UTStarcom's (UTSI) CEO William Wong on Q2 2014 Results - Earnings Call Transcript

| About: UTStarcom, Inc. (UTSI)

UTStarcom, Inc. (NASDAQ:UTSI)

Q2 2014 Earnings Conference Call

August 15, 2014 08:30 AM ET

Executives

Himanshu Shah – Chairman

William Wong – Chief Executive Officer

Robert Pu – Chief Financial officer

Lin Song – Chief Executive Officer iTV Media

Jane Zuo – Senior Manager, Investor Relations

Analysts

Tony Tian – Merriman Capital

Bill Gregozeski – Greenridge Global

Carter Driscoll – MLV & Co.

Operator

Ladies and gentlemen, thank you for standing by for UTStarcom’s Q2 2014 Earnings Conference Call. (Operator instructions) 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. Jane Zuo, Investor Relations Senior Manager for UTStarcom. You may begin.

Jane Zuo

Good morning and welcome to UTStarcom’s Q2 2014 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 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. Himanshu Shah, Chairman of the Board; Mr. William Wong, our CEO; Mr. Robert Pu, our CFO; and Mr. Song, CEO of iTV Media.

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 business, specific initiatives and their performance in Q2 2014. These statements are forward-looking in nature and subject to risks and uncertainties that may cause actual results to differ materially and adversely from the company’s current expectations.

This includes risks and uncertainties related to among other things changes in the financial condition and cash positions of the company, changes in the composition of the company’s management and their effect on the company, the company’s ability to realize anticipated results of operational improvements and benefits of divestiture, the ability to successfully identify and acquire appropriate technologies and businesses for inorganic growth and to integrate such acquisitions, the ability to internally innovate and develop new products, assumptions the company makes regarding the growth of the market and the success of the company’s offerings in the market, and the company’s ability to execute its business plans and manage regulatory matters.

The risks and uncertainties also include the 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 the period of specific transitions and the conduct of its business is exposed to additional risks as a result.

All forward-looking statements included in this conference call are based upon information available to the company as of the date of this conference call, which may change; and the company 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, Jane, and hello to everyone. As Jane 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.

As usual I will provide an overview of the financial and operating highlights for the quarter, Robert will go into details on the financials and then we’ll take your questions. But first I would like to welcome Mr. Himanshu Shah, our Chairman of the Board, to the conference call to say a few words.

Mr. Shah was appointed as Chairman of the Board in June and I’ve been working closely with him to drive our strategy, push forward with our aggressive transformation and enhance the value of our business. Himanshu, please go ahead.

Himanshu Shah

Thanks, William. Good morning to all of you and welcome to the new UTStarcom. As you know we have a tremendous heritage, a strong brand, and enduring relationships with clients like Softbank, Chunghwa Telecom, BSNL and so forth. We also have strong R&D and product development capabilities which will help in succeeding in markets like the US and India, and that will drive both top and bottom line growth at UTStarcom going forward.

It is for these reasons as well as being a long-time observer and an investor that I decided to serve as Chairman of the Board at no compensation. I’ve been asked about our investment portfolio as well, especially aioTV, iTV and Wireless City, and let me just say our goal is to make sure we realize their true values over time.

The management team under William’s leadership has made progress to right-size the business and refocus resources on the core broadband business. I commend the team for creating an impressive array of products in line with the forces that are fundamentally changing the telecom industry, namely software-defined networking. And William will talk more about it in his prepared remarks.

I would like to add here that the team is united and working quite diligently to make our core business operationally profitable sooner than later. One of the key thing to point out would be to maximizing the efficiency of the BOD and streamlining of our corporate governance. Recently we reduced the size of the Board by 25% to ensure it is quick, decisive, and we are bringing startup mentality at the Board level.

We are also continuing to focus on creating a better management team. I would like to take this opportunity to welcome Min as our new CFO who will officially join the company late next week. He has both technical expertise as a former engineer and financial market experience as a former equity analyst. We look forward to his contribution to our future success including earning reasonable return on our efforts.

With that I will now hand the call back to William.

