UTStarcom Holdings Corporation (NASDAQ:UTSI)
Q4 2012 Earnings Call
March 18, 2013 8:00 AM ET
Jing Ou Yang – Director, IR
William Wong – CEO
Robert Pu – CFO
Ladies and gentlemen, thank you for standing by for UTStarcom’s Fourth Quarter and Full Year 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 fourth quarter and full year 2012 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 slide show 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 the company’s media operational support service business, new strategy of the company’s business and the company’s performance in year 2013. These statements are forward-looking in nature and subject to risks and uncertainties that may cause actual results to differ materially.
This includes risk and uncertainties related to operating figures in financial condition and cash consumption of the company, figures in the composition of the company’s management and their effect on the company. The Company’s ability to realize anticipated result of operational improvements, and the benefit of the divestiture transactions, successfully operate its new Service business, execute on its business plan and manage regulatory matters, 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 inaccurate of the transitions and the conduct of its business which fall to additional risks as a result. All forward-looking statements included in the press release are based upon the information relevant 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.
Thank you, Jing and hello to everyone. As Jing mentioned, 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 US dollars. ]
Let me begin from slide 5, by saying that 2012 was a momentous year for UTStarcom. We took forward a strategic action to transform the company by strengthening the management team, Board of Directors and business model and accelerating a transition to higher growth, more profitable business lines.
In short, we took many steps to better position the company and carry forward for the benefit of employees and customers and allow us to deliver greater value to shareholders over the long term.
To begin with, as you will remember, during the third quarter we kick started a new way forward by exiting the non-strategic and underperforming IPTV deployment business. In conjunction with this important milestone, we identified a set of priorities that will drive our way forward.
The priorities on page 6 of the presentation includes advance our efforts to transition into higher growth, more profitable areas and enhance the value of the business. To redeploy working capital to support higher return opportunities, particularly in the value-added services area and generate a more predictable, subscriber-based recurring revenue stream.
Having identified this as UTStarcom’s strategic growth priorities, we then developed a very specific new strategy designed to fully transform the company into a higher growth, more profitable business focused on providing next generation media operational support services and higher value-added broadband equipment offerings.
Move to slide 7. First we are deploying a TV over IP Services Platform with the aim of turning UTStarcom into a leading provider of high-in-demand digital content, such as local content, premium licensed studio content, internet content and other value-added services over a variety of platforms to mainstream subscribers.
We are building these platforms through a combination of internal development and strategic acquisitions. Our investments in iTV Media and aioTV are fine examples of this strategy. I will provide an update on this in a few moments.
Finally, we have implemented an operating structure that maximizes the potential of business units and foster innovation, collaboration and efficiency. We have structured our business in a way that aggregated license of the potential of business units by providing them with the flexibility, to pursue opportunities while also aligning their interest with broader corporate goals and those of shareholders.
We expect the new strategic plan will result in stronger and more predictable financial results through what will largely to be a subscription-based revenue model. We anticipate revenue from the new TV over IP services become the majority revenue contributor for UTStarcom by 2015 with gross margins in that part of the business exceeding 50%.
Let us move to slide 9 that I will give you a quick update on what has transpired since we announced all these changes. First, it is clear that the IPTV divesture was a turning point for the company, the effects of which we will continue to see for the next several quarters and years. With the IPTV divesture we have made good progress in stabilizing our operating expenses and setting a standard for maintaining strict cost control going forward.
Further, we were able to achieve our gross margin target of 35% despite the shift in sales mix towards less profitable products that persisted for most of the second half of 2012. Given the volume of change undergone we are very pleased with this result. Importantly, it would have been difficult to achieve the margin we did and reduce expenses to the degree we were able to for the full year as we held on to the IPTV equipment business.
While we do have to focus on revenue growth and cost control as Robert would discuss, good progress has been made in revenue additions more efficiently. Second, we are really very pleased with the progress we are making and executing on recently announced plans that are part of our new business strategy.
