Jing Ou Yang – Director, IR
Jack Lu – President and CEO
Jin Jiang – CFO
Lily Wu – TGRA Capital
Himanshu Shah – Shah Capital
UTStarcom Holdings Corporation (UTSI) Q4 2011 Earnings Call March 13, 2012 8:00 AM ET
Thank you for standing by for UTStarcom’s Fourth Quarter and Full Year 2011 Earnings Conference Call. (Operator Instructions) A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
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 2011 Earnings Conference Call. We distributed our earnings press release earlier today and you can find a copy via Newswire Services and on our website at www.utstar.com. In addition, we have posted a slide presentation on our website, which you can download and use to follow along with today’s call.
On today’s call we have Mr. Jack Lu, our President and CEO; and Ms. Jin Jiang, our CFO.
Before we get started, I will read the company’s advisory on forward-looking statements. This call will include forward-looking statements on topics that include, but may not be limited to the company’s restructuring initiatives, IPTV revenues, profit margins and projected business model.
Forward-looking statements are generally indicated by such words as will, expects, estimate, goals, plans or similar words. These statements are forward-looking in nature and subject to risk and uncertainties that may cause actual result to differ materially.
This include risk and uncertainties regarding the ability of the company to realize anticipated result of operational improvements, the company’s ability to successfully launch its Internet TV platform, continue to integrate recent acquisition, successfully operate its new Service business, execute on its business plan and manage regulatory matters, as well as risk factors identified in its latest Annual Report on Form 10-K, Form 10K/A, quarterly reports on Form 10-Q and current reports on Form 8-K and Form 6-K as filed with the Security and Exchange Commission. The company assumes no obligation to update any forward-looking statements.
I will now turn the call over to our President and CEO, Mr. Jack Lu.
Thank you, Jing, and hello to everybody on the call. 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 this call are in U.S. dollars.
Let’s start with slide four and talk briefly about our fourth-quarter highlights. Net income attributable to UTStarcom’s shareholder was $4.1 million, or basic and the diluted earnings per share of $0.03 in the fourth quarter 2011. Total revenues increased 9.6% year-over-year to $83.5 million in the fourth quarter 2011 from $76.1 million for the same period in year 2010.
Gross margin was 34.2% in the fourth quarter 2011 compared to 10.6% in the fourth quarter 2010. Operating income was $8.5 million in the fourth quarter 2011 compared to an operating loss of $26.6 million in the fourth quarter 2010. Cash, cash equivalents and short-term investments were $304 million as of December 31, 2011.
On slide five, we highlight our 2011 financial achievements. Most notably, we exceeded our revenue targets range of $300 million to $320 million by achieving $320.6 million in total revenue for the full year 2011. Total operating expenses in 2011 were $93.1 million, 6.9% lower than our annual target of $100 million. And lastly, we achieved a healthy full year gross margin of 35.7% and met our annual breakeven target established at the beginning of the year, recording net income of $13.4 million.
Turning to slide six and take a look at year-over-year comparisons of the past three years. 2011 was our first profitable year after six years of consecutive losses. Our operating expenses have experienced a downward trend since 2009 while our operating income and the net income have steadily increased since 2009 and turned positive in 2011.
Now let’s take a look at slide seven to recap our 2011 growth strategy. We’ve successfully executed our Return to China corporate strategy in 2011 after bringing a new management team on board. We made steady progress in adding more talented people to our team, streamlining our corporate structure and efficiently managing our costs. Our strong bottom line performance was mainly driven by improved gross margin and a decrease in operating expenses as a result of these restructuring efforts.
In 2011, we launched a new corporate culture initiative to incentivize our employees. We believe this have improved team morale and contributed to our positive financial performance in 2011. The new initiative underscores UT’s core value of integrity, execution, accountability and a shared team approach, which challenges our employees to go above and beyond. This new corporate culture includes team building activities and focus more on performance-based incentives. We believe this new corporate culture established a solid foundation from which to grow into an even stronger company over the next few years.
Turing to slide eight, we were able to effectively execute our second corporate strategy of serving the telecom and the cable markets in parallel in 2011, setting the stage for continuous growth progress in 2012. Our catalyst for our growth in the cable market will continue to be China’s push forward three network convergence. The first phase has already shown substantial progress which networks already displaying the capability to provide the services to end users.
