Fei Wang - Deputy Director, Financial Planning and Analysis and Investor Relations William Wong - CEO Min Xu - CFO.

Tim Savageaux - Northland Securities Inc. Jun Zhang - Rosenblatt Securities Inc..

Ladies and gentlemen, thank you for standing by for UTStarcom's Third 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, Fei Wang. Fei Wang, you may begin..

Thank you. Hello everyone and welcome to UTStarcom's third 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 third 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 the benefits of the divestiture transaction, the ability to successfully identify and acquire appropriate technologies and the 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 this 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..

Thank you, Fei, and hello, everyone. As Fei mentioned, you can follow along on 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 third quarter 2015 and then I will share an update with you on our strategic initiatives. I will then turn the call over to our CFO, Min Xu, who will share with you the details about our third quarter financial performance. Please turn to Slide Five.

While Min will walk you through the full details in just a bit, let me provide a topline summary of our overall financial results for the third quarter. Please note that in today's discussion Min and I will mention certain non-GAAP financials.

In today's earnings call, 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.

Min will give more information on the GAAP and non-GAAP financial measures specifically related to the third quarter during his remarks. At the end of the third quarter, we have started to see improvements in our overall position, thanks to the company's revised business strategy, which we announced earlier this year.

Non-GAAP third quarter revenues were $26.8 million, exceeding our expectations set and shared last quarter. Third quarter gross margin was 22.8%. Operating loss narrowed to $0.6 million.

We continue to maintain a strong balance sheet and from a cash perspective, we ended the quarter with a stronger cash position than last quarter with cash and cash equivalents in the amount of $74.1 million. Now let me walk you through some of the key operational highlights from the third quarter. Please turn to Slide Seven.

First, we continue to focus our efforts on pursuing high margin revenue in our broadband business as this remains a key driver for us globally. Once again, we have made significant progress in this regard. With a more favorable product mix, we're already seeing the fruits of this strategic realignment towards a higher margin suite of products.

We've also created network solutions where we can further add value by participating in network design, implementation and management. Our products continue to attract attention from both our existing client base and increasingly we're seeing interest from a new group of perspective customers for their solution oriented offering.

We're now able to expand our target market to cover a larger portion of the mobile backhaul and Metro aggregation markets, thanks to our innovative Layer3 solutions with SDN/NFV enabling, which implements Layer3 VPN services over Packet Optical Transport network to bolster its packet optical transport and SDN portfolio.

The creation of this product meets a specific demand in the market it is based on a core theory that is central control and software defined. The Layer3 VPN further complements our suite of suite trademark products in addition to our bandwidth on demand service that we announced previously.

Second, in order to maximize our success, we continue to focus on markets where we have deep understanding of and also once where there are genuine gap in the market for our offering, thus giving us a healthy diversification.

Recognizing the importance of LATAM, during the last quarter we continue to deepen customer relationships in this key market for us. In July we participated in a Softbank World Exhibition. At the Exhibition, we showcased our next generation NGPTN products including the TN701B, 703A, 704A and TN765 as well as our MSG2000, our Wi-Fi AC controller.

These products attracted many visitors and received great acclaim. After years of deployment and operation in commercial networks, our PTM products are well known among the customers and have enjoyed great popularity for their high performance, high quality and stability.

We're also pursuing new business opportunities with our existing customers in Latin America, Bangladesh, Myanmar and other key growth markets. As mentioned on the previous call, on the U.S.

front, we have successfully spun off virtual day rate lapse, entity that is developing products that allows seamless access and aggregation at the edge of the network. Our go-to-market strategy is stronger than ever before.

Thanks in part to our ability to partner with in market experts who have been able to help us navigate and secure opportunities in a number of new and exciting markets. The strong response we've seen over the last quarter has demonstrated the strength of our business strategy and has underlined how increasingly diversified our product mix has become.

Third, we further drove down cost and streamlined the business while improving operational efficiency. Operating expenses for the third quarter of 2015 were $6.7 million, a decrease of 24.1% from $9 million for the corresponding period in 2014.

As part of our business transformation, we successfully reduced our operating expense and continue to make savings during the quarter. We're on track to achieve our target of 10% operating expense year-over-year savings in the second half of 2015.

