UTStarcom Holdings Corp (UTSI) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by for UTStarcom's Second Quarter 2014 Earnings Conference Call. (Operator Instructions). 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. Jane Zuo, Investor Relations Senior Manager for UTStarcom. You may begin.

Hello, everyone, and welcome to UTStarcom's second quarter 2014 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. Himanshu Shah, Chairman of the Board; Mr. William Wong, our CEO; Mr. Robert Pu, our CFO; and Lin Song CEO of iTV Media.

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 initiatives and the performance in the second quarter of 2014. 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.

These 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 effects on the company, the company's ability to realize anticipated results of operational improvements and benefits of the divestiture's transactions, the ability to successfully identify and acquire appropriate technologies and businesses 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 offerings in the market and the company's ability to execute its business plans 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 the 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 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, Jane, and hello to everyone. As Jane 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 U.S. dollars.

As usual, I will provide an overview of the financial and operating highlights from the quarter. Robert, will go into detail on the financials and then we will take your questions. But first, I would like to welcome Mr. Himanshu Shah, our Chairman of the Board to the conference call to say a few words. Mr. Shah was appointed as Chairman of the Board in June and I've been working closely with him to drive our strategy, push forward with our aggressive transformation and enhance the value of our business.

Himanshu, please go ahead.

Thanks, William. Hello and good morning to all of you and welcome to new UTStarcom. As you know we have a tremendous heritage, a strong brand and enduring relationships with the clients like SoftBank, Chunghwa Telecom, BSNL and so forth. We also have strong R&D and product development capabilities which will help in succeeding markets like the U.S. and India. And that will drive both top and bottom line growth at UTStarcom going forward.

It is for these reasons as well as being a long time observer and an investor that I've decided to serve as Chairman of the Board at no compensation. I've been asked about our investment portfolio as well especially aioTV, iTV and Wireless City. And, let me just say our goal is to make sure we realize the true values over time.

The management team under William's leadership has made progress to right-size the business and refocus resources on the core broadband business. I commend the team for creating an impressive array of products in line with the forces that fundamentally changing the telecom industry namely software defined networking and William will talk more about it in his prepared remarks.

I would like to add here that the team is united and working quite diligently to make our core business operationally profitable sooner than later. One of the key thing to point out would be the maximizing the efficiency of the VOD and streamlining of our corporate governance. Recently, we reduced the size of the board by 25% to ensure it is quick, decisive, and we are bringing start-up mentality at the board level. We are also continuing to focus on creating better management team.

I would like to take this opportunity to welcome Lin as our new CFO, who will officially join the company late next week. He has good tactical expertise as a former engineer and financial market experience as a former equity analyst. We look forward to his contribution to our future success, including earning reasonable return on our efforts. With that, I will now hand the call back to William.

With that, I will now hand the call over to William.

Thank you, Himanshu. Please turn to Slide 6. In the past few quarters, we have consistently talked about the restructuring of our business and our renewed focus on developing a set of highly competitive broadband products. We're confident that the major restructuring is now behind us and that we are building a business that will achieve long-term sustainable growth.

Operating highlights. There were several operating highlights and milestones in the second quarter. We completed a successful proof-of-concept test of our Software Defined Networking technology, which will evolve into a new product platform for our broadband business. We introduced several new products, including our carrier-class WiFi data offloading technology, which is a product category that is rapidly gaining momentum with our core base of cable and telecommunications service operators.

We also began shipment against the $24 million contract in broadband access equipment that we won in the first quarter of this year for BSNL, a major telecom incumbent in India. BSNL is upgrading its network to offer next-generation multimedia services to its customers. And we reaffirmed our commitment to the U.S. market by moving into a larger office in the heart of Silicon Valley as we ramped up our sales and marketing efforts to U.S. telecommunications carriers and cable service providers.

Financial highlights. As usual, Robert will go through our second quarter financial results in a moment, but let me provide a top line summary of our financial results for the quarter.