By the end of 2011, the government had announced 42 new trial cities for the second phase of the convergence plan. This opens up additional market opportunities for us as we deliver our IP-based network solutions to both cable and telecom operators. I am pleased to share with you that we recently won the IPTV Broadcasting control platform tender in the city of Chongqing.
This is the first of the 42 new trial cities to award such a contract. It is a significant win for us as it was the result of a national-wide casting and bidding process, and the strength in our market share in China’s IPTV markets. We are well-positioned to gain a significant share of the 42 new cities, which will enable us to capture the additional business opportunity from the national rollout expected to take place from 2013 to 2015.
Three network convergence also creates substantial potential demand prospects from China’s cable network operators for our Broadband product. At end of 2011, there were 200 million cable subscribers in China, but only 6.5 million of them were using bi-directional interactive services. We believe this number will increase more than 20% in 2012 and we expect to see continued growth in demand as more and more of cable operators realize the value of investment in a next-generation network to improve their infrastructure.
Furthermore, we continue to stabilize our existing market position in the Telecom sector. Last month, we announced contract wins to support IPTV network expansion for two China Telecom provincial subsidiaries, one in Fujian and the other in Zhejiang.
For the Zhejiang telecom contracts, we are building new IPTV 2.0 platforms in two cities, Wenzhou and Taizhou. This 2.0 platform will serve as solid foundation for China Telecom’s planned large-scale deployment of IPTV 3.0 in a max few years, which could result in additional market opportunity for us.
Looking now at slide nine, we achieved year-over-year profitability, primarily driven by increased sales of PTN and MSTP product in Japan and the Taiwan, respectively, which generally have higher gross margin. Bookings of our PTN product exceeded $100 million at the end of 2011. Moreover, our IPTV product sales increased in India.
In China, our booking margin improved as we continued to expand into the cable market where we have stronger competitive advantage and greater bargaining power, which result in improved contract terms with some cable operators. In addition, our margin improved in China as a result of our effort to restructure our sales commission plan so that commissions are tied to both revenue and gross margin.
At the Beijing Telecom Equipment Expo in September 2011, we introduced a series of new solutions that will better serve the cable market. The new product included our DOCSIS-EOC application and new Wi-Fi product. UTStarcom’s EOC application target cable operators and enables them to provide a faster and a smoother video, voice and data to end users. Our next-generation Wi-Fi product are able to combine with CDN convergence, support multi-terminals and satisfy the need of operators to establish outdoor wireless networks.
Turning to now slide 10 and discussion our third key corporate strategy. Throughout 2011, we have discussed our goal of moving up the value chain and the transitioning from being purely Equipment provider to become a provider Operation Support Service as well. Expanding the Service business through acquisition is a key focus for the management team and we believe it is important that the acquisition is done at the right valuation with targets that also contribute positively to revenue, profits and cash flow.
These requirements means we have to especially careful in terms of due diligence and the negotiations so that we deploy shareholders’ resources in a best possible manner. This degree of caution shaped our acquisition strategy in 2011 and will continue to do so in 2012. Meanwhile, we have been developing other Service-based business initiatives to accelerate our transition and to pursue new market opportunities.
For 2012 and beyond, our margin – our main growth initiative will be strengthening our Media Operational Support Service offering with our newly-established Video Service Cloud, or VSC platform. We believe this solution will be key to the growth of our company as we focus on building up our Service business.
I am excited to introduce our next-generation Cloud-based Video Service platform, which we have gradually developed since 2011. The VSC takes advantage of our RollingStream technology, network infrastructure solutions and the advanced technology of video exchange clouds to support exchange and distribute video and audio content through telecom networks, cable networks and the Internet.
The infrastructure that we have built has the advantage of aggregating audio and video content, which enables media operators to rapidly launch their IP video services and offer customers a high quality and highly-interactive experience through multiple video streams.
At the current space, we have established VDN mods at major cities in China and have a few Internet TV operators using the Cloud Services on our video media. We have signed the cooperation agreement with a key strategic partner to take advantage of the cable operators’ national-wide broadband backbone to provide our IP-based constant exchange and distribution services at a very competitive price.
