UTStarcom Holdings Corp (UTSI) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by for UTStarcom's first quarter 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 2013 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 business, strategic risk-take initiatives, and the performance in the first quarter of 2013. These statements are forward-looking in nature and subject to risks and uncertainties that may cause actual results to differ materially and adversely from the Company's current expectations.

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 benefit of the divestiture transaction, the ability to successfully identify and acquire appropriate technologies and business for inorganic growth and through integrated acquisitions, the ability to internally innovate and develop new products, assumptions the Company makes regarding the growth of the market and the success of the Company's offering in the market, and the Company's ability to execute its business plan and manage regulatory matters.

The risks and uncertainties also include 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 strategic transition and the conduct of its business is exposed to additional risks as a result.  All forward-looking statements included in this conference call are based upon the information available to the Company as of the date of this conference call which may change, and the Company assumes no obligation to update any such forward-looking statement.

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.

Introduction. Let me begin on slides five and six by saying that we are very pleased with how 2013 has begun. In the first quarter we continued and advanced many of the strategic initiatives that we launched in late 2012 to reinvigorate the Company. As you will remember, our intent is to accelerate the transition to higher growth, more profitable business lines, redeploy capital to support higher return opportunities and establish a base of subscribers to value-added services that would generate a more predictable, recurring revenue stream for our business.

Our initiatives are successfully positioning the Company to capitalize on important trends that will have lasting effect on the way our traditional cable service and broadcast customers serve their end user customers who are growing in number and sophistication of their media consumption needs. We truly believe that our efforts will result in a more profitable and competitive business model for the benefit of employees and customers and allow us to deliver greater value to shareholders over the long term.

We are now well along two full quarters in rolling out the strategic plan that we initiated after divesting the underperforming IPTV equipment business. As you have heard us describe in the past, our plan centers on establishing a TV-over-IP services platform through internal development as well as the acquisition of new technologies such as those we have gained access to through our investment in iTV media and in aioTV. This platform will turn UTStarcom into a leading provider of high-in-demand digital content including local content for which there continues to be a strong demand, as well as premium live in studio content, free Internet content and other value-added services.

At the same time, we have implemented an operating structure that will maximize the potential of business units and force through innovation and collaboration while maintaining disciplined control of operating costs.

Indeed, we are already seeing the benefits of the changes we have taken to transform the Company. In the first quarter our operating results were broadly in line with our internal expectations for the period.

From an operating perspective, we are nearly reaching breakeven operating income if you strip away the two one-time charge items. Further, we made significant progress in lowering operating expenses as we planned, and worked hard to hold our overall gross margin relatively stable during this time of transition and repositioning. This is a testament to the strategic plan and the quality of the new management team that is in charge of its execution.

Update on progress. Now, please turn to slide seven. Let me also mention some specific operating achievements from the quarter that support our strategy. iTV. Let me provide an update on iTV Media, which continues to make gains with its very successful commercial launch in Thailand, through a strategic partnership with that country's national telecommunications provider, TOT. This is the first full-scale nationwide launch of iTV Media's TV-over-IP services.

In the first quarter, the number of subscribers of iTV's offering in Thailand exceeded 30,000, up from just a few thousand since the last time we spoke. This shows the strong demand for these services as consumers seek a more personalized and mobile media experience. It also underscores how we can use our existing relations with broadband service providers to launch new services, either those that we develop internally or those developed by partners like iTV. Also in the first quarter we further expanded our relationship with iTV by extending it a $5 million convertible loan. We are thrilled to have such a close relationship with iTV. It provides an important contribution to the subscriber base we aim to develop and it's a tangible validation of the demand for the products and services we want to offer, and the business model through which we will offer them.

aioTV. Moving for a moment to aoiTV in which UTStarcom acquired a significant minority ownership stake last November, it is worth noting that aioTV has recently received prestigious recognition from analysts at the renowned Gartner Group who selected it as one of the four vendors essential for all digital media businesses. Gartner specifically recognized aioTV for its solution that quickly enables service providers, broadcasters and cable networks to deliver both live and on-demand video content through a portal that consumers can customize and access on various connected devices. This is critical recognition that underscores how the market for media consumption is changing and the role that we can play in it with partners like aioTV.

