UTStarcom Holdings Corp (UTSI) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by for UTStarcom's third 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've 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 third-quarter 2012 earnings conference call. Earlier today, we distributed two press releases, one with our quarterly earnings results and one that outlines our new strategic plan for UTStarcom. You can find copies of this 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. William Wong, our CEO and Mr. Robert Pu our CFO.

Before we get started I will read the Company's advisory on forward-looking statements. This call will include forward-looking statements relating to developments and growth of the Company's operational support service business, new strategic plans for the Company's business, the Company's performance in 2012 and expectations regarding share repurchases. Those 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 related to, among other things, changes in the financial conditions and cash position of the Company, changes in the composition of the Company's management and their effect on the Company, the Company's ability to develop and operate its TV-over-IP services business and execute its business plan through acquisitions and organic innovations and to manage and integrate such business as well as risk factors identified in the Company's latest Annual Report on Form 20-F and current reports on Form 6-K as filed with the Securities and Exchange Commission.

The Company is in a period of transition and the conduct of its business is exposed to additional risk as a result. All forward-looking statements included in this release are based upon information available to the Company as of the date of this release which may change. And UTStarcom assumes no obligation to update any such forward-looking statements.

I will now turn the call over to our CEO Mr. William Wong.

Thank you, Jing, and hello to everyone. As Jing mentioned, we have distributed two important press releases today, one covering our third quarter earnings results and one giving an overview of our new strategic plan. 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.

To begin, I point you to slide number five. Let me begin by saying that this is a very exciting time for UTStarcom. We have made several significant changes recently that we believe will position the Company for long-term success and allow us to deliver greater values to shareholders over time. There is an underlying theme to these changes that will drive our efforts for years to come and that is our goal to become a next-generation media company.

Specifically, we intend to fully transform UTStarcom into a higher-growth, more profitable business focused on building a platform of media operational support services and broadband equipment, products and services. We will provide more detail on this call as to what that means, but it is a strategy which we are already executing, having announced a number of key events recently in support of this strategic shift.

In short, we have started to transform and change the makeup of UTStarcom by redesigning the management team, adding new independent directors to the Board and, most importantly, have begun making key and necessary strategic changes to our business model. These include, one, the divestiture of the underperforming IPTV business; two, the recently announced investment in the next-generation video platform company, aioTV. These are just the start of what we have planned and I'll walk through the detail of our strategy in a few moments.

Once again, this is a very exciting time for UTStarcom and we are delighted to be here. There are a lot of opportunities before us but it will require hard work and dedication to seize it. We believe we now have a concrete plan and the right leadership in place that together will enable us to convert those opportunities into profitable growth and the generation of shareholder value.

So with that introduction, let's get started with a review of our third-quarter earnings results. I will now turn the call over to Robert Pu, our recently appointed Chief Financial officer, who will provide you with details of the third quarter. We are delighted to welcome Robert who has extensive CFO level experience and has served on our Board of Directors since November 2011 and as head of the Audit Committee until recently. Following Robert's presentation, I will talk further about our new strategy. Robert.

Thank you, William, and hello to everyone. This is my first earnings conference call at UTStarcom in my new capacity as CFO. I'm very excited about this opportunity and I look forward to working with you in the future.

Please turn to page seven for the financial review section. In the following section of the conference call, I will highlight our third quarter and first nine months 2012 financial results in more detail and with year-over-year comparisons. Before I get into specific detail, I want to reiterate what William touched on earlier in the call. Q3 was a challenging quarter and this is reflected in our revenue numbers. Indeed, the financial results we are announcing today underscore the urgency of the transition that UTStarcom is undergoing to adapt to market conditions, mitigate margin pressure and remain competitive in the products and services that we offer.

At the same time, our Q3 results also demonstrated the strength of our broadband business. Following the IPTV divestiture, we have a linear operation, we have a stable gross margin, and a lower run-rate OpEx. Also we have a strong balance sheet. We have no debt and we have removed significant amount of liabilities from our books through the IPTV divestiture. We continue our share repurchase program and begin to invest in the higher-margin products and services that William will elaborate later in the call.