Turning to slide 11, this slide details the overall structure of our VSC business model. The main product and services include Video Exchange and Distribution Network, Cloud-based Video Services, and the Video Content Exchange Service. Our Video Exchange and Distribution Network is focusing on digitized audio and video contents, as well as its distribution and storage with lower broadband costs.
Call-based Video Services enable us to offer value-added services such as video conferencing, online education, online office and online theater, plus numerous other value-added services.
Initially, we will focus on the Video Distribution Network and the Video Conference offerings to generate a steady stream of revenue. Our Video Conferencing Service enables organization of all size to enjoy secured high-quality video conferencing and a telepresence service through multi-screens.
More importantly, of our Video Conferencing Service can be packaged as a comprehensive enterprise’s management solution while combined with wireless applications such as our Online Office and Wi-Fi Enterprises application. It enables all the participants to download, share, revise, and save working document from multi-terminals while in a conference call.
As we build out Service offerings, our long-term growth will come from expanding into other value-added Service and applications of Cloud-based Services and the Video Content Exchange Services. As we have mentioned in the past, the business shift will not occur overnight, but we hope investors will keep a long-term outlook as we continue to reinvest in growing this new business.
And finally, in regard to our Service business, our iTV.cn subsidiary is collaborating with a major telecom carrier to provide Internet TV Services in Southeast Asia, and they plan to start the launch of such service this month. iTV.cn is still at an early stage of development and will take time to ramp up, but we plan to allocate additional resources as needed to capture potential growth opportunities in this area while we seeking potential strategical partners to speed up the growth of iTV.cn.
Moving to slide 12, in the short term, our focus will be on providing VDN and the secured Internet-based Video Conferencing Services mainly to Chinese enterprises on our VSC platform. We planned to formally launch the VSC platform and its associated services at the CCBN Trade Show on March 20, 2012, in Beijing.
In addition to accelerating the growth of our Service business, we will be focused on improving the profitability of our traditional business, increasing the enterprise’s value of the company and enhancing shareholder communication.
Now I will hand the call over to our CFO, Jin Jiang, to review our financial performance in the fourth quarter and the full year 2011.
Thank you, Jack, and hello, everyone. Please turn to slide 13 and I will discuss our fourth quarter and full year 2011 financial results in more detail. In the fourth quarter, we recorded $83.5 million in revenue. This was a 9.6%, or $7.3 million, increase compared to $76.1 million in the fourth quarter of 2010. This increase was primarily the result of increased sales of PTN in Japan and MSTP and RollingStream infrastructure product sales in Taiwan.
For full year 2011, revenue was $320.6 million, an increase of 10%, or $29 million, compared to $291.5 million for full year 2010. This exceeded our full year revenue target range of $300 million to $320 million. Let me remind everyone that included in the full year revenue is approximately $95.3 million of accelerated amortization of PAS deferred revenue with a 35% growth margin that is not expected to recur in 2012. Our book-to-bill ratio in the fourth quarter was 0.7 without the PAS deferred revenue.
On slide 14, you can see that gross profit margin was 34.2% for the fourth quarter 2011 compared to 10.6% in the fourth quarter 2010. Gross profit margin for the full year 2011 was 35.7%, an improvement from 24.1% for the 12 months ended 2010. As we mentioned earlier, the improvement in gross profit margin continues to be driven by increased sales of higher gross margin PTN products in the fourth quarter 2011. Gross margin for Equipment Sales in China also improved in the fourth quarter 2011 compared to the corresponding period of 2010.
Moving on to slide 15, from the chart, you can see continued progress in our restructuring and cost cutting. Q4 OpEx was $20 million, a decrease of 42.2% year-over-year from $34.7 million in the corresponding period in 2010. OpEx as a percentage of sales, which is represented by the gray line on slide 15, remained relatively low since Q2 2011 compared to year 2010. Q4 OpEx as a percentage of sales was up compared to last quarter due to a one-time divestiture gain realized from the sale of our PDSN business in China, which resulted in a $4.1 million gain included in Q3 OpEx.
Operating expenses for the full year 2011 were $93.1 million, a decrease of 35.3% year-over-year from $144 million in the corresponding period of 2010. We achieved our 2011 target of full year OpEx below $100 million.
Moving to slide 16, you can see our operating and net income trend over the past few quarters. Operating income for the quarter was $8.5 million while net income attributable to UTStarcom was $4.1 million. Basic and diluted earnings per share for the fourth quarter and full year 2011 amounted to $0.03 and $0.09, respectively.
