks, Mike. And just one last question on the financials and I apologize if you gave us on the call. Did you give Q1 cash flow from operations?

Yes, it was 28 million negative.

Okay, great. Thank you, very much.

Tim Long, Banc of America.

A few questions if I could. On the handset, Mike, could you just update us with where we are with ASPs? I know it's a difficult calculation given some of the revenue recognition. Along the same lines, if you could just update us on some of the PAS GSM opportunities and what that could mean for the business, both inside China and outside? And how far along would you be from a PAS CDMA phone? And would that be 450 or 800, or it doesn't matter? What kind of time frame are we on the PAS CDMA side?

Okay, Tim, I'm not sure we got all your questions. So I may have you ask. On the handset ASPs, I think they are probably running around $60 right now. And again, it is a moving target, again because with the low range phones will sell for sub 50; then we've got the mid-range models, which we are kind of saying 80 to 110; and then you've got our high-end models that could be you know a couple hundred dollars. Most of the demand historically has been towards the lower end. We are seeing much more demand for the middle range market this year. People are wanting to see the flip phones, they are wanting to see low-end color, you know 64 K data rates. It's kind of a moving target and we just need to kind of watch that.

Tim, I just wanted to add some colors, or put some colors in that. We have seen -- we are getting a lot faster market share in the higher-end products. And in the low end, we are losing some of our market share. But we purposely trying to make it more high-end. And we have been winning a lot of market. And we have been shifting a lot of people's mind into that market as well. So from overall, we believe that our ASP is really not changing from year-over-year.

Okay. And then just one last question -- Hong, I got the message on the gross margin side, but hat the infrastructure side in the 33 percent range, obviously, that's down a bit. And it's a less competitive market. Could you tell us what has driven that and how quickly could that potentially rebound?

Yes. I think we are talking about the PAS infrastructure, we have been seeing stabilization on that. And then we were really moving towards -- we have a lot of cost reduction programs, putting them together. And if you can imagine that some of our contract has been signed much earlier, so we know we have to use up some of our inventory. And then we're looking forward, we have a very, very clear picture of how we are going to be able to improve that margin.

Now on the other hand, on the other overall market that we have been winning a lot of new contracts throughout many parts of the world in the infrastructure side, now we have also seen -- at the beginning, we always have a difficult time to have a very high margin, but then afterwards we will always have a good effort to reduce our manufacturing costs as far as our re-designing of product to gaining much higher margin. So with the China, we have been seeing the good performance on the future. But on the other hand, on international level that we have also seen, they usually generate higher margin than China will. And so overall, we are very confident the margin will be increased towards when we have a higher mix of international will bring higher margin in the future.

Okay. Just last quick one for me, Hong, could you give us just a ballpark of your China PAS infrastructure business? How much is new deployment now, how much is upgrade or expansion? And then I'm done. Thank you.

Sure. Pretty much I think all of our sales are maybe I would say 90 percent are repeat orders and 10 percent are new ones.

Tim, that's a good number because I actually have the mix here in front of me. But I want to point out that when we call it a repeat customer -- as you know in China, they have the major cities that are controlled by PTT, and then they have the surrounding cities. And so when they choose to deploy one of the surrounding cities, it's new geography even if it's an existing customer. So I just want to point out the distinction.

Great. Thank you.

William Baine (ph), Deutsche Bank.

Can you hear me this time?

Yes.

Great. Just a quick question, the capacity went up to I guess 70 percent capacity utilization. I think that's a bit above where you're guiding in the past. Is that just because the subscriber growth was so strong? Or Q1 was a little weak on the infrastructure adds? And then the second question, in terms of the localization of your components on the handset side, can you give us a little color around the benefit there to your BOM? And what percentage of production is internal versus external at this point? Thanks.

Okay, let me answer the first question about the -- our current infrastructure. Typically, we would say -- typically, our utilization is less than 60 percent, is because we have been adding a lot of infrastructures. And this time in Q1, we had actually increased a lot of new subscribers. If you look at our announcement, we had add 5 million in the first quarter. It is a faster addition than any other time. If you look at our historical last year, combined with four years in the past, we have a 26 million. So clearly we are adding tremendous amount of Q1. And also you have been seeing our Q1 revenue recognition basis, we have been adding a lot of infrastructures as well. And most of the $500 million that we have made announcement are coming out from infrastructures. So we see a very, very strong infrastructure business towards the Q4 and Q1. And subscriber is growing much faster than anyone else's really can imagine because it's much faster than last year's. And the second question was --?

Can you repeat your question on components, on exactly what you're trying to get to, William?

Sure. Just in terms of the localization or -- you're doing your own base bench ship on the handset side. I think you just mentioned that you are going to introduce that in Q3. That in addition to any other localization of handset components -- what sort of benefit is that going to give you in terms of BOM? Or any color around the benefit in terms of lowering your cost of handsets?

