UTStarcom Holdings Corp (UTSI) 2007 Q3 法說會逐字稿

Good morning. My name is Dennis and I will be your conference operator today. At this time I would like to welcome everyone to the UTStarcom third quarter 2007 earnings 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. (OPERATOR INSTRUCTIONS). I will now turn the call over to Mr. Hong Lu. Please go ahead sir.

Thank you, Dennis. Good morning and thank you for joining us today. I am Hong Lu, UTStarcom's Chief Executive Officer, and I am pleased to host today's call with Fran Barton, our Chief Financial Officer, and Peter Blackmore, our Chief Operating Officer.

The agenda for today's call is as following -- Peter will begin with the call with a discussion of the business units and operational update, after which I will give an update on the China market. Fran will then discuss our Q3 financial results, give an update on liquidity. And finally, he will discuss the thoughts on Q4. Then we will turn the call over to Q&A.

So before we begin with the formal remarks, I would like to remind everyone that some of the information we will discuss today constitute 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 and our quarterly report on Form 10-Q and current report on Form 8-K, which are filed with the Securities and Exchange Commission.

With that, I would like to turn the call over to Peter. Peter?

Thanks, Hong, and good morning everybody. Over the last four months -- and I think you will recall that is since the completion of the previous strategic alternatives study by the Board -- management has been working with a very high sense of urgency to put the Company back on track for profitable earnings growth.

We have taken a number of steps and this has included a complete strategic review of the Company, which was completed within nine weeks; a thorough in evaluation of each of our technologies and businesses, which were then positioned into core and non-core assets; the creation of new business units to both focus the Company and also to enable the alignment into core and non-core businesses -- this was announced and will be completed by the end of quarter four -- extensive internal communications to ensure all parts of the Company are energized; restructuring to get the right level of cost base going forward -- this will also be completed by the end of quarter four -- strengthening our go-to-market operations in both international and China and Hong will be addressing the progress in China later; and completing a worldwide OEM agreement with a very large global partner and our plan is to have two or three worldwide OEM partners in 2008.

With each of the steps we are confident we have taken the right actions to get the Company back on track. We were careful to protect the R&D investment in our new products. Almost all of our future revenue growth will come from technologies that are early in their lifecycle. It was tempting to cut R&D more and get to profitability earlier, but that would have been a strategic mistake.

In some ways you have to think of UTStarcom today as a large startup. Our previous technologies, such as PAS, have declining revenues, but we do have many strong technologies to take their place but they are early in their lifecycle and in customer acceptance. We have cut the cost base and the functions against a benchmark goal, measured by best-in-class in our industry and we did this against a revenue reflecting our core technologies only. Not all the functions can get to benchmark immediately as we do have internal controls to improve, new IT systems to implement and some legal costs as we close out this year's investigations. They will all get to benchmark by end of 2008.

Although both our research and development and SG&A percentages are currently too high, we believe we can do much better. The model for our R&D is between 10% and 11% of our revenue, excluding PCD. We believe this is a reasonable ratio for an infrastructure business. The SG&A model is between 13 and 14%, excluding PCD. Excluding PCD revenue is the right way of looking at our cost base as PCD is a standalone business.

The SG&A is still too high, but there are a number of costs driving that, including improving financial controls and implementing a new ERP system. We can get to the ratios I stated by late 2008 and 2009. The revenues in the early part of 2008 are still ramping.

We are also aggressively working on improving the supply chain and this includes procurement improvements, outsourcing certain aspects of the supply chain and ensuring we steadily improve margins as a result. The decision to outsource the supply chain for the terminal business unit has been made recently and will be implemented by quarter one. The decision on the infrastructure products will be made by quarter one.

All of these programs should bring us to profitability in 2009. In the meantime, we are putting plans to attempt to bring that profitability into 2008, but we cannot commit to the 2008 profitability yet. We will prepare a 2008 budget during the next quarter and give you an update no later than our next earnings call.

So how are we progressing in the market? I will give highlights of our business. We are structuring our core business into two business units. They are the Multimedia Communications business unit, which includes IPTV, NGN Softswitch and the PAS business, which is based on Softswitch and continues to be material even though revenues have declined. The second is our Broadband business unit, which includes MSTP, MSAN, IP DSLAM and our GPON devices.