First of all, we deliver a $31.9 million revenue in the second quarter, exceeding the high end of our guidance for last quarter. Secondly, our gross margin was 20.1% for the second quarter, improved from 14.2% on a sequential basis and was flat year-over-year as compared to 20% for the corresponding period of 2013.

We're encouraged that we managed to achieve the stability and were able to protect our gross margin. Importantly, we further decreased operating expenses by 14.7% versus the same period last year building on a significant cost savings we have achieved in prior quarters as we have right-sized our business. Lastly, we maintain a strong balance sheet, ending the quarter with $95.1 million in cash and zero debt.

Business update. Broadband. Please turn to Slide 7. During the second quarter, from the product perspective, we continue to innovate and make bold moves in the market to capture future opportunities in three key product categories. First, in packet optical transport technology, our new TN765 product is showing early signs of sales momentum.

This is a premier product that we introduced earlier in the year. We have begun the final acceptance process with a Tier 1 operator in Japan and already received order for commercial trial. This is a strong signal indicating the beginning of the shift of our product mix towards the higher end of our product suite. These early results are encouraging, providing confidence that we are on the right track to grow the business. The flagship carrier, Ethernet-based packet optical transport product with 100 gig services support, will bring us strong revenue and margin moving forward.

Second, we bolstered our WiFi solutions offering with the global launch of a carrier-grade WiFi data offloading product after successfully deploying it in very large scale on the network of Japan's SoftBank, a Tier 1 carrier and long-standing UTStarcom customer.

The global market for carrier-grade WiFi equipment is growing rapidly amongst both telecommunications and cable operators. Our access controller, which controls as much as 10x more access points than other offerings in the market, puts us on the forefront of this market and is meeting exactly the need of operators for good user experiences under very large scale deployment.

Finally, we successfully completed a proof-of-concept test of our Software Defined Networking technology with major Tier 1 operators in Tokyo, Japan. As we have said in the past, we believe that SDN will revolutionize broadband network operations. This technology allows network operators to better monetize their network access by offering new value add and dynamic services, such as bandwidth on-demand provisioning, which has been a long-time goal of the industry. We believe we are ahead of the market in SDN-based solutions for network operators, and we aim to lead the industry in this product category.

Business update, new media. Now please turn to Slide 8 to discuss our strategic investments, aioTV and iTV Media. As we have said in the past, as an investor in these companies, we continue to benefit through their growth and the development of their businesses. In addition, we're exploring ways to package their media services and technology with our broadband products. Let's discuss them briefly.

aioTV continues to make measurable progress in its subscriber growth and rolling out its trials and customer engagements in Mexico, Colombia, Canada and the United States. They're in talks with several of the largest operator in Latin America and the Caribbean and are expecting new contracts for the deployment later this year.

As for iTV Media, today, we have invited the Chief Executive Officer, Lin Song, to join us to give you a better understanding of that business, the progress that it has made to date and his vision for iTV's future. Lin, the floor is yours.

Thank you, very much, William. It's a pleasure to join the call and I thank you, all, for welcoming me. I'll be brief in my comments, so please turn to Slide 10.

We, at iTV Media, share a common vision with UTStarcom for what the future of media entertainment will be. Put in the simplest terms, it will be customizable, it will be on-demand and it will be available on multi-devices.

Our technology is residing in different part of the network than UTStarcom's broadband equipment, but in many ways, they support the same goal to help the networks' operators acquire and retain subscribers by transforming from a traditional broadcast TV service to offering a new intelligent and interactive entertainment platform that integrates the best of the broadcast TV experience with the best of Internet video service. This includes time-shifting, Video-on-Demand and customizable channel creation that unify management across multi-devices, whether they are on PCs, iPads and Android-based devices.

In short, we're a multi-channel service provider, and we're unique because we own the whole suite of platform technology that allow us to offer the best quality of service and unmatchable user experience. While most of the service providers have to rely on third parties to build their platforms, we can improve our platform and -- on a continued basis and thus, we stay ahead of the curve.

