Good afternoon. At this time I would like to welcome everyone to the UTStarcom first quarter 2006 earnings conference call. (Operator Instructions) At this time I would like to turn the call over to Fran Barton, CFO. Thank you, you may begin. Fran Barton: Thank you, Jamie. Good afternoon and thank you for joining UTStarcom's first quarter 2006 earnings conference call. I'm Fran Barton, UTStarcom's CFO, and I'm pleased to host today's call with our CEO, Hong Lu. I'd like to remind everyone that some of the information we'll discuss today constitutes forward-looking statements. Actual results could differ materially from our current expectations. To understand the risks that could cause results to differ, please refer to the risk factors identified in our latest annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, which are filed with the Securities and Exchange Commission. With that, I'll turn the call over to Hong.

Thank you, Fran. Thank you, everybody for joining us this afternoon. Let me begin by providing a brief summary of our first quarter financial results. UTStarcom had a solid first quarter, exceeding guidance on a number of our key metrics. Our total revenue for the quarter was $597 million, which came in above our guidance range of $505 million to $535 million. Our loss per share was also favorable to guidance and came in at $0.09 loss, compared to guidance of a loss of $0.65 to $0.75 loss. We also generated positive cash flow from operations of approximately $54 million as compared to previously expected breakeven. Our strong first quarter performance is attributed to the higher-than-anticipated sales from our PCD and PAS handset divisions, as well as improved gross margin across all the business units. Fran will give more detail on first quarter results and the business units update later on in the call. From an operations perspective, I also believe we have a solid first quarter. During the quarter, we continued building presence in our strategic target markets. Let me quickly run through our target list of addressable markets which consist of ongoing business and future growth drivers. The ongoing business category includes: Our future growth drivers includes: The transition we are making to our future growth drivers is evidenced by recent contract wins in IPTV, NGN and FMC in multiple regions globally. Some examples of these wins includes the recent announcement of our first FMC trial with Brazil Telecom. In addition, we have also recently won a contract with a PODT in the Philippines to build out their next generation network. This is the first win for UTStarcom in their country, and in which we beat out major incumbent suppliers. Finally, I am especially pleased by our recent…

(Operator Instructions) Your first question comes from Mike Ounjian - Credit Suisse.

Thank you. Hong, could you talk a little bit about the timing of some of these IPTV deployments? How quickly should we expect them to rollout, in particular the two in China that you walked through and the one in Central Europe? Fran, any color you can give us on the mechanics around recognizing revenue on these deployments?

Hi, Mike. Regarding the IPTV in China, we have been operational since the latter part of last year, and we also are getting some pay customers, so we feel comfortable that commercial trial is going to open up more cities. There are only two authorized cities in China. One is in Harbin, which is operated China Netcom, and the other one is in Shanghai, operated by China Telecom. We are the major supplier in Shanghai. We had split that originally with Siemens and in the second half, we were just awarded by them again and another one was shared by BTE. So those are the two official ones but we do have a contract that we had signed and I am expecting that official license will be given. Those are things we are expecting for the second half, more activity, and we hope we will start making more positive announcements on those. And then the European, as well as the others, we have a good approach in India, which we made an announcement in Bharat, so that is a pay trial. We also have the pay trial in Brazil, and I don't think we can announce the name yet but we have one major carrier in Brazil that had also given us the pay trial, as well. So, I'm more confident that our product has been sustained going through our commercialization, and we are competing against many, many other major companies. So far we feel very good about our competition and relating to our stability of the products. So I hope more activity will come in the second half of the year from business perspectives. Fran Barton: Yes, Mike, the mechanics vary from time to time, but generally the mechanics would be similar to other infrastructure sales mechanics. So, if you'll recall, the order we sold last year in Japan, we sold the carrier all our infrastructure products, but it took a couple of quarters to rollout because of first time installation, its a new application and new testing and so fourth. There's probably a good -- oh, pick a number -- six-month lag or something, could even be a nine-month lag, possibly, in a new country first time around. Over time, that should shorten up a little bit, but there'll always be some sort of lag. I can take you through more detail offline, but that's the short answer.

Okay, that's helpful. In terms of your comments on the full year outlook, sort of a 10% to 15% revenue decline, if I'm recalling correctly, the last time you'd made comments along those lines it was more of a 5% to 10% decline. It appears the first half, I mean, the Q1 numbers obviously stronger than your guidance; with Q2 down maybe collectively, it appears the first half id at least in line with what you're expecting. So is the more cautious comment here on the second half really coming from timing issues, or is there something you're seeing in terms of market dynamics that's getting you to be a bit more cautious? Fran Barton: Okay, yes, good question and good memory, too, yes. We had been talking in the 5% up to 10% we had said before, and now we're saying possibly a little over 10%. There's probably two small dynamics. One has to do with PCD in the short-term, which is just a lifting-off in this difficult market, transitioning, again, from Curitel to us. Although, as you said, Q1 was very good , Q2 they're going to probably have a smaller revenue number than Q1. The first half will be a good number, nevertheless, so we're generally optimistic there. The second area that we also need to be cautious is probably in China with the PAS handset business that the handsets are coming under a lot of pressure from the mobile suppliers, and we'll have to ensure that our customers, China Netcom and China Telecom, continue to be aggressive in that market. So we're just being a little bit cautious probably with those two particular areas, and everything else is pretty much as we had thought it would be.

