UTStarcom Holdings Corp (UTSI) 2008 Q4 法說會逐字稿

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the UTStarcom Fourth Quarter 2008 and Year-End 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. Mr. Hutton, you may begin your conference.

Thank you. Good afternoon, and thanks for joining our call. I'm Barry Hutton, Senior Director of Investor Relations.

And before the call begins, I'd like to remind everyone that some of the information we'll discuss today constitutes forward-looking statements. Actual results could differ materially from our current expectations. And 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, our quarterly reports on Form 10-Q and current reports on Form 8-K, which are filed with the Securities and Exchange Commission.

In addition, today's call will include certain pro form non-GAAP financial measures. The most directly comparable GAAP information and a reconciliation between the pro form non-GAAP and GAAP figures is attached to the earnings release issued earlier today and filed in a Form 8-K. The reconciliation is also available on our website in the Investor Relations section.

And now, I will turn the call over to Peter Blackmore, our Chief Executive Officer.

Thanks, Barry. Good afternoon, everyone, and thank you for joining our conference call.

Earlier this afternoon, we issued our fourth quarter and our year-end financial results. As you saw in the press release, our quarter four results do include a number of one-time items. The majority of these items are related to our actions to simplify the company, including the restructuring we announced in December and also our exit from non-core businesses and products.

In a few minutes, we'll give you additional color around these one-time items. But first, I want to provide some quarter four highlights.

Total revenues of $241 million were above the management outlook we provided on the third quarter call. And this revenue reflects better-than-expected performance both in China and outside China.

Obviously, in this current environment, the markets place a premium on a strong balance sheet. So I'm pleased that we ended the year with a net cash position of $340 million and no debt, well above our prior indications to you.

Our total GAAP operating expenses were $109 million, including a number of one-time items. However, we continued to make good progress on our underlying expense run rate. Without the one-time items, we were well below the outlook we provided to you on the third quarter call.

Let me just touch briefly on our strategy and what we did in 2008. As many of you know in late 2007, we outlined a very specific set of strategic priorities, which we expect will improve our competitive position and return the company to profitability.

These priorities are to narrow our focus on selected IP-based products where we have clear differentiation, second, to build our leadership in developing economies, primarily across Asia, Latin America and certain parts of Europe, third, to leverage our strong carrier relationships to introduce products into these key markets and obviously to manage our cash very carefully as we turn around the company.

Throughout 2008, the management team has worked hard to consistently execute on these priorities. Clearly, 2008 was a tough year across the industry, but we did have a number of successes worth mentioning.

First, we have now streamlined the company and clearly have improved our focus. We have exited all of the non-core businesses apart from one, which will be wound down by the end of the quarter two, 2009, as we complete our final commitments.

Secondly, we continue to win strategic projects in IPTV, NGN softswitch and IP broadband in developing economies. And I'll touch on a number of examples later.

We were recognized by two IT publications for our IPTV leadership in China. We were also recognized for the second year in a row on our broadband leadership in India.

And very importantly, we finished the year with a strong cash position, reminding you $340 million and no debt. And we also repaid the $290 million to satisfy our convertible note obligations earlier in 2008.

Let me now update you on our restructuring and our expense initiatives. Clearly not withstanding the progress I talked about, the Board, management team and all of our employees all recognize the goal is to return the company to profitability and achieve positive cash flow as quickly as possible. We entered 2009 with a continued sense of urgency to reach these goals. So now, I'd like to address our focus in 2009.

In December, we initiated a number of steps to aggressively streamline the company further. And if you recall at that time, we said these actions will reduce our annualized expenses by 25%, year-over-year, and bring our quarterly run rate of expense to less than $70 million by the fourth quarter of 2009.

Today, I'm pleased to update that expectation and say that our quarter one OpEx will be less than $75 million, so clear progress, plus we are now working on additional actions, which would bring our fourth quarter OpEx to be approximately $60 million.

We also announced, on our last call, that we shall transition some key functions to China. Not only does this action reduce our expenses, it also provides a more coordinated and better operation. This process of consolidation is now underway, and we expect it to be completed before the end of quarter three this year.

