UTStarcom Holdings Corp (UTSI) 2005 Q4 法說會逐字稿

At this time I'd like to welcome everyone to the UTStarcom 10-K filing conference call. [OPERATOR INSTRUCTIONS] Thank you. Mr. Fran Barton, you may begin your conference.

Good afternoon. And thank you for joining us today on such short notice. I'm Fran Barton, UTStarcom's CFO, and Hong Lu, our CEO, is also here with me today. Mike Sophie is not on the call today. He's had recent surgery. The purpose of our call today anyhow is to discuss the delay in the filing of our 2005 10-K.

I will begin by giving a few prepared remarks, and then we'll open up the call to questions and answers. I'd like to note that we're still in the process of completing all the work around these issues, so much of the information this afternoon will be limited. Despite that I feel it's best to give you as much information as I have at this time. Before I begin, I would like to remind everyone that some of the information I will discuss today constitutes forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including the ultimate outcome of the matters I will discuss today. To understand other risks that could cause results to differ, please refer to the risk factors identified in our latest annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, which are filed with the Securities and Exchange Commission. With that, I'll just say a few words about our press release today.

As mentioned in the release, we need to delay the filing of our 2005 10-K. There are two main reasons for this delay. First, the Audit Committee of the Board of Directors needs additional time to complete the investigation of the circumstances around the premature revenue recognition on a contract with a customer in India. Secondly, management is still in the process of assessing the effectiveness of the Company's internal control over financial reporting for 2005 under Section 404 of the Sarbanes-Oxley Act of 2002.

With regard to the Audit Committee investigation, as we previously discussed on our conference call on February 9, the Audit Committee of the Board of Directors of the Company initiated an investigation at the request of UTStarcom management team with regard to the circumstances surrounding the premature revenue recognition on a contract with a customer in India, as well as certain other transactions. To summarize, the Company recognized approximately $22 million in revenue on a contract in India with total gross margins of less than $1 million this revenue was recognized during several of the quarters from 2003 through 2005. The Audit Committee is in the process of reviewing the facts around why this revenue was recognized prematurely and determining the correct course of action. At the conclusion of the investigation, the Audit Committee will determine if we need to revise prior financial statements. As such, the Form 10-K cannot be completed and filed until this work has been completed.

To date, the Audit Committee has made a significant amount of progress in the investigation, which has covered both the contracted issue as well as certain other transactions within that three-year period. However, they require additional time to ensure a thorough analysis of all this information. I realize that this delay is frustrating to the investment community, but I believe it's the right thing to do to ensure that we get it right. In addition, as a result of the findings of the investigation to date, the management team has begun to adopt and implement appropriate remedial measures at the request of the Audit Committee to help ensure that this does not happen again.

In addition, as discussed in today's press release, we're still in process of completing our Sarbanes-Oxley 404 assessment, in part because of this ongoing investigation. This is the second reason for the delay in our 10-K filing. With respect to our 404 assessment, as detailed in our press release this afternoon, we do expect that we will continue to have material weaknesses in 2005. We believe that we've made a lot of progress throughout the course of 2005, but we still have a long way to go. There are two root causes of these material weaknesses, and they are a lack of adequate financial personnel and a lack of adequate business systems. In many cases, remediation steps have been taken throughout the year, but they often require several quarters of testing to be able to attest to their effectiveness. Details of all material weaknesses, as well as the remediation steps that have been taken to date, and additional remediation steps that will be taken, will be filed in our 10-K.

So to summarize where we are, the Audit Committee investigation needs more time to thoroughly evaluate all the data they have covering this three-year period. We plan to conclude our SOX 404 documentation shortly after that. We will also make any required accounting adjustments by the time we file our 10-K. We plan on all this being done on or about April 30, but we cannot guarantee this, because we can't know in advance whether new issues may arise. I'm sure you can appreciate that we cannot give any more additional detail at this time, but I do want you to know that we will do a thorough, professional job, and we will share the results with you as soon as we can. We're taking these matters very seriously. We know what we have to do, and we plan on doing it. With that, I will turn the call over for Q&A. Operator.