More importantly, we've narrowed the operating loss to $0.6 million, one step close to us operational breakeven. Let me now take a quick moment to provide an update on the two major parts of our business, our broadband business and our strategic investments. Please turn to Slide Eight.

Broadband continues to be a key area of focus for the Company and we achieved significant milestones in this area during the third quarter.

As mentioned in last quarter's call, we launched our Layer3 network function virtualization NFV solution at the Softbank World 2015 Exhibition, an integral part of our Software-defined Open Optical, SOO network solution, which was introduced earlier this year.

The Layer3 NFV solution builds on the benefits that UTStarcom's SDN/NFV enabled network infrastructure offers. It has an expanded range of Layer3 services that were not previously available on Layer2 networks. It offer our customers CapEx and OpEx savings.

It is easy to implement, flexible and offers scalability and therefore meets the specific requirement in the market. Our newly created entity, Virtual Gateway Labs, VGL recently launched its first virtual broadband gateway product. VGL has completed delivery of its first purchase order to a U.S. customer.

VGLs platform will help fuel tomorrow's open access network where broadband will be more than just the Internet, but instead we also offer a new variety of virtual services. All of this and many other services can be deployed remotely by operators.

We're encouraged by the demand we're already seeing for VGLs offerings and it is our belief that this new entity will ultimately generate tremendous value for our business.

We continue to see strong interest in all our key markets for our high margin suite of products including the TN765 with 100G Ethernet services and other carrier-grade Wi-Fi solutions.

We're making significant inroads in key emerging markets such as Myanmar and Latin America, where we see interest in our offering from a number of country network operators.

We remain committed to expanding our R&D capability and fostering a start-up mentality within the organization to encourage greater creativity in line with our simple network, simple operation design philosophy. Moving to our strategic investments in new media, please turn to Slide Nine and I'll share an update on our strategic investments.

As the largest investor in both UiTV and aioTV we fully expect to benefit from their growth and expansion and we therefore continue to actively support the development of their businesses. First an update on UiTV. In August, UiTV added five new critical patents to its IP portfolio.

In addition UiTV continue to increase its global footprint and find a new TV over IP platform customer in China. It has continued on subscriber growth in its TV over IP service operations partnering with TOT in Thailand. Furthermore, UiTV is on track to meet its EBITDA breakeven target by the end of this year.

Turning to aioTV, during the third quarter YIpTV, a Hispanic service provider announced that it has launched a Hispanic streaming TV solution powered by aioTVs platform.

aioTVs' innovative platform allows it to normalize multiple sources of content to provide subscriber, device and player management along with packaging and control two sets enabled YIpTV to quickly realize their vision.

aioTV is continuing the drive the transmission of TV using a software defined methodology that leverages the advances in streaming the customer's device to replace traditional facility-based approaches to video delivery. aioTV has also signed agreement with a major U.S. MSO to launch new services for the MSO based on aioTVs platform.

We expect to announce this customer's win at a later time. We’re working with both of these partners aioTV and UiTV to help generate long-term value which we hope to monetize in due course.

In July ESA also has repaid the full loan with interest, returning approximately $6 million together with a $10 million partial repayment on a convertible loan from IPTV plus others, we’ve already monetized around $19 million from previous investments in the first nine months of 2015 and will continue to monetize other investment at appropriate times as they become due.

Update on shareholder matters. Please turn to Slide 10. You might have noted a recent 13D filing by two of our investors. A share purchase agreement is signed between our two current investors and a new strategic investor.

There are good synergies between this strategic investor and the company that can potentially help to expand our target market segments. However, we’ll stress at this time there are few terms and conditions that have to be met before the proposed transaction can close.

I would like to reassure our shareholders if there is a specific -- customer specific, excuse me, company specific events to be announced we’ll be sure to inform our shareholders in a timely manner. With that, let me turn the call over to Min who will walk through for financials for the third quarter in more detail..

Thank you, William, and hello everyone. I'll now take a few minutes to discuss our third quarter 2015 financial result. Please turn to Slide 12. Before I walk through the specific numbers, I would like to highlight a few key items for the third quarter.

