UTStarcom Holdings Corp (UTSI) 2018 Q2 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for UTStarcom's Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that we are recording today's conference call.

I will now turn the call to Mr. Ralph Fong, Director of The Blueshirt Group Asia. Please go ahead, Mr. Fong.

Thank you, Karina. And hello, everyone, and welcome to UTStarcom's Second Quarter 2018 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 presentation on the 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 Page 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 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. All forward-looking statements included in this call are based on the 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 such forward-looking statements. Also please note that unless otherwise stated, all figures mentioned during this call are in U.S. dollars.

With that, I will now turn 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 presentation on the Investors section from our website.

Now let me quickly recap our results on Page 3. Second quarter performance was in line with expectations. Revenue came in at the higher end of our guidance range. Gross margin was 26%, down from 28% a year ago. We continue to R&D investments view and maintain a robust product offering. This enables us to deliver outstanding value to our customers and to pursue exciting new market opportunities. Correspondingly, we continue to streamline and to (inaudible) our SG&A cost.

Eric will go over to the details of our financial results shortly. Please turn to Page 4. R&D continues to be our focus this quarter. Innovation through R&D is our strength. We increased our R&D investment by recruiting and hiring additional engineering talent with specific field to our routing. In general, with a tremendous emphasis on innovation and technology leadership, which plays a critical role in winning new business. We strive to provide high-performance product, a comparing value proposition and the best service level to our customers. Our engineers are dedicated to developing new product and technologies for the most promising long-term market opportunity.

The worldwide transition to 5G wireless network is the key thing these days. We are very excited about opportunities presented by the transition from 4G to 5G, and we are positioning our product portfolio accordingly. And as we discussed on our last conference call, segment routing is the key technology for the 5G network. It is a breakthrough networking technology, offering greater scalability and flexibility and (inaudible) simplifying networks. The trend towards this architecture is well underway. Our (inaudible) in April this year. And we are excited about the value proposition of this new product. This highly efficient networking platform delivers all the benefit of SDN, including high agility and automation. It also significantly reduce network complexity and optimize operation and maintenance.

To further support the introduction of the SRv6 router product line as well as our latest solution based on other cutting edge technologies, we participated in Softbank World 2018 in Tokyo last month. Softbank World is one of largest corporate events in Japan, and it focuses on the latest trends in IT technology. This is our seventh consecutive year participating in Softbank World. We showcased a number of our newest products, which included SkyFlux, our next-generation SRv6-based routing platform. We also demonstrated our 5G-ready timing solution, SyncRing, as well as presenting our SDN platform, SOO Station, and a new VBG product, our intelligent gateway device.

Furthermore, we were excited to introduce a new retail-focused product at Softbank World. We launched a small commercial refrigerator, goBox. As you can see on Slide 11, goBox is the latest addition to the company's smart retail platform. It mostly integrates with our cloud platform and use image recognition, sensors and the big data for streamlined automated shopping experience. Currently, we are the first and only supplier that deployed an integrated load and image-sensing technology in a smart retail device. goBox is already getting traction in the marketplace. Commercial deployment began in Q2, and we expect to see a significant ramp in shipments in the second half of the year. goBox is currently in commercial use by several customers, including both domestic and globally recognized beverage companies.

In addition to product exhibit, 2 members of our executive management team delivered keynote addresses at Softbank World. They presented the company insight on optimal networking solutions to facilitate 5G deployments and operations. Time, synchronization, evolution and design solution for 5G and IoT applications were also discussed in depth.

Overall, we are extremely pleased with UT's strong presence in this year's Softbank World. We believe, we are in a solid competitive position to continue developing innovative solutions to meet the challenge of the increased network traffic. Our product portfolio is designed to closely align with our vision of enabling network evolution.

