UTSTARCOM HOLDINGS CORP. Q1 2015 Results Earnings Conference Call
June 05, 2015, 8:00 am ET
Executives
Fei Wang - Deputy Director, Financial Planning and Analysis and Investor Relations
William Wong - Chief Executive Officer, Director
Min Xu - Chief Financial Officer
Analysts
William Gregozeski - Greenridge Global
Presentation
Operator
Ladies and gentlemen, thank you for standing by for UTStarcom's first quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time.
It is now my pleasure to introduce the host for today's call, Ms. Fei Wang, Investor Relations Director for UTStarcom. Fei Wang, you may begin.
Fei Wang
Hello, everyone and welcome to UTStarcom's first quarter 2015 earnings conference call. Earlier today, we distributed our earnings press release and you can find a copy on our website at www.utstar.com. In addition, we have posted a slideshow presentation on our website, which you can download and use to follow along with today's call. On today's call, we have Mr. William Wong, UTStarcom's Chief Executive Officer and Mr. Min Xu, UTStarcom's Chief Financial Officer.
Before we get started, I will read the company's advisory on forward-looking statements. This call will include forward-looking statements relating to the company's business, strategic initiatives and the performance for the first quarter 2015. These statements are forward-looking in nature and subject to risks and uncertainties that may cause actual results to differ materially and adversely from the company's current expectations.
This includes risks and uncertainties related to, among other things, changes in the financial condition and the cash position of the company, changes in the composition of the company's management and their effect on the company, the company's ability to realize anticipated results of operational improvements and benefits of the divestiture transaction, the ability to successfully identify and acquire appropriate technologies and businesses for inorganic growth and to integrate such acquisitions, the ability to internally innovate and develop new products, assumptions the company makes regarding the growth of the market and the success of the company's offerings in the market and the company's ability to execute its business plans and manage regulatory matters.
The risks and uncertainties also include the risk factors identified in the company's latest Annual Report on Form 20-F and current reports on Form 6-K as filed with the Securities and Exchange Commission. The company is in a period of strategic transition and the conduct of its business is exposed to additional risks as a result. All forward-looking statements included in this conference call are based upon information available to the company as of the date of the call, which may change and the company assumes no obligation to update any such forward-looking statements.
I will now hand the call over to UTStarcom's Chief Executive Officer, Mr. William Wong.
William Wong
Thank you, Fei Wang and hello, everyone. As Fei mentioned, you can follow along with today's call by downloading the presentation from our website at www.utstar.com. Also unless otherwise stated all figures mentioned during the call are in U.S. dollars.
I will first take you through an overview of our financial and operating highlights for the first quarter 2015 and then I will share an update with you on our strategic initiatives, current company direction and our near-term business outlook. I will then turn the call over to our CFO Min Xu, who will share with you the details of our first quarter financial performance.
Please turn to slide five. While Min will walk you through the full detail in just a bit, let me provide a top line summary of our overall financial results for the first quarter. Please note that in today's discussion that Min and I will mention non-GAAP financials. In today's earnings release, in addition to disclosing financial measures prepared in accordance with GAAP, we also provided non-GAAP financial measures which we believe better reflect the company's core business status and the development trend.
Our first quarter revenue increased 0.3% to $32.4 million from $32.3 million a year ago. First quarter gross margin improved slightly versus the prior year, coming in at 14.9% compared to 14.2% in the corresponding period in 2014. We continue to maintain a strong balance sheet and from a cash perspective, we ended the quarter with cash, cash equivalents and short-term investments in the amount of $67.9 million. Overall, we again delivered a better-than-expected top line performance and also began to drive incremental improvements in our gross margin. This incremental improvement has been driven by our broadband business.
Now let me walk you through some of the key operational highlights from the first quarter. Please turn to slide seven. First, let me share an update with you regarding our evolving product mix. As we have stated in the past, we are committed to creating and maintaining a profitable business and to this end, we have dedicated significant resources over the last two years to develop a higher margin suite of products. To be short, several new products are still in early stages of their product life cycle and we await their positive impact on the top and bottom line. However at the same time, new bookings have been strong which we believe is a good and positive sign about what we are doing on the product development side.