We are beginning to see good momentum and enthusiasm for the combination of our IPTV, NGN and our broadband access solutions, such as IP DSLAM, MSAN, GPON and MSTP. The combination of these products provides good solid differentiation. In particular, the IPTV business continues to gain momentum. Cumulatively, we have booked approximately $240 million in IPTV contracts and recognized approximately $18 million of revenue. We recently won new contracts in Fujian Province in China and a major new customer in another Asian country, which we can announce in a few weeks.

We currently have IPTV deployments in China, Japan, India and Brazil. We have about half a million live IPTV subscribers and contracts for about two million subscriber system capacity.

We do need to emphasize that revenue recognition on these orders will ramp as subscribers grow, so the message is the wins are strategic, but expect the revenues in late 2008 and 2009. In addition in many of these markets, we are not only selling our IPTV solution, but also supporting our customers' IPTV needs with our broadband access equipment. For example, in Brazil, our customer Brasil Telecom has already deployed over 400,000 of our IP DSLAM ports to support its eight million fixed-line subscribers. More recently they have started their first IPTV deployment of 10,000 lines.

In addition, we have also begun an initial deployment of our Continuity fixed/mobile convergence solution to provide advanced services for their 3.7 million GSM subscribers. So Brasil Telecom is a great example of a customer who buys multiple products through the Company.

Another great example is in India where we are providing both access and IPTV solutions to Bharti, BSNL and MTNL. MTNL now currently has an initial IPTV subscriber target of 500,000 subscribers over three years. Bharti has an initial deployment of 120,000 lines and a subscriber target of 500,000, as well. We are in the process of building out BSNL's network to support IPTV services.

Outside of IPTV, our next-generation network and optical solutions are also gaining momentum in key markets. Our optical solutions our supporting entire networks in Japan, India, Taiwan and most recently, Korea, where over 65% of Korea Telecom's backbone network is now based on UTStarcom's NetRing optical transport solution. In Taiwan, we signed our first contract with a cable TV operator to offer our NGN solution. This marks the third main operator in Taiwan we are working with.

In addition, PLDT, the leading fixed-line operator in the Philippines has now replaced a portion of its network of Siemens, NEC and Alcatel Class 5 switches with our mSwitch NGN solution and IAM 8000 multi-service access platform. There are several other large carriers from other countries visiting PLDT to see how they successfully managed this transition.

In total, there are over 60 million subscribers worldwide on our NGN networks and we have a leadership position in this advanced IP-switching technology. During the quarter we signed our first NGN contract in Europe, where we also continued deployments on our first GEPON win at another customer.

We have also just won our first two IP surveillance systems in China and currently are working on several more. This is a new line of business for us. We have adapted many aspects of IPTV technology to enable this and it gives superior capabilities to conventional surveillance systems. We believe this new business has significant potential.

A comment on our gross margins. For a number of reasons, Broadband gross margins have been lower than we would like, ranging from single digits to the mid-teens. But we are now seeing improvements to margins in our bookings. As a result, we believe margins will improve in 2008 into the 20-plus-percent range for the Broadband business. IPTV implementation is typically in the 25-plus-percent range depending on the mix of network equipment and set-top boxes.

Let me talk a minute about PAS. Though PAS is declining, as we previously stated, it still has good margins and an impressive customer base. We have included it in our core business as it is clearly an asset and we are working on leveraging that with new technologies such as packet data. PAS infrastructure margins have stayed quite strong over the last several quarters, predominately above 40%. We believe we will be able to maintain these margins above 40% in 2008.

PAS handset margins are seeing some pressure as the competitors are getting more aggressive. However, for the most part, we expect them to continue to be in the 25% range, which is very good for handsets. Hong will discuss the PAS market in more depth in his discussion on China in a few minutes.

