UTStarcom Holdings Corp (UTSI) 2011 Q1 法說會逐字稿

Thank you for standing by UTStarcom'sfirst quarter 2011conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Jing Ou-Yang, Investor Relations for UTStarcom. You may begin.

Hello, everyone. Welcome to UTStarcom's first quarter 2011 earnings conference call. We distributed our earnings press release earlier today, and you can find a copy on news wire services or on our website at www.utstar.com. In addition, we have posted a presentation on our website, which you can download and use to follow along with today's call. On today's call we have Mr. Jack Lu, our President and CEO, and Mr. Edmund Cheng, our CFO.

Before we get started, I will 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. This including risks and uncertainties regarding the ability of the Company to realize anticipated results of operational improvements, the Company's ability to successfully launch Internet TV platform, continue to integrate recent acquisitions, successfully operate new services business, execute on its business plan and the managed regulatory matters, as well as risk factors identified in its latest annual report on Form 10-K, 10-K/A, quarterly reports on Form 10-Q and current reports on Form 8-K as filed with the Securities and Exchange Commission. The Company [shares] no obligation to update any forward-looking statements.

I will now turn the call over to our President and CEO, Mr. Jack Lu.

Thank you, Jing, and hello everyone on the call. As Jing mentioned, you can follow along on today's call by downloading the presentation from our website at www.utstar.com.

Let us start with slide four, which covers our operational achievements in the first quarter. This quarter we won new EPON/EOC contracts from cables in Hunan, Zhejiang and Jiangsu provinces in China. These contracts are important to us, as they demonstrate our ability to leverage our existing proprietary technology that we have traditionally sold to the telecom operators, into sales to cable operators in China.

We also received an award from China's Ministry of Science and Technology for our innovative three network convergence solutions during a major China cable industry trade show. At this show we were able to demonstrate our interactive TV solutions to a number of provincial cable operators, and I'm happy that many of these leads are showing early progress now.

Meanwhile, we continue to make progress to improve the Company's cost structure. As a result, our operating expense decreased 34% compared to the same period last year. And we expect further improvements next quarter.

In the first quarter we moved our Beijing headquarters into a less expensive, more appropriately sized facility. We also entered into a new lease agreement for our R&D and operational facilities in Hangzhou and are in the process of moving into the facility now. These moves give us a dramatic reduction in rental costs at both locations.

Now please move to slide five, where I will discuss our business in Japan and India. Our last earnings call took place on the day of the devastating earthquake and the tsunami that struck Japan. Our hearts and prayers have been with the people there, and we are thankful that no one on our team was lost or hurt. At this point, we do not anticipate any negative impact on our business due to the earthquake there. On a happier note, we saw a significant increase in orders of our PTN product following the successful completion of the previously disclosed field trial in 2010.

In India, I'm pleased we have made progress in establishing a JV [in] with local partners. If we successfully execute the joint venture, it will help us to improve our position in this market. I will share more with you when we are able to secure a definitive agreement.

Turning to slide 6. I wanted to discuss the market economics in China, which are a primary growth driver in our three point strategy. As a reminder, the new strategy is return to China, targeting telecom and cable operators in parallel, and providing both equipment and services to our customers. According to the International Data Corporation and [ora view] Consulting, the Chinese market for interactive digital TV, or iDTV, showed that 5 million more digital cable TV households completed a two-way digital migration during the first quarter of 2011. This brings the total of two-way digital cable households in China to 50 million.

In the Chinese IPTV market during the first quarter of 2011 there were a total of 6.85 million IPTV subscribers. By the end of year 2011, total IPTV subscribers are expected to be 9 million to 10 million, with a growth rate of 1 million to 2 million new subscribers each quarter.

Finally, in Internet-enabled TV markets there were 7 million Internet TVs sold in China in the first quarter of 2011 and more than 15 million Internet TVs will be sold in the year 2011.

As a leading provider of interactive IP-based network solutions in iDTV, IPTV and Internet TV, we are well positioned to capture this growing market opportunity. One that is further reported by China's three network convergence policy.

Next, on slide seven, I wanted to share more about the Internet TV platform, which is targeting to launch this year through our majority-owned subsidiary iTV Media, Inc., whose name was changed from Stage Smart Limited. This platform will be accessible by potential customers through a new website called www.itv.cn. The focus of this business will be to deliver Chinese language content to all [the world's] Chinese. We plan to launch a pilot trial in the second quarter and the fee subscription based service in Q3 or Q4.

itv.cnwill provide a high quality user experience with integrated multi-screen viewing from asingle managing platform, time and location shifting, reliableHD streaming, multi-language programming, and value added interactive services such as distance-learning, gaming and e-commerce. These revenues will be generated through advertising, subscription and software license fees. I am encouraged by the progress of this business and look forward to seeing it generate income that will be captured in our new Operational Support Service business segment.

Now I would like to hand the call over to our CFO, Edmond, to share the financial outlook of our company in this quarter.

Thank you, Jack. Hello, everyone. I will start by highlighting the Company-wide financial results, and then cover performance in our business segments, which you may remember are new starting for this year -- for this quarter.

