UTStarcom Holdings Corp (UTSI) 2010 Q3 法說會逐字稿

Greetings, and welcome to the UTStarcom's third quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host for today, Ms. [Jane O'Young,] UTStarcom's IRO. Please go ahead.

Hello, everyone. Welcome to UTStarcom's third quarter 2010 earnings conference call. Earlier today, UTStarcom announced financial results for the third quarter of 2010. That press release is available on the Company's Web site at www.utstar.com. On today's call we have Mr. Jack Lu, our President and CEO; and Mr. Edmond Cheng, our CFO.

I will now read the Company's advisory on forward-looking statements. This call will include forward-looking statements on topics that include but may not be limited to the Company's restructuring initiatives, IPTV revenues, profit margins and projected business model. Forward-looking statements are generally indicated by such words as will, expects, estimates, [goes,] 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 include risks and uncertainties regarding the ability of the Company to realize anticipated results of operational improvements, the Company's ability to close certain investments related to its strategic partnership, revenues and its new business model, successfully transitioning to new management team and the headquarters locations, excluding business plan and managing speculatory materials as well as risk factors identified in its latest 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 non-GAAP financial measures, the most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures is attached to the earnings release issued earlier today and filed in the Form 8-K with the Securities and Exchange Commission. I will now turn the call over to our President and CEO, Mr. Jack Lu.

Thanks for joining our call today. Edmond and I are conducting this call together from our offices in Beijing, where it is 8:00 PM. As many of you know, today is the first time I am participating as a CEO. On today's call, I would like to talk about our management's transition and briefly summarize our business strategy, and then turn the call over to Edmond, who will provide greater detail around the financials for the quarter.

Regarding the management's transition, first I would like to thank my predecessor, Mr. Blackmore, for the work he has done. His effort has brought us a good deal of the way and we intend to improve on the momentum he created. With the close of the PDA investments and the addition of three new Board members, we have accelerated the half-quarter move. I am happy to say that Edmond, myself and most of our top management are now based in Beijing fulltime or spend a significant amount of time here.

As new management, we are trying to start our relationships within the community on the right foot. To this end, we recently hired new IR professionals based in China and the U.S. to help us to continually improve the level of openness and transparency that we maintain with the investment community and to build trust we know we need from the street. Moving on to our corporate strategy, you will have seen the three shifts in our business strategy that we announced recently. I'm glad to have this opportunity to share more about this today.

As mentioned in the press release, the road ahead for UTStarcom's multimedia and broadband equipment-based business faces a steep climb on its own. We all recognize the need to grow the top line, increase profitability and a lower cash burn. The three shifts in our strategy, which is return to China, targeting telecom and the cable networks in parallel, and equipment end services are a natural, even necessary, evolution of what we are doing.

This shift supplements to the pure equipment-based business with new revenue streams that we expect will have higher margins and more recurring revenues. With this context, I wanted to provide more detail about the shift in our corporate strategy. The first shift is what I like to call return to China. Prior to our listing in 2000, UTStarcom had deep Chinese roots.

Privately, we generated more than 60 % of our total revenue from China. Now that we have our headquarters in Beijing, we can better focus on Asian markets, which presents the greatest opportunity for the Company, namely India, China and Japan. This also has the significant side benefit which I mentioned earlier of improved communication and better control of expenses.

To better explain the relevance of the return to China shifts, I wanted to say a few words about Three Network Convergence. For our investors who have not followed developments in the Chinese telecom industry recently, Three Network Convergence is central to the Company's investment emphasis. This is Chinese central government policy directed at improving the capability and effectiveness of voice, video and the data communications services across all of the major communications networks, which is telecom, cable TV and broadband Internet. It is targeted to be completed by 2015.

A report by iChina Research Center says that the Three Network Convergence related markets will reach RMB 688 billion over the next three years. Data from the key regulator of this space, China's State Administration of Radio, Film and Television, sometimes called SARFT, indicated that as of June 2010 there were 177 million households with cable TV, 74 million households with digital cable TV, 30 million of which have completed two-way migration. Finally, there are two million inactive cable TV households.

In July of 2010, 12 Chinese cities and regions were selected as pilots for Three Network Convergence on a trial basis before national rollout. UTStarcom has already won contracts in some of the pilot cities to provide broadband access and interactive TV equipment and services. I will provide more details on these in a minute.

So while we continue to cultivate the telecom space with pure equipment-based sales, you can see that the opportunity in China in Three Network Convergence is significant, and I see it as my job to ensure UTStarcom and its investors win a significant portion of the upside. The PDA investments already gives us access and a deeper understanding of the Chinese government's agencies that make decisions about cable and the telecom network spending. The strategic partnership we recently announced is further evidence of this.

The second shift is that we are now pursuing telecom and cable network customers in parallel because our core IP technology has widespread applications across different networks. We are more than just a telecom equipment provider. Our technology has applications across many kinds of networks, even the smart grids operated by electricity distribution companies. We believe telecom and cable are the most promising of these potential customers and we are pursuing them in parallel.

