UTStarcom Holdings Corp. (UTSI) Q2 2019 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Thank you for standing by for UTStarcom's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today's conference is being recorded. I would now turn over the call to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group Asia. Please go ahead, Mr. Dvorchak.

Thank you, Christian. Hello, everyone, and welcome to UTStarcom's second quarter 2018 earnings conference call. We distributed our earnings press release earlier. You can find a copy at our website at www.utstar.com. In addition, we have posted a presentation on the 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. 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 in the call are in U.S. dollars. I will now hand the call over to UTStarcom's CEO, Mr. Tim Ti. Tim?

Thank you, Gary. 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 Q2 results as shown on page 3. The second quarter came in largely as expected. Revenue of $13.9 million was within our guidance range. Gross margin increased 10 percentage points from a year ago. And we achieved $1.7 million in net income, which represent our second consecutive profitable quarter. Eric would get into the detailed financials in his remarks shortly. The first half also played out as expected. We continued to fund more product development and expand our marketing efforts, which should pay-off in recent growth in the years ahead. Now, let me walk you through key operating highlights. First, we are actively engaged in a large 5G opportunity in China. We are pleased with the excellent initial result. We are collaborating with a partner on this. We are leveraging our expertise in optical backhaul technology to develop state-of-the-art 5G products. We achieved excellent lab evaluation results with this major China carrier. While we cannot offer a lot of detail yet we anticipate receiving initial 5G product orders in the first quarter of 2019. We view this cooperation as a key game-changing event with significant potential revenue opportunities for us in the years to come. 5G is driving significant new investment by network operators. This advance standard requires greater network capacity, better super-strong efficiency and higher data throughput in the network architecture. As a result of this small sale deployment and heavy traffic, a 5G network needs to support hundreds of gigabits of traffic from the core network. With our expertise in optical backhaul, we have the capability to meet business challenges. The global transition to 5G wireless is racing ahead and it represents a tremendous opportunity for which we are well-positioned. This 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. Our second operating highlight was the introduction of new products at Softbank World 2019. Softbank World is one of the largest corporate events in Japan and it focuses on the latest trends in IT technologies. This is our eighth consecutive years of participating in Softbank World. During the event, we introduced the SyncRing XBC340 and the 341 the latest addition to the family of network synchronization equipment. As shown on page 10, both of these Ethernet switches are designed to help ensure high end-to-end time synchronization accuracy, providing full on-path support with SyncE and the PTP. Similar to other offerings in our SyncRing family, these new products have excellent synchronization capabilities. Additionally, both new products support Power over Ethernet output per IEEE 802.3at/af specifications on all of their electric access ports. This makes them perfect choices for efficient 4G/5G small cell deployment. We can offer all-in-one solution to support multiple functions, including synchronization, data forwarding and the PoE functions. We also showcased other products, including SkyFlux our next-generation SRv6-based routing platform. We also demonstrated our 5G-ready timing solution SyncRing XGM30 PTP Grand Master as well as presenting our SDN platform SOO Station and IoT products. In addition, we delivered a keynote speech about packet network evolution strategies for the 5G era. We discussed the growing size and the complexity of transport networks driven by the 5G migration and other applications. We share our view on major strategies to address the evolutionary challenges of telecom networks based on emerging technologies. In summary, we were pleased by our strong presence at this major event. We believe we were exceptionally well positioned to further develop innovative solutions to meet the challenges of a increased network traffic. Our product portfolio enables carriers to manage the high capacity and the complex architectures that 5G is driving. By providing high scalability, performance and efficiency our products fully align with our vision of driving network evolution. Beyond those new products we introduced at Softbank World 2019, our engineering team is working closely with our customers to advance our technology and to broaden our product road map to meet their requirements. Importantly, we continue to drive our growth through innovation that results from significant investment in R&D. We increase this investment by recruiting and hiring the top talent in the industry. As our pipeline of opportunity grows, we remain confident that our strong engineering team is capable of developing the new products that will enable us to capture new business. The