Hello, ladies and gentlemen, thank you for standing by for UTStarcom's Third Quarter 2019 Earnings Conference Call. Please note that, we are recording today's conference call. I will now hand over the call to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group Asia. Please go ahead, Mr. Dvorchak..

Thank you, Grace. Hello, everyone, and welcome to UTStarcom's Third Quarter 2019 Earnings Conference Call. Earlier today, we distributed our earnings press release. You can find a copy at our website at www.utstar.com. In addition, we've 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 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'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 Q3 results, as shown on Page 3. Third quarter results were mixed. Revenue was in line with our expectation.

Gross margin was excellent, expense control was great, but we had an AR reserve charge that resulted in bottom line loss. I do want to point out that the reserve, which is related to our major customer in India, was the prudent accounting measure to apply our accounting policies consistently and conservatively.

The customer, BSNL, is 100% state-owned enterprise is having financial difficulty. The India government is implementing a revival plan to restore BSNL to financial health. In light of that, we are confident we will eventually collect, although the timing of the payment is uncertain.

As such, we prefer to be prudent and account conservatively for this situation, in accordance with our AR reserve policy. Eric will provide more details in his remarks. Looking at operations, we had some encouraging developments in the quarter. First, I want to highlight the product line we consider the future of UTStarcom, our SkyFlux product line.

This product bundles our key technologies that address the needs of 5G. They are Segment Routing, FlexE Ethernet, SDN Controllers and the Synchronization. SDN stands for Software Defined Network, an important technology to improve the flexibility and efficiency of network operations.

5G has been brought out around the globe, but the most aggressive network upgrades are here in China. We are marketing our SkyFlux product through a partner that's competing for massive 5G upgrade here in China. The carrier is doing extensive testing on the equipment they intend to buy next year.

Our products had already passed the laboratory and the field test. We are very encouraged by this achievement as it keeps our team on track to compete for market share. We are cautiously optimistic and excited about this early 5G opportunity. As you can imagine, an upgrade of the whole network around China is a massive undertaking.

Carriers will spend multiple periods over the years. And the winner will capture a very large revenue stream for many years. We have made significant investments in R&D to position the company with the most advanced equipment possible to capture the opportunities in China as well as other markets for years ahead.

Let's turn to an important element of our 5G product package, Synchronization. Synchronization is critical function for 5G networks as well as incoming 5G. As we continue our sales and the shipment of SyncRing products for the 5G network, our 5G product version is being refined and we'll be ready to support a 5G rollout.

We are optimistic about the contribution, the SyncRing product line can make over time. The market is competitive, but we believe our SyncRing product line is the leading solution to address this important technical requirement. Particularly in the 5G rollout, we believe SyncRing will be of significant value to our customers.

Another operating highlight is our participation at India Mobile Congress 2019, or IMC, in October. Although the BSNL situation is difficult, India remains a huge and important target market for us. The country has just completed the 3G to 4G migration.

So it's a bit behind most of the developed countries and [indiscernible] will be great market as they try to catch up in 5G deployment. We used IMC to further reinforce our presence in this important market. The IMC is India's premier telecommunications and mobile technology conference.

This offers a platform for major telecom service providers and the technology leaders to share insights and showcase their latest products and technologies. During the event, we showcased a comprehensive suite of our products, including 5G offering based on next-generation technologies.

This includes a slicing-based transport solution, a 5G indoor coverage solution and solutions for end-to-end network synchronization. Our products can be used in optimized solution for mobile backhaul, metro aggregation, broadband access, network core, Smart Cities and more.

During a CEO panel discussion entitled, Imagine the Connected Future, we shared our view on 5G challenges as well as 5G transport network infrastructures. Additionally, we delivered a keynote speech entitled, Evolving roles of OEM in the digital revolution. The keynote highlight is the evolution of the telecom industry ecosystem.

Final highlight in the quarter was development in the Unattended Retail market, which we are addressing with our goSmart solution. We are expanding our effort in Americas and the Taiwan and actively pursuing promising opportunities there. We are targeting the hotel industry with our goCube line to be deployed in self-service hotel lobbies.

