UTStarcom Holdings Corp (UTSI) 2005 Q3 法說會逐字稿

Good afternoon. My name is Sharico, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the UTStarcom third 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 session. If you would like to ask a question during this time, press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad. Thank you. Mr. Barton, you may begin your conference.

Thank you. Good afternoon and thank you all for joining UTStarcom's third quarter, 2005 earnings conference call. I'm Fran Barton, UTStarcom's CFO, and I'm pleased to host today's call with our CEO, Hong Lu, and our COO, Mike Sophie. I'd like to remind everyone that some of the information we'll discuss today constitutes forward-looking statements. Actual results could differ materially from our current expectations. To understand the risks that could cause results to differ, please refer to the risk factors identified in our latest annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, which are filed with the Securities and Exchange Commission. When that, I'll turn the call over to Hong. Hong?

Thank you, Fran, and thank you everyone, for joining us this afternoon. On today's call, we will focus on four key items -- Q3 results and strategic direction, restructuring, and Q4 guidance and initial thoughts on 2006. Let me begin by providing the brief summary of our financial results. Our third quarter revenue were approximately 635 million in line with the preliminary revenue range provided on October 6, reflecting the pushout of approximately 40 million in IPTV related revenue that we are now targeting to recognize in the fourth quarter. Our GAAP net loss was $3.40 per share. The majority of the loss was driven by the loss of $2.89 share associated with the long-lived asset impairment, the tax effect of the impairment and the deferred tax asset valuation taken during the quarter. Balance sheet and cash flow performance improved during the quarter and we generated approximately 223 million of the positive cash flow from operation during the quarter. In addition, our backlog at the end of the quarter increased to slightly over $1 billion with a book to ratio of over 1.2. We see this as a positive indicator of the consumer demand for our new product. Fran will discuss our financial results in greater detail later in the call.

Moving to our strategic direction, I would like to first address our current situation and discuss our thoughts on the near-term outlook. As you know, the Company has undergone a difficult transition period over the past 12 months. Our PAS market in China has been declining while the revenue from a new product line haven't ramped quickly enough to fill the gap. Earlier this year, we announced the restructuring program to align our organization with this new reality. Today, we have made significant progress in our restructuring initiatives. However, managing expenses is addressing only one of our current challenges. Other crucial elements are ramping topline growth outside of the PAS and improving gross margin across our product line.

Several years ago, we begin investing in a broader range of the products and technologies to diversify our revenue streams. Through a combination of internal R&D and strategic acquisition, we built a broader portfolio of the products aimed at addressing a number of the markets outside of China and PAS. Over the last several months, we have initiated a series of strategic planning sessions in which we consider each of our target markets and their prospective growth rate. We also look at the competitive environment and when we thought we could achieve meaningful revenue from each. We compare our finding against our internal competence. Among the key topics addressing in these sessions were, one, how can we invest our resources and managerial time in the most effective way? And which diversification initiatives carry the most attractive potential returns? Two, are our infrastructure and expenses aligned properly to support these key initiatives? This is an ongoing process and we are using our finding as our basis of our strategy.

Based on this assessment, we create a target list of the key market where we will focus our attention going forward. This target list can be grouped into two major categories, which is, one, ongoing business and, two, future growth drivers. Ongoing business including the following. ne, first, we will continue to make enhancement and optimize the PAS market in China. Despite the recent declines, we believe this market will remain a significant source of revenue for us. UTStarcom has a broad install base with the Chinese carrier customers and will continue to generate sales from network upgrades and expansion. As a PAS utilization rate of approximately 80%, PAS subscriber numbers are expected to top 100 million by mid-2006 which will translate into both infrastructure and asset sales.

Second, we will also continue to drive IP-based broadband access adoption worldwide with our industry-leading IP DSLAM, GEPON and MSCP solutions. Our focus is on expanding on our existing install base in Asia, CALA, and EMEA, as well as building new customers relationship globally.

Finally, we will continue to expand our global handset sales through the expertise of the PCV division partnership with such supplier at Sharp, SGC and Casio and the ramping capability of our internal handset design center in Korea.

As for the future growth drivers, we're focusing on two significant markets. First, we will continue to aggressively lead the IPTV market. We believe this technology has a strong growth potential and we are starting to see the initial adoption by major carrier worldwide. UTStarcom has been one of the pioneer in the market and it is currently one of the very few providers that has a complete entry in IPTV solution in the large-scale commercial service globally. We have enjoyed initial success in China, Japan, North America, Latin America, and India and see additional opportunity in Europe.

