UTStarcom Holdings Corp.
Q4 2013 Earnings Call Transcript

Published: 20 Mar 2014

[Operator:]

Ladies and gentlemen, thank you for standing by for UTStarcom’s Fourth Quarter and Full Year 2013 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. Jane Zuo, Investor Relations, Senior Manager for UTStarcom. You may begin.

[Jane Zuo:]

Hello everyone and welcome to UTStarcom’s fourth quarter and full year 2013 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. William Wong, our CEO; Mr. James Lu, our President; 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 business, strategic initiatives and the performance in the fourth quarter and full year 2013. 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 risk and uncertainties related to, among other things, changes in the financial condition and the cash position of the company, changes in the composition of the company’s management and their effect on the company. The company’s ability to realize anticipated results of operational improvements, and benefit of the divestiture transactions, their ability to successfully identify and acquire appropriate technology and businesses for key organic growth and to integrate such acquisitions, the ability to knowledge and develop such products assumptions the company makes regarding the growth of the market and the success of the company’s offering in the market and the company’s ability to execute its business plan 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 inaccurate of strategic 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 the information relevant to the company as of the date of this conference call which may change and the company assumes no obligation to update [Audio Gap] 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. Please turn to slide five. Let me begin by saying that we ended the [inaudible] full year on a very strong note both financially and operationally, meaning our state of expectation to achieve incremental improvement in performance versus 2012. We reached several technical and financial milestones and are carving out a highly differentiated market position of broadband business. You have heard us say before that we see healthy and improving trends in our financial and operating performance, and 2013 showed exactly this. Specifically, we achieved new customer wins, new product launches and stabilizing financials amongst other developments. Let me quickly elaborate. We show the depth of our R&D and broadband product development capabilities with several product launches, despite beginning the year in the midst of restructuring. We completed the first phase of a major initiative to develop a platform of products, based on Software Defined Networking technology which we believe, will revolutionize the industry and which we are building into our broadband product designs. We secured several new tier one carrier customer engagements for telecom infrastructure projects that will incorporate our broadband products. We have presumed positive sales growth. We achieved our very aggressive internal target of heating positive operating cash flow after adjusting for onetime non-recurring items. Importantly, this favorable trend stand in large part from efforts that began almost 18 months ago to restructure the business, accelerate growth and improve profitability. We have completed divestitures of unprofitable and non-core businesses, staff reductions and deep cost cuts that were challenging but necessary to stabilize the company financially, and unlock capital to invest in and grow the most competitive part of our broadband business which will be the future of the company. As a result, UTStarcom is as much organization with a well-defined and a globally competitive broadband product portfolio that allows us to compete with the top tier of telecommunications infrastructure providers, the high growth parts of the markets such as cloud computing, mobile media and data services. The market for these services is growing in both developed and developing countries across the globe, and we intend to target opportunities both where we have established presence, such as Japan and India, as well as in new markets particularly in Asia, the Americas and Europe. We have already made progress in many of these geographies. In light of our global expansion plans, we are joined by Mr. James Lu, President of Global Sales. He will provide more details on our marketing and sales plan once I conclude my remarks. Financial highlights. Robert will go into the details momentarily, but let me briefly read some financial highlights as well. Overall, we keep many internal and external targets and made incremental improvements in revenue and profitability. We still face top-line and bottom-line pressure from the depreciation of the yen as Japan is a significant source of sales. Also, lower margin products were a greater share of sales in 2013 than in the year prior. These equate on our gross margin some of the key financial takeaways from the quarter and the year include the following

[James Lu:]