Asset disposals. It is important to note that we continued divesting non-strategic assets in the first quarter. As you can see on slide eight of the presentation, in March we disposed our Next Generation Network or NGN-related assets. In April we disposed our DOCSIS-EOC related assets. Both disposals support our overall strategy of focusing on high-margin media services and broadband products while maintaining vigorous cost controls.

With all this said, what we have seen in the first quarter of 2013 is very encouraging, both in terms of our own performance as well as the general direction of the market. Cable and broadband service providers and broadcasters are increasingly eager to integrate TV-over-IP technologies and services into their systems to deploy rich content on demand to a variety of devices.

This is a strong validation of the business model we are pursuing, and it shows the strong momentum underlying the market opportunities that the new UTStarcom will capitalize on. If anything, we believe these trends are accelerating. And as we have said, we expect profit from the new TV-over-IP services to become the majority contributor for UTStarcom by 2015, as the gross margins in that part of the business is expected to be exceeding 50%. Everything that we see in the market today reassures us that these goals are indeed attainable with the business model we are pursuing.

Before I turn the call over to Robert to go over the financial details for the first quarter, I want to touch on a few additional important things that occurred in the beginning of fiscal 2013.

Update on shareholder value initiatives. Please turn to slide 10. First, it is worth reiterating that during the first quarter we concluded several important initiatives to enhance shareholder value as part of our longstanding commitment to our shareholders. During the quarter we completed a cash tender offer to buy back 25m outstanding shares not adjusting for the three-to-one reverse share split at a premium of approximately 30% to the price of the shares at the time the tender offer was announced. Additionally, we completed a three-to-one reverse share split that took effect in March which we believe was in the best interests of shareholders and the Company.

Moreover, we have extended our ongoing $20m share repurchase program. We began the program in August 2011 and have extended the expiration deadline. It is now set to expire in August 2013. To date, the Company has repurchased approximately 12.5m shares for a total of $15m out of the total authorized repurchase amount of $20m in the share repurchase program.

Comment on the take private offer. I would like to address very briefly the take private offer that UTStarcom received in March. We understand that shareholders may have questions about the proposed offer. Unfortunately, we are not in a position to comment on it at this time, but let me reiterate that the Board has formed a special committee to evaluate the proposal and make a decision that is in the best interests of shareholders. The committee recently engaged experienced legal counsel and financial adviser to assist them. But please note that there can be no assurance that a transaction will be approved or consummated. We will provide updates to the market in due course, and we thank you for your understanding on this point.

Let's now move to a full review of our first-quarter earnings results. I'll turn the call over to Robert who will provide you with financial details. 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 12, I will discuss our first quarter 2013 financial results in more detail. Before I walk through the specific numbers, let me highlight a few key themes of the past quarter. First, and importantly, revenue, gross profit and gross margin are stable on sequential basis. However, these measures decreased when considering the year-over-year comparison.

Second, we have started to benefit from aggressive and focused cost-reduction efforts as demonstrated by the significant decrease in operating expenses in the first quarter. Moving forward, we will continue to monitor our OpEx and find ways to improve our cost structure.

And lastly, we ended the quarter in a strong financial position with no debt and about $136m in cash on the balance sheet. We will use this liquidity to invest in our growth plan and other initiatives designed to increase shareholder value.

Now I will turn to the specific results. In the third quarter of 2012 we divested the IPTV business. We will report the financial result of the IPTV business separately as discontinuing operations for all comparable periods upon meeting the requirements to do so. Until then, and at this point, for better comparison of financial performance we have prepared non-GAAP financial report results which focus on our broadband business and present the IPTV business as discontinued operations. So for today's purposes I will only focus on our broadband business and exclude the already divested businesses from our discussions. Please turn to slide 13 for revenues.

For the first quarter revenue was $36.7m, compared to $39.4m for the first quarter of 2012. The slight decrease of revenue was mainly driven by decreased sales of our MSAN and MSTP products. Please turn to slides 14 and 15 for gross profit and gross margin.

