UTStarcom Holdings Corp (UTSI) 2005 Q1 法說會逐字稿

Good afternoon, my name is Christie, and I will be your conference facilitator. At this time, I would like to welcome everyone to the UTStarcom's first quarter 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. [OPERATOR INSTRUCTIONS] Thank you. Mr. Sophie, you may begin your conference.

All right. Good afternoon, and thank you for joining UTStarcom's first quarter 2005 earnings conference call. I'm Mike Sophie, UTStarcom's CFO, and I am pleased to host today's call with our CEO, Hong Lu. In addition, we are pleased to say -- have Ying Wu, our Vice Chairman and CEO of China Operations with us. Hong will begin the call by providing an update on our key achievements in Q1, and then he and Ying will discuss the opportunities and challenges we see in 2005, then he will turn the call over to me for a detailed review of the first quarter financials and guidance for Q2, 2005. Afterwards, we'll open up the call for q&a.

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 reports on form 10-K, quarterly reports on form 10-Q, and current reports on form 8-K, which are filed with the Securities & Exchange Commission.

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

Thanks, Mike. And thank you, everyone, for joining us this afternoon. As I stated on our last call, the primary focus of 2005 will be execution and returning to profitability and predictability of our business.

As you know, the past market in China, which has taken us from 188 million in revenues to over 2.7 billion in revenue in just 5years has matured and is declining. Unfortunately, the curved level of the decline is more severe than we had initially anticipated. We now expect the magnitude of the decline to be in the range of 40 to 50%, rather than 30% the market had initially forecast. At the time, we are pleased that our nine(ph) past businesses are ramping and we are on track to meet our goal for the revenue outside of China in 2005.

In the first quarter, international revenue were nearly 75% of the total sales as compared to approximately 8% in the same quarter a year ago. We're working on further accelerating the growth of our international business to offset the impact of a decline in past revenue. We're happy that our recent successes in the international market are optimistic about the interests of our other wireless, broadband, and handset solutions. But we are also realistic that new technologies, new customers, and a new market takes time to cultivate and build critical mass.

To address our immediate concern related to the declining past revenue in China, we're taking the necessary steps to realign the Company to adjust our new reality. This will include the significant restructuring program which both Mike and I will discuss in more detail later in the call. It is clear that UTStarcom is no longer just a China and past company. We would like to begin with by giving the few highlights from the quarter, then discuss in more detail opportunities and challenges we expect in 2005.

I'll begin with a broadband infrastructure. During the quarter we signed expansion contract with the Japan Telecom for our iAN-8000 and NetRing MSTP. Revenue from these contracts should be recognized in the second quarter. The iAN-8000 is also receiving significant interest from carriers in other markets. We recently passed the trial with the China Telecom and multi-service access solutions ranking in top three of the Class A vendors. With respect to our AN-2000 IP-DSLAM platform, we signed a contract this quarter to provide 250,000 force to China to atone the third largest railroad base fixed line operator in China.

We also announced a contract with a BSNL in India for the AN-2000 and signed an expansion contract with a (indiscernible) and versatile in Europe and Brazil Telecom in Latin America. In addition, I'm particularly excited about the interest in our gigabit EPON solution from operators in several key markets around the world. Including India, Korea, and Taiwan. We recently passed tests for optical access products with our MII in China. Finally, I expect our next generation IPTV solution, mVision, to have a meaningful traction this year with initial interest in Asia markets.

Next, with respect to wireless infrastructure. During the quarter we announced 160 million in past infrastructure contract with the China Netcom and China Telecom. Our 2005 PAS infrastructure contracts total 230 million year-to-date. Though we have stated that PAS revenue are in decline, it is important to know that we are not going away completely. We expect PAS spending will continue even when 3G is introduced, as it addressed the needs of a very large base of a low-end consumers in China.

Subscriber metrics support this view. In the first quarter, there were over 6 million PAS subscriber additions, representing over 60% of the old fixed line addition in China and bearing the total PAS of serving in China to just under 73 million. This tracks our target approximately 20 to 25 million new subscriber addition in 2005. We believe that going forward, China Telecom and China Netcom will focus on network optimization and expansion in line with a new subscriber addition as opposed to the new network construction.