third major highlight is goBox, which continues to ramp. In Q1, we released our first 5G goBox smart vending machine in China, as we show on page 12. This is a model application for utilizing 5G mobile data networks and AI to create a compelling retail experience for consumers. The core element of the goBox smart vending machine is the module. It is a central processing unit that integrates with our cloud platform and uses image recognition sensors and the big data for streamlined automated shopping experience. Our long-term strategy is to market the module for multiple applications in smart retail. Our goBox product family is penetrating the unattended retail market in China as shown on page 13. In Q2 UT and the China Mobile Hangzhou Group jointly launched the goBox 5G-powered smart commercial refrigerator. This demonstrates how 5G mobile data and AI can be integrated to create a compelling retail experience for consumers. We are very excited to work with this recognized industry leader to promote new goBox applications. Beyond the China market, we are actively pursuing goBox sales internationally. We are seeing strong interest in the Americas and Asia. In addition, we are in a process of establishing support teams in other key market. In summary, we are gaining traction and optimistic about the long-term revenue potential. To conclude, I am excited about the opportunity ahead of us. In particular, the 5G rollout is at an inflection point that can drive significant revenue. Furthermore, small retail is a promising growth opportunity for UT. With that, I will now 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 refer to the second quarter of 2019 unless I state otherwise. Also all comparisons are with the same period last year, unless I specify differently. So starting on page 15, revenue was nearly $14 million, down 51% but within our guidance range. India accounted for majority of the revenue. As shown on page 16, gross profit was $5 million and the gross margin was 36%. This is well above the 26% gross margin we had this period last year. Margin was higher due to favorable product and geographic mix. Page 17 shows operating expenses, which were a little bit over $7 million. This is flat versus last year and down 2% sequentially. While SG&A expenses were down 27%, R&D was up 45%. The increased R&D spending demonstrates our commitment to new product development. Lower SG&A spending reflects stringent cost control on our overhead functions. We had an operating loss of $2 million as compared to an operating income of $0.5 million last year due to lower revenue. Now the fluctuation and lumpiness of our revenue stream reflect revenue recognition based on project fulfillment. Turning to page 18. The net income for the quarter was $1.7 million or $0.05 per share, compared to the small net loss of $87,000 or essentially breakeven last year. Net other income was $3.7 million compared to net other expense of $0.3 million a year ago. In this quarter, we benefit from a large write-off of an aged account payable item as well as a tax reserve adjustment as the statute of limitation ran out. The net other income is partially offset by foreign exchange loss as the Chinese yen depreciate against the U.S. dollar. Page 19, summarizes our cash flow. We ended the quarter with $55 million in cash and equivalents, a decrease of $9 million from last quarter. Net cash used in operation was $10 million. Cash used in financing activities was $0.6 million, representing our stock repurchases. With that, let's turn to revenue guidance as shown on page 20. Now before I discuss the numbers, I'd like to point out several risk factors. First of all, there is uncertainty regarding our major customer in Japan due to the transition to the next-generation 5G network. We remain optimistic and cautious about the amount of revenue we can expect from them over the next few quarters. Second, India is a growth market, but it is highly competitive and price-sensitive. Additionally, a major customer and a number of telecom operators are experiencing financial difficulties and in the midst of streamlining the operations. As a result, cash collections are delayed. The Department of Telecom in India is actively working with these operators to rectify the situation. We are monitoring their progress very closely. Furthermore, the Indian rupee is volatile. So, all these factors contribute to a higher level of uncertainty, relating to collection, margin pressure and currency risk in this region. Finally, we are mindful of the uncertainties ramping emerging new markets like 5G, which may take a long time to develop. Now having said that, we see many growth opportunities in new technology trends, new markets, new products and new applications. We are excited and confident about our long-term prospect. So for specific guidance, we expect third quarter 2019 revenue to be in the range of $13 million to $17 million. Again, quarterly fluctuations primarily reflect the normal unevenness in our business that's being recognized 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 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. We are optimistic about our future. We are very confident of our technological direction and our leading-edge product and the service offerings. We look forward to updating you on our business progress in a few months. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.