UTStarcom Holdings Corp (UTSI) 2017 Q3 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for UTStarcom's Third Quarter 2017 Earnings Conference Call. Please note that we are recording today's conference call. I will now turn over the call to Mr. Ralph Fong, Director of The Blueshirt Group. Please go ahead, Mr. Fong.

Thank you, operator, and good morning, everyone. Welcome to UTStarcom's Third Quarter 2017 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 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. Tim Ti, Chief Executive Officer; and Mr. Eric Lam, Vice President of Finance.

Before we get started, let me refer you to the company's safe harbor statement 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. The risks and uncertainties include factors identified in the company's latest annual report on Form 20-F and the current reports on Form 6-K filed with the Securities and Exchange Commission. All forward-looking statements included in this call are based on information available to the company as of the date of this call. That information can change. If so, the company assumes no obligation to update any such forward-looking statement.

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

Thank you, Ralph. And thank you, everyone, for joining our call today. We appreciate your interest in UTStarcom. As Ralph mentioned, you can download the call presentation from the Investors section of our website. Please note that unless otherwise stated, all figures mentioned during this call are in U.S. dollars.

Please turn to Slide 3. I will begin our call with an overview of the third quarter highlights. And I will discuss how we are capitalizing our near-term opportunities, while positioning our sales force to sustain long-term growth. After that, I will turn the call over to our VP of Finance, Eric Lam, who will present the financial details.

Please turn to Slide 4. You can see our results that we are capitalizing on our immediate market opportunities. The results were solid, exceeding expectations. Revenue growth was outstanding and we are profitable again. Most important robust demand in Japan and India drove our sales momentum. Japan is leading the work in the 10G to 100G upgrade within metro networks and the transition is accelerating now in India. There is a massive ongoing build-out of the telecom infrastructure. We have been active in India for years, and our commitment to the market is now paying off. Our sales volume into the country is rising with our key customers. We expect these immediate market opportunities to remain robust. Mobile device usage continues to grow, especially in India, and consumers are demanding faster data speeds and better quality of service. According to industry statistics, the global commercial router market should grow 15% annually from $27 billion in 2015 to $73 billion by 2022. Our products enable our customers to meet the demands of layered consumers. So we are targeting to capture our share of that expanding market.

Please turn to Slide 5. To continue to grow, we have been investing aggressively in R&D in order to create products that will drive sustained long-term growth. We have increased our R&D spending by recruiting and hiring engineering talent with specific skills. We are enhancing our software development capabilities, as the world is moving towards software-based networking. To attract more engineering talent, we established an R&D center in Chengdu, which is the high-tech capital of western China. Our expanding R&D team is focused on developing new products for the most promising long-term market opportunities. For example, the 10G to 100G transition that has taken hold in Japan will soon be gaining traction elsewhere. We are actively marketing our product in Taiwan and Brazil, where we are seeing early success. U.S. broadband expansion in the rural areas is another exciting opportunity for which we are positioning ourselves. The key to winning this new business is technology leadership and that in this regard, our R&D team is delivering.

Let me go into some details on the new products we have developed or in the developmental stage that will drive our growth in the years ahead. This includes the software-defined network that I just mentioned, which is part of our broader SkyFlux Intelligent Network platform. We are pushing ahead the next-generation SyncRing Synchronization technology as well. We are entering a completely new and exciting market of retail store automation. Let me address each of these in turn.

Please turn to Slide 6. SkyFlux is a new and important product we are excited about. It's our next-generation networking platform and at better addressing our customer needs: order service agility, automation and efficiently as well as attracting new customers in new markets. This new platform solution uses a new cutting-edged folding mechanism that is designed with software-defined network, or SDN, in mind. As such, we believe it is an excellent match to SDN-based control with centralized path computation engine, or PCE, enabling service agility and automation sought after by operators today, that is centralized intelligence with full network view and data analytic capabilities seamlessly used to define [omni] demand path and required attributes. We are also developing new SkyFlux devices that will provide support of high-speed interfaces up to 100GE. Hypodensity and small form factor and, of course, will figure the full feature set of carrier-class features of 50 milliseconds protection, plus quality of service, OAM, and hardware redundancies.

