UTStarcom, Inc. (NASDAQ:UTSI) Q4 2017 Results Earnings Conference Call March 9, 2018 8:00 AM ET
Ralph Fong - Director, The Blueshirt Group Asia
Tim Ti - CEO
Eric Lam - VP, Finance
Hello, ladies and gentlemen. Thank you for standing by for UTStarcom’s Fourth Quarter and Full-Year 2017 Earnings Conference Call. Please note that we are recording today’s conference call. I will now turn over the call to Mr. Ralph Fong, Director of The Blueshirt Group Asia. Please go ahead, Mr. Fong.
Thank you, Aaron, and hello everyone. Thank you for joining us on UTStarcom’s fourth quarter and full-year 2017 earnings call. Earlier today, we distributed our earnings press release. 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. Tim Ti, Chief Executive Officer; and Mr. Eric Lam, Vice President of Finance.
Before we get started, let me refer you to the Company’s Safe Harbor statement on slide two. This call will include forward-looking statements relating to the Company’s business and strategic initiatives. Those statements are forward-looking in nature and are subject to risks and uncertainties that may cause actual results to differ materially and adversely from the Company’s current expectations. The risks and uncertainties include factors identified in the Company’s latest annual report on Form 20-F and the current report on Form 6-K, which are filed with the Securities and Exchange Commission. All forward-looking statements including this call are based on information available to the Company as of the date of this call. That information may change, if so, the Company assumes no obligation to update any forward-looking statement.
With that, I will now hand the call over to UTStarcom’s CEO, Mr. Tim Ti. Tim?
Thank you, Ralph. And thank you everyone for joining our call today. We appreciate your interest in UTStarcom. As Ralph mentioned, you can download the call presentation from the Investors section of our website. Please note that unless otherwise stated, all figures mentioned during this call are in U.S. dollars.
I’ll begin our call with the summary of our highlights and then I’ll discuss opportunities for the Company’s long-term growth. After that I’ll turn the call over to our VP of Finance Eric Lam, who will present the financial details.
Now, let me quickly recap our results on slide three. 2017 was an exciting year for us. This is the second consecutive year we generated operating profit. Full-year revenue grew double digits, gross margin expanded, and the net income was up substantially. We exceeded our financial goals and continue to invest aggressively in R&D to develop and introduce new and improved products to strengthen our comparative position.
For Q4, revenue was lower than anticipated due to the timing of order delivery, impacting gross margin and the profitability. While the fourth quarter was below expectation, it does not diminish the success we achieved for the full-year.
Technology leadership is the key to winning new business in the markets. Our R&D team is focused on developing new product for the most promising long-term market opportunities. To give you an example, the 10G to 100G transition is on the way in Japan and we’ll soon begin traction elsewhere. We are actively marketing our product in India, Taiwan and Brazil, and are making good progress.
We are exploring new business opportunities globally. Broadband expansion in the rural area of the U.S. is promising opportunity for us. Furthermore, we are researching the opportunities in the optical networking market in China and may reenter if we find attractive segments in which we can leverage our core expertise.
India remains a core market for us. Demand is increasing rapidly for modern broadband service, driving the use of innovative and cost effective solutions. We have made significant progress in the market and have several project wins in 2017 involving a variety of products and range of services. Additionally, we announced yesterday a large project win with our major customer, BSNL, providing next generation network voice and the data equipment and service.
During our Q3 call, we highlighted some of our new products was released or in the developmental stage. Those new products are very important to the long-term growth of the Company. So, let’s review our progress on slide four and five.
I want to start with one of the most exciting initiatives, one we just formally announced yesterday. As you know, we are leveraging our communication and IT infrastructure expertise to ensure the retail store automation market. I will discuss this more broadly in a moment. We just announced a concrete partnership that will give a strong foothold in the market. We have signed an agreement to form a joint venture with the leading Zhejiang-based manufacturer of refrigerators in China. The JV will initially develop commercial smart merchandising machine for retail stores. In addition to the smart merchandising machines, the JV will develop a more comprehensive retail automation solution. Smart retail solutions enhance the customer experience and the safe operating process. Our operating product will utilize integrated technologies such as the facial recognition, image analysis, behavior identification, load sensor, RFID and the mobile payment. Moreover, the cloud-based operation center will offer various types of value-added services, enabling the real time interaction of people, product and the locality.
We anticipate a substantial a market opportunity to believe this joint venture will gradually enhance the Company’s top and bottom line results for years to come. Retail store automation is especially virtual opportunity and we are moving into aggressively with the joint venture and with our Smart Store initiative. More and more transitional retail stores are recognizing the necessity to upgrade their infrastructure in order to enable innovation and service optimization.
Our R&D team has leveraged our leading information and the communication technologies to create a cloud-based integrated retail store solution. The solution includes IU+, a cloud-based operation center and the intelligence cutting-edge product. The edge [ph] product serves as the central control point for a store to manage all its key functions, such as the synergies, cashier free point of sale, video surveillance system, facial recognition, IoT and smart label. Our control center can also provide secure voice and the data services to connect the stores to its intranet and internet.
We are testing our Smart Store solutions in field trial now. Demonstrations are underway at our partners’ retail and gas station convenience store chains. We are excited to collaborate with our system integration partner as well as one of the best known e-commerce player, based on Hangzhou, China.
