UTStarcom Holdings Corp (UTSI) 2012 Q1 法說會逐字稿

Thank you for standing by for UTStarcom's first-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to introduce your host, Ms. Jing Ou-Yang, Investor Relations Director for UTStarcom. You may begin.

Hello everyone, and welcome to UTStarcom's first quarter 2012 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 slide show 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 Ms. 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 IPTV revenues, progress in the Video Service Cloud platform, profit margin and business model. Forward-looking statements are generally indicated by such words as will, expect, estimate, goals, 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. These include risks and uncertainties regarding the ability of the Company to realize anticipated results of operational improvements, and 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 the risk factors identified in the Company's latest annual report on Form 20-F, previous annual reports on Form 10-K, 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, and 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 the call are in US dollars. As you may recall, deferred revenue amortization related to PHS was included in 2011 results at a rate of approximately $23.8 million per quarter. Specifically, for the first quarter of 2011, PHS deferred revenue was $23.6 million. PHS deferred revenue amortization ended in fourth-quarter 2011, and starting in first-quarter 2012 will no longer impact our results. In order to provide a true apple-to-apple comparison, throughout this call first-quarter 2012 revenues, gross profits and gross margin year-over-year comparisons will exclude PHS deferred revenue amortization recorded in the first quarter 2011.

Let us start with slide 4 and talk briefly about our first quarter highlights. For the first quarter of 2012, total revenues increased 23.8% year-over-year to $46.7 million, compared to sales of $37.7 million, if we exclude $23.6 million amortization of PHS deferred revenue in the first-quarter 2011. Gross profit increased 69.6% year-over-year, to $18.4 million, compared to $10.9 million if we exclude gross profits related to amortization of PHS deferred revenue in the first quarter 2011. Gross profit as a percentage of net sales, or gross margin, was 39.5% compared to 31.1% in the first quarter of 2011. First-quarter 2011 gross margin, excluding PHS deferred revenue amortization, was 28.8%. Operating expenses decreased 26.5% year-over-year to $22.2 million, compared to operating expenses of $30.2 million for the corresponding period of 2011.

Let's move to slide 5 and take a look at our equipment business in China. On our last earnings call, we mentioned that the government has identified 42 new trial cities for the second phase of China's three network convergence. Also, we announced that we had won the tender to build an IPTV broadcasting controlling platform in Chongqing City. Chongqing was the first of the 42 new trial cities to award an IPTV contract to a solution provider. In addition to Chongqing, we have recently won another IPTV tender with Hainan TV station.

The new platform will support the content management and distribution needs of IPTV, Internet TV and mobile TV. The platform will cover entire province of Hainan and provide approximately 100,000 household subscribers with digital high definition and bi-directional IPTV. Out of the 42 new trial cities, 20 are provincial level and will require a solution provider to build an integrated IPTV broadcasting platform. We are targeting to win approximately 15 of these contracts.

I'm very pleased to share with you that we recently won our first IPTV broadcasting control platform expansion contract from Beijing TV station. This is a sizable contract with solid gross margin. It substantiates that some of the trial cities have started to accelerate capacity expansion progress. The initial IBCP contracts will pave the path for additional business opportunities from the national roll-out of the three networks convergence expected to take place from 2013 to 2015. Our expectation is that most of the IBCP platforms will result in future expansion contracts.

Turning to slide 6. I would like to share some information with everyone on continuing investments from China's cable industry in the year 2012. As you can see from the chart, at the end of 2011 there were 202 million basic TV subscribers but only 6.5 million cable subscribers using interactive services. We anticipate the number of subscribers using interactive TV to increase 20% this year, which will lead to increased demand of our iDTV and IPTV solutions. We are witnessing a trend of cable operators increasing their investments in order to improve network infrastructure and service offering. Investments by cable operators is increasing demand for our broadband products, especially our EPON EOC products, which enable cable operators to provide bi-directional and high quality video, voice and data services to end users.

Starting from slide 7. We will be focusing on our newly-introduced Video Service Cloud Platform or VSC Platform to provide some updates on this growth initiative. The VSC Platform will play an important part in building out our service business, or more specifically, our Media Operational Support Services, which will be a priority for us in 2012. We officially launched the platform at the China Broadcasting Network exposition in late March. The VSC platform leverages UTStarcom's RollingStream technology, optical network infrastructure, and the advanced technology of video exchange cloud to store, exchange and distribute video and audio content through telecom, cable and Internet networks.

The infrastructure has the advantage of a [great agent] of 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 devices, such as TVs, PCs, tablets and their mobile phones. The main services includes the Video Distribution Network or VDN services, cloud-based B2B application services and video content exchange services. The VDN is focusing on utilization, distribution, storage and acceleration of audio and video content with significant broadband cost savings. The cloud-based B2B video services have a wide range of value-added services such as video conferencing, online education, online office, and cloud-based storage and computing for video content for enterprise customers.