I just had a few housekeeping questions. First to make sure I heard it right, could you remind me again what the mix of business in China was in Q1? Fran Barton: Well, I didn't say what the mix of business was.

Oh, okay. Did you give a comment on geographic mix for the quarter? Fran Barton: I said that China as a percent of corporate total was 33%.

Yes, that's what I meant. Okay, 33%. I'm sorry I didn't phrase that well. And then as I'm thinking about the wire line margins for Q1, is it fair just to back out the order cancellation fee for the full $22 million from the revenue and the gross profit and think about the adjusted number as under 3% for the rest of the business? Or is there something else I should do there? Fran Barton: Well, two things. One is the math. It's probably closer to 10% when all is said and done. It would probably cost about three margin points on a corporate level, but the broadband business unit itself will drop from 40% to about 10%, just rough numbers. The complexity of that particular thing is that that was some business that customers had basically over-ordered for, but since they ordered, we ended up completing the contract. So it's business that we would have had in another time, maybe with a different set of margins. But the math you mentioned is correct, Mike, if that answered your question.

Okay. The last question was on the PAS handset margins and just how we should think about those. I mean, it sounded like there was a lot of the improvement with the new ASIC and inventory management, but it's going to be down sequentially in Q2. I guess what's the reason for that? Fran Barton: Yes. I think what'll happen we've got a big one-time catch up on cost as the market, the prices have continually declined almost linearly over time. I think the price declines will continue into Q2, Q3 and Q4. The cost improvements will not match the pace of that, at least from a planning perspective for the next quarter, so we'll have a small erosion, but it'll still be good margins.

Maybe I can add a little color for that. Buying from Atheros and our own design, but then consequently, we have sold that business to Marvell. Our exclusivity are about ready to expire, but those are the ones that we also have added to the formula. On top of it, we have a continuation from the other Company 's competition. They have inventory and so fourth, so they are trying to get rid of the inventory. I would see that more people would be aggressively approached in the market and, therefore, that's also caused some of the decline in our margin too.

Got it. Well thank you very much. Fran Barton: Thanks, Mike.

Our next question comes from Jeff Kvaal - Lehman Brothers.

Thanks very much. My first question is on PCD. It sounds as though we should be expecting a fairly sizeable drop off in revenues next quarter. If it's only going to be half of revenues, then somewhere in the zone of -- well, a fairly sizeable drop off. Is that a fair statement and could you go into why that is? Fran Barton: Well, I think what we said was that they would be 50% of our range of 545-575, and I think we also said that they would have a drop off. The reason that I eluded to earlier Jeff, was the fact that in this transition period as Curitel is ramping down and we're ramping up, the two lines are sort of crossing and there's a blip in there that they're not matching one for one. There's a second factor, actually, which is a market factor that this razor product that has been coming out has been really hot for the past maybe month or so, so we're also trying to be cautious on that. Every so often, something that looks good catches fire, catches the imagination. So we're keeping an eye on that, as well. Ultimately it'll be measured on its performance, not on its looks, but right now its got a lot of attention in the market.

So, Jeff, I think when you say that 50%, I think your math doesn't work if it's at 230.

No, no, no, you're right. It's 320 this quarter, right, and then -- Fran Barton: So it's going to be down.

And then next quarter.

That is as you have earlier mentioned, so about that range is what we expecting.

Okay, alright. One might expect if your supply arrangements are coming together that they would come together in a fairly smooth pattern; and that you wouldn't necessarily have a surge in availability and demand for phones in one quarter and then sequentially lower in another. Is there something that I'm misunderstanding here about that migration?

Yes. I think the migration is definitely -- some of them it could be prevented and some of them it's harder to prevent. In our second quarter, we do have a very high demand for UTStarcom's product but, unfortunately, our supply chain -- because of our new demand that it's very difficult for us to catch up to buy all of those right components in time. Just relatively speaking, it's a very big ramp for any company to start out with the size and number of shipments that we are expected to do. That has actually reduced some of the revenue in Q2. Another part is the approval process, particularly with the Sidekick product that has been delayed in the latter part of Q2, so we missed out a bigger opportunity. So those two have negatively impact our PCD sales, so otherwise it would be probably coming in very close to what originally we had planned. Fran Barton: And as Mike had just pointed out, remember we did go $45 million over PCD in Q1, so we did have an over the top and a little bit under, and you're right. You'd think it would be smoother. It doesn't seem to work out that way.

