UTStarcom Holdings Corp. (UTSI) Q1 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the UTStarcom First Quarter 2018 Earnings Conference Call. [Operator Instructions] Now I would like to hand the conference over to your speaker for the day, Mr. Gary Dvorchak. Over to you, sir.

Thank you. Welcome to UTStarcom’s First Quarter 2018 Earnings Conference Call. Earlier today, we distributed our earnings press release, which you can find a copy 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’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 of the slides. 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 the risks and uncertainties that may cause actual results to differ materially and potentially adversely from the company’s current expectations. The risks and uncertainties include factors identified in the company’s latest 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 the 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 on the call today are in U.S. dollars. I’ll now hand the call over to UTStarcom’s CEO, Mr. Tim Ti. Tim?

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 on the Investors section of our website. Now let me quickly recap our results on Page 3. First quarter performance was solid. Revenue came in at the higher end of our expectations and the gross margins exceeded 40%. That, along with our continuous focus on cost control, enable us to return to profitability in the quarter. Earning were slightly down from a year ago. Q1 of 2017 was the strong quarter and that we are also now stepping up our investments in R&D. The R&D reflects our commitment to maintaining a robust product offering that enable us to pursuing exciting new market opportunities. Eric will go over the details of our financial results shortly. Please turn to Page 4. Technology leadership is our focus for the quarter. Our success is driven by innovation. Technology leadership is the key to winning new business in our market. We want to offer high-performance, high-value product and the best services to our customers. We achieved these two R&D programs that strengthen our competitive position in the marketplace. Our R&D team is dedicated to developing new products for the most promising long-term market opportunities. Last year, we introduced our SyncRing product and that it is starting to gain traction. It is target at emerging 5G networks. We have several potential customers now evaluating it and that believe purchases will ramp going into 2019. Even with SyncRing getting traction, we are looking ahead and keeping our new product pipeline full. The latest product in the innovation pipeline is our SRv6 router. Last month, we announced a POC-ready release of this direct toplatform, the SkyFlux UAR series of routers. These new routers are based on segment routing over IPv6 data plane or SRv6 integrated with our SDN platform, SOO network. Segment routing, or SR, is the so-called de facto next-generation network architecture. The trend towards this architecture is underway. The launch of our new SRv6 router product line represents an important milestone for us. It positions UTStarcom as the leading provider of the next-generation technology. We are excited about the value proposition for this new product. The highly efficient networking platform delivers all the benefits of SDN, including high agility and automation. It also significantly reduces network complexity and optimizes operation and the maintenance. To support this new product introduction, we recently participated in two industry events that featured our SRv6 technologies. Thus, highlighting our leadership. Last month, we participated in an interoperability showcase in Paris. This was organized by a well-known and respected networking test center. During the showcase, we participated in live multi-vendor demonstration of the latest SRv6 technology. The second industry event occurred prior to the live demo in Paris. UTStarcom joined a range of interoperability tests with multiple vendors during a high staging lab testing event. We participate in the test that covered several areas of interest, including SRv6, segment routing fault management and the resiliency, SDN, clock synchronization and more. We are very, very pleased that UT has a strong presence in these events. The inclusion of SRv6 into the scope of the highly regarded test demonstrates the growing interest in this new technology. Clearly, the whole industry is preparing for the adoption of SRv6. We are excited to be one of the first industry participants to offer this. Please turn to Page 8. Another important strategic highlight is the joint venture called uSTAR. We formed it with a leading Zhejiang-based manufacturer of refrigerators. This JV will enable us to further capitalize on our telecom expertise while expanding our market opportunity. The JV will be built IoT, smart software, cloud-based OEM software and smart AI retail software that integrates big data analytics and the machine learning. Any form of the next-generation retail market, our solutions will facilitate the services and the transaction styles desired by the modern consumer. In addition to the codevelopment of a smart appliance with uSTAR, we will provide an automation solution for the fast-growing Chinese smart retail store market. Our product line will include smart shopping machines. Smart retail solutions are expected to enhance the customer experience and safe operating costs. Our products will utilize cutting-edge technology, such as facial recognition, image analysis, behavior identification and a load sensor, RFID and mobile payment. Furthermore, with the uSTAR cloud-based operating centers, our solution will offer various types of value-added service, enabling the real-time interaction of people, products and localities. We anticipate a substantial market opportunity and believe this new solution can greatly enhance the company’s top and bottom line results in the years ahead. Retail store automation represents a tremendous business opportunity. We are moving into it aggressively with both our uSTAR JV and our existing smart store initiative. More and more traditional retail store are recognizing the need to upgrade their infrastructure in order to enable innovation and service optimization. Free trial of our smart store solutions are in progress. Demonstrations are underway at our partner’s retail and gas station, convenience store chain. We are excited to collaborate with our system integration partner as well as our – one of the major e-commerce companies based here in Hangzhou. 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 10. Our target regions for the deployment of our broadband infrastructure products are Japan, India, Taiwan and other Asia-Pacific regions. We continue to believe this market provides significant opportunities given the relatively low broadband penetration rates and the strong consumer demand for new broadband services. Specifically, India remains a core market for us with the consistently high interest of – for many of our product lines, including optical transport and the application, fixed and wireless broadband assets. Our business India is gaining momentum. In the first quarter, we won a large project with a major carrier. We’ll provide the next-generation network voice and data equipment and services. We expect more upgrade projects and the new deployments to expand our market share. Along these lines, we have renewed interest in the China market. We are still studying the situation, but we believe that there could be a substantial opportunities for us in optical networking. This is a market in which we have expertise and there is a growing demand in China. Our market research is still just starting, but we will give you update as our analysis evolves. With that, now I will turn the call over to Eric for comments on our financial performance.