We also continue to make meaningful changes to our overall employee headcount. As a reminder, of September 2007, we have 5,800 employees. By March of 2009, our headcount will be approximately 4,300, which is 25% lower than it was 18 months ago.

Further, the headcount will decline, in addition, by midyear as we finalize our wind-down of our Korea operations and due to the transition of certain key functions to China. So obviously our expected reduction actions will continue.

But equally important, we're also very focused on our growth in our core business, which I'll now address starting with the multimedia communications business unit. This business unit provides a number of IP-based products including IPTV and next-generation network softswitches, which are both lead products for us.

In IPTV, we are seeing the move from pilot to production in key customers plus expansion in those customers that have already established a successful IPTV operation. In addition, we also continue to win new accounts.

As of year-end, our global IPTV system had 1.27 million live subscribers, representing an 80% growth since last year.

In China, which is clearly our largest market, we continue to have the leading market share.

In the fourth quarter, we saw our fourth expansion in Shanghai, an area where we have worked for three years and proven our system effectiveness and reliability. We also won the IPTV tender in the Sichuan Province and developed our business in the Zhejiang Province, both of which are new provinces for us.

In India, we have five separate IPTV developments currently underway that represent a significant lead for us in IPTV in this country. In quarter four, Aksh, our partner there, rolled out the BSNL IPTV system, and it is expanding already.

Importantly, two other current customers, MTNL and Bharti that recently announced plans to expand their services. Bharti's January announcement was for an eight-city expansion and assigned UTStarcom as the technology partner for its IPTV service.

As you know, we also have IPTV customers in Brazil and Taiwan. Our customer in Taiwan is planning an expansion of the services this year.

We're also using our IPTV technology as the basis for our digital signage business and have signed new IP signage contracts with China Telecom and China Unicom.

This is a new business with a different business model where revenue streams can be shared in addition to selling the hardware technology, which is based on IPTV.

So far, these deals cover four provinces and include our entrance into Beijing, which is the largest advertising market in China. We shall update you more as we gain more experience in this market.

Turning to softswitch, the NGN implementations at PLDT in the Philippines, Tiscali in Italy and Jersey outside the United Kingdom, these have all gone well, and there is more potential for expansion with each of these customers.

Equally important, we now have great references that demonstrate our ability to replace Class 5 switches from a number of legacy systems, including Marconi, Ericsson, Alcatel-Lucent, Siemens and Fujitsu, moving current subscribers to the new system and doing it all very well.

While many companies have had success with Class 4 replacement, we do not know of any other company that can make the same claims on Class 5 replacement and point to references and exchanging legacy switches as I've described and do it with the credibility that we can.

In addition, our PDS end business, which is also part of the multimedia business suite, has been successfully deployed in 11 provinces to support the CDMA network for China Telecom. This represented a 40% share of that business, and we are working now on phase two of that project, which will be bid shortly.

I'd like to comment briefly on PHS, which is also part of MCBU. As you've heard, earlier this month China's regulators asked the telecom carriers to shut down their PHS operations by the end of 2011. This was anticipated by us, and we have planned for significant reduction in revenues in 2009 as we stated in 2008. We have already assumed that PAS would not be a material part of our business by the end of 2010.

Let's move to broadband business unit. We continue to enjoy the market leading position in India with 34% share. This business is growing as evidenced by an additional purchase order for BSNL's phase-two project. This order is on top of the large order we discussed in November.

Earlier, I also mentioned our IPTV relationship with Bharti, and I'm pleased to say that we've successfully cross-sold our MSAN product to Bharti. And this is a good example of our ability to broaden our sales in key accounts across a wide range.

As you know, prior to 2008, we had not driven the broadband business in China. So in 2008, we made it a priority to grow our presence in this market and we are getting success. Recently, China Telecom reviewed RFP's for fiber optics GEPON and we were rated as having the number-one product in four categories. And we are now working with the 14 provinces to get orders for this equipment.

