U.S. Markets closed

Edited Transcript of UTSI earnings conference call or presentation 10-May-19 12:00pm GMT

Q1 2019 UTStarcom Holdings Corp Earnings Call

BEIJING May 23, 2019 (Thomson StreetEvents) -- Edited Transcript of UTStarcom Holdings Corp earnings conference call or presentation Friday, May 10, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Eric Lam

UTStarcom Holdings Corp. - VP of Finance

* Tenling Ti

UTStarcom Holdings Corp. - CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Timothy Paul Savageaux

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Gary Thomas Dvorchak

The Blueshirt Group, LLC - MD of Asia

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, ladies and gentlemen. Thank you for standing by for UTStarcom's First Quarter 2019 Earnings Conference Call. Please note that we are recording today's conference call. I will now turn over the call to Mr. Gary Dvorchak, Managing Director of the Blueshirt Group Asia. Please go ahead, Mr. Dvorchak.

--------------------------------------------------------------------------------

Gary Thomas Dvorchak, The Blueshirt Group, LLC - MD of Asia [2]

--------------------------------------------------------------------------------

All right. Thank you, operator. Hello, everyone, and welcome to UTStarcom's First Quarter 2019 Earnings Conference Call.

Earlier today, we distributed our earnings press release. You can find a copy of it at 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 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 of the slide deck. 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 included -- include factors identified in the company's latest annual report on Form 20-F and the current reports on Form 6-K that are filed 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 are in U.S. dollars.

I'll now hand the call over to UTStarcom's CEO, Mr. Tim Ti. Tim?

--------------------------------------------------------------------------------

Tenling Ti, UTStarcom Holdings Corp. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Gary, and thank you, everyone, for joining our call today. We appreciate your interest in UTStarcom. As Gary mentioned, you can download the presentation from the Investors section of our website.

Now let me quickly recap our Q1 results on Page 3. We had a strong start to 2019, and I am pleased with our first quarter results. We executed well across our business and the reported solid top line performance.

Revenue grew to nearly $25 million, which was at the higher end of our guidance range. This is very encouraging. Our top line performance again demonstrated our ability to develop and monetize strong customer relationships. On our bottom line, we returned to profitability in Q1. Eric will get into the detailed financials in his remarks shortly.

Now let's turn our attention to 3 key operating achievements. First, we are pursuing an opportunity for advanced 5G transport network technology. We are collaborating with a partner to deliver key equipment for 5G network. We are focusing on optical backhaul solutions that fully leverage our technical expertise in that area. Although we cannot provide much details today, we can say that we are making excellent progress. We have achieved good results in laboratory tests by a major Chinese carrier.

5G is creating the need for significant new investment by network operators. This new standard requires greater network capacity, super-strong efficiency and higher data throughput in the network architecture. Due to dense small cell deployment and heavy traffic, a 5G backhaul network needs to support hundreds of gigabits of traffic on the core network. As such, we believe we can acquire our expertise in optical backhaul to solve these challenges both for the immediate opportunities in China and for other 5G deployments around the world.

The worldwide transition to 5G wireless is a significant opportunity for which we are well positioned.

The 5G migration is gaining momentum in leading markets, such as the U.S., Korea and Japan. In China, all the major carriers are aggressively pursuing 5G upgrades. With the market situation as the backdrop, let me review our expanding product portfolio, which we believe positions us to capture these emerging 5G opportunities.

As you see on Page 5, our advanced product solutions are designed to support challenging new applications, such as Internet of Things, machine-to-machine, vehicle to everything, autonomous driving, augmented reality and more.

From a technology standpoint, segment routing, FlexE and software defined network are critical technologies for 5G. They are focus area for us. These breakthrough technologies offer greater scalability, flexibility, agility and automation, while simplifying network management.

The benefits of the segment routing, FlexE and SDN are well recognized and adoption is underway. Our segment router product line SkyFlux UAR, shown on Page 6, not only delivers all the benefits of SDN but also mitigates network complexity and optimize operation and maintenance. We are confident that SR for 5G will resonate well in the market and will be a major growth driver for UT in the coming year.

In addition, another important product that addresses 5G infrastructure is our SyncRing product line, shown on Page 7. SyncRing enables the extreme timing precision that is needed for maximum network performance. To further support 5G migration, we launched SyncRing XGM30 last November. This latest addition to the SyncRing product lineup enables mobile network operators to meet the stringent time synchronization requirements of LTE, LTE-A and the 5G networks in a cost-effective manner.

