UTStarcom's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: UTStarcom, Inc. (UTSI)

UTStarcom, Inc. (NASDAQ:UTSI)

Q3 2012 Earnings Call

November 15, 2012 7:30 am ET

Executives

Jing Ou Yang – Investor Relations Director

William Wong – Chief Executive Officer

Robert Pu – Chief Financial Officer

Analysts

Jun Zhang – Wedge Partners

Operator

Ladies and gentlemen, thank you for standing by for UTStarcom’s Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time.

It is now my pleasure to introduce your host, Ms. Jing Ou Yang, Investor Relations Director for UTStarcom. You may begin.

Jing Ou Yang

Hello everyone and welcome to UTStarcom’s third quarter 2012 earnings conference call. Earlier today, we distributed two press releases; one was our quarterly earnings results; and one that aligns on new strategic plan for UTStarcom. you can find copies of this 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. William Wong, our CEO; and Mr. Robert Pu, our CFO.

Before we get started, I will read the Company’s advisory on forward-looking statements. This call will include forward-looking statements relating to development and growth of the Company’s operational support services business, it’s new strategic plan for the Company’s business, the Company’s performance in 2012 and expectations regarding share repurchases.

These statements are forward-looking in nature and subject to risks and uncertainties that may cause actual results to differ materially. Those include risks and uncertainties related to operating 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 develop and operate its TV over IP services business and execute the business plans through acquisitions and organic innovations and to manage and to integrate such business, as well as risk factors identified in the Company’s latest Annual Report on Form 20-F, and current reports on Form 6-K as filed with the Securities and Exchange Commission.

The Company is in a period of transition and the conduct of its business is exposed to additional risks as a result. All forward-looking statements included in this release are based upon information available to the Company as of the date of this release, which may change, and UTStarcom assumes no obligation to update any such forward-looking statements.

I will now turn the call over to our CEO, Mr. William Wong.

William Wong

Thank you, Jing, and hello to everyone. As Jing mentioned, we have distributed two important press releases today: one, covering our third quarter earnings results and the one, giving an overview of our new strategic plan. You can follow along with today’s call by downloading the presentation from our website at www.utstar.com. Also, unless otherwise stated, all figures mentioned during the call are in U.S. dollars.

To begin, I’ll point you to slide number five. Let me begin by saying that this is a very exciting time for UTStarcom. We have made several significant changes recently that we believe will position the Company for long-term success and allow us to deliver greater values to shareholders over time. There is an underlying theme introduced changes that would drive our efforts for years to come. And that is our goal to become a Next Generation Media company.

Specifically, we intend to fully transform UTStarcom into a high growth, lower profitable business focused on building a platform of media operational support services and broadband equipment products and services.

We will provide more detail on this call as to what that means. These new strategy which we are already executing, having announced a number of key events recently in support of these strategic shifts. in short, we have started to transform and change the makeup of UTStarcom by redesigning the management team, adding new independent directors to the Board and most importantly, have begun making key and necessary strategic changes to our business model.

These include one, the divestiture of the underperforming IPTV business; two, the recently announced investment in the next generation video platform company, aioTV. These are just short of what we have planned and I’ll walk through the detail of our strategy in a few moments.

Once again, this is a very exciting time for UTStarcom and we are delighted to be here. There are a lot of opportunities before us that it will require hard work and dedication to seize it. We believe we now have a concrete plan and the right leadership in place, with that together will enable us to convert those opportunities into profitable growth and the generation of shareholder value.

So with that introduction, let’s get started with the review of our third quarter earnings results. I will now turn the call over to Robert Pu, our recently appointed Chief Financial Officer, who will provide you with details of the third quarter. We are delighted to welcome Robert, who has extensive CFO level of experience and have served on our Board of Directors since November 2011 and he is Head of the Audit Committee until recently.

Following Robert’s presentation, I will talk further about our new strategy. Robert?

Robert Pu

Thank you, William, and hello to everyone. This is my first earnings conference call at UTStarcom in my new capacity as CFO. I’m very excited about this opportunity and I look forward to working with you in the future.

Please turn to page seven for the financial review section. In the following section of the conference call, I will highlight our third quarter and first nine month 2012 financial results in more detail and with year-over-year comparison.

Before I get into specific details, I want to reiterate what William touched on earlier in the call. Q3 was a challenging quarter and this is reflected in our revenue numbers. Indeed the financial results we are announcing today underscore the urgency of the transition that UTStarcom is undergoing to adopt to market conditions, mitigate margin pressure and remain competitive in the product and services that we offer.

