UTStarcom Holdings Corp (UTSI) 2007 Q4 法說會逐字稿

Good afternoon. My name is Heather, and I will be your conference operator today. At this time, I would like to welcome everyone to the UTStarcom fourth quarter 2007 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. (OPERATOR INSTRUCTIONS) . Thank you, I would now like to turn the conference over to Mr. Hong Liang Lu. You may begin your

Thank you. Good afternoon and thank you for joining us today, I'm Hong Liang Lu, UTStarcom's Chief Executive Officer and I'm 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 follows - - Peter will begin with the call with a discussion with the business units of the update, after which I will discuss the China market. And Fran will then provide Q4 financial results giving an update on liquidity and finally he will give the guidance for Q1 and insight into 2008.

Then we will turn the call over to question and answers. So before we begin our formal remarks I would like to remind everyone that some of the information we will discuss today constitutes forward-looking statements. The actual result could differ materially from our current expectations. To understand the risks that would cause results to differ, please refer to the risk factors identified in our latest annual report on Form 10-K, and in our quarterly reports on our Form 10-Q and current reports 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 hello everybody. I would now like to give the business unit update. In the last six months we've done a lot of work and there were six main categories. I'd quickly like to cover them. We restructured the Company with an 11% cut to headcount. Second, we created a new BU structure to enable focus on our core technologies. Such as IPTV and GN soft switch and IP broadband and also focus on the fast growing developing markets where we have a good market presence. Third we defined noncore areas which we are managing tightly to either drive profitable growth or we shall monetize these to improve shareholder value. Fourth, we've established more operational discipline in the Company. Fifth, we worked on supply chain and quality to drive gross margin improvements and also reduce our inventory. And six, we implemented a business transformation office to have weekly attention on these changes and ensure that our turn around builds momentum fast. The quarter four results reflect to some extent these actions. We still have much work to do and I want to stress the commitment of the management team as we put the company back on track.

On this call today we'll provide more detail in each of the business units, including information on their growth drivers, estimated growth percentages, and target margins. As you recall, we structured the Company to focus on two core business units which we call the multimedia communications business unit and MCBU, and broadband business unit, BBU. Before I go into each business unit I'd like to reinforce the point of the strength of our core portfolio is not necessarily just in each of the individual products. But also in the strong combination of broadband, soft switch and IPTV working together.

Let's begin with the multimedia communications unit, MCBU. We have high confidence in the technology and the opportunities in MCBU. The primary drivers of growth are our RollingStream, IPTV solution and our mSwitch next generation switching network or NGN solution. Focusing on our NGN solution, this is designed to support the growing number of advanced voice and data services as we see tremendous growth in Internet traffic and the end of life of traditional TDM switches. We've designed our mSwitch to allow the provision of next generation services while also significantly reducing operating expenses of current products. MSwitch supports multiple core types over all access technologies, and currently supports over 60 million NGN customers globally.

While PLDT is our largest network transformation project to date, our success there is winning us new customers worldwide. For example, last year a major European carrier, Tiscali, in Italy asked us to supply them with our MSAN equipment. Just prior to year-end, the carrier asked us to replace their entire TD mSwitching network with our soft switch. This is obviously a very key strategic decision and a very strategic win for us. We are currently implementing this project with them.

In quarter four we also won our first NGN soft switch in Taiwan, of the recent notable contracts include Brazil Telecom where our soft switch is supporting applications for fixed mobile convergence and IPTV. With TOT in Thailand and also recently Nextel in Argentina. It is clear that this technology is gaining momentum and we believe we have the best performing soft switch on the market.

Moving to IPTV, our RollingStream solution is designed to enable operators to expand their revenue streams and compete with the cable industry. According to recent research, the goal IPTV market size excluding set top boxes and any system integration is projected to be approximately $4 billion in 2010. Our RollingStream solution is one of the only single vendor end-to-end open IPTV systems in the world and is currently supporting over 750,000 subscribers in deployments throughout the world, in leading markets and have enjoyed market share leading positions in China, India and Japan. And I'd remind everybody that the 750,000 subscribers is up from 600,000 in our last conference call.