William Wong

Thank you, Himanshu. Please turn to Slide 6. In the past few quarters we have consistently talked about the restructuring of our business and our renewed focus on developing a set of highly-competitive broadband products. We’re confident that the major restructuring is now behind us and that we are building a business that will achieve long-term sustainable growth.

Operating highlights. There were several operating highlights and milestones in Q2. We completed a successful proof of concept test of our software-defined networking technology which will evolve into a new product platform for our broadband business. We introduced several new products including our carrier-class WiFi data offloading technology, which is a product category that is rapidly gaining momentum with our core base of cable and telecommunications service operators.

We also began shipment against the $24 million contract in broadband access equipment that we won in Q1 this year for BSNL, a major telecom incumbent in India. BSNL is upgrading its network to offer next-generation multimedia services to its customers. And we reaffirmed our commitment to the US market by moving into a larger office in the heart of Silicon Valley as we ramped up our sales and marketing efforts to US telecommunications carriers and cable service providers.

Financial highlights. As usual Robert will go through our Q2 financial results in a moment, but let me provide a top-line summary of our financial results for the quarter. First of all we delivered a $31.9 million revenue in Q2, exceeding the high end of our guidance for last quarter.

Secondly, our gross margin was 20.1% for Q2, improved from 14.2% on a sequential basis and was flat year-over-year as compared to 20% for the corresponding period of 2013. We’re encouraged that we managed to achieve the stability and were able to protect our gross margin.

Importantly, we further decreased operating expenses by 14.7% versus the same period last year, building on a significant cost savings we have achieved in prior quarters as we have right-sized our business. Lastly, we maintain a strong balance sheet, ending the quarter with $95.1 million in cash and zero debt.

Business update, Broadband – please turn to Slide 7. During Q2 from the product perspective we continued to innovate and make bold moves in the market to capture future opportunities in three key product categories.

First, in Packet Optical Transport technology our new TN765 product is showing early signs of sales momentum. This is a premier product that we introduced earlier in the year. We have begun the final acceptance process with a tier one operator in Japan and already received an order for commercial trial. This is a strong signal indicating the beginning of the shift of our product mix towards the higher end of our product suite. These early results are encouraging, providing confidence that we are on the right track to grow the business. The flagship carrier Ethernet-based packet optical transport product with 100 GB services support will bring us strong revenue and margin moving forward.

Second, we bolstered our WiFi solutions offering with the global launch of a carrier-grade WiFi data offloading product after successfully deploying it in very large scale on a network of Japan’s Softbank, a tier one carrier and longstanding UTStarcom customer. The global market for carrier-grade WiFi equipment is growing rapidly amongst both telecommunications and cable operators. Our access controller which controls as much as ten times more access points than other offerings on the market puts us in the forefront of this market; and it’s meeting exactly the need of operators for good user experiences under very large-scale deployment.

Finally, we successfully completed a proof of concept test of our software-defined networking technology with major tier one operators in Tokyo, Japan. As we have said in the past we believe that SDN will revolutionize broadband network operations. This technology allows network operators to better monetize their network access by offering new value-add and dynamic services such as bandwidth on-demand provisioning, which has been a long-time goal of the industry. We believe we’ll have the market in SDN-based solutions for network operators and we aim to lead the industry in this product category.

Business update, New Media – now please turn to Slide 8to discuss our strategic investments, aioTV and iTV Media. As we have said in the past, as an investor in these companies we continue to benefit through their growth and the development of their businesses. In addition we’re exploring ways to package their media services and technologies with our broadband products. Let’s discuss them briefly.

aioTV continues to make measurable progress in their subscriber growth and rolling out its trials and customer engagements in Mexico, Colombia, Canada and the United States. They’re in talks with several of the largest operators in Latin America and the Caribbean and are expecting new contracts for their deployment later this year.

As for iTV Media, today we have invited the Chief Executive Officer, Lin Song, to join us to give you a better understanding of that business, the progress that it has made to date and his vision for iTV’s future. Lin, the floor is yours.

Lin Song

Thank you very much, William. It’s a pleasure to join the call and I thank you all for welcoming me. I’ll be brief in my comments so please turn to Slide 10.

