UTStarcom Holdings Corp (UTSI) 2009 Q3 法說會逐字稿

Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to the UTStarcom third 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. I will turn the call over to Barry Hutton, Senior Director Investor Relations. Please go ahead, sir.

Good afternoon and thank you for joining our call today. Earlier this afternoon we announced our financial results for the third quarter 2009. That press release is available on the company website. And today Peter Blackmore, our Chief Executive Officer, will start the call by discussing certain business unit highlights including a new product launch and key customer win's. Peter will then give an update on the progress of our restructuring initiatives announced in June. Viraj Patel, our Interim Chief Financial Officer, will then review the third quarter financial results and certain non-GAAP metrics and then Peter will close the conference call with some comments about our expectations for next year.

I will remind you that this call will include forward-looking statements relating to among other things the Company's restructuring initiatives and projected business model. Forward-looking statements are generally indicated by such words as will, expects, estimates, goals, plans or similar words. These statements are forward looking in nature and subject to risks and uncertainties that may cause actual results to differ materially. These risks include the ability of the company to realize anticipated results from operational improvements and execute on the business plan as well as risk factors identified in its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as filed with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements.

In addition, today's call will include certain pro forma non-GAAP financial measures. The most directly comparable direct GAAP and a reconciliation between the pro forma non-GAAP and GAAP figures is attached to the earnings release issued earlier today and filed on 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.

Thanks, Barry. Good afternoon everyone and thank you very much for joining our call today. Early today we issued the press release that outlined our financial results for the third quarter. As you saw on the quarter three results include total revenues of $71 million. This is driven primarily by our IP-based products and services. This quarterly revenue also reflects our decision to minimize our handset operations globally. Doing this has helped to improve our gross margins and reduce the working capital needs.

Quarter three gross margins were 34% which included some benefit specific to the period but it also reflects our margins improve as we focus on our IP infrastructure business. The operating expenses were $58 million. That includes $11 million in one-time charges related to our restructuring activities and a small loss from the divestiture of our career based handset operation. The reduction in our run rate expenses is on track to hit our 2010 targets. Importantly, we ended the third quarter with $241 million in cash and short-term investments and we continue to manage cash well and manage it tightly.

As always, the financial results are clearly important but as you all know quarter three is a time of transition for the company. So equally important to the results is the progress towards repositioning the company for 2010 and beyond. During the second half of this year our management team is very focused on three objectives which I will discuss in more detail. First, we continue to build the product portfolio and the customer pipeline to drive the 2010 revenues we need. Second, we are aggressively executing the restructuring and this will streamline the business and reduce the OpEx flow $100 million for 2010 and while doing this we will maintain the Company's financial R&D and operation resources required to prosper in 2010 and beyond.

Let me now look at some highlights regarding the key developments relating to our product portfolio and sales pipeline that will support our 2010 revenues. I would like to start with the Broadband business unit. On October 30, our Broadband business unit formally announced the launch of our transport network product family which refer to as the TM product. Already we have secured two separate commercial contracts that will utilize the TN product solution. The first contract is with Softbank based in Japan. This is a very important contract. And the second contract is with Shandong Power based in China which is an enterprise win. It's not to a carrier, it's to a utility. And on Tuesday we issued the press releases which discuss both projects and you can find each of those on our web page.

We are all very excited about the TM product launch and the related growth opportunities. As I think you know, the product is designed to help carry networks managed traffic growth by increased bandwidth and generate high [RPUs] for the carriers. We believe we have a leadership product and the wins demonstrate a good start and you can find the technological details about the TM product on the company web page under the products section. We are bidding this product actively in a number of current RFPs. Most notably, we were pursuing the China Mobile tender which has already gone out to RFP stage and we are doing this through a joint partnership with a new partner we have in China, Nokia Siemens. Over the next six months we will launch a number of launch activities which together will maximize the opportunity and give good coverage of the exciting new product to potential clients and technology groups.