At the same time, our Q3 results also demonstrated the strength of our broadband business. Following the IPTV divestiture, we have a linear operation. We have a favorable gross margin in a lower long lead impacts. Also we have a strong balance sheet, we have no debt and we have removed significant amount of liabilities from our books through the IPTV divestiture. We continue our share repurchase program and beginning to invest in the higher margin products and services that we will elaborate later in the call. As you know in the third quarter, we officially divested IPTV business.

As indicated previously, we will report IPTV financial results separately as discontinued operations for 2012 and for all comparable periods. However, it is important to note that we can put this into effect once we meet the requirement to do so. At this point for better comparison of the Q3 and year-to-date financial performance, we have prepared non-GAAP financial results that being today in my remarks, I will focus on our broadband business and exclude the IPTV business and the amortization of PHS deferred revenue from our discussion.

Please note this will apply to for what I discuss for Q3 and year-to-date for 2012 as well as the comparison in 2011. Before we target the numbers, I want to highlight few broad themes for the quarter. First, a major fact that are affecting our topline was a decrease in sales of PTN products in Japan as we refunded for a customers deployment schedule that impacted our total revenue and blended gross profit margin as those products have relatively higher gross margins.

Second despite the top line and margin pressure, we maintained the same old path run rate, which helped us narrow the operating loss. It is important to point out for the margin pressure, would have been much severe, if we continue to operate our IPTV business, which we have online previously creating a drag on our aggregated margins. So as I have said earlier, the results for reporting today validate, the steps that we have taken to improve profitability and now let me move to the details.

Please turn to page eight, for revenue, in the third quarter of 2012, total revenue was $37 million, representing a 19.1% decrease year-over-year, in the first nine months of 2012, revenue was $160.3 million, a decrease of 11.9% year-over-year. As mentioned earlier this was mainly driven by decreased sales of PTN products in Japan and GEPON products in China that was partially offset by increased sales of MSAN products in Japan. Also in Q2 of 2011, we have recognized $11.3 million of revenue from Jersey Telecom contract, and that is also a contributing factor the year-over-year decrease.

Please turn to page nine for gross profit. In the third gross profit was $12.7 million compared to $20.5 million in the prior year period. In the first nine months, gross profit was $40.7 million compared to $56.6 million in the prior year period. The gross profit decrease was mainly due to decreased sales of the PTN product, which I mentioned earlier. This was partially offset by increased sales of MSAN product.

Please turn to page 10 for gross margin. In the third quarter, gross margin was $34.4% compared to 44.7% in the prior year period. In the first nine months, gross margin was 35% compared to 42.9% in the prior year period. The gross margin decrease was primarily due to the decreased sales in relatively higher gross margin PTN product and increased sales of relatively lower gross margin MSAN products both in proportion to total revenue. The relatively higher gross margin generated from the Jersey Telecom contract in the second quarter of 2011 is also a fact to the hit.

Please turn to page 11 for operating expenses. In the third quarter, operating expenses were $18.1 million compared to $10.8 million in the prior year period. However, in Q3 of this year, R&D expenses were higher on a year-over-year basis and in Q3 of last year there was a divestiture gain of $4.2 million. Adjusting for these two items, OpEx in my view is stable in year-over-year comparison.

In the first nine months, operating expenses were $49.5 million compared to $50.1 million in the prior year period. Again, if we adjust the divestiture gain of last year, we believe it reflects the company's continuous efforts to reduce OpEx.

Please turn to page 12 for operating results and net income. In the third quarter, operating loss was $5.3 million compared to operating income of $9.6 million in the prior year period. In the first nine months, operating loss was $8.8 million compared to operating income of $6.7 million in the prior year period.

In the third quarter, net loss was $0.2 million compared to net income of $3.4 million in the prior year period. In the first nine months, net loss was $8.1 million compared to net income of $3.1 million in the prior year period. This is mainly a function of decrease of growth profit and relatively stable OpEx as I have discussed earlier.

Please turn to page 13 for cash position on our balance sheet. We ended the third quarter with $213.1 billion in cash and equivalents and we have no debt. The two pie charts on the slide provide details on cash deposits from location point of view 29% of our total cash is in China, 50% in the U.S. From currency point of view, 39% of our cash is in renminbi, 40% in U.S. dollars and 16% in Japanese yen. We believe that we have a strong balance sheet and we're confident that we can finance our future growth strategy.