In addition, we have designated an exclusive agent in Latin America to market our goSmart products at the point of sale locations such as apartments, hotels and other high traffic areas. So let me conclude, then turn it over to Eric. We fully recognize the challenge we face, new upgrades, travel impacts and the financial challenges of key customers.

These are all affecting us now. However, this has never been -- we love challenge. And we have some [indiscernible] over the years. As we look forward, we see opportunities. The 5G transition will be a massive opportunity for our industry for several years. Our investment in R&D has produced a strong product line that positions us well for the future.

We are seeing earlier signs of success and intended to accept the risk, our effort and capture our share of this great opportunity. Okay. 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 refer to the third quarter of 2019, unless I say otherwise. Also, all comparisons are with the same period last year, unless I specify differently. Turning on Page 11.

Revenue was slightly up to $13 million, down 75%, within our guidance range. The comparison is skewed due to a sizable project for BSNL in India last year. In contrast, even though our revenue was down substantially, our gross profit decline was modest, mainly due to favorable product mix and our gross margin was 55%, as shown on Page 12.

This was far above last year's 19% gross margin. The product mix included some high margin last-time buy product sales to Taiwan as we exit that market. Our exit is driven by political reasons, not operational. Our Taiwan business was steady and profitable.

However, as more Chinese entities invested in our company, our proportion of Chinese shareholders had exceeded a limit established by the Taiwanese government. Consequently, we are no longer permitted to sell telecom equipment there.

Now before I go any further, I would like to take the opportunity to elaborate on the status of our long-time and major customer in India, namely BSNL. The BSNL situation not only impacted our expenses due to higher AR reserve, it also disrupted our normal revenue stream.

As Tim mentioned, BSNL is 100% state-owned enterprise, characterized as a central public sector enterprise, or CPSE. BSNL has been experiencing financial difficulties, and its future is a subject of debate within the India cabinet ministers.

Now prior to Prime Minister Modi's reelection, all new capital projects at BSNL were suspended until the election results were known; this impacted our bookings and revenue in 2019. Furthermore, payments to suppliers for capital projects were delayed as BSNL's financial condition deteriorated.

Now that the election is over, India's Department of Telecom proposed and the cabinet ministry approved a $10 billion revival plan. The plan included a voluntary retirement scheme to reduce people costs as well as the capital infusion plan to upgrade BSNL's infrastructure to 4G.

Additionally, the Department of Telecom authorized government loan guarantees to raise funds for BSNL to clear its outstanding payment to vendors and suppliers. Also recently, the Indian Finance Minister announced support for India's 5-year, $1.4 trillion growth plan, which specifically guarantees suppliers payment for all CPSEs.

Obviously, we are concerned about the aging of our receivable from BSNL. However, with the revival plan in place, we are confident that eventually we will collect from BSNL; however, the precise timing is uncertain. After careful deliberation, the company has decided to provide a $3.6 million AR reserve.

Now this is a prudent and consistent application of our accounting policy based on AR aging. Of course, we will monitor BSNL's payment status closely and adjust the AR reserve accordingly. Now back to operating expenses as shown on Page 13. Operating expenses were $9.6 million, up 65%.

The increase is solely due to the noncash $3.6 million AR reserve charge that we spoke about earlier. We'll focus our spending on what is important. That is R&D, which was up 29%. The increased R&D spending demonstrates our continued commitment to new products and technology development, which we believe will come into fruition in the near future.

Overall, the lower revenue and higher OpEx translated into an operating loss of $2.3 million. Turning to Page 14; net loss for the quarter was $2.1 million or a loss of $0.06 per share compared to an income of $2.1 million or a gain of $0.06 per share last year. Page 15 summarizes our cash flow.

We ended the quarter with $48 million in cash and equivalents, a decrease of $7 million from last quarter. Net cash used in operations was $9.3 million. With that, let's turn to our revenue guidance, as shown on Page 16. Now before I discuss the numbers, I'd like to point out several risk factors.

First, a major customer in Japan is transitioning to next-generation 5G, which introduces uncertainty into their ordering patterns. We did ship signaling products to them this quarter and will continue next quarter, though we are taking a conservative sense about the amount of revenue we can expect from them in the next few quarters.

