Ralph Fong - IR Tim Ti - CEO Eric Lam - VP, Finance

Hello, ladies and gentlemen. Thank you for standing by for UTStarcom’s Second Quarter 2018 Earnings Conference Call. [Operator Instructions] I will now turn the call to Mr. Ralph Fong, Director of the Blueshirt Group Asia. Please go ahead, Mr. Fong.

Thank you, Karina and hello everyone and welcome to UTStarcom’s Second Quarter 2018 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 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 page 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. The risks and uncertainties include factors identified in the company’s latest annual report on Form 20-F and the current reports on Form 6-K in file with the Securities and Exchange Commission. All forward-looking statements included in 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 such forward-looking statements. Also please note that unless otherwise stated, all figures mentioned during this call today are in US dollars. With that, I’ll now turn 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 presentation from the investors section from our website. Now, let me quickly recap our results on page 3. Second quarter performance was in line with expectations. Revenue came in at the higher end of our guidance range. Gross margin was 26%, down from 28% a year ago. We continue to blend R&D investments and maintain a robust product overview. This enables us to deliver outstanding value to our customers and to pursue exciting new market opportunities. Correspondingly, we continue to streamline the [Technical Difficulty]. Eric will go over the details of our financial results shortly. Please turn to page 4. R&D continues to be our focus this quarter. The innovation through R&D is our strength. We increased our R&D investments by recruiting and hiring additional engineering talent with specific fields throughout routing. In general, we put tremendous emphasis on innovation and the technology leadership, which plays a critical role in winning new business. We strive to provide higher performance products at compelling value proposition in the fast service label to our customers. Our engineers are dedicated to developing new products and technologies for the most compelling, long term market opportunity. The worldwide transition to 5G widest network is a key thing at this stage. We are very excited about opportunities presented by the transition from 4G to 5G and we are positioning our product portfolio accordingly. And as we discussed on our last conference call, segment routing is the key technology for the 5G network. It is a breakthrough networking technology, offering greater scalability and flexibility by network. The trend towards this architecture is well underway. [Technical Difficulty] and we are excited about the value proposition of this new product. This highly efficient networking platform delivers order balances of SDN, including high agility and automation. It also significantly reduces network complexity and optimizes operation and maintenance. To further support the introduction of the SRv6 router product line as well as our latest solution based on other cutting edge technologies, we participated in Softbank World 2018 in Tokyo last month. Softbank World is one of largest corporate event in Japan and it focuses on the latest trend in IT technology. This is our seventh consecutive year, participating in Softbank World. We showcased a number of our newest products, which included SkyFlux, our next generation SRv6 based routing platform. We also demonstrated our 5G ready timing solution, SyncRing, as well as presenting our SDN platform SOO Station and a new VBG product, our intelligent gateway device. Furthermore, we were excited to introduce a new retail focused product at Softbank World. We launched a smart commercial refrigerator, goBox, as you can see on slide 11. goBox is the latest addition to the company’s smart retail platform. It’s mostly integrated with our cloud platform and used image recognition, sensors and big data for streamlined automated shopping experience. Currently, we are at the first and only supplier that deployed an integrated load and image sensing technology in our smart retail device. goBox is already getting traction in the marketplace. Commercial deployment began in Q2 and we expect to see a significant ramp in shipments in the second half of the year. goBox is currently in commercial use by several customers, including both domestic and globally recognized beverage companies. In addition to Product Exhibits, two members of our executive management team delivered keynote addresses at Softbank World. They presented the company insight on optimum networking solutions to facilitate 5G deployment and operation. Time synchronization, evolution and the design solution for 5G and IoT application were also discussed in depth. Overall, we are extremely pleased with the UT’s strong presence in this year’s Softbank World. We believe we are in a solid competitive position to continue developing innovative solutions to meet the challenge of the increased network traffic. Our product portfolio is designed to closely align with our vision of enabling network evolution. Before I turn the call over to Eric, I would like to take a minute to highlight our progress in targeting key markets. Please turn to page 12. Our target regions for the deployment of our broadband infrastructure products include Japan, India, Taiwan and other Asia Pacific regions. This market represents significant business opportunities, giving a relatively low broadband penetration rate and the strong consumer demand for new broadband services. We believe we are well positioned to benefit from those market opportunities. Specifically, India continues to be a key market for us. We see continued interest for many of our product lines including optical transport and application, fixed and widest broadband assets. Our business in India is robust and growing. We expect more and upgrade project and new deployments to expand our market share in the region. As we mentioned on our last call, we have renewed interest in the China market. We strongly believe our product and the technologies are well suited to support the 5G migration in China. That represents substantial opportunities for us in the optical networking. We are already in initial discussions with partners about potential collaborating on a next generation mobile network project. We will continue to focus on and to evaluate business opportunities in this key market. With that, now, I will turn the call over to Eric for comments on our financial performance. Eric?