William has told you in past quarters about the success we had with TOT, the domestic telecom service provider in Thailand. This is our first large-scale commercial deployment, which we began formally in January 2013. Since then, we have seen dramatic customer adoption of our service package, and we expect the whole company, including MeTV, to operate the cash flow breakeven by the end of 2014.

But our success in Thailand goes beyond our partnership with TOT. We also built and operate the Smart TV and mobile TV services for Samsung in that country, which acquired hundreds of thousands of subscribers for both free and paid services with Samsung. So we are expanding our footprint by adding partners in Thailand, as well as in other part of the world. We are building a solid platform of growth, a track record of success and believe that we can replicate our success in other markets.

Before I turn the call back to William, let me say that we are very grateful to have the support of UTStarcom at this early stage of our business. William and his team share a long-term view of the industry and understand better than most where it is going, what the customers want and what technology can deliver to them. Together, we are foreseeing some very exciting opportunities, and we look forward to keep you updated in the future. So thank you, again, for your time. And William, back to you.

Thank you, Lin. Before, we move on to Robert's review of our second quarter financial results, let me provide a quick update on the gross strategy that we are following. Please turn to slide 12.

The core of our strategy is growing our broadband business which will be the primary revenue contributor. Let me walk you through our progress today.

First, we formally opened our new offices, Silicon Valley in June to serve as an R&D and product test lab as well as to house product demonstrations for prospective customers. This is a major statement of our ambition to market our products, to U.S. telecommunications and cable service operators and compete with the world's largest network infrastructure players for their business. We believe in our technologies and our ability to cultivate a loyal and long lasting customer base in the U.S. as we have in markets such as Japan, Taiwan and India.

Second, we have greatly expanded our global marketing and sale initiatives. Especially, through our presentations and participations in industry conferences. Just this year, we have hosted [booths] and displays and attended a variety of events including the Optical Fiber Conference in San Francisco and the big telecom event in Chicago.

Through the engagement with business and technology executives from operators and partners at these events, it further reinforces our belief in our TN765 with 100 gig internet services support is the right product for the customers in the U.S. market. And, we're hitting also the prime markets window for the deployment of carrier grade WiFi.

Third, I recently returned from the CableLabs Summer Conference in Colorado, a premier cable industry event, where I met with business and technology executives for major U.S. cable service operators and displayed our latest offering from all three key broadband product categories -- packet optical transport, WiFi solutions and Software Defined Networking.

We were amazed to learn that there's quick and large-scale deployment of WiFi by cable operators in U.S. and Europe. Our broadband, WiFi and SDN experience, as well as the TV over IP and OTT video expertise from our portfolio companies, give us the unique advantage to packet solutions that are perfect fit to resolve the issues in broadband service offering, OTT video addition, large-scale WiFi hot spot management and new enterprise services offerings in the cable industry.

Fourth, we have made significant developments in building out our broadband product portfolio in the three key areas that I've discussed. This includes our success with WiFi data offloading solutions that give us an entry into e-commerce and big data analytics. In the SDN area, we're expanding the scope of our transport SDN offering, and we are riding at the forefront of this exciting industry revolution. We have world-class R&D and product development teams that have commercialized an impressive array of new products that allow UTStarcom to compete on a global stage.

Fifth, we continue make good progress in India to extend our success in India's broadband market. We gave a keynote speech at Convergence India earlier in the year, besides the $24 million broadband access contract that we're currently executing. With the business environment shaping up under the new administration, our strong branding end market share in India, we expect to ride the strong growth in packet optical transport products, carrier WiFi and also in the GEPON area with our partner, DASAN Networks, from Korea.