We at iTV media share a common vision with UTStarcom for what the future of media content entertainment will be. Put in the simplest terms it will be customizable, it’ll be on-demand and it will be available on multi devices. Our technology is residing in a different part of the network than UTStarcom’s broadband equipment but in many ways they support the same goal – to help the network operators acquire and retain subscribers by transforming from traditional broadcast TV service to offering a new, intelligent, interactive entertainment platform that integrates the best of the broadcast TV experience with the best of internet media service.

This includes time-shifting, video-on-demand and customizable channel creations that unifies [management] across multi-devices, whether they’re on PCs, iPad and Android-based devices. In short, we are a multichannel service provider and we’re unique because we own the whole suite of platform technology that allows us to offer the best quality of service and unmatchable user experience. While most of the service providers have to rely on third parties to build their platforms we can improve our platform on a continued basis and thus we stay ahead of the curve.

William has told you in past quarters about the success we’ve had with TOT, the domestic telecom service provider in Thailand. This is our first large-scale commercial developer deployment which we began formally in January, 2013. Since then we have seen dramatic customer adoption of our service package and we expect the whole company, including MeTV to operate cash flow breakeven by the end of 2014.

But our success in Thailand goes beyond our partnership with TOT. We also build and operate the Smart TV and Mobile TV services for Samsung in that country which [acquired] hundreds of thousands of subscribers for both free and paid services with Samsung. So we are expanding our footprint by adding (inaudible) in Thailand as well as in other parts of the world. We are building a solid platform of growth, a track record of success and believe that we can replicate our success in other markets.

Before I turn the call back to William let me say that we are very grateful to have the support of UTStarcom in this early stage of our business. William and his team share our long-term view of the industry and understand better than most where it is going, what customers want and what technology can deliver to them. Together we are pursuing some very exciting opportunities and we look forward to keep you updated in the future. So thank you again for your time, and William, back to you.

William Wong

Thank you, Lin. Before we move on to Robert’s review of our Q2 financial results let me provide a quick update on the growth strategy that we are following. Please turn to Slide 12.

The core of our strategy is growing our broadband business which will be the primary revenue contributor. Let me walk you through our progress to date. First, we formally opened our new office in Silicon Valley in June to serve as an R&D and product test lab as well as to house product demonstrations for perspective customers.

This is a major statement of our ambition to market our products to US telecommunications and cable service operators and compete with the world’s largest network infrastructure players for their business. We believe in our technologies and our ability to cultivate a loyal and long-lasting customer base in the US as we have in markets such as Japan, Taiwan and India.

Second, we have greatly expanded our global marketing and sales initiatives, especially through our presentations and participations in industry conferences. Just this year we have hosted booths and displays and attended a variety of events including the Optical Fiber Conference in San Francisco and the big telecom event in Chicago.

Through the engagement with business and telecom executives, from operators and partners at these events, it further reinforces our believe that our TN765 with 100 GB internet services support is the right product for the customers in the US market; and we’re hitting also the prime market window for the deployment of carrier-grade WiFi.

Third, I recently returned from the CableLabs Summer Conference in Colorado, a premier cable industry event where I met with business and technology executives from major US cable service operators and displayed our latest offering from all three key broadband product categories: pocket optical transport, WiFi solutions, and software-defined networking. We were amazed to learn that there’s quick and large-scale deployment of WiFi by cable operators in the US and Europe.

Our broadband, WiFi and SDN experience, as well as a TV-over-IP and OTT video expertise from our portfolio companies give us the unique advantage to package solutions that are perfect fits to resolve the issues in broadband service offerings, OTT video addition, large-scale WiFi hotspot management, and new enterprise services offerings in the cable industry.

Fourth, we have made significant developments in building out our broadband product portfolio in three key areas that I’ve discussed. This includes our success with WiFi data offloading solutions that give us an entrée into ecommerce and big data analytics. In the SDN area we’re expanding the scope of our transport SDN offering and we are riding at the forefront of this exciting industry revolution. We have world-class R&D and product development teams that have commercialized an impressive array of new products that allow UTStarcom to compete on a global stage.