UTStarcom continues to maintain a 55 to 60% market share in PAS infrastructure and greater than 50% share in PAS headsets. Declining PAS revenue are being offset by emerging opportunity with other wireless infrastructure products, including CDMA-2,000 and CDCDMA(ph). We expect our non-PAS wireless infrastructure shipment to exceed 100 million in 2005, this compared to shipment of less than 5 million in 2004. We have begun our first shipment of our multimedia 2000-IPCDMA(ph) solution to (indiscernible) in China -- I mean in India. I see significant interest in this product globally as we believe it is only all IP-based CDMA solution in the world, from the fridge to the bay station.

In addition, we sign a contract with Acunet(ph) in Sweden for our moving media 6,000 wireless broadband solutions. We are now our second CDCDMA customer in in Europe, this also marks the first appointment of the wireless broadband service in Scandinavia. We have also successfully completed the trial of the multimedia 6,000 with several tier one carrier worldwide and are very enthusiastic about the level of interest. Finally, we continue to believe that UTStarcom is a well-positioned in China to capitalize on anticipated rollout of the 3G networks based on the recent trial, quality of our technology and a strong relationship with the Chinese carriers.

Now, I will update you on handsets and CPE's. Integration of the Audiovox into the Personal Communications division of the UTStarcom has been completed and it is a strong performance, was a key driver behind our solid first quarter results. During the quarter, we announced that several handsets launches, including our first Evideo handsets with Verizon and the CDM80910 camera phone we launched with several carriers in North America. In addition, our vision of bringing our own design and manufacturer entry-level CDMA handsets for north and south America to compliment our existing handsets portfolio is becoming a reality. The CDM-1,000 single-band phone is seeing initial success in south America and the CDM-7,000 series TRI-band handsets is in the approval process with several tier 1 and tier 2 carriers in North America. The CDMA-7100 series with a browser and a (indiscernible) technology is in approval process with several regional carriers in North America.

While we are pleased with the initial acceptance of our CDMA-CDM-700 -- 7000, and CDMA-1100 in North America, we believe shipment volume will be lower than we had initially anticipated as we are experiencing some delays in the design and the qualification process. Our strategy for the success in improved profitability of the personal communication division includes the introduction of our own handsets into the market and by building relationships with the key third party suppliers. With the introduction of additional supplier, we are able to expand market share and improve gross margin.

Finally, early in the quarter, we announced our F-1000 Wi-Fi handsets and the first relationship with Advantage (ph) and (inaudible). We are seeing a tremendous amount of demand of this phone in multiple markets around the world. We believe the breadth of our handsets' capability positions UTStarcom extremely well in the worldwide wireless market. We can now provide our customer globally with a complete wireless solutions from infrastructure to handsets for PAS, CDMA, and 3G networks.

Now Ying and I would like to discuss the opportunity and challenges we're expecting in 2005. Ying will begin with a discussion of the PAS market in China. Ying?

Thanks, Hong. The record pace of decline of the past market in China creates a key challenge. As Hong mentioned, we had initially anticipated this year's decline in overall China PAS revenue to be around 30%, and the shares estimated with you on our earlier call. Our peers, such as ZTE and Lucent, as well as industry research groups Norton and TRK have also echoed this estimate. What we see now is the much faster dropoff in PAS spending as (indiscernible) reserve modest in anticipation of the 3G rollout in China.

Based on our worldwide estimates, we expect this year's decline to be between 40 and 50%. This will have a meaningful impact to our overall revenue expense-- expectations for this year. At the current rate of decline, we now expect combined PAS infrastructure and handset revenue to be approximately 1 to 1.2 billion in 2005. This compares to revenue of approximately $2 billion in 2004. Our top is to buildup the pipeline of (indiscernible) opportunities filling the gap created by decline of PAS market. Based on the market analysis and our dialup with Chinese carriers, we had anticipated the gradual slowdown in PAS spending and have been taking stats to adjust our business to this new reality.

Hong will discuss more details. Hong?

Thank you, Ying. In the past 12 to 18 months we have made a significant R&D investment in the diversification of the product portfolio. We have also built a direct presence and established a carrier relationship in a new geographical market and have expanded our technical reach through the strategic M&A and a partnership agreement. We're starting to see the substantial results from these diversification efforts. This quarter's performance shows that we are on the right path.

The impact of our diversification strategy is also evidence in our expanded portfolio, product portfolio. UTStarcom now offers a full suite of IP-based wireless solution and handsets as well as market-defined next generation broadband solutions. Being realistic, though, we know that establishing a meaningful presence in a new market does not happen overnight. Developing new customers relationship and introducing those customers to innovative products, such as our TV-over-IP solution, mVision, and our optical (indiscernible) from gigabit EPON require extended lead time.

