UTStarcom Holdings Corp (UTSI) 2009 Q1 法說會逐字稿

Good evening. At this time, I would like to welcome everyone to the first quarter 2009 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 and good afternoon, everyone. I am Barry Hutton, UTStarcom's Senior Director of Investor Relations. Earlier today, we announced our financial results for the first quarter 2009. That press release is available on the Company Website.

On today's call, Peter Blackmore, our Chief Executive Officer, will review those results and provide an update to the cost initiatives we announced in December. He will then offer some highlights relative to our key business units. Viraj Patel, our interim Chief Financial Officer, will then give non-GAAP results and review the segmented financial details of our first quarter. And before we open the call for your questions, Peter will close with comments about our plans going forward.

Before the call begins, I would like to remind everyone that some of the information we will discuss today constitutes forward-looking statements. Such statements relate to, among other things, our cost-cutting initiatives and expectations for 2009. 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, the quarterly reports on Form 10-Q, and current reports on Form 8-K which are filed with the Securities and Exchange Commission.

The Company assumes no obligation to update any forward-looking statements.

And in addition, today's call will include certain pro forma non-GAAP financial measures. The most directly comparable GAAP information and the reconciliation between the pro forma 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 would like to turn the call over to Peter.

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

We announced our first quarter 2009 financial results this afternoon and Viraj will review the business unit details in a few minutes.

First, though, I would like to discuss the factors that drove the key financial and operational metrics for our business. Despite the economic recession, we continue to see comments from the business media and other technology companies which indicate that China and India, our primary markets, are indeed holding up better than other regions.

Similarly, the demand for our infrastructure technology held within our customer base. And in the first quarter, these businesses recorded a book to bill ratio of 1.2.

Our total revenue was $119 million which is just slightly below the anticipated guidance range. Our revenues were below forecast for the Korea handset operations, a business we are winding down and they were below because the shipments were delayed due to a charger for a handset that needed to be redesigned. We do expect these shipments to resume late in the second quarter.

However, we are pleased that our core business met or exceeded our internal expectations in the first quarter so our infrastructure business was indeed able to compensate for part of the Korea handset shortfall.

In the first quarter we had a gross profit of $22 million or 18.1% of sales. This number includes an inventory reserve, net of $6.4 million, relating primarily to a reserve against our remaining inventory of PAS handsets. As you know, China announced in January that the PHS frequency would be used for other purposes by 2011.

This is reducing the already slow demand for PHS handsets. We do expect to sell our remaining PAS handsets inventory over the next few quarters.

Our ongoing gross margin run rate without these special charges against inventory would indicate a business operating in line with our internal expectations.

The operating expenses of $81 million included an $11.4 million in special charges. Specifically a $6.6 million charge relating to the accounts receivable for one customer having payment difficulties. We are in negotiations with this customer for a revised payment plan, but prudent accounting process is to take full reserve.

In addition, there is a $4.8 million charge resulting from the restructuring actions we announced in December. You can see that our OpEx run rate, not including these items, reflects a successful execution of our various cost initiatives. This OpEx run rate will continue to fall further throughout the year.

The above resulted in an operating loss of $59 million.

In relation to our balance sheet, we are particularly pleased with our quarter end cash and cash equivalents balance of $301 million. This balance is well above prior guidance level and reflects our aggressive actions to manage costs and working capital tightly.

Now I would like to spend a few minutes to update you on the cost initiatives we announced in December. As you know, in December we announced a plan to reduce our operating cost by 25% by the end of 2009.

In February we reduced the quarterly expense guidance further to be $60 million by quarter 4 of 2009. In the first quarter, we continued to work hard to execute all of these initiatives as quickly and as smoothly as possible; and I am pleased that we have made progress in line with our expected timelines.

We continue to work towards the wind down of our career-based handset business. The expenses related to the facilities, the employees will end by July as expected. We currently have some remaining inventory on our books and we are working with our partner, PCD, to sell through this remaining inventory.

We have also made continued process towards consolidating our functions in China. During the quarter we began to recruit and train the talent in China to ultimately take full responsibility for certain functions currently handled in the United States.