Fifth, we continue to make good progress in India, to expand our success in India’s broadband market. We gave a keynote speech at Convergence India earlier in the year. Besides the $24 million broadband access contract that we’re currently executing, with the business environment shaping up under a new administration, our strong branding and market share in India we expect to ride a strong growth in packet optical transport products, carrier WiFi and also in the GPON area with our partner, DASAN Networks from Korea.

And a final point of our strategy is to add new technologies and products to our portfolio through joint R&D efforts, like our partnership with DASAN Networks of South Korea. We have already begun joint development of a packet optical transport product with DASAN targeting the Korean market. In addition, our two companies have held many joint meetings with potential customers in Asia and we are optimistic about the prospects for new sales opportunities in India and Japan as well.

Please turn to Slide 13. Alongside growing our broadband business we will maximize our investment return in iTV Media and aioTV. First, as I have said before, we benefit as an investor in the appreciation of the value of the business. The investments are maturing and we see several signs that bode well for the valuations, including recent acquisitions of companies such as Azuki Systems by Ericsson, RayV by Yahoo – both with similar technologies and business models as aioTV.

Second, our investments in iTV Media and aioTV provide opportunities for UTStarcom to market new media products to our broadband customers, potentially opening new revenue streams for us and increasing our value to our broadband customers. And finally, these investments are yielding insights that we’re using now to ensure that our broadband technology is capable of supporting networks that deliver a highly-customized on-demand, mobile and fixed line entertainment features that consumers want. This will further differentiate our SDN platform as well.

As we grow our broadband business and maximize our investment return in aioTV and iTV Media we will continue to improve operation efficiency. We have reported several successful quarters of significant year-over-year decreases in expenses to streamline our core business and invest in new growth initiatives. We will continue our cost control efforts to protect shareholder value.

Let me change topics very quickly and comment on Robert’s departure from UTStarcom which was announced a few days ago. Robert joined UTStarcom early in this transition and transformation. He had previously served on the Board and was fully aware of the challenges that he would face as CFO. He has served us extremely well in this capacity. I want to thank him personally for his financial stewardship at a challenging time and for his contribution to the structuring that’s largely behind us, in no small pat thanks to his efforts.

We respect his professional decision to pursue other opportunities and wish him all the best. As we announced, Robert will remain with us as a Consultant for a period of six months to ensure a smooth transition on the Finance Team.

At the same time we wholeheartedly welcome Mr. Ming Shu to UTStarcom who will join us officially on August 21st as the new CFO. Ming has deep and relevant financial and technical expertise given his history as a former equity research analyst and senior software engineer, so he brings many important skills to UTStarcom. Most importantly we believe he will be a great addition to our senior management team, and given his capital markets experience, will benefit our efforts to drive greater and better interaction with our investors and perspective shareholders. I’m excited to work closely with Ming on many important initiatives that will drive our transformation forward.

Now let me turn the floor to Robert to review our Q2 results and then we will provide our outlook for Q3 and turn to your questions.

Robert Pu

Thank you, William, and hello everyone. Please turn to Slide #15. Before I walk through the specific numbers let me highlight a few key themes of Q2.

We achieved better than expected revenue in Q2 and sequential improvement in our gross margin. We also significantly reduced our OPEX on a year-over-year basis and we have a strong balance sheet. We see all these as very good continued progress in our overall business plan.

Now please turn to Slide #16 for revenue. In Q2 revenue was $31.9 million compared to $47.7 million in the prior-year period. In the first half revenue was $64.2 million compared to $85.0 million in the prior-year period. In last quarter’s earnings conference call we gave Q2 revenue guidance of a range between $25 million to $30 million. We’re glad to report that we have exceeded our revenue guidance.

In the first half we have experienced stabile demand for our products from our key customers. We continue to expect that the revenue ramp-up from our new products will contribute to our top line starting from the second half of 2014.

Please turn to Slides #17 and #18 for gross profit and gross margin. In Q2 gross profit was $6.4 million compared to $9.6 million in the prior-year period. Gross margin was 20.1% which is flat compared to 20.0% in the prior-year period. In the first half gross profit was $11.0 million compared to $21.2 million in the prior-year period. Gross margin was 17.1% compared to 25.0% in the prior-year period.

