Fei Wang - IR Director Tim Ti - CEO Xu Min - CFO

Tim Savageaux - Northland Capital Markets

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. And if you have any objections, you may disconnect at this time. It is now my pleasure to introduce the host for today's call, Ms. Fei Wang. Fei, you may begin.

Thank you. Hello everyone and welcome to UTStarcom's First Quarter 2016 Earnings Conference 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. 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. 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. 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 of 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, Fei. And hello everyone. As Fei 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 U.S. dollars. I will first take you through an overview of our financial and operating highlights for the first quarter of 2016 and then I will share with you an update of our strategic initiative and our near term business outlook. I will then turn the call over to our CFO, Xu Min, who will share with you the details about our first quarter 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 first quarter. In addition to disclosing financial measures prepared in accordance with the 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 non-GAAP financial measures specifically related to the first quarter during his remarks. At the end of our first quarter, we continued to see positive impact from company's revised business strategy, which we announced last June. Non-GAAP first quarter revenue were $22.3 million, exceeding our expectations set in the share last quarter. First quarter non-GAAP gross margin was 27.2%, the second highest since as Q4 of 2013. We achieved non-GAAP profitability with the non-GAAP net income of $0.3 million in the first quarter. We had a positive operating cash flow of $2.0 million and ended the quarter with $80.2 million cash and the cash equivalents and no debt. Now, let me walk you through some of the key operational highlights for Q1, 2016. Please turn to Slide 4. First, we remain focused on pursuing high margin revenue in our broadband business. In Q1, 2016 our resource realignment to high-margin product suite result in improving period mix and the gross margin compared with a year ago, despite the lumpy booking trend we continue to put in effort to improve our gross margin. 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. With our innovative product portfolio, including Layer3 Solution with SDN/NFV enabling sole network solution and NG-PTN products, we continue to deepen our relationship with our customers in key markets, including Japan, India, Taiwan. We are also exploring new opportunity in global mobile backhaul and metro aggregation market. In US VGL had net good progress on solidifying a seamless access and aggregation solution at an edge of the network with the virtual broadband gateway product. Third, we continue to streamline the business and improve operational efficiency. Non-GAAP operating expenses for Q1, 2016 were $6.6 million, a decrease of 15% from corresponding period in 2015. We achieved positive operating cash flow of $2 million and non-GAAP EPS of $0.01 per share, improving operational efficiency and the productivity will continue to be our focus throughout the year. Fourth, we are accelerating our investments for our future growth, in an effort to accelerate our investment and R&D in data center and the smart city market we established information and communication innovation group or ICI group to focus on further research and development in loss markets. We are very excited about the opportunities in front of us and remaining committed to expanding our R&D capability and fostering a start-up mentality within the organization to encourage greater creativity in line with our Simple Network, Simple Operation design philosophy. With that, let me turn the call over to Min, who will walk through the financials to the first quarter and 2016 in more detail.