And the final pawn of our strategy is to add new technologies and products to our portfolio through joint R&D efforts. Like our partnership with DASAN Networks in South Korea, we have already begun joint development of a packet optical transport product with DASAN targeting the Korean market. In addition, our two companies have held many joint meetings with potential customers in Asia, and we are optimistic about the prospects for new sales opportunities in India and Japan as well.

Please turn to Slide 13. Alongside growth -- alongside growing our broadband business, we will maximize our investment return in iTV Media and aioTV. First, as I have said before, we benefit as an investor in the appreciation in the value of the business. The investments are maturing, and we see several signs that bode well for the valuations, including recent acquisitions of companies, such as Azuki Systems by Ericsson, RayV by Yahoo!, both with similar technologies and business models as the aioTV.

Second, our investments in iTV Media and aioTV provide opportunities for UTStarcom to market new media products to our broadband customers, potentially opening new revenue streams for us and increasing our value to our broadband customers.

And finally, these investments are yielding insights that we're using now to ensure that our broadband technology is capable of supporting networks that deliver a highly-customized, on-demand mobile and fixed-line entertainment features that consumers want. This will further differentiate our SDN platform as well.

As we grow our Broadband business and maximize our investment return in aioTV and iTV Media, we will continue to improve operation efficiency. We have reported several successive quarters of significant year-over-year decreases in expenses to streamline our core business and invest in new growth initiatives. We will continue our cost control efforts to protect shareholder value.

Let me change topics very quickly and comment on Robert's departure from UTStarcom, which was announced a few days ago. Robert joined UTStarcom early in its transition and transformation. He had previously served on the board and was fully aware of the challenges that he would face as CFO. He has served us extremely well in this capacity. I want to thank him personally for his financial stewardship at a challenging time and for his contribution to the restructuring that's largely behind us. In no small part, thanks to his efforts.

We respect his professional decision to pursue other opportunities and wish him all the best. As we have announced, Robert will remain with us as a consultant for a period of six months to ensure a smooth transition on the finance team.

At the same time, we wholeheartedly welcome Mr. Min Xu to UTStarcom, who will join us officially on August 21 as the new CFO. Min has deep and relevant financial and technical expertise, given his history as a former equity research analyst and senior software engineer, so he brings many important skills to UTStarcom. Most importantly, we believe he will be a great addition to our senior management team and given his capital market experience, will benefit our efforts to drive greater and better interaction with our investors and prospective shareholders. I'm excited to work closely with Min on many important initiatives that would drive our transformation forward.

Now let me turn the floor to Robert to review our second quarter results, and then we will provide our outlook for the third quarter and turn to your questions.

Thank you, William, and hello, everyone. Please turn to Slide number 15. Before I walk through the specific numbers, let me highlight a few key themes of the second quarter.

We achieved better-than-expected revenue in the second quarter and sequential improvement in our gross margin. We also significantly reduced OpEx on a year-over-year basis, and we have a strong balance sheet. We see all of these as very good continued progress in our overall business plan.

Now please turn to Slide number 16 for revenue. In the second quarter, revenue was $31.9 million compared to $47.7 million in the prior year period. In the first half, revenue was $64.2 million compared to $85 million in the prior year period. In last quarter's earnings conference call, we gave second quarter revenue guidance of a range between $25 million to $30 million. We're glad to report that we have exceeded our revenue guidance.

For the first half, we have experienced stable demand for our products from our key customers. We continue to expect that the revenue ramp-up from our new products will contribute to our top line, starting from the second half of 2014.

Please turn to Slide number 17 and 18 for gross profit and gross margin. In the second quarter, gross profit was $6.4 million compared to $9.6 million in the prior year period. Gross margin was 20.1%, which is flat compared to 20% in the prior year period. In the first half, gross profit was $11 million compared to $21.2 million in the prior year period. Gross margin was 17.1% compared to 25% in the prior year period. In the first half, the year-over-year gross profit and gross margin decrease was partially due to the depreciation of the Japanese yen.