In the fourth quarter of 2007, we announced important new IPTV contracts in the Fujian Province in China, as well as with a new customer in Thailand, Markwell Interestingly, Markwell is our first win with a cable TV operator and we see additional opportunities with that class of carrier. We also won another IPTV order in Sri Lanka, with SLT, Sri Lanka Telecoms and we'll be rolling out that system in quarter two of 2008. We have also won another IPTV contract with a new customer in India and will be announcing that in our next earnings call. In addition, we also announced the official launch of the IPTV service in Brazil with Brazil Telecom. I would like to remind you that we have greater than 65% share in China and clearly the dominant share in India, well over 80%. We are also seeing continued growth in IP surveillance, which is an offshoot of our IPTV technology. We won two new contracts in two cities in China, and are looking at additional business in several additional provinces in China. Our view is that these two product areas,NGN and IPTV are at the beginning of their life cycles and bookings can ramp fast. We're very pleased with momentum they are gaining in their respective markets and believe the revenue for each of these product lines can grow in excess of 80% in 2008.

Also included in this business unit is the PAS business which has a valuable installed base, although it does continue to decline. Despite the decline in PAS, the growth in IPTV and NGN enables us to offset that decline making MCBU revenues flat in 2008. Gross margins for the MCBU should be in the range of 35 to 40%, and this includes a combination of the higher margin network equipment and the lower margin customer equipment such as set top boxes. Importantly, the order backlog for MCBU already supports greater than 70% of the revenue plan for 2008, and the margins for these bookings is at the levels just stated.

Let's turn to the broadband business unit, or BBU. This includes our traditional broadband and access and transport products such as IP DSLAM, IM8000 which is our next generation multiservice access network MSAN, GEPON, which is our optical access product and NetRing our multiservice optical transport product line. We anticipate revenue growth in this business unit to be between 15 to 20% in 2008. The broadband business has been driven by the global demand for data and multimedia applications. Our broadband solutions have designed to support operators who are building triple and quadruple play converge networks using either copper or fiber.

Our MSAN provides concurrent support for multiple applications including traditional voice and next-generation media services over either copper or fiber, and we currently have over 25 million lines deployed with Tier 1 and Tier 2 carriers globally. Our GEPON suite of products is designed to provide bandwidth intensive high margin applications over fiber, such as video over IP. UTStarcom was the first vendor to introduce a GEPON solution globally, one of the top five vendor worldwide, that's a quote from [Infranexts] research which specializes in this type of analysis. Our NetRing is a third generation family of products that supports optical backbone and core networks in India, Korea, Taiwan, Japan and South America. We are beginning to see good momentum for the combination of our IPTV, NGN and our broadband access products. And this combination of products also provides good solid differentiation. Importantly, we also expect gross margin improvement for the BBU throughout 2008 and should be consistently above 20% per quarter. Backlog for BBU supports greater than 30% of revenue for the 2008 plan, and the current orders already show (inaudible - back ground noise) just stated.

Let me comment now on services. Our services organization is in both China and international and supports our core product portfolios. Services revenues are expected to be flat in 2008 with margins of approximately 30%. However, we have an opportunity to build up our services business as we are clearly selling solutions when implementing complex networks based on NGN and on IPTV, and it's our intention to build up this business.

Let's move to the terminals business unit. The terminal business unit or TBU consists of all handsets sold in support of our past business in China or elsewhere, as well as those in support of our PCD business in the United States and South America. This business unit is driven by the growth in PCD-related CDMA sales which are offset by declines in the past business in China. We expect overall growth of approximately 15% in 2008. The TBU is also actively looking into (inaudible - background noise) technology and geographic markets to drive growth and margin improvement beyond 2008 including WCDMA technology.

In addition, in the area of Telematics, we have won some important initial contracts with global automobile manufacturers. We will provide updates on these in the future. Margins in this business will fluctuate depending on product mix, but will be in the low 20% range.

Moving to the other areas, in our new segment reporting we have consolidated our MSBU and CSBU into an Other category. The CSBU, Custom Solutions Business Unit is primarily comprised of applications from the Comworks acquisition some years back. These products include IP based messaging services and tracks, our transaction Gateway product. This business unit also includes its own services organization which generates revenue in the service of its deployments. Revenue for this business is expected to nearly double in 2008 approaching 40 million annually. Gross margins are very good for these businesses at typically above 50%. We believe this business will be profitable in 2008. And Mobile Solutions Business Unit or MSBU is comprised of our MovingMedia 2000 IP based CDMA and GSM business. With an all IP network and distributed software architecture called MovingMedia, this is designed to enable wireless service with significant backlog cost savings and the ability to offer new value-added services in remote and niche applications. This business is expected to grow by over 30% in 2008 with gross margins of approximately 40%.