Turning to some specifics. We have high expectations for our TN765 product with 100-Gig Ethernet services, which we pilot with Softbank in Japan and believe this would drive higher margin revenue in the future. We are also encouraged by the positive response we continue to receive on this and other products at industry and trade events. In March, we participated in the 2015 Optical Fiber Communication Conference and Exposition in Los Angeles and the Competitive Carriers Association's 2015 Global Expo in Atlanta.
At the events, we displayed our latest suite of broadband packet optical network infrastructure technology showcasing our TN765 with 100-Gig Ethernet services for Metro networks. We also delivered presentations introducing our SOO SDN Product line and unveiled a SDN/NFV-enabled network infrastructure, sharing how NFV technologies can helps telecom operators to reduce the variety of vendor-specific equipment and technologies used on a single metro network. In recognition of the strong interest we are seeing in our higher margin product lines, we now intend to shift most of our resources to the further development and sales of our higher margin product lines to ensure we fully capitalize on the demand in certain key geographies that are responsive to our improving offerings.
Second, we are still making strides on our geographic diversification which goes hand-in-hand with expanding our customer base. During the first quarter, in North America we focused on ramping up our new larger Silicon Valley office to enhance our marketing efforts with telecommunications carriers and cable service providers in the United States. As I mentioned a moment ago, we participated in various conferences in this market, which is helping to drive our visibility and connectivity to potential customers.
In Japan, we continue to strengthen our partnership with Softbank and are actively seeking other similar customers. Last quarter, we successfully placed our packet optical transport products with another operator in Japan besides Softbank. And this was a good first step of our customer expansion effort in this market. We are continuing our sales effort in Japan to penetrate the market and secure more customers. We have already brought onboard a dedicated sales team focusing on penetrating another major operator in Japan. So far we are progressing well according to plan.
In India, we won a significant three-year contract with BSNL, India's largest national wireline carrier, to support its major network enhancement. The deal highlights UTStarcom's ability to be a leading provider of advanced efficient and reliable broadband infrastructure solutions.
In terms of other geographies, in Southeast Asia we recently announced that we won Banglalion in Bangladesh as a new customer in the carrier Wi-Fi segment, proving once again that we are the global partner of choice to support network service providers as they enhance their core infrastructure. We are making good progress in Southeast Asia and we expect to announce more design wins in the next several months.
Let me now take a quick moment to provide an update on the two major parts of our business, our broadband business and our investments in new media. Please turn to slide eight. Starting with broadband, as we have stated consistently, broadband is the key area of focus for our company and we are continuing to make incremental progress in this area. Our high margin flagship products, the TN765 with 100-Gig Ethernet services and the carrier grade Wi-Fi solution continue to be popular and in demand. We are seeing strong demand from emerging country network operators for our market leading solutions, which include carrier Wi-Fi, mobile backhaul, as well as Metro network aggregation solutions. We have been focusing on the opportunities in the higher end of the market and our R&D teams are working on new products and solutions to meet evolving customer needs.
Moving to our strategic investments in new media. Please turn to slide nine and I will share an update on our strategic investments, UiTV and aioTV. As the largest investor in both companies, we expect to benefit from their growth and expansion and we therefore continue to actively participate and support the development of their businesses. Both have had good achievements in the beginning of 2015. For instance, during the first quarter, aioTV continued to lead in its space in terms of product design and innovation. AioTV has been engaged with multiple potential customers in the U.S. in licensing its platform and solutions. It is expected to announce a key design win in the next quarter or two.
Meanwhile on UiTV front, beyond continuing with the nurturing of its partnership with TOT in Thailand, it has also begun to market and license its technologies to companies in China and Asia. We expect them to sign up some license fee in the next several months. As a reminder, we do hope to monetize these investments in the future at an appropriate time.