Second, we believe we have a compelling and unique CDMA 2000 product portfolio. Which includes an all IP base station, PDSN, and a core network switch. This architecture allowed for extreme cost-effective remote deployment as well as a niche deployment such as a disaster support, military application and in-flight or in-building services. We're seeing initial interest from the customers in the U.S. in which we deploy several base stations to support the relief effort for Hurricane Katrina. We have also won a contract with the reliance in India and see additional opportunity in Asia Pacific and EMEA. I am confident that by focusing our resources and leveraging our core competence, we can build strong presence in these areas in the market. And in participating in a future growth. We expect that initial revenue for the IPTV and CDMA will be lumpy from quarter to quarter but should smooth out as they ramp through 2006 and 2007.

Moving on our restructuring initiatives. We believe we have made very good progress in our restructuring efforts today and are making additional cuts in order to achieve further expensive savings. Also, with the aim of narrowing our focus, we're actively pursuing opportunity to divest some of our non-core assets and we will make details available as they materialize through the Q4. Fran will provide more detail on the restructuring program later on the call.

Our focus for 2006 is a continue our transition and positioning our Company for long-term profitable growth in a market and technology where we have a competitive advantage. We expect to see the modest revenue growth in the market such as CALA, India and Asia Pacific, which will be offset by flatish revenue in China and North America and declining in Japan. Operationally, we will put a strong focus on a growth margin improvement as well as a continuing expense control. Anticipated growth margin improvement should be driven by, one, an improved supply chain infrastructure, two, quality improvement, three, ramping of the new ASIC in our PAS handset and optical transport product line. Finally, the transition to our own design handset to the PC channels. We have charted a path to the return to the Company's the profitability and positioning the Company accordingly. We will continue to provide detail on our progress on a quarterly basis. And now, I will turn the call over to Mike, who will give the operation update and detail on our business units performance in Q3. Mike?

Thanks, Hong. As discussed in prior conference calls, we've organized the Company into strategic business units. I'll give a quick update on our three main business units, wireless infrastructure, broadband infrastructure and handsets. Starting with the wireless business unit. Net taps subscriber additions were 5.3 million in the quarter, bringing total subs to 83.8 million in China at the end of September. This compares to net adds of approximately 6.5 million in the second quarter. Past subscriber growth slowed during the seasonably weaker summer months as operators curtailed their promotions and focused on profitability as we also saw in the second half of last year. In addition, the transition to the PIM card-based handsets caused some channel disruption and slightly increased handset prices. We continue to maintain leading market share for both PAS infrastructure and PAS handsets at approximately 55% for each. As Hong mentioned, we continue to believe the PAS will be a large and important market for UTStarcom in the future. These sentiments were echoed in several comments by telecom officials in China, including an analyst from the MAI who stated that PAS would coexist with 3G for at least ten years, given its user base, cost benefit and the fact that voice will remain the predominant means for communication for most Chinese people. We expect that the PAS market in China will be more stable next year after a 50% decline in 2005. We currently anticipate that PAS-related CapEx from our PAS revenues will be slightly down in 2006 as compared to 2005.

Also during the quarter, China Telecom officially launched our Q-Box as an extension of its PAS service offerings. They launched a home box commercial trial in six cities in China, including Shanghai. By September 31, there were more than 20,000 subscribers whose had signed up for Q-Box service in these cities. China Telecom's President, Wayne Sha Chu, commented at a recent conference with investors, that the launch of the home box trial demonstrated China Telecom strategy to leverage fixed line mobile convergent technology to provide differentiated services. UTStarcom is now working closely with China Netcom in promoting Q-Box, A commercial trial is being launched shortly in Beijing.

Finally, in our other wireless businesses, we continue to make progress with our CDMA 2000 product lines. During the quarter, we announced a contract with China Intercom for our CDMA PDSN product. In addition, we announced an inflight test of our CDMA infrastructure with Boeing and we shipped multiple base stations to support relief efforts for Hurricane Katrina. We expect to see meaningful growth from our CDMA family of products in 2006.

Moving on to the broadband business segment. e also continue to see progress from our broadband products in the quarter, in which we announced contracts in Colombia, Brazil and India. During the quarter, we launched our first commercial IPTV network in Japan with the Auto BB. They currently have approximately 30,000 active subscribers on their networks. In the fourth quarter, we expect to launch commercial IPTV services with DSSI, a competitive local exchange carrier in Florida, and at least one commercial network in China.