[OPERATOR INSTRUCTIONS] Your first question comes from Mike Ounjian from Credit Suisse.

A few questions, Fran. First, related to the audit committee's investigation. In this press release it mentions the situation in India and certain other transactions. Is there anything new in the -- in terms of other transactions that are being investigated for potential changes in revenue recognition?

Mike, good question. No. You can probably appreciate how these things go. You find something that isn't correct, and it's one thing to fix it, but I think it's only prudent to check around to make sure that it doesn't occur somewhere else as well. So some effort is being put in, and because you can appreciate this covers the duration of three years, '03, '04, and '05, to do an adequate sampling of other takes a little bit of time, and that's the reason for the extra time. So I think implied in your question also was so did you find something else, and the answer is, no, we haven't so far. There's nothing of the magnitude of the initial transaction that we're talking about, but until we really finish all that work, we can't really conclude with certainty that everything is okay.

Okay. And the next question really just is around the outstanding debt and some of the terms of that debt. It seems pretty clear on the convertible notes. On the credit facility, though, it sounds like there's some ambiguity as to whether this results in a breech or event of default. Why is -- what is the ambiguity here, and when do you think that will be resolved, as to know whether there's an issue?

Sure. So as you said, the converts we laid out what that period is, and as I think everybody's read that, you realize that after we get into this default period in April, there's a 60-day cure period. So that's a pretty straightforward, we have quite a bit of time -- not quite bait, but a reasonable amount of time to deal with that. With respect to the China lines of credit, I guess what we're trying to say, we don't see or aware of any covenants that have anything to do with this. Sometimes some of the language can take a little extra scrutiny, but that is not a long effort, so we'll very shortly sort that out. But I'm reasonably confident that none of the covenants in those documents have any cross-default type language in them.

Okay. And then the last question I had was, in February, with you gave preliminary Q4 results, which it looks like those haven't changed, you also gave guidance for Q1. Given that we're halfway through March is there any update to provide on whether you'd still feel comfortable with that guidance, or should we be thinking at all differently about the first quarter?

Mike, you do a good job. You've got all the good questions. First of all, to be technically precise, regarding Q4, we have made a subsequent $2 million adjustment to expenses. As you all appreciate, whenever your books are opened for an extended period of time, if you come upon any subsequent information that causes you to rethink an accrual you made or an estimate you made, you should clean it up in that period. So we have about a $2 million expense increase for that. Characterize that as a good example of a large part of that was we did have a legal settlement, so we had estimated in Q4 what we thought it was going to be. We ultimately had an actual settlement, and it's appropriate. It's not necessary if it's small, but we thought, while we're doing this, we might as well clean that up as well, so we did have some of that. So technically it's virtually the same, but it's not exactly the same, so I wanted to make sure that we were giving clarity on that.

With respect to Q1, you realize the call is not about Q1, and we don't want to really get into that. We want to stick to the subject at hand, but I guess if I were to say a sentence on that, we are -- we have been somewhat encouraged by our performance early in the quarter so far, but I think you realize how this goes. We're a back end loaded technology company, and a lot of transactions come through in the last month, and a lot of those come through at the end of the last month, and on top of that we have our normal rev rec of checks on top of that, so I think it it's really premature to draw any specific conclusions about the quarter, other than, as I said, it did seem to get off to a decent start.

Great. Thank you very much.

Okay, good, Mike.

Your next question comes from Mark Sue of Royal Bank of Canada.

This is actually Jennifer Tenenbaum dialing in for Mark.

Can you just speak up a little bit? Your voice is--.

Can you hear me?

Not as strong as Mike. That's better.

Just wondering if you -- how many contracts are you reexamining? Is it 10? Is it 100? Or it's just a few that you're looking at? And you said that each individual contract was not that big, but in total, in aggregate, are the contracts larger than the 22 million or smaller or?