As a reminder, a major portion of our revenue is denominated in Japanese yen and our reporting currency is the U.S. dollar. So in U.S. dollar terms, the depreciation of the Japanese yen resulted in a year-over-year gross profit and gross margin decrease. However, it is noteworthy that gross margin in the second quarter improved sequentially mainly due to better product mix, and we expect that gross margin will be stable in the second half.

Please turn to Slide number 19 for operating expenses. In the second quarter, operating expenses were $9.2 million compared to $10.8 million in the prior year period. In the first half, operating expenses were $17.1 million compared to $26.1 million in the prior year period. Throughout 2013 and 2014, we have worked very diligently to reduce OpEx. As a result, the 2013 full year OpEx was about 45.3% lower compared to 2012. And again, in the first half of 2014, OpEx was 34.3% lower compared to the first half of 2013. Moving forward, in the second half of 2013, we will continue to control OpEx, and we expect we will maintain the current OpEx run rate.

Please turn to Slide number 20 and 21 for operating loss and net loss. In the second quarter, operating loss was $2.8 million compared to operating loss of $1.3 million in the prior year period. In the first half, operating loss was $6.1 million compared to operating loss of $4.9 million in the prior year period. In the second quarter, net loss was $4.6 million compared to net loss of $2.1 million in the prior year period. In the first half, net loss was $7.9 million compared to net loss of $7.1 million in the prior year period.

Earlier this year, when we reported 2013 full year and Q1 2014 results, we talked about we're focused on operating cash flow as one of the most important financial metrics for us. It is important to reiterate that 2013 full year operating cash flow was close to breaking even, a significant improvement over the past years. And for 2014, we aim to make incremental improvement over what we have achieved in 2013. And in the first half of 2014, we track closely to the first half of 2013. We expect that with stable top line, stable gross margin and controlled OpEx, in the second half of 2014, we will achieve this goal.

Please turn to Slide number 22 for our cash flow and cash balance. We have approximately $95.1 million in cash and no debt at the end of the second quarter of 2014. In the second quarter, cash used by operating activities was $3.5 million. Cash used by investing activities was $2.9 million.

At this point, I have gone through our key financial metrics. To sum it all up and moving forward, in the second half, we will keep our focus on top line growth, cost control and cash generation. We will continue to work diligently with the goal to generate operating cash flow and improve our financial performance.

This concludes my second quarter and first half 2014 financial review section. Now I will turn the microphone back to William to discuss our outlook. William?

Thank you, Robert. Now please turn to Slide 24. I'll say a few final words about our outlook, and then we can come to your questions.

While we're still moving through a transition as we emerge from the transformation we have undergone for the last two years, we're excited about the future and see continued demand for innovative technologies we are bringing to market. We're committed to broadband as a driver of the business and the primary revenue driver going forward. However, we're still early in the transition to sales of our latest products. We expect them to become significant revenue contributors beginning in the later part of 2014.

In terms of near-term revenue expectations, we anticipate total revenue in the third quarter of 2014 to be in the range of $25 million to $30 million. As for our gross margin, we will continue to work to mitigate the pressure on gross margin and expect that it will remain relatively stable throughout the remainder of the year. We will also maintain our vigilant focus on cost control. Taking all of this together, we believe we will deliver incremental improvements in financial performance compared to 2013.

With that, Robert and I would like to take your questions. Operator, please open the line for Q&A.

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

Your first question comes from Tony Tian. Your line is open. Please go ahead.

Hi, thanks for taking my call. I have a couple of questions. The first question is are there any progress this quarter in the U.S. market for your WiFi data offloading product? Is there any opportunity to start taking orders from this particular carrier for the WiFi offloading product later this year or next year?

This is William. I'll take this question here. I think, actually, we -- in the midst of all this expense cuts in the company, we managed to allocate a good marketing and sales dollar for the expansion of the North American market.

In June, as you heard, we've moved into a new and much bigger facility in Silicon Valley. That gives us a good base to start promotion for in-house R&D, test lab, demo centers and technical support in anticipation for the turning up of the business in the U.S.