Now please turn to slide 11 and 12. With our standard quarterly update concluded, I now want to take a few minutes to elaborate a bit more on our current and evolving view towards our business direction. You will have hopefully seen what we have said in the press release, but I would like to discuss now as well.
During the last several years, we have undergone a significant business transformation. As part of this, non-core parts of the business were shed, costs have been dramatically reduced, new industry-leading products were developed and strategic investments have enabled UTStarcom to enter many new global markets and own portions of promising new technology companies. As a result, the business model and operations have become more stable than in the past, setting a good foundation for positive performance in what is a dynamic industry.
And in the last several quarters, we have been exceeding our own expectations for quarterly revenue, another good sign we think. However at the same time, ongoing market challenges, the extended evolution of the business model and the fact that key carrier customers have cut CapEx plans significantly has meant that the transformation, while fully in progress, is happening more slowly than planned. Because of this reality, it has become apparent that additional aggressive steps need to be taken to create a healthier base for the business.
We are aware that we need to respond to a need to make our business much more nimble, efficient and profitable, which also will mean smaller. So we are therefore taking steps to further fine-tune our business model and further reduce our cost structure as we enter the balance of fiscal 2015. We are therefore going to take some forceful steps in this area to push our transformation forward in a new way. We intend to streamline the business model further focusing only on the most profitable broadband products and geographic markets while cutting additional cores from the business.
In short, moving forward, we intend to shift most of our resources to the further development and sales of our higher margin product lines to ensure we fully capitalize on demand in certain key geographies that are responsive to our improving offerings. Less profitable products will no longer be offered and the go-forward business development resources will shift towards the higher opportunity markets such as Japan, the U.S. and emerging countries.
While we believe that this will mean revenue will be higher quality and more profitable and that margins will more quickly improve, it will also translate into a modified revenue profile and a reduced size of annual turnover. The new higher quality and higher margin broadband products are still in early stages of their product life cycle but the company believes the uptake of these higher-end products will begin later this year. Furthermore, it would take an additional 10% of cost out of the business by further streamlining operations.
Taken together, this will ultimately yield a stronger, more competitive and more profitable UTStarcom in the long-term, albeit with a lower expected overall top line growth rate than planned. In terms of what this means for the near-term outlook, the effects of this recalibration of the existing strategy will be apparent starting in the second quarter. For the second quarter, the company expects to generate revenue in the range of $15 million to $20 million.
Given this transition that is underway, we are planning to provide an update on annual revenue and bottom line expectations later in the year. While the strategic adjustments to our business strategy will impact our revenue profile and will alter our financial targets for 2015, we are confident that it will allow UTStarcom to be a more efficient player in the higher end of the market in the key global locations that are most welcoming to our innovative products. This should help us to more quickly achieve margin expansion and sustainable long-term profits for the company.
With that, let me turn the call over to Min who will walk through the financials for the first quarter in more detail.
Min Xu
Thank you, William and hello, everyone. I will now take a few minutes to discuss our first quarter 2015 financial results.
Please turn to slide 14. Before I walk through the specific numbers, I would like to highlight a few key items for the first quarter. First quarter revenue exceeded our expectation. The upside came from Japan PTM related service revenue of $2 million. Gross margin during the quarter improved sequentially due to a favorable product mix. Our cash balance at the end of quarter was $67.9 million and we had no debt. Subsequent to the quarter, we received the $10 million cash repayment from IPTV and converted the remaining balance of our 20 million convertible bond to 14% of IPTV equity interest.
Please turn to slide 15 for a non-GAAP revenue review. Please note that non-GAAP revenues exclude the IPTV sales. In first quarter total non-GAAP revenue was $32.4 million, exceeding our initial expectations of $25 million to $30 million and above previous quarter revenue of $28.7 million. Our revenue recognition depends on carrier customers' CapEx and OpEx budget and their deployment schedules. We continue to expect volatilities from quarter-to-quarter.