Next, the opportunity in synchronization. Please turn to Slide 7. Earlier this year, we successfully shift our new SyncRing product. SyncRing product is designed for evolution of a mobile network to LTE-Advanced and 5G, especially addressing the mobile synchronization market, as the world moved to LTE-Advanced and 5G mobile networks. We will continue to explore new sales opportunity for SyncRing. Even as we successfully deployed first-generation SyncRing product, our R&D work on this product line continues. The industry is preparing for the release of 5G technology laddered in 2019. As such, we have initiated further development of our SyncRing technology to empower the market with a synchronous solution to meet the 5G network requirements. This includes updated network architecture, improvement in hardware for better accuracy, introduction of the new automatization technologies and extended monitoring capabilities.

Finally, I would like to introduce our Smart Store initiative. Please turn to slide 8. More and more transitional retail stores recognize the necessity to upgrade their infrastructures in order to enable innovation and service optimization. Our team is leveraging our cutting-edge information and communication technologies to deliver a cloud-based integrated retail store solution; the solution includes IU+, a cloud-based operation center and intelligent customer age products. That serves as a store's center point to enable IP managed cashier-free ports, video surveillance systems, facial recognition, IoT and demand labels as well as to provide secure voice and data service and to connect stores to intranet and Internet. Our Smart Store solution is currently being tested in field trials and demonstration are underway at our partners, retail and gas station convenience store chains. We see this market developing rapidly and are excited to be involved on the ground floor with the one of the best partners in the e-commerce sector in China.

With that, now I will turn the call over to Eric, who comments on our financial performance. Eric?

Thank you, Tim. And thank you, everyone, for joining the call today. I will review our financial performance for the third quarter of 2017.

Now let me begin with Slide #9, where I will highlight a few key items for the third quarter. Revenue was up 59% year-over-year, ahead of our expectations. Our strategy of focusing on high-value products resulted in a strong gross margin performance. We also continue to manage our expense carefully, contributing to positive operating income in the quarter versus an operating loss last year. Non-GAAP net income was $2.5 million, which compares to non-GAAP net loss of $1.5 million last year. Finally, we remain highly focused on cash generation and maintaining a strong balance sheet. We generated positive operating cash flow and entered the third quarter with a solid cash position.

Now please turn to Slide #10, so that we can review the non-GAAP revenue. Please note that the non-GAAP revenue excludes IPTV revenues. In the third quarter, total non-GAAP revenue was $26 million compares to $16 million in the same quarter last year. The year-over-year increase in revenue was largely due to higher revenue in Japan and India; Japan, accounted for approximately 60% of revenue; India about 31% and the rest of the world the remaining 9%.

Now please turn to Slide #11 and 12 on gross profit and gross margin. Please note that non-GAAP cost of sales and operating expenses excluded stock-based compensation, legacy IPTV costs and costs related to legacy India Department of Telecom's revenue. In the third quarter, non-GAAP gross profit was $11 million, up from $4 million a year ago. Non-GAAP gross margin improved significantly to 41% from 24% in the same period last year. The year-over-year increase in gross margin was largely attributable to favorable product mix. We are very encouraged to see that the positive results from our efforts focusing on high-value products.

Moving on to Slide #13. Let's look at operating expenses. In the third quarter, non-GAAP operating expenses were $7 million, up slightly from $5 million from prior year. The increase in operating expenses was due mostly to higher sales incentives, bonuses and onetime service fees related to privatization and auditing. Non-GAAP operating expenses in Q3 2017 were 28% of sales, improving from 31% of sales in the same period last year.

Next, let me summarize our operating income and net income being shown on Slide #14 and 15. In the third quarter, non-GAAP operating income was $3 million compared to an operating loss of $1 million a year ago. Non-GAAP net income was $3 million or $0.07 per share compares to a net loss of $2 million or a loss of $0.04 per share in the same period last year.

Slide #16 summarizes our cash flow. As discussed earlier, we ended the quarter with $91 million in cash and cash equivalents. Cash provided by operating activities in the quarter was $2 million and cash used in investing activities was $3 million.

On Slide #17, we included both GAAP and non-GAAP key financial highlights, and those are for your reference.

With that, I will turn the call back to Tim for additional comments. Tim?

Thank you, Eric. In summary, we are encouraged by our solid third quarter results and the momentum we have been building throughout 2017. We continue to believe we have the right strategy investing in research and development and strengthening our product portfolio with our high-value product solutions. We are confident that the actions we took in the last 18 months and our diversity of our product solution, geographies and the revenue stream will provide us with a foundation to drive profitable growth.

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

(Operator Instructions) We do not have any questions at the moment. (Operator Instructions) Mr. Fong, there is no questions at the moment.

All right. Thank you, operator. And thank you for your participation, ladies and gentlemen, and we may now disconnect.

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