As I have mentioned in the last several months we have invested in and expended the important strategic partnership that will allow us to build and deploy a TV over IP services platform. When we are done with iTV Media and aioTV represents an important proof-of-concept with the strategy we are pursuing.
It demonstrates our ability to find the targets of technology and deliver the value-added media services and products that consumers increasingly demand.
Let’s go to slide 10. We made significant progress in the introduction of media operations of our synergies through our partner iTV Media, of which we are the single largest investor.
In October, iTV Media deployed its carrier grade internet TV managed services nationwide in Thailand through a strategic partnership with that country’s national telecommunications provider TOT which has been a customer, user of UTStarcom’s IPTV service.
This was the first commercial launch of iTV’s carrier grade internet TV managed service and reaching an area of coverage of 5 million households. iTV Media aggregates over 150 channels including local content and premium licensed studio content from international media companies such as Fox, HBO Asia, NBC Universal, Sony, Xalted Networks, Viacom, Zee TV et cetera.
Out of this 30 channels are of HD quality and iTV Media operates the TV over IP services platform on the ground. iTV Media recently notched another milestone by forging an agreement to license its IPTV and video-on-demand services to the Spanish OTT/IPTV provider Mira TV.
This deal would bring iTV services to approximately 200,000 subscribers in Spain by 2014. These deals set important precedence for the way that iTV Media UTStarcom enforce relationships in both developed and developing countries through both physical deployments as in Thailand and license arrangements as in Spain.
We will continue to aggressively support iTV Media by working closely with its management team to find opportunities and continue to grow. Leveraging UTStarcom’s customer relations on the government side, iTV Media is currently pursuing multiple amounts of countries in Asia as its pipeline for IPTV services deployment.
On slide 11, please note another milestone of our strategy. In the fourth quarter, we acquired a 34% stake as the largest in aioTV, a cloud-based video navigation and distribution platform whose relationships with cable TV operators in North and South America complements our relationships in Asia and in Europe.
The deal gives us access to technologies that UTStarcom can deploy commercially in Asia as we did with iTV Media in Thailand. It also gives UTStarcom technologies that can manage the media services platform that we are developing instantly.
aioTV has just launched an OTT product Pass Box that we anticipate will reach up to 1 million subscribers by 2014. Both the iTV and aioTV partnerships showcase how we will partner with our broadband cable customer reach. We rolled out those products and services and develop a recurring subscriber-based revenue model.
In addition, we are actively identifying new investment targets and we’ve acquired significant fit in for making our right acquisitions of companies like this with market-leading media technologies that will bring additional capabilities and functionalities through our services platform and which we can then deploy commercially in Asia partly and interestingly.
Turning to slide 13. I would like to highlight our efforts to enhance shareholder value. During fiscal 2012, we also worked very hard to enhance value for our long-term shareholders. During the year, we continued with a robust share repurchase program, setting up our share repurchases to the maximum rate allowed under the program initially in the five years and this reflects our long-term confidence in UTStarcom.
Additionally, in November we launched a cash tender offer to buyback 25 million outstanding shares at a premium of 30% for the stock at the time the tender was announced. We concluded this in January 2013.
As we look ahead, we are going to continue with our share repurchase program and also are on track to effect a 3 to 1 reverse share split and Robert will go over the details of that. With that overarching introduction, I hope that it is clear how serious we are about transforming the business and setting a new cap for UTStarcom and its shareholders.
We have worked quickly and proactively and decisively to enhance our management team, strengthen the underlying business and chart the new strategy that will include our competitive position and deliver stronger and more residual financial results.
Let’s now move to a full review of the fourth quarter and full year 2012 earnings results. I will turn the call over to Robert who will provide you with the financial details for both periods. Following Robert’s presentation, I will talk about our expectations for 2013 and beyond. Robert?
Thank you, William and hello everyone. Starting from slide number 15, I will discuss on full year 2012 financial results in more detail. Before I walk through the specifics, let me begin by saying that our overall performance and the underlying fundamentals largely mirror the third quarter.
