UTStarcom Holdings Corp (UTSI) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by for the UTStarcom conference call.

(Operator Instructions)

It is now my pleasure to introduce the host for today, Mrs. Fei Wang. Fei, you may begin.

Welcome to UTStarcom's second quarter 2016 earnings conference call. Earlier today we distributed our earnings press release; you can find a copy at our Web Site at www.utstar.com. In addition, we have posted a slideshow presentation on our Web Site, which you can download and use to follow along with today's call.

On today's call we have Mr. Tim Ti, Chief Executive Officer and Mr. Min Xu, Chief Financial Officer.

Before we get started, I will read the Company's advisory and forward-looking statement. As you can see on slide two, this call will include forward-looking statements relating to the Company's business and strategic initiatives. Those statements are forward-looking in nature and are 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 effect on the Company; the Company's ability to realize anticipated results of operational improvements and the benefits of the divestiture transaction; the ability to successfully identify and acquire appropriate technologies in the business for an organic 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 to the Company's ability to execute business plan and to 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 and 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 call -- which may change -- and the Company assumes no obligation to update any such forward-looking statements.

I will now hand this call over to UTStarcom's CEO, Mr. Tim Ti.

As Fei mentioned, you can follow along with today's call by downloading the presentation on our Web Site at www.utstar.com. Also, unless otherwise stated, all figures mentioned during this call are in U.S. Dollars.

I will first take you through an overview of our financial and operating highlights for the second quarter of 2016 and then I will share with you an update of our strategic initiatives and our near-term business outlook. I will then turn the call over to our CFO, Min Xu, who will share with you the details about our second quarter financial performance.

Please turn to slide 3. While Min will walk you through the full details in just a bit, let me provide a top-line summary of our overall financial results for the second quarter. In addition to disclosing financial measures prepared in accordance with GAAP, we will also provide non-GAAP financial measures which we believe better reflect the Company's core business status and the development trends. Min will give more information on the GAAP and the non-GAAP financial measures specifically related to the second quarter during his remarks.

During the second quarter we achieved positive operating income and a net profitability thanks to our continued focus on margins and the operation efficiencies. Second quarter non-GAAP revenues were $20 million, at the high end of our guidance of $15 million to $20 million.

Second quarter non-GAAP gross margin was 41.2%, the highest since Q1, 2012. Second quarter non-GAAP operating income of $1.9 million was the second highest since Q1, 2012. Second quarter non-GAAP net income of $5.5 million was the highest since Q1, 2012. We had a positive operating cash flow of $0.6 million and ended the quarter with $81.5 million cash and no debt.

Now, let me walk you through some of the key operational highlights for Q2, 2016. Please turn to slide four. First, we remain focused on pursuing high margin revenue in our broadband business. During the second quarter all regions achieved margins higher than 25%. The consolidated margin of 41.2% was the highest since 2012.

We will continue to realign resources toward high margin product [suite] and innovative network solution. However, due to soft demand in second half, we expect our second half gross margin to be similar to 2015.

Second, we continue to streamline the business and improve operational efficiency. Non-GAAP operating expenses for Q2 2016 were $6.4 million, a decrease of 46% from corresponding period in 2015. During the quarter, we moved our global R&D and operation center to a new location in Hangzhou, reducing any facility costs.

Third, we are accelerating our investments for new future growth. As we mentioned during last quarter conference call, we established ICI group to focus on product R&D in datacenter and smart city market. On July 21st, SoftBank World exhibition in Japan, we released our SyncRing Synchronization Solution. The SyncRing product family product provides a optimal integrated solution for various applications that require precise frequency, phase and the time synchronization over packet networks.

Please turn to slide five. The SyncRing Solution makes use of both IEEE 1588v2 and the synchronized Ethernet technologies to provide a robust and the highly accurate synchronization solution that can meet stringent requirements of LTE and LTE Advanced networks. The product family includes XGM10 indoor Grand Master, XGM 20 outdoor Grand Master, XBC510 Boundary Clock Switch. The solution components are centrally managed by our proven OMC-O NMS network management platform.

With that, let me turn the call over to Min, who will walk through for financial for the second quarter, 2016, in more detail.

I will now take a few minutes to discuss our second quarter, 2016, non-GAAP financial results. Please turn to slide six.