For example, in Latin America we were in discussion in lab trial with customers for almost one year before we were awarded our first IP-EPON contract in the region. Now we can count Telmex and Brazil telecom as two of our key customers there. It would take time and a very concentrated effort to replace a 1 billion in PAS business with these new solutions. The majority of the steps that we were taken today were focused on growth and diversification of our pipeline.

Now, that fact is that an expected dropoff in PAS revenue makes it clear that we must address our cost structure as well. We have to make UTStarcom a leaner, more flexible organization to facilitate its adjustment to the new market reality. We also have to realign our investment in infrastructure with a new growth opportunity that are outside of China market. Based on this consideration, we are committed to the restructuring program designed to reduce the break-even revenues for each product line, align our investment with a key growth opportunity and facilitate the process of globalization. Our primary goal is to achieve consistent and sustainable level of profitability beginning in the second half of 2005. Mike will go over the restructuring program in detail, including the expected cost savings and anticipated time line.

Despite the challenges we face on our PAS globalization, I remain optimistic about the future of UTStarcom. We have a history of a successful introduction, ground-breaking technology and developing new market with the PAS in China. Our IPT spans globally and now with opportunity for such a product as our gigabit EPON, mVision, CDMA and CDCDMA. We also have a solid track record of managing the Company for the growth and profitabilities. This management team has grown to the Company over 15 times in the past five years, even as many of our competitor were facing a decline.

We call our business model B(indiscernible), which means business for the other four billion. There are over six billion people in the world, but over four billion do not have access to basic, affordable telecommunications. We believe UTStarcom is uniquely positioned to deliver the newest and most cost-effective OIP-based solutions to those other four billion people. I am confident that UTStarcom would successfully in penetrating new markets and building our presence as a leading global equipment provider.

Now I will turn the call over to Mike.

Thank you, Hong. First, let me provide some detail on the first quarter results and the restructuring plan we announced today, and then I'll discuss our guidance for the second quarter of 2005. We closed the first quarter with sales of 901.8 million. Sales for the quarter grew 44.9% year-over-year and 20.8% sequentially and were driven by strong sales in markets outside of China. By product category, handsets and CPE revenues were 443.6 million, driven by strong sales of 315.6 million in the Personal Communications division. This compares to revenues of 236.4 million in the first quarter of 2004 and 425.9 million in the fourth quarter of 2004.

Broadband revenues were approximately 342.9 million in the quarter, driven by the strength in our Japan markets, this compares to revenues of 49.3 million in the first quarter of 2004 and 115.3 million in the fourth quarter of 2004. Sales, Japan Telecom were 268.6 million in the quarter. Wireless infrastructure sales were approximately 115.3 million in the first quarter and were reflective of declines in the PAS market in China. This compares to approximately 336.5 million in the first quarter of 2004 and 205.5 million in the fourth quarter of 2004. By geography, sales in China represented approximately 25.2% of our total sales in the first quarter, which compares to 91.7% in the first quarter of 2004.

Our overall gross margin dollars for the first quarter were 238.2 million or 26.4% of sales. Gross margins for the Company, not including the Personal Communications division, were approximately 38.3%. Gross margins for the Personal Communications division were approximately 4.3%. The improvement to gross margins in the quarter is primarily attributed to the large Japan Telecom contract we recognized in the quarter, which brought our overall broadband gross margins to approximately 50% of sales. Wireless infrastructure margins came in at 33.9% of sales in the first quarter and our PAS handset margins ended the quarter at 11 1/2%.

Total operating expenses for the first quarter were 181.8 million or 20.2% of sales. Specifically, SG&A expenses were 12% of revenues and R&D expenses came in at 7.4%. Income taxes expense for the first quarter was 7.9 million, for an effective tax rate of 17.1%. Net interest and other expense for the first quarter of 2005 was net expense of approximately 10.2 million, primarily driven by unrealized foreign exchange losses of 9.4 million. At the end of the quarter we held large Japanese yen denominated balances in both cash and accounts receivable as a result of our increased sales to Japan and a change in our billing terms from U.S. dollars to Japanese yen on several large contracts. As the yen has strengthened since the end of March, we are opportunistically converting our cash and hedging our AR to lock in subsequent foreign exchange gains, which will be realized in Q2.