And we have also made a very significant marketing effort in relation to that. We participated in very -- key trade events in the telecom, as well as the cable industry, in the last two quarters, as I was saying, including the OFC in San Francisco, the WiFi data offloading summit and the big telecom event in Chicago. So this has given us actually very good exposure to the key customers that we are going after in this market.

Besides the carrier WiFi, which we received pretty good feedback and interest, we have also gotten the -- generated a lot of interest in our packet optical transport product and as well in the SDN offerings that we are currently in development. So these are all very strong endorsement to the fact that our current set of product portfolio is very good fit for the market in the North America.

As -- in line with that, actually, you will see a lot of trade media coming out as well for which we will be gaining more and more exposure in this space here.

Respect to specific sales opportunity, we are currently in discussion with some prospective customers, and we would probably start certain lab tests on the product offerings later into the year. So -- and we expect sales orders would begin sometime in the 2015.

While we are talking about U.S. here, I should also say that we're undertaking a similar approach in India to leverage on our strong branding, market share and the business growth opportunity over there to pursue in multiple manners relative to our packet optical transport products, as well as our carrier WiFi offerings.

Thank you, William. My second question, you mentioned that you already received orders for a commercial trial TN765. And will you be able to share some details of the order? And do you expect to book revenues for this product in 3Q? And I also assume that TN765 will carry a much higher SDN gross margin.

Yes. We cannot disclose the specific details of the order by itself, but we can say that we have begun shipment in Q3 and will follow on with additional shipments in Q4, and there will also be shipment to multiple customers starting in the fourth quarter. And of course, the heavy volume is going to come in 2015. And you're right, that is a very high -- that would be a much higher gross margin compared to whatever you're seeing today, and that's why -- and that's exactly what we've said in the beginning of this year, that our performance will start to improve as we transition more and more into high-margin product offerings that we have, and we're very happy to see that the TN765 are seeing a lot of strong adoption in the market there.

And then my last question regarding your OpEx number. Robert just mentioned that the current run rate is something you believe you can achieve for the remainder of the year. I just want to clarify if the current run rate -- is the current quarter run rate of 9-point-something per quarter? Or it's the first quarter run rate of $8 million-something? I think, given the company's financial situation right now, any further cut in OpEx will make a big difference to the bottom line.

Yes, Tony, this is Robert. First, I want to say our Q2 OpEx is marginally higher compared to Q1. It is mainly due to our enhanced sales marketing efforts. In previous press releases, we announced that we have expanded office space in the U.S. and now as a small team in the U.S. because the U.S. market entry is a very critical part of our future strategy. But that costs money, right? So that's one driver of our Q2 OpEx being higher than Q1.

And secondly, we incurred regulatory-related expenses, such as legal fee and audit fee as we filed our Annual Report in the second quarter of this year, but those expenses only happens once a year. So that's why our Q2 OpEx is marginally higher than Q1.

And just now during the conference call, I mentioned our OpEx run rate. I think -- if you're doing a forecast for financial modeling, I think it is conservative and -- to use the first half number, [namely] about $17 million as a pro forma OpEx number for the second half. And what we did in the past couple of years and with our current headcount and office space and other drivers of OpEx, we're pretty confident our OpEx in the second half will be stable or comparable to the OpEx we incurred during the first half.

Thank you, Robert, that's all I have. Thank you.

Your next question comes from the line of William Gregozeski from Greenridge Global. Your line is open, please go ahead.

Hi, thanks. Congratulations on a really good quarter. You touched on this a bit, William. In regards to working with partners like DASAN, do you -- can you give a time line of how you think that might work in starting to grow sales in a place like Korea with them?

Well, let me comment on the entire partnership that we have with DASAN so far. It's -- from a joint sales perspective, actually, we have begun that effort for some time. And we have been successful already in doing joint sales in Japan. And currently, as I have said earlier, we are joining together going after a number of markets in Asia. And in particular, we're expecting more business in both Japan and India.