For the first quarter gross profit was $11.7m compared to $15.1m for the first quarter of 2012. Gross margin was 32% compared to 38% for the first quarter of 2012. The year-over-year gross profit and gross margin decrease was mainly due to a decrease in average selling price, and the depreciation of the Japanese yen. We continue to monitor the Japanese yen impact on our income statement and update our investors accordingly. Please turn to slide 16 for operating expenses.

For the first quarter operating expenses were $15.4m, compared to $16.8m in the first quarter of 2012. In the past quarter we divested our non-performing MGM product, which resulted in a divestiture loss of $3m. We also reduced our rental space to further reduce our ongoing operating expenses, which resulted in a write-off of leasehold improvements of $1m. Adjusting for these one-time items, our normalized OpEx was $11.4m in the first quarter, representing a significant decrease from last year.

We have now clearly started to benefit from our cost reduction efforts that we initiated in the second half of 2012. We'll continue to monitor our OpEx and find ways to improve our cost structure. Please turn to slide 17 for operating income and net income.

The first quarter operating loss was $3.7m, but if adjusting for the one-time items mentioned before, it was close to breaking even, compared to operating loss of $1.8m for the first quarter of 2012. For the first quarter net loss was $5m, including $2m of net loss being picked up from iTV Media, our invested media operations entity via the equity method of accounting as compared to net loss of $2.1m for the first quarter of 2012. As discussed earlier, this quarterly operating performance and as compared to the same period of last year, is mainly a function of slight decrease of revenue and gross profit while at the same time reduced operating expenses. Please turn to slide 18 for our cash balance.

We have $136m in cash, and we have no debt. The two pie charts on the slide provide details on our cash deposits. And you can see on the page 34% of our total cash is held within China and 31% in the US. 25% of our total cash is deposited in CNY and 55% in US dollars, and 10% in Japanese yen.

Please turn to slide 19. I will walk you through our cash flow for the first quarter. Cash used from operating activities was $4.7m. In the first quarter cash used by investing activities was $5.8m as we continued to invest in iTV Media. In the first quarter cash used from financing activities was $31m. In the quarter 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 this transaction we also completed a three-to-one reverse split of our shares. As William stated earlier, we view these as very important initiatives that have helped enhance shareholder value and reflect our longstanding and enhanced commitment to our shareholders.

This concludes my first quarter 2013 financial review section. Now I'd like to turn the call back to William to discuss our business outlook.

Thanks. Thanks, Robert. We remain pleased with the positive initial progress that is under way. As I said earlier, we're seeing the early indicators of success through our ability to weather challenging marketing conditions, hold our margins steady, and approach breakeven operating income as planned. However, we are of course not claiming victory yet, and there's a great deal more to do.

Our outlook. Now please turn to page 21 of the presentation. With respect to the immediate term, as mentioned on the last earnings call, 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 a year of investment and continued transition. At the same time the Company presently 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, with respect to operating performance, the Company will focus on holding margins relatively stable by maintaining a similar product mix to 2012 as well as making additional progress with lowering operating expenses.

The current outlook is based on constant currency rates versus 2012. And as mentioned in our earnings release, the depreciation of the Japanese yen may in fact have a negative impact on our gross profit and gross margin.

Looking to the future, we expect our new strategic plan will in time result in a more predictable recurring revenue stream and we expect to achieve accelerated rates of growth beginning in 2014. More specifically, as mentioned earlier in the call, we anticipate profit for the new TV-over-IP services to become major contributor for UTStarcom by 2015, as the new TV-over-IP business is expected to have gross margin exceeding 50%.

Before we move on to your questions, it is worthwhile to recap very quickly the key highlights from the quarter.

First, we took several steps to maintain our momentum in transitioning to a refined business and operating model. We strengthened our relationship with a key partner, iTV, through which we are developing a base of subscribers and gaining access to market-leading technology. iTV now has already garnered over 30,000 subscribers in the first commercial launch in less than a year.