In the first half the year-over-year gross margin and gross profit decrease was partially due to the depreciation of the Japanese Yen. As a reminder, a major portion of our revenue is denominated in Japanese Yen and our reporting currency is the US dollar. So in US dollar terms, the depreciation of the Japanese Yen resulted in a year-over-year gross profit and gross margin decrease. However, it is noteworthy that gross margin in Q2 improved sequentially, mainly due to better product mix and we expect that gross margin will be stable in the second half.

Please turn to Slide #19 for operating expenses. In Q2 operating expenses were $9.2 million compared to $10.8 million in the prior-year period. In the first half operating expenses were $17.1 million compared to $26.1 million in the prior-year period.

Throughout 2013 and 2014 we have worked very diligently to reduce OPEX. As a result the 2013 full-year OPEX was about 45.3% compared to 2012, and again in the first half of 2014 OPEX was 34.3% lower compared to the first half of 2013. Moving forward in the second half of 2013 we will continue to control OPEX and we expect we will maintain the current OPEX run rate.

Please turn to Slides #20 and #21 for operating loss and net loss. In Q2 operating loss was $2.8 million compared to operating loss of $1.3 million in the prior-year period. In the first half operating loss was $6.1 million compared to operating loss of $4.9 million in the prior-year period. In Q2 net loss was $4.6 million compared to net loss of $2.1 million in the prior-year period. In the first half net loss was $7.9 million compared to net loss of $7.1 million in the prior-year period.

Earlier this year when we reported 2013 full-year and Q1 2014 results we talked about we’re focused on operating cash flow as one of the most important financial metrics to us. It is important to reiterate that 2013 full-year operating cash flow was close to breaking even, a significant improvement over the past years; and for 2014 we aim to make incremental improvement over what we have achieved in 2013. And in the first half of 2014 we tracked closely to the first half of 2013. We expect that with stabile top line, stabile gross margin and controlled OPEX in the second half of 2014 we will achieve this goal.

Please turn to Slide #22 for our cash flow and cash balance. We have approximately $95.1 million in cash and no debt at the end of Q2 2014. In Q2 cash used by operating activities was $3.5 million. Cash used by investing activities was $2.9 million.

At this point I have gone through our key financial metrics. To sum it all up and moving forward, in the second half we will keep our focus on top line growth, cost control and cash generation. We will continue to work diligently with the goal to generate operating cash flow and improve our financial performance.

This concludes by Q2 and first half 2014 financial review section. Now I will turn the microphone back to William to discuss our outlook. William?

William Wong

Thank you, Robert. Now please turn to Slide 24.

I’ll say a few final words about our outlook and then we can come to your questions. While we’re still moving through a transition, as we emerge from the transformation we have undergone for the last two years we’re excited about the future and see continued demand for the innovative technologies we are bringing to market. We’re committed to broadband as a driver of the business and a primary revenue driver going forward; however, we’re still early in the transition to sales of our latest products. We expect them to become significant revenue contributors beginning in the later part of 2014.

In terms of near-term revenue expectations we anticipate total revenue in Q3 of 2014 to be in the range of $25 million to $30 million. As for our gross margin we will continue to work to mitigate the pressure on gross margin and expect that it will remain relatively stable throughout the remainder of the year. We will also maintain our diligent focus on cost control. Taking all of this together we believe we will deliver incremental improvements in financial performance compared to 2013. With that, Robert and I would like to take your questions.

Operator, please open the line for Q&A.

Question-and-Answer Session

Operator

We will now begin the question and answer session. (Operator instructions.) Your first question comes from the line of Tony Tian. Your line is open, please go ahead.

Tony Tian – Merriman Capital

Hi, thanks for taking my call. I have a couple of questions. My first question is, are there any progress this quarter in the US market for your WiFi data offloading product? Is there any opportunity to start taking orders from this particular carrier for the WiFi offloading product later this year or next year?