Now we started also the joint development of our packet optical transport product with DASAN. So in that regard, the product that we have aimed for is targeted for the Korean market. So we have -- have engineering a lot of exchanges on both sides, and the entire development has been on its way. And from a timing perspective, I think we will report it later on as we begin to market the product in Korea.

Okay. With Sprint and T-Mobile not going forward, do you have any sense from SoftBank what their plans might be as far as the network in the U.S. and how you guys fit into that?

Well, I cannot speak for SoftBank, okay. But just from our own perspective, it is unfortunate that they cannot move forward with the Sprint acquisition of T-Mobile. But from UTStarcom's standpoint, actually, I believe it benefits us in the two areas.

First of all, we expect a lot more management attention now. And particularly with the new CEO, Marcelo Claure, on board, that more management attention now would be focusing on the restructuring the growth of Sprint and I mean in particular, the building out of its own network and the deployment of its network in the U.S. So as a long-time technology and product provider to SoftBank, obviously, we are anticipating and we are hoping and pushing for our share of that growth of the network deployment of Sprint.

Secondly, with the acquisition effort being dropped, we would expect there will be more CapEx available for Sprint's network growth, as well as the growth of SoftBank's network in Japan, okay? I think that is a very important point in -- besides the management attention, is the CapEx in itself. So we are very happy actually to work with a very successful customer like SoftBank that we can also go with them to expand globally.

As a matter of fact, in SoftBank, in Japan, the overall market with the recent deployment of the 4G cellular network, there's a much bigger demand now for the mobile backhaul. And similar like in the U.S. environment, there are big demand now moving up to the 100 gig Ethernet services. And as we have seen through the deployment of our WiFi data offloading solution for SoftBank in their Japan's network, we anticipate actually this would also carry into more growth in light of business for us with our new product offerings in Japan as well. And with the CapEx hopefully increasing, that would give us good opportunities moving forward.

Okay. And my last question is in regards to iTV, is it possible to get a current number of subscribers for iTV?

Maybe, Lin Song can help us with that answer.

Yes, altogether we have close to half a million subscribers that includes the subscribers we have with TOT and other partners. So, we -- this is as a said in a presentation, it's a tremendous growth. You know, we only have about one half year commercial operation. So, this is quite a significant achievement as a new operator.

That seems like substantial subscriber growth. Do you have any sense for what it might be in the next -- in the next 12 months?

Well, we do have a very aggressive subscriber growth plan. Actually, our partner TOT, they have even more aggressive subscriber growth plan since we operate their IPTV service. And, our disclosure will be under their concurrence. So, we're going to disclose the growth number at a proper time. But, they do have even you know bigger growth plan than our internal plan.

So, we're happy to see our partner very bullish about the market that our product can bring to them.

All right, great thank you very much.

Thank you.

Your next question comes from the line of Carter Driscoll from MLV. Your line is open, please go ahead.

Good day, thanks for taking my questions. I want to maybe focus a little bit on the SOO offering and you know talk about how the proof of the concept trial went and when you might be able to commercialize that and then maybe use that for additional trials. And, you know talk about maybe in relation to some of the other newer products, how that can help increase your margin profile.

Yes. The SOO product is the trademark name for our SDN offering. And actually, when we did the proof-of-concept trial, we had anticipated a lot of follow-on discussion with the customers on hand to carry that through actually to product releases. So actually, we -- at this -- at present time, we expect to begin product shipment of our SOO products within 2014.

Having said that, I think we are one of the very early product launches of SDN offerings in this market. There's been a lot of talks about PoCs and so forth. But in the real world, turning it into an actual product shipping, I think we are a leading -- ahead in the market right here.

The SDN area actually would drive a lot of changes in this market space. In particular, it kind of like separates the control plane, which will be implemented a lot by software, from the data plane, which is going to be managed mostly by hardware. So in that regard, we expect a migration on part of our revenue stream from the current hardware-based revenue into software-based revenue, and recurring services from that point on as well.

