UTStarcom Holdings Corp. (UTSI) Q1 2010 Earnings Call Transcript
Published at 2010-05-04 23:55:20
Peter Blackmore - Chief Executive Officer Jack Lu - Chief Operating Officer Kenneth Luk - Chief Financial Officer Randy Liao - Director of Investor Relations and Global Treasurer
Good afternoon. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the UTStarcom first quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator instructions)
Good afternoon. Earlier today, we announced our financial results for the first quarter of 2010. That press release is available on our company web site at utstarcom.com. On today’s call we have Peter Blackmore, our Chief Executive Officer; Jack Lu, our Chief Operating Officer; Kenneth Luk, our Chief Financial Officer; and Randy Liao, Director of Investor Relations and Global Treasurer. This call will include forward-looking statements relating to, among other things, the company's restructuring initiatives, projected business model, the closing of the sale of our Hangzhou building, and the strategic investment of the Beijing development area. Forward-looking statements are generally indicated by such words as “will,” “expects,” “estimates,” “goals,” “plans” or similar words. These statements are forward-looking in nature and subject to risks and uncertainties that may cause actual results to differ materially. These risks include the ability of the company to realize anticipated results from operational improvements, execute on its business plan and manage regulatory matters as well as risk factors identified in its latest annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as filed with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements. And in addition, today's call will include certain non-GAAP financial measures. The most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures is attached to the earnings release issued earlier today, and filed on Form 8-K. Now I will turn the call over to Peter.
Thank you and hello everybody. It’s good for you to join the call today. I happened to be in the US this week and Kenneth is in China so please bear with us if they are any slight delays between us during the call. I’d like to start by talking about our first quarter 2010 financial results which we released earlier today. While Kenneth will provide more detail, I’d just like to discuss some factors that drove the key financial and operational metrics for our business. Importantly, our first quarter results for the first time were almost entirely based on the performance on our core products. These are the ones that will drive bookings and revenue going forward. I’d remind you that core revenue does include the past restatement that will continue until the end of 2011. Revenue was $81 million for the quarter. This sequential decline from quarter 4 was as expected and as you remember in quarter 4, we had some accelerated revenues from BS&L because we started revenue recognition of that and got the full year of 2009 all in quarter 4, and we also recognized a very small amount of handset revenues in quarter 1 in an immaterial amount as we’ve now completely exited this business and this compared with the $17 million we recognized in quarter 4. The first quarter gross margins were 34%. This was above our target gross margin expectations for our business. It does represent some one time items but also the positive impact of serving higher margin broadband products including the TN product. Our operating expenses were $46 million which did include a restructuring charge of $7.5 million. We also had a bad debt charge of $4 million. In addition, we sold certain assets and liabilities related to our remote access server RAS product line which benefited operating expenses by $1.8 million. However, our run rate operating expenses continued to decline sequentially and we expect our run rate operating expenses to be lower next quarter as approximately 300 employees left the company in quarter 1 as planned. We have additional cost measures planned in quarter 2 plus the ongoing transition of outsourcing manufacturing due in quarter 2. So I want to make clear that by the end of quarter 2, we should be below 1,800 employees and we are still on track to achieving our target of $100 million in annualized operating expenses. The cash importantly we ended the quarter with $235 million in cash and short term investments and this number includes $14 million of deposit from the building sale. In Aril we also received an escrow of an additional $56 million of the sales proceeds from the building. As we will discuss later, we shall get the balance of the building monies in quarter 2. So I’d now like to update you on the two pending transactions we’ve talked about in the last couple of calls. First, the BDA investment. We continue to believe this investment is an important strategic move for UTStarcom as it will improve the company’s ability to tap high growth China IPTV market. In connection with the transaction we will also move our headquarters to Beijing, China, and will be eligible for tax incentives and other financial and non-financial assistance to the company from the BDA. We are waiting for approval and we expect this transaction to close in the second quarter. To remind you, once the deal closes, we will have a strong