Thank you, Tim, and hello everyone. I will now take a few minutes to discuss our first quarter 2016 non-GAAP financial results. Please turn to Slide 5. Before I walk through the specific numbers, I would like to highlight a few key items for the quarter. Q1 non-GAAP revenue was $22.3 million, exceeding our guidance of $15 million to $20 million. Non-GAAP gross margin was 27.2%, second highest in the past 10 quarters. Non-GAAP EPS was $0.01 per share making it the first non-GAAP profitability since Q4, 2013. Our cash balance at the end of the quarter was $80.2 million, up from last quarter and we have zero debt. Please turn to Slide 6 for non-GAAP revenue review. Please note that non-GAAP revenue excluded IPTV revenue. In the first quarter, total non-GAAP revenue was $22.3 million, compared with $25.7 million for the previous quarter. The sequential decline was largely due to lower third party sales. Please turn to Slide 7 and 8 for gross profit and gross margin. Please note that non-GAAP cost of sales and non-GAAP operating expenses excluded stock-based compensation. In first quarter, non-GAAP gross profit was $6.1 million, down from $7.9 million in the previous quarter and up from $4.8 million a year ago. Non-GAAP gross margin was 27.2%, down from 30.6% in the previous quarter and up from 14.9% a year ago. The sequential margin decline was due to cost associated with service team restructuring. Please turn to Slide 9 for operating expenses. In first quarter, non-GAAP operating expenses were $6.6 million, up from $5.1 million in the previous quarter and about 15% from $7.8 million in the prior year period. Please note that, excluding the favorable impact of $1 million legal fee reversal, Q4, 2015 operating expenses would have been $6.1 million. Please turn to Slide 10 and 11 for operating income and net income. In the first quarter, non-GAAP operating loss was $0.6 million, compared to operating income of $2.7 million in the previous quarter and $2.9 million operating loss a year ago. In the first quarter, non-GAAP net income was $0.3 million, compared to net loss of $14.7 million in the previous quarter and $5.2 million net loss a year ago. At the end of the 2015 the book value for convertible bond of UiTV was zero, therefore there was no equity pick up loss in Q1. Please turn to Slide 12 for cash flow. We ended first quarter with $80.2 million in cash and we had no debt. In the fourth quarter, cash provided by operating activities was $2.0 million. Cash flow provided by investing activities was $50,000 million. Cash used in financing activities was $0.9 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 13, I would like to recap our go-forward strategy and prioritize with you. In the remaining quarter of 2016 our first priority will continue to be working with our customers to built innovative and high quality communication solution. We will continue to focus on internal and external communication and collaboration in order to improve productivity, efficiency and response time. Second, we are accelerating our investment in data center and smart city markets. The new ICI group will be nimble and focused. We expect to work with our partner to fill the gaps in the market with our innovative offering. Third, we will remain prudent on cost management and continue to improve overall operational efficiency and productivity. Now please turn to Slide 14 for our near term outlook. In 2016, we will continue our focus on profitability and shareholder value. Looking specifically at the second quarter of 2016, the company expects to generate non-GAAP revenue in the range $15 million to $20 million. We are very excited about the future opportunities to see the promising path toward our goal of profitability. We will continue to optimize our core optical network business to exceed our customer’s expectations. We will also invest in new products which will be cornerstone of our future growth. We thank you for your support and look forward to delivering 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.

Thank you. [Operator Instructions] We will now take our first question from Tim Savageaux from Northland Capital Markets. Please go ahead. Your line is open.

Hello and congratulations on a nice Q1 result. I wondered if you could maybe talk a little bit about specific business drivers in the quarter, whether customer or geography what kind of factors led to the solid upside from a top line perspective. And then similarly, I think your guidance for next quarter is similar to where it was last quarter, I wondered, if you can say that’s a reflection of changing business dynamics or maybe continued conservatism or how do you see those same factors that affected Q1 results to the upside playing out in Q2? Thanks.

Thank you, Tim. So I'll take the question. So the upside for Q1 compared to our guidance mostly came from Japan and you know our expectation for 765 sales actually was probably a little bit conservative. However, it did – the upside did come from a kind of an increase demand due to heavier network traffic on our customer’s network and also it is Q1 it is our – one of our old customers fiscal year end. So we benefited from kind of you know, year end buying. So I would say it happened to be a few favorable factor happening together. So our Q2 guidance of 15 to 20 we believe is realistic and normally if you see our 2015 Q2, the revenue also had a pretty steep decline, we don’t expect that kind of deep steep decline will happen again. However, seasonally you can say Q2 is probably one of the weaker quarter for the year. So I don’t think its conservatism. So we do expect our revenue will probably – will be within the range of $15 million to $20 million.

Okay. Understood. And you mentioned 765, your metro shipments to a major customer as a driver, I wondered if you could give us our view of kind of overall demand for 100 gig, metro optical solutions in your markets and kind of an update on the overall traction from a trial or deployment perspective…

Yes. So we do see pretty favorable trend for customers deploying 100 gig [ph] products and you know, in terms of trial and the deployment, we do see certain level of increase.

Okay. Thank you. I'll pass it on for now.

All right. Thanks, Tim.

[Operator Instructions] There are no further questions at this time. I would now like to hand the call back to our host for any additional or remarks.

Okay. Thank you for joining us on our first quarter 2016 earnings conference call. We look forward to updating you on our second quarter 2016 results in a few months' time. Feel free to get in touch with us any time if you have further questions, concerns or comments. Thank you, everyone.

That does conclude our conference for today. Thank you for participating. You may all disconnect.