Now let me transition from a view of our income statements to highlights of the balance sheet and cash flows. Our cash and cash equivalents, short-term investments totalled 388.9 million at the end of March as compared to 698.8 million at December 31st, 2004. The decline in cash, approximately 310 million, was primarily due to the following: $84 million was used to pay down short-term notes payable during the quarter as we tightened our cash and debt positions to reduce negative interest spreads; 150 million was spent on promotional activities for the JP agreement, which was a one-time payout of funds associated with exiting the promotional business as we previously disclosed; 18 million was an asset purchase of Giga Telecom in Korea, and $58 million of other working capital growth, which was primarily attributed to cash AR balances on higher Q1 revenue, which will be collected in both Q2 and Q3; cash collections from customers remains strong and were approximately $840 million during the quarter.

Although we expect our cash levels to fluctuate from quarter to quarter, we expect cash flow from operations to be positive for Q4. Additionally, we currently have over $900 million of borrowing capacity in China, of which less than 1/3 was utilized as of March 31st. Our accounts receivable balance was 907.1 million, an increase of 100.5 million over the fourth quarter balance, reflecting the increase in revenues quarter-over-quarter. Our DSO's total, including the Personal Communications division was 91 days for the first quarter.

At the end of March, our total inventory and deferred cost balance decreased by 4.4 million to 784.6 million and inventory turns for Q1 were 3.4. At March 31st, our customer advances were 93 million, which represents a decrease of 230.9 million, compared to December. Approximately 150 million of this decrease was spent on promotional activities in conjunction with the Japan Telecom agreement and the remainder was recognized into revenue as we completed all of our promotional obligations.

Our short-term debt balance at the end of the first quarter was 275.5 billion. During the quarter, we repaid approximately 84 million in short-term debt. We plan to utilize our lines of credit, both for and against and repaying periodically, to manage cash needs across our global operations by geographic region.

As Hong mentioned earlier in the call, UTStarcom continues to evolve. Revenues from China and PAS, which has driven such dramatic growth over the past several years are declining, while at the same time we are ramping up presence in global markets. We have had two very disappointing quarters last year, which is frustrating for our shareholders and ourselves, and our focus this year is to position the Company internally to be able to deliver profitability and predictability, given our new market realities. Therefore, beginning the second quarter, we will initiate a significant restructuring plan.

The specific elements of the restructuring plan include the following: A reduction in net employee head count by approximately 1400 employees or 17% of our global work force. We expect to notify all employees that would be impacted by this restructuring in the second quarter. We also intend to expand our outsourcing of operations in the areas of supply chain and IT. This is designed to result in savings and working capital improvements in 2005.

As such, we expect a reduction in overall operating expenses by approximately $40 million per quarter with the full effect realized by the fourth quarter of 2005. We also expect to reduce working capital requirements by $200 million by the end of fiscal year 2005. We expect to take a one-time charge of approximately $25 million associated with these restructuring plans in the second quarter of 2005. We are still in the process of finalizing these plans and communicating them to our employees. Furthermore, we will continue our internal review to identify additional areas where improvements can be made to our cost structure. Our objective is to return to consistent profitability in the second half of 2005. We will provide updates on our progress on our quarterly calls.

With regards to guidance for Q2, the revenue for the second quarter of 2005, revenue should be approximately 740 million. As discussed throughout the call, we continue to see more severe declines in the PAS business in China, while our international businesses are growing, but for which revenues are lumpy from quarter to quarter. Handsets and CPE revenue should be approximately 500 million, of which 345 million will be from our Personal Communications division. Wireless infrastructure revenues should be approximately 150 million, driven by declines in the PAS market in China and broadband revenues should be approximately 90 million in Q2.

As noted in our press release, we have also deployed equipment for our contract value of approximately $30 million in revenue related to our mVision IPTV products. This customer plans to launch commercial services in the second quarter of 2005, and at this time, we have not included revenues associated with this contract in our guidance assumptions for the second quarter because this is a new technology and there are uncertainties around the timing of the final acceptance. However, if final acceptance were to be achieved in the second quarter, it would result in an upward revision of revenue, margin, and net income guidance for the quarter.

Our backlog as of March 31st was approximately 950 million. In Q2, gross margins should be approximately 15 to 18% on a consolidated basis. This is driven by product shift in the second quarter. Total operating expenses should be approximately 25% of sales and will include approximately 25 million in charges that will be above the 25% associated with our restructuring costs. As disclosed earlier, we also expect this restructuring to range between 20 and 25 million. If you look at it as a loss per share of 13 to $0.16 in the quarter. These are still preliminary as our plans are finalized and implemented.