Thank you, Tim and thank you, everyone for joining the call today. I will review our financial performance for the second quarter of 2018. All figures I cite will refer to Q2 2018 and all comparisons, unless I state otherwise, are with the same period last year. Please turn to page 13 for our financial review. Revenue was 28.5 million, up 26% from last quarter and down 9% from the same period last year. Q2 revenue was at the higher end of the guidance range, reflecting substantial revenue growth from India. Now, please turn to pages 14 and 15, which highlight gross profit and gross margin. Gross profit was 7.5 million compared to almost 9 million a year ago. Gross margin was 26%, down from 28% from the same period last year and down from 40% last quarter. This low margin reflects higher revenue contribution from India, which typically has a lower average selling price and margin profile. Now, let’s turn our attention to operating expenses on page 16. Operating expenses were 7 million, down from 7.2 million in the same quarter last year and up slightly from 6.8 million last quarter. More important to know, R&D spending increased 22% from the same period last year, while SG&A expenses declined 14% year-over-year. Now, this is the result of our continuing effort to streamline our support functions. And the year over year increase in R&D spending largely reflects the hiring of additional engineers in the quarter. Page 17 and 18 summarize our operating income and net income. Operating income in the second quarter was 0.5 million, down from 1.7 million last year and 2.3 million last quarter. We reported a net loss of 90,000 basically due to currency translation losses. Now, on a per share basis, we essentially broke even. This compares to a net income of 2.4 million or $0.07 per share in the same period last year and an income of 4 million or $0.11 per share last quarter. Page 20 summarizes our cash flow. We ended the quarter with over 80 million in cash, cash equivalents and restricted cash, a net decrease of 18 million from last quarter. Net cash used in operation was 14 million, mostly to fund several large projects in India and net cash in investing activities was 2 million. Now, let’s turn to revenue guidance, shown on page 21. Before we talk about numbers, let me reiterate some underlying trends in our business. There are uncertainties and possible deviation from the normal business patterns related to a major customer in Japan as they are in the process of transitioning to the next generation network. However, we are very optimistic, but cautious about the amount of revenue we expect from them in the second half and beyond. We are growing rapidly in India, but India is a highly competitive market. As you saw in our Q2 financials, pricing and margins are lower there than what we had commanded in other regions. Overall, we see significant growth opportunities in new regions, new products and new applications and we are very, very excited and confident of our long term prospects. However, we are mindful of the increased uncertainty in this competitive and dynamic market in the short term as well as the time it takes for the significant and logical migrations. For specific guidance, we expect third quarter revenue to be in the range of 38 million to 43 million. We anticipate gross margin to be lower than in the second quarter, reflecting fulfillment of several large products in India, which traditionally as we mentioned before are lower margin geography. With that, Tim and I would like to take your questions. Operator, please open the line for Q&A.

[Operator Instructions] Our first question comes from the line of James Bartholomew [ph].

Yes. I have listened to these long-winded presentations for years. Sales have gone down, down, down, for many years, earnings are basically non-existent. The company has basically become a nothing company. If management worked for me, I’d have fired the whole bunch of you. I’ve never seen any results meaningful. I hear these long winded presentations, and that’s all I hear out of this company. If and when I ever get to the point where I’d break even on my investment, I’ll personally come to China and apologize, but not until then. What do you say?