Finally, our IP DSLAM is ranked number one in the majority of categories in a recent detailed product analysis report published by Heavy Reading, a noted industry analyst firm. In the study, Heavy Reading evaluated 50 different products from 19 vendors and I noted that UTStarcom earned first place in most important category by a clear margin. We expect our broadband business to grow in 2006 from our current revenue run rate over what we experienced here in the second half of 2005.

In our terminal segment, our PCD division had another strong quarter in Q3 shipping a total of 2.1 million handsets with an average sale price of about $163. We shipped our first internally designed and manufactured device to Unefon in Mexico, Smartcom in Chile and Sprint in North America. Sprint is calling the UTStarcom phone the CDM 105 and should be available in all their channels by mid-November. To date, we have shipped approximately 250,000 of our own handsets through the PCD channel and expect shipments to reach approximately 400,000 by the end of 2005. In addition, we began shipping three new devices from our supplier partners to Verizon. We also successfully launched the first Microsoft Windows for Mobile 2005 device available in North America with Sprint.

Looking at personal communications business, we have been focusing on transitioning our strong customer base to our new line of internally manufactured handsets as well as those from our broadening supplier partners such as Sharp, HTC, Casio and KTFT. We are very enthusiastic about our product roadmap for 2006 and believe the carriers are receiving it very well. We believe that these initiatives will replace most of revenues formally associated with Carrytel. However, their attrition does lead us to initially expect revenues from the PCD division to be flat, just slightly down in 2006, while delivering higher gross margins. As for PAS handsets, we continue to migrate to our new A6, which are more cost-effective than our prior chip solution. During the third quarter, we introduced one new handset model with a new A6 and plan to introduce several more in the fourth quarter. This should drive gross margin improvements for our handset business. Now, I'd like to turn the call over to Fran. Fran?

Thanks, Mike. First, let me provide some detail on the third quarter results and give a status on our restructuring initiatives. Then I'll give guidance for the fourth quarter of 2005. We closed the third quarter with sales of 635 million, which were in line with the revised revenue guidance we gave on October 6th. Sales for the quarter were down approximately 1.5% year over year and approximately 12% sequentially as anticipated. By business segment, PCD sales were 364 million on the quarter which were up approximately 6% sequentially. Sales for the non-PCD terminals business were approximately $106 million, which were down approximately 27% sequentially due to seasonality as well as channel disruption due to the transition to the PIM card-based handsets that we discussed before.

Sales for the broadband business were approximately $33 million in the quarter which declined approximately 49% sequentially and came in below our original expectations for the quarter due to the pushout of approximately $40 million in IPTV revenue into Q4. Wireless infrastructure sales were 113 million, down approximately 23% sequentially due to seasonal declines in the China PAS market discussed previously. Service revenues were approximately $19 million for the quarter.

By geography, sales in China represented approximately 33% of the total sales of the third quarter, which compares to approximately 91% for China in the third quarter of 2004.

Gross margin. Our overall gross margin dollars for the third quarter were approximately $54 million or 8.5% of sales as compared to our initial guidance of 15% to 18%. The margin decline is attributed to two primary factors, pushout of the Yahoo broadband IPTV revenues and additional warranty and inventory reserves taken in the quarter. By segment, gross margins for the quarter came in as follows. Gross profit margin for the Personal Communications Division was 3.6%, which came in lower than anticipated due to price reductions on selected handsets and additional warranty reserves from increased returns. Broadband gross margin was negative 43% of sales which reflect the revenue shortfall associated with the delay in recognition of the SBB Invision contract as well as additional warranty and inventory reserves. Wireless infrastructure margin was 29% which reflects the recognition of incremental international wireless revenues that had lower margins. Handset margins, excluding PCD, came in at 13% which declined sequentially due to lower margins on GSM and CDMA handsets in China. PAS handsets in China ran approximately 15% in the quarter.

Operating expenses. Operating expenses for the third quarter, not including impairment charges, were approximately $160 million or 23% of sales. This included 24 million of restructuring costs. This reflects our ongoing cost reductions which came in slightly better than expectations for the quarter. SG&A expenses were approximately $89 million or 14% of sales. R&D expenses were approximately $60 million or 9.5% of sales in the quarter. Total operating expenses for the third quarter, including the impairment charges taken in the quarter, were approximately $378 million. So that's the 160 million that I mentioned earlier and the about 218 million of impairment charges for a total of 378 million.