Also, as noted in our press release today, and discussed in our form 10-K, we have applied to have our new facility in China designed as a high-tech zone, which would impact two UTStarcom entities, HUTS and HSTC. We expect to receive this designation the second quarter, which would have the benefit of reducing our tax rate applied in China from the current of approximately 26% to 15% for HUTS, and approximately 13% down to 7.5% for HSTC.

Although the lower tax rate would significantly reduce the Company's tax expense, it would also create a non-cash tax charge in the second quarter of approximately $25 million, or a loss per share of approximately $0.22. This charge would be necessary because the deferred tax asset, which represents future tax deductions, would be calculated using the lower tax rate. Our annual effective tax rate for Q2 should be approximately 27% before the charge, reflective of the profitability by geographic region and tax credit.

We have EPS guidance for Q2 as a loss of approximately 70 to $0.80, which is inclusive of both, the non-cash tax and restructuring charges. We expect to be cash flow positive from operations in the second quarter and continued improvements in accounts receivable and inventory levels throughout the year.

Now, I would like to give an update on the improvements we are making to our business systems and internal infrastructure and controls. In our 10-K, we outlined, in detail the steps we have taken and will continue to take on remediation of the internal control weaknesses identified in our Sarbanes-Oxley section 404 assessment. An example of the key improvements we have made include the hiring of several key finance and accounting personnel, including regional controllers in Kalla(ph), India, and Asia pack regions.

In addition, since we filed our 10-K, we have hired a Vice President of Finance in China, and we plan also to hire and train additional finance personnel in the U.S., Japan, and China. We are committed to the process of ensuring that we have a world class internal control and have been and will continue to be based pro active into the remediation of all weaknesses over the course of the year. We will continue to provide you with quarterly updates on our progress.

Very key to the improvements in our overall control environment is the continued improvements in our business systems, implementation and supply chain program. Our supply chain transformation program continues to build the foundation for our growing global business by increasing our efficiency, agility and scalability. The value we are creating for this program is both qualitative and quantitative.

For example, through our work in the procurement and sourcing, we have already generated annual savings of 16.5 million with the expectation of generating a further 10 million annual savings this year. We are also continuing to focus on aggressively managing our inventory, specifically our slower-moving products. We are building our supply chain planning capability by reengineering our part member management process, our forecasting and planning processes, and establishing standard terms and conditions with our key suppliers. We are also focusing on building the expertise of our employees. Our programs so far has involved over 1,000 people in our organizations in some way either through direct project involvement, training or support roles. This involvement not only generates the awareness of the need to transform our supply chain, but also builds the support we need to drive the changes we are making.

Overall, we see the key technology enabler to bring together all of our internal control and supply chain improvements is the continued implementation and optimization of our global business systems. We continue to work to standardize the whole company on Oracle and are putting together specific focus on order management processes, which include sales and purchasing through year-end. We are also continuing to bring our remote offices up and expect to have Japan go live in the second quarter of this year, and we realize that this type of ARP conversion is a multi-year process, but we result in a much stronger organization overall.

With that, I would like to turn the call over for the q&a. Christie?

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the q&a roster. Your first question comes from Hasan Imam from Thomas Weisel Partners.

Thank you. I had a couple questions. First of all, in terms of the full year guidance, previously you guys had talked about 4 billion. I'm wondering if there's an update to that, given your new expectations of PAS decline? And then secondly, you talked in the past about 100 million or so in free cash flow? I'm wondering if that's still the-- still going to be the case? Thank you.

Yeah, Hasan, this is Mike. I think what we tried to make very clear on our last conference call as we finished the fourth quarter, is that we were going to move away from giving full-year guidance, and we're specifically only giving guidance one quarter out, given the changing business environment. I think what we have now is provided at this point is we've got our Q1 actuals. We're giving our Q2 guidance. I think we are specifically are highlighting that we have $950 million of backlog as we exit Q1.

The other thing I would point out is that our handset business has really moved much more to a book-and-ship business. So, I think, you kind of can take those data points and calculate where you think the year will. We also try to give some very specific guidance on PAS for the full calendar year. With regards to cash flow, we are projecting to be cash flow positive from operations here in Q2. And I think we just need to kind of work through the balance of the year, and we're focusing on generating substantial freeing up of working capital and cutting our operating costs so that we can achieve a break-even with a much lower revenue.

Your next question comes from Daryl Armstrong with Smith Barney.

Thank you very much. Just wanted to talk a little bit about the restructuring. I want to make sure I understand this. I would assume that most of the cost benefits that you guys are going to see will actually come from the head count reduction, correct?