I remind you that moving these functions to China gives us the combined benefit of reducing costs and aligning our work with a customer base that is primarily in Asia. We still expect to complete the majority of this consolidation during the second and third quarters of this year.

The anticipated reductions in headcount are also taking place as expected. In December, we stated our target of a 15% reduction year-over-year and we actually have moved ahead of schedule and we reached this goal by the end of March.

Going forward, we will have are the reductions as we complete the Korea one down and the China consolidation this summer. In addition to these actions announced in December, we are committed to taking additional actions or take a significant step towards reducing our operating losses. And I will talk more about that at the end of this call.

Let me move to now business unit discussion and I want to give some strategic and operational highlights starting with the multimedia communications fiscal unit. And as you know, that business unit offers two of our lead products, namely IPTV and NGN SoftSwitch.

In the IPTV Arena, as of March, had 1.32 million subscribers globally and our solution continues to see strong customer demand and receive third-party industry allocation. The Multimedia Research Group, MRG, a leading independent IPTV research firm, released its global IPTV market leaders' report in April.

In this UTStarcom is rated Number 1 in Asia across five of the six tracked categories due to our strong position in China. An MRG analyst noted this type of regional category takeover is unprecedented.

In China, we also signed an IPTV expansion agreements with China Telecom in both Shanghai and Shenzhen. In India, we are currently expanding IPTV Services [body] including a service launched in the city of Jaipur.

In Taiwan, [Markwill] launched our IPTV service on April 1.

Simultaneously we continued our path of leveraging our existing IPTV technology into adjacent markets. Based on our rolling string platform, China Telecom selected us to be the exclusive technology supplier to deliver the first mobile TV system in the Henan province. We expect this system to go live this month.

We also made more progress in China's IP signage market where we have now won eight contracts and shipped 4,800 advertisement terminals and we have a growing backlog. [Telus] has also accepted our deployment of the IP messaging system.

Our next generation network products continued to demonstrate leadership in Latin America, where we started network migration for Nextel in Argentina. And in Thailand we booked an NGN contract with TOT, the Telephone Organization of Thailand.

We also made progress in the newer cable operator market including a successful product show in March when we demonstrated our interactive digital TV solutions. We established a strategic partnership with SMIC, who ordered an initial contract to build an interactive digital platform for the cable operator in China's Guangdong province.

I will turn to the broadband business unit. We continue to have a leading broadband position in India, and more recently we have supplemented our global offerings there by becoming more aggressive in China.

In the first quarter, we had a number of broadband wins. In China's CTC procurement bid for GEPON, we were ranked first in three out of four categories, leading to an initial contract win and, more importantly, this puts us onto the short list of 15 of the provinces in China. Outside of China, we have secured repeat business in India with [Barty] and the Philippines with PLDT and the Middle East with both [Bezec] and Yemen Telecom.

Looking forward, we continue [to] designs of meaningful growth opportunities in broadband in both China and India.

Relation to efforts to increase our bookings and revenue, I talked about the importance of strategic alliances to augment our internal efforts. And in March we hired a senior director of alliances to work directly with each of the business units and to manage a team that is responsible for potential relationships in Asia, Europe and North America.

At this point I will ask Viraj to give you the financial details for our first-quarter results. And after that I will close the call with some comments about our business model and plans for the rest of 2009. Viraj?

Thanks, Peter, and good afternoon to everyone. As Peter has already given good details regarding our income statement, let me just start by discussing the cash balances.

As mentioned earlier, we ended the quarter with cash and cash equivalents of $301 million, well above our prior expectations. The lower than expected cash usage was due to strong cash collections, good working capital management, and particularly, the reduction in our prepayment source suppliers for our Korea operations as its business is being wound down.

From an operating cash flow standpoint, we had a net loss of $67 million and after adding back non-cash charges of $16 million such as depreciation and amortization of stock-based compensation and bad debt reserves, and changes to the working capital balances, we ended the quarter with a net cash usage of approximately $12 million.

On the GAAP results, a number of special items affected our first-quarter results. So I want to clarify the operating expense run rate of our ongoing businesses.