Let's talk about impairment charges. As discussed during the call on October 6th, management held a series of planning meetings in the third quarter with the aim of narrowing the strategic focus of our diversification efforts on a going-forward basis. During these strategic planning meetings, we determined that certain circumstances had changed sufficiently to indicate that the fair value of some or all of our operating units may be below their book values. As a result, we conducted an evaluation of our long-lived assets including goodwill, tangible assets, property, plant and equipment for any impairment. At the conclusion of our evaluation, we determined that the fair values of our operating units are below their book values. As such, we recorded non-cash impairment charges of $193 million for goodwill, $2 million for intangible assets, and $23 million for property, plant and equipment. These add up, as I said earlier, to $218 million total impairment charges.

Income taxes. Total income tax expense for the quarter was $104 million which includes $123 million non-cash tax charge related to the impairment discussed above. The regular operating tax benefit without the impairment would have been a $19 million benefit. I should point out there we're still reviewing these impairments and the valuation allowance and final numbers will be in our 10-Q which we expect to file by November 9th.

Net interest and other income and expense. Net interest and other income for the third quarter of 2005 was approximately $25 million, which was primarily driven by a $20 million gain we recognized on the extinguishment of $90 million of our convertible notes during the quarter. To date, we've retired approximately $128 million of these convertible notes for a total cash outlay of $57 million and 4.9 million share outlay.

Net income and GAAP EPS. Our total net loss for the third quarter was $403 million or $3.40 per share. This includes charges of approximately $340 million, $341 million, or $2.89 diluted earnings per share that are associated with asset impairment, tax effect of the impairment, and deferred tax asset valuation itself.

Moving on to the balance sheet. Our cash and cash equivalents in short-term investments total $511 million at September 30th as compared to $381 million at June 30th.

Working capital. Accounts receivable and day sales outstanding. Our accounts receivable balance was $579 million, which represents a reduction of approximately $272 million from the Q2 levels. This is the result of stronger than anticipated collections of just over $1 billion during the quarter. Our DSO total, including the Personal Communications Division, was 82 days for the third quarter, which compares to 106 days in the second quarter of 2005.

Inventory. As of the end of September, our total inventory decreased by approximately $75 million to $675 million. Inventory turns for the quarter were 3.2 turns, which is consistent with the Q2 levels. Give the strong collections and reductions in receivables and inventories, we achieved approximately $223 million of positive cash flow from operations in the third quarter. Though focus, we'll continue to focus on reductions in overall AR and inventory over the coming quarters.

Short-term debt. Total short-term debt balance at the end of the second quarter was $226 million. During the quarter, we repaid approximately $39 million in short-term debt. Currently have lines of credit totaling approximately $850 million to China with various maturity dates over the next 12 months. As these lines become due, we expect to renew them as we have done historically. We also have a receivables-based facility of $100 million in the U.S.

Restructuring. Let me walk you through our accomplishment to date on the restructuring front. As you recall, the key deliverables under our restructuring program included a working capital reduction of $200 million and an operating expense reduction of $40 million per quarter to come to $140 million per quarter number. We originally expected to deliver these savings by the end of Q4. I am pleased to say the working capital target has already been exceeded as we now have reduced working capital by a total of $271 million.

We're also well on our way to realize promised operational expense savings. Q3, our operating expense was approximately $160 million. It is expected to be approximately $145 million in Q4, not including restructuring, not including the restructuring costs we expect to incur in the quarter. We plan to exceed our original target in Q1 of 2006 bringing operating expenses to approach the $130 million level.

In the process of executing on our original restructuring plan, we identified some new areas of savings, which will include additional head count reductions in the fourth quarter. As such, we expect to incur restructuring charges of approximately $20 million to $25 million in the fourth quarter. As we finalize our strategic plans, we'll continuously revisit our cost structure to ensure that these two are in sync.

Now me cover the guidance going forward. Guidance for Q4. Revenue. For the fourth quarter of 2005, revenue should be approximately $650 million to $680 million. By segment, the revenue should be as follows. Revenues from the PCD division should contribute approximately 50% of the total revenues. Other handsets and CPE revenue should be approximately 20% of total revenues. Wireless infrastructure should also be approximately 20%. Broadband revenues should be approximately 10% in Q4. And this would include the $40 million in IPTV revenues from Softbank that was pushed out from Q3.

