UTStarcom Holdings Corp (UTSI) 2011 Q4 法說會逐字稿

Thank you for standing by for UTStarcom's fourth-quarter and full-year 2011 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, Miss Jing Ou-Yang, Investor Relations Director for UTStarcom. You may begin.

Hello, everyone, and welcome to UTStarcom's fourth-quarter and full-year 2011 earnings conference call. We distributed our earnings press release earlier today and you can find a copy via a newswire services and on our website at www.UTstar.com. In addition, we have posted a slide 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 Miss Jin Jiang, 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. The statements are forward-looking in nature and subject to risk 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 successfully launch its Internet TV platform, continue to integrate recent acquisitions, successfully operate its new service business, execute on its business plan and manage regulatory matters, as well as risk factors identified in its latest annual report on Form 10-K, Form 10-K A, quarterly reports on Form 10-Q and current reports on Form 8-K and 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, Mr Jack Lu.

Thank you, Jing. Hello to everyone on the call. As Jing mentioned, you can follow along with today's call by downloading the presentation from our website at www.UTstar.com. Also, unless otherwise stated, all figures mentioned during this call are in US dollars. Let's start with Slide 4 and talk briefly about our fourth-quarter highlights. Net income attributable to UTStarcom's shareholders was $4.1 million or basic and dilutive earnings per share of $0.03 in the fourth quarter 2011. Total revenues increased 9.6% year-over-year to $83.5 million in the fourth quarter 2011, from $76.1 million for the same period in year 2010. Gross margin was 34.2% in the fourth quarter 2011 compared to 10.6% in the fourth quarter 2010. Operating income was $8.5 million in the fourth quarter 2011 compared to an operating loss of $26.6 million in the fourth quarter 2010. Cash, cash equivalents and the short-term investments were $304 million as of December 31, 2011.

On Slide 5, we highlight our 2011 financial achievements. Most notably, we exceeded our revenue target's range of $300 million to $320 million by achieving $320.6 million in total revenue for the full year 2011. Total operating expenses in 2011 were $93.1 million, 6.9% lower than our annual target of $100 million. And lastly, we achieved a healthy full year gross margin of 35.7%, and met our annual breakeven target established at the beginning of the year, recording net income of $13.4 million. Turning to Slide 6 and take a look at year-over-year comparisons of the past three years. 2011 was our first profitable year after six years of consecutive losses. Our operating expenses have experienced a downward trend since 2009, while our operating income and net income have steadily increased since 2009 and turned positive in 2011.

Now let's take a look at Slide 7, to recap our 2011 growth strategy. We successfully executed our return to China corporate strategy in 2011 after bringing a new management team on-board. We made steady progress in adding more talented people to our team, streamlining our corporate structure and efficiently managing our costs. Our strong bottom line performance was mainly driven by improved gross margin and decreasing operating expenses as a result of these restructuring efforts. In 2011, we launched a new corporate culture initiative to incentivize our employees. We believe this has improved team morale and contributed to our positive financial performance in 2011. The new initiative underscores UT's core value of integrity, execution, accountability and Dare To Dream approach which challenges our employees to go above and beyond. This new corporate culture includes team building activities and focuses more on fulfilment space incentives. We believe this new corporate culture establishes a solid foundation from which to grow into an even stronger Company over the next few years.

Turning to Slide 8, we were able to effectively execute our second corporate strategy of serving the telecom and the cable market in parallel in 2011, setting the stage for continued growth progress in 2012. A catalyst for our growth in the cable market will continue to be China's push forward three network convergence. The first phase has already shown substantial progress with networks already displaying the capability to provide services to end users. By the end of 2011, the government had announced 42 new trial cities for the second phase of the convergence plan. This opens up additional market opportunities for us as we deliver our IP-based network solutions to both cable and telecom operators. I am pleased to share with you that we recently won the IPTV broadcasting control platform tender in the city of [Tianjin]. This is the first of the 42 new trial cities to award such a contract. It is a significant win for us, as it was the result of a nationwide task team in the bidding process and it strengthened our market share in China's IPTV market. We are well positioned to gain a significant share of the 42 new cities which will enable us to capture the additional business opportunity from the national roll-out expected to take place from 2013 to 2015.