As you know, in the third quarter we officially divested the IPTV business. As indicated previously, we will report IPTV financial results separately as discontinued operations for 2012 and for all comparable periods. However, it is important to note that we can put this into effect once we meet the requirements to do so.

At this point, for better comparison of the Q3 and year-to-date financial performance, we have prepared non-GAAP financial results. Let me state in my remarks I will focus on our broadband business and exclude the IPTV business and the amortization of PHS deferred revenue from our discussion. Please note this will apply to what I discuss for Q3 and year-to-date for 2012 as well as the comparison in 2011.

Before we dive into the numbers, I want to highlight a few broad themes for the quarter. First, the major factor affecting our topline was a decrease in sales of PTN products in Japan as we responded for our customers' deployment schedule. That impacted our total revenue and blended gross profit margins as those products have relatively higher gross margins.

Second, despite the topline and margin pressure, we maintained the same OpEx run rate which helped us narrow the operating loss. It is important to point out that the margin pressure would have been much severe if we continued to operate the IPTV business which, as we have outlined previously, was creating a drag on our aggregated margins. So, as I said earlier, the results we're reporting today validate the steps that we have taken to improve profitability.

And now let me move to the details. Please turn to page eight for revenue. In the third quarter of 2012 total revenue was $37m representing a 19.1% decrease year over year. In the first nine months of 2012, revenue was $116.3m, a decrease of 11.9% year over year. As mentioned earlier, this was mainly driven by decreased sales of PTN products in Japan and GEPON products in China, but was partially offset by increased sales of MSAN products in Japan.

Also in Q2 of 2011 we recognized $11.3m of revenue from Jersey Telecom contract and that is also a contributing factor to the year over year decrease.

Please turn to page nine for gross profit. In the third quarter gross profit $12.7m compared to $20.5m in the prior-year period. In the first nine months gross profit was $40.7m compared to $56.6m in the prior-year period. The gross profit decrease was mainly due to decreased sales of the PTN products which I mentioned earlier. This was partially offset by increased sales of the MSAN product.

Please turn to page ten for gross margins. In the third quarter gross margin was 34.4% compared to 44.7% in the prior-year period. In the first nine months gross margin was 35% compared to 42.9% in the prior-year period. The gross margin decrease was primarily due to decreased sales in relatively higher gross margin PTN products, and increased sales of relatively lower gross margin MSAN products, both in proportion to the total revenue. The relatively higher gross margin generated from the Jersey Telecom contract in the second quarter of 2011 is also a factor here.

Please turn to page 11 for operating expenses. In the third quarter operating expenses were $18.1m compared to $10.8m in the prior-year period. However, in Q3 of this year, R&D expenses were higher on a year-over-year basis and in Q3 of last year there was a divestiture gain of $4.2m. Adjusting for these two items, OpEx, in my view, is stable in year-over-year comparison. In the first nine months, operating expenses were $49.5m compared to $50.1m in the prior-year period. Again if we adjust the divestiture gain of last year we believe it reflects the Company's continuous efforts to reduce OpEx.

Please turn to page 12 for operating results and net income. In the third quarter, operating loss was $5.3m compared to operating income of $9.6m in the prior-year period. In the first nine months operating loss was $8.8m compared to operating income of $6.7m (sic - see press release "$6.6m") in the prior-year period.

In the third quarter, net loss was $0.2m compared to net income of $3.4m in the prior-year period. In the first nine months, net loss was $8.1m compared to net income of $3.1m in the prior-year period. This is mainly a function of the decrease of gross profit and the relatively stable OpEx as I have discussed earlier.

Please turn to page 13 for cash position on our balance sheet. We ended the third quarter with $213.1b in cash and equivalents. And we have no debt. The two pie charts on this slide provide details of our cash deposits. From location point of view, 29% of our total cash is in China, 50% in the US. From currency point of view, 39% of our cash is in renminbi, 40% in US dollars and 15% in Japanese yen. We believe that we have a strong balance sheet and we're confident that we can finance our future growth strategy.

Please turn to page 14 for cash flow. In the third quarter, cash used in operating activities was $1.8m compared to cash outflow of $13.6m in Q3 of last year. And cash used in investing activities was approximately $2.9m compared to $1.1m cash inflow in Q3 of 2011.