The 5G rollout is at an inflection point that will present opportunities for us to drive future revenue. As a result, we continue to put substantial R&D and marketing resources in 5G to prepare for this rollout. We are confident we can drive growth as well capture these new opportunities.

Our second achievement is the ramp of goBox, one of our smart retail offerings. During the quarter, we released our first 5G goBox smart vending machine in China. As we shown on Page 8, the goBox smart vending machine is a model application to utilize 5G mobile data networks and AI to create a compelling retail experience for consumers.

We are confident that retail store automation is a significant and sustainable long-term opportunity, as you can see on Page 10. A growing number of transitional retail stores recognize the need to upgrade layer infrastructure in an effort to offer more innovative service. Smart retail solutions are comparing new ways to enhance the customer experience and assist operating costs.

Our new goBox small vending machine is already penetrating the unattended retail market in China. We are very encouraged by the early progress. Further showing this initial market interest, Hangzhou China Mobile is using the goBox in its own retail outlet to showcase 5G-enabled retail automation. We are excited by this opportunity to work with the prestigious customer to promote new goBox application. This demonstrates how 5G mobile data and artificial intelligence can be integrated to create a compelling retail experience for consumers.

We are also pursuing goBox sales opportunities internationally. We are seeing strong interest in U.S., Japan, Taiwan, India and Korea. In response, we are now establishing a support team in key markets for the goBox smart retail initiative.

In sum, the goBox smart vending machine is seeing solid traction in the market. We are extremely excited about the potential long-term revenue opportunity.

The third achievement was establishing cross-selling activity with our strategic partner, Tongding. Please see Page 11. As you recall, we formed this strategic partnership with Tongding last September to jointly market and distribute each company's products and services in China and the international market. Tongding specialize in R&D, manufacturing, sales and the distribution of communication cable and optical fibers. TD's core product line includes optical fibers, urban communication cables, optical cables, radiofrequency cables, optical instruments, electromechanical communication equipment and the more. In addition, Tongding is involved in mobile Internet and Internet of Things applications.

We are focused on developing Tongding's optical fiber cable business in India and have started marketing and selling layer fiber cable products there. Meanwhile, we are supporting Tongding's technical sales team in selling our flagship PTN and SyncRing products in China. TD's initial focus will be on enterprise customer, such as oil and gas, mining and other relative verticals.

When we look at the entire product and service offerings from both companies, we see a significant synergy. Importantly, the products and the services of each company are levered to the broadband infrastructure business.

As I mentioned on our last call, the fundamental demand drivers for our broadband business are strong, as I show on Page 12. Our target markets, such as Japan, India and Asia Pacific, have low broadband penetration rates and a strong consumer demand for new services. India is a great example. And our business layer is robust. In January, we announced 2 significant Wi-Fi project wins there with BSNL. Additionally, we are participating in a new project with the focus on infrastructure build-out, which we view as an incremental opportunity to leverage UT's and Tongding's products portfolio.

We are very excited to pursuing opportunities around the world in partnership with Tongding. The partnership is still young, but we believe it enables both of us to fully leverage our combined sales channels, market presence, customer base and the expanded portfolio of products. As the partnership matures, we anticipate meaningful revenue in 2020. We look forward to building a long and productive relationship with Tongding.

Before I turn the call over to Eric, I want to emphasize our long-term commitment to invest in growth. We are driving growth through the innovation that results from meaningful investment in research. As you see on Page 13, we are proud to be leaders in important technologies, such as the segment routing. We continue to invest heavily in R&D to maintain and extend our lead. To step up our investment in 5G, smart retail and other industry trends, we are spending to attract the top engineering talent in our industry.

As our pipeline of opportunity grows, we are confident that our world-class engineering team can develop the new products and the technologies that will enable us to capture new business.

With that, I will now turn the call over to Eric for comments on our financial performance. Eric?

--------------------------------------------------------------------------------

Eric Lam, UTStarcom Holdings Corp. - VP of Finance [4]

--------------------------------------------------------------------------------

Thank you, Tim, and thank you, everyone, for joining the call today. As I review our financial performance, please keep in mind that all figures refer to the first quarter of 2019 unless I state otherwise. Also, all comparisons are with the same period last year unless I specify differently.