Three network convergence also creates substantial potential demand prospects from China's Cable Network operators for our broadband product. By the end of 2011, there were 200 million cable subscribers in China, but only 6.5 million of them were using bidirectional interactive services. We believe this number will increase more than 20% in 2012 and we expect to see continued growth in demand as more and more cable operators realize the value of investments in the next generation network to improve their infrastructure. Furthermore, we continue to stabilize our existing market position in the telecom sector. Last month, we announced contract wins to support IPTV's network expansion for two China telecom provincial subsidiaries, one in [Fujian] and the other in Zhejiang. For the Zhejiang Telecom contract, we are building new IPTV 2.0 platforms in two cities; Wenzhou and Taizhou. This 2.0 platform will serve as solid foundation for China Telecom's planned larger scale deployment of IPTV 3.0 in the next few years, which could result in additional market opportunity for us.

Looking now at Slide 9. We achieved year-over-year profitability primarily driven by increased sales of PTN and MSTP product in Japan and in Taiwan respectively which generally have higher gross margin. Bookings of our PTN product exceeded $100 million at the end of 2011. Moreover, our IPTV product sales increased in India. In China, our booking margin improved as we continued to expand into the cable market where we have stronger competitive advantage and greater bargaining power which results in improved contract terms with some cable operators. In addition, our margin improved in China as a result of our effort to restructure our sales commission plan so that commissions are tied to both revenue and gross margins. At the Beijing Telecom Equipment Expo in September 2011, we introduced a series of new solutions that will better serve the cable market. The new products included our DOCSIS-EOC application and the new Wi-Fi products. UTStarcom's EOC application targets cable operators and enables them to provide a faster and a smoother video, voice and data to end users. Our next generation Wi-Fi product are able to combine with CDN convergence, support multi-terminals and satisfy the needs of operators to establish outdoor wireless networks.

Turning now to Slide 10. And discussing our third key corporate strategy. Throughout 2011, we have discussed our goal of moving up the value chain and transitioning from being purely an equipment provider to become a provider of operation support service as well. Expanding the service business through acquisition is a key focus for the management team and we believe it is important that acquisition is done at the right valuation with targets that also contribute positively to revenue, profits and cash flow. These requirements mean we have to be especially careful in terms of due diligence and negotiations, so that we deploy shareholders' resources in the best possible manner. This degree of caution shaped our acquisition strategy in 2011 and will continue to do so in 2012. Meanwhile, we have been developing other service based business initiatives to accelerate our transition and to pursue new market opportunities.

For 2012 and beyond, our margin, our main growth initiative will be strengthening our Media Operational Support Service offering with our newly established Video Service Cloud or VSC platform. We believe this solution will be key to the growth of our Company as we focus on building out our service business. I am excited to introduce our next generation cloud-based video service platform which we have gradually developed since 2011. The VSC takes advantage of our RollingStream technology, network infrastructure solutions and the advanced technology of video exchange clouds, to support, exchange and distribute video and audio content through telecom networks, Cable Networks, and the Internet. The infrastructure that we have built has the advantage of aggregating audio and video content which enables media operators to rapidly launch their IP video services and offer customers a high quality and highly interactive experience through multiple video screens. Currently, we have established VDN nodes at the major cities in China and have a few Internet TV operators using the trial services on our video media. We have signed the cooperation agreements with a key strategic partner to take advantage of the cable operators national-wide broadband backbone to provide our IP-based content exchange and distribution services at a very competitive price.