Thank you, Tim. And thank you, everyone, again for joining the call today. I will review our financial performance for the first quarter of 2018. All figures that I cite refer to Q1 2018 and all comparisons, unless I state otherwise, are with the same period last year. Please note that the key difference between our GAAP and non-GAAP financials is that non-GAAP financial excludes stock-based compensation and the difference is immaterial. Considering the immaterial difference between GAAP and non-GAAP financials, we will only be reporting GAAP financial result starting this quarter. I would like to quickly mention that in 2018, the company adopted the latest accounting pronouncement, ASC 606. In accordance with the new accounting standard, the company increased the beginning balance of its 2018 retained earnings by $7.4 million. Now please turn to Page 11 to begin our revenue review. Revenue was $22.6 million for the quarter, essentially flat when compared to the same period last year and up 24% on last quarter. Q1 revenue was at the high end of the guidance range. The top line performance was in line with our strategy to focus on high-value and high-margin products. As is normally the case in Q1, revenue from Japan dominated as the Japanese end the fiscal year. We achieved good result and good revenue from Taiwan this quarter, and we are very happy that our PTN products are gaining a foothold there. Now please turn to Pages 12 and 13, which highlight gross profit and gross margin. Gross profit was $5 million, essentially flat when compared to a year ago. Gross margin was 14.5%, up modestly from 14.4% from the same period last year and up from 25% last quarter. The performance reflects consistent year-over-year pricing and demand from a major customer in Japan. Now let’s turn our attention to operating expenses on Page 14. Operating expenses was $6.8 million, up from $5.5 million in the same quarter last year and up slightly from $6.5 million last quarter. The year-over-year increase in operating expenses largely reflects our continuing investment in R&D. Pages 15 and 16 summarize our operating income and net income. Operating income in the first quarter of 2018 was $2.3 million. This is significantly higher than the $1.9 million loss last quarter, but down 37% from an exceptionally profitable quarter a year ago. Net income was $4 million or $0.11 per share. This compares to a net loss of $3.6 million or $0.10 per share last quarter and an income of $5.9 the same period last year. Page 18 summarizes our cash flow. We ended the quarter with $99 million in cash, cash equivalents and restricted cash. This is a net decrease of $2 million from last quarter. Net cash used in operations was $5 million, partially offset by $3 million cash release absorption investments. Now let’s turn to our revenue guidance on Page 19. Before we discuss the numbers, let me preface the conversation by discussing some underlying trends in our business. We are very pleased with our Q1 performance, but we need to caution you not to extrapolate those solid result out for the balance of the year. Future demand from our major customer in Japan is difficult to gauge. The network is undergoing a transition to the next-generation technology that is far more commoditized and competitive than in the past. We are optimistic but yet cautious about the amount of revenue we expect from them in the second half and beyond. Furthermore, we’re expecting rapid growth in India. We are developing a robust, profitable and growing business in India, but it is a highly competitive market. Pricing and margins are simply lower here than what we have experienced in other regions. Tim gave you details about exciting growth opportunities in new regions, new products and new applications. We want you to share our enthusiasm and confidence for our long-term prospects. However, we also want you to be mindful of the increased uncertainty in these competitive and dynamic markets. Now for a specific revenue guidance, we expect the second quarter revenue to be in the range of $23 million to $28 million. With that, Tim and I would like to take your questions. Operator, please open the line for Q&A.