So as a result, we would also expect the increase in the gross margin from the software revenue contribution. But of course, this is going to be taking some time before the entire SOO offering would be popularized with a lot more customers as we begin the shipment towards the later part of this year.

Okay, thank you for that. And then I'm assuming you're -- it's still going to be a license-based model with kind of ongoing maintenance fees, is that kind of go to market strategy from revenue perspective?

That is correct.

Okay. Just one other kind of follow-up. As you give -- as you kind of go through the ending stages or -- in 2014 through your restructuring and kind of get the company more focused, as you say, on the broadband space and right-sized some cost perspective, when you hit, say, 2015, what do you think the kind of target operating model is going to look like from maybe an operating -- from a gross to an operating perspective? Maybe give me a range. I'm not trying to box you in too much, but where do you think -- in an optimal scenario, your gross margins and operating margins can become, say, ending 2015, once you got all the product rollout and beginning the commercialization.

I think, at this point, it might be a little bit premature for us to speculate on that as we typically went through our planning cycle towards the fourth quarter in the year. And at such point, we will have also very good visibility into multiple areas. First of all, our new product, 765, which would certainly bring us a lot better gross margin as we step into 2015, and with a much more revenue contribution from the front line.

And also, as you pointed out earlier, the SOO offering that we have in the SDN area would also bring online for more revenue on the higher-margin software side. And lastly, we anticipate certain revenue contribution coming from our effort in the U.S. market there. So although we are very hopeful at present time and we see a lot of opportunities in our pipeline, but as far as nailing down to a specific range of numbers, I -- we will probably do something in the fourth quarter there.

Fair enough, fair enough. Maybe just the last question, if I may, maybe for Lin. Is it a potential to port aioTV and iTV to the U.S. market? Or maybe you could talk about the competitive dynamics in the U.S. as it becomes one of the target markets from some of the other sectors and whether there's an opportunity to expand here in the U.S.

I think I would say a little bit and then maybe Lin could add to it. Actually, we did not say too much about aio's effort today. The majority of their sales effort has been into the Americas, meaning, both North and South America. They have made tremendous progress, actually, in these Latin America countries where we have -- they have already signed a lot of agreement. And in the more recent quarters, they're expecting actually a lot of actual deployment and the launching of a subscriber base there.

In the U.S. market, as we have all heard, right, there is tremendous demand towards the OTT services. And as such, what aio was providing in the OTT area are indeed in the very good demand. And in that respect, they're anticipating adoption of their technology platform any time now with some of the major cable operators in the U.S.

While currently, iTV is focusing their effort in Thailand. But as Lin Song mentioned earlier, actually, their entire system can be easily copy paste and pointed to a different location because there's very minimal reliance on any third party technologies that they need, they're fairly self-sufficient from the technology platform perspective and then they also have all the relations and actually managed all the contents -- contracts from the Hollywood studios and so forth. So it will be quite easy for them to expand and then start to work on the U.S. space.

And so I -- from the UTStarcom's perspective, with the portfolio of products that we are launching, now planning for the cable market, I'm quite hopeful that there's a lot of synergies that we can drive together with iTV to go pursue the U.S. market.

Yes, it seems like a natural fit with your broadband offering is to be able to package those two together and attack the U.S. market.

You're exactly right there.

Okay, all right and that's all I have for right now. Thanks for taking my questions gentlemen.

Thank you.

(Operator Instructions) It appears we do not have any questions at this time. I will now pass the call back to Jane for any additional or closing remarks.

Thanks for joining us on our second quarter earnings conference call. We look forward to updating you on our third quarter 2014 conference call in a few months. Feel free to get in touch with us anytime if you have further questions, concerns or comments. Thank you, everyone.

That does conclude our conference for today. Thank you for participating. You may all disconnect.