Turning to Slide 11. This slide details the overall structure of our VSC business model. The main product and the services include video exchange and the distribution network, cloud-based video services, and the video content exchange service. Our video exchange and distribution network is focusing on digitized audio and video content as well as its distribution and storage with lower broadband costs. Cloud-based video services enable us to offer value-added services such as video conferencing, online education, online office and online theater, plus numerous other value-added services. Initially, we will focus on the Video Distribution Network and the video conference offerings to generate a steady stream of revenue. Our video conferencing service enables organizations of all size to enjoy secure, high quality video conferencing and the tele-presence service through multi-screens.

More importantly, our video conferencing service can be packaged as a comprehensive enterprises management solution while combined with various applications such as our online office and Wi-Fi enterprises application. It enables all the participants to download, share, revise and save working documents from multi-terminals while in the conference call. As we build out our service offerings, our long-term growth will come from expanding into other value-added service and applications of cloud-based services and video content exchange services. As we've mentioned in the past, the business shift will not occur overnight, but that we hope investors will keep a long-term outlook as we continue to reinvest in growing this new business.

Finally, in regard to our service business, our iTV.cn subsidiary is collaborating with a major telecom carrier to provide Internet TV services in Southeast Asia and they plan to start the launch of such service this month. iTV.cn is still at an early stage of development and will take time to ramp up. But we plan to allocate additional resources as needed to capture potential growth opportunities in this area while we're seeking potential strategic partners to speed up the growth of iTV.cn.

Moving to Slide 12, in the short-term our focus will be on providing VDN and secured Internet based video conferencing services, mainly to Chinese enterprises on our VSC platform. We plan to formally launch the VSC platform and its associated services at the CCBN Trade Show on March 20, 2012 in Beijing. In addition to accelerating the growth of our service business, we will be focused on improving the profitability of our traditional business, increasing the enterprise's value of the Company and enhancing shareholder communication.

Now, I'll hand the call over to our CFO, Jin Jiang, to review our financial performance in the fourth quarter and the full year 2011.

Thank you, Jack, and hello, everyone. Please turn to Slide 13 and I will discuss our fourth-quarter and full-year 2011 financial results in more detail. In the fourth quarter, we recorded $83.5 million in revenues. This was a 9.6% or $7.3 million increase compared to $76.1 million in the fourth quarter of 2010. This increase was primarily the result of increased sales of PTN in Japan and MSTP and RollingStream infrastructure product sales in Taiwan. For full year 2011, revenue was $320.6 million, an increase of 10% or $29 million compared to $291.5 million for full year 2010. This exceeded our full-year revenue target range of $300 million to $320 million. Let me remind everyone that included in the full year revenue is approximately $95.3 million of accelerated amortization of PAS deferred revenue with a 35% gross margin that is not expected to recur in 2012. Our book-to-bill ratio in the fourth quarter was 0.7 without the PAS deferred revenue.

On Slide 14 you can see that gross profit margin was 34.2% for the fourth quarter 2011, compared to 10.6% in the fourth quarter 2010. Gross profit margin for the full year 2011 was 35.7%, an improvement from 24.1% for the 12-months ended 2010. As we mentioned earlier, the improvement in gross profit margins continues to be driven by increased sales of higher gross margin PTN products in the fourth quarter 2011. Gross margin for equipment sales in China also improved in the fourth quarter 2011 compared to the corresponding period of 2010.

Moving on to Slide 15. From the chart you can see continued progress in our restructuring and cost cutting. Q4 OpEx was $20 million, a decrease of 42.2% year-over-year from $34.7 million in the corresponding period in 2010. OpEx as a percentage of sales which is represented by the gray line on Slide 15 remained relatively low since Q2 2011 compared to year 2010. Q4 OpEx as a percentage of sales was up compared to last quarter due to a one-time divestiture gain realized from the sale of our PDSN business in China which resulted in a $4.1 million gain included in Q3 OpEx. Operating expenses for the full year 2011 were $93.1 million, a decrease of 35.3% year-over-year from $144 million in the corresponding period of 2010. We achieved our 2011 target of full year OpEx below $100 million.