Now please turn to slide eight. Our first quarter 2011 revenues were $61.3 million, compared to $80.8 million in Q1 of 2010 and $76.1 million in the fourth quarter of 2010. The decrease was primarily due to the wind-down of our handset business, which resulted in a decrease of $3.9 million in revenue, as well as the decrease in the sales of MSAN product. At the same time, I would like to highlight that the sales of our PTN products in Japan increased significantly. That is by $6.6 million in the first quarter of 2011 compared to the same period last year.

To better understand the demand of our products in the future, let us look at the book to bill ratio in the first quarter of 2011 forthe equipment sales business. Without the PAS deferred revenue, our book to bill ratio was 1.03. With the PAS deferred revenues, our book to bill is 0.64. This shows that our existing business is in a stable and steady position,and new revenue growth will come from our new OSS segment.

On slide number eight -- numbernine, you can see that gross profit in Q1 of 2011 was $19.1 million, or 31% of revenue. This compares to $27.2 million or 34% in Q1 of 2010, and $8.1 million or 11% of total revenue in Q4 of 2010. We expect to continue our focus on improving profitability by strengthening controls in our supply chain processes and by generating higher margin revenue from the new Operational Support Services business in 2011. In addition, the new and streamlined corporate structure improves our internal efficiency and provides added control over costs.

Slide ten shows that our operating expenses continued to decrease both year-over-year and sequentially. Q1 OpEx was $30.2 million, which compares to $46 million in Q1 of 2010 and $34.6 million in Q4 2010. In fact, our run rate operating expenses for quarter one are down to $24 million. As you can see, we are well on our way to reach the annualized goal of lower than $100 million in OpEx for the full year of 2011.

On slide 11 you can see that we have reduced our operating loss in Q1 of 2011 to $11.1 million, an improvement from operating loss of $18.8 million in quarter one of 2010. Our first quarter 2011 net loss was $10.3 million, or a loss of $0.07 per share. This shows an improvement from quarter one of 2010, when the net loss was $16 million, or a loss of $0.12 per share. The weighted average number of shares for this calculation was 155 million for quarter one of 2011.

Next let's look at our segmented financial results on slide 12, and remember that we changed how we segment our revenue this quarter, and also going forward, in order to better reflect our operating structure and allow our investors to track our progress in our new OSS business. The new reporting segments are Equipment Sales and Services Sales. The Equipment Sales segment tracks our equipment sales, including network infrastructure and application products.

The second segment is Service Sales. Service Sales tracks the services and support we provide to customers related to the equipment they purchase and our new OSS services that we provide through long-term revenue sharing arrangements with the cable and telecom operators and our Internet TV platform established by our iTV Media subsidiary formerly known as Stage Smart. The revenue generated through long-term revenue sharing contracts of operational support services provided to cable and telecom operators includes advertising, subscription, and software license fees.

In the first quarter of 2011, the Equipment Sales segment generated $52.8 million in revenue at a gross margin of 32%. This compared to Q1 of 2010 revenue of $69.2 million at 33% gross margin. As a reminder, we are continuing to offer amortized deferred revenue related to PAS through the end of 2011 at the rate of close to $23 million per quarter. Gross margin associated with the PAS deferred revenue is approximately 35%, and PAS revenue is recorded under the Equipment Sales segment.

Our Services Sales segment generated $8.5 million at 23% gross margin in the first quarter of 2011. This compares to $11.7 million at 37% gross margin in Q1 of 2010. As you can see on the slide, we have broken this down further to provide additional details. We expect to see the OSS segment begin to make significant contributions to the overall result, starting in the third quarter of this year. The decreasing gross margin percentage of the Service business primarily due to the decrease in this segment's revenue, while the cost in providing these services cannot be reduced proportionately.

Now let us turn to slide 13 for the balance sheet and cash flow statement. We ended the quarter with a balance of $310 million in cash, cash equivalents and short-term investment, and zero debt. In the first quarter of this year, we have negative operational cash flow of $39.8 million.(Sic-see presentation slides) This is due to the following factors.

At the end of last year we disclosed a number of improvements in our management structure. During the early part of the first quarter, these management changes combined with seasonal delays related to the Chinese New Year to cause collections to fall below an acceptable level. The good news here is that the situation has been addressed, and the team is focused on stepping up collection efforts. As a result, we are already seeing an improvement in the status of collections on delayed accounts receivable.

Also in quarter one, there was some restructuring related service costs that impacted our cash flow, and we expect this to be lower in Q2. Cash flow is an important focus of our management team process. We continue to examine additional options to improve our current cash flow. In addition to operational process improvements, we are considering trade financing and leasing arrangements.

I will now hand the call back to Jack.

Thank you, Edmond.

While we have successfully made it through the most difficult period of our restructuring; and we are also getting traction in active TV, including IPTV, iDTV and Internet TV; we realize that we must make more [significant] progress to improve cash flow management and the [valuance] of the OSS business. We are focused on this and making every effort to drive improvements in this area. We anticipate the growth of the Operational Support Service business will start to materially increase in the third quarter. This will come as a combination of organic growth through new agreements, and also acquisitions, some of which are already in the pipeline. I look forward to reporting on our progress in this area in the future.

