UTStarcom Holdings Corp (UTSI) 2011 Q3 法說會逐字稿

Thank you for standing by for UTStarcom's third quarter 2011 1 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) It is now my pleasure to introduce your host, Ms. Ying Ou-Yang, Investor Relations Director, for UTStarcom. You may begin.

Hello everyone. Welcome to UTStarcom's third quarter 2011 earnings conference call. We distributed our earnings press release earlier today and you can find a copy on newswire 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 our call today we have Mr. Jack Lu, our President and CEO, and Ms. Jin Jiang, UTStarcom's 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 revenue, profit margin and projected business models. Forward-looking statements are generally indicated by such words as will, expects, estimates, hopes, plans or similar words. The statements are forward-looking in nature and subject to risks and uncertainties that may cause actual results to differ materially. Those include risks and uncertainties regarding the ability of the Company to realize anticipated results of operational improvements.

The Company's ability to successfully lunch Internet TV platforms contingents to integrate recent acquisitions, successfully operate new service business, execute on its business plan and manage regulatory matters. As well as risk factors identified its latest annual report on Form 10-K, Form 10-K-A, quarterly reports on Form 10-Q and current reports on form 6-K. As filed with the Securities and Exchange Commission. The Company assumes no obligation to update any forward-looking statements.

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

Thank you Jing and hello to everybody 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. Also, unless otherwise stated, all figures mentioned during this conference call are in US dollars.

Let's start with slide 4 and talk briefly about our third quarter highlights. Net income attributable to UTStarcom shareholders was $8 million. Or basic earnings per share of $0.05 in the third quarter of 2011. Total revenue increased 35% year-over-year to $83.3 million in the third quarter of 2011 from $61.4 million of same period in year 2010. Gross margin was 38.4% in the third quarter of 2011 compared to 19.7% in the third quarter of 2010. 37.6% in the second quarter of 2011, and 31.1% in the first quarter of 2011. Operating income was $14.2 million in the third quarter of 2011. Cash, cash equivalents and short-term investments were $305.9 million as of September 30, 2011.

The third quarter was our second consecutive profitable quarter. Our strong bottom line performance was driven mainly by improved gross profit margin and steadily decreasing operating expenses. Our main priority going forward will be achieving sustainable long-term profitability. We are pleased to see that some of our restructuring and reorganization efforts have gained traction. Management have targeted the key growth drivers for our Company to achieve sustained profitability, mainly a move away from being entirely equipment dependent to a more blended business model that includes higher value and thus higher margin services. Of course, this type of shift would not occur overnight. But we hope investors maintain a long-term perspective as we reinvest resources in areas that we believe will drive the growth of our business.

Moving on to slide number 5. We witnessed profit margin increments in the third quarter, driven mainly by the increased sales of PTN product in Japan, which generally had higher gross margins. Our gross margin also including China as a result of our strong competitive advantage in the cable market.

On slide 6, regarding some of our recent business highlights. We announced in the third quarter the completion and the rollout of our end-to-end Internet TV solution for cable TV network customers in China. This contract was our first successful Internet TV deal and we expect to win more of this type of contract in the future, which have potential to open up additional service-related revenues. In the third quarter we also won new sizable EPON contracts from cable operators in Hebei in the Sichuan province. and Ningxia Electric Power Company in China. These contracts reflect our ability to leverage our existing technology that we have traditionally sold to telecom operators to create sales to cable operators and the power grid companies in China.

We recently won the IPTV integrated broadcasting control platform contract in Tianjin which extends our market-leading position. We will continue to pursue market opportunities related to China's triple network convergence as a second round of trial cities will be announced towards the end of this year or early next year. In October, we won MFTP and the PTN contracts from Chunghwa Telecom, the largest integrated telecom operator in Taiwan. Our MFTP and PTN products will enhance the operational capacity of the client to better support his commercial services. Our success and high customer satisfaction in Japan with regard to our PTN products has helped us sell this product to other customers in the Asia-Pacific markets.

And finally, just a few days ago we entered into a strategic relationship agreement with one of the largest digital TV content providers in China, Wasu Digital TV Media Group. Through our partnership with Wasu, we will join them in upgrading cable network from analog to bidirectional digital. Which we believe will help improve our equipment sales. In addition, our partnership with Wasu will allow us to carry Wasu's rich digital TV content on our IPTV and IDTV solutions, presenting an enhanced and more attractive user experience. This is a meaningful step for us to exclude our corporate strategy and strive to grow our OSS business. We plan to provide more detailed information on this strategic agreement in the near future.