Separate from the TM prospects we continue to move forward with additional Broadband business. Earlier in the year we spoke about our plan to leverage sales channel relationships in certain markets, one of them South America, and we are pleased to announce the recently new sales alliance relationship with (inaudible), an international provider of information and communications technology through many countries in Latin America. This sales relationship has already secured projects in Argentina, Chili, Paraguay and Peru. These projects utilize a cross section of our Broadband products including IPD slam and [Sam] the GE Palm solutions. And, importantly, I would like to just re-iterate one significant item. As we mentioned last quarter, we do expect to take a significant order in India for phase three of the BSNL contract in quarter four.

Let's move to the multimedia communications business. In this business we continue to have the leading market share in IPTV in both China and India. As we look towards 2010 growth opportunities in the China IPTV market, as we have explained before, a meaningful proportion of the industry's 2009 investment has been dedicated to 3G, that the indications are that 2010 will see a return to significant IPTV investment by the industry. And in recent months this quarter we won a number of new contracts that are clearly positive indication towards our prospects next year.

Also this week on Wednesday we announced a new relationship with a Beijing-based government agency named the State Administration of Radio, Film and Television, or SARFT. Beginning in November, SARFT will start deploying our IPTV software platform and other solutions throughout the Sichuan province and this was the province that you will remember was damaged by last year's earthquake. The project goal is to ensure that the province has access to TV and radio channels to receive important information from media and other content. Specifically, the province residences will have simultaneous access to 7,000 new video streams through the system. We do expect this relationship with SARFT to be a long-term strategic opportunity for us. The SARFT agency is active in a number of provinces and this additional contract will create a benchmark for interactive multimedia content providers to develop future operations.

Also in China CCTV and the [Hunan] Television Station jointly established a new IPTV corporation model and UTStarcom was appointed as the solution provider in four cities. Importantly, China Telecom has named us as one of the preferred vendors to roll out the new set-top box standard which is standard 2.0. This is an open standard for set-top boxes which will enable us to compete more effectively for set-top box sales not only for our own systems but also for competitive systems. And in [Granju], the capital of the [Grand Dong] Province we recently launched the IDTV service, SMIC, the southern media group and this is a revenue sharing model. We share in the advertising revenues and we are expected to expand the service to other cities throughout the province. In India we continue to move forward with multiple deployment projects that we have won and many of these systems are going live in quarter four and in 2010.

Let me now switch to an update on restructure and the progress towards our 2010 model. Obviously a major effort we continued to execute our restructuring plan which, you remember, we announced in June of this year. Plan was carefully put together to target profitability in 2010 without sacrificing our long-term strategic focus on (inaudible) products and to make sure we were successful, particularly in the selected target markets which are primarily China, India and Japan. This restructuring will achieve three goals. It will streamline our competitor focus on these key regions of China, India and Japan. It has focused our product portfolio to concentrate on opportunities that are very likely to drive growth and attractive gross margins such as the opportunities I just mentioned in both Broadband and MCview. And, third, very importantly, it will reduce our operating expenses so that our 2010 Op Ex will be less than $100 million. We have made good progress in quarter three and are on track to complete all of these restructuring actions.

To give it a little more color on the restructuring process, we have reduced our support for certain legacy businesses. And as we made clear, our business will be almost entirely focused in 2010 on the IP base system products in the related professional services. We are continuing to make R&D investments in products most likely to generate growth in 2010 and beyond and the example we gave in this call of the TN product, the new (inaudible) product is a perfect example.

Regarding our sales strategy, our lead markets of China, India and Japan are around primarily dedicated direct sales team focused on Broadband and our IPTV products. And you will also note in China we extended our coverage by working with Nokia Siemens to penetrate China Mobile which will be a new account for UT if we win this contract we are currently bidding for. Across the rest of Asia, Latin America and Europe we have a combined approach that although it has some direct sales teams to support current high potential clients, it will focus increasingly on channel and OEM relationships and we continue to build up these partnerships in carriers such as the new relationship in Latin America I just mentioned.

Next on plan and anticipated we recently selected a vendor to outsource our manufacturing operations. This vendor has been selected. We will not announce the name today. There will be a press release coming out shortly. Obviously completing the manufacturing change requires us to manage a very, very good transition as we move to the outsourced manufacturer. We are beginning the transition planning and beginning the movement operations during quarter four. However, because we expect to a large order from BSNL in quarter four plus orders we will receive from Softbank and others we expect very large shipments in quarter one so we are planning to manage the transition carefully in quarter one so that we really execute superbly well on these important shipments as well as handing over to our new outsourced partner.