Before I turn the call over to Eric, I would like to take a minute to highlight our progress in targeting key markets. Please turn to Page 12. Our target regions for the deployment of our broadband infrastructure product include Japan, India, Taiwan and other Asia Pacific regions. This market represents significant business opportunities. Given their relatively low broadband penetration rate and the strong consumer demand for new broadband services, we believe we are well positioned to benefit from those market opportunities. Specifically, India continues to be a key market for us with the continuous interest for many of our product lines, including optical transport and aggregation, fixed and wireless broadband assets.

Our business in India is robust and growing. We expect more and upgrade project -- and new deployments to expand our market share in the region.

As we mentioned on our last call, we have renewed interest in the China market. We strongly believe our product and technologies are well suited to support 5G migration in China. That represents substantial opportunities for us in the optical networking. We are already in initial discussions with partners about potential collaborating on the next-generation mobile network project. We will continue to focus on and to evaluate business opportunities in this key market.

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 will review our financial performance for the second quarter of 2018.

All figures I cite will refer to Q2 2018 and all comparisons, unless I state otherwise, are with the same period last year. Please turn to Page 13 for our financial review. Revenue was $28.5 million, up 26% from last quarter and down 9% from the same period last year. Q2 revenue was at the higher end of the guidance range, reflecting substantial revenue growth from India.

Now please turn Pages 14 and 15, which highlight gross profit and gross margin. Gross profit was $7.5 million compared to almost $9 million a year ago. Gross margin was 26%, down from 28% from the same period last year and down from 40% last quarter. This lower margin reflects higher revenue contribution from India, which typically has a lower average selling price and margin profile.

Now let's turn our attention to operating expenses on Page 16. Operating expenses were $7 million, down from $7.2 million in the same quarter last year, but up slightly from $6.8 million last quarter. More importantly to note, R&D spending increased 22% from the same period last year, while SG&A expenses declined 14% year-over-year. Now this is the result of our continuing effort to streamline our support functions. And the year-over-year increase in R&D spending largely reflect the hiring of additional engineers in the quarter.

Page 17 and 18 summarize our operating income and net income. Operating income in the second quarter was $0.5 million, down from $1.7 million last year and $2.3 million last quarter. We reported a net loss of $90,000 basically due to currency translation losses. On a per share basis, we essentially broke even. This compares to a net income of $2.4 million or $0.07 per share in the same period last year and an income of $4 million or $0.11 per share last quarter.

Page 20 summarizes our cash flow. We ended the quarter with over $80 million in cash, cash equivalents and restricted cash, a net decrease of $18 million from last quarter. Net cash used in operation was $14 million, mostly to fund several large projects in India. And net cash used in investing activities was $2 million.

Now let's turn to revenue guidance showing on Page 21. Before we talk about numbers, let me reiterate some underlying trends in our business. There are uncertainties and possibly deviation from the normal business pattern related to our major customer in Japan as they are in the process of transitioning to the next-generation network. However, we are very optimistic but cautious about the amount of revenue we expect from them in the second half and beyond. We are growing rapidly in India, but India is a highly competitive market. As you saw in our Q2 financials, pricing and margins are lower there than what we had commanded in other regions. Overall, we see significant growth opportunities in new regions, new products and new applications, and we are very, very excited and confident about our long-term prospect. However, we are mindful of the increased uncertainty in this competitive and dynamic market in the short term as well as the time it takes for the significant and logical migrations.

For specific guidance, we expect third quarter revenue to be in the range of $38 million to $43 million. We anticipate gross margin to be lower than in the second quarter reflecting the fulfillment of several large projects in India, which traditionally, as we mentioned before, a lower margin geography.

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

(Operator Instructions) Our first question comes from the line of James Bartholomew.

Yes, I listened to these long-winded presentations for years. Sales have gone down, down, down for many years. Earnings are basically nonexistent, the company has basically become a nothing company. If management worked for me, I'd fire the whole bunch of you. I've never seen any results meaningful. I hear these long-winded presentations and that's all I hear out of this company. If and when I ever get to the point where I'd breakeven on my investment, I'll personally come to China and apologize, but not until then. What do you say?

