UTStarcom Holdings Corp (UTSI) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by for UTStarcom's second 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, Miss Jing Ou-Yang, Investor Relations Senior manager for UTStarcom. You may begin.

Hello, everyone, and welcome to UTStarcom's second-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 with include forward-looking statements, relating to the Company's business, strategic initiatives and the performance in the second 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 includes 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 to integrate such 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 the 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 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 on slide five with an overarching assessment of the second quarter of 2013. This was a quarter in which we reasserted the strength of our core broadband business while continuing our transition into a provider of advanced media services with a growing subscriber base. Also, we achieved several important financial milestones. Net sales, on a non-GAAP basis, increased 19%. We also continued reducing operating expenses both sequentially and year over year. And perhaps most notable, we generated positive operating cash flow.

All of this is indicative of the healthy and improving trends in our underlying business. We did also experience a decrease in our gross margin, which we highlighted as a possibility last quarter, and Robert will go into a bit more detail on this in a few moments.

As you will remember, the strategy we launched last year is intended to accelerate UTStarcom's transition to higher growth, more profitable business lines, redeploy capital to support higher return opportunities and establish the base of subscribers to value-added services that will generate more predictable, recurring streams.

As you've heard us describe in the past, on slide six, our plan centers on; first, 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 our strategic commerce iTV Media and aioTV; second, implementing an operating structure that will maximize the potential of our business units and foster innovation and collaboration while maintaining disciplined control of operating costs.

Please turn to slide seven. We have taken several decisive steps to put this strategy into practice over the past several quarters. We have disposed of non-core and loss-making businesses, we have invested in strategic partnerships to acquire advanced media services technology and we have aggressively reduced operating expenses.

We believe that, taken together, these initiatives will transform UTStarcom into a leading provider of media operational support services. Our efforts are already successfully repositioning the Company to capitalize on important trends in the development of mobile and on-demand services and are permanently reshaping the way that our traditional cable service and broadband customers serve end-user customers.

Alongside these initiatives, we have continued to grow our broadband business with focus on higher value-added products and services that are targeted to a specific set of customers. As I mentioned earlier, we are driving important developments on this side of the business with the launch of a series of new product innovations that deliver on UTStarcom's vision of -- Simple network, simple operation.

These developments, along with disposal of non-core product lines, are refining our broadband business into a streamlined developer of specialized products and, as the operating results show, these changes are having a positive impact.

Now please turn to slide eight to discuss some specific operating achievements in the second quarter that support our strategy and highlight the ongoing programs we are making in many areas. iTV Media. In the second quarter we strengthened our partnership with iTV Media, in which UTStarcom already owns a significant minority stake through the purchase of a convertible bond in the company. In addition, iTV Media has continued to make gains in the first commercial rollout of its flagship media services product.

As we have discussed in the past, iTV Media is currently engaged in a strategic partnership with Thailand's national telecommunications and broadband service provider, TOT. In the second quarter, the number of subscribers of iTV Media's offering in Thailand doubled from the first quarter to nearly 60,000. This validates the media services side of our business strategy as it demonstrates potential consumer demand for a more personalized and mobile media experience. It also underscores how we can use our existing relationships with broadband service providers like TOT to launch new services and develop a base of subscribers that will provide recurring revenue.

aioTV. Moving on, the advanced media and entertainment offerings offered by aioTV, in which UTStarcom acquired a significant minority ownership stake last year, are receiving positive feedback from cable operators, particularly in the Americas. The Company announced in June that it signed a licensing agreement with a major broadcast service provider in Panama to use the aio platform to deliver a media service offering to over 3m customers. This is a very significant development, as it will provide a large-scale test bed for technologies that we can look to deploy to other markets, mainly Asia, through our existing relations with cable and broadband service providers.

Lastly, on slide nine, our Broadband business is generating relatively good profit margins and developing into a niche business as we round out our portfolio with additional products. To this end in August 2013 we announced a formal launch of important extensions to our market-leading PTN product line and network management system. The NetRing TN701, which we recently announced, bolsters a new product line that extends our broadband products to the edge of the network going forward.

The innovations in size and tolerance to harsh operating environment demonstrate a simple network, simple operation mantra that is guiding product development and will help customers meet increasingly sophisticated needs. Likewise, the new network management system architecture we launched greatly increases the number of PTN nodes that can be managed on a single network, improving capacity distribution and lowering operating costs. Both are already in commercial deployment with some of our largest and longest-standing customers in the critical (inaudible) innovation. [With these] further refine our product offerings following disposal of non-core businesses earlier in the year and positions us as strategic partners of some the largest broadband and mobile service providers.

Besides these two announced products, we have also passed critical development milestones in several other new broadband products that we'll be launching throughout the rest of 2013, leveraging on our network management system expertise, we have embarked on carrier SDN program that will expand our PTN product services into software defined PTN.