Okay. So I don't recall -- I'm certain I didn't say that they weren't big or anything. What we try to do is the same thing any statistical scientist would do, sue try and take some of the big hitters and identify those. So we've tried to identify some number of contracts that would represent a large sample population, approaching even half of the revenue just to do a search to satisfy ourselves that there doesn't exist one of these. So there's -- it's significant enough, as you might imagine, to take a certain amount of work on the part of our staff and on the part of the investigators.

And at the time that you released your results for the fourth quarter, did you -- were you looking at reexamining these other contracts, or is that something that just occurred more recently?

No, we do our normal contract review, but as I mentioned earlier, this particular time period now caused us to look back into 2003 and 2004, as opposed to just Q4 of last year. So they would have been strictly incremental to what we had done at the end of Q4.

Okay. Then when you finally come out, I guess just to clarify, with the K, the restatements will -- of the other years will be in there as well as--?

Yes, first of all, just also to clarify again, we have not concluded that any restatements are required. I think we've been using words lake either adjustments or corrections. So we will make the appropriate adjustments or corrections, which could include restatements, but may not include restatements. That just hasn't been determined yet. So to answer your question, I think, when we do our final 10-K, I think everything will be clear, and everything will be right.

Okay. Thank you.

Your next question comes from Larry Harris of Oppenheimer.

Yes. Thank you. If I could ask a question, I realize this may be somewhat off topic, but there was an announcement that KTF may be acquired by LG. Any thoughts on that and how that might affect the supply relationship?

Larry, I'm sorry, this is Hong. Can you repeat the question again?

Yes. There have been reports that KTF Technology could be acquired by LG Electronics, and it's been reported that KTF is suppling a couple of your new handset models, including the CDM 9200, and so I know it's a little early, but is there any thought that you might have how this may affect the supply relationship?

We do not have a very detailed conclusion yet. KTFT is indeed our supplier, and we are actually buying from them and selling them to several carriers here. So with their acquisition, it could cause some of our future relationships, or they may decide to stop coming into the United States or decide to just focus on general markets, so we don't know. But I can say one thing. We are continuing to expand our product lines with the other suppliers, which is not really coming to this country yet, including the new product line from Sharp and also from Casio, and Hitachi, a new joint venture. On top of that we have continued to developing some of our other products, come to United States by our Korean team in Korea. It's 100% owned by UTStarcom. So KTFT is only one of those companies, and it is a not very significant part of our supply chain at this moment.

I understand. All right. Thank you.

Thanks, Larry. I think what we're going to do here is wrap up. I did want to make just two quick summary statements. The first one is, in some of the questions from Jennifer and Mike earlier, when I was referring to "we," I was oversimplifying the fact. I do want to point out again that we do have independent forensic accountants doing all this work. This is not management work. We are supplying them with data and documents and so forth but all the decision making, the sample size determination, the analysis is all done by the forensic accountants. The UTStarcom side of the house is providing the information, and having these people do that assessment.

And the second point I wanted to make was, there was maybe some conclusion in Jennifer's thing about, I don't know, additional problems. I think, to clarify, that the additional analysis that's going on is not additional problems. We have not identified in the work of the independent accountants, they have not identified any problems of the nature that we're talking about. So the fact that they're reviewing them I don't think people should read into that anything more at this time until that's complete that they're working through their sample. So I just wanted to clarify that.

I guess the last point I wanted to make is this is a difficult call for the Company. In some ways we'd probably rather not be here doing this call right now, but we recognize our responsibility to sometimes to update you, sometimes to explain things, but we tried to take the time to at least give you a little bit of color on what's going on. I notice lots of companies not filing promptly today, are just sending in their press release, but we did think was important to share with you a little bit, and if there were major concerns, we could at least answer them. It sounds like the concerns that I've heard are very reasonable, sensible things, and hopefully we've answered them satisfactorily to you. Anybody who has further questions can reach me, I will be happy to help you. So with that, I thank you all for tuning in today, and that's the end of this call.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.