Moving on to our non-core business, I would like to highlight our PCD business. PCD business is doing very well. Quarter three was a record quarter for the Company, with revenues of over 450 million. In addition, gross margins for the PC business are now in the 5% to 6% range and we expect them to remain at these levels, or even improve slightly, in 2008. During the third quarter, we launched four new handsets including the HTC, PPC-6800 next-generation smartphone at Sprint and the UTStarcom-manufactured SuperSlice at Virgin Mobile. We also announced the fourth-generation Sidekick, the LX, with T-Mobile and are seeing very good volumes in our CDM-8630 senior citizens' phone and the UM-150 USB modem with Verizon Wireless.

During the quarter we shipped a total of 2.4 million units, of which approximately 750,000 were UTStarcom units. With growing revenues and improving margins, the PCD team is doing a great job and we are pleased with their performance.

So let me summarize. In summary, we are positioning the Company for long-term success. We do have excellent R&D in core areas of the market. We have acceptance of our technology, particularly in Asia and in developing economies. We are focused on expansion in China, India, Japan, Taiwan, Latin America, Russia, Eastern Europe and Middle East.

As Fran will show when he goes through the numbers, quarter three results clearly do not yet benefit from this alignment. We shall see progress in 2008, but I want to make it clear that the revenue ramp in many of these contracts is deferred until implementation is complete. So the way to measure progress will be by bookings plus a gradual growth in revenue and with it, profitability. We have put in place the new BU structure for the Company by the end of this quarter, so quarter four onwards, we shall be reporting to reflect this change. That was not the case in quarter three.

The completion of our financial filings was a huge step in the right direction. We are now focused on liquidity and the renewal of the bond so that does not detract from our focus on the core business. And Fran will address liquidity in more detail later. We are also looking at all our assets and we shall not be shy about monetizing ones that are non-core to improve our liquidity. I also hope you understand that we also cannot say a lot more about that on this cal to protect the revenue streams of the business.

The management team is committed, working with a high sense of urgency and is positive about our potential as we go forward. We also believe we have a much-energized team throughout the Company. We have spent a lot of time meeting people in all locations and discussing the strategy and turnaround with them.

With that I would like to turn the call over to Hong, who will provide an update on the China business. Hong?

Thanks, Peter. As you know, I have spent a vast majority of my time in China since the beginning of June. The bulk of my time has been spent in three key areas -- one, focusing the business on our future strategy. The strategy now in includes broadening our sales plan to include broadband access products, gigabit EPON and optical transport, whereas historically, we have primarily concentrated on PAS and more recently, IPTV sales. Two, I have also spent a considerable time on customer relationships and finally, the infrastructure improvements.

I will discuss each of these in more detail in this call, beginning with the business and strategy. Despite the continuing rate of declining in the PAS business, I believe with our new sales strategy we have some significant market opportunities in China that could drive overall market growth in 2008 and beyond. Beginning with the PAS market, we are seeing continued decline in the core infrastructure market as aggressive pricing competition from China Mobile and China Unicom is affecting subscriber additions. We still have considerable backlog in the PAS infrastructure business, so that revenues are declining at a slower rate, but bookings are declining at the current rate of the overall market decline.

At the same time, we believe there are opportunities to expand the life of the PAS business in China. For example, we are in active discussion with China Telecom and China Netcom to upgrade their network to include higher-speed 128k packet data service. In fact, we are in the progress now of submitting the proposal to China Telecom to upgrade their entire network deployment.

While it is too early to forecast this opportunity to provide additional PAS revenue to offset product overall decline in the next year or so. If this happens, it would also provide us with the opportunity to sell terminals in support of this packet service.

In the PAS handsets market, we have regained some market share in the third quarter, putting our share in the high 30%. We are targeting returning our market share to about 40% over the next few quarters.

As Peter mentioned, the IPTV market in China is also an area of focus. There are currently about 385,000 subscribers on our 18 commercial networks in China. We believe this translates into better than 60% market share. We are also seeing healthy subscriber growth and operator demand for those cities in China that already have licenses, such as Shanghai, [Harbin], [Peugeot], [Shaman], Taisho and Xi'an. For example, we believe China Telecom in Shanghai has set an initial target of over 500,000 subscribers in 2008. The goal is in rival PCCW in Hong Kong, who currently has approximately 800,000 subscribers. In addition, just last week we won an award with China Telecom to be the sole IPTV vendor across the entire Fujian province. The initial contract is a couple hundred thousand lines in eight cities in the province and we are in active discussion on expansion project for the next year.

