UTStarcom Holdings Corp. (UTSI) Q4 2018 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen, thank you for standing by for UTStarcom's Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] Please note that we are recording today's conference call. I will now turn the call over to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group Asia. Please go ahead, Mr. Dvorchak.

Hey, thank you, operator. Hello, everyone, and welcome to UTStarcom's fourth quarter and full year 2018 earnings conference call. Earlier today, we distributed our earnings press release. You can find a copy of it at our website at 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 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 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?

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 result on Page 3. We reported strong top line performance in 2018. Full year's revenue grew double-digit to $116 million, as we demonstrated our ability to follow, develop and monetize strong customer relationship. Operationally, we execute well on our strategy. We secure key project wins in India and introduced advanced product solutions that enhanced our competitive position. Fourth quarter revenue met expectations and was within our guidance range. Our gross profit grew 26% year-over-year. Eric will go over the details of our financial results shortly. I will now turn our attention to operating highlights. First, I want to emphasize that innovation is our core focus, and it drives our business. As you see, on Page 4, we are proud to be leaders in important technologies, such as Segment Routing, and are investing heavily in R&D to sustain and extend the leadership. Since mid-2017, we have stepped up our spending to attract some of the top engineering talent in our industry. We will continue to escalate our investment and activity to take the best talent our industry can offer. As our pipeline of opportunity grows, we are confident that our outstanding engineering team can develop the new products and the technology that will enable us to capture new business. Extensive investment in R&D enables us to focus on key trends that will drive the telecom equipment industry for years to come. Let's review that. One of the most important trends is the worldwide transition to 5G wireless network. The 5G migration is gaining momentum in leading markets such as the U.S, Korea and Japan. China is also rapidly pursuing 5G. 5G is creating the need for significant new investment by network operators. As this new standard requires, greater network capacity, better efficiency and higher data throughput in the network architecture. As you see on Page 5, our expanding product portfolio ensures that we are well positioned to capture this emerging 5G opportunity. Our advanced product solutions are designed to support challenging, new applications, such as the Internet of Things, machine-to-machine, vehicle-to-everything, autonomous driving, augmented reality and more. Segment Routing, FlexE and Software Defined Network or SDN are key technologies for 5G and our focus areas for UT. These breakthrough technologies offer greater scalability, flexibility, agility and automation, while also simplifying network management. The benefits of the Segment Routing, FlexE and SDN are well recognized, and adoption is underway. SkyFlux UAR, our segment router product line, shown on Page 6, not only delivers all the benefits of SDN, but also significantly reduce network complexity and optimize operation and maintenance. We believe SR for 5G will resonate well in the market, and there will be prominent growth opportunity for UT in the coming year. Another important product that addresses 5G infrastructure is our SyncRing product line shown on Page 7. SyncRing enables the extremely precise timing needed for maximum network performance. To further support 5G migration, last November, we launched SyncRing XGM30, which enables mobile network operators to meet the stringent time synchronization requirements of LTE, LTE-A and the 5G network in cost-effective manner. The 5G transition is at an inflection point. That will present opportunities for us to drive future revenue. As such, we are putting tremendous R&D and the marketing resources in 5G to prepare for the transition. Next. Let's turn our attention to broadband infrastructure business shown on Page 8. The fundamental demand drivers for our broadband business are strong. Our target markets, such as Japan, India, and Asia Pacific have a low broadband penetration rate and a strong consumer demand for new services. We are ideally positioned to establish new customer relationship across the region, build up our classic PTN product line continually in Japan plus the transition progress from 10G to 100G metro networks. India has grown to be an important market for us, and the business layer is robust. Interest is high across all product lines, especially in optical transport, aggregation, fixed and the wireless broadband assets. In January of this year, we announced two significant Wi-Fi project wins with BSNL in India. The first project is to provide high-speed data services to over 1,000 remote village clusters in Northern and the North-eastern India. A second project is for the implementation of a massive public hotspot network in rural India. UT will assist BSNL and provide Wireless Access Points, Power over Ethernet Switches, Wireless Controllers and other related components and services. Going forward, we anticipate additional upgrade projects and the new deployment enabling us to expand our market share in the region. Building on 5G transitions and the broadband infrastructure, we believe the retail store automation is a tremendous long-term opportunity, which is shown on Page 9. Growing numbers of transitional retail stores recognize the need to upgrade their infrastructure in order to offer more innovative service. Smart retail solutions are expected to enhance the customer experience and to save operating cost. We launched a small commercial refrigerator, goBox, last year, as you can see on Page 10. goBox is the company's flagship product line in smart retail. It mostly integrates with our cloud platform and the uses image recognition sensors and the big data for a streamlined, automated shopping experience. Currently, we are the leading vendor that deploys an integrated load and image sensing technology in the smart retail device. goBox is gaining traction in marketplace. Its product line is beginning to penetrate the unattended retail market in China. The company is also exploring and pursuing sales opportunities internationally. Speaking of the retail - smart retail, I will like to update you on our uSTAR joint venture. We recently acquire the outstanding 51% equity interest from our partner so that UT now own 100% uSTAR. uSTAR was established in March 2018 to develop a comprehensive retail automation solution and a cloud-based service. With that now, I will turn the call over to Eric and - 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 refer to the fourth quarter and full year 2018, unless I state otherwise. Also, all comparison are with the same period last year, unless I specify differently. Okay, starting from Page 11. Fourth quarter revenue was nearly $13 million, down 30% from the same period last year. Revenue was within our guidance range, reflecting the substantial revenue contribution of Japan driven by PTN product sales in the quarter. Now as Tim mentioned, 2018 revenue was $116 million, up 18% from the prior year. We saw strength in India, which accounted for over 50% of our total revenue. As shown on Page 12, Q4 gross profit was nearly $6 million compared to $5 million in the same quarter last year.Q4 gross margin was 45%, up from 25% last year. The higher gross margin reflects favorable product and geographical mix in the quarter. 2018 gross profit was $32 million compared to $33 million last year, 2018 gross margin was 28%, down from 30% - 34% last year. Now looking at operating expenses and income on Page 13. Fourth quarter operating expenses were $8 million compared to $6.5 million in the same quarter last year. The increase is mainly due to our continuing investment in R&D. 2018 operating expenses were $28 million, essentially flat when compared to last year. R&D spending increased 29%, while SG&A expenses declined 11%. This is the result of our continuing effort to streamline our support functions and our commitment to R&D investments. The year-over-year increase in R&D spending, largely reflects the addition of engineering resources. We had an operating loss of $2.2 million in Q4 compared to an operating loss of $1.9 million in the same quarter last year. 2018 operating income was $5 million, a little bit down from the $7 million from last year. Turning to Page 14. The net loss for the quarter was $1 million or $0.03 per share, which includes a foreign exchange gain at the Indian rupee, rebounding from an earlier decline. That compares to a net loss of $4 million or $0.10 per share in the same period last year. 2018 net income was $5 million, down from the $7 million in 2017. Page 15 summarizes our cash flow. We ended the quarter with $74 million in cash, cash equivalents and restricted cash, an increase of $7 million from last quarter. Net cash generated from operations was $4 million. Cash from investing activities was $1 million as we consolidated the wholly owned subsidiary uSTAR into our financial results. Additionally, we used about $0.5 million for stock repurchase. Now let's turn to revenue guidance shown on Page 16. I will like to reiterate the key point that I mentioned during our last earning call. A level of uncertainty with our major customer in Japan stems from the transition to the next-generation 5G network. However, we remain optimistic, but cautious, about the amount of revenue we expect from them, in the next few quarters. While we continue to expand in India, it remains a highly competitive and price-sensitive market. Margin pressure and currency risks of this region are challenges that we manage carefully. We continue to see growth opportunities in new geographies, new products and new applications and remain excited and confident of our long-term prospects. However, we are mindful of the increased uncertainty in these dynamic markets, as well as the time it takes for significant technology migrations. For specific Q1 2019 guidance, we expect revenue to be in the range of $20 million to $25 million. Now quarterly fluctuation, primarily, reflect the normal unevenness in our business, as we recognize revenue based on project fulfillment. As Tim mentioned at the outset, we are confident in our ability to capture new customers and grow over time. However, with just a few large customers and sizeable project currently, our quarterly revenue pattern is likely to be uneven. With that, Tim and I will like to take your questions. Operator, please open the lines for Q&A.