What we have seen in the second quarter of 2013 is very encouraging, both in terms of our own performance as well as the general direction of the market. Our conversations with cable and broadband service providers validate steps that we are taking to develop TV-over-IP technologies and services that they can integrate into their system to deploy rich content on demand to a variety of devices.

Now, please turn to slide 11 and let me switch here to discuss the important initiatives that we have had in place to further enhance shareholder value. As you are aware, UTStarcom had an aggressive share repurchase program in place, extending back to 2011. That program, which we extended twice, expires this month. In total, the Company repurchased $15m out of the total authorized repurchase amount of $20m. This program shows our commitment to balance prudently effective cash management with our abiding policy to reward long-term shareholders.

Before I turn the call over to Robert to go over the financial details of the second quarter, 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. The Board's Special Committee is working closely with its legal and financial advisors to evaluate the proposal and make a decision that is in the best interests of shareholders. We should note, however, that there can be no assurance that a transaction will be approved or consummated. As we have said in the past, we will provide updates to the market in due course. We thank you for your understanding on this point.

Let's now move to a full review of our second-quarter earnings results. I will turn the call over to Robert who will provide you with the 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 second-quarter and first-half 2013 financial results in more detail. Before I begin, let me remind everyone that in the third quarter of 2012 we divested the iPTV business so, for a better comparison of financial performance on a year-over-year basis, we have prepared non-GAAP financial results which focus on our remaining broadband business. So for today's purposes, I will focus on our broadband business and exclude the already divested businesses from our discussion.

Please turn to slide number 13. Before I walk through the specific numbers, let me highlight a few key themes of the second quarter and the first half of 2013. Starting with the positives, and as William highlighted in his remarks, we are very proud of several key themes. First, revenue for both the second quarter and the first half increased on a year-over-year basis as we continued to experience strong demand for our equipment and products from our customers.

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

Third, we generated positive operating cash flow in the second quarter, reflecting the positive performance on top line and coupled with lower costs.

Lastly, we ended the quarter in a strong financial position with no debt and about $124.7m in cash on the balance sheet. As we have said before, we will continue to invest in our growth plans and other initiatives designed to increase shareholder value.

Moving to one of the challenges we faced in the quarter, gross profit and gross margin decreased from 2012 levels, which we had flagged as a possibility last quarter. The decrease is largely due to the Japanese yen depreciation along with an additional loss provision in our India business P&L. We have taken certain measures and mitigated impacts, for example converting our Japanese-yen-denominated assets to US-dollar-denominated assets to hedge against poor exchange risks. However, by doing business in international markets, we're inherently exposed to such risks. Furthermore, Japan is perhaps our most important market commercially, so this is a market we're committed to.

Now let me turn to the specific results. Please turn to slide number 14 for revenue. For the second quarter revenue was $47.4m, compared to $39.9m for the second quarter of 2012. For the first half, revenue was $84.1m, compared with $79.2m for the first half of 2012. The significant revenue increase in the second quarter was mainly due to certain sales orders delayed from Q1 to Q2. Therefore, the first-half revenue number is a better measurement to look at. For the first half, revenue increased from prior year period as we experience stable demand for our products.

Please turn to slide numbers 15 and 16 for gross profit and gross margin. For the second quarter gross profit was $9.6m, compared to $12.9m for the second quarter of 2012. Gross margin was 20.1% compared to 32.3% for the second quarter of 2012. For the first half gross profit was $21.2m, compared to $28m for the first half of 2012. Gross margin was 25.2%, compared to 35.3% for the first half of 2012.

The year-over-year gross profit and gross margin decrease was mainly due to the continued depreciation of the Japanese yen. A major portion of our revenue was denominated in Japanese yen. Most of our costs were denominated in renminbi and our reporting currency is the US dollar. Depreciation of the Japanese yen and the relative strength of the renminbi throughout the first half of 2013 resulted in the gross profit and gross margin decrease.

Another factor of this increase is that we booked an additional loss provision in our India business P&L. This is due to an increase in the estimated cost to complete a project there, resulting from a cost increase by our service provider in conjunction with its final contract renewal.

If excluding our India business from our P&L, gross margin for all other regions was about 30% both for the second quarter and the first half. We will continue to monitor the Japanese yen situation and other factors impacting our income statement and update our investors accordingly in the future.

Please turn to slide number 17 for operating expenses. For the second quarter, operating expenses were $10.8m, compared to $16.2m in the second quarter of 2012. For the first half, operating expenses were $26.2m, compared to $33.1m (sic - see presentation "$33.0m") in the first half of 2012.