William Wong

This is William, I’ll take this question here. I think actually in the midst of all the expense cuts in the company we managed to allocate a good marketing and sales dollar for the expansion of the North American market. In June as you’ve heard we’ve moved into a new and much bigger facility in Silicon Valley that gives us a good base to start promotion for our in-house R&D test lab, demo centers and technical support in anticipation of the turning up of the business in the US.

And we have also made very significant marketing efforts in relation to that. We participated in very key trade events in the telecom as well as the cable industry in the last two quarters, as I say including the OFC in San Francisco, the WiFi Data Offloading Summit and the big telecom event in Chicago. So this has given us actually very good exposure to the key customers that we are going after in this market.

Besides the carrier WiFi which we received pretty good feedback and interest, we have also generated a lot of interest in our packet optical transport product and as well in the SDN offerings that we currently have in development. So these are all very strong endorsements to the fact that our current set of product portfolio is a very good fit for the market in North America. In line with that actually you will see a lot of trade media coming out as well for which we will be getting more and more exposure in this space here.

With respect to a specific sales opportunity we are currently in discussion with some perspective customers and we will probably start certain lab tests on the product offerings later into the year. So and we expect sales orders would begin sometime in 2015.

While we are talking about US here I should also say that we are undertaking a similar approach in India to leverage on our strong branding, market share and the business growth opportunity over there to pursue in multiple manners relative to our packet optical transport products as well as our carrier WiFi offerings.

Tony Tian – Merriman Capital

Thank you, William. A second question, you mentioned that you already received orders for a commercial trial of TN765 and will you be able to share some details of the order? And do you expect to book revenues for this product in Q3? And I also assume that TN765 will carry a much higher ASP and gross margin.

William Wong

Yes, we cannot disclose the specific details of the order by itself but we can say that we have begun shipments in Q3 and will follow on with additional shipments in Q4, and there will also be shipments to multiple customers starting in Q4. And of course the heavy volume is going to come in 2015, and you’re right – that would be a much higher gross margin compared to what you’re seeing today, and that’s exactly what we said in the beginning of this year that our performance would start to improve as we transition more and more into a high-margin product offerings that we have. And we’re very happy to see that the 765 is seeing a lot of strong adoption in the market there.

Tony Tian – Merriman Capital

And my last question regarding your OPEX number, Robert just mentioned that the current run rate is something you believe you can achieve for the remainder of the year. I just want to clarify that the current run rate is the current quarter run rate of 9 point something per quarter or it’s the Q1 run rate of $8 million something? I think given the company’s financial situation right now any further cut in OpEx will make a big difference to the bottom line.

Robert Pu

Yes, Tony, this is Robert. First I want to say Q2 our OpEx is marginally higher compared to Q1, it is mainly due to our enhanced sales and marketing efforts. In previous press releases we have announced that we have expanded office space in the US and we have a small team in the US because the US market [inaudible] a very critical part of our future strategy. But that costs money, right, so that’s one driver of our Q2 OpEx being higher than Q1.

And secondly we incurred regulatory-related expenses such as legal fees and audit fees as we filed our Annual Report in Q2 this year, but those expenses only happen once a year. So that’s why our Q2 OPEX is marginally higher than Q1. And just now during the conference call I mentioned our OPEX run rate. I think if you’re doing a forecast for financial modeling I think it is conservative to use the first half number, namely about $17 million, as a pro forma OPEX number for the second half.

And with what we did in the past couple of years, and with our current headcount and office space and other drivers of OPEX we’re pretty confident out OPEX in the second half will be stable or comparable to the OPEX we incurred during the first half.

Tony Tian – Merriman Capital

Thank you, Robert, that’s all I have. Thank you.

Operator

Your next question comes from the line of Bill Gregozeski from Greenridge Global. Your line is open; please go ahead.

Bill Gregozeski – Greenridge Global

Hi, thanks, and congratulations on another good quarter. You touched on this a bit, William. In regards to working with partners like DASAN can you give a timeline of how you think that might work in starting to grow sales in a place like Korea with them?

