John Evans - Petrus IR Tim Ti - CEO Xu Min - CFO

Jun Zhang - Rosenblatt Securities

Ladies and gentlemen, thank you for standing by for the UTStarcom's 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 call is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to introduce the host of today's call, Mr. John Evans. John, you may begin.

Hello everyone and welcome to UTStarcom's Fourth Quarter and Full Year 2015 Earnings Conference Call. Earlier today, we distributed our earnings press release. You can find a copy on our Web-site at www.utstar.com. In addition, we have posted a slideshow presentation on our Web-site, 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. Min Xu, Chief Financial Officer. Before we get started, I will read the Company's advisory on forward-looking statements that you can see on Slide 2. This call will include forward-looking statements relating to the Company's business and strategic initiatives. These 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. This includes risks and uncertainties related to, among other things, changes in the financial condition and 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 benefits from the divestiture transactions, the ability to successfully identify and acquire appropriate technologies and businesses for inorganic growth and to integrate such acquisitions, the ability to internally innovate and develop new products, assumptions the Company makes regarding the growth of the market and the success of the Company's offerings in the market, and the Company's ability to execute its business 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 in a period of strategic transition and the conduct of its business is exposed to additional risks as a result. All forward-looking statements included in this conference call are based upon information available to the Company as of the date of this call, which may change, and the Company assumes no obligation to update any such forward-looking statements. I will now hand the call over to UTStarcom's CEO, Mr. Tim Ti.

Thank you, John. Hello everyone. As John mentioned, you can follow along with today's call by downloading the presentation from our Web-site at www.utstar.com. Also, unless otherwise stated, all figures mentioned during the call are in U.S. dollars. For those of you not able to attend my last call introducing myself as a new CEO, I would like to say, welcome. We are in our first couple of months of working out a detail of the strategic direction that we want to chart in 2016 and beyond. I will first take you through an overview of our financial and operating highlights for the fourth quarter of 2015 and then I will share our strategic initiatives. I will then turn the call over to our CFO, Xu Min, who will share with you the details about our fourth quarter and the 2015 financial performance. Please turn to Slide 3. While Min will walk you through the full details in just a bit, let me provide a top line summary of our overall financial results for the fourth quarter. In addition to disclosing financial measures prepared in accordance with GAAP, we will also provide non-GAAP financial measures which we believe better reflect the Company's core business status and the development trend. Min will give more information on the GAAP and non-GAAP financial measures specifically related to the fourth quarter during his remarks. At the end of fourth quarter, we have seen improvements in our overall position, thanks to the Company's revised business strategy, which we announced last June. Non-GAAP fourth quarter revenues were $25.7 million, exceeding our expectations set and shared last quarter. Fourth quarter non-GAAP gross margin was 30.6%. The highest was Q2 of 2013. We have achieved positive non-GAAP operating income of $2.7 million for the fourth quarter. We continue to maintain a strong balance sheet, and from a cash perspective we ended the quarter with a stronger cash position than last quarter with cash and cash equivalents in the amount of $77.1 million and no debt. Now, let me walk you through some of our key operational highlights for Q4 and full year 2015. Please turn to Slide 4. First, we remain focused on pursuing high margin revenue in our broadband business. In 2015, we have made significant progress in realigning resource to high-margin product suite and innovative network solution. As I result, our product mix as well as gross margin has improved throughout 2015. Although booking remained lumpy, customer adoption of TN765 has picked up its pace. Second, we continue to focus on of our traditional key market where we have deep understanding and experience, while selectively investing in markets with great potential. In 2015, we further deepened and broadened our relationship with our key customers. We strengthened our product portfolio to cover a larger portion of the mobile backhaul and metro aggregation markets, thanks to our innovative Layer3 Solution with SDN/NFV enabling sole network solution and NG-PTN products including the TN701B, 703A, 704A and TN765. We established Virtual Gateway Labs, a new U.S. entity focusing on products that allow seamless access and aggregation at the edge of the network. VGL released its virtual broadband gateway product and the complete delivery of its first purchase order to a U.S. customer. Third, we continue to streamline the business and improve operational efficiency while selectively investing for future growth. Non-GAAP operating expenses for 2015 were $31.6 million, a decrease of 8% from $34 million in 2014. More importantly, we achieved operating profitability in the fourth quarter with a non-GAAP operating income of $2.7 million. We remain committed to expanding our R&D capability and fostering a [stark] [ph] mentality within the organization to encourage greater creativity, in line with our 'simple network, simple operation' design philosophy. Please turn to slide 5, data center market opportunities. In December 2015, a strategic investor, Phicomm Group, acquired 5 million shares of UTSI stock. We believe that potential collaboration between Phicomm Group and UTStarcom could extend UTStarcom's target market segments into data center and Smart City. Most of these areas would be on UT's core strength and offer extensive opportunities for us. The data center market is expected to grow at a compound annual growth rate of 10% globally and 18% in China over the next four years. With China comprising at least 20% of the global data center market investment, we believe that a significant component of data center growth is the software-defined network market where, as we said earlier, UT brings significant value. For UT, we believe we can benefit from the potential need of a large volume of DC switches and that our SDN/NFV can bring many benefits including the integration of DC and telecom infrastructure for efficient end to end service orchestration as well as integration with DC for efficient implementation of network functions including firewall, DPI, VPN, routing, load balancing, et cetera. Please turn to Slide 6, Smart City market opportunities. As a new industry, Smart City market growth is driven by the growth in the networking of connected devices and the need of connected infrastructure from municipal structures to home and building. There is estimated for the Smart City market to have its growth growing from under 1 billion to over 5 billion by 2023. We believe Smart City will require 100% broadband penetration, the growth of NG-PTN metro network and SDN/NFV capabilities, which all play into UT's core strengths. In addition, our experience in building the type of large network management system, give us the core competency to build and sell into this growing market. With that, let me turn the call over to Min who will walk you through the financials for the fourth quarter and 2015 in more detail.

