UTStarcom Holdings Corp (UTSI) 2016 Q3 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for UTStarcom's third quarter 2016 earnings conference call. Please note that we are recording today's conference call.

I will now turn over the call to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group. Please go ahead, Mr. Dvorchak.

Welcome to UTStarcom's third quarter 2016 earnings conference call. Earlier today, we distributed our earnings press release. You can find a copy at our website at www.utstar.com. In addition, we 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. Tim Ti, Chief Executive Officer; Mr. Min Xu, Chief Financial Officer; and Mr. Eric Lam, VP of Finance.

Before we get started, I will read the company's advisory on forward-looking statements. As you can see on Slide 2, 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 risks -- 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 its 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 that are 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 well. All forward-looking statements included in this conference call are based upon information available to the company as of the date of this call, and that information can change. The company will assume no obligation to update any such forward-looking statements.

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

Thank you, Gary, and thank you, everyone, for joining our call this morning. We appreciate your interest in UTStarcom. As Gary mentioned, you can download the call presentation from the Investors section of our website at www.utstar.com. Also please note that unless otherwise stated, all figures mentioned during this call are in U.S. dollars.

I will begin our call with the overview of our financial and operating highlights for the third quarter of 2016. Next, I will provide an update on our strategic initiative and the near-term business outlook. Then I will turn the call over to our CFO, Min Xu, who will present financial details for the third quarter.

Before we are starting on the results, I want to discuss the news we released today. Our Director, Mr. Gu, resigned from the board for personal reasons, and I will join the board. I want to thank Mr. Gu for his contribution to the board during his tenure. We also announced today that Min is leaving us for a new CFO opportunity. Min has been a valuable contributor to our success, especially during the strategic transition we began last year. He is leaving on good terms, and we will miss him. I want to welcome Eric Lam, who is joining us to be our VP of Finance. Eric was a UT veteran and was with UTStarcom from 2006 to 2013 and is quite familiar with UT finance, supply chain, and sales operations. Supported by our excellent financial staff, you can rest assure that Eric will manage our financial functions seamlessly during the transition.

In addition, Min will remain available to us on consulting basis until next May. Eric is here with us on the call today. I would like to have him say a few words.

Thank you, Tim, and hello, everyone. I am excited to be back with my old colleagues at UTStarcom. I have been in the high-tech industry for almost 40 years, of which eight of those years were with UTStarcom. I worked in the U.S., the Philippines, Hong Kong, and China in various finance and accounting leadership capacities with both multinational and startup companies. I studied finance and accounting, and have an MBA from Columbia Graduate Business School in New York. I am confident that I can fit into my new role quickly with help from Min and the finance team.

I look forward to speaking with and meeting all our shareholders and analysts in the months ahead. Please feel free to reach out to me with any questions or comments. Back to you, Tim.

Thanks, Eric. If you have any questions, Eric will be available during the Q&A period.

Now, let's move on to the results, starting on Slide 3. Last quarter, we previewed our expectation that the second half will be soft, and alas, it's what we saw this quarter. Nonetheless, results were not [bad], just a cooling off from the fast pace we experienced earlier in the year. We are comparing the period of [pause that] that refreshes. Our efforts this quarter are setting us up for continued profitability and the growth next year.

Third quarter revenue was $16.4 million down sequentially and year-over-year, but within our guidance range. We remain on track with our strategy of focusing on higher value, higher-margin products, thus achieving a gross margin of 24.4%. Obviously, that is down from the second quarter, which was unusually high.

Our operating expense are scaled for a slightly higher revenue run rate; so we did have a loss this quarter. However, we still managed to take nearly $1 million out of operating expense in just the past three months. So you can see that our expense discipline is still firmly in place.

Finally, we remain highly focused on cash management and sustaining our strong balance sheet. We had a positive operating cash flow, and our cash balance was relatively spread even with our share repurchase. From a financial perspective, we are historically on track for seeing the benefits from our strategy.

Now let me walk you through some of the key operational highlights from the third quarter. Please turn to Slide 4. First, as you know, we focused on pursuing high-margin revenue opportunities in the broadband business. This is an important drive for us around the world. Our product revenue in the quarter was mainly from our classic PTN product line. This product line is doing well in Japan, which is an early adopter in move from 10G to 100G Metro networks. We also see meaningful 100G migration opportunities in India and Taiwan. This generational shift is just beginning, so it should drive growth in PTN for the near future.

Building on our core business is our focus, a suite of new opportunities. Early in the quarter, we introduced a new product that addresses the mobile backhaul market, which is involving the mobile network move to LTE and LTE-Advanced. We introduced our SyncRing product family at Softbank World Expo in Tokyo in July. SyncRing addresses a growing problem within mobile backhaul networks, timing synchronization among the base stations making up the network. The super high-speed data transfer on LTE-Advanced network creates huge challenges for signal synchronization. As the world moves to LTE-Advanced mobile networks, we see immense opportunities for SyncRing. We expect this product to be a major contributor in the years ahead.

SyncRing is a complex, high value, high-margin product that we're pursuing in our R&D efforts. You should expect to see us grow our similar type of product in the years ahead. The development of the SyncRing product demonstrates our commitment to R&D spending. We believe it is essential to continue to develop and introduce new and enhanced products to maintain our competitive position. We have a stable and effective R&D team in place, and they continue to execute our strategic plan to develop next-generation products. We will continue to use R&D strategically to reduce costs and improve product performance, which can result in better pricing and higher margins.

