UTStarcom Holdings Corp (UTSI) 2012 Q4 法說會逐字稿

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

Hello, everyone, and welcome to UTStarcom's fourth quarter and full year 2012 earnings conference call. Earlier today, we distributed our earnings press release and you can find a copy on our website at www.utstar.com. In addition, we have posted a slideshow 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 the Company's media operational support service business, the new strategy of the Company's business and the Company's performance in year 2013. These statements are forward-looking in nature and subject to risks and uncertainties that may cause actual results to differ materially. This include risks and uncertainties related to among other things, changes in the financial condition 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 realize anticipated results of operational improvements and the benefits of the divestiture transaction, successfully operate its service business, execute its business plan and manage regulatory matters 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 risks as a result. All forward-looking statements included in this press 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, 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.

Let me begin from slide five by saying that 2012 was a momentous year for UTStarcom. We took thoughtful and strategic action to transform the Company by strengthening the management team, Board of Directors and business model and accelerating a transition to higher growth, more profitable business lines. In short, we took many steps to better position the Company to carry forward for the benefit of employees and customers and allow us to deliver greater value to shareholders over the long term.

To begin with, as you will remember, during the third quarter, we kick started a new way forward by exiting the non-strategic and underperforming IPTV equipment business. In conjunction with this important milestone, we identified a set of priorities that will guide our way forward.

The priorities on page six of the presentation include advance our efforts to transition into higher growth, more profitable areas and enhance the value of the business. Redeploy working capital to support higher return opportunities particularly in the value-added services area and generate a more predictable subscriber-based recurring revenue stream.

Having identified this as UTStarcom's strategic growth priorities, we then developed a very specific new strategy designed to fully transform the Company into a higher growth, more profitable business focused on providing next generation media operational support services and higher value-added broadband equipment offerings.

Let's move to slide seven. First, we are deploying a TV over IP service platform with the aim of turning UTStarcom into a leading provider of high-in-demand digital content, such as local content, premium licensed studio content, premium Web content and other value-added services over a variety of platforms to mainstream subscribers.

Second, we are building this platform through a combination of internal development and strategic acquisitions. Our investments in iTV Media and aioTV are prime examples of this strategy. I will provide an update on this in a few moments.

Finally, we have implemented an operating structure that maximizes the potential of business units and fosters innovation, collaboration and efficiency. We have structured our business in a way that aggregates and maximizes the potential of business units, by providing them with the flexibility to pursue opportunities while also aligning their interests with broader corporate goals and those of shareholders.

We expect the new strategic plan to result in stronger and more predictable financial results through what will largely be a subscription-based revenue model. We anticipate revenue from the new TV over IP services to become the majority revenue contributor for UTStarcom by 2015 with gross margins in that part of the business exceeding 50%.

Let us turn to slide nine and I will give you a quick update on what has transpired since we announced all these changes. First, it is clear that the IPTV divestiture was a turning point for the Company, the effects of which we will continue to see for the next several quarters and years.

Since the IPTV divestiture, we have made good progress in stabilizing our operating expenses and setting a standard for maintaining strict cost control going forward. Further, we were able to achieve our gross margin target of approximately 35% despite the shift in sales mix towards the less profitable products that persisted for most of the second half of 2012.

Given the volume of change we undertook, we are very pleased with this result. Importantly, it would have been difficult to achieve the margin we did and reduce expenses to the degree we were able to for the full year, had we held on to the IPTV equipment business. While we do have to focus on revenue growth and cost control as Robert will discuss, good progress is being made in running the business more efficiently.

Second, we are really very pleased with the progress we are making on executing recently announced plans that are part of our new business strategy. As I have mentioned in the last several months, we have invested in and expanded important strategic partnerships that will allow us to build and deploy a TV over IP services platform. What we have done with iTV Media and aioTV represent an important proof of concept for the strategy we are pursuing. It demonstrates our ability to find the right partners and technology to deliver the value-added media services and products that consumers increasingly demand.

Look at slide ten. We made significant progress in the introduction of media operational support services, through our partner iTV Media, of which we are the single largest investor. In October, iTV Media deployed its carrier grade Internet TV managed services nationwide in Thailand through a strategic partnership with that country's national telecommunications provider TOT, which had been a customer and a user of UTStarcom's IPTV before that.

This was the first commercial launch of iTV's carrier grade Internet TV managed service and is reaching an area covering over 5m households. iTV Media aggregates over 150 channels including local content and premium licensed studio content from international media companies such as Fox, HBO Asia, NBC Universal, Sony, Turner Networks, Viacom, Zee TV, etc. Out of this, 30 channels are of HD quality and iTV Media operates the TV over IP services platform on the ground.

iTV Media recently notched another milestone by forging an agreement to license its IPTV and video-on-demand services to the Spanish OTT/IPTV provider Mira TV. This deal will bring iTV's services to approximately 200,000 subscribers in Spain by 2014. This deal sets important precedents for the way that iTV Media and UTStarcom can forge relationships in both developed and developing countries, through both physical deployment as in Thailand and license arrangements as in Spain. We will continue to aggressively to deploy iTV Media working closely with its management team to find opportunities to continue to grow.