[Operator Instructions] Your first question comes from the line of Tim Savageaux from Northland Capital. Your line is open.

Yes, hello. And hi, guys. And congrats on the quarter specifically from a gross margin perspective. We certainly get a sense of, I guess, likely the impact of India on your overall financials given the emergence of them in the 40s here in the quarter. And that sort of leads into my question, which is - and you can comment on Q1 guidance if you like - or the question is really about as you look at 2019, I mean, the - you have obviously got some positive drivers, 5G and this overall growth in India, you mentioned the potential lumpiness. But as you consider 2018, where you were able to grow pretty nicely, given those drivers and also the fact that you are increasing operating spending to some degree, I mean, does that signal that you feel like you can continue to grow overall in '19? And what role will the contribution from India likely play in that? Do you expect that to increase?

So, okay. Tim, thank you for your question. This is Eric. Yes, 2019, it will be - we do have some uncertainty about the revenue. We do expect pretty good revenue from India as we had some - we had good projects going in India. The 5G transition or the 5G – sail [ph] into 5G, that may come - that's some timing issue. It may not be able to capture much of the revenue in 2019. So it is going to be a - maybe some slight hiccups during this year. So we still - a lot of uncertainty. That's why we want to be a little bit more cautious in terms of our revenue stream going forward. But we do see the 5G coming hot and heavy after this year. So it may - if it comes, it's going to be near the end of the year. So Tim, you've got anything…

Got it. It reflected...

Yes. It's...

Yes, just got this follow-up...

Yes, we do see this 5G migration - yes, it's, sorry, it's I just…

Sorry about that. Go ahead.