Before I walk through the specific numbers, I would like a highlight a few key items for the second quarter. Q2 non-GAAP revenue was $20.0 million, at the high end of our guidance of $15 million to $20 million. Non-GAAP gross margin improved sequentially to 41.2%, helped by favorable product mix.

We achieved a consecutive quarter of profitability with positive non-GAAP net income of $5.5 million and a non-GAAP EPS of $0.15. Our cash balance at the end of the quarter was $81.5 million, slightly up from last quarter, and we have zero debt.

Please turn to slide seven for a non-GAAP revenue review. Please note that non-GAAP revenue, excluded [legacy] IPTV revenues and legacy Indian DoT revenues. In the second quarter, total non-GAAP revenue was $20.0 million, compared with $22.3 million for the previous quarter. The revenue decline was due to decrease in Japan, partially offset by increase in India.

Please turn to slides eight and nine for gross profit and gross margin. Please note that non-GAAP costs of [rabbit cells] and non-GAAP operating expenses excluded stock based compensations, legacy IPTV costs and costs related to legacy Indian DoT revenues. In the second quarter, non-GAAP gross profit was $8.3 million, up from $6.1 million in the previous quarter and $2.7 million a year ago.

Non-GAAP gross margin was 41.2%, up from 27.2% in the previous quarter and 16.2% a year ago. Second quarter margin benefitted from a one time, noncash margin related to a legacy product revenue amortization in India. Excluding the one time benefits, the margin would have been 34%. I would also like to point out that due to relatively soft demand in second half, we expect margin to stay at around 20% level for the next two quarters.

Please turn to slide ten for operating expenses. In the second quarter, non-GAAP operating expenses were $6.4 million, down from $6.6 million in the pervious quarter and $11.7 million in the prior year period. We expect operating expenses to stay flat for second half.

Please turn to slide 11 and 12 for operating income and net income. In the second quarter of 2016, we achieved [the most] positive operating income and positive net income. In the second quarter, non-GAAP operating income was $1.9 million compared to operating loss of $0.6 million in the previous quarter and operating loss of $9.0 million a year ago.

In the second quarter, non-GAAP net income was $5.5 million compared to net income of $0.3 million in the pervious quarter and net loss of $0.9 million a year ago. Second quarter net income included favorable impact from $3.3 million tax accrual reversal.

Please turn to slide 13 for cash flow. We ended quarter with $81.5 million in cash and we have no debt. In the second quarter, cash provided by operating activities was $0.6 million. Cash flow provided by investing activities was $1.1 million. Cash used in financing activities was $2.0 million, which was mostly related to our ongoing share repurchase program.

This concludes my financial review. Now, I would like to turn call back to Tim for concluding remarks.

Turning now to slide 14, I would like to recap our strategy and the priorities with you. Going forward, our first priority continues to be working with our customers to develop innovative and a [first cut] communication solutions. We will continue to emphasize effective communication, collaboration and accountability in order to achieve productivity efficiency and a quick response time.

Second, we are accelerating our investment in communication solutions, data center and the smart city market. [ETL] will become part of the ICI Group focusing on [BBT] based communication solutions and related products. We expect to work with any potential partners to fill the gaps in the market with our innovative offering. Third, we will remain prudent on cost management and continue to improve overall operational efficiency and productivity.

We expect the moving of our global R&D and operation center to save any facility cost and we will continue to look for ways to further improve our operational efficiency.

Now please turn to slide 15 for our near term outlook. In the first half of 2016, we have achieved $1.3 million operating income and $5.7 million net income. In the second half of 2016, we will continue our focus on profitability and shareholders' value despite relatively soft demand.

Looking specifically at the third quarter of 2016, the Company expects to generate non-GAAP revenue in the range of $15 million to $20 million. We see opportunities and the challenges in front of us and there is confidence on our trend toward profitability. We will continue to optimize our core optical network business to meet out customers' demand. We will also invest in new product which will be cornerstone of our future growth.

We thank you for your support, look forward to delivering improved value for our business and our stakeholders. With that, Min and I would like to take your questions. Operator, please open the line for Q&A.

(Operator Instructions).

We will now take our first question from [Tim Sabiock] from Northland Capital Markets. Please go ahead; your line is open.

Wanted to ask a question about your comments around softening demand trends in the second half and sort of contrast that with I think what has been a fair bit of sort of positive commentary and results around at least the beginnings of 100Gb/s metro optical ramps among carriers and cloud providers in the U.S. and perhaps elsewhere.