Backlog as of September 30th increased to slightly over $1 billion with a book to bill ratio in the quarter of over 1.2. This compares to backlog of 915 million at the end of June. Of our backlog, broadband is approximately 24%, wireless infrastructure is about 33%, handsets are about 38%, including PCD, and service is about 5%.

Gross margins. In Q4, consolidated gross margins should be approximately 12% to 15%. By business unit, the gross margin should be as follows. Broadband margin should be between 30% and 35%. Wireless infrastructure should be approximately 28% to 32%. Handsets should be approximately 11% to 13% and PCD margin should come in at approximately 4%.

Operating expenses. Operating expenses should be approximately $145 million or 22% of sales, excluding anticipated restructuring charges of approximately $20 million to $25 million as I mentioned earlier.

Tax. Our Q4 tax expense should be approximately $5 million.

EPS guidance for Q4 is a loss of approximately $0.45 to $0.55, which is inclusive of restructuring charges in anticipated gains on disposal of assets, about $32 million.

Cash flow. We expect to be slightly cash flow positive from operations again in the fourth quarter as we make further reductions in inventory and receivables.

In summary, we're bringing more focus to our product strategy, which simply stated, is to build on our current strengths, of a core IP network and DSLAM PAS and handsets while we migrate to new areas such as IPTV and CDMA. These new areas may not generate much overall growth for a few quarters, but the opportunities are great.

Despite the Q3 P&L disappointment, the Q3 balance sheet is looking much better. More cash, less debt, lower receivables, lower inventories. In Q4, we're cautious about revenue growth although we do expect better gross margins and thus a reduced loss. Our restructuring goals have already been exceeded on working capital, on working capital reductions and our expense reduction goals will also be exceeded by Q1. This reduced spending level will reduce our break-even point for 2006. This will allow some time for our new businesses to ramp. This could allow us to return to profitability in the second half of 2006. We will continue to work on the product strategy, margin improvements, expense reduction and the cash flow improvements throughout 2006. With that, I'd like to turn the call over to Q and A. So Sharico, if you would give us our first caller, please.

At this time, I would like to remind everyone if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. The first question comes from Jeff Kvaal with Lehman Brothers.

Yes, thanks very much. Mike, this may be a question best suited for you but it certainly sounds as though PCD is a growing percentage of the overall business. I wonder if you wouldn't mind clarifying where you are on the, on your relationship with Curitel and how we should expect that to change in 2006? Thank you.

Yes, Jeff. The PCD division, as you know, has just come up on the one-year anniversary. It was November 1st is when it closed last year. We've been very pleased with that acquisition and I think they're achieving their target. They certainly have exceeded their revenue goals that we have initially laid out for 2005. So I think what you're seeing is the reason it's becoming a higher percent of the business is not only are they exceeding the revenue objectives but obviously the other part of the business, PAS specifically, declined 50% over last year. With respect to Curitel, they announced early in the year that they had wanted to go direct. And I think what we've been able to do is to continue that relationship throughout 2005. We do expect them to continue to want to go direct in the U.S. and we anticipate that in 2006, they will have some success in that strategy. At the same time, we've had a two-pronged approach with PCD on our strategy. One is to continue to expand our strategic partners and suppliers, which we've done a very good job of achieving. And, secondly, is to introduce UTStarcom product into the channel. As we mentioned on our prepared comments, we have got the first model now shipping in both the CALA region as well as in the U.S., and we're focusing specifically on two additional models that we'll be bringing to market early in 2006. So I think net net from all of that, we do expect revenues to be flattish or potentially slightly down in calendar year 2006. But we do anticipate continued margin improvement on the handsets.

Also, Jeff, I think we also have successfully to recruit other companies including Sharp and Casio and Hitachi and many other companies that wanted to participating with our programs. And so we have a lot of, if you will, replacement for the curitels product as well.

Okay. So we should expect few, if any, new launches with Curitel in 2006, then?

Yes. In some cases, we still have some inventory we will continue to do that and also we have some products that we have still, have life cycle that we will continue to sell throughout the the life of the products. Then we'll gradually to start cutting over with other products including UTStarcom, our own.

Okay.

And Jeff, let me add that it doesn't mean we won't continue to sell the Carrytel product. I think we've always had a very open approach here. And they're going to probably find that it's a lot more difficult to go direct than they had anticipated. And as Hong said, there's still going to be existing inventory, existing models that we'll sell in 2006 and we'll just have to see how it develops.