Moving to slide 8. Initially our focus will be on the VDN and certain B2B cloud-based services such as video conferencing service to generate a steady stream of revenue. We have already established Internet nodes in five major cities in China, Beijing, Shanghai, Maoming, Lanzhou and Hong Kong. Also, our VDN system has been deployed and is ready for commercial use. At this time, we have four trial Internet TV customers using our Video Distribution Network, and expect a number of them to become commercial revenue-generating clients in the second quarter of 2012.

Regarding our B2B cloud-based services, our video conferencing system is online and we currently have five trial customers that we expect some of them to become commercial revenue-generating clients in the second quarter of 2012. Besides providing secure, high-quality video services, our video conferencing service can be packaged as comprehensive enterprise management solution, while combined with wireless applications such as our online office service and Wi-Fi enterprise application. It enables all participants to download, share, revise and save working documents from multiple terminals, while active in a conference call.

For the second quarter 2012, we expect solid progress from VSC business. On slide 9, we highlighted some of our operational targets for our VSC business in the coming quarter. First, as we just mentioned, we expect some of the VDN and video conferencing trial customers to become commercial clients and start to bring in VSC related revenue. For the VDN services, our targeted commercial customers are Internet TV operators and provincial and city-level cable operators. For video conferencing services, we expect our commercial contract to come from real active enterprises, education enterprises, as well as provincial and city level cable operators. For all commercial contracts, we will charge monthly subscription or service fees with the potential for more added value revenue.

Additionally, we expect to finalize our JV agreements with a key strategic partner which will enable us to take advantage of these nationwide cable backbone infrastructure. This will permit us to provide our IP video content exchange and distribution services at a very competitive price. Once this business contract has been finalized, we will be able to provide investors with more details. On a system roll-out side, we expect to add approximately 10 more VDN nodes to bring our national node count to around 15, and which will enhance our nationwide infrastructure.

Moving now to slide 10. We summarize the key competitive advantage of our VSC Platform, which will position us favorably to accelerate the growth of our Media Operational Support Service business. First of all, this platform will be viewed on our strategic partner's nationwide broadband backbone infrastructure. It will allow us to provide VDN services to end users at a very competitive price. Secondly, this platform will leverage UTStarcom's RollingStream technology, optical network infrastructure, and the advanced technology of video exchange cloud to save on CapEx costs to build out the entire network. Last but not least, we will continue to take advantage of the deep relationship we have built with the TV, media and the cable industries in China in the past few years. We expect operators in this industry to become future target customers of our Video Distribution Network, and the video content exchange services. Our existing clients will benefit from the development of our VSC business, as the Internet TV and the cable TV operators look to improve the quality of their services.

Lastly, before I hand the call over to our CFO, Jin Jiang, I want to highlight some of the initiatives the management team has both completed and are going to expand UTStarcom's commitment to high standard of corporate governance. We successfully completed the 404 internal control audit, and successfully removed all material weaknesses that were included in our 2010 annual report. In 2010, we had a material weakness related to peer-read and financial reporting process. Since that time, we have implemented strict processes to improve our reporting process, including hiring key individuals in corporate finance and accounting, with increased knowledge of US GAAP and SEC requirements. With our restructuring efforts to move the headquarters to China, we consolidated and streamlined our global processes, while maintaining an appropriate level of control points.

The other material weakness that we were able to remedy was related to our treasury process. To remediate this issue, we designed and implemented controls to separate closely related functions in cash management and reduced the risk of misappropriation of assets. We also instituted stricter approval requirements for certain actions related to cash management and conducted periodic reviews to ensure effectiveness. The remediation of the material weakness is a reflection of the current management's commitment to maintain high standard of corporate governance. Upholding such high standard of corporate governance will continue to be a priority of the Company. Now, I will hand the call over to our CFO, Jin Jiang, to review our financial performance in the first quarter 2012.

Thank you, Jack, and hello everyone. Please turn to slide 12, and I will discuss our first-quarter 2012 financial results in more detail. I would like to remind everyone again that there was $23.6 million of PHS-related amortization of deferred revenue, with 34.8% gross margin included in the first-quarter 2011 GAAP financial results. In our comparison analysis below, we will exclude amortization of PHS-deferred revenue from first quarter 2011. In the first quarter 2012, we recorded $46.7 million in revenues. This was a 23.8% increase compared to the corresponding period of 2011, if we exclude amortization of PHS deferred revenue. The increase was primarily the result of increased sales of our MSTP products in Taiwan and MSAN products in Japan. Our quarter one book-to-bill ratio was 0.81.