So, realizing you have a fair bit of concentration; with your major customer, I think you referenced some expectations of seasonality there last quarter. I wonder if you could talk about the drivers of the soft demand commentary, whether that's more related to Japan and your largest customer or other factors?

So, yes, I agree with your general comment that in general, the 100Gb/s adoption is actually increasing and it's a very positive environment out there. However, specific to our largest customer in Japan, they are our largest customer; they're actually adopting 100Gb/s very aggressively.

However, the soft demand is more related to the [warm] seasonality and, second, the deployment cycle. So we previously thought our Q2 would be relatively weak, but turned out to be pretty strong and now we're seeing probably there will be some quiet period in the second half. But we're working very hard on our potential deal pipeline.

Also, a question on the gross margin side. Even excluding the one-time item, you did see some pretty significant improvement and would have been positive on the operating profit line even excluding that item, so I wonder if you could talk about drivers of that expansion -- and understanding it may be coming back down with your overall demand commentary -- but, for the quarter itself, assuming it's 34% or what have you, that's still pretty solid gross margin performance. Any key sort of moving parts driving that higher?

Right, so here's some color for the quarter. I would say for our margin in our key market in Japan, the margin has always been pretty high. And in the previous quarters, we did have some relatively low margin, for example third party sales and in some cases some of the legacy revenue amortizations. So, luckily in Q2, we didn't have any of those.

As Tim mentioned in previous comments, all the region actually have margin higher than 25%, which is pretty unusual. However, we also caution that in second half we are expecting to see some of the lower margin legacy revenue and amortization to come back, which could impact our margin a little bit.

Final question from me is on the cash side -- cash balance increased a little bit despite I think some of your benefits there being noncash in nature. But in general, I think you've done a nice job maintaining that cash balance up around $80 million as you sort of move back down on the revenue line maybe back down to a modest or solid operating loss position.

I wonder if you could speak to expectations for cash into the second half of the year? Whether you've got any sources of cash upcoming that are non-operating or generally how you see the cash balance playing out form its current level of almost $2.20 a share, I guess?

For this quarter's cash balance we did benefit from our operating profit and also some of the positive foreign exchange impact. Looking forward, we might get less of a foreign exchange impact benefit. In addition, as I mentioned, we are seeing probably relatively soft demand and a lower margin.

So we expect our operating line will probably be not as great as in the first half. In addition, we are actually investing in our working capital for some of the future business. So we do see the cash will probably decline from the current level.

Our next question comes from [Jim Bartholomew], from a private investor. Please go ahead; your line is open.

I had a question on the share repurchase program. Where were those shares bought? Were they bought from an individual or on the open market?

Those were bought from mostly from open market with one large block purchase.

And that was all open market, no private individual?

No private individuals.

(Operator Instructions)

Our next question comes from [Kevin Liu] from Rosenblatt Securities. Please go ahead; your line is open.

When do you expect you could expand to the new product which could drive some growth?

As we mentioned in previous quarters, we are focusing on R&D activities for those products and we are making good progress. We already announced our SyncRing products and we're looking forward to announce some of the other new products towards the end of this year.

My next question is what is market opportunity in Japan going forward?

For the opportunities in Japan, it's pretty exciting and [even loan is] our major customer in Japan is slow a little bit for 100Gb/s extension. But with the older bandwidth demand in global special LTE mobile, we would expect a little delay. But we can highly expect it in the first half of next year.

In addition to our traditional core business, we're also starting to introduce the new product -- SyncRing product -- which is providing the precise timing phase clock. It's perfect for the highly demand -- accuracy timing -- for the next generation mobile network, especially 5G and LTE [at the vents].

That's our product, which already have our new customer in Japan try it and hopefully we can get the order in the next year.

My last question is, on the operation leverage do you guys have any further way to improve cash flow?

For the operation, as we mentioned, we continue to streamline and optimize our organization. So I just mentioned we just move our new facility for the global R&D and operation center, which again, dramatically save our overall operation cost. But in average you will see that that continues our goal to think how to optimize and how to improve our efficiency in terms of our operation and also our design.

There are no further questions from the phone.

(Operator Instructions)

As there are no further questions, I'll turn the call back to your hosts for any additional closing remarks.

Thank you for joining us on our second quarter 2016 earnings conference call. We look forward to updating you on our third quarter 2016 results in a few months.

Feel free to get in touch with us at any time if you have further questions, concerns or comments. Thank you, everyone.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.