Let me now discuss SkyFlux, our next generation networking platform targeted at better addressing our customers’ needs for service agility, automation and the efficiencies. This is a new and important product for us, which is attracting new customers in new markets. SkyFlux is using a new cutting edge for on-boarding mechanisms designed to better accommodate software-defined network. SDN-based control is the direction all networks are going because of the centralized intelligence through network view and the big data analytics. SkyFlux enables the service agility and automation sought by the operators today. Our SkyFlux devices will support high-speed interfaces up to 100G and high port density, small form-factors and other carrier-class features.
An important immediate opportunity we have discussed is the synchronization. During the year, we shipped our new SyncRing product. We designed SyncRing for evolution of the mobile networks to LTE-Advanced and 5G, especially addressing the mobile synchronization market. The global migration to LTE-Advanced and the 5G mobile network should create new sales opportunity for SyncRing. Even as we roll out the first generation SyncRing, we are investing in R&D for future generation of this product line. The industry is preparing for the 2019 release of 5G technology. To be prepared, we are developing a next generation synchronized solution to meet key 5G network requirements, such as updated network architecture, improvement in hardware for better accuracy, introduction of new optimization technologies and extended monitoring capabilities.
With that, now I will turn the call over to Eric, who will comment on our financial performance. Eric?
Thank you, Tim. And thank you everyone for joining the call today. I will talk to our financial performance for the fourth quarter and full-year 2017.
Please turn to page six for a non-GAAP revenue review. Please note that non-GAAP revenue excludes IPTV revenues.
Full-year 2017 non-GAAP revenue was $98 million, up 14% from prior year. The increase was in line with our strategy to focus on high-value and high-margin products. In the fourth quarter, total non-GAAP revenue was $18 million which compares to $28 million in the same quarter last year. By geography, we saw strength in India, which accounted for approximately 62% of revenue, up 31% in Q3, Japan about 27%, down 60% from Q3; and the rest of the world, the remaining 10%.
Please turn to page seven and eight, which highlight gross profit and gross margin. Please note that non-GAAP costs sales and operating expenses excluded stock-based compensation and legacy IPTV costs. Full-year 2017 non-GAAP gross profit was $33 million, up $28 million from last year. Non-GAAP gross margin for full-year 2017 was 34%, up slightly from 33% in 2016. For the fourth quarter, non-GAAP gross profit was $5 million, down from $10 million a year ago. Non-GAAP gross margin fell to 25% from 37% in the same period last year. Now, the delivery timing that Tim mentioned earlier when discussing revenue, impacted the gross margin due to product mix change.
Now, let’s turn our attention to operating expenses on page nine. Full-year non-GAAP operating expenses were $26 million, up 6% from $24 million in 2016. The increase in operating expenses reflects our continuing R&D investment and one-time service fees related to the privatization offer and auditor change in 2017. In the fourth quarter, non-GAAP operating expenses were $6 million, essentially flat from a year-ago.
Page 10 and 11 summarize our operating income and net income. Full-year non-GAAP operating income was $7 million, almost doubling the operating income of $4 million in 2016. Full-year non-GAAP net income was $8 million or $0.22 per share, which compares to the net income of $3 million or $0.07 per share in 2016.
In the fourth quarter non-GAAP operating loss was $2 million, compared to an operating income of $4 million a year ago. Non-GAAP net loss was $3 million or loss of $0.09 per share versus the net loss of $2 million or loss of $0.05 per share in the same period last year.
Page 12 summarizes our cash flow. We ended the quarter with $80 million in cash and cash equivalents, a net decrease of less than $4 million in 2017. Net cash from operation increased $6 million. We have moved $6 million to restricted cash and placed $3 million in a term deposit for higher interest. For the quarter, net cash decreased of $11 million was attributable to $8 million of inventory purchases for several large projects in India and a shift of $3 million to a term deposit, again for higher interest.
In Q4, we took an impairment charge on acquisition in AIoTV, weighting down the remaining value of this investment to zero. However, on the positive side, I’m happy with the recent progress of one of our value investments, namely IPTV which operates in China and Thailand. iTV’s growth is accelerating in China. The Thailand business is stable and profitable. Furthermore, this is attracting interest from potential investors expressing strategic intent to fund and expand the Thailand operations. Now, this is still too early, but we do see the possibility of reaping some cash benefit and payback from investment in this entity.
On page 13, we included both GAAP and non-GAAP key financial highlights for your reference.
Now, looking forward, we are expecting revenue to be in the range of $18 million to $23 million for Q1 2018.
With that, I will turn the call back to Tim for additional comments. Tim?
Thank you, Eric. We are confident our technology, product solution and geographic coverage provide a foundation for solid future. We are seeing strength in India. We have introduced important new products especially SyncRing and see other opportunities developing such as in retail store automation. Our operating achievements in 2017 positioned us well for future growth. We have a dedicated talented team in place to deliver long-term value to our shareholders.
With that, Eric and I would like to take your questions. Operator, please open the lines for Q&A.
Thank you, Aaron. That will conclude today’s conference call. And thank you for your participation. You may all disconnect.
Thank you. That concludes today’s conference call. Thank you for your participation.