In addition, we have been short-listed on China Unicom's EPON vendor list. Our ability to execute was proven as we delivered the first wave of products in just two months.

In Korea, we have worked with Korea Telecom Corporation since 2006, the largest telecoms operator in Korea. That relationship continued to expand last quarter as we sold additional MSTP product.

Today, our product is located in major provinces on Korea Telecom's core backbone network covering the south, middle and northeast of Korea, plus the international gateway, as well.

In Japan, our longstanding relationship with SOFTBANK continues to be productive as they will use our optical network MSAN and CP to further pursue their network expansion.

In addition, I am pleased with the development progress of our transport network, or TN product, which we've mentioned in previous calls. So far, we have completed testing of this product with two major customers in different countries. We have leadership in this technology, and we are very hopeful it will bring new business opportunities in 2009.

Part of our strategy to also increase volume in the broadband area involves expanding our relationship with OEMs and value-added resellers.

Our most important OEM relationship continues to be with NEC. And they have already taken OEM of our broadband products including MSAN, GEPON and MSTP. And we're now negotiating for them to take OEM of our TN products. The area where we had most success with NEC last year was in Latin America.

We're also working on potential new partnerships and have a number of important discussions underway in geographies in Asia and Europe undergoing.

As I think you can hear, we are very focused on revenue and bookings growth in 2009. Before we talk about 2009 in more detail, I would like to turn the call over to Viraj to discuss the fourth quarter results, as well as first quarter guidance.

Thanks, Peter.

Before I discuss the financial results for the quarter, I'd like you to know that we expect to file our 2008 Form 10-K on Monday, March 2.

I'll start the financial conversation by giving you some color to our consolidated results and the significant items recorded in the fourth quarter.

Because of the PCD and other divestitures and our announcement to wind down the Korea handset business, I'll follow with the discussion of non-GAAP results, which will help you put our Q4 results in context of our 2009 business model.

For fourth quarter, we had GAAP revenues of $241 million compared to $806 million the same quarter a year ago. The vast majority of the year-over-year difference is explained by the fact that PCD is not reflected in our Q4 2008 numbers due to the July divestiture.

GAAP gross profit in Q4 was $30 million, or 12.4% of consolidated revenues.

However, the Q4 gross profit was negatively affected by two items. First, we recorded an $18 million inventory reserve charge, mostly tied to the Korea-based operation. And the second item relates to a $6 million charge mainly associated with the first phase of our large broadband project in India.

The operating expenses on a GAAP basis were $109 million for the quarter and were affected by four significant items.

First, the restructuring actions that we had announced in December led to a severance charge of $13 million.

Second, we took a non-cash impairment charge of $27 million comprising primarily of capitalized software intangibles and equipment.

Third, we eliminated the 2008 bonuses, and that benefited the quarter by $9 million. As you know, in December, the executive team voluntarily waived its year-end cash bonuses, and we have since eliminated the bonus pool across the employee base.

Fourth, we had a $4 million gain related to our PCD divestiture.

The GAAP operating loss came in at $79 million. Our fourth quarter 2008 net loss was $81 million or $0.65 loss per share, which compares to a net loss of $25 million or $0.20 loss per share to the comparable quarter a year ago.

However, when making the comparison, it's important to note that Q4 2007 results included a $54 million gain on securities sold during that period.

As you note in our press release this afternoon, we expect our independent auditors to include a going concern uncertainty comment in our 10-K for 2009.

However, the management team is confident that we have a strong cash and working capital base to successfully manage the plans in 2009.

We have finished 2008 with net cash and short-term investments of $314 million. The cash usage in Q4 was better than the indication we gave you in November due to strong cash collections both in China and outside of China.

We also settled our working capital escrow account related to the sale of PCD. We will settle the final escrow account at the end of -- at the anniversary date of July 2009.

As Peter stated, we're already making significant progress on the actions announced in December, which will significantly reduce both expense and cash usage. All of this gives management confidence going into 2009.

Now let me take you through the non-GAAP results. We refer you to the tables that were attached to the press release that was just released.