Thank you, sir. Ladies and gentlemen we will now begin the Question-and-Answer Session. [Operator Instructions] We have the first question from the line of Bill Catcher [ph]. Please ask your question.

Yes. Hopefully, your projections will work out. I’ve been a shareholder for over 10 years now, and I’m wondering what you are doing to promote the company in terms of the Street? There were very few companies that seem to be following you, brokerage and investment houses. And I’m wondering what you’re going to do or what you can do for promoting the company to the Street?

Hey, Bill. This is Gary Dvorchak, I am with The Blueshirt Group. We’re UTStarcom’s Investor Relation firm. So we actually have a fair amount of activity going on, and you may or may not see us because it’s really focused on institutional investors. So we do have one analyst who’s been following us, Tim Savageaux of Northland Capital. And in the past and probably again in the future, we’ll work with him to set up different investor meetings. Also on a regular basis, the management team is traveling around the U.S. And depending on where they are, we, Blueshirt Group, will set up investor meetings for them as well. So we have a regular program going to generate interest. I’ll give the caveat that we are a small cap company. So it’s not like we’re Apple or we’re on TV every day. But the key place where we can find buyers of the stock is in smaller funds, mutual funds and hedge funds. And so on a regular basis, we are doing outreach and making sure that we’re trying to set up meetings and get in front of the appropriate folks. And we also work on getting conference invitations along those lines as well.

Well, in the past, I dealt with someone named Ralph Fong. Is he part of your organization? Or do – are they working with a new organization?

Yes. He’s one of the staff of Blueshirt Group.

I see. Okay. And the volume with the company on daily basis has not been very significant also. So I assume that the major investing houses and maybe large cap funds are – have no knowledge or interest in the company. Is there anything that you can do to increase that?

Well, a couple of things. One, the trading volume is related to the fact that we have a lot of good long-term shareholders. And so the more shareholders you have that are believers in the story and think that we’re going to drive over time, they don’t want to sell. So it’s kind of two-edge sword, everyone wants long-term shareholders. But if you have it, you have less trading volume than usual, which is not a problem. And in fact, to the extent we generate buying interest, we want people to have to pay a little bit more to buy the stock. We want investors to pay a fair value. But at the same time, we want the stock to go up over time, which means there has to be more demand than supply. And to your other point about which funds are interested, you’re right, funds that do large cap investing, funds that are interested in different sectors are obviously not going to be interested in us. So we really focus our efforts on small cap funds and technology – funds that are interested in technology and telecom equipment, in particular. So that’s where we are typically doing our outreach in trying to generate buying interest.

Okay. And finally, would the management be able to project the hopeful possibility that there won’t be a loss for the final quarter of this year as it was last year?

Bill, this is Eric Lam. First, thank you for your continuing interest in UTStarcom. To answer your question is very – we normally – we do not give out profit guidance. And as I mentioned earlier, the market that we’re in is getting very, very dynamic. And it’s very difficult to predict some of the potential customers' buying habits or trend. So it’s very difficult for us to predict.

Okay, well thank you, gentlemen.

Thank you [Operator Instructions] There are no further questions at this time. I would like to turn the conference back to the speakers. Please go ahead.

Thank you, operator. Yes. First quarter results demonstrate our solid execution on key initiative. As Eric mentioned, we are confident about our future. We are progressing well in our target regions. We introduced our SRv6 router product line and position us as one of the leading providers of the next-generation technology. And of course, we are excited about the completely new application such as retail automation. We remain committed to investing in R&D and strengthening our product portfolio with high-performance and high-value products. We’re optimistic about the business opportunities and confident that our technologies, geographic focus and the strategic partnership position us for a solid future. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all disconnect the lines. Thank you.