Our reported first-quarter operating loss was $59 million. However this includes approximately $18 million in special charges that Peter outlined a few minutes back. Without these charges, our underlying operating expenses were lower than our previous internal projections.

Below the operating loss line, we recorded an unrealized foreign currency loss of approximately $7 million, due to the continued weakening of the Indian rupee against the US dollars. If you recall over time, this currency has fluctuated both in our favor and against us.

For non-GAAP financial results, let me briefly touch a few things on it. As you know, for the past 12 months, we have divested PCD and we took action to wind down our Korea-based handset business.

To help you understand our Company, excluding these operations, we have prepared some additional financial tables and attached them to our earnings release and posted them on our Webpage. I do want to emphasize that the non-GAAP numbers do not adjust for any of the special items that were highlighted in the press release or in this conference call.

For the quarter, we had non-GAAP revenue and gross margins of $80 million and 23.8% of margins, respectively. In the same period last year, the revenue were $155 million and gross margin was 36.8%. This reduction in revenue and margins is directly related to the decline in the China PAS business.

For Quarter 1, non-GAAP operating expenses were $78 million, which also include the special charges previously discussed. So this year's run rate was greatly improved in comparison to $106 million of OpEx in the first quarter of 2008.

This improvement over last year reflects lower professional services fees as [via] result historical accounting and legal matters. The improvement also reflects our ongoing efforts to rationalize cost across the Company.

Our non-GAAO operating loss was $59 million in Q1, was the loss of $49 million last year. (Technical Difficulty.) Let me give you a brief (inaudible) segmented financial results.

For multimedia communications, business unit generated revenue of $34 million and gross margin of 31%. This compares to $61 million last year and 49% in the same period last year. As mentioned earlier, the decline in the PAS revenues, already discussed earlier, affected our revenue this year and the gross margins this year.

For broadband, the revenues of $15 million versus $26 million a year ago. The year-over-year change continues to reflect our planned reduction in low margin [CPE] products. Gross margins for Quarter 1 were 11% versus 9% last year.

On the handset segment, revenues for the quarter were $56 million, which includes $36 million revenue generated from our Korea-based operation. This compares to revenue of $44 million in Quarter 1 of last year that was primarily PAS handsets sold in the China market that have since declined.

Gross margins declined to 11% for the quarter compared to 37% last year. This change was due to the change in the product mix previously discussed where we took inventories reserves for our PAS handsets.

I will now turn the call over to Peter so he can make his comments about operational plans going forward.

Thanks, Viraj.

At this point in the call, we normally provide financial guidance for the next quarter plus some thoughts on our business beyond that. However for this quarter, we are temporarily moving away from that normal practice and I want to be upfront with you as to why.

In February, I said our announced cost initiatives would let us exit 2009 with a quarterly OpEx of $60 million and the business model positioned to achieve profitability during 2010. However, it is clear to everyone, the Board, management team and our investors, that we need to accelerate that. So we are -- want to rethink our business model further.

To that end, the management team have been evaluating a number of initiatives. We expect to finalize this valuation by the end of May and we are committed to sharing the details and our further actions with you by then.

Given that context, we have decided not to provide financial guidance today as it is likely to change in just a few weeks' time and we thought it better to give you a complete picture then.

Despite this temporary change in guidance policy, I do want to reiterate a number of key points about our business.

The first point is demand for our key products in China and India continues to be good. Recently, some major technology companies have reiterated the view that these regions will have a growing demand in 2009 and that is consistent with our Quarter 1 bookings that were ahead of our internal plan and so far, the Quarter 2 bookings remain on track.

The second point relates to our gross margins. As we outlined earlier, some special items affected the first quarter gross margins but excluding these items, the gross margins indicated performance, our business performance performing in line with our prior expectations.

The third point relates to our expense levels. As we said earlier in the call, we have quickly executed the plans announced in December and we are well ahead of the time frame for reductions that we outlined at that time. This gives us the confidence in our ability to execute the additional measures we will announce later this month.

Finally, I will point to our cash levels. The March 31st balance of $301 million exceeds the guidance we gave in February. And this reflects our aggressive actions to manage our cash well.