Moving to Slide 16. You can see our operating and net income trend over the past few quarters. Operating income for the quarter was $8.5 million, while net income attributable to UTStarcom was $4.1 million. Basic and diluted earnings per share for the fourth quarter and full year 2011 amounted to $0.03 and $0.09 respectively.

On Slide 17, let's take a look at our segmented financial results. As a reminder, the two main reporting segments are equipment sales and service sales. The equipment sales segment tracked our equipment sales including network infrastructure and application products. The service sales segment is split into first of all the services and support we provide to customers related to the equipment they purchase. Secondly, our new service business that we provide through long-term revenue sharing arrangements with the cable and telecom operators, plus our Internet TV platform established by our iTV.cn subsidiary. In 2012, media operational support services from our video service cloud platform will also be included in this segment. In the fourth quarter of 2011, the equipment sales segment generated $76.1 million in revenue, compared to $67.3 million in revenue in the corresponding period of 2010. The increase was primarily driven by increased sales of PTN and MSTP products in Japan and Taiwan and RollingStream infrastructure product sales in Taiwan. The $2.2 million one-time additional release of PAS deferred revenue also contributed to the year-over-year increase.

For the full year 2011, the equipment sales segment generated $285.5 million in revenue, compared to $251.1 million in revenue in the corresponding period of 2010. The increase was mainly driven by increased sales of PTN products in Japan and RollingStream infrastructure product sales in India and Thailand. The $7.4 million of equipment revenue recognized from the Jersey Telecom Limited contract in the second quarter of 2011, also contributed to the year-over-year increase. The year-over-year increase in equipment sales was partially offset by the wind down of our handset business and the decrease in sales of our other major product lines. Deferred revenue accelerated amortization of $95.3 million related to PAS is included in equipment sales through the end of 2011 at the rate of approximately $23.8 million per quarter. Gross margin associated with the PAS deferred revenue is approximately 35%. Our equipment based service sales segment generated $7.4 million in the fourth quarter of 2011. This compares to $8.8 million in Q4 of 2010.

Full year 2011 service sales were $34.5 million, compared to full year 2010 service sales of $40.4 million. The decrease was primarily due to fewer iPAD maintenance contracts from the phase-out of PAS in China in 2011, offset by increased service revenue in our international business. The new service revenue for the fourth quarter of 2011 and full year 2011 was $0.02 million, and $0.5 million respectively. Although the OSS revenue contribution in the past year has not been significant, the new service business will play an important part in our Company's future growth and strategy and will be our focus in 2012. Now let us turn to Slide 18 for the balance sheet and overview of our cash by region and currency of cash deposits. We ended the quarter with a balance of $304 million in cash, cash equivalents and short-term investments and zero debt. The two pie charts on this slide provide details on our cash deposits. As you can see, 44% of our total cash is held in China, 24% of our total cash is deposited in R&D. 41% is deposited in US dollars. And 29% in Japanese yen.

Finally, on Slide 19, we like to talk about our cash flow. In the fourth quarter, we had close to breakeven operational cash flow with outflows of $0.2 million, compared to positive operational cash flow of $5.2 million in the same quarter last year. We will continue to focus on improving operational processes to drive us towards operational cash flow breakeven in 2012. We announced a $20 million corporate share repurchase program in August and started the program in September. As of today, we have repurchased approximately $6.5 million worth of the Company's shares. At the same time, our management team has collectively and with their personal funds executed 80% of the $0.5 million management share repurchase program that was also announced in August. The management and corporate buyback will continue in the first quarter of 2012.

Now we would like to take any questions you may have. Operator, please open the line for Q&A.

(Operator Instructions) Lily Wu, TGRA Capital.

I wanted to understand a bit more about the IPTV trial wins, for example in Tianjin or Zhejiang, Fujian. For any of these contracts, what is a typical contract size and also how would the booking look like? Is it a one-time sale of equipment systems to implement the IPTV system in the cities or is it a multi-year contract? And how large are they, typically, for something like a Tianjin contract?