On slide 13, you can see that gross profit margin was 39.5% for the first quarter 2012 compared to 28.8% in the first quarter of 2011, if we exclude $23.6 million of PHS deferred revenue amortization, with a 34.8% gross margin in the first quarter 2011. The improvement in gross profit margin was driven by increased sales of higher gross margin MSTP and MSAN products in the first quarter 2012. Gross margin for equipment sales in China also improved in the first quarter 2012 compared to the corresponding period of 2011, as a result of our efforts to focus on gross margin, rather than pure revenue growth. In the first quarter 2012, we also have reversals of third party commission reserve and purchase order liability accrual and sale of previously reserved inventory totaling $1.3 million. These items positively impacted our gross margin in the first quarter 2012. For the full year 2012, we anticipate our overall gross margin to remain in the mid-30% range.

Moving to slide 14. Q1 2012 OpEx was $22.2 million, a decrease of 26.5% year-over-year from $30.2 million in the corresponding period in 2011. The year-over-year decrease was mainly the result of our restructuring and cost cutting efforts. Moving to slide 15. Operating loss for the quarter was $3.8 million, while net loss attributable to UTStarcom was $4.2 million, compared to operating loss of $19.3 million, and net loss attributable to UTStarcom of $18.5 million for the first quarter 2011, if we exclude PHS-related amortization of deferred revenue.

On slide 16, 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 track our equipment sales including network infrastructure and applications products. The service sales segment is split between services and support we provide to customers related to the equipment they purchase, and secondly, our new service business, which includes long-term revenue sharing arrangements with the cable and telecom operators, ITV. CN related sales and Media Operational Support Services from our Video Service Cloud platform. In the first quarter of 2012, the equipment sales segment generated $38.7 million in revenue, compared to $29.2 million in the corresponding period of 2011 if we exclude PHS-related amortization of deferred revenue. The increase was primarily driven by increased sales of MSTP and MSAN products in Taiwan and Japan.

Our equipment-based service sales segment generated $7.8 million in the first quarter 2012. This compares to $8.3 million in Q1 of 2011. The decrease was primarily due to fewer NGN service contracts in China this year, slightly offset by increased service revenue in our international business. Total new service revenue for the first quarter of 2012 was approximately $0.2 million. This is a result of an IP signage revenue sharing project and technology service revenue generated by our ITV. CN subsidiary. As Jack mentioned earlier, we are expecting to generate new media operational support service revenue contracts from both video distribution and video conference services in the second quarter of 2012.

Now let us turn to slide 17 for the balance sheet and overview of our cash by region and currency of cash deposits. We ended the quarter with a balance of $285.4 million in cash, cash equivalents and short-term investments with zero debt. The two pie charts on this slide provide details on our cash deposits. As you can see, 41% of our total cash is held within China. 48% of our total cash is deposited in RMB. 32% is deposited in US dollars and 16% in Japanese yen.

Finally, on slide 18, we would like to talk about our cash flow. We experienced normal seasonal delays in the first quarter related to the Chinese New Year, which traditionally causes weaker collection in Q1 compared to other quarters in the year. Operational cash flow was negative $14.7 million, compared to a negative operational cash flow of $39.4 million in the same period 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 2011 and started this program in September of last year. As of today, we have repurchased approximately $7.2 million worth of the Company's shares. At the same time, our management team has collectively and with their personal funds fully executed the $0.5 million management share repurchase program that was also announced in August 2011. We will more aggressively execute the remaining corporate share buyback plan in the second quarter of 2012. This concludes our first-quarter 2012 financial review section. Now, we would like to take any questions you may have. Operator, please open the line for Q&A.

Thank you, ladies and gentlemen. We will be conducting a question-and-answer session.

(Operator Instructions)

The first question comes from Lily Wu of TGRA Capital. Please go ahead.

I was wondering, the equipment sales, $38.7 million, what proportion of that was related to the cable business versus telecom?

Now, if we look at the equipment sales, about approximately 20% of that is generated from our network application products. So, the cable and telecom segments will fall into the IPTV segment. So, if we look at the revenue contribution from the cable market, it is more -- can be more easily seen from the booking side, because at the end of the year we saw cable markets to consist about 40% of our total bookings. So, I think in the next few quarters, we will see increases in the cable operators' contribution to our revenue.

Okay.

This is Jack. Also, complementary to Jin's answer, ever since last year we start to rapidly increase the booking from the cable market in China, but due to engineering and the contract implementation cycle, most of them will start to turn into revenue from this year.

Okay. From subsequent quarters?

Yes, yes.

Okay. And so, just to be clear, in first quarter itself, the revenue contribution from cable related, could you repeat that? I didn't quite get it. In the first quarter itself.

Combining both telecom and cable, they contributed around 20% -- they consist about 20% of our --.