As I mentioned, we don't want to provide financial guidance until we discussed our further initiatives later this month, but we do want to give you a chance to ask questions about the first-quarter results and our broader business. So at this point I will ask the operator to open the call to Q&A.

(Operator Instructions). Hamed Khorsand with BWS Financial.

My question is regarding -- let me ask a housekeeping question first. I missed the IPTV numbers. How many people did you have on your equipment?

It was 1.32 million subscribers. 1.32.

OK and that's China only or complete, worldwide?

Worldwide, but the majority are in China because the India ones where we have a lot of wins, they are all still in the early stages. So the number of subscribers is not that high yet.

All right. Now my question I wanted to ask was, the stimulus spending that China dished out earlier this year, what kind of benefit have you seen from that? And do you think that that spending has gone in through the channels by now?

Really just a broad answer to your question, reading the newspapers, I do believe -- and I travel to China every month as you know, so separate from our business, I do believe that stimulus package is having an effect on consumer demand. Obviously if it has an effect on consumer demand, it can potentially help our IPTV business. So that is where we see the most impact.

Nothing on the infrastructure level, then?

Oh, the infrastructure -- basically that is a separate thing. The infrastructure spend on broadband rollout in China, we believe, will continue to be strong. There isn't a specific stimulus package for that, but the telcos have continued -- the three major telcos there continue to have strong CapEx as was remarked a number of times. So that is a bit separate, but we continue to see strong demand there as we said on the call.

And then also, just planned restructuring. Would that in effect change the way you guys, your revenues structure at this time or is this still too early?

We'd like to pass on any comments about what we will announce later this month so we can give you a complete picture then if we may.

Okay. Thank you.

Ari Bensinger with S&P.

Thank you. I know you're not giving any guidance in terms of operating model, but I'm wondering if I X out the charges, it seems like the gross margin came in at around a 30% level which was above our forecast. And I am wondering absent any more restructuring (inaudible) how do you see the product mix impacting gross margin as the year progresses?

Well, we've got to keep passing on these questions because obviously they are good questions and I appreciate that. But we would like for you to wait until the end of the month. We can give you a complete picture on our plans going forward if we may.

Okay and maybe on the cash position. How much more room is there for capital working improvement? I mean that was really taking an operating loss in the $15 million range and knocking it down to the $10 million to $12 million range. How much more room is there going forward for working capital improvement?

As you know, we still carry some handset (inaudible) for the Korea operation. So there is some room for improvement. As Peter suggested, I think we would prefer to give you further guidance at the end of this month as far as the cash operating model is concerned.

I will try one more. Do you have any CapEx forecast for the year?

Our CapEx generally has been -- not [in that] significant, typically, depreciation and amortization kind of offset the CapEx.

Fair enough. Thank you.

(Operator Instructions). Don [Epsy] with Shaw Capital Management.

Good afternoon. Just have two questions for you. Based on the initiatives that you folks are planning to announce later this month, can you UT be operationally profitable in Q3 or Q4 of this year?

It's a good question but obviously it will have to pass on that until later this month.

I mean, is it feasible for us to even be thinking about?

Well, we are not asking you to wait for -- we're only asking you to wait for a few weeks and we will give you a complete answer.

Okay. That's fair. One more for Peter. Peter, as you are aware, the industry is consolidating. Oracle bought Java. Cisco just announced that they will aggressively be pursuing acquisitions and we are hearing similar talk from many others throughout the industry.

What kind of role do you see UT taking in this consolidation phase the industry is seeing?

Obviously we don't comment on M&A. What we're aiming to do is to build a profitable company with a significant base of business in China and India. And we think there's plenty of opportunity to do that. Notwithstanding there are some very strong competitors in China, but there aren't many companies like us which have the footprint in India that we do for a company of our size. So we are in a little bit of a different category.

So let me just finish there, Don, but I've tried to give you some color.

At this time, presenters, there are no further questions. Do you have any closing remarks?

Thank you. I appreciate everybody joining our call and obviously we have set some expectations for later in the month. And we will meet those and I would like to thank you all again for joining us and appreciate your support. So thank you very much.

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