In the past several quarters, we have worked very diligently to reduce OpEx. We right-sized the business by divesting non-core products, reduced redundancies in our workforce and promoted accountability and productivity among our staff. We also reduced people-related overhead expenses and outsourced services expenses.

From the first quarter of this year, we have clearly started to benefit from our cost-reduction efforts that we initiated from the second half of 2012. By the second quarter, we managed to maintain run-rate OpEx within $12m per quarter.

For the first half, after adjusting items, our run-rate OpEx was about 30% lower, compared to 2012. We will continue to monitor our OpEx and find ways to further improve our cost structure.

Please turn to slide 18 and 19 operating income and net income. For the second quarter, operating loss was $1.3m, compared to operating loss of $3.3m for the second quarter of 2012. For the first half, operating loss was $5m, compared to $5.1m for the first half of 2012.

For the second quarter, net loss was $2.1m, compared to net loss of $7.3m for the second quarter of 2012. The Q2 2013 net loss included $2.4m of net loss being picked up from iTV Media, our invested media operations entity, via the equity method of accounting. Adjusting for this item, we achieved $0.3m in net income from our core broadband business.

For the first half, net loss was $7.1m, compared to net loss of $9.4m for the first half of 2012. The first-half 2013 net loss included $4.4m of net loss being picked up from iTV Media via the equity method of accounting. Again, adjusting for this item, net loss from our core operations was $2.7m for the first half of 2013.

As discussed earlier, both the second-quarter and first-half operating performance have improved on a year-over-year basis. This is mainly a function of the slight increase in revenue and significantly reduced operating expenses. Very importantly, we achieved this improvement while facing pressure on the gross profit and the gross margin. Please turn to slide number 20 for cash balance and cash flow.

We have about $124.7m in cash and we have no debt at the end of Q2. For the second quarter, we generated positive operating cash flow of $2.9m. Cash used by investing activities was $14.8m, as we continued to invest in iTV Media. Cash generated from financing activities was $2.7m, which is mainly due to AR factoring.

We're happy to report positive operating cash flow, as we understand the great value for shareholders. We need to generate cash from operations, which we did in Q2. We will continue to manage our P&L and cash flow in the future quarters, with the aim to increase shareholder value. However, we're in the early days of our turnaround plan. We'll continue to monitor our progress and update investors in the future.

This concludes my second-quarter 2013 financial review session. Now, I will turn the call back to William to discuss our business outlook. William?

Thank you, Robert. If you would please turn to slide 22. As we are halfway through 2013, we can say that, in many ways, it is shaping up to be as momentous as last year. We continued to make progress on several fronts to replace the unprofitable revenues from the IPTV divestiture and align our business with long-term shifts in the market.

We have achieved several operational and financial milestones and are developing our subscriber base. But the changes we are making will take time to complete and bear fruit. As we have said, we expect 2013 to be a year of ongoing transition and investment, and we continue to see it as such.

Additionally, our gross margin may continue to experience some headwinds from the depreciation of Japanese yen against the US dollars, as sales in Japan accounts for a large portion of the Company's total revenues. But if the Japanese yen exchange rates remain the same as they are now, and we maintain our focus on generating efficiencies from operations, we foresee incremental improvement in overall financial performance over 2012, as we said at the end of the first quarter.

What's more, we expect to build on those gains and can see higher rates of growth taking hold, beginning in 2014. Over the long term, we expect that our balanced focus on strategic initiatives and continuing investment in our value-added broadband business will result in a more profitable and competitive business model for the benefit of employees and customers and allow us to deliver greater values to shareholders.

We continue to expect profits from new TV-over-IP services to become the majority contributor for UTStarcom by 2015, with gross margin in that part of the business exceeding 50%.

Before moving on to your questions, I would like to recap some of the highlights of the quarter on slide 24. First, we achieved significant improvement in several key financial metrics. Net sales on a non-GAAP basis grew robustly. We improved overall efficiency, cutting operating expenses by an additional third on top of cuts from recent quarters, and we generated positive operating cash flow.

Second, we strengthened the overall business, foremost with new product launches in our core broadband business. We also increased our investment in a key partner, iTV Media. As we saw greater market adoption of products from iTV Media and aioTV, that will support our new service-oriented strategy.

And, finally, we completed a multiyear share repurchase program that returned a total of $15m to shareholders.

We believe that the direction in which we are taking the Company will position UTStarcom to participate from a position of strength in the next wave of media and entertainment trends that are fundamentally changing the way that media and entertainment are consumed and delivered. As we have said in the past, everything that we see and hear in the market today reassures us that these goals are indeed attainable with the business model we are pursuing.

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 comes from Al Tobia of Sidus. Please go ahead.

Regarding the buyback, since it's completed and you're not announcing a new buyback, I assume -- is this the end of the buyback for the short term?

Yes. As you said, this is the end of our buyback program.