Moving to slide 7. This quarter we introduced a series of new and improved product including DOCSIS-EUC solution, PTN 735, and MS 3005 eroding stream server, MC6098B high definition set-top box. And several WiFi products at the Beijing Telecom Expo late September. This new and improved product will play a key role in our growth as we target China's telecom and cable industry in parallel. Providing enhanced solution that will help modernize communications networks and improve the cyber experience.

Turning to slide number 8 and talking briefly about our iTV.CN subsidiary. After the non commercial trial last quarter, this quarter we have successfully launched our Internet TV operations and services in North America via our iTV.CN subsidiary. The Internet TV platform will serve a growing demand for Chinese language television content from the overseas Chinese speaking population. Besides high-quality HD streaming, our platform has the capacity for integrated multi-screen viewing, time and location shifting, multiple language programming, and additional value-added services like distance learning, gaming and e-commerce.

We also signed a contract to provide Internet TV operational services to a major telecom operator in Southeast Asia to serve the local audience. iTV.CN revenues will be generated through advertising, subscription, and software license fees. We also believe the launch of our iTV.CN platform will open up additional revenue opportunities related to operational support services. Although iTV.CN has achieved an operational milestone this year, it is still at the early stage of development. It will take time to ramp up. We plan to continue allocating the capital and resources required to capture potential growth opportunity.

Now I'd like to hand the call over to our CFO, Jin Jiang, to share details on our financial performance in the third quarter.

Thank you very much, Jack. Hello everyone. As Jack mentioned earlier on the call, we have seen an improvement in gross margins in the third quarter, both year-over-year and sequentially quarter to quarter. We will continue to be disciplined in managing our costs while still investing in the business in order to achieve sustainable profitability.

Please turn to slide 9. In the third quarter, we recorded $83.3 million in revenue. This was a 35.7% or $21.9 million increase, compared to $61.4 million in the third quarter of 2010. Significant items included the following-- increased sales of PTN products in Japan; MSAN products in India and Japan; rolling stream infrastructure products in India and Thailand; and GEPON and set-top boxes in China. For the first 9 months of 2011, revenue was $237.1 million, an increase of 10.1%, or $21.7 million compared to $215.4 million in the first 9 months of 2010.

On slide 10, let's look at the booking trends for the equipment sales and equipment-based services business. Our book to bill ratio in the third quarter was 0.98 without the PAS deferred revenue and 0.7 with the PAS deferred revenue. Our actual booking amounts in the third quarter of 2011 was $58 million, which is a positive trend as you can see from the chart.

On slide 11, you can see that gross profit margin with 38.4% for the third quarter 2011 compared to 19.7% in the third quarter of 2010. Gross profit margin for the first 9 months of 2011 was 36.2%, an improvement from 28.9% in the corresponding period of 2010. As we mentioned earlier, the improvement in gross profit margin was primarily the result of increased sales of PTN products with higher gross margins, as well as improved margins in the China market. In addition, gross profit in the third quarter of 2011 was positively impacted by $1.9 million of 1-time indemnifications from our customer due to their cancellation of a purchase order in October of 2010.

Slide 12. From the chart you can see our continued progress in our restructuring and cost cutting. Q3 OpEx was $17.8 million, a decrease of 49.8% year-over-year and 33.2% sequentially. Q1 2010 OpEx was $46 million. Q3 2011 OpEx showed a reduction of 61.3%. OpEx as a percentage of sales, which is represented by the red line on slide 12, is down to about 21.3%, an improvement compared to last quarter's 27.1%. This demonstrates the leverage we have accomplished as a result of our ongoing cost-cutting efforts. Also, please note that we had a 1-time $4.2 million net gain on divestitures in the third quarter of 2011 that was related to a contingent gain realized upon transfer and release of obligations in connection with the sale of China PDSN assets back in 2010. We have guided in the past of achieving lower than $100 million in OpEx for the full-year 2011. And we are confident of reaching this target.

Moving to slide 13. You can see our operating and net income trends over the past few quarters. Operating income for the quarter was $14.2 million, while net income attributable to UTStarcom was $8 million. Earnings per share for the third quarter and first 9 months of 2011 amounted to $0.05 and $0.06, respectively. The weighted average number of shares for these calculations were 155.5 million for Q3 2011.