Leveraging UTStarcom's customer relations on the equipment side, iTV Media is currently pursuing multiple other countries in Asia in its pipeline for further IPTV services deployment.

On slide 11 please note another milestone for our strategy. In the fourth quarter, we acquired a 44% stake as the largest investor in aioTV, a cloud-based video aggregation and distribution platform whose relationships with cable operators in North and South America complement our relationships in Asia and in Europe. The deal gives us access to technologies that UTStarcom can deploy commercially in Asia as we did with iTV Media in Thailand. It also gives UTStarcom technologies that can augment the media services platform that we are developing internally. aioTV has just launched an OTT product, Pass Box, that we anticipate will reach up to 1m subscribers by 2014.

Both the iTV and aioTV partnerships showcase how we will partner with our broadband and cable customers to roll out those products and services and develop a recurring subscriber-based revenue model. In addition, through actively identifying new investment targets and we'll acquire significant stakes in or make outright acquisitions of companies like this with market-leading media technology that will bring additional capabilities and functionalities to our services platform and which we can then deploy commercially in Asia quickly and efficiently.

Turning to slide 13, I would like to highlight our efforts to enhance shareholder value. Throughout fiscal 2012 we also worked very hard to enhance value for our long-term shareholders. During the year, we continued with our robust share repurchase program stepping up our share repurchases to the maximum rate allowed under the program initiated in the prior year and this reflects our long-term confidence in UTStarcom.

Additionally, in November, we launched a cash tender offer to buy back 25m outstanding shares at a premium of approximately 30% to the price of the stock at the time the tender was announced. We concluded this in January 2013.

As we look ahead, we are going to continue with our share repurchase program and also are on track to effect a 3-to-1 reverse share split and Robert will go over the details of that.

With that overarching introduction, I hope that it is clear how serious we are about transforming the business and setting a new path for UTStarcom and its shareholders. We have worked quickly aggressively and decisively to enhance our management team, strengthen the underlying business and chart a new strategy that will improve our competitive position and deliver stronger and more predictable financial results.

Let's now move to a full review of our fourth quarter and full year 2012 earnings results. I will turn the call over to Robert who will provide you with the financial details for both periods. Following Robert's presentation, I will talk about our expectations for 2013 and beyond. Robert.

Thank you, William, and hello, everyone. Starting from slide number 15, I will discuss our fourth quarter and full year of 2012 financial results in more detail.

Before I walk through the specifics, let me begin by saying that our overall performance and the underlying fundamentals largely mirror the third quarter. In particular, we were able to achieve our full-year 2012 gross margin goal of approximately 35% and had an increase in broadband equipment sales relative to the third quarter results. At the same time, we made some progress in cost cutting. We have begun to see traction on this front in the fourth quarter on a sequential basis and have a plan to see that moving forward.

Lastly, we ended the quarter in a strong financial position with no debt and approximately $180m in cash on the balance sheet. We will use this liquidity to invest in our growth and as William has mentioned, execute on strategic initiatives designed to increase shareholder value.

Now I will turn to the specific results. In the third quarter of 2012 we have divested the IPTV business. We will report the financial results of the IPTV business separately as discontinued operations for all comparable periods, upon meeting the requirements to do so.

At this point, for better comparison of the Q4 and full-year performance we have prepared non-GAAP financial results which focus on our broadband business and present our IPTV business as discontinued operations. But for today's purposes, I will focus on our broadband business and exclude largely the already divested businesses from our discussions.

Please turn to slide 16 for the revenues discussion. For the fourth quarter, revenue was $41m compared to $47m for the fourth quarter of 2011. For the full year, revenue was $157m compared to $179m in 2011. For both the fourth quarter and full year, the revenue decrease was mainly driven by decreased sales of our PTN product in Japan which was partially offset by increased sales of MSAN products in Japan.

Additionally, the one-time revenue of $11m from the Jersey Telecom contract in the second quarter of 2011 also contributed to the revenue comparison.

Please turn to slide 17 and 18 for gross profit and gross margin discussion. In the fourth quarter, gross profit was $13m compared to $16m for the fourth quarter of 2011. Gross margin was 32% compared to 34% for the fourth quarter of 2011. For the full year, gross profit was $54m and gross margin was 34%. For the full year of 2011, gross profit was $73m and gross margin was 41%.

For both the fourth quarter and the full year, the gross profit and gross margin increased mainly due to a shift of revenue mix, namely decreased sales of higher gross margin PTN products and partially offset by increased sales of lower gross margin MSAN products.

Again, the higher gross margin generated from the one-time Jersey Telecom contract in the second quarter of 2011 is also a contributing factor to the year-over-year comparison analysis here.

Turning to slide 19 for operating expenses, for the fourth quarter operating expenses were $17m, a slight increase from $14m in the fourth quarter of 2011. For the full year, operating expenses were $69m, an increase of 10% year over year from $63m for the full year of 2011. However, in Q3 of 2011 there was a divestiture gain of $4m that offset OpEx. Adjusting for that, OpEx is stable in year-over-year comparison.