In the third quarter we divested the IPTV business with a total cash impact of $50m. In this transaction we deconsolidated $30m in cash to balance one-off liabilities. And we purchased a $20m convertible bond that can be converted into 33% equity stake of the new IPTV business in the next five years.

In the third quarter, cash used in financing activities was $3.7m, mainly for share repurchase, compared to $1.5m in Q3 of 2011. We continued our $20m share repurchase program in the third quarter and will continue to do so in the upcoming quarters. As of today, we have bought back $14.8m worth of our common shares so we have $5.2m left in the program. At this point, the expiration of the share repurchase program is February of next year.

I now want to turn to our outlook for the balance of 2012. In the context of our Q3 and year-to-date results, I believe our Q4 P&L is expected to be similar to our Q3 P&L. And our normalized growth margin for Q4 and full year is expected to be around 35%. And overall for the full year we will be slightly under operating cash flow breaking even.

This concludes my financial review. Now I would like to turn the call back to William.

Thanks, Robert. To begin, I ask you to go to slide number 16. The new management team has developed and already begun implementing a strategic plan in order to accelerate revenue growth, bolster profit margins, improve operational cash flow and increase shareholder value.

More specifically, we know we need to do the following, focus exclusively on faster-growing, higher-margin market opportunities; create a business model with an enhanced overall profitability profile; generate a more predictable subscriber-based recurring revenue stream; participate in new business opportunities where UTStarcom has the potential to become the top one or two service providers. We believe that, taken together, this will help accelerate UTStarcom's transition into what we are calling a next generation media company with a business model centered on media operational support services as well as higher value-added broadband equipment, products and services.

The plan we will execute builds on many important steps we have taken to date. And we believe our action will put UTStarcom in a better position to serve the evolving needs of the cable and broadband service providers that have historically made up UTStarcom's customer base.

Please now go to slide 17. Our go-forward roadmap has been based largely on extensive market analysis undertaken to understand where the most promising growth opportunities lie and it's in keeping with some of the key mega trends that are changing the way that people consume entertainment.

One of the biggest of these trends is the proliferation of screens on which people view content, especially as they increasingly adopt a variety of mobile devices for their computing and entertainment needs. No longer are consumers confined to their television for video programming. In today's mobile environment, consumers view video content on their mobile phones, tablet devices, laptops and PCs. Perhaps as a byproduct of this need for enhanced mobile capabilities, we're seeing another mega trend that we are very interested in capitalizing upon, the shift towards interactive television such as Internet-based games and TV-based shopping which reflect customized viewing through time-shifting and video-on-demand.

In short, viewers today are increasingly seeking a pull approach to their entertainment experience, paying to access selected content when and where they want it rather than having content dictated to them by broadcast and cable programming.

Please now go to slide 18. Having identified these trends as strategic growth opportunities for UTStarcom, we have also realized that we need to quickly evolve to meet the market demand. We have therefore developed three strategies to better position us to pursue and monetize these trends.

First, we will create and build a TV-over-IP services platform which we see us offering some of the fastest growing and highest margin opportunities in the marketplace.

Second, we plan to build out this platform and these services through a combination of internal development and strategic acquisitions.

Finally, we will design an optimal operating structure to maximize the potential of business units and foster innovation, collaboration and efficiency and minimize costs to keep our business strong.

Please now go to slide 19 and I will provide more detail on each of this. First, we will create and build a TV-over-IP service platform which we see as offering some of the fastest growing and highest margin opportunities in the marketplace. Through TV-over-IP services, UTStarcom will aim to be a leading provider of high in demand digital content such as video programming and other value-added services, over a variety of platforms.

UTStarcom will offer an integrated platform to support the entire workflow of broadcasters and cable service providers TV-over-IP operations such as encoding and transcoding, program planning, media distribution, content publication and product management. This platform will allow us to provide value-added services to broadband and cable service providers and in turn enable them to deliver rich media content to slow and eventually reverse the churn that has been eroding their customer base over the last several years.

These dedicated services will allow broadcasters to provide a personalized entertainment experience that meets people's desire for a blend of premium and free programs virtually anywhere, anytime and on any device.

This platform also provides the basis to offer additional services and features such as games and TV shopping as well as enterprise services such as remote education. We will leverage our existing relations with broadband and cable operators to help them carry out the transition of their current services to IP and cloud-based services. Please now go to slide 20.