Let's move to PCD. PCD business continues to exceed our expectations. Quarter four was another record quarter for this division with revenues of over $560 million, and gross margins of 6.2%. During the fourth quarter, we launched three new SmartPhone devices based on the Microsoft Windows platform, including the touch SmartPhone at sprint. In addition we launched the Ultra Slim CDM1450 at Pet Metro PCS and added two new colors of our G-Zone rugged phone with Verizon. During the quarter we shipped a total of 2.8 million units, of which approximately 25% were UTStarcom units. With growing revenues, and improving margins, the PCD team continues to do a great job and we are clearly very pleased with their performance.

Let me comment on supply chain. We made a number of improvements in the supply chain in quarter 4, including the first phase of outsourcing our terminals business which generated a one-time cash saving of 5.5 million point margin improvement in the terminal business. Overall, we also improved inventory turns to 5 as compared to 3.7 in the third quarter. Our supply chain improvements done in the last six months are having an impact. We believe we'll benefit margins by three percentage points in 2008 and we expect to continue to increase inventory turns by a factor greater than 35%.

Let me now summarize. A lot of progress has been made and we also know from customer feedback that they approve of and support our more focussed strategy. We are seeing the benefit of that strategy as we illustrated with some key quarter four wins. And also with our confidence in the margin and growth goals for 2008. Our focus in 2008 will be to grow our core business and continue to focus on our operational improvements. We are also actively pursuing our liquidity plan to strengthen our cash position, which does include the divestiture of certain noncore assets. We need your understanding that whilst we shall be aggressive here, it is difficult to talk about specifics until, for example, we have reached agreement for a transaction. Clearly, our objective is to strengthen the core business and manage or divest noncore to improve shareholder value as quickly as we can. Now I'd like to hand it over to Hong. Hong?

Thank you, Peter. I will provide an update on the China market and operations. Beginning with the recent regulatory changes in China, recently, the Chinese government released an official document which stated that both telecom operator and a broadcast operator were free to compete in each other's field. We believe it is very good news for IPTV business in China. The content will continue to be controlled but the distribution will be open. This means that our customers, China Telecom and China Netcom can offer IPTV services through out China.

As a result, we have seen a significant increase in set top boxes demand in January compared to Q4. In addition, media sources continue to circulate that there will be a reorganization of the telecom industry in 2008. While no official announcement has been made, we believe, in the end, we will have three operators, China Mobile, China Telecom, and China Unicom. All of which will be able to compete freely in both fixed and mobile markets in China. If this happens, we believe there will be a more downward pressure in a past business in China Telecom and China Netcom focusing in their GSM and CDMA business. However, we still believe that our PAS/Packet mode solution is compelling since the data rate is better than current CDMA and GSM data rates. At this time, we continue to see the demand for our packet mode from both China Telecom and China Netcom. We also believe this would provide an opportunity for us to sell new CDMA and other handsets in China. For our past handsets business we shift our focus in quarter four from a direct sales model to a distribution model. In doing so, we have gained market share in both fourth quarter and early 2008. We have also introduced a number of new past models which have a very good acceptance of the market.

In terms of our IPTV business, while we believe the new regulation are a positive, we still believe it would take up time for the market to mature. We continue to maintain approximately 70% subscriber market share and we will have about 500,000 subscribers at the end of January. In 2008, we believe both China Telecom and China Netcom will focus their business on IPTV and, therefore, we expect faster booking growth. This bookings will translate into revenue in 2009 and beyond. As Peter discussed, our IPTV business has also created new market opportunities. In IP surveillance, for example, we won two new contracts in the fourth quarter in (Tongshin) and (Hangzhou). We are also currently working on several surveillance projects with the Government and Health Department in China. We are also seeing IPTV as a new opportunity for us to get into the enterprises and advertising market in China. Another area where we are seeing interest in China is for our mSwitch. And broadband and access technology. In order to improve backbone networks in China Telecom and China Netcom, we are looking to upgrade our PAS soft switch platform to release 5 which we believe will open more opportunity for our broadband multiservices access, and optical network and reduce operating costs for our customers.

Finally, internally we are seeing higher employee's morale as a result of the announcement of our new strategic directions. We've seen much better working relationships amongst the departments, even with the Q4 restructuring. We have had a number of high level government officials and customer visits to show their support of the company, and we're seeing the much higher level of sales expertise compared to a year ago. All of these leads me to be very optimistic about our opportunity in China as far as our ability to execute on those opportunities. With that, I would like to turn the call over to Fran. Fran?

