UTStarcom Holdings Corp (UTSI) 2017 Q4 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for UTStarcom's Fourth Quarter and Full Year 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 Asia. Please go ahead, Mr. Fong.

Thank you, Aaron, and hello, everyone. Thank you for joining us on UTStarcom's Fourth Quarter and Full Year 2017 Earnings Call. Earlier today, we distributed our earnings press release. 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. 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, which are 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 may change. If so, the company assumes no obligation to update any forward-looking statements.

With that, I will now hand 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.

I will begin our call with the summary of our highlights, and I'll then discuss the opportunities for the company's long-term growth. After that, I will turn the call over to our VP of Finance, Eric Lam, who will present the financial details.

Now let me quickly recap our results on Slide 3. 2017 was an exciting year for us. This is the second consecutive year we generate operating profit. Full year's revenue grew double digits. Gross margin expanded, and the net income was up substantially. We exceeded our financial goals and continued to invest aggressively in R&D to develop and introduce new and improved products to strengthen our competitive position.

For Q4, revenue was lower than anticipated due to the timing of order delivery impacting gross margin and the profitability. While the fourth quarter was below expectations, it does not diminish the success we achieved for the full year.

Technology leadership is the key to winning new business in the market. Our R&D team is focused on developing new products for the most promising long-term market opportunities. To give you an example, the 10G to 100G transition is underway in Japan, and we'll soon be gaining traction elsewhere. We are actively marketing our products in India, Taiwan and Brazil and are making good progress. We are exploring new business opportunities globally. Product expansion in the rural area of the U.S. is a promising opportunity for us. Furthermore, we are researching the opportunities in the optical networking market in China and may reenter if we find attractive segments in which we can leverage our core expertise.

India remains a core market for us. Demand is increasing rapidly for modern broadband service, driving the use of innovative and cost-effective solution. We have made significant progress in the market and had several project wins in 2017 involving a variety of products and range of service. Additionally, we announced yesterday a large project win with our major customer, BSNL, providing next-generation network voice and data equipment and service.

During our Q3 call, we highlighted some of our new products was released or in the developmental stage. Those new products are very important to the long-term growth of the company, so let us review our progress on Slides 4 and 5.

I want to start with one of the most exciting initiative, one we just formally announced yesterday. As you know, we are leveraging our communication and IT infrastructure expertise to ensure the retail store automation market. I will discuss this more broadly in a moment.

We just announced a concrete partnership that will give us a strong foothold in the market. We will sign an agreement to form a joint venture with the leading Zhejiang-based manufacturer of refrigerator in China. The JV will initially develop commercial smart merchandising machine for retail stores.

In addition to the smart merchandising machines, the JV will develop a more comprehensive retail automation solution. Smart retail solution enhance the customer experience and safe operating process. Our operation product will utilize integrated technologies, such as the facial recognition, image analysis, behavior identification, load sensor, RFID and mobile payment. Moreover, the cloud-based operation center will offer various types of value-added service, enabling the real-time interaction of people, product and locality. We anticipate a substantial market opportunity to believe this joint venture will gradually enhance the company's top and bottom line results for years to come.

Retail store automation is especially virtual opportunity, and we are moving into aggressively with the joint venture and with our smart store initiative. More and more traditional retail store are recognizing the necessity to upgrade their infrastructure in order to enable innovation and service optimization. Our R&D team has leveraged our leading information and communication technologies to create a cloud-based integrated retail store solution. The solution includes IU+, a cloud-based operation center and intelligent customer age product. The age product serves as the central control point for a store to manage all its key function, such as synergy, cashier-free point of sale, video surveillance system, facial recognition, IoT and smart label. Our control center can also provide secure voice and data services to connect the stores to its intranet and the Internet. We are testing our smart store solution in fields right now. Demonstration are underway at our partner's retail and gas station, convenience store channel. We are excited to collaborate with our system integration partner as well as one of the best known e-commerce player based in Hangzhou, China.

Let me now discuss SkyFlux, our next-generation networking platform targeted at better addressing our customers' needs for service agility, automation and efficiency. This is a new and important product for us, which is attracting new customers in new markets.

SkyFlux is using a new cutting-edge forwarding mechanism designed to better accommodate Software Defined Network. SDN-based control is the direction all networks are going because of the centralized intelligence through network view and big data analytics. SkyFlux enables the service agility and automation sought by the operators today. Our SkyFlux devices will support high-speed interface up to 100GE and high-port density, small form factors and other carrier-class feature.