We are also expanding the focus of our business, including IP surveillance and education. A few weeks ago, we signed our first IP surveillance contract in the Northeast region of China and just last week we signed our second IP surveillance contract in the western region. In addition, we are working on a few educational projects in several provinces and in Beijing, which we believe could be quite significant.

While regulatory hurdle continues to take time in China for IPTV, we believe the market is ready for significant growth once they are resolved. We believe we have the most stable commercialized IPTV products in the China market. Besides IPTV customers in China are showing very high interest in our broadband access, gigabit EPON, PAS NGN migration and optical transport products.

From an internal prospect, we restructure our sales team and have promoted and hired significant management talents who have already worked to improve communication between the business units and supply chain, HR and finance.

In all, I am encouraged by both our internal progress and customer demand in China. So I would like to turn the call over to Fran. Fran?

Thanks, Hong. Let me begin by discussing our financial results for the third quarter of 2007. Revenue for the third quarter of 2007 was $646 million, which represents a sequential increase of approximately $108 million, or 20% from Q2.

Our overall revenue increases in the quarter can be attributed to three primary items. First, growth in the PCD business. Q3 PCD sales were $458 million as compared to $358 million in Q2, an increase of 28% sequentially. Secondly, growth in the international broadband business. Broadband revenues were $42 million in Q3 '07 compared to $39 million in Q2 '07, an increase of 8%. Third, wireless revenues were up approximately 7% sequentially. This was partially offset by a sequential decline off 5% in the terminals business as the PAS market continues to decline. However, our overall book-to-bill ratio in Q3 was 1.2.

PCD revenues represented approximately 71% of total sales in the third quarter. By geography, sales in China represented approximately 19% of total sales in the third quarter.

Gross margins. Because PCD was a much-higher percentage of sales in the third quarter, overall gross margins were lower and came in at approximately 10% of sales. In addition, wireless and broadband margins were both lower in Q3 because of an additional $10 million inventory reserve taken during the quarter. These reserves are the result of our decision to exit some product lines and to reevaluate our forecast as part of our restructuring plans. Wireless margins were also affected by the recognition of some low-margin, non-core revenue in the quarter. On a positive note, PCD margins improved sequentially and were approximately 5.9%.

SG&A expenses, inclusive of stock compensation, were approximately $70 million, or 11% of sales, in the quarter. The sequential decline is primarily attributed to a gain of approximately $4 million in the quarter from milestones met in the Marvell sale of assets. In addition, we had a reversal of approximately $2 million in bad debt reserves as we collected some older AR in China.

R&D expenses were approximately $42 million, or 7% of sales, in the third quarter, trending slightly lower than 2006 spending levels. Other operating expenses were $4 million and included amortization of intangibles during the quarter. Net interest and other income and expense was an expense of approximately $1.5 million in the third quarter related to the interest expense on our convertible bonds.

Total income tax expense was $3 million for the quarter, reflecting taxes for jurisdictions where we have profits. Our total net loss for the third quarter was $55 million, or a loss of $0.46 per share.

Moving on to the balance sheet, our cash and short-term investments totaled $644 million at the end of the third quarter. The sequential increase of approximately $116 million is attributed to short-term investments as two previously long-term equity investments have now become current. Our total short-term debt balance was approximately $415 million at the end of Q3, reflecting additional borrowings of approximately $35 million in China during the period. Short-term debt includes China borrowing of approximately $140 million and our convertible bond of approximately $275 million.

Our accounts receivable balance was approximately $336 million for the quarter. The increase in AR reflects the increase in revenue during the quarter. Our DSO improved during the quarter and came in at 47 days, which was a new low for the Company. This reflects continued improvement in our non-PCD DSO and the mix change to a higher PCD portion of total revenue.

Our inventory level was approximately $610 million at the end of the third quarter, down approximately $43 million sequentially. This decrease is attributed to better inventory controls and new programs implemented as part of our supply chain improvement process.

We used approximately $40 million of cash in operating activities in the third quarter, $55 million of which came from our operating loss during the three-month period, offset by lower inventory levels and non-cash depreciation and amortization charges.