Perfect. Thanks very much.

Your next question comes from Tim Long with Banc of America.

Just a few ones here, if I could. On the Softbank mVision IPTV business, you said you're hoping to recognize that 40 million in revenues in the fourth quarter. To just update us on your thoughts on the opportunities for some follow-on business from that contract? I think you may have said that Japan may start to go down at some point. Maybe just update us on that. And secondly, onto the wireless infrastructure area, specifically CDMA, could you give us your thoughts on where you see activity there? There's been a little bit more going on in that sector. Just highlight for us some of the opportunities or wins that you may see in that area. Thank you.

Hi, Tim. Let me answer the first product in Japan. We have very unique opportunity and I think this is a very early stage. We have been started shipping and we have been getting additional PO coming in for our set-top boxes and depends on how well that they're going to perform. And we will be, we are ready to do further expansion. Our first initial phase has, we have pretty much covered a lot of the central offices areas. And next stage will be more of a, the expansion for the additional capacities, as well as the set-top boxes. And look like we are looking for additional set-top boxes and we are receiving, as I said, going to be receiving additional PO for that. And they're hopeful that if we can promote that process, then we'll be in a very good position. Now, the success of the product is really not only the systems, you have to have a very good, the contents involved and the type of things they wanted to watch in there, et cetera. So, I think it's going to take some time, but it's going to be a very interesting, the opportunity in those IPTV technology will deliver a lot of new way to watch the TVs.

And also let me answer you about CDMAs. We have two sites we have already deployed in Europe, UKBV and Atinent in the Sweden. Both are indicated to us that they were going to increase their, an expansion of their units. And we are actively talking to several others opportunity in other region as well as in Japan. We are very hopeful those order will be coming in. And we are very ready to do the business once the order has been given to us. And so we also have a plan for the increase and expand on this market as well.

Tim, you'd also made a comment about the Japan being down, year over year. Let me very clear. If you'll remember in Q1 of this year, we recorded a little over 300 million of revenue in Japan. That was really kind of due to the lump sum recognition on that one contract that had actually been shipping throughout Q3 and Q4 of last year. So if you actually take a look at the run rate in Japan over the last three quarters, we do see that business growing slightly, not only with the mVision but continued broadband deployments.

And also we are talking several other operators as well. So I think Japan is going to be still be our key market outside of Mainland China and North America.

Okay. So, Mike, that means that actual shipments are likely to be up, just the revenue recognition is down?

Yes, correct. You remember we had to delay rev rack due to the service element and so that was why it was all recorded in Q1.

Okay. Thank you. And there's --

I'm sorry again?

on TDCMA. Yes.

CD CDMA, If we have any business, it will be start shipping probably in late Q4 or beginning of the Q1.

Okay. Where geographically could we potentially see that business?

In Asia and also CALA, EMEA market.

Okay. Are those deals that have been signed already? Or is there, are we in negotiation stage?

We're in the middle of a negotiation with some of them and -- yes, I think both in negotiation.

We've got existing customer relationships, as Hong mentioned, with UKBB and FNET where we're having ongoing shipment this quarter, Tim, and then we've got, as Hong was pointing out, we've got some new opportunities. Obviously, we don't want to get too specific unless we're able to close those deals.

Okay. Thank you.

Sure.

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

Mike? Are you there?

Go ahead, Mike. Your line is open.

Operator, it seems like there's a problem with this line. Maybe we could go to the next caller and circle back to Mike if he re-initiates.

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

Hi, this is actually Dave Fang in for Hasan Imam. I have a couple of questions. First, could you comment on what you think the status of 3G is in China? Second, are you part of the trial 3G network at Yahoo broadband? And finally, it sounds like from your comments in the press release that you're planning to become more focused and possibly exit some businesses. Do you think that will require some additional restructuring on your part in the future?

Let me answer the 3G -- yes, we are part of 3G, the trial in Japan with Yahoo broadband or they call it DV Mobile. We are one of the major participants in there. And talking about China 3G license, we have totally no idea when would be coming out and we were expecting earlier. But then now we have under the impression that they will be delayed. And there's a lot of talk about first getting up with the SCDMA or the CDMA 2000 as well as WCDMA so, it's a very, very hard for us. And every time we have seems to answer those questions, it never materialize. So we are very, very unclear about 3G market situation and license status in China right now.

Now, as far as the restructuring, we have taken all that into consideration already. So I think we don't have to make any further restructuring expenses reserve.