Thank you, Tim, and hello everyone. I will now take a few minutes to discuss our fourth quarter and full year 2015 non-GAAP financial results. Please turn to Slide 7. Before I walk through the specific numbers, I would like to highlight a few key items for the fourth quarter. Q4 non-GAAP revenue was $25.7 million, exceeding our guidance of $18 million to $22 million. Non-GAAP gross margin improved sequentially to 30.6%, helped by favorable product mix. More importantly, we have achieved operating profitability which is $2.7 million operating income in the fourth quarter of 2015. Our cash balance at the end of the quarter was $77.1 million, an improvement from last quarter and we have zero debt. Please turn to Slide 8 for a non-GAAP revenue review. Please note that non-GAAP revenue excluded [indiscernible] IPTV revenues. In the fourth quarter, total non-GAAP revenue was $25.7 million, compared with $28.7 million a year ago. Full year 2015 revenue was $101.6 million, compared to $125.2 million in the prior year period. The decline in revenue was mostly due to reduction of relatively low margin third party sales. Please turn to Slide 9 and 10 for gross profit and gross margin. Please note that non-GAAP cost of sales and non-GAAP operating expenses excluded stock-based compensations. In the fourth quarter, non-GAAP gross profit was $7.9 million, up from $6.1 million in the previous quarter and $3.4 million a year ago. Non-GAAP gross margin was 30.6%, up from 22.8% in the previous quarter and 11.9% a year ago. The sequential margin improvement was due to favorable product mix. Full year 2015 non-GAAP gross profit was $21.5 million, compared to $22.2 million in 2014. Non-GAAP gross margin was 21.2%, compared to 17.7% in 2014. Please turn to Slide 11 for operating expenses. In the fourth quarter, non-GAAP operating expenses were $5.1 million, down from $6.7 million in the previous quarter and $9.0 million in the prior year period. Excluding one-time legal bill reversal of $1 million, the non-GAAP OpEx would have been $6.1 million. Full year 2015 non-GAAP operating expenses were $31.4 million, 7.7% lower than $34.0 million in 2014. Please turn to Slide 12 and 13 for operating loss and net loss. In the fourth quarter, non-GAAP operating income was $2.7 million, compared to operating loss of $5.6 million in the prior year period. In the fourth quarter, non-GAAP net loss was $13.7 million, compared to net loss of $13.7 million in the prior year period. The fourth quarter net loss included $3.1 million loss pick up from UiTV, $2.3 million impairment for UiTV loan, $6.7 million impairment for UiTV investments and $2.8 million impairment for aioTV investment. Full year 2015 non-GAAP operating loss was $9.8 million, compared to loss of $11.8 million in 2014. Full year 2015 non-GAAP net loss was $24.5 million, compared to loss of $28.0 million in 2014. Please turn to Slide 14 for cash flow. We ended fourth quarter with $77.1 million in cash and we had no debt. In the fourth quarter, cash provided by operating activities was $6.5 million. Cash flow used for investing activities was $1.1 million, among which $0.5 million was convertible bond to aioTV. Cash used in financing activities was $0.2 million, which was mostly related to our ongoing share repurchase program. This concludes my financial review. Now I will turn the call back to Tim for concluding remarks.

