UTStarcom Holdings Corp. (UTSI) Q3 2018 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen, thank you for standing by for UTStarcom's Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note that we are recording today's conference call, Friday, the 9th of November 2018. I'll now turn the call over to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group Asia. Please go ahead, Mr. Dvorchak.

Thank you, Amy. Hello, everyone, and welcome to UTStarcom's Third Quarter 2018 Earnings Conference Call. Earlier today, we distributed our earnings press release. You can find a copy of on our website at www.utstar.com. In addition, we have posted a presentation on our website, we 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 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 will 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. Our outstanding top line results demonstrate our ability to establish and to monetize strong new customer relationship. Revenue of $52 million doubled from a year ago, primarily driven by fulfillment of a large order for a big project at our top customer in India. Although our revenue would be uneven from quarter to quarter, over the long term, we are highly confident in our ability to serve the vast needs of new customers around the globe. The quarter's gross profit grew 32% from the last quarter due to the higher revenue from India. We also effectively controlled our operating expense, which decreased 23% from a year ago. This results in operating income of $4.1 million, up by 1/3 versus last year. Eric will go over the details of our financial results shortly. Please turn to Page 4. Innovation is the core competency that drives our business. We remain committed to technology leadership through investing in R&D. We have increased that investment by hiring additional engineering talent continuously over the last 12 to 15 months. Our engineers are dedicated to developing new products and technologies to capture future market opportunities. One such opportunity is the global transition to 5G wireless networks. 5G requires significant change to network architecture, which will result in compelling benefits such as greater network capacity, spectrum efficiency and higher data throughput. As the network operators around the globe prepare for commercial rollout of 5G, we are seeing a stepped up level of activity. Our growing product lineup ensures that we are well positioned to capture the emerging opportunities in 5G. Our diverse product solutions are designed to optimize 5G infrastructure to support challenging new applications such as Internet of Things, machine-to-machine, vehicle-to-everything, autonomous driving, augmented reality and more. Our initial foray into 5G infrastructure is our SyncRing product line, which enables the high-precision timing needed for maximum network performance. SyncRing is gaining traction with several potential customers testing evaluation units. We expect purchases to ramp up in 2019 in line with the 5G migration. Additionally, segment routing is a key technology for the 5G network and a primary focus for UT. This is a breakthrough networking technology offering greater scalability and flexibility while simultaneously simplifying network management. The trend towards this architecture is well underway. We launched our new SRv6 router product line earlier this year, and we are excited about the value proposition of this product. It not only delivers all the advantages of SDN, including high agility and automation, but also significantly reduce network complexity and optimize operation and maintenance. We believe that SRv6 for 5G is the primary growth opportunity for UTStarcom in the years to come. We are putting significant R&D and marketing resources into driving the success of this product. We are pursuing aggressive marketing program to penetrate new 5G opportunities. One example of this is our recent participation and sponsorship of the International Timing & Sync Forum or ITSF in Romania. ITSF is the largest synchronization specialty conference in the industry. The 4-day event presents an opportunity for network operators, standards organizations, end users and the vendors to discuss future requirement challenges and solutions. In the conference, we introduced SyncRing XGM30, the latest offering in our SyncRing family. This product is installed outdoors using a satellite signal as the primary time reference. It supports numbers of standard for precision clock synchronization and is positioned a robust IPv6 compact outdoor device. Similar to other offerings in our SyncRing family, this new product provides an excellent integrated solution for various application and the required precise frequency, phase and time synchronization over packet-based network. It enables mobile network operators to meet the stringent time synchronization requirements of LTE, LTE-Advanced and 5G networks in a cost-effective manner. In addition to the launch of XGM30, our executive management team delivered a keynote address at ITFS in the Sync Over Packet for 5G Era presentation. We discussed the challenge related to highly accurate synchronization in mobile network. We also outlined our strategy to achieve accuracy in meeting the technical requirements of 4G and 5G network. Now let's turn to discussion of our progress in targeting key markets. Please turn to Page 6. Our target markets for broadband infrastructure products include Japan, India and other countries in Asia Pacific. This market represents significant business opportunities given their low broadband penetration rate and strong consumer demand for new broadband services. We believe we are well positioned to establish new customer relationships across the region. Let's talk about India for a moment. India remains a key market for us and our business there is robust. Interest is high for many of our product lines including optical transport and aggregation, fixed and wireless broadband assets. In Q3, revenue from India was well ahead of our expectations, driven by, primarily by the outgoing fulfillment of large projects there. Going forward, we anticipate incremental upgrade projects and new deployments, enabling us to expand our market share in the region. Next, China. We continue to believe our products and technologies are well suited to support the 5G migration in China. This is a significant opportunity for us optical networking. As we discussed on our last call, we are collaborating with our partners to position ourselves as a vendor of choice to support the next-generation 5G mobile network migration. Furthermore, in September, we formed a strategic partnership with Tongding Internet Information Co. to jointly market and distribute both companies' products and services in China and overseas. Tongding is listed on the Shenzhen Stock Exchange and they specialize in communication cable and optical fibers. The company is also involved in mobile Internet and Internet of Things application. The strategic partnership's initial focus is on developing Tongding's optical fiber cable business in India as well as marketing UTStarcom's flagship PTN and SyncRing products in China. This partnership enables both companies to fully leverage our combined sales channel, market presence, customer base and expanded product portfolio. 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. As I review our financial performance, please keep in mind that all figures will refer to the third quarter of 2018, unless I say otherwise, also all comparisons with the same period last year unless I specify differently. Please turn to page 11 for our financial review. Now as Tim mentioned, revenue was $52 million, doubling from the same period last year. Q3 revenue also exceeded our guidance range, reflecting the substantial revenue growth from India. Please turn to page 12 which highlights gross profit and gross margin. Gross profit was nearly $10 million compared to $7.5 million in Q2. The higher gross profit reflects the growth in India. Gross margin was 19%. Now let's turn our attention to operating expenses on page 13. Operating expenses were less than $6 million compared to $7.5 million in the same quarter last year and $7 million last quarter. More importantly, R&D spending increased by 17% while SG&A expenses declined almost 40%. Now this is a vivid result of, one, our continuing effort to steamline. sorry, to streamline our support functions; and two, our firm commitment to R&D investments. The year-over-year increase in R&D spending largely reflects the steady addition of engineering resources. We achieved $4 million of operating income in the third quarter of 2018, up from $3 million last year and $0.5 million last quarter. I'd like to comment briefly on currency. The India rupee declined significantly and unexpectedly during this quarter, resulting in a large foreign exchange loss. Now despite the unfavorable currency impact, we achieved our highest-quality operating income in 7 years and attained net income of $2 million or $0.06 per share. This compares to net income of $2.2 million or $0.06 per share in the same period last year. Page 15 summarizes our cash flow. We ended the quarter with approximately $67 million in cash, cash equivalents and restricted cash, a decrease of $14 million from last quarter. Net cash used in operation was $12 million as cash collection on a couple of completed large projects in India is scheduled to come in the next quarter. Additionally, net cash used in financing activities was $0.9 million, which is solely attributable to our stock repurchase program. Now let's turn to our revenue guidance shown on Page 16. I'd like to reiterate a key point that I mentioned during our last earning call. The uncertainty with our major customer in Japan is due to their transition to the next-generation 5G network. We are optimistic, but cautious about the level of revenue we expect from them in the next few quarters. While we continue to grow rapidly in India, it remains a highly competitive and price-sensitive market. Margin pressure and currency risks from this region are challenges that we manage carefully. We continue to see growth opportunities in new geographies, new products and new applications and we remain excited and confident about our long-term prospect. At the same time, we are mindful of the increased uncertainty in this dynamic market as well as the time it takes for significant technology migrations. For specific guidance, we expect fourth quarter revenue to be in the range of $10 million to $15 million. The sequential decline primarily reflects a natural unevenness in our revenue stream as we recognize revenue based on project fulfillment. As Tim mentioned at the outset, we are highly confident in our ability to capture new customers and grow over time, but with just a few large customers and sizeable projects, our quarterly revenue pattern is likely to be uneven. With that, Tim and I would like to take your questions. Operator, please open the line for Q&A.