Thank you for sharing your opinion with us. It is a very competitive market, and we are trying extremely hard to try to turn the company around, and I think we have been successful in doing so as you can see the results, we finally turned to profit last year. And we're very confident in our future. So I hope that you give us a little bit more time and be a little bit more patient. Hopefully, we can show the result that you're looking for.

I'll believe it when I see it.

We certainly will try, sir.

Adding one more company in transition. You can see the new management team since 2016, we make our company already make a pretty big change and from the loss to the breakeven. Now last year actually, we are profit about $7 million. And the technology in a transition cycle and from the customer also adopted new technology is a very, very hard challenge market. And as you say, we do everything to make company growing and become profitable is the mission to all the management team. Okay. And thank you for your patience for the past few years, and we can prove we are making better and progress.

Our next question comes from the line of Mr. Roy Watson.

I want to echo some of the sentiments of the previous gentleman. I've been a long-time shareholder actually, holding shares since the IPO. Got about three questions. The first relates to the India revenue. You're guiding higher in the third quarter, and it sounds like you're expecting revenues to accelerate. I want to confirm will revenue from India be accelerating in each quarter for the foreseeable future? Or are you forecasting flat revenue? Or this is just, sort of, a onetime payment that you're getting for the third quarter?

Mr. Watson, thank you for asking the questions and being a long-term shareholder of UTStarcom. In terms of the third quarter revenue, we are expecting a significant contribution from our India operation there. Now our type of business, we -- in India in particular, we are doing large projects so in terms of revenue recognitions, when the project is complete and when you can recognize revenue, we do record those revenue according to the project milestone. So, because it will be large projects, so it's very difficult to have a very smooth trend quarter-by-quarter, but we are seeing -- we are embarking on several large projects in India so the revenue will be coming on stream in -- particularly in Q3 and also continue in the future.

So -- okay. And that's, kind of, what I'm getting at, is $38 million a pretty good run rate for us to factor in our analysis for foreseeable quarters?

It's very difficult to tell, because as I mentioned, it's on a project basis, so we finish a large project and depending on the timing on the next project or projects, the revenue will fluctuate.

Okay. Second question is related to your Aceland investment. I haven't seen any numbers or any updated valuations. Do you have those numbers? And are there any plans to monetize that asset?

Yes. Essentially, the project has been over, so we still have over $2 million worth of holding in the Aceland company. Now we are just in the process of trying to get the investment back. It's just a small -- from administrative perspective, they need to liquidate the company, they need -- for us to get our money back so it's a long slow process, but the project has been over for years. So there's not going to be any change there. The money is in the bank, it's just the question of when we're going to get the money back.

Okay. And my final question. I can appreciate the fact that you guys have been making progress in the turnaround efforts, specifically cutting expenses, getting closer to consistent profitability. One of, I guess, the concerns I've had over a number of years is with the share price -- with Wall Street really not recognizing any of the turnaround efforts. Have you all considered increasing the level of the buyback or doing a consistent buyback from quarter-to-quarter?

We have been buying back, we have -- starting Q2, we are actively buying -- repurchasing our share on a regular basis. But we are limiting our volume in terms of the repurchases. We do see a lot of business opportunities in the future, and we really want a big use of our cash as efficiently as possible. So we're very cautious in terms of spending our cash.

Okay. That -- I mean that makes sense. I guess, what I was getting at is I noticed the $1 million you spent on a buyback this quarter, and I was just wondering if we could expect that from quarter-to-quarter or if that was more of a onetime deal?

That we will certainly look at, our cash situation, and discuss with the board members to make sure that we have -- we would balance out our cash requirement and also return to the shareholders.

(Operator Instructions) There are no further questions at this time. I would like to hand the conference back to the presenters. Please continue.

Thank you, operator. As, Eric mentioned, we are optimistic about our future, and we are progressing well in our target regions. We are very confident of our technical direction and the cutting-edge products and the service offerings. We are well-positioned to benefit from the latest and the emerging trends, particularly related to IoT, AI and 5G migration. We look forward to providing you with our business progress in few months. Thank you all again.

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