William Wong

Well, let me comment on the entire relationship that we have with DASAN so far. From a joint sales perspective actually we have begun that effort for some time, and we have been successful already in doing joint sales in Japan. And currently as I said earlier we are joining together, going after a number of markets in Asia; and in particular we’re expecting more business in both Japan and India.

Now we started also the joint development of our packet optical transport product with DASAN so in that regard the product that we have aimed for is targeted for the Korean market. So we have engineered a lot of exchanges on both sides and the entire development has been on its way. And from a timing perspective I think we will report it later on as we begin to market the product in Korea.

Bill Gregozeski – Greenridge Global

Okay. With Sprint and T-Mobile not going forward do you have any sense from Softbank as to what their plans might be with regards to the network in the US and how you guys fit into that?

William Wong

Well, I cannot speak for Softbank but just from our own perspective it is unfortunate they cannot move forward with the Sprint acquisition of T-Mobile. But from UTStarcom’s standpoint actually I believe it benefits us in two areas. First of all we expect a lot more management attention now and particularly with the new CEO Marcelo Claure onboard that more management attention now will be focused on restructuring the growth of Sprint; and in particular the building out of its own network and the deployment of its network in the US. So you know, as a long-time technology and product provider to Softbank obviously we are anticipating, we’re hoping and pushing for our share of that growth of the network deployment of Sprint.

Secondly with the acquisition effort being dropped we would expect that there will be more CAPEX available for Sprint’s network growth as well as the growth of Softbank’s network in Japan. I think that is a very important point besides the management attention is the CAPEX in itself. So we’re very happy actually to work with a very successful customer like Softbank that we can also grow with them to expand globally.

As a matter of fact, in Softbank in Japan, the overall market with the recent deployment of the 4G cellular network, there’s much bigger demand now for the mobile backhaul. And similar like in the US environment there’s big demand now moving up to the 100 GB Ethernet services. And as we have seen through the deployment of our WiFi data offloading solution for Softbank in Japan’s network, we anticipate actually this would also carry into more growth and a lot of business for us with our new product offerings in Japan as well. And with the CAPEX hopefully increasing that would give us good opportunities moving forward.

Bill Gregozeski – Greenridge Global

Okay. My last question is in regards to iTV, is it possible to get a current number of subscribers for iTV?

Willam Wong

Maybe Lin Song can help us with that answer.

Lin Song

Yeah. Altogether we have close to 0.5 million subscribers. That includes the subscribers we have with TOT and other partners. So this is as I said in the presentation, it’s tremendous growth. We only have about one-half year commercial operation so this is quite a significant achievement as a new operator.

Bill Gregozeski – Greenridge Global

That seems like substantial subscriber growth. Do you have any sense for what it might be in the next twelve months?

Lin Song

Well we do have a very aggressive subscriber growth plan. Actually our partner TOT, they have an even more aggressive subscriber growth plan. Since we operate their IPTV service and our disclosure will be under their concurrence, so we’re going to disclose the growth number at a proper time. But they do have an even bigger growth plan than our internal plan, so we’re happy to see our partners very bullish about the market that our product can bring to them.

Bill Gregozeski – Greenridge Global

Alright, great. Thank you very much.

Lin Song

Thank you.

Operator

Your next question comes from the line of Carter Driscoll from MLV. Your line is open, please go ahead.

Carter Driscoll – MLV & Co.

Good day, thanks for taking my questions. I want to maybe focus a little bit on the SOO offering and talk about how the proof of concept trial went and when you might be able to commercialize that, and then maybe use that for additional trials and talk about maybe in relation to some of your other newer products, how that could help increase your margin profile.

William Wong

Yeah, the SOO product is the trademark name for our SDN offering and actually when we did the proof of concept trial we had anticipated a lot of follow-on discussion with the customers on hand to carry that through actually to product releases. So actually we at this present time, we expect to begin product shipment of our SOO products within 2014. Having said that I think we are one of the very early product launchers of SDN offerings in this market. There’s been a lot of talks about POCs and so forth but in the real world, turning it into an actual product shipping I think we are leading ahead in the market right here.