Second, we plan to build out this platform and these services through a combination of internal development and strategic acquisitions. We have already established internal expertise through the continual development of our video services cloud and our legacy IPTV equipment business, both of which will help us develop new services for our customers.

In addition, we will acquire or take significant stakes in companies that have market-leading media technologies that bring additional capabilities and functionalities to our service platform and which we can then deploy commercially in China and Asia quickly and efficiently.

Our investments in iTV and aioTV are prime examples of this strategy. iTV recently announced the first commercial launch of its service with a major broadband operator in Thailand demonstrating the demand in the marketplace for their services. And aioTV has proven itself with established relations with broadband service providers and broadcasters in North and South America who sells its services to millions of end user customers in their local markets. We look forward to building on their success as we work with the management team there to find opportunities to grow their business in Asia.

Finally, we will design an optimal operating structure to maximize the potential of business units and foster innovation, collaboration and efficiency. We will structure our operations in a way that aggregates and maximizes the potential of our existing and to expand business units, by providing them the flexibility to pursue opportunities while also aligning their interests with UTStarcom's broader corporate goals and those of our shareholders.

The Company will also aim to maximize efficiency in operations and minimize fixed costs in order to keep the underlying business strong. Please now go to slide 21.

As we prepare to fully execute, we take comfort in the foundation that already exists on which we will build. We believe that we have the geographic, technical and financial strength to put these strategies in motion and to succeed.

In short, first, UTStarcom is a well-regarded brand name with established customer relationships with cable and broadband service providers both in Asia and across the globe.

Second, we have the relevant experience with the technology and processes to help support this effort and to offer these services to our customers. And we will add subscribers through new partnership agreements going forward.

Third, we have important knowledge of mobile technology and our customers' operations. That will allow us to allow to develop services for their networks and end user customer base.

Finally, we have a very strong balance sheet that gives us the financial strength we need. With $230m in cash and virtually no long-term debt, we are well positioned financially to successfully carry out our plans. Please now go to slide 22.

Our plans are ambitious and while we are confident in our ability to succeed, traction will not come overnight. More specifically, we are viewing 2013 as a year of investment, service deployment and continued transition, followed by accelerated success and high rates of growth beginning in 2014.

To give you some perspective regarding the opportunity, we expect the adoption of this new strategic plan will in time result in a more predictable recurring revenue stream based on an array of sources including subscription fees, platform licensing fees and fees on value-added services as well as higher margins due to the increased profitability of these revenues.

UTStarcom will be focusing its growth efforts in China and across Asia and based on current plans the Company expects to invest in and launch its TV-over-IP services in multiple countries during 2013.

The Company anticipates revenue from the new TV-over-IP services to become the majority revenue contributor for UTStarcom by 2015, with gross margins in that line of the business exceeding 50% in that same timeframe.

In conclusion, let me reiterate that this is a very exciting time for UTStarcom. There are a lot of opportunities before us and it will require hard work and dedication to seize it. We believe we now have a concrete plan and the right leadership in place that together will enable us to convert those opportunities into profitable growth and the generation of shareholder value.

This concludes our remarks and now we would like to take any questions that you may have. Operator, please open the line for Q&A.

We will now begin the question and answer session. (Operator Instructions).

And our first question will come from Jun Zhang of Wedge Partners. Please go ahead.

Thanks for taking my call. So my first question is what's the new TV-over-IP platform different from the previous production offering like the rolling stream solution. So it's going to be a totally new solution or something based on the existing rolling stream solution platform? Thanks.

What is the most different on our new platform versus in the past, the key thing is right now we are essentially providing the solution in a turnkey operation to broadband and cable operators. So we start with content aggregation of the premium licensed content, local content, internet content and to [defining] of the entire content management, service delivery to the set top box, etc. So this is a very comprehensive platform solution that we are offering to operators as opposed to before where it was more of like an equipment and infrastructure solution only.

Okay. So the new TV-over-IP platform, can it be offered to both cable operator and the telcos or only to the cable operator?

We are targeting broadband operators as well as cable operators. So -- and to a large extent, a lot of this are previous customers of UTStarcom who has bought equipment from us before. So there is plenty of that customers out there already in Asia and in the globe.