Yes. Head count is our single largest driver of costs. If you look at head count and labor and related costs associated with that, it's about 60% of our expense structure. So head count is a single driver, but we're looking at all aspects; we're looking at material procurement, we're looking at things like travel. So we're going to look across the board. We've identified quite a few of areas for reduction.

Well, I guess one thing that I'm still trying to understand a little bit better is the fact that, when I look at annualized cost savings, that you guys are forecasting, I guess it's somewhere around $160 million a year. That comes out to over $100,000 per employee, and since most of these employees, I assume, there are in the organization or in China, I'm a little surprised that that number is quite that high. That's generally what you see more typically of someone like a Lucent or a Nortel, where their employee base is more North American-oriented, as opposed to being in China.

Daryl, at this time we're still in the process of notifying our employees. So we don't want to be very specific on where the reductions are, but it's not going to be in any single geographic location. And there are quite a bit of costs associated outside of direct labor as well in our expense structures.

Okay, all right. And then finally, in terms of, in terms of 3G licenses, clearly, there's been a lot of discussion around that. Any color in terms of what, what the current holdups are relative to that process? I know there have been some anticipation that we would see some additional carrier re-orgs within China. That hasn't materialized yet. Any color that you guys can provide there would also be helpful as well.

This is Ying. As a matter of fact, there is no clear instruction from Chinese, and recently we discussed with MII on the restructuring of the carriers in China as well as. [ indiscernible ] To answer it there's no plan until now. So, we don't have any clear informations on that, but we estimate China should give realizes around the fourth quarter some time. In terms of the restructuring, it's very, very complicated. Right now, according to our source, there is no clear plan yet, approved by the central government.

But there are, I just wanted to also put the color in. The best estimate of what Chinese government will not going to delay further beyond the Olympics in 2008, and they need to have the system up and running and take all the bugs away. So, I really do believe that they will not be able to wait any longer beyond the end of this year, and so maybe end of this year, beginning of next year that they will have to start giving out the license. And that's our best estimate that we can give. But we have been wrong in the past about when the 3G will be given, so we could be wrong again, but I think that makes a very good timing-wise around end of this year or beginning of next year.

Yes, that sounds logical. Then one final real quick housekeeping question. I'm sure I probably just missed this. What was the cash flow from operation this quarter?

It was approximately 180 million negative, Daryl.

Okay. Thanks. That's it.

Your next question comes from Jeff Kvaal with Lehman Brothers.

Thanks, very much. I have two questions. First, Hong, could you give us an update, or perhaps Ying, on the ASIC that you're designing for the PHS phones, and where we should think about the timing for that and the impact on margins?

No, the ASIC we have been working for quite some time, and this particular case in China, starting from May 17, that every new handsets that will require a pin card-- in other words, similar to GSM cards-- and what they call it the pin card. Starting from this year that we have originally have the product out to be ready to release, but we were asked by the MII and operators to make sure that our handsets provide that. So because of that, we have been delay our shipment in Q3. So we are re-work on ASIC again to make it prepared for that, and so at this moment, we have two potential ASIC coming out, one our own, the other one is another company's.

Okay, perfect. So the handset margins would start benefiting from that really in the December quarter? Beginning September quarter, starting December?

I think the Q3 we will start having one or two models, and Q4, if we have seen the success of the Q3 model and that'll be expanded to more. I think the real, real benefit will be coming in, in 2006.

Okay, perfect. And then Mike, for you, can you give us an update about the 100 million in PHS revenue that was delayed for recognition from in the December quarter? Is that now in the guidance for the second quarter?

Yes. Just for everybody that may not have that orientation. If you remember, we did announce in the first part of January that we had about $100 million of revenue that we had anticipated in the fourth quarter had moved into calendar year 2005. Specifically, these were contracts where we actually deployed equipment and actually, the equipment was put in commercial service, but as we mentioned, there is changes in the procurement practices in China there's now a six-month delay from the time from that you, that you -- achieving financial acceptance. So yes, Jeff, those contracts are in our guidance for Q2, and as Hong mentioned, we did sign quite a few contracts, over 200 million of contracts year to date for past infrastructure that's built into our guidance as we go into Q3.

Okay, so is all of that 100 million then following in the June quarter?

I think there my have been a small amount in Q1, but the majority of it is Q2.

Okay, perfect.

Your next question comes from Mike Ounjian with Credit Suisse First Boston.