Thank you, William for asking me to join the call and thank you to everyone for welcoming. It is a pleasure to be here with you. Alongside the technical and operational feeds, we have achieved in 2013 this year we also launched our marketing and sales plan to enter new geographic markets and increase market share to tier one carriers. First, we will deepen our penetration into markets where we have an existing presence, such as Japan and Taiwan. We will accomplish this by expanding the range of product we sell to existing customers as well as new customers especially in large markets where there are multiple tier-one carriers. Second, we will enter new geographic market with our existing customers as they are expanding beyond their home market. And third, we will seek partnerships that can help us enter new markets such as value added channel partners. These partners are especially important to helping us establish a foothold in Europe and the U.S. as well as in new Asia-Pacific markets. In fact, we have already achieved several milestones. For one, we signed a long-term contract to Chunghwa Telecom in Taiwan for a management package optical transport projects that would last after few years. In Indonesia, we secured a major market optical transport project that will support more by for the country’s largest cellular service provided for our partner and in Brazil, the largest market in America besides the U.S. we won a contract with a major telecom service provider on a mobile backhaul and fixed line network. These new customer relationships together with our historical strong presence in Japan and India validate our technical superiority and give us a widened global platform to sell a broad range of products and services in some of the largest and most dynamically growing consumer market. So if you look at the map of the world today, UTStarcom has already planted a flag in several part of Asia, Japan, Taiwan, Indonesia and India. In fact, we already have 35% market share in India a country of over 1 billion people. Indonesia is a particularly exciting because it has the large population 250 million people many of whom are very young. Also, the economy is growing largely so domestic consumption so it has the right demographics and the right market structure for the services we offer. Moving to the Americas, we also have a in Brazil which is another rapid developing country. It has the second largest economy in the America, next to the U.S and the second largest population. If developing markets like Brazil and Indonesia there is a great opportunity for us to benefit from that growth as carriers through telecom infrastructure to serve a growing middle class consumer base. In developed markets, like the U.S. and in Europe where we expect to plant flag this year, there is an opportunity to work with incumbent carriers at the existing numbers to offer a broader array of 4G products and services. These are just some broader description of our plans, but I will be happy to take questions in the Q&A session. For now, let me give the floor to Robert to discuss our financial results. Robert?

[Robert Pu:]