The SDN area actually would drive a lot of changes in this market space. In particular it kind of like separates the control plane which will be implemented a lot by software from the data plane which is going to be managed mostly by hardware. So in that regard we expect a migration on part of our revenue stream from the current hardware based revenue into software-based revenue and recurring services from that point on as well. So as a result we would also expect an increase in the gross margin from the software revenue contribution, but of course this is going to be taking some time before the entire SOO offering would be popularized with a lot more customers as we begin the shipment towards the later part of this year.

Carter Driscoll – MLV & Co.

Okay, thank you for that. And then I’m assuming it’s still going to be a license-based model with kind of ongoing maintenance fees – is that the kind of ongoing go-to-market strategy from a revenue perspective?

William Wong

That is correct.

Carter Driscoll – MLV & Co.

Okay. One other kind of follow-up: as you kind of go through the ending stages in 2014 through your restructuring and kind of get the company more focused as you say on the broadband space and right-sized from a cost perspective, when you hit say 2015 what do you think the kind of target operating model’s going to look like from a gross to an operating perspective. Maybe give me a range – I’m not trying to box you in too much but what do you think in an optimal scenario your gross margins and operating margins can become say ending 2015 once you’ve got all the product rollouts and beginning the commercialization?

William Wong

I think at this point it might be a little bit premature for us to speculate on it as we typically run through our planning cycle in Q4 in the year; and at such point we will have also very good visibility into multiple areas: first of all our new product 765 which would certainly bring us a lot better gross margin as we step into 2015 and with much more revenue contributions to the top line; and also as you pointed out earlier, the SOO offering that we have in the SDN area we’ll also bring online for more revenue on the higher-margin software side.

And lastly we anticipate certain revenue contribution coming from our effort in the US market there. So although we are very hopeful at the present time and we see a lot of opportunities in our pipeline, but as far as narrowing it down to a specific range of numbers we will probably do something in Q4 there.

Carter Driscoll – MLV & Co.

Fair enough. Maybe just a last question if I may, maybe for Lin: is it potential to deport aioTV and iTV to the US market? Or maybe you could talk about the competitive dynamics in the US as it becomes one of the target markets for some of the other sectors and whether there’s an opportunity to expand here in the US?

William Wong

I think I would say a little bit and then maybe Lin could add to it. Actually we did not say too much about aioTV’s efforts today. The majority of their sales efforts has been into the Americas, meaning both North and South America. They have made tremendous progress actually in the Latin American countries where they have already signed a lot of agreements and in more recent quarters they’re expecting actually a lot of actual deployment and the launching of a subscriber base there.

In the US market as we have all heard there’s tremendous demand towards the OTT services and it’s just what aioTV is providing in the OTT area are indeed in very good demand. And in that respect they’re anticipating adoption of their technology platform anytime now with some of the major cable operators in the US.

While currently iTV is focusing their effort in Thailand, but as Lin Song mentioned earlier actually their entire system can be easily copy/pasted and be pointed to a different location because there’s very minimal reliance on any third-party technologies that they need. They’re fairly self-sufficient from the technology platform perspective and they also have all the relations and actually manage all the contents contracts from the Hollywood studios and so forth. So it’ll be quite easy for them to expand and then start to work on the US base.

So from a UTStarcom perspective with the portfolio of products that we are launching now planning for the cable market I’m quite hopeful that there’s a lot of synergies that we can drive together with iTV to go pursue the US market.

Carter Driscoll – MLV & Co.

Yeah, it seems like a natural fit with your broadband offerings to be able to package those two together and attack the US market.

William Wong

You’re exactly right there.

Carter Driscoll – MLV & Co.

Alright, I think that’s all I have for right now. Thanks for taking my questions, gentlemen.

William Wong

Thank you.

Operator

(Operator instructions.) It appears we do not have any question sat this time. I’ll now pass the call back over to Jane for any additional or closing remarks.

Jane Zuo

Thanks for joining us on the Q2 Earnings Conference Call. We look forward to updating you on our Q3 2014 conference call in a few months. Feel free to get in touch with us anytime if you have further questions, concerns, or comments. Thank you everyone.

Operator

That does conclude our conference for today. Thank you for participating, you may all disconnect.

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