Thank you, Hong. I would like to cover the fourth quarter financials, update on liquidity and some guidance for the first quarter of 2008. So before I give the financial results, let me provide an update on some current outstanding issues. First is convertible notes. As you know, our outstanding convertible notes are due on March 1st. Our plan is to pay off the notes using the existing cash on our balance sheet. We have successfully repatriated from China the funds necessary to completely meet the principal and interest obligations of the notes. Therefore, today we transferred the full payment due of $289.5 million including principal and interest to the trustee of the notes, and with instructions to pay them when due. That still leaves us in a net cash position with approximately $180 million as of today. We believe that the best use of that net cash is to keep it available for operational needs and, therefore, we have no plans to do any share buybacks at this time.

Two, going concern opinion. Also as noted in our press release, we expect to receive a going concern uncertainty paragraph from our independent auditors. As some of you may know, the basis for going concern opinions is typically based on historical results. And does not take into account planned improvements that the company has formulated. In our case, because we have had losses and had negative cash flows and because of the upcoming note's repayment, we expect to receive this going concern modification. Beginning in the fourth quarter of 2007, we have implemented and will continue to implement a number of initiatives to address these concerns and to return the company to profitability and positive cash flows.

So some of the initiatives we've taken to date include restructuring the Company's operations as Peter mentioned to reduce headcount by 11% and, therefore, reduce our separating expenses; secondly we're refocusing the company's direct sales efforts to specific regions and targeting customers that have the highest potential return. For the remaining regions and customers, we're forming OEM partnerships with certain strong regional vendors. The combination of these two initiatives lowers both our operating costs and SG&A. Fourth, as Peter also mentioned, implementation of supply chain and manufacturing efficiencies to improve gross margins, including the outsourcing of certain manufacturing which will also reduce our inventory levels.

In addition, we're also reviewing a number of additional initiatives which may include the potential sale of noncore assets to generate cash and reduce working capital. We have active discussions ongoing in this regard and will report any results when appropriate. We also have the license or sale of certain of our numerous noncore patents. We're also looking at potentially taking on additional lines of credit. We're also looking at potentially additional capital through either public or private financing. And finally, we will be performing additional expense reductions as necessary.

In summary, I want to give a clear message about our cash situation. We normally do not provide mid quarter cash updates, but in this case, I believe it is helpful to do so. I do need to point out, though, that our cash fluctuates significantly throughout the quarter due to collections and disbursement cycles and any given day isn't necessarily representative of the but having said that, at year-end we had approximately $503 million of cash and short-term investments and $323 million of debt. Therefore, our net cash was $180 million. As of today, setting aside the 290 million for the notes, we're still at a net cash position of roughly $180 million. This is made up of cash of about $228 million offset by $48 million in our remaining short-term debt. About half of the cash is here in the U.S. and half is in China. We feel that our current cash, as well as our liquidity plans, will be adequate for the foreseeable future.

Now, on to the discussion of our financial results for the fourth quarter of 2007. Revenue for the fourth quarter of 2007 was $806 million, which represents a sequential increase of approximately $160 million or 25% above Q3 levels. And versus our guidance of flat to slightly up. By business unit, some of the revenue drivers were as follows. One, the multimedia communications business unit, Peter mentioned earlier, which includes or IPTV, NGN, PAS, et cetera, was $118 million as compared to $57 million in Q3. The broadband business unit, which is our DSLAM, MSAN, GEPON, MSTP and so forth, was $51 million as compared to $41 million in Q3. The terminals business unit which has our PAS, CDMA and some GSM handsets in there was $43 million as compared to $59 million in Q3. And the custom solutions business unit, which is our IP messaging and tracks, sales were about $6.5 million as compared to $2 million in Q3. Mobile solutions where our IP CDMA product is, was about a $1 million as compared to $10 million in Q3. And our services business unit sales were $18 million as compared to $19 million in Q3. Finally, PCD sales were $560 million in Q4, as compared to $458 million in Q3, an increase of 22% sequentially.

Overall, our book-to-bill ratio was 0.8 in the fourth quarter compared to 0.9 in the fourth quarter of last year. The book-to-bill for nonPCD was 0.6, primarily due to the higher seasonal revenues in China. While the PCD book-to-bill was 0.9, which is typical for large seasonal revenue swings in the fourth quarter.

Now, covering gross margins. Overall, our gross margins came in at approximately 12.7% of sales, up 2.7 points from Q3. And consistent with our guidance. PCD margins were 6.2% while total nonPCD margins were approximately 27% combined. By business unit, let me give you some of the gross margins. The multimedia communications business unit was 46.8%, broadband was negative, which is due to an $8 million loss provision for certain costs to complete at contract in India. The terminals BU margins were 27%. Custom solutions BU margins were 86%. Mobile solution's margins were 27%. And the service margins were 51%.