Today, we are also providing pro form non-GAAP metrics to help you evaluate our ongoing businesses excluding PCD, which has been divested, and the Korea-based handset operations, which we expect to wind down by July 2009.

The reconciliation tables are attached to the earnings release and posted on our investor relations website.

After making the relevant adjustments, our non-GAAP revenues for fourth quarters 2008 and 2007 were $149 million as compared to $246 million. And the non-GAAP gross margins were 23% versus 27%. Both items were impacted by the anticipated decline in our PAS business.

Our non-GAAP OpEx, which removes only those expenses directly tied to our PCD and Korea-based operations, were $104 million in Q4 2008 compared to $139 million in Q4 2007. This marks a 25% improvement from the year-ago period.

Finally, the Q4 non-GAAP operating loss was $70 million versus $74 million a year ago. Despite the decline in non-GAAP revenues, we were able to more than compensate by cutting our OpEx in 2008.

Again, I'll remind you that the above pro forma numbers only remove the effects of PCD and the Korea-based operations. These non-GAAP metrics and financials table do not adjust for the one-time items that were mentioned here and in our press release.

Now let me take you to the segmented results. Multimedia communications, our quarter four revenue in the multimedia communications segment were $81 million compared to $121 million a year ago. This segment was impacted by the declining PAS infrastructure trends, which declined 50% year-over-year and was partially offset by growth in other infrastructure products. Q4 2008 gross margins for the segment came in at 42% compared to 35% a year ago.

Broadband, our broadband revenue for Q4 was $18 million, which is down from $51 million a year ago.

As I said in our prior calls, the 2008 segment reflects the planned reduction in a low-margin IP DSLAM and CPE and other offerings. This low amount of revenue recognition in the quarter does not reflect the long-term health of this segment, which has many project deployments currently in progress.

Gross profit in the fourth quarter of 2008 was negative $10 million, or 57%. This compares to negative gross profit in fourth quarter of 2007 of $3 million, or 6%. Both periods were impacted by specific charges and loss provisions related to phase one of our large infrastructure project in India.

As we have mentioned previously, phase two of this project has been better structured in terms of pricing and project milestones, which should help to mitigate some of the one-time charges and loss provisions that we saw in phase one.

Gross margins during the most recent quarter were also impacted by other inventory valuation adjustments.

Handsets, before I take you to the handset business, I'd like to remind you that our fourth quarter handset results now include revenue related to our Korea handset business. Last year, this revenue had been recorded separately in our PCD segment, which was divested in July. This detail is documented in the non-GAAP tables we have provided earlier.

The revenue from our handset business in the fourth quarter of 2008 was $122 million, which compares to $43 million in the same quarter a year ago. Of the $122 million revenue, $92 million is related to our Korea-based handset operations.

Gross margins in Q4 were 1% compared to Q4 2007 of 27%.

The 2008 quarterly results included an inventory charge totaling $18 million tied primarily to the Korea-based operation that we are winding down toward an exit by the end of Q2.

Let me just give you a brief guidance on our first quarter guidance. We recognize that our large markets are not immune to the current global economic climate.

However, most indications continue to show that China and India will be less impacted than other parts of the world. In particular, telecom infrastructure projects are still funded in the CapEx budgets of the major telcos in China and India.

All of the guidance that I will discuss for the first quarter is on a GAAP bases. We expect total revenue in the first quarter to be in the range of $120 million to $130 million. This is lower than the quarterly run rate we expect in the rest of the year. Our revenue recognition of key projects is low this quarter, and our Korean handset wind down will also impact our revenue.

We expect our revenues to improve as we progress throughout the year. In a minute, Peter will offer his insight regarding our business for the year.

For the first quarter, we expect gross margins to be in the range of approximately of 20%, which reflects the mix of lower margin Korea handset revenue.

We expect OpEx in Q1 will show continued improvement over our Q4 2008 levels, and we are projecting a Q1 OpEx to come in at less than $75. This number will fall further in the second half of 2009 as we move ahead with our recently announced initiatives.

We expect our net cash and short-term investment balance to be at about $270 million at the end of quarter one. This is not indicative of our quarterly cash burned rate for the rest of the year.