Okay, and when do you expect to be sustainably cash flow positive?

In the second quarter, we generated positive operating cash flow, and it is our near-term plan to manage our P&L and our cash flow in the future quarters to create shareholder value.

If you would do that -- I would assume you'd always manage your P&L to create shareholder value. My question is, when do you anticipate sustainable cash flow generation. Not going into losses, not dipping below into the red. When do you expect to be sustainably cash flow positive?

Well, we have already achieved a positive operating cash flow in Q2. Like I said earlier, we do not have visibility of Q3 and Q4 at this point, but it is our intention and our plan to continue to achieve what we have done in Q2.

Okay. Maybe I'll ask it a different way. Do you expect that the $124m in cash that you have on the balance sheet now to be roughly the low point in cash, or do you expect that cash to decline below that level in the future?

Well, from the operational cash flow point of view, we will -- we plan to manage our P&L and cash flow to generate positive cash flow in the future. But, also, at the same time, for investing activities, we will continue to invest in our growth front, such as iTV Media in the future, as we see fit.

Okay. So on that score, can you achieve the plan you're talking about without making acquisitions? Have you made enough acquisitions? Do you have enough with the Company now in order to achieve your targets?

Well, we have the baseline of the new media technology to start and continue on with our current assets. We will continue to explore other new investment opportunities and deploying those technologies and platform into countries beyond Thailand and so forth. So we constantly would look at the situation as we move forward to determine whether it would make any sense to do any additional investments or acquisitions.

Okay. And just regarding the yen policy, I assume that you can -- you can just do a normal hedging process on this, right? You don't have to change over to convert the business to a dollar-based business. Is there just an ongoing hedging policy you can do to offset movements in the currency?

Well, we have taken certain measures to hedge against the Japanese yen depreciation in recent quarters. For example, again, we convert our cash balance denominated in Japanese yen into US dollars, because our reporting currency is the US dollar. And we'll continue to do that in the future, as we see fit, to hedge against the foreign exchange risks.

However, at the same time, I'd like to say it again, Japan is a major -- is a very significant and important revenue and profit source for us. It's a very important market commercially for us. We're committed to Japan, and by doing business in Japan, and given our reporting currency is the US dollar, we are -- we will continue to be inherently subject to the foreign exchange risk involving the dollar and the yen.

Okay, and then I don't want to monopolize the call. One last question, when do you expect an answer from the Special Committee?

The Special Committee has been set up, and its legal and financial advisers have been engaged. The Special Committee and its advisers are evaluating the proposals. We will update our investors and disclose such information once the Special Committee makes a decision. And so, unfortunately, as of today, we're not in a position to speculate on that.

You should have a timeframe, right? It should occur within a reasonable amount of time. Will it occur within Q3, by the end of the year? It can't go on forever. It has to have some kind of a timeframe.

Right. Well, the Special Committee, again, is the Special Committee that's evaluating the proposal, and the Special Committee will act in the best interest of the Company and its shareholders. I'm not in a position to speculate on a specific schedule for this.

Okay. I don't have any more questions.

Our next question comes from [Jim Bartholomew], a private investor. Please go ahead.

Yes. I'm not happy at all with the performance of the Company. The performance of the Company is questionable. Management has stated that shareholder value is important, but this has only been talk. There has been a lot of talk, but no results. If the Company is truly going forward, as stated a number of times, the Company should obviously not be sold.

I question management's capability and motives, and don't know if management's motives are accurate an honorable. I am waiting for an answer.

Well, as managers of the Company, we always act in the best interest of the Company and also of the shareholders. And also, I'd like to take this opportunity to very briefly reiterate our Q2 performance, so if you look at for the entire P&L line, from revenue increased on a year-over-year basis for Q2 and also for year to date. The gross profit and gross margin line, unfortunately, we need to update our investors that we're subject and we have been impacted by the Japanese yen depreciation situation and an additional provision for loss, for contract loss, in our business in India.

But at the same time, I'd like to reiterate that we have reduced operating expenses compared to 2012 levels. As a result, if you look at our operating income, net income and loss, we have improved incrementally throughout the first half of 2013 compared to the prior year period. So we are working to turn around this Company and to create shareholder value.

I should also add that during the first half of this year, we have completed a $30m tender offer. We have continued on the stock purchase plan and we have also done the three-for-one reverse split. All of those are for the benefit of our shareholders.

Well, as a shareholder, I have invested in the Company over the years, and there have been no results at all for me and many other shareholders, I assume. Logic would say that the Company, as you presented, that is going to be profitable and the markets expand -- logic would say that the Company should not be sold and shareholders somewhere down the road will benefit.

Go ahead. I'm finished.

Thank you.

And this concludes our question-and-answer session, so I'd like to turn the conference over to management for any closing comments.

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

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