The total operating expenses for the quarter were $155 million of which $41 million was R&D, $76 million was SG&A expenses, and $38 million were other operating expenses. Included in these operating expenses were some unusual expenses such as $14.5 million in restructuring charges, secondly, a noncash impairment of $23 million of long-lived assets, primarily related to our MSBU division. And about a $4 million catch-up for stock option-related expenses. Net interest and other income and expenses were income of approximately $50 million in the fourth quarter. Of which $54 million was related to the proceeds of the sale of (Gemdale ) Equity during the quarter, this was offset by net interest expense related to our convertible notes. Income tax expense was $22 million for the quarter. You may not be aware that the tax laws in China changed recently and now foreign unremitted earnings will be subject to withholding tax and, therefore, we accrued 11.7 million for any potential future dividends from China. In addition, we accrued 5.4 million in China withholding tax on the sale of our Gemdale stock. Therefore, our total net loss for the fourth quarter was $24.6 million or a loss of $0.20 per share.

Let me now move over to the balance sheet. Cash and short-term investments were $503 million at the end of the fourth quarter, a reduction of approximately $141 million from Q3 levels. The reduction in net cash at the end of the quarter can be primarily attributed to the pay-down of $92 million or short-term debt in China, and a reduction of approximately $45 million in accounts payable. So our net cash position as we said earlier was about $180 million at the end of the quarter. Our total short-term debt balance was approximately $323 million at the end of Q4, which reflects, as I said earlier, pay-down of China borrowings of approximately $92 million during the quarter. The convertible notes balance of 275 million is also included in short-term debt. And as I said, that money has been sent to the trustee.

Accounts receivable balance was $331 million for the quarter, a slight decrease from Q3. Our DSO came in at 37 days, which was another new low for the company, and compares to 47 days last quarter and 54 days in Q2. This reflects continued improvements to both our nonPCD DSO as well as PCD -- as well as mix change to a higher PCD portion of total revenue.

Inventory. Or our inventory level was approximately $525 million at the end of the fourth quarter, reflecting a decrease of $85 million from Q3 levels from continued tighter operational controls. Cash flow we used approximately $141 million of cash in the fourth quarter as I mentioned earlier, of which $28 million was used in operating activities, primarily accounts payable, and $92 million was related to paying down our short-term debt, as I said. So nearly all the cash usage was for paying down debt or paying down payables.

Now, let me give some guidance for the first quarter of 2008. We expect that overall revenue should be approximately 500 to $520 million. This decline from Q4 levels is due to the Q1 seasonality and also reflects the continued decline of the PAS business. Our overall gross margins in the first quarter should be around 13%. The first quarter operating expenses should range between 115 and $120 million. Finally, we believe we'll be roughly cash neutral for cash flow from operations during the quarter.

With respect to 2008, I really don't want to give specific guidance yet, but I will share some preliminary thoughts with you on the full year. We believe that revenues should improve overall by approximately 3 to 6% year-over-year. Margins should also improve year-over-year and come in between 14 and 16%. And finally, excluding any unusual expenses, our operating expenses should decline and stay consistent below $110 million per quarter during the second half of the year. At this time, we still believe the most likely breakeven point will occur in 2009. However, we continue to put operating plans in place to attempt to reach breakeven late this year. I'll give you some business unit specifics for '08 from some initial thoughts. The MCBU revenue should be roughly flat in the 300 to $330 million range. As Peter said earlier, over 70% of this is driven by backlog that we already have in place and we have additional visibility from our sales pipeline. And as Peter also mentioned, the margins here should be in the 35 to 35-plus percent range. BBU revenues should be approximately 170 to $190 million in 2008, about 30% of this is driven by backlog already in place, while the remainder, of course, is based on the sales pipeline. Margins for this BU should improve and come in consistently above 20% in 2008.

The TBU, terminals business unit revenues, should be approximately 200 to $220 million with margins in the low 20s. CSBU should be approximately $40 million in revenue with margins in the 70% range. PCD revenues should be up approximately 4 or 5% next year or this year with gross margins holding in the 6% range. Service revenues are expected to be approximately $60 million with margins in the mid-30s.