Board with good China expertise which we believe will be critical to driving the long term strategic direction of the company including the IPTV cable opportunity we have talked about. Jack Lu joined the company on March 1 as COO and will transition to CEO after a transition period. Secondly an update on the Hangzhou building sale. As many of you are aware, we agreed to sell our building in Hangzhou for approximately $140 million less taxes and cash back in December. To date we’ve received a deposit of approximately $40 million. We have also received an escrow in an additional $56 million in sales proceeds in April and have obtained an irrevocable bank guarantee letter from the buyer for the remaining amount of the cash proceeds from the sale lease back agreement. Importantly, the title transfer was officially accepted on Wednesday 28 of April, China time, and furthermore, the buyer paid the taxes for the transaction on April 29. We now expect the sale to close in the next few weeks and we expect to receive the balance of the cash proceeds from the sale which will be a further $63 million. These cash infusions will further strengthen our debt free balance sheet and provide the financial resources required for the company to prosper in 2010 and beyond. I’d now like to comment on a couple of key appointments. As you would have also seen, we announced earlier today the appointment of Edmond Cheng as Senior Vice President and Chief Financial Officer. He will replace Kenneth Luk who is resigning from the CFO position due to personal reasons. Kenneth will stay with the company until after the filing of our 10-Q for the first quarter of 2010 and I want to thank Kenneth for his work here at UTStarcom. I’m extremely pleased to welcome Edmond to UTStarcom’s management team. As you will have seen from the press release, he’s got a wealth of financial and management expertise with companies such as Applied Materials and Compaq Computer as well as a track record of successful CFO. He will be joining us from Zoomlion, a publicly listed company on the Shenzhen Stock Exchange where he was CFO. I would also like to add that we have appointed a new General Counsel and Secretary and this is Mr. Henry Lee. Henry will join UTStarcom as Senior Vice-President, Counsel and Secretary effective May 10. He joins us from ITT China Investment Company where he was the General Counsel for China and Indonesia and Chairman of the Asia-Pacific Ethics and Compliance Review Board and a board member of the China operation. Henry has extensive experience in litigation, corporate governance, and intellectual property law. Under his leadership each of our businesses will receive very good strategic counsel. I look forward to having him as a member of our senior management team. With these new hires, we have now completed our management team build-up in China. Let me now move to business segment highlights. I emphasize that our core business is now entirely focused on two core technologies, which are IPTV and broadband. Secondly, I would emphasize that our market focus is primarily China, India and Japan. So we are a very targeted, very focused company in technology and market strategy. I would like to quickly run through some highlights for the first quarter related to the core product portfolio starting with the multi-media communication business. I would like to emphasize that we continue to have the leading market share in IPTV in both China and India. In China, we are seeing good demand for set-top boxes so far this year, which is a positive indicator for the demand for IPTV. Market opportunity for IPTV, particularly in China, is very attractive. Recent estimates by IDC forecast that the number of IPTV subscribers in China will grow to over 15 million by 2011 from approximately the 4 million subscribers today. Also just being topical, we presented the leading cable TV industry conference in Beijing called CCBN. We received very positive feedback from the cable TV executives who visited us. The positive feedback was based on our total solution cable capability for cable TV for their network integration. In addition our GEPON and EOC network conversions integrated solution also won the technology innovation award with its great design concept, leading technology, and reliable technical support. Some notable wins in the quarter included IPTV expansions from Best TV and also the Beijing educator committee as well as an upgrade for Shanghai to phase 5 of their IPTV rollout. We also received a new IPTV win from China Mobile Research. We have won a large order of the set-top boxes from China Telecom Zhejiang. In India we also are currently expanding the IPTV business services with Bharti and won a new order for that in Q1. I am also pleased to say that we saw progress in the new cable operator market. We signed cable IPTV contracts with the [Ishang] network and U2 cable. Let me now move to broadband. As you know, we have the leading market share in India’s broadband market with approximately 30% share. The India broadband market is headed for significant growth over the next five years as the Indian government and the telecom carriers ensure that the country expands a number of broadband pipes. Industry experts believe the market will grow through the current 10 million broadband