We also continued shedding non-strategic assets by disposing the Next Generation Network and EOC businesses. This will strengthen and help focus our overall business.

Second, we made progress operationally and financially, highlighting the fact that our initiatives are gaining traction. We are holding margins steady during a time of transition and made significant progress in lowering operating expenses, which will strengthen our overall financial foundation.

Third, we completed and extended significant value-enhancing financial transactions to reward our long-term shareholders. These transactions include the $30m tender offer, the three-to-one reverse share split, and the extension of our ongoing share repurchase plan. To date, since 2011, we have returned a total of $45m to shareholders.

In conclusion, we remain 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 will enable us to capture opportunities that will translate into significant overall improvement in the Company's business performance and enables us to deliver enhanced shareholder value over the long term.

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

Thank you. We will now begin the question and answer session. (Operator Instructions). And our first question will comes from the line of [Judosi Ukwamba] of MarisCapital. Please go ahead.

Hi, thanks for taking the question. Just a couple of questions about some of the reclassifications from things that were fully consolidated to -- businesses fully consolidated to businesses that are consolidated using the equity method, or other movements of different assets. Is there any reason we should expect further operating or non-operating losses from some of these reclassification actions? And then I have a couple of follow-ups.

Hi, this is Robert. I think you're referring to the iTV consolidation in last year and the equity method of accounting that we started to adopt from Q1 of 2013. Actually between the third quarter and Q1 of this year, so for the second half of 2012, we accounted our investments in iTV, we have the cost method of accounting. And after we made additional investments into iTV Media entity, we need to adopt equity method of accounting starting from Q1 in 2013. So that's the background of the accounting treatment of our investment in iTV.

And at the same time we recognize that iTV Media is still at its investment stage and its top priority is to fully penetrate the market, for example in Thailand, by expanding the number of subscribers and with the intention to realize revenue and profit in the future with the critical mass of subscribers in this market.

So at this point iTV Media is at the investment stage, and I think investors and also the Company is expecting that we will potentially pick up more operating losses in the future quarters.

Okay. Thank you, that's helpful. Can you give us some guidance about magnitude of future investments you expect to make in iTV or other related entities or subsidiaries?

Sure. So firstly, let me comment on that we have about $136m in cash at the end of Q1, and we have no debt at the end of Q1. So we believe we have sufficient liquidity to fund our future strategic growth plan. And also at the same time what the management team is trying to do is to have a balance between further investments in our future growth, and the same time make sure that we have sufficient liquidity for our core business. And also we have sufficient funds for other initiatives to create our shareholder value.

Okay, thank you. And just one more question. The cash that's in China and/or is CNY denominated, would there be any -- are there -- can you help us understand what the regulatory or tax hurdles might be to moving that cash to the United States at some point, should you decide to do so? And just give us a sense of to the extent that that cash is in short-term investments, how you think about the possibility for impairment or losses on those investments? I'm thinking about something, for example, like auction rate securities that we had in the US which were pretty widely used in a crisis and ended up being worth less than a dollar on the dollar. So just -- can you give us a flavor for what some of the short-term investment are in CNY in China and what difficulties you would face in moving that cash?

Sure. I think there are two points here to address. The first point is moving cash out of China into the United States. And secondly is CNY investment in our -- in China, in CNY-denominated investment vehicles. From the first point, a typical way of moving cash from a Chinese subsidiary to its parent company in the US, we can do it through a dividend distribution, but however, as you might be aware that if we do that, there is a withholding tax involved. And if you -- and generally speaking, if a wholly-owned subsidiary of the US parent company distributes dividends from China directly to the US the withholding tax rate is about 10%. So that's on the first point.

And on the second point is, we have an investment policy that we can only invest in the so-called risk-free assets. So for our short-term investment and also in our cash, we either put it into a very liquid like an equivalent of a checking account, or into a money market instrument.

Thank you very much.

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

Thank you for joining us on our first-quarter earnings conference call. We look forward to updating you on our second quarter 2013 in a few months. Feel free to get in touch with us any time if you have further questions, concerns or comments. Thank you, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.