So looking back on 2007, we spent a lot of effort, a lot more effort than we anticipated sorting out our historical problems. We fully covered all of them with you, so I'm not going to repeat them now. Our most recent, one of our most important challenges was to pay off the convertible note, which is, as I said now in progress. We can now look forward to giving our primary focus to running the business. Specifically, we'll be focusing on our core businesses. In all of these we expect revenue growth and margin improvements with the exception of PAS. We also expect growth in our noncore businesses as well. But some of these may be divested. We will also continue to focus on reductions to operating expenses. This could include some additional select business unit restructuring as well. Finally, we will be continuing to focus on liquidity. So we believe our plans in all of these areas are realistic, although we relay there's a lot hard work for all of us to ensure that the plans are successful. Our management team and all of our employees are optimistic about our future and excited about our opportunities. So with that, I'd like to turn it call over to Q&A and ask if Heather could organize the Q&A session.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of David Steinberg with DLS Capital.

Hey, guys, you actually answered the questions for me, I'd like to make a comment, you've did an admirable job taking care of this convert, looking after your shareholders, and creating some value for the enterprise. So good luck and keep doing a good job.

Thank you. Thank you very much, David.

Thanks, David.

Your next question comes from the line of Hamed Khorsand with BWS Financial.

Good afternoon, thank you for taking my call. Could you provide some color as to the IPTV field trials that are ongoing in South America, Middle East, Europe, anything like that?

Our biggest one in South America is Brazil Telecom and it's gone very successfully, so they're now looking at expansion of that. The Middle East, we're talking with a number of people but we don't have any projects current there. But we have high hopes that we can break into the Middle East market. And then we did in the call highlight where we're strongest, which is China, India, Taiwan, and obviously we have a strong presence with Soft Bank in Japan, using IPTV as well, and we saw growth in our China and India and Taiwan markets last year. So I hope that summarizes it for you.

Yes. And on the Indian market, any comments on news overnight with MTNL and the licensing issue?

I'm not up to date with that, so I'd have to come back to you, which I'm willing to do once I've looked at it, so I apologize, I missed that news.

Okay. Thank you.

Your next question comes from the line of Andrew Rosenfeld with Prudential Asset Management .

Can you talk a little bit about, on the IPTV front, with 70%, I guess, of the 80 guidance covered by backlog, is it a long sales cycle as to why that might be flat this year?

It's a long -- let me just clarify the 70%. The 70% was the business, the whole business unit, so it wasn't necessarily IPTV, it was the whole MCB business unit, a good portion of which is frankly PAS. Then Peter, I'm sorry for interrupting.

No, no. IPTV is typically a 6 to 9-month sales cycle because people usually spend a lot of due diligence on what product they want. They usually do testing. And then to go live, usually once we've got a contract, the first stage would go live after about three months. They tend to really test that thoroughly. Then they ramp, according to their own plans. And we would get obviously revenue, typically the way we do that, we get part revenue at -- install part revenue, a period after install, usually a balance of 20% 12 months later. That explains the revenue recognition of time line. So I hope that answers your question.

Okay, yes, I guess I didn't take that into account, so sorry about that, I was thinking that was IPTV on its own. But when you're talking about some of the follow-ones, have you seen a lot of follow-on orders from some of the orders you've had and contracts you won in China?

Sure. Yes, we are getting some extension orders in China, so we have, talking about not only set top boxes earlier I was mentioning that in Q4, the run rate per month was about 20,000 set top boxes, and so far Q1 this year we have not seen that number has been more than double and maybe close to 60,000. So it's actually tripled. But we are delivering roughly about 40,000 today, and we see a lot more aggressive plan being put into place by our customers and we really are getting geared up for supply chain to supply them. And overall, we see the both China Telecom and China Netcom our focus one of their major focus in this year is to grow IPTV, so this is becoming a relatively hot topic. And there is a very -- and still, some of the uncertainty in the regulatory areas, but that has been one of authorized official letter as a document came out, but I'm very hopeful it's going to clear up a little bit more, but I think a lot of operators are still waiting to see how is that going to come, and if that is total open it up, we see a significant potential in China for IPTV this year.

What do the margins look like on the set tops?

It's -- I think it's in the high teens in currently. But there's a good pressure coming towards us, so our effort to see how can we build the product with the higher volume to negotiate with our suppliers and build the better products or redesign the products, et cetera. So I probably hope that in the future we'll be able to make it towards closer to 20%.

Okay. And then in India on the IPTV front, do margins get squeezed there a little bit? I don't know if you can talk about the market in India.

We haven't seen that yet, all the contracts, I commented on the new ones, Sri Lanka , India, so far we haven't seen -- we've seen competitive pressure but it hasn't impacted our

The infrastructure margin we are still seeing in China is very healthy as well, so we will see how we're going to -- how our task is to -- how we're going to improve our set top [inside].