The (multiple speakers) first of all, our localization is about 65 percent-ish, and another 35 percent that we are really getting from -- predominantly from Japan. By offering our own base-band, not only will reduction of our costs, but also we have been building our own RF chipsets as well. That's also will increase the sensitivities. And in this particular band, we have been adding a lot of the 3G features into this. So we were getting a lot more better features compared to many other competitors. So we are very, very excited about that. Also, we are adding a lot more features, in terms of future. Everybody else is looking for function with 802.11 function type, and we are also putting into the same chip too.

Okay. And just the last bit of that was what percentage of handsets are you doing internally versus outsourcing to contract manufacturers at this point, still about the same?

Yes, we have always, historically -- we are working with two other major companies, and we are open to more. So if we have a lot more handsets (indiscernible) primary, we will work with them any more. So at this moment we are predominantly working with two.

Thanks. Just in terms of, internally, are you doing any internally in your new factory or not quite yet?

Well, we have always very few internally. I mean, we only -- at the beginning when we had the pilot run we'll do it -- make sure we will do it, and then we will be getting it out. So we have 20 models. So we will do all those -- the pilot run by ourselves first.

Thanks, guys.

William, and for the audience, this is -- your first question was a very important point that I'd like to kind of come back to, because I commented in our prepared script here a little bit is that, as you pointed out, historically, we talked about a 60 percent capacity utilization on the infrastructure. And we're talking about numbers around 70 percent here in Q1. As Hong pointed out, phenomenal sub growth here in Q1. At the same time, you saw the tremendous amount of contracts that we were signing as well. Just those contracts have not been put into service yet, so you're not necessarily seeing the capacity. But the point we're really trying to drive home is the sub numbers are all expected to continue. And obviously, with this high of a utilization rate, that means as the sub numbers continue to increase, they are going to be buying a lot of additional infrastructure and a lot more handsets.

I think maybe I wanted to add one more point. Typically, if any company -- when they are running the infrastructure in any similar environment, if they are about 60 percent, 65 percent, that's pretty much they will have to add more infrastructure is because no system can handle 100 percent of the capacities. And typically, the capacity is at the range of 70 percent. So that means that we are very -- looking forward to a more expansion business that's coming.

Stephen Koffler, Wachovia Securities.

Yes, I'd like to follow up on that, because that was my main question about the sub growth. So it looked like China had adds of 9 to 10 million in Q1, for the country, that is. And the expectation was that should be a seasonally slow quarter because of Chinese New Year, correct? So we are still using 30 to 35 million, that's the number that you threw out, and I guess that's still a number that's going around the circles in China. But isn't there a pretty solid case that the number of subs should be more than that based on the Q1 performance? And I have a follow-up after that.

Well, actually, the sub is -- Chinese New Year is indeed -- from a business point of view, it depends on what kind of a business that we are in. If it's infrastructure business, we're going to be slow because everybody will be not going to work during that period of a time. But from another business from subs, it is the peak of year because they buy a lot of gifts during the New Year's, just almost like Christmastime. So we see significant growth in the sub is because a lot of people, they wanted to start sending the short messages, and they are having a day off, so therefore they will go to stores to buy more. So the sub growth, we are expecting in Q1, to grow. In fact, in Q2, Q3, we are seeing it will be slowing down, typically, because it's too hot during the -- during the summertime, where we will see some slowdown in Q3.

Okay. As I remember and I just want to make sure I have these things correct, the thinking was that handsets -- I think I remember this correctly, handsets were supposed to slow down in Q1 because of Chinese New Year. And I thought that basically subs would go along with that.

Steve, you've got it right on the handsets because the Chinese New Year was earlier this year than typical. So a lot of the operators bought in the fourth quarter, as we talked about, in preparation for the Chinese New Year. So you're exactly correct on what you're thinking in terms of handset shipments.

So the sell-through -- you think the sell-through to the consumer was actually strong in Q1, as indicated by the sub numbers?

Yes.

Okay, I understand. The other thing I'd like to ask about is on a per-share basis, if you could just help us -- the M&A costs that your -- that contributes to the downward revision, how much on a per-share basis does that amount to?

You mean on a -- from a dilution point of view with the acquisitions?

Yes. I mean, well if you could just tell us the total amount of M&A costs, we would like to separate --?

I think it's a little over 7 cents in Q2 because we are talking about a $5 million in-process R&D charge in the quarter, is our initial estimates. And then on top of that, we've got incremental R&D that could be another 4 million of spending, and 1 to 2 million of SG&A. So we are looking at a sizable amount of expenses that we will have to take it on a GAAP basis here in Q2. We're not projecting any revenues in Q2 so the revenues are second half. So I think we just have to -- you know we go through Q2. And as we said Q4, it will be accretive to our earnings but --

So on the operating expenses, it sounds like we should be adding about 6 million per quarter? Like on an absolute basis just add 6 million for the additional (multiple speakers) -- R&D?