We announced in December last year the plan to consolidate back office functions into China and at the same time simplifying our operation, rationalizing facilities and obviously reducing costs. Many of our functions are being moved to China making UT stock common in Asia focused operations. With the concentration of employees and functions in one location we are able to consolidate a number of our facilities. Currently, our headquarters continue to be in (inaudible) but it is now a much smaller office. In fact, those of you who have visited us know we had three buildings and are now down to one building and just a small number of people as we moved or eliminated functions and transferred them.

In addition, and this is a new comment, we were looking at the potential advantages formally moving the company headquarters to China. I will talk more about that as our plans unfold. With all of these changes, clearly we plan to have the senior management team which is being based partly in (inaudible) and partly in China, we will be moving the senior management team to China obviously supported by very good people in the region such as India and Japan and other regions so we continue to have a strong international presence. But in terms of moving the senior management team, we are on track to do that and to make sure we have the appropriate capacity and bench strength. We have already been recruiting people and aligning various functions to senior managers that are joining us already based in China.

As we mentioned our last call we are looking expanding our Board of Directors and are very active in this and the aim is to add Board members with much more familiarity with the China market. We are talking with a number of potential candidates and will advise you as soon as we have firm news on recruits.

In terms of head count, the employee head count at the end of October was 2 -- was under 2700 people and this is down from about 4300 in June of this year. Obviously we are on track to have further reductions in quarter four and some reductions in quarter one to complete the outsourcing of the manufacturing operations, but I want to emphasize we are collectively well on our way to bring the head count for the employees below the 2000 base that we announced when we talked about the restructuring in June and will complete that on time.

Let me also give you a quick update on the sale of our [Hangzhou] facility. We worked with the local government to ensure that a building sale will be support by them and it will be. We have made a contract with a realtor to market the building and that is active and ongoing. There is genuine interest in the building already but I want to remind you that the timing of the transaction obviously is still uncertain. We want to maximize the value of this building. It's a very unique building, a very special building and we want to take the time to find the right partner as we go through this transaction. At this point, I will hand over to Viraj to give more detail of our quarter three results.

Thanks, Peter. Good afternoon, everyone. I will start by highlighting the company-wide numbers presented in GAAP and non-GAAP basis. In the third quarter 2009 we had GAAP revenue $71 million versus $181 million a year ago. It's very important to recognize that the vast majority of the year was anticipated and it is directly attributable to lower revenues from past business. As you know, use of the past technology has been winding down for some time. And earlier in 2009, the China government formally reallocated the spectrum from past [3G] uses. As such, we had anticipated this decline in past revenues. The GAAP gross profit in quarter three was $24 million or 34% of revenues. This compares to gross profit of $57 million or 32% in the third quarter of 2008. As outlined in the press release, the Q3 gross profit did benefit from the reversal of $6.5 million inventory charge. You recall that in prior periods we wrote down certain handset inventory. Our GAAP operating expenses were $58 million and were also impacted by certain significant one-time items totaling $10.6 million.

First, in June, we had announced a significant restructuring charge and we took some related charges in Q2. As we continue to execute our plan, we recorded an additional $8.9 million restructuring charge in Q3. We do expect to take an additional restructuring charge in Q4 as the rest of the work force reduction is finalized. All of these charges are primarily related to one-time service payments to identified employees. Second, we recognize $1.7 million non-cash loss related to divestiture of the handset operations. With these special charges we have been able to achieve a 37% reduction in OpEx year-over-year. The reduction comes from a broad range of items across the SG&A category. We also lowered our R&D expenses by streamlining our strategic focus and exiting noncore areas. GAAP operating loss came in at $34 million. Third quarter [2000] net loss was $35 million or $0.20 per share.

Let me briefly touch on the non-GAAP results. At this point I want to take moment to discuss non-GAAP pro forma numbers that were issued in our press release and posted to our web page this afternoon. Over the past 18 months we have taken actions to narrow our focus towards IP base products and services. Our actions include exiting a number of non-core businesses, namely the divestiture of [PCD] in July of 2008 and wind down off a Korea based handset business. I remind you these non-GAAP results do not adjust for restructuring charges and any other special charges on non-cash items. These results only are just for our exit from PCD and the Korea handset operations.