Okay, thanks. My next question is what's your view in the next two or three years what percentage of revenue will coming from the equipment business and what percentage of revenue will come from the TV-over-IP platform and a rough idea on the revenue breakdown by the regions. Thanks.

As we said, we are focusing our initial market in the Asia region, including China. And we have also said that currently the company anticipates by 2015 our TV over IP services revenue will become a major contributor to our total revenue.

Okay. So how much revenue, what percentage of revenue is coming from China or overseas China?

Jun, this is Robert. We're not ready to give you the breakdown of the revenue allocation among regions. But I would say the majority of our revenue should come from our APAC region including China.

Okay, great, thanks. And Robert, what kind of cash volume in your view will be used for the acquisition or the new TV-over-IP platform rollout in the next year or two?

Jun, I didn't hear you very clearly. Would you please repeat, thank you.

Sorry, probably the signal. What kind of cash volume will be used for the acquisitions or the new TV-over-IP platform rollout in the year or two years?

Sure. Currently on our balance sheet we have more than $200m in cash and we have no debt. And based on our current financial model we believe we have sufficient funds for the strategy that William has just laid out today.

Okay, thanks. And my last question is the new acquisition, the aioTV what's the role you bring in the new strategy, especially in China.

aioTV has a very innovative platform that particularly caters for contents coming from the Internet. So in our overall TV over IP platform that would be a good part of the platform offering so that we would be able to combine what we call the typical pay TV content, meaning the premium licensed content plus some of the local content and to, via aioTV's platform combine that to include Internet content. So in that platform we would be able to offer a new user experience that incorporates all this different enriched contents coming from very different sources.

So in China there's plenty of those what we also call the OTT type of content so that would be combined with the typical pay TV or cable programs and delivered to the family room of the viewers.

Okay. So could you also comment what kind of the revenue generation model from this aioTV if you guys deploy them in China?

Inside of China it would be mostly through a subscription-based revenue model and with the combination of advertising based on the partially free Internet content. So it will be a combination of both type of business models. Which also reflects actually the revenue model that aio is seeing in the rest of the world. Particularly in North and South America where they have been deployed, it's also via similar models.

Okay, thanks. That's all my questions. Thanks a lot.

Thank you.

Our next question comes from [Don Kinsey] of JP Morgan. Please go ahead.

Good morning. I had a couple of question. The first one is any comments or thoughts with regard to monetizing the tax loss which you guys have on the balance sheet.

And then the second one, maybe if you could just comment in general. Obviously the strategy you guys are embarking on there's a lot of competition, if you can maybe just talk a little bit about your view of the competitive landscape and how you guys will fit in.

And then lastly, thoughts on why you guys are repurchasing stock instead of paying out a special dividend. Thank you.

Let me answer the thoughts on the repurchase question first. Compared to issuing a dividend or special dividend I think buying back our stock provides liquidity to our shareholders and potentially avoids the double taxation situation. So that's why we initiated and we continued our stock buyback program.

Okay.

And Don, I think earlier you had a question on I believe it's our carryover of net operating loss, is that --

Yes, correct.

We have done a Section 382 analysis on the NOL carry forward. And in our opinion the best way to utilize the value of that NOL is actually to make money and have profits against the NOL and non-taxable at the same time.

Okay. And then any thoughts or comments you can give me on the competitive landscape and how you see yourselves fitting in would be helpful. Thank you.

I think you're referring to the competitive landscape of our broadband business. Is that correct?

Correct.

Okay. In the broadband space actually in where we are focusing, particularly in the transmission area, with the PTN products, there are a number of different players in there, but each with very specific architecture set up. So in where we have been playing we have been enjoying a relatively strong margin because of the wide-scale deployment that we have done on our PTN products. So moving forward we continue to focus on being a very niche product play and targeting to customer architectures that would maximize the benefits based on the using of our products.

So the -- in essence the competitive landscape that we have carved out gives us a unique advantage to compete with other people and also enjoy a relatively high gross margin.

Okay, thank you.

Thank you.

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 third quarter 2012 earnings conference call. We look forward to updating you on our fourth quarter and full year 2012 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.