Thank you, James and hello everyone. Starting from slide number 18, I’ll discuss our financial results in more detail. Before I begin, I’d like to remind everyone that in the first quarter of 2012 we divested the IP TV business so for better comparison of our financial performance our year-over-year basis we have prepared non-GAAP financial results which focuses on our broadband business. So for today’s purposes, I will focus on our broadband business and exclude the already divested businesses from our discussion. Please turn to slide number 19 before I walk through the specific numbers and let me highlight a few key themes of the fourth quarter and the year of 2013. We managed to do well in several important areas first, revenue for the year of 2013 increased incrementally on a year-over-year basis as we continually experience stable demand for our broadband equipment products from our customers. Second, throughout 2013 we benefitted from aggressive and focused cost reduction efforts as demonstrated by the significant 20% OpEx for the year. Moving forward, we will continue to find ways to further improve our cost structure and expect to further reduce our OpEx significantly in 2014. Third, we made significant improvements in cash flow and incremental improvement on the bottom line during the year, reflecting the positive performance on the top-line coupled with lower costs. Lastly, we ended the year in a strong financial position with no debt and approximately $107.8 million in cash on the balance sheet. As we have said before, we will continue to invest in our growth plan and other initiatives designed to enhance shareholder value. Moving to one of the challenges we faced in 2013, gross profit and gross margin decreased from 2012 level which we had flat in last few quarters. The decrease is largely due to the in depreciation versus the US dollar. We have taken certain measures to mitigate the impact for example we convert our Japanese cash assets to US dollars regularly. However, by doing business in international markets where inherently exposed to such risks furthermore Japan is perhaps our most important commercial markets at this point so this is a market we’re committed to. It’s very important to note that we achieve incremental improvement in financial performance in spite of this, we estimate to the foreign exchange impact is more than $10 million. So it is adjusting for the non-operational item, we would have had more positive results in operating income and net income and operating cash flow measurement. Now let me turn to the specific results. We’ll turn to page 20 for revenue. In the fourth quarter revenue was $38 million compared to $41 million in the prior year period. For the full year, revenue was $163 million compared to $157.3 million in 2012. Our revenue recognition is dependent around carrier customers’ deployment schedules. So it is always better to look at year-to-date or full year numbers to normalize any seasonality. For full year 2013 revenue increased likely from the prior year as we experienced stable demand from our broadband equipment products from our key customers. Please turn to slide 21 and 22 for gross profit and gross margin. In the fourth quarter, gross profit was $7.2 million compared to $13.3 million in the prior year period. Gross margin was 18.8% compared to 32.4% in the prior year period. For the full year, gross profit was $40.2 million compared to $54 million in 2012. Gross margin was 24.7% compared to 34.3% in 2012. As I mentioned a moment ago, the year-over-year gross profit and gross margin decrease was mainly due to the depreciation of the Japanese yen. As a reminder a major proportion of our revenue is denominated in Japanese yen. Most of our costs are denominated in renminbi and our reporting currency is the US dollars. In US dollar terms, the depreciation of the Japanese yen and the relative strength of the renminbi throughout this year resulted in the year-over-year gross profit and gross margin decrease. As I discussed earlier in the call, we estimate the foreign exchange impact on our gross profit was more than $10 million so is adjusting for this non-operational item for 2013 gross profit and gross margin results would have been more comparable to 2012 results. Also, during our second quarter conference call, we let everyone know that we booked an additional law provision in our India business P&L in the second quarter of 2013 which negatively impacted our year-to-date gross profit and gross margin in results. This was due to an increase in the estimated cost complete of projects in India resulting from the cost incurred by our service provider in conjunction with their final provider renewal. We will continue to monitor the Japanese yen situation and other factors impacting our income statements and update our investors accordingly in the future. Now please turn to slide number 23 for operating expenses. In the fourth quarter, operating expenses were $15.7 million compared to $15.9 million in the prior year period. For the full year, operating expenses were $53.4 million compared to $67 million in the prior year. Throughout 2013, we worked very diligently to reduce all we right-sized the business by divesting non-core products reducing redundancies in our workforce and promoting accountability and productivity among our staff. We also reduced people related overhead expenses and outsourced service expenses. Throughout 2013, we have clearly benefitted from our cost reduction efforts that we initiated in the second half of 2012. As a result, the 2013 OpEx is 20% lower than 2012. Furthermore, the higher fourth quarter OpEx reflected a continuous restructuring related costs and expenses incurred for the privatization project. The operational runway OpEx for the fourth quarter is within $12 million consistent with Q3. With continued cost reduction efforts, we expect to further reduce OpEx significantly in 2014. Please turn to slide number 24 and number 25 for operating income and net income. In the fourth quarter operating loss was $8.6 million compared to operating loss of $2.6 million in the prior year period. For the full year, operating loss of $13.2 million compared to operating loss of $13 million in 2012. In the fourth quarter, net loss was $16.1 million compared to a net loss of $8 million in the prior year period. In the fourth quarter, we absorbed non-operational and non-cash equity pick up and impairment mainly from iTV Media for $12.2 million. Adjusting for these items net loss for our broadband business was $3.9 million in the fourth quarter compared to a net loss of $5.8 million for the prior year period. For the full year net loss was $22.7 million compared to net loss of $17.6 million in 2012. For the full year, we absorbed non-operational and non-cash equity pick up and impairment mainly from iTV Media from $19 million. So adjusting for this item, net loss from our core operations was $3.7 million in the year of 201, representing a significant improvement compared to 2012. And when we perform accounting and financial reporting for iTV Media related matters we worked closely with our auditor PWC and we always act out of conservatism. At the same time we also noted, that since its commercial launch iTV Media has made significant progress in 2013 as demonstrated by its subscriber growth in the future as an investor, our plan is to continue to help iTV Media to develop its business and eventually capitalize on this investment. Please turn to slide number 26 for our cash balance and cash flow. We have approximately $107.8 million in cash and we have no debt at the end of 2013. For the full year, cash used by operating activities was $1.9 million which is very close to breaking even and a significant improvement compared to past years. Cash used by investing activities was $28.9 million mainly due to investments in iTV Media. Cash used by financing activities was $30.7 million, which is mainly due to share buyback via a tenure offer to return liquidity for our shareholders. Please turn to page 27, for the full year we have made significant improvements in operating cash flow compared to past years. We have worked very hard to achieve this as we understand that to create value for our shareholders we need to generate cash from operations and therefore the enterprise value of our broadband business can be appreciated by our investors. In 2013 we made good progress, executing our business plan as demonstrated in our P&L and cash flow measurements. At the beginning of the year 2013 we said we expected to achieve incremental improvement in financial performance. Now, looking back at 2013, we have achieved improvements in both top-line and bottom-line. Also, we have made significant improvements in operating cash flow. Very importantly, we achieved these improvements while facing pressure on the gross profit and gross margin into the Japanese yen depreciation. Looking ahead, our key focus on vigilant cost control, cash generation and executing our strategic initiatives we will continue to use our strong cash position to invest in our growth plans and other initiatives designed to create shareholder values. And by now I think I’ve covered our financial results extensively. So lastly I want to articulate our perspective on valuation and shareholder value here at UTStarcom. Please turn to slide number 28 in short, we believe our valuation should most appropriately be equal to the sum of parts that include our net cash position throughout the enterprise value of our broadband business throughout the economic value of our strategic investments. Let me put some numbers around these three parts first on cash we have $107.8 million and no debt. Second our enterprise value, we compete in an industry with long term growth prospects driven by continued IT traffic growth due to proliferation of smart devices and mobile apps. We note that our comparable companies on average approximately 1.5 times twice the sales ratio. Third on our investments the company has made investments in the past most notably aioTV and iTV Media among others. We will continue to do our best to help these companies to make further progress and therefore ultimately create shareholder value to UTStarcom’s shareholders. We believe that investors will begin to better understand it going forward and that in the long run, our market capitalization will eventually reflect the true economic value of all our underlying assets. This concludes my fourth quarter and full year 2013 financial review section. Now I will turn the microphone back to William to discuss our outlook.