Okay. Thank you.

Sure.

Your next question comes from with Tienyu Sieh with Merrill Lynch.

Hi. I was just wondering if you could provide us with an update on IPTV in China. You mentioned earlier that you expect some business to come through from there. Can you update us first on what is the magnitude of the opportunity we should look at over the next 12 months? And also an update on the competitive landscape there?

Okay. Now, IPTV overall in China, we have significant number of trial sites. We actually have probably about close to 40 test sites. But we have actually very actively working closely with the heart being in the north and we also actively working with Shanghai and also with the trendjo as as well as the Fujo and we are in the very final discussion with the Serjian province. And predominantly with China Telecoms and also we will be actively engaged with China Netcoms as we speak. I think this is in the very, very early stage. I know most of operators there are going to focus on quite a bit of their future expansion and IPTV, it seems to be one of their focus points. Now, nevertheless, that we have been doing the trial, in Harbin, we have been seeing fairly strong and it takes some time to really make the system mature. And we believe we are one of the most mature system-wise and commercially ready and we are already deployed in Japan. So, it is also commercially ready in China. I would say the system is going to be still lumpy. And so we were hoping it's going to be a very, very significant revenue base for us in 2007 on. But 2006 is going to be a lot of introduction and a lot of groundwork and a lot of smaller installation bases to start, to begin with. And so I'm still saying it's going to be a fairly major revenue for us, but not as significant as IP, for the I PAS for us. I don't know. Did I answer your questions?

You could help. In terms of the 40 trial deployments, if we could look at sort of the scale and sort of the revenues associated with that in comparison to, say, the deployments in Japan. Is it going to be a -- I mean, in 2006, is it going to be on the order of tens of millions or could it at the higher end of the range be significantly better than that? Just to help us understand how to put a number to the scale of initiatives that are underway.

Okay. Now, the trial site that we have, largest one is in Harbin. We already have more like close to 50,000 subscriber trial. And so that's a very significant trial site. And we believe capacity's over 10 million. So I think each city, it would be easily giving you close to I would say, anywhere between 5 to $10 million range. If they start taking off obviously, we'll go more. And in Japan, we have a much bigger contract. It's a much bigger scale. So one single order wise,Japan is much bigger. And it takes some time. As I said, the final acceptance and everything else is, we have to satisfy their requirements and everything else. It's going to take some time. And so, therefore, I think it's very hard for us to even focus on those when will be recognized. But opportunity-wise, China is by far much bigger than in Japan just simply because of the sheer number of users out there with the broadband capabilities.

And with regard to the competitive landscape? I mean if we look at your contracts in Japan, broadband pricing different from what it was in China? Or what should we expect with regard to competition and pricing?

I don't want to underestimate our competition. But at this moment, we haven't seen anybody come close to us.

Right, thanks.

Your next question comes from William Bean at Deutsche Bank.

Most of my questions have been answered. I was just wondering whether you could give us a little bit more color on the 3G situation in Japan.

The 3G, they have three landscapes with two under the WCDMA. One is the Eaxis, the other one is the Softbank group. We believe both of them will be getting a license. And another one is TDD license by IP Mobile and that's a more of a TD CDMA and I think they're also going to get that license as well. So, we are working with all three of them. And some is more chances than the others. But I think Japan is going to get the new license for sure this year.

And so the licenses come out this year in timing should you win contracts with the end of next year for recognition?

Well, again, it's hard to say for those negotiation. It depends on how we're going to, the contract and final acceptance, everything else. I will probably say that it should be, if there's anything happen, it should be in, within the 2006 time frame.

Okay. Great. And could you talk a little bit about IPTV outside of China and Japan? Any progress made there?

Yes. We have fairly strong position in Cala. Maybe Mike can share that with you.

I was down in Brazil, you've seen some of our announcements on the Brazil opportunity, just a couple weeks ago. So we're very excited about Brazil. And obviously, we want to let that develop and we'll give more announcements as we go forward. I think we've also mentioned DSSI down in Florida. We're anticipating them launching commercially this quarter and we're very excited about that. In Hong's comments, he also mentioned we've won a contract for IPTV in India so we think we're going to be able to grow that market. We also think that we're close to some opportunities with IPTV in Europe. So this is an area that a lot of people are talking about, but we're actually deploying real equipment and it's being put into commercial services. And as Hong also pointed out though, it's important to stay cautious here because this is very early stage. It's new technology. These are new services that the customers are launching so we're quite excited. I just don't think we want to get too far ahead of ourselves over the next few quarters or even '06 in terms of predicting revenue.