Okay. Starting from Page 14. First quarter revenue was nearly $25 million, up 9%. Revenue was at the higher end of our guidance range, reflecting a substantial contribution from India and Japan. Japan was driven by PTN product sales, which were seasonally strong as they closed the fiscal year.

As shown on Page 15, gross profit was nearly $7 million compared to $9 million last year and $6 million last quarter. Gross margin was 28%, down from 40% last year. Margin was lower due to the product and geographical mix.

Now let's look at operating expenses and income on Page 16. OpEx was a little bit over $7 million compared to the $6.8 million last year. The slight increase is primarily due to our continuing investment in R&D to support new product development. R&D increased 14% as we had more engineers. Meanwhile, SG&A was flat, and we continue to streamline our support functions. For the quarter, we had a slight operating loss of $0.3 million as compared with an operating income of $2.3 million last year.

Turning to Page 17. The net income for the quarter was $0.4 million or $0.01 per share, down from $4 million or $0.11 per share last year. In Q1, we benefited from the foreign exchange gain as the RMB and the Indian rupee be appreciated against the U.S. dollar.

Page 18. Page 18 summarizes our cash flow. We ended the quarter with $64 million in cash and equivalents, a decrease of $10 million from last quarter. Net cash used in operation was $8.5 million. Cash used in investing activities was $0.3 million.

With that, let me turn to our Q2 revenue guidance, as shown on Page 19. However, before I discuss the numbers, I would like to point out a few risk factors. First of all, we have a level of uncertainty with our major customer in Japan due to the transition to the next generation 5G network. We remain optimistic but cautious about the amount of revenue we can expect from them in the next few quarters. Second, while we continue to expand in India, it remains a highly competitive and price-sensitive market. Also, the Indian rupee is volatile. As such, we continue to face margin pressure and currency risks in this region. Last but not least, we remain mindful of the uncertainty and dynamics inherent in the early stages of market development such as the 5G migration. We are fully aware of the time required for significant technology migration.

Now having said that, we see many growth opportunities in new technology trends, new geographies, new products and new applications. We are excited and confident of our long-term prospect.

So for specific guidance, we expect second quarter revenue to be in the range of $13 million to $17 million. Now quarterly fluctuation reflects the normal unevenness in our business as we recognize revenue based on project fulfillment. We are confident in our ability to capture new customers and grow over time. However, with just a few large customers and sizable projects, our quarterly revenue pattern is slightly to be uneven.

With that, Tim and I would like to take your questions. Operator, please open the line for Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Tim Savageaux from Northland Capital.

--------------------------------------------------------------------------------

Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [2]

--------------------------------------------------------------------------------

A couple of questions. I wanted to start focusing on the 5G optical transport opportunity you mentioned developing in China. And I guess question number one, and it sounds like this is the case that this is a partner other than Tongding that has kind of brought you into this, but I'd be interested if that's the case or not. And whether you can provide any more color as to the timing and potential size of the opportunity.

--------------------------------------------------------------------------------

Tenling Ti, UTStarcom Holdings Corp. - CEO & Director [3]

--------------------------------------------------------------------------------

The partner, yes. I think Tongding will be definitely our partner and yes. So yes, the 5G partner, we have one potential, another one, another partner. Unfortunately, we cannot disclose it right now, yes. But definitely, it will be a big project shooting for the 5G backhaul for the major China carrier.

--------------------------------------------------------------------------------

Eric Lam, UTStarcom Holdings Corp. - VP of Finance [4]

--------------------------------------------------------------------------------

Tim, this is Eric. At this stage, we're still in the testing phase, and it's difficult for us to predict or to comment on the size of the opportunities and the timing of it. We are progressing well so far. So we do -- we are hopeful that we can realize -- we can actually make shipments and realize revenue as soon as we can. But we really cannot comment on it at this stage.

--------------------------------------------------------------------------------

Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [5]

--------------------------------------------------------------------------------

Well, perhaps you can comment more generally, I know you haven't been involved in China on the transport side historically. But as you assess these opportunities, what sort of demand environment are you seeing in China in terms of either current deployments or future opportunities as you kind of begin to enter that market?

--------------------------------------------------------------------------------

Eric Lam, UTStarcom Holdings Corp. - VP of Finance [6]

--------------------------------------------------------------------------------

Okay. So Tim, I think one thing from a technology perspective, we believe we have the right technology to support the 5G migration in China, particularly for, I guess, for a certain carrier. We really cannot mention anything more than that, more specific than that. So we believe we're in a very good position from a technology perspective to develop the type of product and solution that will be very helpful for them to continue this 5G migration. So I think, Tim, you can from a...