lines to 100 million in broadband lines over the next 5 years. I also want to make it clear that we are fully aware of the recent developments that require telecom operators in India to seek security clearance for import of telecom equipment before placing orders. A U.S. based organization, governed by U.S. laws, if UTStarcom finds anything of concern it will work with its customers in India and with the Department of Telecom and the government of India to address these concerns as per the defined process of the policy that they have laid out. With regards to phase 3 of the BSL contract, we are still pushing hard for certificate order in India for phase 3 in Q2. We also expect to participate in the expansion of the mobile market in India with our optical TN product. In addition I would remind everyone that SoftBank in Japan also continues to be a very important customer of ours and is one advanced to their testing of the TN product line to enable it to be used in their online networks. So it is clear that we’ve seen the majority of our broadband growth coming from primarily India and from SoftBank in Japan. Let me now talk about bookings. In the absence of the BSNL order in Q1, our book-to-bill in the first quarter was well below 1. This is too low and is not acceptable to us. We are driving hard on ramping bookings for the rest of the year in both broadband and IPTV. We expect future bookings will depend on large contracts in broadband and we will see signs of meaningful growth opportunities. As I described these primarily come from India and Japan, as well as growing IPTV in China where we see lots of opportunity. As a reminder our revenue recognition cycle is typically 9 months depending on the specific product and the contract provisions, so our bookings in Q2, Q3, Q4 will be driving 2011 revenues. b I will now hand the call over to Kenneth to provide more details around our first quarter 2010 results.
Thank you Peter and good afternoon everyone. Before we step into key business unit performance, I will start by highlighting the company-wide numbers presented by both GAAP and non-GAAP basis. First of all, I will talk about our GAAP results. In the first quarter of 2010, our GAAP revenues were $81 million compared with $119 million for the same period a year ago. The vast majority of the year-over-year difference was due to the buy down of our handset business. Total was offset by our increasing broadband point-of-sale. The GAAP gross profit in Q1 was $27 million or 34% of revenues, which is higher than our gross margin target. This compares to gross profit of $22 million or 18% in the first quarter of 2009. The year-over-year improvement in gross margin is mainly due to the [ferration] of the past deferred revenue amortization and to the increase in sales of our high margin of our PTN product. Our GAAP operating expenses were $46 million, a decrease of $35 million from the same period a year ago as the result of restructuring and out of costs reduction administrative. The total operating expenses of $46 million includes two significant items. First we had $7.5 million of restructuring charges primarily related to the 2009-restructuring plan. Total restructuring costs record through March 31, 2010 related to the 2009 restructuring plan was $47.8 million. Second, we also recorded an additional bad debt reserve of $4 million in Q1. On the other hand, we have a net gain of $1.8 million in the collection of the sale of the Legacy business. The GAAP operating loss in Q1 was $19 million, which represents a significant improvement from a loss of $59 million in Q1 ’09. Our run rate operating expenses have also declined from the [prior] quarter. Including the [odd] income of $4.9 million, which mainly consists of foreign exchange gains, our first quarter in 2010 net loss was $16 million or a loss of $0.12 per share. Next, I want to take a moment to discuss the non-GAAP numbers, which were issued with the press release. Here I would like to remind you that the non-GAAP results only adjust for the divestiture of our PCD and the wind down of our Korean-based handset operation, but they do not adjust for the restructuring charges or any other special charges or non-cash items. The non-GAAP revenues and gross margins for the first quarter of 2010 were $78 million and 34% respectively. This is compared to the non-GAAP revenue and gross margin of $80 million and 24% in Q1 2009. Our non-GAAP operating expense was $46 million in the first quarter of 2010. This result compares favorably to the $78 million in non-GAAP operating expense a year ago due to the company’s [inaudible]. We continue to make progress towards reducing our cost structure and expect to see additional benefits along with the [inaudible] of our manufacturing operations. Finally, the non-GAAP operating loss in the first quarter of 2010 was $19 million comparing with a loss of $59 million a year ago. Next I will move to discuss the performance of our various business units using GAAP numbers. In the first quarter, our multimedia communications segment had revenues and gross margins of $42 million and 38% respectively. This compares to Q1 2009 results of $42 million and 30% respectively. Multimedia communications revenue and gross profit benefit from the acceleration of the [inaudible] quarter