Okay. Thanks a lot, guys.

Your next question comes from Daryl Armstrong with Citigroup.

Thank you very much. A couple of questions. You guys talked about the fact that you expect that Curatel will see some success in terms of efforts of going direct to the customer. You guys sell through the audiovox channels. Is that based on commentary that you're hearing from the service providers or is that just your own internal assessment?

I would say it's more based on our intelligence and knowledge of the market. I mean, we know very well what's going on inside the various carriers and I think we also know very well how they're looking at our product line, which we're very excited about as we go into 2006. So, I think again some limited success, we would anticipate for Curitel in next year. That's why we're feeling we're saying our revenues should be flattish with higher gross margins.

Right.

But you aren't expecting that their traction will come at your expense in so much as the share that they get, you guys will actually end up losing?

I think we feel we're going to be very competitive, Daryl, going into next year. I'm not saying we wouldn't have our revenues drop slightly, but again, I think we're going to be very competitive with not only the new suppliers that we've added, but also with our new products.

Daryl, I think we need to also be intelligently understand infrastructure building is extremely difficult. For instance, logistics and customer services and you have to get the customer in two days. Those are quite a task. And you negotiating with contract with the every major operators. Typically takes about a minimum three months, maybe can be as long as six months. And it's infrastructure and building all of that. We're not saying that's impossible. We're saying this is quite a lengthy process.

Okay. Then one last question. You guys mentioned that the gross margins was in the handset business were impacted by higher return. Is that just a function of the fact that the returns are a little bit higher on your own manufactured handsets as you go down the lending curve or was there something else that actually occurred there that actually caused the returns to be a little bit higher?

I think just, this is Fran, just in the, we had a couple of places, mainly in the PCD. We're talking about some model changes. I think of it more as a normal product evolution, sort of wind down the old and wind up the new. So, I don't think it's any more complex than that. I think there was an issue in China, maybe, with some technology changes as well. So each of them are some version of a sort of a new technology replacing an old. And just having the finish out and clean up the inventory.

Daryl, we want to remind you that for the JD Power recently make the surveys, and we came out very, very well. In other words, you know, UTStarcom's brand in North America, getting a lot of recognition as a very high-quality product.

Right. And then one last question. And I appreciate your patience here. Could you give me any color in terms of at least in terms of the EDBL product that you're selling into North America, how pleased you are with the traction there?

Yes. We are selling quite a bit of EDBL phones as well as EDBL cards.

What are the handsets?

The handsets, we are from our partners that we are shipping quite a bit. And we also working on our own version as well.

Okay. Thank you. I'm sorry?

That's okay, Daryl. I was going to say in terms of last questions, we're going to also maybe take our last question Sharico. So if you could take one more, I think we'll do that right now and then close out.

Your final question comes from Bill Choi with Kaufman Brothers.

Great for getting me in the here. I wanted to talk about getting your low cost chip sets and you have your own base chip sets coming in online along with perhaps chip set. I was under the impression that these low-cost chip sets would comprise perhaps up to about half of your handsets by the fourth quarter and looking at your gross margin guidance of 11% to 13%, it's something does not fit well with these, the margin benefit that would come from these low-cost chip sets. Can you just talk about what's going on for the gross margin guidance for the fourth quarter?

Yes, Bill. This is Mike. I'll take that. As I think, as we've been talking about the net sub adds in Q3 were down a little bit from Q2. So the reality is we're consuming some of the existing inventory and we'll continue with some of the existing chip sets and models. And so that's just delaying the ramp up of the new ASIC a little bit to consume the existing inventory.

So, would you put that kind of half of your phones into the March bucket?

Yes, March bucket, I think I feel more comfortable, more than half.

What would gross margin on something like that look like?

Much higher than now, maybe approaching closer to 20 or arranged -- you know, high teens.

High teens, probably, yes.

As you know, we did significant cost reduction, but we also need to be cautious about market pressures on pricing. We don't want to take the entire cost reduction forward into gross margin improvement at this point.

Okay. Thanks.

Okay, then, Operator, thank everybody very much and we appreciate it. If there's any further questions, you can call us directly and we'll be happy to take your questions. Thank you. Goodbye.

This concludes today's UTStarcom conference call. You may disconnect at this time.