Please turn to page 14 for cash flow. In the third quarter, cash used in operating activities was $1.8 million compared to cash outflow of $13.6 million in Q3 of last year. And cash used in investing activities was approximately $2.9 million compared to $1.1 million of cash inflow in Q3 of 2011. In the third quarter, we divested the IPTV business with a total cash impact of $50 million. In this transaction, we would be consolidated $30 million in cash to balance bond of liabilities. And we purchased a $20 million convertible bond that can be converted into 33% equity stake of the new IPTV business in the next five years.

In the third quarter, cash used in financing activities was $3.7 million mainly for share repurchase compared to $1.5 million in Q3 of 2011. We continue our $20 million share repurchase program in the third quarter and we'll continue to do so in the upcoming quarters.

As of today, we have bought back $14.8 million worth of our common shares. So we have $5.2 million left in the total. At this point the expiration of the share repurchase program is February of next year.

I now want to turn to our outlook for the balance of 2012. In the contacts of our Q3 and year-to-date results, I believe our Q4 P&L is expected to be similar to our Q3 P&L and our normalized gross margin for Q4 and full-year is expected to be around 35% and overall for full-year we will be slightly under operating cash flow breakeven.

This concludes my financial review, now I would like to turn the call back to William.

William Wong

Thanks, Robert. To begin I ask you to go to slide number 16. The new management team has developed and already begun implementing a strategic plan in order to accelerate revenue growth also profit margins, improve operational cash flows and increase shareholder value. More specifically, we know we need to do the following, focus exclusively on faster-growing, higher margin market opportunities, create a business model with an enhanced overall profitability profile, generate a more predictable subscriber base recurring revenue stream, typically new business opportunities where UTStarcom has the potential to become the top one or two service providers.

We believe that taken together, this will help accelerate UTStarcom’s transition into what we are calling a Next Generation Media company with a business model center on media operational support services as well as higher value added broadband equipment products and services. The plan we will execute is based on many important steps we have taken today and we believe our action will put UTStarcom in a better position to serve the evolving needs of the cable and broadband service providers that has historically made up UTStarcom’s customer base.

Please now go to slide 17, our go-forward roadmap has been based largely on eccentric market analysis undertaken to understand where the most promising growth opportunities lie. And it’s in keeping with some of the key mega trends that are changing the way that people consume entertainment. One of the greatness of this trend is the proliferation of screens, on which people view content. Especially as they increasingly adopt a variety of mobile devices for their computing and entertainment needs. No longer, our consumer is confined to their television for video programming.

In today’s global environment, consumers’ new video content on their mobile phone, tablet devices, laptops and PCs. Perhaps as a byproduct of these need for enhanced mobile capabilities, we are seeing another mega trend that we are very interested in capitalizing a point, the shift towards interactive television such as Internet based games and TV based shopping which reflect customized viewing through time shifting and video on demand.

In short, viewers today are increasingly seeking a pool of goals to the entertainment experience and to expect selected content when and where they wanted, a lot of them having content, they’ve stated to them by broadcast and cable programs.

Please now go to slide 18. Having identified these trends as strategic growth opportunities for UTStarcom, we have also realized that we need to quickly evolve to meet the market demand, we have therefore developed three strategies to better position us to pursue and monetize these trends.

First, we will create and build a TV over IP service platform, which we see operates some of the fastest growing and highest margin opportunities in the marketplace. Second, we plan to build out this platform and these services through a combination of internal development and strategic acquisitions.

Finally, we will design an optimal operating structure to maximize the potential of our business units and faster innovation, collaboration and efficiency, and minimize costs to keep our business strong.

Please now go to slide 19, and I will provide more detail on each of this. First, we will create and build a TV over IP service platform, which we see operates some of the fastest growing and highest margin opportunities in the marketplace. Through TV over IP services, UTStarcom will aim to be a leading provider of high-end demand digital content, such as video programming and other value-added service, over a variety of platforms.

UTStarcom will offer an integrative platform to support the entire workflow of broadcasters and cable service providers, TV over IP operations, such as encoding and transcoding, program planning, media distribution, content publication and product management. This platform will allow us to provide value-added services to broadband and cable service providers and in turn enable them to deliver, which media content to slow and eventually reverse return that has eroding the customer base over the last several years.

These dedicated services will allow broadcasters to provide a personalized entertainment experience that needs people desire for a blend of premium and free program virtually anywhere, anytime and on any device. This platform also provides the basis to over additional services and features such as games and TV shopping, as well as enterprise services such as remote education. We will leverage our existing relations with broadband and cable operators to help them carry out the transition of their current services to IP and cloud-based services.