As we invest in our R&D spending, we continue to control other operating expense. This focus on efficient operations is a key element of our strategy. In the third quarter, operating expense were $5.4 million, almost $1 million below the second quarter level. Part of those savings came from the relocation of our global R&D and operations center to a new building in Hangzhou. That move also resulted in a new, attractive work environment that makes our employee happier and more productive.

Finally, let me again emphasize our commitment to shareholders, who are the owners of the company and our partners. Operating efficiently and more profitably is one element of that commitment. Another is the prudent return of capital, which are -- we accomplished again in the quarter. We repurchased 352,000 shares, returning $721,000 to shareholders. Since inception of the repurchase program through today, we have bought back approximately 3.5 million shares at a total cost of $7.8 million. The board recently approved a two-year extension to our existing 40 million share repurchase program, extending the expiration date to November 2018.

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

Thank you, Tim, and thank you, everyone, for joining us on the call today. I will review our financial performance for the third quarter 2016.

Let's begin with Slide 5. Before I walk through the specific numbers, I would like to highlight a few key items for the third quarter. Q3 non-GAAP revenue was $16.4 million, within our guidance range of $15 million to $20 million. Non-GAAP gross margin improved 160 basis points to 24.4% from the same period last year. The increase in gross margin was largely due to favorable product mix. Non-GAAP net loss was $1.5 million or $0.04 per share in the quarter. This compares to non-GAAP net loss of $4.8 million or $0.13 per share in the same period last year. Cash provided by operating activities in the quarter was $1.6 million. Our cash balance at the end of the quarter was $81.1 million, largely flat compared to the prior quarter, and we have zero debt.

Now please turn to Slide 6 for a non-GAAP revenue review. Please note that non-GAAP revenue excludes IPTV revenues and legacy Indian DoT revenues. In the third quarter, total non-GAAP revenue was $16.4 million, which compared to $20 million in Q2 and $26.8 million in the same quarter last year. The revenue decline was largely due to lower revenue in Japan.

Please now turn to Slide 7 and 8, which highlight our gross profit and margin. Note that non-GAAP costs of sales and the non-GAAP operating expenses exclude stock-based compensation less IPTV costs and the costs related to legacy Indian DoT revenues. In the third quarter, non-GAAP gross profit was $4.0 million, down from $8.3 million in the previous quarter and $6.1 million a year ago. Non-GAAP gross margin was 24.4%, down from 41.2% in the previous quarter, but up from 22.8% a year ago. The sequential margin decline was due to lower mix of higher-margin product sales in the quarter.

Moving on to Slide 9, let's look at operating expenses. In the third quarter, non-GAAP operating expenses were $5.1 million, down from $6.4 million last quarter and $6.7 million in the prior year period.

Next, let me summarize our operating income and net income shown on Slide 10 and 11. In the third quarter 2016, non-GAAP operating loss was $1.1 million compared to operating income of $1.9 million in the previous quarter and operating loss of $0.6 million a year ago. In the third quarter, non-GAAP net loss was $1.5 million compared to a net income of $5.5 million in the previous quarter and net loss of $4.8 million a year ago.

Slide 12 summarizes our cash flow. As discussed earlier, we ended the quarter with $81.1 million in cash and no debt. Cash provided by operating activities in the quarter was $1.6 million. Cash used in investing activities was $1.3 million, mostly related to CapEx. Cash used in financing activities was $0.7 million, largely for the ongoing share repurchase program. On Slide 13, we include both GAAP and non-GAAP key financial highlights for your reference.

This concludes the financial review. Before I hand the call back to Tim, I want to thank my finance team for their contributions in the past two years. They have been amazing. I'm grateful for having opportunity to work with William, Tim, everyone in the senior management team and all UT employees to make a difference at UT. I would also like to thank you, our investors, sell-side analysts, and everyone on the call for the support. I'm confident and optimistic that the company is on the right track and will have much success in the years ahead under Tim's leadership. I also have full confidence in Eric leading UT's financial team.

With that, I'll turn the call back over to Tim for additional comments on business outlook.

Thank you, Min. In summary, the third quarter was transitional for us as we progress from the strong demand environment in the first half of the year to the ramp of exciting new growth opportunities in 2017. During the quarter, we introduced our newest SyncRing product, which provides critical functionality for the next generation mobile backhaul networks. Our PTN product line is poised to benefit next year from the rollout of 100G Metro networks in our prime geographies such as Japan. We believe that our new strategy is the right one, with a tight focus on small set of market in which we can add the most value for our customers. We are seeing the payoff from this strategy with stable revenue and higher margins.

Looking at the fourth quarter of 2016, the company expects to generate non-GAAP revenue in the range of $15 million to $20 million as shown in Slide 14. As we look to the remainder of 2016 and into 2017, we will maintain our commitment to growing profitably, prudently, and managing our operations and remaining financially strong. We believe we are in a position to execute well and to build a great foundation to increase shareholder value.

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

(Operator Instructions) There are no questions from the telephone.

There are no questions from the telephone.

Okay, well, operator, if we don't have any questions, then we'll conclude the call. If anyone on the call wants to give us a ring afterwards, we'll be available to speak with shareholders and analysts. So thanks for your attention, and we'll all disconnect now.

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