In particular, we were able to achieve our full year 2012 gross margin goals of approximately 35% and an increase in broadband equipment sales relative to the third quarter results. At the same time, we made some progress we have begun to see traction on this front in the fourth on a sequential basis and as planned we see that moving forward.
Lastly, we ended the quarter in a strong financial position with no debt and approximately $180 million cash on balance sheet. We will use this liquidity to invest in our growth and as William has mentioned, execute on our strategic initiatives designed to increase shareholder value.
Now I would turn to the specific results. In the third quarter of 2012, we have divested the IPTV business we will report the financial results of IPTV business separately as discontinued operations for all comparable periods but only in the requirements to do so.
At this point for better comparison of the Q4 and full year performance, we have prepared non-GAAP financial results which focus on our broadband business and presents the IPTV business as discontinued operations. So for today’s purposes, I will focus on our broadband business and exclude largely the already divested businesses from our discussion.
Please turn to slide 16 for a revenue discussion. For the fourth quarter, revenue was $41 million, compared to $47 million for the fourth quarter of 2011. For the full year, revenue was $157 million, compared to $179 million in 2011. For both the fourth quarter and full year, the revenue decrease was mainly driven by decreased sales of our PTN which was partially offset by increased sales of MSAN products in Japan.
Additionally, the one-time revenue of $11 million from the Jersey Telecom Limited contract in the second quarter of 2011 also contributed to the year-over-year revenue comparison.
Please turn to slide 17 and 18 for gross profit and gross margin discussion. For the fourth quarter, gross profit was $13 million, compared to $16 million for the fourth quarter of 2011. Gross margin was 32%, compared to 34% for the fourth quarter of 2011. For the full year, gross profit was $54 million and gross margin was 4%.
For the full year of 2011, gross profit was $73 million and gross margin was 41%. For both the fourth quarter and the full year, the gross profit and gross margins increased as mainly due to a shift of revenue mix mainly decreased sales of higher gross margin PTN products and partially offset by increased sales of lower gross margin income drivers.
Again the higher gross margin generated from the one-time Jersey Telecom contract in the second quarter of 2011 is also a contributing factor to the year-over-year comparison analysis here.
Turning to slide 19 for our operating expenses. For the fourth quarter, operating expenses were $17 million, a slight increase from $14 million in the fourth quarter of 2011. For the full year, operating expenses were $69 million and the increased 10% year-over-year from $63 million for the full year of 2011.
However in Q3 of 2011, there was a divestiture gain of $4 million that offset OpEx adjusting for that OpEx is stable in year-over-year comparisons.
Turning to slide number 20 for operating income and net income. For the fourth quarter, operating loss was $3.6 million and operating income of $1.8 million for the fourth quarter of 2011. For the full year, operating loss was $14.8 million, compared to an operating income of $10.3 million for the full year of 2011.
This decrease of quarterly and full year operating performance is mainly a function of decrease of gross profits and stable OpEx as discussed earlier.
For the fourth quarter, net loss was $6.7 million, compared to net loss of $2.7 million for the fourth quarter of 2011. For the full year, net loss was $16.4 million, compared to net income of $2.5 million for the full year of 2011.
Turning now to slide number 21 for cash balances. We ended 2012 with $180 million in cash and we have no debt. The two pie charts on this slide provides more details on our cash deposits, as you can see 28% of our total cash is held within China and 48% in the United States. 40% of our total cash is deposited in RMB, 28% in US dollars and 24% in Japanese Yen.
Finally, on slide number 22, I will walk you through our cash flow for the fourth quarter. Cash used from operating activities was approximately $6.4 million. In the fourth quarter, cash used by investing activities was approximately $18 million as we continue to invest in media, technology and services.
In the fourth quarter, cash used from financing activities was $2 million. We continued our $20 million share repurchase program in the fourth quarter as of December 31, we have repurchased $15 million worth of our stock. The company has $5 million left under the current program. We will continue to execute this plan. Our Board has approved to extend the share buyback program to August of 2013.