[William Wong:]

Thanks, Robert. To sum up, and on slide 29, given our hard work over the last 18 months, we believe we have stabilized operations, made this as much stronger and set a strong foundation for growth. Even so, we are still moving through a continued concession looking at 2014’s specifically we are fully committed to broadband as the driver of the business and drive revenue contributor now and going forward. While many of the latest initiatives for our broadband businesses significant momentum new products are in early stages in the current life cycle. Together with the new customer wins that are going through project deployment phases we do expect them to become significant revenue contributors beginning in the latter part of 2014. At the same time, we will continue to work to mitigate the pressure on the gross margin that access you to the ad wins from the depreciation of the Japanese yen against the US dollar. Further, we will maintain a tight focus on financial controls and continue to reduce costs as we have consistently throughout our restructuring. Taking all of this together, we believe we will therefore, be able to deliver additional incremental improvement in overall financial performance compared to 2013. With that, I’ll open the call to questions. Operator, please open the line for Q&A.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Tony Tian of New Oriental Capital. Please go ahead.

[Tony Tian:]

Hi. My first question earlier this year SoftBank liquidated its stake in the company besides the reason that exchange of SoftBank investment strategy. I was just wondering what or would there be any significant change on your business relationship with SoftBank? And what percent of revenue was coming from SoftBank in this fiscal year 2013?

[William Wong:]

Actually our relationship with SoftBank has been rolling year after year and that customer relationship portion with SoftBank really has no specific ties to that investment that they have divested off earlier in the year. We continue to work with SoftBank very closely in a lot of new projects, and we will also follow their footsteps as they grow their business on a global basis. Actually our business relationship with them has been stronger than ever because it’s evidenced in what we have done for them in Japan. After our packet optical transport product was deployed in the last few years, they were able to significantly reduce the OpEx and also reduce the CapEx in the deployment of the infrastructure. And to answer your question about the percentage in 2013, they are approximately five zero, 50% of the revenue.

[Tony Tian:]

Thanks. My next question is also related to SoftBank. SoftBank obviously plays a significant role in the global telecom industry particular with this recent acquisition of Sprint in the US market and then very likelihood of Sprint buying T-Mobile in the U.S. market in the near future. So given you blunt history with SoftBank, do you see any opportunity in the U.S. markets just by looking at the relationship with SoftBank?

[William Wong:]

In that regard of course, we would start looking at Sprint’s operation. Typically, they lease a lot of their infrastructure from other carriers. Whether looking at how SoftBank has operated in Japan before, they typically wanted to own their own proprietary infrastructure and that as a result prime factor that enables them to induce the OpEx and reduce the CapEx and we sorted a very high operational profitability. So if SoftBank would undertake this similar strategy in the U.S. since they are the largest shareholder with Sprint, their influence we expect would be there. If SoftBank wanted to take the same strategy in that manner then of course we will be there to support that and I think our philosophy all along of simple network, simple operation will also fly in that environment in the U.S.

[Tony Tian:]

And my last question is regarding your validation as you just discussed, we’re looking at your validation looking at some parts mattered obviously your business could have used a lot of more than handling the market is giving the validation. And with your continued effort in business and new business initiatives in the key growing areas like cloud computing mobile area plus your major company iTV I was just curious for the two companies iTV Media and aioTV the two companies has any plan to either go public or seek being buy out in the near future? The reason I’m asking this question is as the shareholder of UTStarcom, I guess will be very curious to know when and how the company can realize the validation of these two companies.