--------------------------------------------------------------------------------

Tenling Ti, UTStarcom Holdings Corp. - CEO & Director [7]

--------------------------------------------------------------------------------

Yes. For the market size definitely in China, it is a carrier. You really have a -- they have bigger [footprint], yes, deployed. And they also have a 5G service, probably announced by end of this year. So that's the reason. But again, this is really on the test stage, so we haven't seen their potential forecast deployment in 2 years. Okay, so we still need to see, yes.

--------------------------------------------------------------------------------

Eric Lam, UTStarcom Holdings Corp. - VP of Finance [8]

--------------------------------------------------------------------------------

But typically, China market, as you're well aware, is a huge market and that the demand for equipment, for the solutions are relatively very significant. So we are very hopeful and very excited about the opportunities. But, again, it's too early in the process for us to have anything more definitive to report at this stage.

--------------------------------------------------------------------------------

Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [9]

--------------------------------------------------------------------------------

Understood. With regard to the results and outlook, and you mentioned, I think, a solid contribution from India in the first quarter and you were only able to put up pretty solid gross margins as a result. And I also cited project variability and commenting on the Q2 guide. Can we infer from that, that India, if that's volatility in India that's driving that guidance and will also drive gross margins? Or you also made reference to volatility in SoftBank. So as you look at the decline in Q2 guide, I guess the question is, is it Japan or India that's driving that?

--------------------------------------------------------------------------------

Eric Lam, UTStarcom Holdings Corp. - VP of Finance [10]

--------------------------------------------------------------------------------

Well, as you're well aware, India, we have -- we are engaged in a number of large projects, and as a result, we are quite active in that particular market. So we hope that, that will continue and we'll continue to see opportunities in India. So we're working there very, very diligently. As far as Japan is concerned, Japan as you know, is migrating to 5G. And at this time, there's a lot of uncertainty from a revenue perspective. So we are banking on India to helping out during this transition period as we solidify our position with the Japan market. Now as far as Q1 is concerned, that is really a fairly even mix between India and Japan sales, but moving forward, at least in the short run, we believe that India will be more dominating at least in the short run.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from line of [Ryan Watson from Fidelium Advisors].

--------------------------------------------------------------------------------

Unidentified Analyst, [12]

--------------------------------------------------------------------------------

So Tim, deployment and contract signing aside, when do you anticipate that the 5G trial testing will be complete?

--------------------------------------------------------------------------------

Tenling Ti, UTStarcom Holdings Corp. - CEO & Director [13]

--------------------------------------------------------------------------------

That's clearly a sophisticated testing. So just the testing -- official testing just started. So usually the occurrence they see is probably in the Q3 some time and we will see some result by Q3, yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [14]

--------------------------------------------------------------------------------

Okay. That's helpful. Let me ask you another question about -- so to date, there's been no evidence of Tongding support. Can you give us any specific example that's led to a single contract win?

--------------------------------------------------------------------------------

Tenling Ti, UTStarcom Holdings Corp. - CEO & Director [15]

--------------------------------------------------------------------------------

A couple of contracts, actually, we worked out. First one in India, okay? As I mentioned in my -- I just reported, we are starting to help work together to selling Tongding's optical fiber, okay, to Indian customers. So actually, the sales are growing. It's very strong. So we do see multiple optical fiber orders, okay. That's using our sales channel in India. And in China, as I mentioned, they're starting to sell in PTN and also the SyncRing. And this order carry across products. So they already have a dedicated team to start it. So have a couple of customers already starting to engage. Again, this is not just a -- it's not consumer product. Always, the optical transport product, well, our selling cycle a little longer. So actually, we hopefully can get some deal by second half.

--------------------------------------------------------------------------------

Unidentified Analyst, [16]

--------------------------------------------------------------------------------

Yes. I guess what I was looking at is to the best of my knowledge, it looks like all of those relationships were existing UTSI relationships. I was looking for a situation where Tongding added value to UTSI or was bringing on new partnerships for UTSI's benefit.

--------------------------------------------------------------------------------

Eric Lam, UTStarcom Holdings Corp. - VP of Finance [17]

--------------------------------------------------------------------------------

Well, they are actively engaged in -- or setting up to sell our products in the China market. So -- but that takes time, as Tim mentioned, because it is primarily selling to the carrier and not a consumer type of product. So -- and at the same time, we are actively engaging to help them to market their product outside of China, and particularly in India, in the vicinity, in Southeast Asia. So -- but that again, is at an early-stage other than the cable -- optical fiber cable sales that we are directly engaged in, the other business opportunities are still in the development stage.