Thank you for the question. This is Jack. Actually, as we introduced it before, along with the three network convergence, the Chinese central government mandates that all the IPTV systems must be implemented by the integrated broadcasting and controlling platform that is handled by central and local TV stations. So there is one central level IPTV broadcasting control platform by city TV, each of the province or cities will have their own local platform as well. The one that we recently won in Tianjin city is one of the local platforms in the newly issued 42 trial cities in the second phase.

The issue of -- the size of the contracts varies from the capacity designed from different locations and normally this is an one-time contract but followed with expansion in one or two years. That is a typical case. The deal size, it also varies as well and due to competitive consideration we are not in a position to disclose the size of -- exact size, deal size of the winnings. Sorry for that.

Okay. Thanks for that. And I'm sorry if I missed it on the call, but did you provide fiscal 2012 guidance or any type of indication of what type of growth or revenue we might be looking at, especially considering that the legacy PAS, the $23 million per quarter will be going away in 2012?

This is Jin. No, you did not miss it in our script. I think because our business in 2012 will be in a transition year where we will be focusing and developing our new business model, we are right now not in a position to issue financial guidance for 2012. We would like investors to focus more on our growth business, especially on the service side, so that's why we have not provided 2012 guidance.

Okay. But are we looking at being able to offset fully the loss of legacy revenue in the coming year or what are your thoughts on that?

Looking at our equipment -- traditional equipment business, we are anticipating reasonable growth and healthy growth in that area. It is driven mainly by a steady pipeline, which we can see right now, and also the opportunities in our domestic cable markets.

Okay. Great. And the operation and services is also expected to grow?

Yes, that will be our key initiative and focus in year 2012.

(Operator Instructions) Himanshu Shah, Shah Capital.

Can you talk about the Youku and Tudou merger announcement from yesterday and its impact on your businesses as a supplier as well as your iTV.cn would be a competitor to their business model. Can you talk more about that, please?

Okay, thank you. First, we also heard the breaking news of the merger of Tudou and Youku. Due to the local policy limitation by the government, they are limited on non-TV screen services and the typical business model is guards revenue and income from advertisements, while it provides free content. Our iTV.cn [doesn't even] focus on Internet TV services on a TV screen outside of China, with Chinese content to overseas Chinese people. So, in certain time periods, we can see very strong competitiveness against [geography], between iTV.cn and the Youku/Tudou. We're quite confident that iTV service will grow up quickly after the preliminary build out. Secondly, we're about to announce our VSC platform. The most basic service is our VDN offerings. As long as our service quality is good and our cost is low enough in the form of competitive price, we could be attractive service supplier to those video media operators including Youku and Tudou. Thank you.

Thanks. Can you talk about why you did not buy back your stock aggressively in light of its current valuation?

We have been executing against our share buyback program, starting from September and through to today. So, we have been executing against that. And to date, we have purchased approximately $6.5 million worth of the Company's shares. And as you know, our daily purchases will be limited by SEC regulations.

There is no way you can just buy in a block? Because you have over $300 million in cash and the market value -- you have a negative enterprise value of $60 million, $70 million every year. I'm just scratching my head over here, why the Board is not taking this initiative over here and buyback 5 million, 10 million shares.

I think we have announced a $20 million corporate buyback plan which is approved by our Board of Directors and we have been executing against it. However, we do have to balance the proper usage of our cash especially in light that we have new initiatives in 2012 with our new business, especially our VDN platform and other initiatives. Therefore, currently our plan is to continue to execute the $20 million corporate share buyback program.

Are you operationally -- are you going to be operationally profitable in 2012?

As we have mentioned in our script, we will continue to work on our operational processes and we will drive towards operational cash flow breakeven in 2012.

(Operator Instructions) 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 fourth quarter 2011 earnings conference call. We look forward to updating you on our first quarter 2012 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 ended. We thank you for attending today's presentation. You may now disconnect your lines.