It is important to note that Three Network Convergence policy is an important catalyst in our business with both of these target customers. The third and the final shift in our corporate strategy can be called equipment and services because of Three Network Convergence in China and UTStarcom's expertise in building and operating the technology and service platforms for IPTV and Internet TV. UTStarcom will see now new opportunities to provide more end-to-end solutions to operators in this space.

I would like to point you to three examples of these strategy shifts, as I know some of you have questions about the kind of business UTStarcom may be going forward. First, as listed in our press release, we have signed several deals with local provincial cable operators where we provide equipment and technology to enable them to offer interactive TV services.

Second, in a strategic partnership we announced recently we are working to provide the technology and operational support system for our Internet TV service that we believe we will provide recurrent revenue services. Third, the SMIC deal disclosed in today's press release sees us providing interactive high definition TV and value-added services in our long-term revenue sharing arrangement. We are currently working on several other similar deals.

While I cannot get into exact numbers for the last two examples today, I wanted to expand on the basic impact we expect they will have on our financial position. First, it is important to understand that because we have to use our own working capital to install equipment and staff technology team on-site, the initial profit contributions are expected to be slightly negative. However, the model is such that we expect to recoup this investment with a greater return and at a higher margin than our pure equipment sales model.

Moving from our business in China to India, last quarter the management thought the BSNL (inaudible) contract was well on its way to PO and DOT approval. Unfortunately, since then the terms being offered have deteriorated and made us [answered] about when, if and how much this [contract] may be. Given the stage of the negotiations and the uncertainty, we could not discuss this further.

Finally, for our broadband business in Japan, as we shared on the last call that we passed (inaudible) SoftBank BB's quality control tasks. We have already started to receive purchase orders from the clients for our TN technology in Tokyo, Osaka and Nagoya. As a result, we expect a sizable increase in 2011 once this initial rollout proves themselves. With this overview of the recent management position and our strategy, now I would like to hand the call over to Edmond to share our third quarter 2010 results.

Thank you, Jack. Hello, everyone. Before discussing the key business units' performance, I will start by highlighting the Company-wide numbers presented on both a GAAP and non-GAAP basis. In the third quarter of 2010, GAAP revenues were $61.4 million compared with $70.5 million for the same period a year ago. The year-over-year decrease was primarily due to the wind down of our handset business, which generated $15.6 million in quarter three last year.

Q3 revenue was in line with the expectations we established in the announcement we put out two weeks ago. For the quarter, we had a gross margin of 19.7%, which was 11% lower than the second quarter, and reflects the impact of the following significant items, $8.5 million in additional inventory reserve and a $1.9 million one-time reserve for unrecoverable output VAT. These negative impacts are offset by a gain of $5.6 million in third party commissions payable was previously accrued and has passed the statute of limitations. Without these items above, gross margin would have been in the high-20s.

Our GAAP operating expenses were $35.4 million, a decrease of $32.6 million from the same period a year ago. These are the result of restructuring and other cost reduction initiatives. With respect to OpEx, we have booked the following significant items. During the quarter, we recorded approximately $2.3 million of restructuring charges. We booked a reserve for prepaid [expected] income tax, a foreign tax credit of $2.5 million, which we deemed are not recoverable.

A total gain of $1.4 million on our divestitures in the sale of China and [color] PDSN and converting our EMEA business model from a direct to an indirect sales and services model. With the completion of closing down of our U.S. facilities, the divestment of [color] and the European reseller deal as mentioned above. We have essentially completed refocusing the Company's resources in Asia. We are still working towards reducing our run rate OpEx to achieve the targeted annual run rate operating expenses for 2011 at or lower than $100 million. We are making substantive progress and are getting closer to our target.

The GAAP operating loss in Q3 was $23.3 million, and improvement from the loss of $33.8 million in Q3 2009, primarily reflecting our improved cost structures. Included in other income of $7 million, which mainly consists of foreign currency gains of $6.9 million due to the strengthening of the Japanese yen, Chinese renminbi, Indian rupee, and Korean won against U.S. dollars. Our third quarter 2010 net loss was $17.2 million or a loss of $0.13 per share.

Next come to our segmented financial results. In the third quarter, our Multimedia Communications segment had revenues and gross margin of $39.5 million, and 36%, comparing to Q3 of 2009 results of $30 million and 43% respectively. Revenue grew 31.5% year-on-year.

As a reminder, we are amortizing the deferred revenue related to PAS through the end of 2011 at the rate of $23 million per quarter. Gross margin associated with the PAS deferred revenue is approximately 35%. For Broadband Infrastructure, our revenue for quarter three was $21.1 which was down from $24.8 million a year ago. Compared to Q3 last year, [AMSEN] revenue decreased by $7 million, Services revenue decreased by $3 million. These are, however, partially offset by the sales increase in PDN of $6 million. Therefore, the overall sales was a decrease of $3.7 million.

The gross margin in the third quarter were negative 8%, a decrease from 32% a year ago. The decrease in gross profit percentage was primarily due to the unfavorable impact of $8.5 million inventory reserve. Without this impact, the gross margin would have been about 30%, similar to a year ago.