In January of 2013, we completed a $13 million cash tender offer for 25 million shares of our stock at a purchase price of $1.27 per share to return value and liquidity to our shareholders. Following the transaction, we also proposed a 3 to 1 reverse split of our shares. The Extraordinary General Meeting of Shareholders will be held on March 21, 2013 for this matter.
We believe the reverse split is in the best interest of shareholders and the company. We intend the marketability and liquidity of our stock. I thank you in advance for your support. This concludes my fourth quarter and full year 2012 financial review session.
Now, I would like to turn the call back to William to discuss further on our business outlook. William?
Thanks, Robert. We are very pleased with the prospects and initial progress that is underway, whether we are not claiming victory yet and there is a great deal more to do.
Please turn to slide 24. With respect to the immediate term, this year we will require focus and hard work as we invest in and build a platform for the future and we currently view 2013 as a year of investment and continued transition, at the same time, the company personally expects to achieve a degree of incremental improvement and overall financial performance versus 2012.
There will be a need to replace unprofitable revenue that was removed with the IPTV divestiture and revenue will be below last year while this process is ongoing and the top line is in transition.
At the same time, the company will focus on holding margins relatively stable by maintaining a similar product mix to 2012, as well as making additional progress with lowering operating expenses.
Looking to the future, we expect our new strategic plan will result in stronger and more predictable financial results as we expect to achieve accelerated successes and high rate of growth beginning in 2014.
More specifically, as mentioned earlier in the call, we anticipate revenue for the new TV over IP services to become the majority revenue contributor for UTStarcom by 2013 with gross margins in that part of the business exceeding 50%.
Before I end the call, I think it is worth taking a moment to summarize to you a short list of key takeaways from today in short. 2012 was a year of significant enhancement change for UTStarcom. We successfully divested the IPTV business along a new strategy that we firmly believe positions us better for success in the foreign markets.
We made investments in this strategy and we began to see some good signs of initial traction in the marketplace via some of the new and excellent partnerships that will drive our business forward. We also strengthened our management team and board creating a team very well equipped to bring UTStarcom forward.
While doing lot of this, we also focus diligently on finding the ways to reward our shareholders during this time of transition. We returned $45 million to shareholders which will include both share repurchases and our recently completed tender offer in January 2013.
And we expect to effect a reverse share split that should improve the marketability and liquidity of our common stock.
In conclusion, we are very excited about the long-term opportunities before us and we are confident that our clearly defined new strategy positions us very well in evolving media environment. We expect our actions to enable us to capture opportunities that will translate into significant overall improvement in the company’s business performance and enable us to deliver enhanced shareholder value over the long-term.
This concludes our remarks and now we would like to take any questions that you might have. Operator, please open the line for Q&A.
Thank you. (Operator Instructions) The first question will come from Jim (inaudible) a private investor. Please go ahead.
Yes, our company has performed poorly for years. President (Shi Jin Ping) has outlined a new great renaissance plan for China. Will our company’s performance improve? Or will we be an embarrassment to President (Shi Jin Ping) and (Lee Kur Chung) an embarrassment to President (Shi Jin Ping’s) great renaissance plan?
As we have outlined our strategy moving forward, it is a strategy that we plan to implement over the course of next few years. So far, we are quite confident that we are actually heading along that line. We have demonstrated milestones along the way and we will continue to execute along that path. So, I believe we are trending in the right direction with what we have done so far.
(Operator Instructions) Thank you. There are no further questions at this time. I will turn the conference back to management for closing comments.
Jing Ou Yang
Thank you for joining us on our fourth quarter and full year 2012 earnings conference call. We look forward to updating you on our first quarter 2013 in a few months time. Feel free to get in touch with us anytime if you have further questions, concerns or comments. Thank you everyone.
The conference has concluded. We thank you for attending today’s presentation. You may now disconnect your line.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!