Great, thank you. Mike, just a follow-up on the guidance. So, within the 90 million of broadband, is there a portion of that from Japan Telecom? It sounded like from the beginning of the call there was. I just wanted to get a sense of how much that is. And then is there anything else sort of underway, under contract that would be coming that would not be showing up in the Q2 numbers? With Japan Telecom, that is.

Yes, the answer is we did receive follow-on contracts from Japan Telecom for our iAN-8000 product. We also continued to get orders for our MSDT(ph), as well as our DSLAM products and we are moving forward with our IPTV in multiple markets. So yes, Japan does has significant revenue. We don't want to get in the habit of breaking out by customer what our revenue expectations are for quarters, but we are achieving nice call on contracts as well as the new products being accepted.

Great. And then the mVision product, the 30 million you mentioned that may or may not be recognized in Q2, what kind of impact would that have on your margins to the extent it gets recognized?

Again, we want to be customer sensitive here, but I think in general, we've tried to say is our broadband margins are obviously very good on a global basis, and in general, infrastructure margins are much better than handsets. So it would have a very favorable impact.

Okay. And then the last question, just on the broadband side would be, when -- you didn't ask that $50 million deal with Telmex last year. Has that -- has a good portion of that been recognized already or is that something still come in terms of seeing it in the revenues?

Michael, the contract with Telmex is a framed contract, it's a 50 million. And they have not been deployed, a lot of those yet, in fact, we have only have the first Phase, and we are hoping Shin(ph) will be able to release the second phase and beyond for the third and the fourth phase. So far, we have been deployed and working very well, so the customer is very happy with our solution so far.

Great, thanks. Just one last housekeeping question, Mike. Apologize if I missed this. What was CapEx for the quarter?

Oh, I didn't break it out. I apologize. Actually, let me just check that number and I'll announce it in a few minutes and we'll go to the next question, but I will answer that one for you, Mike.

Yes, no problem. Thanks, Mike, thanks, Hong.

Your next question comes from William Bean with Deutsche Bank.

Hi, guys. Sorry about that. Just-- sorry if I missed it, but in terms of the PHS guidance, can you give us a breakdown, infrastructure versus handsets? And also for Q1?

Okay. Let me answer Michael's question. It was 28 million of CapEx, expenditures in Q1, and then specifically, with the Q1 results, let me just pull it back up here. Oh, were you asking whole year or Q1? I'm sorry, William?

For Q1 and then whole year? Q1, Q2, whole year? That would be great.

Okay. Go ahead-- Okay, I think what we were trying to communicate is in Q1 we had about 443 million of handset revenues, of which we said 316 million was PCD. So the balance would be PAS handsets. For the Q1 guidance. With regards to Q1 infrastructure, we said that was 115 million. That's by and large almost all PAS there is some PDSN product in there but it's only a few million.

Regards to Q2 guidance, William, which I think is you were asking, what we're doing is we're saying total guidance is 740 million. We're saying handsets and CP, breaking it between 500 million for total handsets , we're saying 345 million of that is PCD, so the balance is primarily PAS handsets, and wireless infrastructure was projecting at about 150 million, and again, that will be lion's share that will be PAS infrastructure. And as we go into the second half, we have not given specific numbers, but actually you'll start to see the PDM and the PCNA revenue recognition.

Okay. And can you give us a sense of whether infrastructure for PAS appears (inaudible) increase greater than regular handsets or do you expect them to both go down about the same rate?

This is Ying. Actually, the infrastructure has been slowing down for the last quarter and the Q1, because they had some capacity built up last year, but we've seen, actually, reasonably strong growth, like Hong mentioned, 6 million (indiscernible) in the first quarter. So we're talking about 2 million per month. So we expect the second half, actually, we are getting much more orders in from last month and this month. We're expecting more orders coming in Q3 and Q4 because they're using up their capacities.

Okay, great. Can you just give us a sense of the (inaudible) design handsets (inaudible) other vendors and how you would like-- look at that going forward? Going forward?

Maybe I didn't quite understand that question, again, William. One more time?

Within PCD, within Audiovox, the breakdown between UTStarcom designed handsets and handsets sourced from Audiovox's original partner? How-- where that is now and how you expect that to move going forward?

Yes, William, we had originally targeted about 20% of the volume in calendar year 2005 to be UTStarcom products, and then our balance to be a (indiscernible) of suppliers. What we're trying to articulate is we're continuing down this two-pronged approach with designing complimentary UTStarcom products and then continuing to expand our supplier base with-- they'll provide product into PCD, and through the expanded providers as well as the UTStarcom product, we can gain more market share, we can also get an improvement in overall gross margins.