amortization compared with the same period a year ago. Gross margins associated with our [inaudible] are 35.6%. As a reminder, we amortize the deferred revenue relating to [PAS] through the end of 2011 and the balance to be amortized was $165 million as of the end of March 2010. For broadband infrastructure, our revenue for Q1 was $35 million which was up from $21 million a year ago. The increase was mainly due to the increase in sales of our [M Fan] product as well as the [inaudible] products. The gross margins in the first quarter were 28%, a significant improvement from 12% a year ago due to primarily a lower provision for inventory in 2010 compared to 2009 as well as an increase in sales of our high margin [TN] products. For handsets, in the first quarter, we recorded $4 million of revenue at 39% gross margin which compares with $56 million at 11% gross margin in the year ago period. This significant decline in revenue was due to the write down of our Korea handset business and our exiting the handset business in China. The decrease in gross margin was mainly due to inventory clearing sales of [inaudible] made handset sales to PCP LLC which had been previously reserved. It’s partially offset by inventory clearing sales of [inaudible] handset at very low margin in China in the first quarter of 2010. We do not expect our handset segment to make material contribution to our revenue of gross margin in 2010 and beyond. Finally, I will end with a discussion on our cash position at the end of 2010. We ended the quarter with a strong balance of $235 million in cash and cash equivalents and short term investment. Our operating cash [burn] for the quarter was about $31 million including a cash payout of $9.8 million for restructuring. As of the end of March 2010 we have received a deposit of approximately $14 million on the sale transaction of the company’s Hangzhou building facility. We received an escrow account an additional $56 million of sales proceeds in early April and also received $6.8 million which has been used to pay the tax bureau by the end of April. We expect to receive the remaining $63 million upon the close of the sale of the Hangzhou building in the second quarter. We are also expecting to receive cash proceeds of roughly $48.5 million upon the closing of the strategic investment in the second quarter of this year. We remain comfortable with our cash position as we believe it is [inaudible] to support our working capital needs for 2010. At this point I would like to give the call back to Peter.
Thanks Kenneth. Let me turn now to our outlook for 2010 and as previously, I’d like to reiterate that we’re not providing specific guidance for the full year at this time given the pending closing of the strategic investment from the BDA. However, we remain very committed to the target business model we have shared with you over the last several quarters. To remind you, this model anticipates annualized revenues greater than $350 million. Our 2010 revenues will be driven largely by bookings from late 2009 and early 2010. In addition, I’d also remind you we have the benefit of $100 million in deferred revenues which we should recognize in 2010 as we get final customer acceptance. We anticipate revenues for quarter 2 will be in the same or similar range as they were for quarter 1 of this year. We expect gross margins in the high 20s and as you can see, we’ve changed our [part] mix to focus entirely on IP based products and have now exited the handset business which tended to have lower margins and higher working capital requirements. In the first quarter we started to see the revenue and gross margin benefit of our new TN product. We do expect annualized operating expenses to be less than $100 million once we complete the restructuring and outsource manufacturing which we are very close to doing. Equally important [inaudible] this operating model is the fact we have simplified the company so it is clearly focused on two core technologies which are IPTV and optical broadband. We’ve also primarily focused the company on the China and India markets plus SoftBank. Our strategy is simple to understand and I think you’d agree is very targeted indeed. In summary, we have made significant progress towards restructuring the company and improving the business model. The company is very close to achieving the cost base of approximately $100 million a year and we will also be prepared to make further improvements [inaudible] cost structure going forward. In closing, the building transaction will provide a cash infusion which will further strengthen our debt free balance sheet and provide the financial resources required for the company to prosper in 2010 and beyond. As you can expect, the focus is now firmly on growth as the other operational aspects have been well taken care of in the last 12 months. Management is working hard on ramping books, IPTV, and optical broadband technologies in our target markets of China, India, and Japan. At this point I’d like to ask the operator to open the call and prepare for Q&A.
(Operator Instructions) There are no questions.
I would like to thank everyone for joining the call. I appreciate it and look forward to talking to you. Thank you very much.
This concludes today’s conference call. You may now disconnect.