As the year progresses, we expect the cash burn in the second half of the year to be lower than the first half of the year. At this point, I'd like to give the call back to Peter so he can provide his views regarding out 2009 business goals and objectives.

Thanks, Viraj.

So far, today's discussion has focused, obviously, on the quarter four results and near-term quarter one outlook. So I'd like to give you an indication of our objectives for 2009.

So first is to minimize our cash usage during the year. As we've said, our recently announced actions will generate annualized savings greater than $100 million, and we'll continue to work very hard on this as we did in quarter four.

The second is to build our customer bookings in 2009. This is for revenues later in the year but also, obviously, for revenues in 2010. As I said in the previous call in -- last call, we are confident that our bookings from IP infrastructure products will grow more than 10% in 2009.

With regards to gross margins, the lying down of our Korea handset operation will clearly move our product mix towards higher-margin IP products.

In addition, we're continuing to make good supply chain improvements, which will lead to a benefit in our core product gross margins. On expenses, as you've seen, we're moving very aggressively and will continue to do so. We expect to exit 2009 with a quarterly operating expense at about $60 million.

Clearly, our goal is to exit 2009 with a better business model that positions us to achieve profitability during 2010.

We have a lot of work to do. And like everybody, we face an uncertain economic climate. However, we shall continue to take the actions necessary to get us there.

We shall update you quarterly as to our progress.

At this time, I'd like to ask the operator to open the call for questions.

(Operator Instructions)

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

Hi. It's Hamed Khorsand here. Hi, guys. Just so -- the guidance came out a little scratchy on my phone. Was it $120 million or $130 million on the revenues?

It was a range of $120 million to $130 million for revenue. Did you get the other figures?

Yes, I got that, gross margins 20%.

The question I had was related to the South Korea handsets. Back in 2008, you guys indicated that revenue recognition would continue through the first half of '09. How much of that is reflected in that $120 million or $130 million guidance?

It's a much smaller amount than quarter four, [Stephen], and we don't anticipate high handset revenues from Korea in quarter one. Quarter two, we're winding down the projects. We've got one major project to finish, potentially another major project to do a little bit more of, but we're rapidly winding down that business.

Okay. And then, the question was why the sudden increase in the inventories? And your accounts receivable was also up quarter-over-quarter.

Viraj, do you want to take that?

The accounts receivable is -- it's more part of the function of sales that happens at the end of the quarter. The inventories actually are down from quarter.

Okay. Last year I thought it was $195 million.

Inventory, that's in the press release. It's $300 million, $304 million to be exact.

Yep.

Okay. And what are you guys seeing from a -- trend-wise that guidance was basically half from Q4? I mean, are the projects getting delayed from being completed where you guys can record the revenues? Can you just provide a little bit more on what's going on?

Revenue recognition isn't driven so much by the economic climate. It's more just when a project comes to fruition and when can get an FAC signed. So quarter one is a low quarter for us with that respect.

The bookings is more like an indicator of what's happened in the economy. Quarter one is tracking as we expect for bookings.

Okay. Thank you.

Thank you.

Thank you. Your next question from the line of Bill Choi with Jefferies & Company.

Hi, guys. This is Rob, actually, in for Bill.

Hello.

So just on the OpEx side of things. You guys are obviously making pretty good progress there so far just executing on some of those goals. But -- so the $60 million that you've outlined for later this year, can you kind of give a little more detail on how you get that incremental $10 million from the original $70 million target?

Well we've identified already about half of it. Examples such are we just stopped our 401(k) joint program. We stopped our EPPS program. Those both provide 10% each of that. We're being tight on travel like everybody else without stopping sales travel, obviously, but we're tight on travel. We're looking at streamlining additional back office functions. Some international facilities consolidation we're moving more aggressively on, so some very firm programs that cover half of it.

And the other half I'm very confident we'll get, but I won't elaborate on it yet.

Okay, got it. And as you look at the headcount reduction that you outlined, how much of the -- can you remind us how much of the employee base will be transitioned to China?