Thank you, Min. Turning now to Slide 15, I would like to recap our go-forward strategy and priorities with you. First, we will continue to focus our efforts on pursuing high margin revenue in our broadband business, as this remains a key business driver for us globally. In order to support this strategy, we are working with the prospects to identify where our services meet their business needs. Second, in order to maximize our success, we will continue to focus on markets where we have deep understanding now and also ones where there is [indiscernible] gap in the market for our offering, thus giving us a healthy diversification. Third, we will continue to assess our current business model and remain prudent on our cost management. Fourth, we expect cooperation with Phicomm Group to extend our business and market in the near future. Now please turn to Slide 16 for our near term outlook. In 2016, we will continue our strategy of transformation to focus on profitability and ultimately enhance shareholder value. Looking specifically at the first quarter of 2016, the Company expect to generate non-GAAP revenue in the range $15 million to $20 million. We firmly believe that we are well on our way toward our goal to build a stronger, more competitive and profitable UTStarcom now and in the future. We are optimizing and executing on our core business to maintain our near-term goals as well as investing in the new products and we hope we'll be significant in the long-term. We thank you for your support as we continue to work hard to deliver improved value for our business and our stakeholders. With that, Min and I would like to take your questions. Operator, please open the line for Q&A.

[Operator Instructions] We'll now take our first question from Jun Zhang from Rosenblatt Securities. Please go ahead.

So my first question is that, what's your product roadmap for the data center and the Smart City for this year?

This is Tim. Regarding to our product roadmap, Smart City and data center market are really a continuation of our UTStarcom core competency in products. So as we said in our prepared remarks, [we also operate] [ph] our Smart City. Combined with our technology, currently our plan for the first product for data center, we plan to have first product introduction will be end of this year. Regarding to Smart City, we will plan for the 2017, in the Q2 of 2017.

Okay, thanks. So my second question is that, what's the product trend, the sales trend of the product of 765?

The main key feature or key function for 765 is our core competent technology of 100G. For 100G, [virtual] [ph] market is going very strong. We can see the traction from multiple customers. And it's also our main driver for our margin improvement. But however, according to currently telecom carrier optics control, we see the quarter by quarter the revenue may be versatile. We still need to work with customers to maintain and keep the high interest for this market and the product.

Okay, thanks. So my last question is about what's your current cash level by the end of Q1?

So at this point, we cannot disclose the cash level yet. But I can give you a little bit color. If you look at Q4 cash collection, we have been doing a great job and I believe the trend will continue and we expect the cash level probably will be flat to slightly up.

Okay, thanks. That's all of my questions. Thanks a lot.

[Operator Instructions] As there are no further questions in the queue, I'd like to hand the call back over to your host for any additional or closing remarks.

Thank you for joining us on our fourth quarter and full year 2015 earnings conference call. We look forward to updating you on our first quarter 2016 results in a few months' time. Feel free to get in touch with us any time if you have any further questions, concerns or comments, and thank you very much.

Thank you. That will conclude today's conference call. Thank you for your participation.