On slide 17, let’s take a look at our segmented financial results. As a reminder, the two main reporting segments are Equipment Sales and Service Sales. The Equipment Sales segment tracks our Equipment Sales, including network infrastructure and application products. The Service Sales segment is split into first of all the services and support we provide to customers related to the equipment they purchase; secondly, our New Service business that we provide through long-term revenue sharing arrangements with the Cable and Telecom operators, plus our Internet TV platform established by our iTV.cn subsidiary.
In 2012, Media Operational Support Services from our Video Service Cloud platform will also be included in this segment. In the fourth quarter of 2011, the Equipment Sales segment generated $76.1 million in revenue compared to $67.3 million in revenue in the corresponding period of 2010. The increase was primarily driven by increased sales of PTN and MSTP products in Japan and Taiwan and RollingStream infrastructure product sales in Taiwan. The $2.2 million one-time additional release of PAS deferred revenue also contributed to the year-over-year increase.
For the full year 2011, the Equipment Sales segment generated $285.5 million in revenue compared to $251.1 million in revenue in the corresponding period of 2010. The increase was mainly driven by increased sales of PTN products in Japan and RollingStream infrastructure product sales in India and Thailand. The $7.4 million of Equipment revenue recognized from the Jersey Telecom Limited contract in the second quarter of 2011 also contributed to the year-over-year increase. The year-over-year increase in Equipment Sales was partially offset by the wind down of our handset business and the decrease in sales of our other major product line.
Deferred revenue accelerated amortization of $95.3 million related to PAS is included in the Equipment Sales through the end of 2011 at the rate of approximately $23.8 million per quarter. Gross margin associated with the PAS deferred revenue is approximately 35%. Our Equipment-based Service Sales segment generated $7.4 million in the fourth quarter of 2011. This compares to $8.8 million in Q4 of 2010.
Full year 2011 Service Sales were $34.5 million compared to full year 2010 Service Sales of $40.4 million. The decrease was primarily due to fewer iPad maintenance contracts from the phase-out of PAS in China in 2011, offset by increased Service revenue in our international business. The New Service revenue for the fourth quarter 2011 and full year 2011 was $0.02 million and $0.5 million, respectively. Although the OSS revenue contribution in the past year has not been significant, the New Service business will play an important part in our company’s future growth and strategy and will be our focus in 2012.
Now let us turn to slide 18 for the balance sheet and overview of our cash by region and currency of cash deposits. We ended the quarter with a balance of $304 million in cash, cash equivalents and short-term investment, and zero debt. The two pie charts on this slide provide details on our cash deposits. As you can see, 44% of our total cash is held in China; 24% of our total cash is deposited in RMB; 41% is deposited in U.S. dollars and 29% in Japanese yen.
Finally, on slide 19, we like to talk about our cash flow. In the fourth quarter, we had close to breakeven operational cash flow with outflows of $0.2 million compared to positive operational cash flow of $5.2 million in the same quarter last year. We will continue to focus on improving operational processes to drive us towards operational cash flow breakeven in 2012.
We announced a $20 million corporate share repurchase program in August and started the program in September. As of today, we have repurchased approximately $6.5 million worth of the company’s shares. At the same time, our management team has collectively and with their personal funds, executed 80% of the $0.5 million management share repurchase program that was also announced in August. The management and corporate buyback will continue in the first quarter of 2012.
Now we will like to take any questions you may have. Operator, please open the line for Q&A.
Thank you. Ladies and gentlemen, we will be conducting a question-and-answer session. (Operator Instructions) And our first question will come from Lily Wu of TGRA Capital. Please go ahead.
Lily Wu – TGRA Capital
Yes, hi. Thank you. I want to understand a bit more about the IPTV trial wins in, for example, in Chongqing or Zhejiang, Fujian. For any of these contracts, what is a typical contract size? And also how would the booking look like? Is it a one-time sale of equipment systems to implement the IPTV system in the cities? Or is it a multi-year contract? And how large are they typically for something like a Chongqing contract?