Okay. Secondly, Fran, I'm wondering if you could give us some thoughts on the trajectory of OpEx into the second half of this year? Or if not, the trajectory, at least some of the moving parts. That would be kind of you. Thank you. Fran Barton: Sure, sure. Thanks, Jeff. Well, the trajectory is to be down, so we would like to see Q3 below Q2 and Q4 below that. So we can't say for sure what -- we're not going to be into guiding a couple quarters out right now, but the answer to your question, the trajectory will be down. The OpEx will not be growing. It'll be declining.

Okay, fantastic. Thank you very much. Fran Barton: Okay.

Your next question comes from the line of Larry Harris - Oppenheimer.

Yes, thank you. I just wanted to get a better handle here with respect to Marvell. Was there a gain recorded in this quarter on the Marvell transaction? Fran Barton: No. Because of the nature of the contract, there's a number of performance criteria and supply agreements and so forth attached, Larry, so as they play out and milestones are met and so forth, those gains will show up in future time periods.

With respect to the product roadmap, because T-mobile has announced the Sidekick, could we see it in the third quarter maybe benefiting your results? Also, any updates on the 7075? Is it approved to any carriers yet? And the Casio water-resistant model?

Now first the Sidekick, we have already started shipping; although we were expecting the earlier part of Q2, but it went into the second half of Q2. Therefore, it didn't benefit our Q2 results. But in Q3, we are expecting a good benefit. Particularly, we see the new model is very, very slick and much more attractive than the previous model and therefore, I think it will benefit us in the second half of the year. Regarding 7075, we have not yet received any approval from any carrier at this moment yet, but we are aggressively working to get approval, so we'll be benefiting in the second half.

Understood. And the Casio water-resistant model?

That one, we already have the orders in. We just need to be able to deliver, and I think that is our plan is in the second half of the year.

Understood. Okay, thank you.

Sure. Fran Barton: If there's anymore questions we'll take them. If not we'll close down.

Your next question comes from the line of Bill Choi - Jefferies.

Okay, thank you. Hi, guys. On the wireless infrastructure, can you break that down between PAS and the non-PAS part? Fran Barton: The shortest answer is it's something like 90% PAS, so for all intents and purposes, it's nearly all PAS, and the rest of the stuff isn't all that meaningful. I can take you off line through it if you need, but it's predominantly PAS.

Now, you guys were kind enough to give the overall PAS numbers for China, and recent reports are that there's been actual PAS subscriber declines in certain markets due to aggressive pricing from the mobile. Can you give some level of update on the overall PAS market as we look into Q2, at the end of Q2?

Yes. Typically in China, they have a very heavy promotion during the Telecom Day, which was normally on May 17th. And this year, we see a lot of aggressive promotion from both China Mobile and China Unicom. Our fixed-line operator has been a little shy to put the same promotion during the same period of time. So, they're shifting that off a little bit. We still remain to see, the new subscriber from China Telecom and China Netcom's fixed line operators are heavily depending on our PAS, so it still recorded about 50% of their total new subscriber is due to PAS, as well as their total revenue income are coming in -- roughly 25% of the total income is due to the PAS. So it is still one of their major revenue sources. So I think that the Q2 was a disappointing number to all of us, but I think now we do plan to ramp it up in the second half of the year. Then just for information, normally Q3 is the slowest period in entire China, and that will start ramping up in the Q4. So I think Q4, we expect it to be a very good quarter for us.

Any guess whether it will be actually able to hit $95 million to $100 million for the entire PAS market for the full year?

Yes, I think it's a very strong -- well, I'm very optimistic about hitting $95 million, and north of the $95 million doesn't seems to be the issue. The first quarter we have over $4 million new subscribers, and that is about $90 million right there. So I think that no matter how we're looking at it, to have the three quarters do 5 million is very, very simple to me to achieve; there is very high probability we'll be seeing even an additional 10 million.

Okay, one final question. On the services, gross margins were 23%, and based on your restatements, it was running in the high 40's, if not into the 50s -- and in one quarter, even into the 60s. Can you talk about gross margins in the services and what changed this year? Fran Barton: Yes. Roughly it's a classification difference. The profitability of the services are at their historical levels. We're just taking a sharper pencil as to what is cost of goods versus what is SG&A, so I wouldn't put a lot into that, Bill.

Okay. Thanks.

Gentlemen, there are no further questions at this time. Are there any closing remarks? Fran Barton: No, I just want to thank everybody for attending, and we'll announce our next earnings call publicly. Thank you all for your attention and have a good day.

Ladies and gentlemen, today's conference will be available for replay today at 5:30 p.m. Eastern Standard Time through June 28, 2006 at midnight. To listen to the replay, please dial 1-800-642-1687; or internationally, 706-645-9291. Thank you. This concludes today's conference. You may now disconnect.