Well we haven't identified that on previous calls. We've just said we're moving the back office functions that are here in Alameda to China wherever we can. You've got about 220 to 230 people in Alameda. Not all of them will go to China, but a large proportion of those jobs will. We've already reduced our Rolling Meadows, Chicago facilities, so that's under half of what it was. And please also remember that if you look at our worldwide headcount we're primarily a China-based workforce. It's 80%-plus.

Right. Okay. All right. So just on the cash flow, if I could touch on that real quick. Viraj, you mentioned -- you were talking about the balance sheet metrics a little bit. Can you kind of a give a sense for your working capital management and your ability to kind of improve those metrics later this year to get to a better or a lower cash burn rate?

Yes. So as I said, you know, we expect the cash balance to be at about $270 million. As we take additional cost out, we expect that the cash burn going forward will not be as much as what we expect in Q1. As Peter has also said, we have streamlined our operations, it becomes easier to manage and we require less working capital base.

We ended the year with $314 million of cash and short-term investments and we have no debt on the books, which is a much stronger position than what we had last year at December 31, 2007.

Okay. And the -- all right. So the PCD, the escrow settlement payment that was made, how much was that and how much is remaining next year? Can you just remind us, as well?

The escrow settlement was for $7 million, and another $10 million will be settled -- anticipating settlement in July 2009.

Got it. Okay. And depreciation and amortization in Q4, do you have that amount?

Yes, it's fairly negligible actually. It's $5 million to $6 million.

$5 million to $6 million, okay. And maybe Viraj or Peter, if you'd like to answer, what do you see just generally from your customers in terms of payment cycles just with everything that's going on in the credit markets? Have you seen kind of a -- you know, customers, I guess particularly within India, looking to extend payment cycles at all?

The projects that we enter, which are large broadband or IPTV projects, they typically follow a patent for payment, which is a small amount on installation, typically 20%. You get another 60% after you've committed a lot of -- the FAC has got the production going, and then usually retain 20%. So that type of contract has not changed.

And given that the cycle of implementation is typically six to nine months, it can't -- unless they artificially slow it down. But usually, they're putting in this project to gain operating effectiveness or put in new lines. And in places like India and China, there's an urgency to build out infrastructure, build it out particularly in the rural areas, which are not as well covered as the major urban areas.

So we're not seeing a fundamental change. The market stays very competitive and the challenge for us is to not only negotiate the contract well but also make sure the implementation goes very well. But it hasn't -- the payment terms haven't fundamentally changed because of the economy. But I think it's due to those countries having a need to build out infrastructure. And they're supported by the government in doing that.

Okay. Okay, and then lastly, on the CDMA handset side, can you kind of just give us an update of where you are, what you're seeing in China as a move toward 3G?

Well clearly --.

And sort of put --.

Sorry. Anything -- I didn't mean to interrupt you. Anything else?

Oh, no. I was just going to say what sort of progress you've been making there with growing that line.

Well most of our CDMA products come to market in quarter two of this year. We've got a very limited subset available for sale in quarter one. So we see quarter two ramp. Clearly the demand for those products is very high. So the key is to get a winning design at the right price. And obviously, we'll know more about that in quarter two, quarter three. But the underlying demand in the market is very high.

Okay, great. Thanks very much.

Thank you.

Thank you. Your next question comes from line the Himanshu Shah with Shah Capital Management.

Hi, guys. Can you give us an update on the real estate monetization in China?

Well we -- are you talking about the Hangzhou building? Is that right?

Yes.

So in that building, clearly we've tried sublet certain parts because it's -- as we've been very open with people, it's under utilized. We were successful in one contract. Obviously, the market in property has slowed down in China like many other areas. But we're continuing to work at that. And we're also talking to the Province of Hangzhou about flexibility because historically we weren't allowed to look at the sale of that property.

So that is still the situation, but we're obviously talking a bit with them because if they would relax that, then we have a lot of assets in that building. As part of the 10-K, we just had the building valued again, and it was valued above what it's in our books at 180 -- remind me, Viraj, $180 million?