Now, before I discuss Q4, I would like to give a quick update on liquidity. The value of our two largest equity investments as of last Friday, November 9, was approximately $130 million. These are assets that can be monetized over the next 12 months and are now included in short-term investment on the short-term investments line on the balance sheet. In addition, the Company has begun a program to monetize its IP assets to their full benefit. We have a strong IP portfolio of over 3000 patents which we can license. This also includes some non-core patents that can be sold. We have seen a significant amount of interest in our patent portfolio and have executed our first sale transaction in the fourth quarter. We will provide further information on our patent program on the Q4 call.

As we begin our Q4 discussion, I just want to remind you again that these are forward-looking statements, which are subject to change. As you are aware, we have been very busy in the last month putting out five quarters of financial statements. Therefore, Q4 numbers should still be considered as work-in-progress.

In the fourth quarter, we expect that overall revenue should be flat, with the possibility of some upside. Specifically, PCD and wireless revenues should be flat to slightly up, while broadband and terminals revenues should be down slightly. Overall, gross margin should be up two to four points. This should be driven by PCD margins remaining consistent in the high fives, wireless margins in the low 40% range, as compared to lower levels in Q3, and broadband gross margins will continue to be below 10% as we clean up our low-margin backlog in the remainder of 2007.

Operating expenses will be up sequentially to around $130 million in Q4. Included in these expense assumptions are approximately $10 million associated with our headcount reduction due to restructuring and approximately $5 million of additional non-cash stock option expenses taken in the quarter as we catch up a full year's worth of options in the fourth quarter. We have not included any potential one-time gains in our fourth quarter assumptions.

Finally, we believe cash flows from operations could be neutral. This includes restructuring expenses, but does not include any other special expenses or potential gains. The net-net of the above is that Q4 should be better than Q3.

With respect to 2008, while we are not prepared today to give full guidance for the year, we do believe that revenues and margins should improve year over year and operating expenses should come down. At this time, we feel the most likely breakeven point will occur in 2009. However, our goal is to put operating plans in place to attempt to reach breakeven in late 2008.

So let me summarize. From a financial perspective, our goal is to create shareholder wealth. We are aggressively putting plans in place to do that. Our revenue grew this quarter and we believe it will again next quarter. Further, we believe it will grow in 2008 versus 2007.

Our gross margins are expected to improve in Q4 and we expect 2008 gross margin percentages to be better than 2007. Our operating expenses have been cut significantly and we believe 2008 will be considerably lower than 2007. Our inventory and AR programs have been reducing these assets and we believe there is room for continued improvement.

Our cash and short-term investments of $644 million give us room to operate over the foreseeable future. And as Peter mentioned, we will monetize our assets whenever appropriate.

We have significantly lessened the burden of focusing on our past mistakes and are now very optimistic about facing the challenges and opportunities of the future. We believe we can make reasonable profits and enjoy positive cash flows in the future. We believe we should not sacrifice the future or the future potential by slashing R&D or sales programs. Rather, we should be thrifty and prudent, but confident enough in our future to persevere against the easy solution of the excessive cuts or selling ourselves cheaply.

The entire organization is excited about our opportunities and therefore, our future. This will not be a short-term recovery, but we have the vision, the technology, the people in place and the passion to be successful.

With that I would like to turn the call over to the Q&A session, so Dennis would you please organize the Q&A session for us?

(OPERATOR INSTRUCTIONS). Mike Ounjian, Credit Suisse.

Thank you for taking the questions. Fran, just to start on the liquidity side, that update was helpful, but just a couple of quick questions. So obviously the equity investments gained some value since the quarter was reported. Could you talk about some plans to potentially lock in that value? I realize it may not be ideal to just sell everything at once, but are there options to at least lock in some of the profits just to make sure the balance sheet doesn't deteriorate depending upon the equity markets?

Yes, Mike, there are those opportunities. As we have said in the past consistently, we are trying not to go into too much detail about the plan. I think we are aware of all the options we have.

I will say that in the last week we have begun monetizing some of that investment. And so for now, I will just say that, but, yes, I understand your point and we are certainly looking at that.