Non-GAAP revenues and gross margin for third quarter 2009 were $63 million and 35% respectively. This compares to third quarter 2008 non-GAAP revenues and gross margin of $146 million and 35%. 2009 metrics reflect the anticipated decline in our past business as I mentioned earlier. Our non-GAAP OpEx was $57 million in the third quarter. Even including the special items from the period, these results compare favorably to the $82 million in non-GAAP OpEx a year ago to the company's broad strategic cost cutting initiatives. We are clearly making progress toward reducing our cost structure. The non-GAAP operating loss was $35 million versus a loss of $31 million a year ago.

Let me now turn to the segment results. Multimedia communications. In quarter three, our multimedia communication segment had revenue and gross margins of $22 million and 46% respectively. This compares to Q3 results of $58 million and 53% for prior comparable quarter. The multimedia segment revenues were negatively impacted by the wind down of past business in China. The past business decline was partially offset by an increase in sales of our IPTV systems. On Broadband, revenue for the quarter was $16 million, which was down from $31 million a year ago. This decline comes from our actions to exit certain low margin broadband products. Gross margins in quarter three were 22%, a significant improvement from 10% a year ago as we managed well the phase two part of the BSNL multiplay deployment.

For services segment, the revenue for the quarter was $17 million which compares to $14 million in the same quarter a year ago. This continued to be a high margin business for us as reflected in the third quite gross margin of 34%. For handsets, the total revenue recorded for $16 million compared to $72 million a year ago. Last year's handset business recorded $35 million from selling equipment in North America. That is a business we exited. And as stated earlier we also had a significant decline in revenue from China handset activity. The gross margin of 21% benefit includes $6.5 million benefit as we worked with PCD to sell through some handsets which were previously written down.

For cash flow, our cash balance we ended the quarter with a strong balance of $241 million which includes cash, equivalents and short-term investments and as of September 30, 2009. During Q4 and Q1, we expect to make cash payments to related to the restructuring charges that we have taken. Ultimately, we reiterate our expectation to end the year and sufficient cash liquidity to support our working capital need for 2010. At this point, I would like to give the call back to Peter.

Thanks, Viraj. Let me talk briefly about year end guidance and the target business model. I'm sure you understand that for the rest of this year our focus will continue to be on completing the execution of the major restructuring plan we announced in June. At the same time we want to drive a very healthy sales pipeline which will help our business not only in quarter four but make sure we have a strong 2010. And we want to maintain a strong cash position. Doing all of this aligns the company to achieve profitability in 2010. Consistent with last quarter, we will not be providing specific guidance for the fourth quarter given significant changes we are currently undergoing to our operating model. I do want to reiterate and emphasize our 2010 target financial model. We do expect annualized revenues great, than $350 million. These 2010 revenues will be driven by bookings from 2009 and early 2010. In addition, we also have the benefit of over $100 million of deferred revenues which we'll recognize in 2010 as we get the final customer acceptance.

Let's move to gross margins. We expect gross margins in the high 20s. We changed our product mix. We now minimize the CDMA handset operations which tends to have both low margins and high working capital requirements. As a result, we are almost entirely weighted toward IP based systems. In 2010 we will also see the revenue and gross margin benefits from the new products such as TN which have good gross margins.

Let's move to operating expenses. We do expect annual operating expenses to be less than $100 million excluding any unseen one-time items and the restructuring progress continues to make us confident in our ability to achieve this. In relation to cash levels and cash flow, our anticipated December cash levels and the anticipated 2010 cash flows indicate we will maintain not only the financial resources and flexibility, but we will be able to make any desired investments in our customer's products and employees to be successful. At this point, I'd like to ask the operator to prepare the question-and-answer session.

(Operator Instructions) At this time there are no questions. At this time there are no questions. I will return the call to management for any closing remarks.

Thank you, operator. I know we have calls later today and tomorrow with many of the investors so I'm sure we will have most of the questions there. I would like to thank you, all, very much, for listening and look forward to talking with you. Thank you very much.

Thank you. That does conclude today's UTStarcom third quarter 2009 earnings conference call. You may now disconnect.