Please turn to slide 16 and 17 for gross profit and gross margin. Please note that non-GAAP cost of sales and non-GAAP operating expenses exclude stock-based compensation. In the first quarter, non-GAAP gross profit was $4.8 million, improved from $3.4 million of gross profit in previous quarter and $4.6 million a year ago. Gross margin was 14.9%, up from 11.9% in previous quarter and 14.2% a year ago. The margin improvement was due to an increase in higher-margin PTN product mix.
Please turn to slide 18 for operating expenses. In the first quarter, non-GAAP operating expenses were $4.8 million compared to $7.4 million in the prior-year period. The slight year-over-year increase was due to our investment in the U.S. and India markets offset by further streamlining in our operation. Looking forward, we will continue our effort to improve operation efficiency and target to achieve 10% year-over-year savings on operating expenses in second half of 2015.
Please turn to slide 19 and 20 for operating loss and net loss. In the first quarter, non-GAAP operating loss was $2.9 million compared to operating loss of $2.8 million in the prior-year period. In the first quarter, non-GAAP net loss was $5.2 million compared to net loss of $2.8 million in the prior-year period. The first quarter net loss included $3.2 million loss pick up from our investment in UiTV via the equity method of accounting.
Please turn to slide 21 for balance sheet and cash flow. We ended first quarter with $67.9 million in cash and we had no debt. In the first quarter, cash used by operating activities was $9.2 million, cash used in investing activities was $0.6 million, cash used in financing activities was $1.5 million, which was related to our share repurchase program.
This concludes my financial review. Now I would like to turn the call back to William to give some concluding remarks. William?
William Wong
Thank you, Min. Turning now to slide 23, I would like to recap our go-forward strategy and priorities with you. First, we will focus only on higher margin revenue in our broadband business which will continue to be the key driver our business globally. Less profitable products will no longer be offered. This will, of course, translate into a modified revenue profile and a reduced size of annual turnover. Well, we believe that this will mean revenue will be higher quality and more profitable and that margins will more quickly improve.
Second, we will focus only on higher opportunity geographic markets, which means we will fine-tune our market focus. Our go-forward business development resources will shift towards the higher opportunity markets such as Japan, the U.S. and emerging countries to ensure we fully capitalize on demand in certain key geographies that are responsive to our improving offerings, rather than those that demand lower pricing and therefore drag our profitability down.
Third, we will continue to streamline the business and further cut costs while continuing to seek out improvements in operational efficiency. As I mentioned, we would take an additional 10% of cost out of the business by further streamlining our operations. Also we are constantly looking for ways to be more nimble and efficient and we will accelerate this effort.
Fourth, we will continue to nurture our strategic investments, UiTV and aioTV with the goal of monetizing these investments and generating a quick return. We remain committed to these two strategic investments and we are working with the management of both companies to help them grow their respective market share. We will share updates on their progress as we go.
Lastly, in parallel to our near-term resource allocations and cost reduction efforts, we are also exploring a variety of broader ways to unlock the true value of our broadband business. Specifically, we are planning to evaluate various strategic alternatives for this business, which may include strategic partnerships and potential access to the PRC capital markets.
As mentioned a few minutes ago, we believe that taken together, this will ultimately yield a stronger, more competitive and more profitable UTStarcom in the long-term, albeit with a lower expected overall top line growth rate than planned. Our focus now and for the rest of the year is to fully complete this transition to the higher end of the product line and to build on the solid fundamentals that we have already established, creating a rationalized and stronger organization for the future.
We thank you for your support as we continue to work hard to deliver improved value for our business and our stakeholders. With that, Min and I would like to take your questions. Operator, please open the line for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from William Gregozeski from Greenridge Global. Your line is open. Please go ahead.
William Gregozeski
Thanks. A couple of questions, guys. You mentioned the focus on Japan, the U.S. and the emerging countries. Are there certain countries you are cutting efforts to [indiscernible] or anything that you can mention?