There are trade war restrictions and political concerns in Japan, all potentially impacting procurement decisions involving China suppliers and even China-based suppliers. This makes us very cautious on our business in Japan.

Similarly, we are mindful of the uncertainties surrounding emerging -- sorry, emerging new technology opportunity like 5G, which could be slow to develop and highly competitive. However, we are confident of our new technological capability, let's say, of product offerings.

Over time, we do see many growth opportunities in new technology trends, new markets, new products and new applications. All in all, we are excited about our long-term prospects. Now moving to our specific guidance; we expect fourth quarter 2019 revenue to be in the range of $12 million to $15 million.

Please bear in mind that the fourth quarter revenue mix is unlikely to match that of the third quarter and may affect the level of profitability. With that, Tim and I would like to take your questions. Operator, please open the line for Q&A..

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

I have a number of questions. I guess, with regard to the guidance, let's just maybe take it region by region. I can't imagine, well, what are your expectations for the potential of any new business in India? I assume your guidance for Q4 remains dominated by Japan. Eric, you made a comment on mix.

Maybe that refers to the Taiwan last-time buy not reoccurring, but would that be accurate with regard to most of your near-term revenue coming from Japan? And beyond that, I guess, if you could be more specific with regard to the risks to that revenue going into next year? Then I'll follow-up on India..

Tim, for Q4, it looks -- it appears, at this point, the revenue is going to be a very balance from Japan and from India. So that's -- and you're right that we would not have the Taiwan last-time buy benefits in Q4..

Okay. Well, that's interesting then.

Well, can you say with regard to India, so are you engaging in new projects with BSNL? Is this another Indian customer as you can work on receivables?.

There really is a continuation of some of the existing projects with BSNL that we are finishing up. We are at the installation and commissioning phase. So as we complete those installations and commissioning those products, then we will recognize mostly the service revenue. So that's what we are counting on for Q4 from India..

Got it. And can you talk to the size of the overall receivable with BSNL? I know you're taking $3.6 million on a reserve, and they have -- are the subject of this multibillion-dollar revival plan.

But can you give us the magnitude for the overall exposure?.

Well, the receivable has been building up because of -- we -- as we complete the project, which we started last year. So the receivable are probably in the magnitude of over $50 million as of Q3.

So now we -- as we mentioned, we were very -- of course, we were concerned about the nonpayment of BSNL because of their financial difficulties and the time it took for the government to decide to, I guess, revive this enterprise.

So finally, they have made that decision, and that's very good news for us because as far as we know, there's no reason to believe that we won't get paid. So the question for us is really the timing of the payment. Things are not moving the quickest in India. So -- but then things are already in motion. So we do expect payment very soon.

So again, the precise timing is a thing that's always been in question. So that's the reason why we decided to continue our reserve practice and policy and reserve a fair amount based on the aging of our receivables..

Okay, got it. Fair enough. And look, obviously, you've got to express some reservations about Japan over time. And -- well, you can tell me whether post resolution of this receivables issue, whether you expect kind of potential new projects with -- in India, but, Tim, you did describe kind of new product, the trial in China as the future of UTStarcom.

And I wonder if you can speak to or give us some estimation of the timing of transitions from a trial to deployment for the 5G trials you're engaged in China..

Tim, right now we still have one major test we need to pass, okay? So once we pass the test, so the next year, the forecast is significant, okay? I currently cannot disclose the number, but that was -- the size of China. So that will be a major contributor for our revenue in 2020..

[Operator Instructions] The next question comes from the line of David King from [indiscernible]..

Yes, good evening. Why would management allow themselves to not be paid by a major customer? This sounds like management incompetence. I've listened to prior management conference calls; I've been a shareholder of this company for some time. This is just another long-winded, bullshit, meaningless presentation.

The company appears to be systematically gutted. I was just....

[Operator Instructions] This is the end of the question-and-answer session..

Okay. Thank you, operator. We are optimistic about our future. We are confident of our technological direction and our leading-edge product and the service offering. We look forward to updating you on our business progress in a few months. Thank you..

That will conclude today's conference call. Thank you for your participation. You may now disconnect..