Finally, I wanted to make it clear that we are still pleased that we are on track for the target we set on the last call for 2011. As a reminder of the targets, as you can see on slide 14, our total revenue for the year in the range of $300 million to $320 million. 10% of total sales in 2011 from our new OSS service business. Operating expenses of less than $100 million, and break even in 2011 on the full year basis.

Thank you all for listening in. At this point, I would like to ask the operator to open this for the Q&A. Thank you.

Thank you. (Operator Instructions). Our first question comes from Mike Barone of Sidus Investment.

Yes. Hi, guys. I was wondering if you could talk a little bit about your cash flow expectations for Q2. It seems like you had a couple of issues in Q1 that might not reoccur in Q2, and I just wondered if you would give us any guidance on cash flow for Q2 from an operating standpoint?Thank you.

Hi, Mike. We expect Q2 operating cash flow to continue to improve. In fact, we will be trying very [fast] to look at situations where it will be close to a break even situation there.

Okay. That will is a major improvement. Is there any specific reasons behind that? Is it --

One of the major reasons behind that is we have been stepping up the effort of collections because of the situation happened in Q1, so that is something that we are catching up with the collection effort. That will be the primary driver for that.

And also there is some seasonal reasons because of the Chinese New Year. That is a traditional phenomena.

Right.

I understand fully.

You are welcome, Mike.

Our next question from Jun Zhang from Wedge Partners.

Hey, Jack, thanks for taking my call. My first question iswhat do you think of the cable operator spending right now? And any updates on the [BT] model? And what do you think [when] the [cooperation] with the Thousand Media Group and also the International Radio Company revenue contribution, starting Q1 or Q2? Any insights on that? Thanks.

Okay. So according to our observation and our [activity] with customers from the cable side, you can see the spending for the cable operators still increasing. So we see lots of activities for potential deals and cooperations in China. As for our [cooperation with SMAC and the CRI], so actually as we disclosed before, what we called itv.cnis actually based on our cooperation with the CRI. We are still to be the major channels for CRI's content deployment to [all of the] Chinese [tours]. So we also mentioned we projected a significant revenue from this kind of operation from Q3 this year.

Okay. Thanks. And my second question is, what do you think about the talk of IPTV spending? Because right now the government is kind of suspend the network convergence process. And what do you see the IPTV spending right now, and how is UTSI positioned in that market right now? Thanks.

Okay, sothere is some articles and essays that comment on the TNC progress. So actually the most official message from the government is we strive to work on TNC by Chinese government, and that was recent in [12 to] five year plan. So that is no doubt for that. Although some of the operators from their own [interest] they have different awards, but that is government deal, so no doubt going forward. And according to our communication with related government officials, that is very clear message in recent weeks, especially recently the MIT -- Ministry of Information Industry -- the chief engineer to quote very strong support, just spoke to some of the question about TNC possibility.

Okay. Thanks. And also what is the revenue coming from Japan and India right now in Q1? What percentage of revenue?

The percentage of revenue in quarter one coming from Japan is 44.4%.

Okay. And then how about India?

Coming from India is 10.8%.

Okay. So any idea of revenue contributions from other Southeast Asia markets?

We expect other Southeast Asia markets to be soft in the first half, but we are looking at increasing demand in second half at this point. Particularly we are working on a project in Thailand.

And (inaudible -- multiple speakers) --

Okay, I see. And my last question is how do you see the process of cost reduction in Q2? Or is it possible that Q2 be profitable? And any ideas for insights?

We optimistically, I would say, are looking at Q2 to be very close to break even level.

Okay. I see. Okay, okay. That's all my questions. Thanks. Thanks a lot.

(Operator Instructions). Our next question comes from Ke Chen of Shah Capital Management.

Yes. There is a strong dose of smartphone on the streets in China. Could you talk about the potential opportunity to transfer PAS to WiFi [spacing] in China?

Yes, this is one of the strategic initiatives that we are working on, but because of the government policies and the frequency allocation for PAS, this is kind of a sensitive question to [impact] IP. But some of our customers from telecom operators in certain provinces started to talk to us trying to convert the original PAS base station into WiFi 3G offloader to [mark] the antenna stations. So actual we have some trial orders already in Q4 and Q1 this year. This is actually one of the key areas that we are working with telecom operators that has continued to leverage our strengths in that field.

So this new business is not in your guidance in 2011 yet?

Yes, because we are still in the trial stages. We want to make sure before we can put it in the guidance.

And there is still uncertainty of the government policy as well.

Yes.

I see. Thanks.

(Operator Instructions). Thank you. There are no further questions at this time. I will turn the call back to management for closing comments.

Thank you for joining us on today's earnings conference call. We look forward to updating you on our second quarter 2011 results in a few month's time. Feel free to get in touch with us anytime if you have any further questions, concerns or comments. Thank you everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect, and have a great day.