We are running a little further behind on the handsets that are internally designed for UTStarcom product. We are getting initial acceptances and we are looking at shipping the products, but I don't think we'll achieve the 20% this year, it'll be something probably, about 10%, but it probably won't achieve 20% of the volume in year one. We are making progress on getting additional suppliers signed up as well, so we're feeling good about the progress we're making there as well.

William, maybe I should add another color for how we overall are progressing in the CDMA other markets. We have recently, we made announcement that we have received a China Unicom's CDMA orders and we also aggressively approaching India market and other parts of the Asian market. So, we are very -- so far we have been getting a lot of attraction and in particular we are very happy that we have already start receiving and start shipping the CDMA handsets to China market.

Can you just give us maybe perhaps a rough sense of where PCD-- of non PHS North America versus the rest of the world.

Number-wise, I would probably say the rest of the world will have higher more than 60% of the total volume with the rest of the world.

And about -- the rest 50% North America for--

Less than 40%.

Okay. And that's excluding THS?

Yes.

Thanks, guys!

Sure.

Christie, we're approaching 2:30. Maybe we could take two more questions.

Okay. Your next question comes from Bill Nasgovitz with Heartland Funds.

Yes, can you hear me okay?

Yes.

Mike, I'm sorry, I might have missed this. Did you say that you're going to be cash flow positive in Q2?

Yes, cash flow positive from operations in Q2.

That's a hell of a-- from 180 million negative, how do you propose to do that?

Well, I think we tried to be very open about what happened with the cash. Now, specifically, as we mentioned, in Q1 we used 150 million was associate we with exiting the JT agreement that was payments to the distributors that were -- for the promotional activities in Japan, and then we used 18 million of cash to do the purchase of the Giga Telecom assets, which again, we're not planning on acquiring like that in Q2. And the other thing, as we pointed out, there was 58 million of working capital that was primarily tied to higher accounts receivable balances. We actually had a very nice uptick in revenue in Q1 versus Q4, and those receivables are collecting in Q2.

So what range of positive cash flow are you looking for in the quarter?

It could be as high as $50 million. But I don't think we want to get locked in on a specific number.

Okay. Thank you.

You have a follow-up question from Hasan Imam.

Yes, thank you. I have a follow-up question. Hong, could you talk about the dynamics in the PAS market, maybe one more time? Because it was always expected that in 2005, essentially with the green field buildout done, we were going to move into a kind of incremental capacity add phase. So I'm just wondering why you now think the downturn is more severe than you had expected in the past?

Hasan, I think maybe I don't want to send the wrong message that, our subscriber growth is still very, very strong. So it is showing the best year 2004, we had a increased, net increase of 30 million, and prior to that for the five years, we add 35 million. So you can see the 2004 was a significant year. And so far this year, we are looking at around 20 to 25-- I would probably say more confidently with the first quarter we have a 6 million-plus. We are really approaching closer to 25 million than the 20 million that we had set earlier.

So, those numbers we have given out to the market toward the end of last year was holding. In fact, it was in the higher side. So, but the nature of-- I mean, our customers, who wants to spend the money, is holding their investment for the potential 3G license that they are getting. So, although the customer growth has been growing very, very well, they are preserved their cash flow potential 3G expenditures. So, we had also talked to China Telecom recently, that they had told us PAS is still their largest CapEx in this year's as well. So, we know we are still getting the biggest, largest share, but they have been conserve the capital and the money.

So, then with this country (inaudible) actually service this type of subscriber growth?

Not for a along time because they are reaching their capacities. And we have one study shows overall-- out of 180 cities, maybe 30-some cities is really over 80%, reaching 90, and those are the cities that totally, they will require some expansion seriously soon.

Okay, so there is a possibility that maybe that in the second half of the year we see the CapEx, CapEx uptick (indiscernible)?

Well, Hasan, we have already received 230 million year-to-date from January to April with the 230 million, so that's a significant amount of the investment in those infrastructures. So, we believe that we will continue to see some of those expenditures to continue to spend.

(indiscernible) It is positive-- we want to be that conservative, we'll have to come around the number we can count on? So any upside will be a plus to us.

Okay, thank you.

Okay, that concludes the call today. Christie?

Mr. Sophie, are there any closing remarks?

I don't think we have any. We're available, obviously, for one-on-one calls if anybody wants to call in and this call will be available for replay and perhaps you could announce the replay number?

The replay number is 1-800-642-1687.

Thank you.