Yes.

So that we will continue to work on, and I'll update you if I've got more information.

What kind of -- what is the potential market for your -- the Class 5 switch, especially in 2010?

In '10? Well I see growth in 2009, and we see -- looking forward to 2010, we think there's a lot of potential. The reason I say that is I think all telecom carriers are sitting on a problem, which they all have to face up to. Where we've been successful in the Class 5 switch is these more aggressive tier-two carriers who will take a well managed risk, if you will, to replace their whole backbone, move to a next-generation solution. The footprint is amazing. It comes down 90%. So it's a very green answer. Cost of power and so on is a fraction of what it was before. And the cost of maintenance is a fraction of what it was before. Plus you get the flexibility because it's a softswitch. So on software you can easily make changes.

And we're having a lot of visits to the installations we have. Obviously, the one we've had the longest is PLTD in the Philippines. They're looking to expand this year. But I'm very optimistic about this market.

Now as you look towards 2010, I think it could be quite big because it strikes me that everybody's got to face up to this next-generation change at some stage. And once you get one big tier, one carrier moving and having a competitive advantage when it does that, it'll start a lot of activity.

You gave around $120 million, $130 million guidance for the first quarter with progress in the following quarters. Is it -- I mean, what kind of progress are we talking about over here, substantial or it's going to be pretty mediocre?

Well I don't know what you mean by mediocre.

Well I mean, you're losing $50 million a quarter here.

I know. I know.

You're talking about OpEx cuts, but they're not sufficient.

No, no. So growth in bookings in paramount and growth in revenue. Quarter one is lower because of revenue recognition this quarter. We're not giving guidance beyond quarter one. But clearly, as Viraj said, we expect higher revenues quarter two, quarter three, quarter four. And if I may, I'll leave it at that.

Are you at all contemplating a 20% pay cut as a lot of the other tech companies are doing, especially in light of the fact that you've been losing a lot of money for so many years now?

Remember, we have changed a huge amount. There are no bonuses, no salary increases. Remember that a lot of our executives are in China. Of my direct reports, six are in China. They can look out of their offices at the buildings of Huawei and ZT, which are right across the block, if you will. So I think we're having to manage and motivate a workforce in a difficult economic environment and in a turnaround. So I would be very cautious about that.

And the other point, which I hope you can understand from the references to moving a lot of functions from Alameda to China, some of the Western-based executives will not be with us by the end of the year. I won't be more specific than that. So asking to take a pay cut right now is I don't think the right course of action.

But we have been very aggressive on reducing our costs, and we're driving the headcount down very fast. So I think we've been very responsible.

When do you think the market is going to start to give you credit? I mean, your market value is $130 million. You've got $270 million cash on March 31, as you said. You talk about your technology, which you claim that it's very good. A lot of technology companies do the same thing.

When do you think the market is going to start valuing your true potential?

I think, like your self, everybody wants to see the turnaround get to a breakeven and a positive cash flow situation. The plan is, as I said, to exit this business year, 2009 -- is to position us to have profitability in 2010. There's a lot of work to get there. We are having good acceptance of our technology. We continue to have leadership in IPTV. I'm excited about softswitch, as we talked about. And the broadband products we're pushing very hard to enter the China market, which will be very important for us. We're doing good market share in India.

So there is good market acceptance for our products. We've had a lot of work to do in 2008, simplifying the company, aggressively manage the cost space. We've moved fast on that. But we still have work to do, and that is why I think people are not valuing us above the cash position we have, which is very frustrating, but we still have work to do.

Thanks.

Thank you.

Thank you.

Your next question comes from the line of Paul Wehner with DLS Capital.

Hi, guys. Viraj, on the one schedule where you have the reconciliation of gross profits, the minus $4 million that you give to the Korea BU, does that include the $18.5 million write-down?

Yes, it includes primary -- most of it's in that number. I mean, without that, you'd have a different margin you see -- as you can see. If you'd exclude that, you have a margin of -- the margin is 22% on a core business.