Okay. Selling off noncore assets, you talk a little bit about that. Would that included all facets of noncore, I guess, kind of looking at some of your branded product, would that be included in the Encore.

We prefer not to go into detail because it's not quite like the company like General Electric saying it's going to sell its plastics division. We have to be sensitive to the revenue protection and sensitive to our customers. We want to manage that very well. So if you'll excuse us, we won't give anymore comment on that other than to say obviously it's noncore assets and ones we think really would be better off outside our portfolio. We will keep some of our noncore assets because clearly some of them are getting quite attractive.

Understandable. Finally, looking at the guidance on the quarter, Q1 SG&A of 115 or OpEx of 115 to 120, is there any way to bring that down into under 110 second half of year? Is there any way to get that lower? Is that being conservative with OpEx guidance or can you talk a little bit about that?

Yes. It's where we are right now, and I think we all internally are thinking about that as well, and we haven't yet got any specific plans to get it lower, but we know that we need to. And we know that we want to. So we're giving the guidance for what we see before us, either actions that are taken or imminent. After that, we'll let you know as we're taking further ones. So we're going in that direction. I don't want to preset inspection until we've done the work and figured out how to do it specifically.

We're conscious of shareholder value and we'll take the right action. So we'll give you an update on the next earnings call on that.

We understand that it's not satisfactory.

I appreciate you taking the time to answer my questions and good luck, good work, I guess, on the convertible.

Thank you very much.

Thanks.

Your next question comes from the line of Faland [Menzinez] with Donald Smith & Company.

Hi there, what's the balance on the goodwill and intangible accounts, is my first question? And secondly, you lost 25 million on a gap basis in the quarter while the shareholder equity fell to 83 million, if you can explain what accounts the difference?

Okay. Those are some great questions. In terms of the intangibles, I believe it was something around $20 million more or less. So rounded numbers, $20 million. Basically, intangibles and goodwill. So stuff we had picked up when we acquired some of these businesses years ago. And now, given our overall situation that looks like that value is not being maintained. The customer lists, goodwill, that sort of thing. The reconciliation is something I'm going to have to do off-line, because I haven't -- I know it's reconciled because all the debits equaled all the credits but I haven't done that specific analysis. If you give me a call afterwards I'll be happy to take you through that.

Thanks.

Thank you.

Your next question comes from the line of David Steinberg with DLS Capital.

Already answered it. Thank you.

Oh, good, thanks. So we're doing a good job of anticipating something. Thanks, David.

Your next question comes from the line of Trendan Waters with Crowell Weedon.

How much of the [Gemdale] and [Infanara] stock has been sold and how much remains?

Yes, basically all of it's been sold for [Gemdale] and approximately all of it for [Infanara], for your purposes, let's say it's all been sold.

Okay. Now, have you guys considered selling and leasing back the 2.7 million square foot building in China?

Yes.

Okay. I guess one other thing.

I didn't mean to be flippant. So you can imagine a lot of complexities when you get tax grants and special favors and special benefits from the government. So there's a lot of complexities in that. So there's many things to do. You could sell it. If not a sale and leaseback you could lease excess space, take a loan against it, there's a number of activities, not just semi leaseback. So we're going through the whole list. We think we're aware of what the whole list is. And we think we'll end up doing the right thing to get some value there.

Good. One last thing. The PCD sales or revenues, expectations for 2008, what is the figure you guys are looking at?

I just want to make sure I understood the question. Was the question what was our 2008 PCD revenues?

No, what's your expectation for this year for PCD revenue?

This year, yes. I'm trying to check if I already said that, but I know the answer anyhow, somewhere in the 4 to 6% revenue growth range for 2008 versus 2007.

Okay. Great. That's all. Thank you.

Thank you. So the -- I do want to also clarify the question around [Gemdale]. So although all has been sold, because you asked me the question in February, I don't want you to think that it all got sold in Q4 of last year, because this is a Q4 call. So in the eight weeks of this year, we also sold some of it, we'll announce that. But as of today of course it's all sold but I announced that there was a 55 or $6 million gain in Q4 numbers. That is the Q4 portion of the sale and there's a Q1 portion of the sale I'll do that on the next conference call.

Great.

Your next question comes from the line of Himanshu Shah with Shah Capital.

Good evening, guys.

Hi, how are you?

I'm fine, I think the operator made a mistake on the name, it's Himanshu Shah. Two questions, one is, you had a decent quarter, why didn't you preannounce?