I see. Okay. And there was a reference on the call that the book-to-bill ratio in the first quarter was 0.81. Was that the ratio entering the quarter or exiting the quarter?

This is exiting the quarter.

Okay. And that's just on the equipment sale side?

Correct. It's on our traditional equipment sales.

Okay.

Because our new -- yes, our new service business, the booking and the revenue will be recognized in the same quarter.

Okay. All right. And on the operating cash flow, could you go over again, looking at the press release, Other liabilities was negative $9 million. What exactly was that?

Our Other liabilities normally consist of other accruals that we have on our books which are liabilities to our vendors, or they are, for example, salary payables or bonus payables that have been accrued on our books. So, our Other liabilities lines consists of changes in those balances in Q1, which we have paid down those liabilities.

Okay. And so you're still giving guidance of cash flow breakeven for the year, you think that's realistic?

We are -- our outlook is that we will be operational cash flow breakeven in 2012.

Okay. All right. Thank you very much.

Thank you so much, Lily.

(Operator Instructions)

The next question comes from Louis Lubrano of BMI Capital. Please go ahead.

Congratulations on a very encouraging quarter. In your news release statement, you talk about for 2012, you anticipate a healthy revenue growth rate, stable gross margin and improvement in operational cash flow. My question is, how do we translate that into net profits? What is the gap between all those good things and a good, healthy net profit? Thank you.

Thank you so much for your question and thank you for your words of encouragement. So, if we take a look at what we have mentioned in terms of our revenue growth, we are expecting a healthy revenue growth, and we've also mentioned that we expect our total operating expenses to be less than 2011 annual operating expenses, and we also are expecting our margins to be in the mid-30s. So, given those metrics, we are -- if you model it out in the financial model, even though we're not giving exact financial guidance, but if you use those outlook and if you model it out, we are looking at overall P&L breakeven.

That's very good. Thank you very much. Don't be shy to say it.

Say it again, please?

Sorry. Could you please repeat that?

You shouldn't be shy to say that in your news release. Thank you very much.

This year, so we just want to emphasize our strategic initiatives to develop service, especially media operational supporting service business, such as VSC business. So in order to gradually lead our Company to a totally new direction, while maintaining healthy growth of the traditional business. So this is why we want to emphasize more to our investors how we pay more attention to the new direction.

Thank you, sir.

The next question comes from Himanshu Shah, of Shah Capital. Please go ahead.

Two questions. Jack, can you talk about the legal planning that has been done and also the strategy that you're pursuing to monetize your carry-forward tax losses, which I assume is around $1 billion, but you can also give me the exact amount as of March 31. And the second question is on ITV. CN, what is the existing sub both in the US and also in the other markets in Asia that you're pursuing? Thank you.

Okay. So could you please clarify a little bit about your first question?

I just wanted to find out, because you have a lot of carry-forward losses, and so what have you done in terms of separating subsidiaries and whatnot and what kind of thought process that you have to monetize those carry-forward losses which could be quite material to shareholders.

Thank you for your question. This is Jin. If we're looking at our total loss carry-forwards, we do have a significant amount on our books. However, once we start to utilize these losses, we will have to do a detailed 382 study to analyze to make sure that these losses will not be limited in the utilization. So, the Company is currently in the process of performing such a 382 study to analyze our losses.

And what is the exact amount of losses that you have as of March 31?

Sorry, Himanshu, I don't have the exact amount for the end of the year. And I will need time to -- maybe I can get back to you, as to what we have as the balance at the end of 12-31. Sorry, I don't have the balance as of 3-31.

What is the balance at the end of December 31, then?

If you give me a few minutes, let me look that up for you.

You can get back to me on that, that's fine. What about ITV. CN, Jack, on both the existing subscribers in the US and also some of the markets that you have talked about in the past that you're pursuing in Asia?

Okay. So our ITV. CN subsidiary is focused on providing China-related content, TV content to overseas Chinese through Internet TV or OTT solution. We launched our service in October last year in US and, later on, we started working on the joint effort to provide similar services plus TV program from US and other countries in Thailand. Now, currently, our strategy is, given the limited resources and also extremely high subscriber acquisition cost in the US, so ITV. CN focus more their strategy and resources on Asia-Pacific market now. So, in the US market, we're still running at a low-profile [backing] approach, while we just focus on Asia-Pacific market.

So, currently up to now, the number of subscribers in US aren't a lot. ITV. CN service is not very significant. So we're about, according to our current plan, we are about to have commercial launch in Asia-Pacific in an Asia-Pacific country very soon.

Thank you.

(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 first-quarter 2012 earnings conference call. We look forward to updating you on our second-quarter results in a few months' time. Feel free to get in touch with us anytime if you have further questions, concerns or comments. Thank you, everyone.

Thank you. The conference has concluded. You may disconnect your line. Thank you once again.