Great. And you mentioned also that there had been to date this quarter a sale on the -- within the IPR portfolio already. Is that something that we should consider to be material or was that just more to highlight there are opportunities there that could get more material over time?

Mike, this particular one is not material. In our extensive portfolio, we have a number of older patents that maybe aren't that useful to us and in some cases some non-core patents. Those are being looked at for (technical difficulty) we have sold one and we expect in 2008 that it would be -- that there could be some significant numbers in there, but not at this time.

Mike, if I could emphasize too I want to be careful that people don't misunderstand. Many of our IP patents are also very core and obviously we're not going to be selling those. We will be licensing those or extracting value that way, so I want to make sure I make the distinction between the core and the non-core patents.

Great. That's helpful. And turning to orders, you mentioned book-to-bill of 1.2 in the quarter. Could we get some picture of what the mix looked like sort of PCD relative to some of the core businesses?

Yes, Mike, I don't have that in front of me, but I can say that PCD is particularly strong. Of all of the areas, PCD was the strongest. We are just having tremendous -- tremendous orders coming in right now, so we are looking for a very healthy continuation of those orders and healthy revenues in Q4 into 2008. So I would say that PCD led the charge there.

Okay. That's helpful. Peter, just to hit in on a couple of points you made, first, on the -- you mentioned the plans for expectations for two or three global OEM relationships in 2008 if I remember that correctly. If you could just give us some more color I guess as to what the strategy is for OEMs versus selling directly to carriers and I guess any update on sort of how far along that processes with -- in terms of discussions?

I am delighted to, Mike. We have concluded the first arrangement and orders -- or bookings beginning to appear on that and we are using it to sell our range of MSTP, MSAN and GEPON in the first arrangement and we are targeting areas around the world where we have a presence, but we don't have large direct sales force. For example, that could be Latin America, Indonesia, Russia. Now we want to extend that with one or two more worldwide organizations.

For the OEMs, we differentiate between regional ones, which a local region can sign up to help a particular project. For these worldwide OEMs, we are looking to sell our portfolio, particularly in the optical products, and to really use their capabilities with carriers where they have better relationships than we are and also minimize our direct cost of direct sales. So I hope that made sense, Mike.

Yes, it does. It does make sense and in terms of the one you have already completed, I guess you can't share the name. Is it even possible to give us some color? Is this more of a global western vendor or is this one of the Asian OEMs? Any color you can give on --?

It is a global Asian vendor and we hope to be able to announce it, but cannot do it just yet.

Thank you. And then just lastly, on the R&D and SG&A targets as a percent of non-PCD sales, I would agree that is a more effective way to look at it, but obviously currently a long way from your target. At least could you give us some color on those targets, how you are thinking about the how much just comes -- how much comes from cost cutting versus how much comes from expectations of revenue growth?

It is the latter. Basically, we have taken the cost actions that we have described. Those will flow through into 2008 and what we did was assess the revenue ramp from bookings we currently have plus confidence of orders that will come that we could get revenue recognition with later in 2008, so that drove the ratios. Now the dependency there is on revenue recognition, which I was cautious about, because it can slip from -- out of the quarter very easily if a carrier delays their implementation.

Right. Fair enough, but it is fair to think of this, then, as targets for the end of '08 or early '09 depending on revenue recognition?

That's correct.

Thank you very much for taking the questions.

Larry Harris, Oppenheimer.

Yes, thank you. With respect to the cycle for IPTV, what sort of timeframe should we be thinking about in terms of the time between, say, order and when you ship the products and then from the time that you ship the products until revenues are recognized and then from the time when revenues are recognized until you have cash collection? Are we talking about a timeframe of a year or two years? Could you somehow size that up? Thank you.

I'll take the order. This is Hong, Larry. The order usually takes the partial down payment and so we typically will ask our customers to pay a certain down payment, anywhere between 10% to 50% down payment when we deliver the product. And typically we will deployed the product and put into the services. That could be anywhere between a three months to six months and we will probably by then talking about the expansion and we have some condition if they ask us to deliver a certain features and based on that particular agreement with the company, we will then, depending on that agreement, to recognizing the revenue are not.