Well, we did not think it was is that spectacular, we're pleased with the revenue. A lot of that revenue came from PCD, which doesn't have a lot of flow through to profit. And we thought it was a good quarter.

Okay. Switching gear to India, you take $8 million charge in the quarter, is that it? Because you sounded like last time, when you spoke in October, that you took 32 million in the third quarter, and I kind of -- my recollection is that you made a statement that that was going to be it. So should we expect some negative surprises out of India going forward?

So first of all, I do hope that we never made that statement. Because we, with a complex multiyear project like this, it's every quarter we're going to have to reassess, revalue, and the cost of producing -- acquiring product, delivering product, various contractual arrangements, including penalties and so forth. So we're going to have to every quarter go through and do an accounting and see whether it goes up or down. By the way, we've had some quarters will it's gone the other way. So I would -- I hope I wouldn't be so foolish as to say that we're done. So what we say is that everything we know is booked, and if we get some good news next quarter, we'll reverse it, if we get some bad news, we'll unfortunately have to book it. You should understand the Phase of this project delivered virtually all the equipment, a tiny bit less, the project is up and running, so obviously, Fran's got to be rightly cautious but the bulk of the work has been done and the customer's very pleased.

Two additional questions. One on Japan. I'm under the impression that you cannot be bidding for the order in the second quarter. The question is, what are the chances, because you already did the first phase of the work?

I'm not too sure what your question about the order. Which order are you talking about?

Well, the order that you received back in '05. And I'm under the impression that they're going to be issuing another tender. Is that so? Or that is not the case from your perspective?

Well, we are talking about many, many different projects with our customers, but predominantly in Japan, it's Soft Bank, and they have many different projects. And if you are saying that is a continuation with our first order, if there's any opportunity and we are extremely pleased because they are very happy with our performance so far and predominantly we're the only bidder, not the only bidder, we're the only supplier in the past. So-- and so I think if they have any order out there, we're in a very good position.

Staying on China, what percent of the revenues approximately will be coming from China in 2008, in your opinion?

I think it's roughly, I think we have to be careful, probably roughly around 20% or so, or 25%.

Okay. Last question, on the soft switch, I know you got an order from Tiscali. Any orders like that we should expect over the next 12 to 18 months?

I think we are very pleased with the progress we are making. A lot of people are very pleased with the potential savings from the operational side. Particularly we have demonstrated in PLDT had shown that there's a significant potential savings in energy savings, the real estate savings, and the headcount savings. And so after we have make that as a showcases, we have gained a lot of momentum. So we're not the only one to please, our operators are very extremely pleased. So all I can tell you is that the activity is very high.

Yes, the activity's high, I think we have to leave it at that, and we're obviously looking forward to a lot of momentum here.

Do you think, Peter, the India contacts are going to be profitable going forward? I mean, you guys are doing a lot of business there, but you really haven't made any money there. And I'm just wondering, is there light at the end of the tunnel here?

Well, this -- let me step back a moment. The large contract with the Government Telecom's carrier, we publicly said it's not profitable, we've taken a reserve. All the other India contracts are actually profitable. So India is a profitable area for us. We learned a lot in that first government contract, so if we take further contracts, we will do a better job with the government carriers. But the private carriers we have lots of profitable contracts.

Thank you. And good luck to all of us.

Thank you.

Your next question comes from the line of Hamed Khorsand with BWS Financial.

Just one follow-up. Are there any specific countries in the Middle East you're targeting with IPTV, Turkey, Pakistan? What kind of time frame are you looking for?

The time frame would be the cost of this year, because they're very early in discussions, it's impossible for us to be more specific. And they're in some of the Arab countries, we've also discussed with Turkey.

You're in negotiation early on for maybe the end of the year then?

We're not in firm negotiations yet. We haven't done a lot of work in the Middle East. Let me step back. We haven't done a lot of work in the Middle East, but it is a very fast growing part of the world, also a very wealthy part of the world. As part of the 2008 plans, we put extra sales resources in the Middle East. We've just run a very successful conference over there targeting a number of carriers. So we've started a dialog. It's far too early to say we're in contract negotiations. I apologize if I sounded more aggressive than that before. I do think it's going to be a good era for us. I hope that answers your question.

Okay. Thank you.

There are no further questions at this time. Are there any closing remarks?

So I would just like to thank all of you, we'll get back to work and you've got our -- the management team here commitment, so I think it was a good quarter, but we're now very focussed on 2008. So thank you all for joining us. Appreciate it.

Thank you.

Thank you.

This concludes today's conference call. You may now disconnect.