An important immediate opportunity we have discussed is synchronization. During the year, we shipped our new SyncRing product. We designed SyncRing for evolution of our mobile networks to LTE-Advanced and 5G, especially addressing the mobilization synchronization market. The global migration to LTE-Advanced and 5G mobile network should create new sales opportunity for SyncRing.

Even as we roll out the first-generation SyncRing, we are investing in R&D for future generations of this product line. The industry is preparing for the 2019 release of 5G technology. To be prepared, we are developing a next-generation single solution to meet key 5G network requirement, such as updated network architecture, improvement in hardware for better accuracy, introduction of new optimization technologies and the extended monitoring capabilities.

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

Thank you, Tim, and thank you, everyone, for joining the call today. I would talk to our financial performance for the fourth quarter and full year 2017.

Please turn to Page 6 for a non-GAAP revenue review. Please note that non-GAAP revenue excludes IPTV revenues. Full year 2017 non-GAAP revenue was $98 million, up 14% from prior year. The increase was in line with our strategy to focus on high-value and high-margin products. In the fourth quarter, total non-GAAP revenue was $18 million, which compares to $28 million in the same quarter last year.

By geography, we saw strength in India, which accounted for approximately 62% of revenue, up 31% in Q3; Japan, about 27%, down 60% from Q3; and the rest of the world, the remaining 10%.

Please turn to Page 7 and 8, which highlight gross profit and gross margin. Please note that non-GAAP cost of sales and operating expenses excluded stock-based compensation and legacy IPTV costs. Full year 2017 non-GAAP gross profit was $33 million, up $28 million from last year (sic) [up from $28 million last year]. Non-GAAP gross margin for full year 2017 was 34%, up slightly from 33% in 2016. For the fourth quarter, non-GAAP gross profit was $5 million, down from $10 million a year ago. Non-GAAP gross margin fell to 25% from 37% in the same period last year. Now the delivery timing that Tim mentioned earlier, when discussing revenue, impacted the gross margin due to product mix change.

Now let's turn our attention to operating expenses on Page 9. Full year non-GAAP operating expenses were $26 million, up 6% from $24 million in 2016. The increase in operating expenses reflects our continuing R&D investment and one-time service fees related to the privatization offer and audited change -- and auditor change in 2017. In the fourth quarter, non-GAAP operating expenses was $6 million, essentially flat from a year ago.

Page 10 and 11 summarize our operating income and net income. Full year non-GAAP operating income was $7 million, almost doubling the operating income of $4 million in 2016. Full year non-GAAP net income was $8 million or $0.22 per share, which compares to a net income of $3 million or $0.07 per share in 2016. In the fourth quarter, non-GAAP operating loss was $2 million compared to an operating income of $4 million a year ago. Non-GAAP net loss was $3 million or a loss of $0.09 per share versus the net loss of $2 million or a loss of $0.05 per share in the same period last year.

Page 12 summarizes our cash flow. We entered the quarter with $80 million in cash and cash equivalents, a net decrease of less than $4 million in 2017. Net cash from operation increased $6 million. We have moved $6 million to restricted cash and placed $3 million in a term deposit for higher interest. For the quarter, net cash decrease of $11 million was attributable to $8 million of inventory purchases for several large projects in India and a shift of $3 million to a term deposit, again, for higher interest.

In Q4, we took an impairment charge on acquisition in aioTV, weighting down the remaining value of this investment to 0. However, on the positive side, I'm happy with the recent progress of one of our investments, namely IPTV, which operates in China and Thailand. iTV's growth is accelerating in China. The Thailand business is stable and profitable. Furthermore, this is attracting interest from potential investors expressing strategic intent to fund and expand the Thailand operations. Now this is still too early, but we do see the possibility of reaping some cash benefit and payback from our investment in this entity.

On Page 13, we included both GAAP and non-GAAP key financial highlights for your reference.

Now looking forward, we are expecting revenue to be in the range of $18 million to $23 million for Q1 2018.

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

Thank you, Eric. We are confident our technology, product solution and geographic coverage provide the foundation for solid future. We are seeing strength in India. We have introduced important new products, especially SyncRing, and see other opportunities developing such as in retail store automation. Our operating achievements in 2017 position us well for future growth. We have a dedicated competitive team in place to deliver long-term value to our shareholders.

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

(Operator Instructions) There are currently no questions in queue. (Operator Instructions) As there are no further questions, I will now pass the session back to Tim.

Thank you, Aaron. That will conclude today's conference call, and thank you for your participation. You may all disconnect.

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