On slide 14, let's take a look at our segmented financial results. It's probably worth reminding everyone that the 2 main reporting segments are equipment sales and service sales. The equipment sales segment tracks our equipment sales including network infrastructure and application products. The service sales segment is split into services and support we provide to customers related to the equipment they purchase. And secondly our new operational support services, or OSS, that we provide through long-term revenue-sharing arrangements with the cable and telecom operators and our Internet TV platform established by our iTV.CN subsidiary. In the third quarter of 2011 the equipment sales segment generated $75.3 million in revenue, compared to $52 million in revenues in the corresponding period of 2010. For the first 9 months of 2011, equipment sales segment generated $209.4 million in revenue, compared to $183.8 million in revenue in the corresponding period of 2010.

We want to remind investors that we amortize the deferred revenue related to PAS through the end of 2011 at a rate of approximately $23 million per quarter. Gross margin associated with the PAS deferred revenue is approximately 35%. PAS revenue is reported under the equipment sales segment. Our equipment-based service sales segment generated $7.7 million in the third quarter of 2011. This compares to $9.4 million in Q3 of 2010. First 9 months of 2011 service sales were $27.2 million compared to first 9 months 2010 service sales of $31.6 million. The decrease was primarily due to a lower renewal rate of PAS service contracts driven by the anticipated phaseout of PHS in China on December 31, 2011. While services fixed costs remained relatively constant.

Total OSS revenue for the third quarter 2011 and first 9 months 2011 was $0.3 million and $0.5 million, respectively. As we have mentioned on previous calls, the OSS business will play an important part in our Company's future growth strategies. As such, we are being very prudent in our due diligence and valuation process of potential acquisition targets and revenue-sharing partners.

Now let us turn to slide 15 for the balance sheet and overview of our cash by region and currency of cash deposits. We ended the quarter with a balance of $305.9 million in cash, cash equivalents and short-term investments and zero debt. The 2 pie charts on this slide provide details on our cash deposits. As you can see, 43% of our total cash is held in China and the remaining 57% is held outside of China. 40% of our total cash is deposited in RMB, 32% in US dollars, and 20% in Japanese yen.

Finally, on slide 16, we'd like to talk about our cash flow. In the third quarter, we have quarterly operational cash flow of negative $12.1 million compared to operational cash flow of negative $12.4 million in the same period last year. In the second and first quarter of 2011, we reported positive cash flow of $12.1 million and negative cash flow of nearly $39.4 million, respectively. The positive cash flow in Q2 was primarily due to us being able to catch up on delayed customer payments from Q1. Collection in Q3 went back to normal levels. We will continue to focus on improving operational processes to drive us towards operational cash flow breakeven, which we anticipate will take some time.

We announced a $20 million corporate share repurchase program in August and started the program in September. As of today, we have repurchased $4 million worth of the Company's shares. In the third quarter, the Company repurchased $1.5 million worth of the Company's shares. At the same time, our management team has collectively, and with their own personal funds, executed 80% of the $0.5 million management share repurchase program that was also announced in August.

This ends my portion of the presentation. I will now hand the call back over to Jack.

Thank you Jin. In closing, we would like to turn your attention to our 2011 outlook. Firstly, our total revenue, OpEx and annual breakeven outlook remain unchanged. We expect our total revenues for full year 2011 to be in the same range, the range of $300 million to $320 million. And our annualized operating expenses be less than $100 million. Secondly, as Jin mentioned earlier, our OSS business will play an important role in our Company's future growth and profitability. We have been very particular and deliberate in identifying acquisition targets and revenue-sharing partners. Our goal is to find the most suitable targets at the right valuation. And as such, we have a very rigorous due diligence process. We hope investors will be patient regarding this new business line as we push to provide increased value to our shareholders.

Now, I would like to take any questions you may have. Thank you all for listening. Operator, please open the lines for Q&A.

(Operator Instructions) Jun Zhang, Wedge Partners.

On the third quarter, I have 2 questions. One is I would like Jack to talk about the cable spending in China. I just saw you announced a great deal with Wasu Digital. So I think maybe Jack could talk about the outlook for the business from cable side, and the mix between the cable and telecom business going forward. Thanks.