Min Xu
Hi, Bill. Yes, actually in the lot of the emerging countries, in particular in the Southeast Asia, we have been making good strides. As we here announced the design win in the Bangladesh recently and actually I would expect that we would be able to announce additional design wins in that region. So that would include countries such as Myanmar, Vietnam and so forth. And more recently, we have also expanded our sales coverage to Latin America as well as Africa.
William Gregozeski
Okay. What about the countries that you are stopping?
Min Xu
I am sorry. Please repeat.
William Gregozeski
I was wondering what countries you are, I am assuming there are countries you are stopping efforts in?
Min Xu
We are focusing into a lot of these emerging countries and there's areas where we do not see very high profit and the high return for our products then we would have, in essence, slow still down some of the efforts there.
William Gregozeski
Okay. And then with the - sorry.
Min Xu
So it's not really a specific country we are focusing on. So we are actually evaluating every opportunity probably looking at different accounts and there may be -- so basically we are more picky in terms of opportunities.
William Gregozeski
Okay. So --
Min Xu
We are not blankly stop investing in certain regions.
William Gregozeski
Okay. All right. As far as the streamlining of the sales, are you cutting all of the resale products or just resale products under a certain margin threshold?
Min Xu
It's only the low margin resale products that we are cutting. For other areas that we do see decent profit and decent margins, we will continue with those efforts. And as a matter of fact, when we run into areas where we see additional resale products that could bring in addition gross margins, we would continue and even expend on those efforts.
William Gregozeski
Okay. Is there margin threshold that you guys are aiming at now?
Min Xu
So it would be hard to specify or quantify that number right now. Obviously we will do that gradually and that would depend on the product cycle and specific customers how much of potential there would be. So it will be hard for us to provide a single number for that.
William Wong
And Bill, to answer that as well, it is also depends on how much effort we have to put in relative to the margin that we would be obtaining with respect to selling those other products. So like what Min has said, it is difficult to spell out a specific number.
William Gregozeski
Okay. So is there anything that we should be looking for in the second quarter or for the full year for a margin target you guys are looking at?
Min Xu
We don't give our gross margins targets, as you know. But as I said during the presentation earlier, we are looking at a slight different revenue profile as we fine tune the strategy so that's why we have revised the guidance for second quarter and then we would do guidance for the rest of the year at a later time this year.
William Gregozeski
Okay. Are you still looking to be cash flow positive by the end of the year, though? Or is that hard to say right now?
Min Xu
Well, we obviously are always looking to turn the business to become profitable. That's our goal. However, at this point we don't give out specific timeline on that and as you look at the cost reduction efforts that we are undertaking, so even beyond dropping the lower margin revenues, we are also taking a lot of steps in further reducing our operating expenses. So hopefully all of that would, in the end, result in a profitable business for us.
William Gregozeski
Okay. Last question is on UiTV. Have they made any progress in finding out a third party fund or as it looks now, is it just likely that you guys might have to do the funding for them?
Min Xu
The focus in the last quarter or so, it's for UiTV to remain self-sufficient financially on the long. So to that regard, I believe they have made great strides and they are doing pretty well reducing costs and also finding additional revenue streams and so for and that's why you also hear them starting to licensed their technology and platform to other companies in China and in Asia. So as they continue on that ramp, then once that they have gone through and past that stabilize point, then they will continue on with the fundraising effort. But at that point, of course, then you are bringing a profitable entity to raise fund, then we would be talking about a different valuation there. So that's the goal there and we are still hopeful that at such point that we can bring in additional outside investors to and I would say more strategic investors to come into play.
William Gregozeski
Okay. All right. Thank you.
Min Xu
Thanks, Bill.
William Wong
Thank you, Bill.
Operator
[Operator Instructions]. Thank you. There are no further questions at this time. I will turn the conference back to Fei Wang for closing remarks.
Fei Wang
Okay. Thank you. Thank you for joining us for our first quarter 2015 earnings conference call. We look forward to updating you on our second quarter 2015 results in a few months time. Feel free to get in touch with us anytime if you have further questions, concerns or comments. Thank you, everyone.
Operator
This concludes our conference for today. Thank you for participating. You may all…
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