Okay. So if you put that $18.5 million back in, you'd actually have a gross profit from Korea of $14.5 million?

Right.

Okay. Was that just an extremely good quarter? Are you guys --?

Well remember, we've taken all of the -- not all of the R&D, almost all of it out. So you've got an unusual business model now. You've got very little expenses.

Right, you have a wind-down model.

So it's a wind-down model.

Excellent. Okay.

It's not representative of a true business model.

Okay. There was one other -- all right, thanks.

Thank you.

Thank you. (Operator Instructions)

Your next question comes from line of Andrew Rosenberg with Footprint Assets Management.

Yes, on that $75 million OpEx guidance for the first quarter, is there any restructuring in that number?

I don't think so, no.

No, that's the run rate.

That's going to be the run rate? Okay.

Right.

That's the run rate, yes. Yes, because we took the restructuring charge in quarter four.

Okay, so that's all just your regular OpEx and that's -- or SG&A and then R&D.

Well maybe, just as we said before, just for clarity, as we go through moving functions to China, which is more like the quarter two, quarter three timeframe, there may be some additional restructuring. It wasn't possible for us to size that completely accurately in quarter four. But all of the quarter one actions were in the quarter four restructuring.

Okay. And then on the gross margins side, I know it's probably early to get past the first quarter, but do you think low 20s, is that going to hold -- move higher throughout the year, or is that hard to say at this point?

As you exit the Korea business, you get a jump up from low 20s to mid 20s or better.

Okay. And then, on the OEM side, I know you mentioned NEC down in Latin America. Are you taking a big hit on margin with the OEM model, or has it proven to be a pretty good strategy at this point? I don't know if you can talk about that a little bit.

It's a good strategy for us because a number of reasons. We get cash in much more quickly than we do if we sell directly because that is part of the arrangement. Clearly, our selling cost goes right down and, though it is still a reasonable margin model, not as good as if we sell direct, but we're very happy with it.

Is that -- is there any specific I guess region that you would look at an OEM partner to maybe help out on the sales front, geographically speaking I guess?

I think there's room -- NEC, by the way, just don't do it in Latin America. They're also present in other parts of Asia and Europe. There's room for some additional OEM partners. And one of the things I'm very conscious of is the direct sales force is primarily on IPTV softswitch plus broadband projects where we have a generally good relationship with a carrier. If somebody else has got a better relationship, I'd much prefer to use a partner there. And so we're working hard trying to find additional partnerships because I think that gives us a lot of leverage.

Would you make an announcement if you had an agreement with an OEM partner in the near future?

When we have an agreement, we'll certainly announce it. And we do -- it's not just OEM. We're quite happy to have just a normal reseller relationship, in addition to OEM where we actually engineer the product for somebody else and it goes under their name. So we have two approaches.

Okay. All right. Well thanks for taking my questions.

Thank you.

Thank you. We have a follow-up question from the line of Bill Choi with Jefferies & Company.

Hello?

Hi, guys. Sorry, just one quick follow-up question. Is there -- has there been any update on the sales leadership?

Our sales leadership?

Yes.

Yes, that person has been in position since -- a couple of months now for international sales leadership. He joined us -- his name is Luis Dominguez. And he's sort of got off to a good start, so we're very pleased to have him.

Okay. And what is his -- what is he kind of initially tasked with?

Well there's a lot of work to do in international. So he's streamlined the operations. He's changed two of the region managers, one in Europe and one in Asia. He's putting a lot of focus on building up some new key accounts. He's very experienced in Asia and Latin America. He is Latin American, as you can tell by the name. And he brings with him many senior level contacts in Asia and Latin America. So he's out helping the sales force build new business and accounts that we haven't had before.

Okay, great. All right, thanks again.

Thank you.

Thanks.

Thank you. I would now like to turn the call back over to Mr. Peter.

Well thank you very much. I appreciate your questions and appreciate all your attendance. Barry will be following up with all of you. And Viraj, Barry and myself are available for follow-up calls. So thank you again. Let's close the call, Operator.

Thank you.

Thank you for joining today's conference call. You may now disconnect.