So while people still keep very high interest on China's triple convergence network emergence, so we still keep the preliminary market analyst that we have from the third party analysts. So the total spending related to 3 network convergence in the last 3 years, will reach as high as RMB688 billion. Including about RMB250 billion for equipment and the network building. And also RMB440 billion related to interactive media user demand. So, both factors are actually of our target market. So now we are fully engaged in the equipment and analysis build up side. And while increasingly getting involved in the active media user demand as well. According to our information, and also I just mentioned, the Chinese government is going to announce the second venture of trial cities at the end of this year or sometime early next year. Am I answering your question?

Yes thanks. The other question to talk about, you mentioned earlier about the cash auditing. Do you have any updates on that? And also, could you talk a little bit about the outlook for the cash burn in the remaining of this year, and what's your plan for next year? Thanks.

Let me address your first question regarding the cash clarification process. Currently, the audit committee is carrying out an independent cash confirmation procedure. And we will be able to report the outcome once it is complete. And I think it will be fairly soon you will be seeing a report.

And then to answer your second question, I think you're asking about the Q4 cash flow forecast. As I have mentioned, I think it is going to be our continuing effort to improve our cash flow performance. We have a few initiatives that we are looking at to improve that performance. And Q3 results is a very normalized level for the Company. And we anticipate Q4 will be pretty close to Q3 levels.

(Operator Instructions) Jon Gruber with Gruber McBaine.

A question on outlook for 2012. What is the revenue outlook for 2012 given that we have to overcome the $96 million that goes away in '11? So how do you see 2012 revenue at this juncture?

At this moment, we are really not ready to give out the outlook for next year. We will share with you as our visibility towards 2012, and more beginning of next year. Looking forward towards 2012, we are anticipating a healthy growth of our business, primarily driven by a steady pipeline of PTN products. And also the opportunities that we mentioned today in the China domestic cable market.

Earlier the thought was you possibly could have flat revenue, which would entail a very healthy growth in the base business because of the $96 million dropping off. That doesn't seem real possible now, is it? Is that possible?

Currently the Company is going through a very rigorous budgeting and forecasting process. And I think once we have more visibility, we will share with you, probably in the beginning of next year.

Maybe I can just add more. So, although we don't have an accurate and a final budgeting and forecast results, but basically, we will pursue the growth of real business and the real revenue. That is out of the PHS, same and apart, from organic growth of our equipment sales. And also some parts from our OSS. And potentially also M&A for our OSS portion. But we really don't have the exact number at this moment. But we're still confident that the healthy growth from our current business is forcible.

Lilly Wu with TGRA Capital.

I was wondering if you could give us some color on services revenue. The equipment services was a decrease, I guess, for this quarter due to the phaseout of PHS. And operational support services is still relatively small. Was it fair to assume that services should be a growth driver in the future? And how do you envision that happening?

Our service revenue mainly consists of a few portions. One is our equipment related services and the other one is our new operational support services. And we are anticipating our operational support services to generate higher profit margins compared to our equipment-related services.

And as you mentioned, the PHS, along with the PHS phaseout, the equipment related service is going down. That is foreseeable. And for the OSS portion, we will achieve that from a combination of organic development from internal, just like our iTV.CN and our revenue-sharing partnership with some local operators, cable operators. And some highly selective M&A that's aligned with our overall strategy. So that is our reaction to arrive it. For the OSS, as you know, it is still in the early stages. But we still keep our commitment in that, to both capital and resources to make it happen.

So what's the time frame for OSS in terms of if we look at organic growth or M&A opportunities? Is that something that will be meaningful in 2012? Or still at a very low level?

I don't think it is the right time to give a very accurate forecast. But you can see, for example, we just launched our Internet TV service in the US. And then we engaged in Internet TV service authorization in Southeast Asian countries. Sorry I can't, just due to competition reasons, we are not allowed to disclose the operator's name. But, along with, we first are going to pursue healthy and rapid growing of subscriber numbers. And then we can see the income and the revenue from subscription and also advertising income. So that takes some time. For me, I think we need to see at least 1 or 2 quarters, and then gradually we are going to build up the revenue growing, and also subscriber growing model at that time.

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

Thank you for joining us on our third quarter 2011 earnings conference call. We look forward to updating you on our fourth quarter 2011 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.

The conference has now concluded. Thank you for your participation and you may now disconnect your lines.