[William Wong:]

Yeah as a major shareholder both these companies, we are doing a number of things first of all we – first and foremost is to help them to grow their business to maturity. And as I said earlier in my script with iTV Media we expect them to reach critical breakeven point this year as soon as they achieve about 300,000 subscribers. At that point, it will be a very easy benchmark in the industry to measure the kind of value that they would bring. With respect to aioTV and as we all understand they were in the very heated area the OTT video space, and as I mentioned earlier about this term acquisition by Ericsson of Azuki System, our understanding is that deal was value at about 125 million. And as we analyze we make some simple comparison there are indeed a lot of similarity that we can draw from. In the second step actually both companies, aioTV and iTV Media as we change financial advisor of their own and they have been exploring strategic alternatives in the past for the companies. So we do expect and we do hope that as a major shareholder of both companies that at the right valuation and the right timeframe, we’re able to capitalize on all these investments and as a result create a lot of value for our shareholders.

[Tony Tian:]

That’s all I have. Thank you.

[Operator:]

Our next question comes from William Gregozeski of Greenridge Global. Please go ahead.

[William Gregozeski:]

Hi. Couple of question, you had mentioned more into the value added reseller space for some of the broadband products. How much in dollar terms or percent of total sales do you think that will make up for 2014?

[Robert Pu:]

Hi Bill this is Robert. Thanks for asking this question. We do have proprietary packet optical transport product that we already offered for our carrier customers. And also we’re functioning more and more in the 2013 as a value added reseller for synergistic data transport product, such as mostly accessed point products. And because we plan to cover the full spectrum of our customers’ needs from access point to the, [inaudible] network and then to the core network. So we do deal this as a way to satisfy our customers’ demand and also another engine for top-line growth. We’re still early into this sales and marketing in this so it’s kind of difficult to quantify at this point but constructively speaking in terms of gross margin the value added products gross margin tend to be lower compared to our proprietary product, but at the same time as in dollar terms so the gross profit and also at the same time we satisfy our customers demand and needs and also from a financial angle, the value added to the set of product absorb less SG&A such as R&D service and other back office expenses.

[William Gregozeski:]

Okay. And as far as the cash position you have, I don’t know if you have any more buybacks planned or other investments you’re looking at, but would you consider buying products instead of just being value added reseller of that?

[Robert Pu:]

Yes Bill, this is Robert again. We do have $108 million on our balance sheet and we have no debt at the end of 2013. I think for the use of cash we will invest in our own R&D efforts to develop proprietary products and we will probably I mean we’re always on the lookout for licensing or acquisition or opportunities, but we will be very selective in 2014 and moving forward. Because if we want to sell a synergistic product from another vendor from a current customer, we can always have a transfer price or something like that scheme arranged instead of we pay upfront amount of we incur a lot of CapEx upfront to buy that product.

[William Gregozeski:]

Okay. All right. And as far as the gross margins for the whole 2014, do you have a range of what you’re looking at what you’re assuming a flat currency?

[Robert Pu:]

At this point, with all the information we have, I think 2014 gross margin should be comparable to our 2013 full year gross margin.

[William Gregozeski:]

Is that with adding back the currency exchange or as you reported it for GAAP?

[Robert Pu:]

That is assuming the constant US dollar and Japanese yen exchange rate about 100.

[William Gregozeski:]

Okay. And would you consider doing any hedging just given the currency exchange and losses you had in the last couple of years?

[Robert Pu:]

Well we did try to even mitigate talk about it during my financial review section that we regularly we convert our Japanese yen cash as we receive them into US dollars. So that we will do to mitigate these risks and also on the other hand I want to stress again that the Japanese market is probably the most important commercial market for us in 2014 and also in the near future. So this is the market that we are committed to.

[William Gregozeski:]

Okay. All right. Thank you.

[Operator:]

[Operator Instructions]. This will conclude our question-and-answer session. I would like to turn the conference back over to Jane Zuo for any closing remarks.

[Jane Zuo:]

Thank you for joining us on our fourth quarter full year 2013 earnings conference call. We look forward to updating you on our first quarter 2014 conference call in few months. Feel free to get in touch with us anytime if you have further questions, concerns or comments. Thank you everyone.

[Operator:]

The conference has concluded. We thank you for attending today’s presentation. You may now disconnect.