--------------------------------------------------------------------------------

Unidentified Analyst, [18]

--------------------------------------------------------------------------------

Okay. Let me we switch gears for a moment. Eric, you're forecasting Q2 revenue of $17 million. Q4 of last year, it was $12.7 million. If you go back to 2017 and you toss out the outliers, there's a trend right now that shows that total revenue is actually decreasing. Can you give us any revenue guidance for all of 2019, what you expect that to come in at?

--------------------------------------------------------------------------------

Eric Lam, UTStarcom Holdings Corp. - VP of Finance [19]

--------------------------------------------------------------------------------

Well, we typically only provide the next quarter's guidance because in our market, it is very volatile. As I kept on repeating, we engage in project sales, so our revenue stream is not very even because it's all depending on the project fulfillment or timing of the project fulfillment. So on a quarter-to-quarter basis, the comparison may not be as meaningful as in the past. Don't forget that we are now -- our accounting practice is different. Under the new accounting rules, we recognize revenue based on shipment. So when the project -- we complete a project shipment, then we recognize the revenue. So -- which is a little bit different than before. So that the revenue pattern is not as -- may not be as consistent as in the past, so it's difficult to read into -- you really -- our suggestion is don't read into the quarterly fluctuation too much because it is project-based, so it's very difficult. We have to comply with the accounting rules and we cannot manipulate the numbers just to smooth it out. So we have to just report it as it happened. And, again, we cannot give out -- we don't normally give out annual guidance on the revenue side.

--------------------------------------------------------------------------------

Unidentified Analyst, [20]

--------------------------------------------------------------------------------

Sure. I appreciate that. I've got 2 last questions around the stock price. So 18 months ago, the stock price was near $6. Today it's essentially half that. It's basically trading at near the same price it was in 2014, so that's no growth in the last 5 years. Let me ask you this, what portion of executive compensation is tied to earnings growth or shareholder return?

--------------------------------------------------------------------------------

Tenling Ti, UTStarcom Holdings Corp. - CEO & Director [21]

--------------------------------------------------------------------------------

That is -- I guess our compensation is through the Board to decide it. And I will say us, over 50% is performance based. It's aligned with our company revenue and profit. So that's usually our compensation committee to decide it. So it's the Board's decision, and it's all based on our company profitability and linked with the executive performance, yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [22]

--------------------------------------------------------------------------------

Okay. And I guess the reason I'm asking this question is the stock price is going down year-after-year, and so long-term shareholders, when you see management is continuing to get bonuses, it's a little perplexing because a lot of other companies that routinely underperform, often executive pay will get cut or they will withhold bonuses if the share price remains depressed for multiple years. So I think what a lot of long-term shareholders would like to see is some sort of commitment from the UTSI Board to freeze bonuses at least until there's some sort of share price growth, milestones that are met. And that's it for me.

--------------------------------------------------------------------------------

Tenling Ti, UTStarcom Holdings Corp. - CEO & Director [23]

--------------------------------------------------------------------------------

Ryan, the new company -- the company, I was -- the position starting from 2016. And you can look into all the company annual results starting 2016. We're starting to make a profit. We have really consecutive 2, 3 years profitability, okay? So you are talking about back to -- before 2016. Sorry, that's the previous executive. So my executive team is starting to build up since 2016. Yes, compared with last year, it's a pick for $6, yes. But for the company, total results, you can see -- you can see the contribution from the executive team, okay? Of course, to getting -- to have the stock price growth getting better, so it's our target together. Again, as a market, it's going to transition to 5G. So from the previous technology to this new technology, the 5G technology, we believe this will move to help the company to get in -- stand up, give it to another stage. So just give us more time, we will show our results.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions. I'll now hand the call to today's presenter, Mr. Tim. Please continue.

--------------------------------------------------------------------------------

Tenling Ti, UTStarcom Holdings Corp. - CEO & Director [25]

--------------------------------------------------------------------------------

Thank you, operator. We are optimistic about our future. We are very confident of our technological direction and our leading-edge product and service offering. We believe we are positioned to benefit from emerging trends in 5G migration, IOT, end-to-end and more. We look forward to updating you on our business progress in a few months. Thank you.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

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