Well, thank you for sharing your opinion with us. It is a very competitive market and we are trying extremely hard to try to turn the company around. I think we’ve been successful in doing so. As you can see the results, we finally turned to profit last year and we’re confident in our future. So, I hope that you give us a little bit more time and be a little bit more patient, hopefully, we can show you the results that you’re looking for.

I’ll believe it when I see it.

We certainly will try, sir.

Thank you.

Yeah. Company in transition, you can see the new management team, since 2016, we make a company, already made a pretty big change and from the last to the breakeven, now last year, actually we profit about $7 million and the technology in a transition cycle and from the customer also adapted new technologies, it’s a very, very challenging market and as you say, we do everything to make company growing and become profitable. It’s the mission to all the management team. Okay. And thank you for your patience for the past few years. And we can prove we are making better and the progress.

Our next question comes from the line of Mr. Ryan Watson [ph].

Hi. I want to echo some of the sentiments of the previous gentlemen. I’ve been a long time shareholder, actually holding shares since the IPO. I’ve got about three questions. The first relates to the India revenue. You’re guiding higher in the third quarter and it sounds like you’re expecting revenues to accelerate. I want to confirm, will revenue from India be accelerating in each quarter for the foreseeable future or you’re forecasting flat revenue or this is just sort of a one-time payment that you’re getting for the third quarter?

Thank you for asking the question and being a long term shareholder of UTStarcom. In terms of the third quarter revenue, we are expecting a significant contribution from India operation there. Now, out of the business, in India, in particular, we are doing large projects. So in terms of revenue recognitions, when the project is complete and we can recognize revenue, we do record those revenue according to the project milestone. So because there will be large projects, so it was very difficult to have a very smooth trend quarter-by-quarter, but we are seeing – we are embarking on several large projects in India, so the revenue will be coming on stream in, particularly in Q3. And also continue in the foreseeable future.

Okay. And that’s kind of what I’m getting at, is 38 million a pretty good run rate for us to factor in our analysis for foreseeable quarters?

It’s very difficult to tell, because as I mentioned, it’s on a project basis, so we finished a large project and depending on the timing on the next project, or projects, the revenue will fluctuate.

Okay. Second question is related to your Aceland investment. I haven’t seen any numbers or any updated valuations. Do you have those numbers and are there any plans to monetize that asset?

Yes. Essentially, the project has been over. So we still have over $2 million worth of holding in the Aceland company. Now, we’re just in the process of trying to get the investment back. It just is from administrative perspective that they need to liquidate the company, they need for us to get our money back. So it’s a long, slow process. But the project has been over for years. So there’s not going to be any change there. The money is with the bank. It’s just a question of when are we going to get the money back.

Okay. And my final question, I can’t appreciate the fact that you guys have been making progress in the turnaround efforts, specifically cutting expenses, getting closer to consistent profitability. One of, I guess, the concerns I’ve had over a number of years is with the share price, with WallStreet really not recognizing any of the turnaround efforts, have you all considered increasing the level of the buyback or doing a consistent buyback from quarter to quarter?

We have been buying back. We have – starting in Q2, we are actively buying, we’re purchasing our share on a regular basis. But we are limiting our volume in terms of the repurchases. We do see a lot of business opportunities in the future and we really want to make use of our cash as efficiently as possible. So we’re very cautious in terms of spending our cash.

I mean that makes sense. I guess what I was getting at is, I noticed the 1 million you spent on a buyback this quarter and I was just wondering if we could expect that from quarter to quarter, if that was more of a one-time deal.

We will certainly look at our cash situation and discuss with the board members to make sure that we have – we would balance out our cash requirement and also return of – to the shareholders.

[Operator Instructions] There are no further questions at this time. I would like to hand the conference back to presenters. Please continue.

Thank you, operator. Yeah. As Eric mentioned, we are optimistic about our future and we are progressing well in our target regions. We are very confident of our technical direction and the cutting edge product and the service offering. We are well positioned to benefit. And emerging trend, particularly relate to IoT, AI and 5G migration, we look forward to providing you with our business progress in few months. Thank you all again.

That will conclude today’s conference call. Thank you for your participation. You may now disconnect.