Please now go to slide 20; second, we plan to be roll this platform and these services through a combination of internal development and strategic acquisitions. We have already established internal expertise through the continual development of our video services cloud and our legacy IPTV equipment business, both of which we will hope that develop new services for our customers.

In addition we will acquire or take significant steps in companies that have market leading media technologies that bring additional capabilities and functionalities to our service platform, and which we can then deploy commercially in China and Asia quickly and efficiently. Our investments in iTV and aioTV are prime examples of this strategy.

iTV recently announced the first commercial launch of its service with a major broadband operator in Thailand, demonstrating the demand in the marketplace for their services. And aioTV has proven itself with the established relations with broadband service providers and broadcasters in North and South America, who sells its services for millions of end-user customers in their local markets.

We look forward to building on their success as we work with the management team there to find opportunities to grow their business in Asia.

Finally, we will design an optimal operating structure to maximize the potential of business units and foster innovation, collaboration and efficiency. We will structure our operations in a way that aggregate and maximize the potential of our existing and to expand business units by providing them the flexibility to pursue opportunities, while also aligning their interest with UTStarcom’s broader corporate goals and those of our shareholders. The Company will also aim to maximize efficiency in operations and minimize the fixed costs in order to keep the underlying business strong.

Please now go to Slide 21. As we prepare to fully execute, we take comfort in the foundation that already exists on which we will build. We believe that we have the geographic, technical and financial strength to put these strategies in motion and to succeed.

In short, first, UTStarcom is a well regarded brand name and established customer relationships with cable and broadband service providers both in Asia and across the globe. Second, we have development experience with the technology and processes to help support this effort and to offer these services to our customers and we will add the subscribers through new partnership agreements going forward.

Third, we have important knowledge of mobile technology and our customers operations that will allow us to develop services for their networks and end-user customer base.

Finally, we have a very strong balance sheet that gives us the financial strength we need. With $213 million in cash and virtually no long-term debt, we are well positioned financially to successfully carryout our plans.

Please now go to Slide 22. Our plans are ambitious and while we are confident in our ability to succeed, success will not come overnight. More specifically we are viewing 2013 as a year of investment. Service deployment and continued transition followed by accelerated success and high rate of growth beginning in 2014.

To give you some prospective regarding the opportunity, we expect the adoption of this new strategic plans will incline in a more predictable recurring revenue stream based on an array of sources including subscription fees, platform licensing fees, and fees on value added services as well as higher margins due to the increased profitability of these revenues.

UTStarcom will be focusing it’s growth efforts in China and across Asia and based on current plans, the Company expects to invest in and launch it’s TV over IP services in multiple countries during 2013. The Company anticipates revenue from the new TV over IP services to become the majority revenue contributor for UTStarcom by 2015 with the gross margins in that line of the business exceeding 50% in that same timeframe.

In conclusion, let me reiterate that our business have very exciting time for UTStarcom. There are a lot of opportunities before us, but it will require hard work and dedication to see this. We believe we now have a concrete plan and the right leadership in place that together will enable us to convert those opportunities into profitable growth and the generation of shareholder value.

This concludes our remarks, and now we will like to take any questions that you may have. Operator, please open the line for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Jun Zhang of Wedge Partners. Please go ahead.

Jun Zhang – Wedge Partners

Thanks for taking my call. So my first question is what’s the new TV over IP platform different from the previous production offering like the RollingStream solution, so it's going to be the totally new solution for something based on the existing (inaudible) solution platform? Thanks.

William Wong

That is the most different on our new platform versus in the past; the key thing is right now we essentially providing the solution and a turnkey operation to broadband and cable operators. So we start with content aggregation of the premium license content, local content, Internet content, and to the setting of the entire content management, service delivery and to the set-top box et cetera. So this is a very comprehensive platform solution that we offering to operators, so as opposed to before where is this more of like an equipment and infrastructure solution only.

Jun Zhang – Wedge Partners

Okay. So the new TV over IP platform be offer to those cable operators and the Telecos only to the cable operator?

William Wong

We are targeting broadband operators as well as cable operators. So to a large extent and lot of this our previous customers of UTStarcom who has brought equipment from us before, so there is plenty of that customers already in Asia and the globe.

Jun Zhang – Wedge Partners

Okay, thanks. So my next question, what’s your view in the next two or three years, what percentage of revenue were coming from the equipment businesses and what percentage of revenue will come from the TV over IP platform, and rough idea on revenue break down by the regions? Thanks.

William Wong

As we said we're focusing our initial markets in the Asia region including China, and we've also said that currently the Company anticipates by 2015 our TV over IP services revenue will become a major contributor to our total revenue.