Thank you. [Operator Instructions] There are no questions at this time, I'd now like to turn the conference back to our presenters. Please continue. Yes, we have a question from Greg Gibas of Northland Securities. Please ask your question now.

Hi guys. This is Greg on for Tim Savageaux. Thanks for taking the question. First, regarding the major customer in Japan, when should we expect to see a pickup in revenues from them again? Is it kind of being held off in the next several quarters, like you said?

Yes, it's Tim. And yes, the Japan, our major customer, still under POC and the trial for this new technology, due to the coming 2020 Olympics, so all the new networking deployment and job will be actually more controlled by the older projects so that's the reason we also tried to push the POC can we go faster, but there is some delay there. So hopefully, next year, second half, we can get some pretty good number. That's our expectation, yes. Thank you.

Okay. And then just secondarily, kind of a similar question for the Indian market then. I guess, assuming a sequential decline next quarter, when should we expect strength from the Indian market again?

Yes, as mentioned in my presentation, mainly India is based on a tender basis. So it's a big project is when tenders open floating and then we win the tender then starting to deliver. There's a major project as we mentioned in our presentation. There's a major big project revenue because we finished that on time, delivered our product. So we get a bigger revenue result in Q3. And that will also impact Q4, it will mainly come from the other region. So the next one we still have some project we will deliver in Q1 and Q2, yes, next year. Okay.

Thank you. Our next question is from James Bartholomew. Please ask you question.

Yes, it sounds like more of the same if you average up this quarter with the outlook, there's really not much progress. All these items that are presented, all the projects that allegedly you're involved with, you should be way ahead of where you are now. I don't see any progress -- any meaningful progress at all even though you tried to present one. If you've got $66 million in cash, let me manage it. I don't know why a company this size would have $66 million in cash or equivalents. I'll manage that money and I'll bet I make more money off than you guys are. I'm waiting for your response.

Okay. Well, we do see opportunities, but then we are working very hard on the next generation of technology. And as Tim mentioned before, we believe we are very well positioned for the next generation. However, it does take time because we do have -- we only have a few customers and we have large projects, so it's very difficult to maintain a very steady growth pace. But we are optimistic about our future and our technology, so we are confident that we're going to come ahead in the long run.

Thank you. As there are no questions as of this time, I'd like to turn the conference back to our presenters. Please continue.

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

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.