Yes, that would be on the conservative side for Q3 and Q4, correct. And then with the in-process R&D, something closer to 10 for Q4.

Got you. Thanks, a lot.

Brenda, we've gone a little over an hour here, so maybe we could take two more callers.

Certainly, sir. Your next question comes from Tinu (ph) Slia (ph) Merrill Lynch.

I just wanted to check on the DSL, if you -- you quoted a number of 300,000 or 330,000 in China for the first quarter. What do you estimate your marketshare there to be because with the shift towards more IP-based DSLAM, we would have thought you would start to see a bit more of an acceleration in your business there?

You're right. But they also bought a lot of orders toward the end of the last year and the beginning of the year, so early beginning of the years. So they really have a lot of digest going on in the market and they are adding a lot more subscriber bases. And so our marketshare, we are not quite understanding our marketshare, but probably about 10 percent. And we are now in either number four or number five-ranking in China. And we hope we will be able to become the number three by the end of this year.

So would you expect to see -- when would you expect to see perhaps a ramp or a pickup, when does this inventory get digested and --?

I think our inventory, as we speak, they are gradually to digest. And we have to show them some very meaningful application, value-added services. So we are very, very aggressively showing them our PV over IP or videos and triple play type of things in the market now. So you will see many, many market areas that we are showing the real demo as we speak. So in the future, we will be a lot more actively. And the people want to differentiate their services, then they will realize they have to go to IP. ATM cannot handle this.

Right. Just a follow-on question, can you just -- I'm sorry if you touched on this in the opening, but can you just outline again sort of the competitive advantages you see in the CDMA field versus Fau (ph) AZTE (ph), etc., given -- you know I mean PAS, you've got a clear competitive position. But I guess in CDMA, given the relative newness of the business, could you perhaps just outline that?

Absolutely, we always want to differentiate ourselves. So I wanted to make sure that whenever we do anything, we always see the differentiation between ours and the other companies. And we believe today, we are the only one with the softswitches in the CDMA and in a meaningful way, and also, we are working with IP-based base station as well. So we have been able to reduce a lot of operating expenses because they don't have to have a backhaul into the central offices. So there's a lot of -- the customer realizes that will be saving a lot of their operational OpEx expenses. And we have been able to generate a lot of interest. In fact, you know, we have been seeing a lot of other companies, even our competitors, has been approaching us to see if we will be supplying, willing to supplying our softswitches to them. I hope I answered that. Maybe I just will summarize it. Because of our softswitch capability in IP solution on our base station, it's a big differentiation between ours and other competitors.

Right. But would I not be wrong in saying that they use some of the softswitch value is always difficult to pin down because typically it's all sold in a bundle?

Yes. Yes, that's true. So there's a lot of differentiation we will be able to say is that how much operating costs that we will be able to save it for them. And we can quite obviously show very aggressive numbers. And we also believe our base station -- and the IP-based base station is a very aggressively -- we will be able to offer to our customers, as well.

Right, thanks.

Last question.

Your final question comes from Jeff Kvaal, Lehman Brothers.

I have two questions for you. I think the first question is on the margin side. It sounds like you are thinking 27 to 28 percent gross margins in the second quarter. Could you talk a little bit about what the factors are that would drive that sequentially lower? And then my second question relates to the 2005 target revenue number.

Okay, Jeff, I will take the first question here. I think we are seeing 27 to 28. I don't necessarily want to lock in on 27 percent here for Q2. But I think if we take a look at the Yen, and I think people realize that the Yen in Q1 did hit ranges of 105 and it's come back up more recently towards 108. But when we run that through our cost of goods impact, we are looking for something like maybe a 106, 107-type impact on cost of goods in the fourth quarter -- I am in Q2, whereas we ran like more like 109 in Q1. So that's going to have maybe a 0.4 to 0.6 percent impact on our margins. So that's probably the biggest thing we are looking at here between Q1 and Q2. Then obviously, we're trying to build in what's going to happen from competitive pressures on the handsets. You know, we have been signing contracts, as Hong talked about more stable pricing environment on infrastructure. We continue to drive the costs out, so we see that being very favorable, and then the international business is ramping. So I think all that's gone together to provide the guidance.

Okay, fantastic. And then as far as 2005 goes, it seems as though you are loosely targeting 3 to 3.5 billion in sales and --

I think we said in excess of 3.5.

Okay.

Yes, so we want to be clear that we're looking for a minimum of 3.5 next year.

Okay. And then we should be thinking about after-tax margin of 9 to 10 percent?

Well, yes, we'll give detailed financial guidance. But if we are successful in running the company, yes.

That's a target operating model?

Yes.

Okay. All right. Perfect. Thanks, very much.

Okay. That concludes the conference call here for today. If there's any additional questions from anybody in the audience, we will be happy to take your calls into the company. And again, thank you all for participating.

This concludes today's UTStarcom first-quarter 2004 conference call. You may now disconnect.