In the third quarter, the Handset business recorded $826,000 in sales, a negative 46% gross margin. This is due to we are still clearing our inventory. This compares with $15.6 million at a negative 21% gross margin in the year- ago period. We do not expect our Handset segment to make a material contribution to our revenue or gross margin going forward. Any additional Handset revenue will be from sales related to inventory clearing.

Now I wanted to talk about bookings and to share the book-to-bill ratio as a metric for measuring the equipment base business. Without the PAS deferred revenue, our book-to-bill ratio for the third quarter was slightly larger than one. With the PAS deferred revenue, our book-to-bill ratio is [still 0.63.]

Turning to the balance sheet and cash flow, we ended the quarter with a strong balance of $338 million in cash, cash equivalents and short-term investments, and most importantly zero debt. This cash balance is an increase of $30 million from the prior quarter. We continue to improve on our operating cash flow. Operating cash flow for the quarter was negative $12.4 million on a GAAP basis, which includes restructuring charges.

Q3 operating cash flow is an improvement from Q2 of negative $40.8 million. We generated $34.6 million from investment activities, which came solely from the PDA deal. This amount is net of issuance costs for the transaction. I would like to remind everyone that the PDA transaction closed in September 2010.

Under the terms, UTStarcom issued approximately 18.1 million shares of common stock and options to purchase up to 4 million shares of common stock through November 8, 2010. We have clearly made significant progress in the quarter. At this point, I would like to give the call back to Jack.

Thanks, Edmond. Turning to our outlook for 2010, as we are still in the early days of our leadership of the Company, I would like to refrain from providing guidance beyond the three-point plan for profitability that was established by previous management and announced in our announcement two weeks ago. Moving forward, we are considering changing how we report on our business progress to better reflect and to give visibility into our new business.

As such, we are committed to coming up with financial and the non-financial metrics that indicate how we are mining the new seams of revenue opened by the strategic shifts I described earlier. To reiterate, this strategy includes a return to China, telecom in parallel with cable, and finally, the equipment and services. At this point, I'd like to ask the operator to open this for the Q&A.

Thank you. Ladies and gentlemen, we will be conducting a question-and-answer session. (Operator Instructions) One moment, please, we will poll for questions. Your first question comes from the line of [Leo Jhia] with [Iriga USA].

Hi. Good morning, everyone. Got a few questions for you. The first is, you significantly lowered your operating cash burn in the quarter, so I'm wondering, what did you do exactly to achieve that, and how should we think about your operating cash flow going forward?

This is Jack, thank you for raising the question. First of all, we have lowered our operating expenditure, and that's the critical driver for reducing cash burn. And secondly, we have been very focused on working capital management, and that would also provide additional cash flow to reduce our cash burn. And going forward, you will see that we continue to focus on these two areas, and we've continued to drive improvement on operating cash flow as we have demonstrated in the last three quarters.

Okay. So when do you expect to achieve, say, operating cash flow break even? In two quarters or three quarters?

At this point in time, it is still a little bit early for us to make a prediction. We will certainly, later on, maybe in our Q4 earnings announcement. We will provide guidance at that point in time to you and the rest of the investment community.

Okay. All right. So on your OpEx, I know earlier you said that your OpEx for 2011 will be less than $100 million. Could you be a bit more specific. Is it $90 million, $80 million? Do you have a target?

At this point, we still need some more time to work out the details, and as I mentioned before, we will actually provide guidance in our Q4 earnings call.

Okay. All right. The other question regarding the OpEx is you have a $2 million plus restructuring charge this quarter. Do you foresee any future restructuring charges?

As you can see, we've almost completed our restructuring for debt [measure.] So you had anticipated that these restructuring charges will be trending down in the next few quarters.

I see, okay. You also gave a lot of color on the book-to-bill ratio with and without the past revenue amortization. Do you foresee your book-to-bill ratio to improve significantly with the past revenue included in the next couple of quarters? Obviously, I know that depends on whether you can sign the BSNL contract or not, but any color will be very helpful?

I understand what you are looking for, Jack. But as you can understand in the equipment-based business, the equipment-based business is very unpredictable. That's exactly why, Jack, our CEO is looking at the three strategic shifts that we are looking at primarily is to bring the Company to a different level of performance with recurring revenue and predictable revenue streams. If you look at this level of business activities, then the booking numbers will not be as meaningful as the equipment-based business. So we will have different metrics for the new business going forward. At this point in time, I would say we'll defer that to maybe our Q4 earnings call and we'll provide more clear guidance.

Okay. That's fine. Thank you.

Thank you.

Thank you. (Operator Instructions) Thank you. There are no further questions at this time. We will turn the conference back over to management for closing remarks.

Thank you for joining us on our third quarter 2010 earnings conference call. We look forward to updating you on our fourth quarter 2010 results in a few months time. Feel free to get in touch with us any time if you have further questions, concerns or comments. Thank you, everyone.

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