Thank you for the question. This is Jack. Actually as we introduced it before, along with the three network convergence, the Chinese Chongqing government mandates that all the IPTV system must be implemented by the Integrated Broadcasting and the Controlling Platform that is handled by central and the local TV stations. So there is one central level IPTV broadcasting control platform by CCTV and each of the province or cities will have their local platform as well. The one that we recently win in Chongqing city is one of the local platform in the newly issued 42 trial cities in the second phase.
Each of the – the size of the contracts varies from the capacity design from different locations, and normally, this is a one-time contract but followed with expansion in one or two years. That is the typical case. The deal size, it also varies as well, and due to competitive consideration, we are not in the position to disclose the size of – exact deal size of the winnings. Sorry for that.
Lily Wu – TGRA Capital
Okay. Thanks for that. And I’m sorry if I missed it on the call, but did you provide fiscal 2012 guidance? Or any type of indication of what type of growth or revenue we might be looking at, especially considering that the legacy PAS, the $23 million per quarter, will be going away in 2012?
Yes. Hi, Lily. This is Jin. No, you did not miss it in our script. I think because our business in 2012 will be in a transition year where we will be focusing and developing our new business model, we are right now not in a position to issue financial guidance for 2012. We would like investors to focus more on our growth business, especially on the Service side, so that’s why we have not provided 2012 guidance.
Lily Wu – TGRA Capital
Okay. But are we looking at being able to offset fully the loss of legacy revenue in the coming year? Or what are your thoughts on that?
Looking at our Equipment – traditional Equipment business, we are anticipating reasonable growth and healthy growth in that area. It is driven mainly by a steady pipeline, which we can see right now, and also the opportunity in our domestic cable markets.
Lily Wu – TGRA Capital
Okay. Great. And the Operation and Services is also expected to grow?
Yes, that will be our key initiative and focus in year 2012.
Lily Wu – TGRA Capital
Okay. All right. Great. Thanks for that.
Thank you, Lily.
(Operator Instructions) And our next question will come from Himanshu Shah of Shah Capital. Please go ahead.
Himanshu Shah – Shah Capital
Hi. Can you talk about the Youku and Tudou merger announcement from yesterday and its impact on your business as a supplier, as well as your iTV.cn would be a competitor to their business model? Can you talk more about that please?
Okay, thank you. First, we also heard the breaking news of the merger of Tudou and Youku. There due to the local policy limitation by the government, they are limited on non-TV screen services and the typical business model is – got revenue from advertisement while they provide the free content. Our iTV.cn focus on Internet TV Services on the TV screen outside of China with Chinese content to overseas Chinese people. So the – in certain time periods, we can’t see very strong competitiveness against the other between iTV.cn and the Youku Tudou. And we are quite confident that iTV service will grow up quickly after the preliminary build-up.
Secondly, we are about to announce our VSC platform. The most basic service is our VDN offerings. As long as our service quality is good and our cost is low enough in the form of competitive price, we could be attractive Service supplier for those Video Media Operators, include Youku and Tudou. Thank you.
Himanshu Shah – Shah Capital
Thanks. Can you talk about why you did not buy back you stock aggressively in light of its current valuation?
Hi, Himanshu. We have been executing against our share buyback program starting from September and through to today, so we have been executing against that. And to date, we have purchased approximately $6.5 million worth of the company’s shares. And as you know, our daily purchases will be limited by SEC regulation.
Himanshu Shah – Shah Capital
There is no way you can just buy in a block because you have over $300 million in cash and the market value – I mean you have a negative enterprise value of $60 million, $70 million every year, and I’m just scratching my head over here why the board is not taking this initiative over here and buy back 5 million, 10 million shares.
I think we have announced the $20 million corporate buyback plan, which is approved by our board of directors. And we have been executing against it. However, we do have to balance the proper usage of our cash, especially in light that we have new initiatives in 2012 with our new business, especially our VDN platform and other initiatives. Therefore, currently, our plan is to continue to execute the $20 million corporate share buyback program.
Himanshu Shah – Shah Capital
Are you operationally, I mean, are you going to be operationally profitable in 2012?
As we have mentioned in our script, we will continue to work on our operational processes and we will drive towards operational cash flow breakeven in 2012.
Himanshu Shah – Shah Capital
(Operator Instructions) 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 2011 earnings conference call. We look forward to updating you on our first quarter 2012 result 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 now ended. We thank you for attending today’s presentation. You may now disconnect your lines.
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