Turning to slide number 20 for operating income and net income, for the fourth quarter, operating loss was $3.6m compared to operating income of $1.8m for the fourth quarter of 2011. For the full year, operating loss was $14.8m compared to an operating income of $10.3m for the full year of 2011. This decrease of quarterly and full-year operating performance is mainly a function of decrease of gross profit and stable OpEx as discussed earlier.

For the fourth quarter net loss was $6.7m, compared to net loss of $2.7m for the fourth quarter of 2011. For the full year, net loss was $16.4m compared to net income of $2.5m for the full year of 2011.

Turning now to slide number 21 for cash balance, we ended 2012 with $180m in cash and we have no debt. The two pie charts on this slide provide more details on our cash deposits and you can see 28% of our total cash is held within China and 48% in the United States. 40% of our total cash is deposited in renminbi, 28% in US dollars and 24% in Japanese yen.

Finally, on slide number 22, I will walk you through our cash flow for the fourth quarter. Cash used for operating activities was approximately $6.4m. In the fourth quarter, cash used by investing activities was approximately $18m as we continued to invest in media technology services.

In the fourth quarter, cash use from financing activities was $2m. We continued our $20m share repurchase program in the fourth quarter. As of December 31, we have repurchased $15m worth of our stock. The company has $5m left under the current program. We will continue to execute this plan. To support this goal, our Board has approved to extend the share buyback program through August of 2013.

In January of 2013, we completed a $30m cash tender offer for 25m shares of our stock at a purchase price of $1.20 per share to return value and liquidity to our shareholders.

Following the transaction, we also proposed a 3-to-1 reverse split of our shares. The Extraordinary General Meeting of shareholders will be held on March 21, 2013 for this matter. We believe the reverse split is in the best interests of shareholders and the Company to enhance the marketability and liquidity of our stocks. I thank you in advance for your support.

This concludes my fourth quarter and full-year 2012 financial review section. Now I would like to turn the call back to William to discuss further on our business outlook. William.

Thanks, Robert. We are very pleased with the positive initial program that is under way. However, we're not claiming victory yet and there is a great deal more to do. Please turn to slide 24.

With respect to the immediate term, this year will require focus and hard work as we invest in and build a platform for the future and we currently view 2013 as year of investment and continued transition. At the same time, the Company certainly expects to achieve a degree of incremental improvement in overall financial performance versus 2012.

There will be a need to replace unprofitable revenue that was removed with the IPTV divestiture and revenue will be below last year while this process is ongoing and the top line is in transition. At the same time, the Company will focus on holding margins relatively stable by maintaining a similar product mix as 2012 as well as making additional progress with lowering operating expenses.

Looking to the future, we expect our new strategic plan will result in stronger and more predictable financial results as we expect to achieve accelerated successes and higher rate of growth beginning in 2014. More specifically, as mentioned earlier in the call, we anticipate revenues from the new TV over IP services to become the majority revenue contributor for UTStarcom by 2015 with gross margin in that part of the business exceeding 50%.

Before I end the call, I think it's worth taking a moment to summarize for you a short list of key takeaways from today. In short, 2012 was a year of significant and positive change for UTStarcom. We successfully divested the IPTV business and launched a new strategy that we firmly believe positions us better for success in the current market. We made investments in this strategy and we began to see some good signs of initial traction in the marketplace via some of the new and extended partnerships that will drive our business forward. We also strengthened our management team and Board creating a team very well equipped to bring UTStarcom forward.

While doing all of this, we also focused diligently on finding ways to reward our shareholders during this time of transition. We returned $45m to shareholders if you include both share repurchases and our recently completed tender offer in January 2013. And we are set to effect a reverse share split that should improve the marketability and liquidity of our common stock.

In conclusion, we are very excited about the long-term opportunities before us and we are confident that our clearly defined new strategy positions us very well in the evolving media environment. We expect our actions to enable us to capture opportunities that will translate into significant overall improvement in the Company's business performance and enable us to deliver enhanced shareholder value over the long term.

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

Thank you. We will now begin the question and answer session. (Operator Instructions). The first question will come from Jim Bartholomew, a private investor. Please go ahead.

Yes, our Company has performed poorly for years. President Xi Jinping has outlined a new great renaissance plan for China. Will our Company's performance improve or will we be an embarrassment to President Xi Jinping and Li Keqiang and an embarrassment to President Xi Jinping's great renaissance plan?

We have outlined our strategy moving forward. It is a strategy that we plan to implement over the course of the next few years. So far we are quite confident that we are actually heading along that line. We have demonstrated milestones along the way and we will continue to execute along that path. So I believe we are traveling in the right direction with what we have done so far.

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 fourth quarter and full year 2012 earnings conference call. We look forward to updating you on our first quarter 2013 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. We thank you for attending today's presentation. You may now disconnect your lines.