But we are very concerned about the payment terms, so therefore we wanted to making the part of the payment earlier and as much as we can. So our -- hopefully the model will be about 60% when we complete our delivery and the remaining part to be within a year or so to collect the money.

Okay. That's helpful. And then with respect to the targeted income statement ratios relative to gross margins, SG&A and R&D and the SG&A and R&D were, as I recall, were stated excluding PCD. On the other hand, PCD, at least right now, is about 70% of revenues. You know, should we be assuming that -- how should we be looking at operating expenses at PCD or should we be looking at them as being in the four to 5% of sales range? Any help there would be good.

Larry, this is Fran. Can you just restate your last part because I didn't know what you were talking about, four or 5% operating expense for PCD. Did you mean gross margins or --

Gross margins right now are at PCD are right at 6%, correct?

Just under six, yes.

And I am assuming that there is a nominal level of R&D or at least a lesser percentage of R&D because of the devices that are sold from HTC, Curatel and others. And so what I'm trying to do is I'm trying to get at what your operating expenses for the total company are likely to be, because PCD, at least for now, is still a significant percentage of total revenues.

Sure. Let me help a little bit there. So PCD as we know it doesn't really have any R&D. The Company does, but we actually classify that right now on our terminals business unit. So we do for the products we design for ourselves. They aren't in PCD's P&L. So for PCD's P&L, all you will see, and if you look at the segment reports in the 10-Q and so forth, you will see gross margin and a little bit of SG&A on top of that couple of points.

So predominantly all of the OpEx, the 130 million to 135 million per quarter that the Company has been running at very, very high-level, that is nearly all of the non-PCD business. And that number I think we have given indications and we are, in fact, on track to get that down into the 115 to 120 level. So the ratios that Peter gave really are for -- with PCD out are talking about having revenues basically increase, while expenses are flat to slightly down.

PCD's revenue -- I'm sorry, PCD's expenses its operating expenses are relatively fixed and flat. So as their revenues go up and their gross margins do whatever they do, they don't typically incur any more operating expense. So their margins flow through to profit. Their incremental margins flow through to profit. So I rambled there a little bit, but I don't know if I got to answer the question you were asking.

All right. That's helpful. Thank you.

(OPERATOR INSTRUCTIONS). Paul [Waner], DLS Capital.

Fran, can you give us some status on the lines of credit in China and also the convert coming due in March?

Yes. The China lines of credit, as I say -- as we have said in the past, as each of them come due, we have been fortunate in the past to renew them and our expectation is to continue that through Q4 and into the new year. We did in the last quarter take down some additional loans of about $35 million on our China lines. From time to time those move up and down, sometimes just to use them to make sure that they know we are there and then we pay them back a quarter later. So so far nothing has changed with respect to the China lines other than the fact that we used a little bit last quarter.

With respect to the convert, it is still due in March and as we have indicated in the past, we have a number of options to deal with that starting with refinancing some or all of it, repaying some or all of it, again, monetizing assets, monetizing some of the short-term investments. There is a string of options and we are holding all those options and we will do the right thing in the appropriate time.

So now we are all caught up, starting today, with our financials and we are in -- our quiet period's are closed, our financials are current, so now we will go to work and work on those multiple strategies that I just mentioned. But I am not but I tell you exactly what the sequence is because, you know, the guys on the opposite side. It is bad enough they know my strategy, I don't want them to see all my cards, too.

I understand.

(OPERATOR INSTRUCTIONS). At this time there appear to be no further questions. Are there any closing comments?

Yes, I think we will just thank everybody for paying attention and tuning in at this relatively early time of the day today. We are very pleased that we did get to file Friday on time and if we had the luxury of having the call after markets or something, we would have done that, but we wanted to get our conference call as soon as possible after our filing and this was the first available moment that we could get you altogether.

We encourage you to check in and talk with us now. We will be -- we are totally up-to-date on all our filings. We feel very good about that. I won't rehash what we went through today, but thank you all for tuning in and look for you on the next conference call.

Thank you everybody.

Ladies and gentlemen, this does conclude the UTStarcom third quarter 2007 earnings call. You may now disconnect.