Jun Zhang – Wedge Partners

Okay. So how much revenue, what percentage of revenue coming from China, or overseas China?

Robert Pu

We are not ready to give you the breakdown of the revenue allocation among regions but I would say majority of our revenue should come from our APAC region, including China.

Jun Zhang – Wedge Partners

Okay, clear, thanks. And Rob, what kind of cash loan in your view will be used for the acquisition or the new TV over IP platform in the next year or two?

Robert Pu

I didn’t hear you very clearly, could you please repeat. Thank you.

Jun Zhang – Wedge Partners

I’m sorry, I probably the signal. What kind of cash volumes will be used to acquisitions or the new TV over IP platform, roll outs in the year or two years?

Robert Pu

Sure. Currently on the balance sheet we have more than $200 million in cash and we have no debt and they found the current financial model we believe we have sufficient fund for the strategies that what just I’m laid out to be.

Jun Zhang – Wedge Partners

Okay, thanks. And my last question is do acquisition, the aioTV what’s the role including aioTV the new strategy, especially in China?

William Wong

aioTV has very innovative platform that particularly caters for contacts coming from the Internet. So in our overall TV over IP platform, that would be a good part of the platform offering, so that we would be able to combine what we call the typical pay TV content meaning the premium license content, plus some of the local content and to wired aioTV’s platform, combined that to include Internet content. So in that platform, we would be able to offer a new user experience that incorporate all this different in which coming from various different sources. So in China, there’s a plenty of those what we called the OTT type of content. So that would be combined with the typical Pay TV or cable programs and deliver to the family room of the viewers.

Jun Zhang – Wedge Partners

Okay. So could you also comment what kind of the revenue generation model from this aioTV if you got declared that in China?

William Wong

In China, it would be mostly through a subscription based revenue model and with the combination of advertising based on the partially free into that context. So it will be a combination of both type of the business models, which also reflects actually the revenue model that aio is seeing in the rest of the world, particularly in North and South America where they have been deployed, it’s also via similar models.

Jun Zhang – Wedge Partners

Okay, thanks. That’s all my questions. Thanks a lot.

William Wong

Thank you.

Operator

Our next question comes from [Don Kennedy] of JPMorgan. Please go ahead.

Unidentified Analyst

Good morning. I had a couple of questions. The first one is any comments or thoughts with regard to monetizing the tax loss, if you guys have on the balance sheet? And then the second one maybe if you could just comment in general obviously the strategy you guys are embarking on, there is a lot of competition. If you can maybe just kind of talk a little bit about your view of the competitive landscape and how you guys will fit in? And then lastly thoughts on why you guys repurchasing stock instead of paying out the special dividends? Thank you.

William Wong

Let me answer that I’d referred to this question first and compared to issuing dividends or special dividends, I think buying back our stock provide liquidity to our shareholders and potentially avoid the double taxation situation. So that’s why we initiated and we continue our task buyback program.

Unidentified Analyst

Okay.

William Wong

And Don, I think earlier you had a question on I believe it’s our carryover of net property and loss, is that…?

Unidentified Analyst

Yeah, right.

William Wong

We have the section of creation (inaudible) NOLs carryforward and in our opinion the best way to utilize the value of NOL is actually to make money and I had a profit to get NOL and non taxable at the same time.

Unidentified Analyst

Okay. And then any thoughts or comments you can give me on the competitive landscape and how you see yourselves fitting would be helpful? Thank you.

William Wong

So I think you were referring to the competitive landscape of our broadband business, is it correct?

Unidentified Analyst

Correct.

William Wong

Okay. In the broadband space actually and where we are focusing particularly in the transmission area with the PTN products, there are number of different players in there, but each with very specific architecture setup. So in where we are playing, we have been enjoying the relative CEO of strong margin because of the wide scale deployment that we have done on our PTN products.

So moving forward, we continue to focus on being a very niche product play and targeting to customer architectures that would maximize the benefits based on using above products. So in essence, the competitive landscape that we have scarfed out give us a unique advantage to compete with other people and also enjoy a relatively high gross margin.

Unidentified Analyst

Okay. Thank you.

William Wong

Thank you.

Robert Pu

Thank you.

Operator

(Operator Instructions) Thank you. There are no further questions at this time. I will turn the conference back to management for closing comments.

William Wong

Thank you for joining us on our third quarter 2012 earnings conference call. We look forward to updating you on our first quarter and full year 2012 in a few month times. Feel free to get in touch with us anytime if you have further questions, concerns or comments. Thank you everyone.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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