Yeah. Yeah, we do see 5G migration has got underway, but this migration is gradually is coming and especially in case of the - Japan. But again, it's more complicated due to the 5G supplier due to especially this vendor from China. So actually at your pace, you don't slow down for 5G due to new vendor selection for a 5G wireless portion, right? So that's also probably a little hindrance to our 5G product delivery, okay. Well, for India is I see is the demand is very strong and - but India mostly is tender basis. So it's - that's the reason you can see our revenue come up and down. You can see in Q3, we jumped pretty high. But at Q4, we're lower. That's because once we get tender, we have a contract to deliver - finish in a period of time. So that's also you can see the revenue is up and down is - that's the major reason, okay.

Okay, a couple of follow-ups. You mentioned in Japan the prospect of an upgrade to 100-gig optical transport. With that - would you expect that to occur in advance of 5G deployments? Or is that part of the whole process or what's really dictating the pace of that 100-gig upgrade in Japan?

Yes, in our view, that migration for 10G to 100G, that's for sure. But regarding to the technology to better interfacing and support 5G requirements, the special feature like the slicing [ph] service feature, they request new PTN. We have mentioned they're using the SRv6 technology, okay, So in addition to the physical port from 10G to 100G, they actually have a new advanced PTN requirement to better interfacing and support 5G special function, okay. That's the - that part would be slowed down a little bit.

Got it. And last question from me is should we expect any material revenue in China in 2019? And what products might drive that?

Okay. Yes. As we mentioned, probably you'll be aware, we have a partner. We announced the Tongding partnership in September of 2018. Tongding, we partnership and we will - with their sales channel and, in China, market presence, they were starting to help us to - or together to promote our PTN and SyncRing product to China customer, so that we expect to see some revenue in 2019. And we also mentioned our new retail - smart retail product from uSTAR. The product, or goBox, as I mentioned in my report, that work getting some revenue in 2019 as well.

Okay. Thank you.

Thank you.

Thank you, Tim.

Your next question comes from the line of Ryan Watson. Your may ask your question.

Hi. Tim, I was wondering if we could get an estimate on your anticipated R&D spend for 2019.

The '19 - we'll - we'll continue to invest segment routing and in SyncRing product, SDN. So we cannot disclose the detailed number, but actually it's a bigger portion in the investment continuously since 2017, okay.

Typically or factually, what we're planning on, we will spend maybe probably about 20% more than this year in 2019 in terms of R&D. So we are shifting a lot of our resources to R&D. We're actually lowering spending on all the support functions so that we can focus our energy and investment in R&D. And so we are expecting at least a 20% increase in R&D spending this year.

Okay. And just to make sure I understood what the previous caller had asked, in terms of Japan, I've always understood that, if anyway, these orders come through, they'll be in the second half, but are you saying that those orders could potentially be pushed out until 2020? And also to follow up on the smart retail initiatives, are you anticipating any meaningful revenue from those initiatives in 2019?

Well, for Japan, yeah, we expected - the order will probably come in the later part of this year in 2019. In terms of the smart retail, as Tim mentioned earlier, our goBox product line is doing - is gaining traction in China. We do expect decent revenue coming from the goBox sales. And additionally, we are exploring and actually working quite hard, trying to expand that internationally. So we do expect some - we do plan on getting decent revenue in China on goBox.

Okay. Let me ask you a question about share buybacks. I know you've been buying share backs - shares back the last year or so, but it's actually not covering the additional shares that - performance shares that you're issuing to employees. Is there a reason why with the amount of cash UT has on its book that it's not buying back greater percentage of shares? And I'm asking that for - long-term shareholders, such as myself, if you look at the 1-, 5-, 10-year returns, the stock has really done nothing to avoid long-term shareholders. And so that cash is sitting there. It's not earning anything. I'm just wondering why it's not be putting - it's not being put to better use.

Yes. I understand your concern. We are looking - in the future, we do see investment opportunities. And especially in the 5G area, we - especially when we enter, we enter into the China market, we do expect revenue to grow quite substantially. And as a result, we do - we will need working capital to fund those projects. So I understand - we would like to buy more. We think it's undervalue, but at the same time, we do need a working capital. So we're looking more in the medium and longer-term basis.

Okay. Last question from me is: Given that 2018's profit margin, I'm sorry, annual profit margins and earnings per share are down relative to 2017, is management going to be receiving any performance-based shares or bonuses in 2019?

Well, 2019 - you mean based on 2018 performance?

Based on 2018's performance, correct.

Yes, yes, we did - well, we at this stage, no, I guess, this is up to our Board of Directors to evaluate our performance, how well we achieved our financial targets in 2018, so we do hope that they give us a bonus.

Right. Like I said, I'm just asking the question because if you've been in the stock as long as some of the shareholders have, I think a lot of us would like to see a return on the investment before we start handing out large bonuses for performance targets, especially when the objectives are - like I said, the profits, the margins and EPS numbers haven't - really haven't increased in the previous year. That's all from me.

Thank you. Thank you for your question.

Thank you.

[Operator Instructions] There are no further questions at this time. I will hand the call back to Tim.

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

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