Q3 non-GAAP revenue was $26.8 million compared with our preannounced of $25 million to $27 million and previous guidance of $18 million to $22 million. Non-GAAP gross margin improved sequentially to 22.8% helped by favorable product mix.

Operating mix -- operating loss for the quarter narrowed to $0.6 million with higher gross profit and lower operating expenses. Our cash balance at the end of the quarter was $74.1 million a slight improvement from last quarter and we have zero debt.

The improvement of our cash balance was due to $6 million ESA loan repayment partially offset by operating cash burn. Please turn to Slide 13 for a non-GAAP revenue review. Please note that non-GAAP revenues excluded less IPTV revenues.

In the third quarter, total non-GAAP revenue was $26.8 million compared with $16.7 million for the previous quarter and the $32.3 million a year ago. The sequential revenue increase was across the Board led by increase in PPN sales. Please turn to Slide 14 and 15 for gross profit and gross margin.

Please note that non-GAAP cost of sales and non-GAAP operating expenses excluded stock-based compensations. In the second quarter non-GAAP gross profit was $6.1 million down up from $2.7 million in the previous quarter and down from $7.7 million a year ago. Gross margin was 22.8% up from 16.2% in the previous quarter and down from 24.0% a year ago.

The sequential margin improvement was due to favorable product mix. Please turn to Slide 16 for operating expenses. In the third quarter, non-GAAP operating expenses were $6.7 million down from $11.7 million in the previous quarter and $8.9 million in the prior year period.

We're on track to achieve our target outlook by more than 10% year-over-year savings on operating expenses in second half of 2015. Please turn to Slides 17 and 18 for operating loss and net loss. In the third quarter non-GAAP operating loss was $0.6 million compared to operating loss of $1.1 million in the prior year period.

In the third quarter non-GAAP net loss was $4.8 million compared to net loss of $7.5 million in the prior year period. The third quarter net loss included $3.5 million loss pick up from UiTV. Please turn to Slide 19 for cash flow. We ended third quarter with $74.1 million in cash and we had no debt.

In the third quarter cash used by operating activities was $4.7 million. Cash flow from investing activities was $6.2 million among which $6.0 million were ESA loan repayment. Cash used in financing activities was $0.8 million which was entirely related to our ongoing share repurchase program. This concludes my financial review.

Now I will like to turn the call back to William to give some concluding remarks.

William?.

Thank you, Min. Turning now to Slide 21. I would like to recap our go-forward strategy and priorities with you. First, we will continue to focus our efforts on pursuing high margin revenue in our broadband business as this remains a key business driver for us globally.

In order to support this strategy, we're working with prospects to identify where our services meet their business needs. Second, in order to maximize our success, we'll continue to focus on markets where we have deep understanding now and also ones where there are genuine gaps in the market for our offering, thus giving us a healthy diversification.

Our strategy to focus on the markets in which we have deep understating is paying off. Our historic relations in Japan has proven to be an engine room for growth for UTStarcom and we intend to replicate this experience in new markets in which we are acquiring and selling off specifically in certain Latin American countries, Bangladesh and the U.S.

Third, we will continue to drive down cost and streamline the business while improving operational efficiency. We continue to access our current business model and we'll continue to maintaining a prudent approach to cost management.

Lastly, we will continue to add value to our strategic investments in UiTV and aioTV with the goal of monetizing these investments and generating a good return in the future. Both of these companies have proven to a sound strategic investment especially as they grow in prominence and gain a greater share of their respective markets.

We will share updates on their progress as we go. Now please turn to Slide 22 for our near term outlook. As mentioned in our previous calls, we have strategically realigned our business in order to transform UTStarcom, generally higher margins and ultimately enhance shareholder value.

We're beginning to see the fruits of this labor and we're determined to achieve even greater economies as we enter the final months of the year. Looking specifically at fourth quarter, the company expects to generate non-GAAP revenue in the range $18 million to $22 million.

We firmly believe that these adjustments will support our goal to build a stronger, more competitive and profitable UTStarcom in the long term. 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..

We’ll now begin the question-and-answer session. [Operator instruction] Your first question comes from Tim Savageaux. Your line is open please go ahead. I am sorry, your first question comes from Jun Zhang from Rosenblatt Securities. Your line is open. Please go ahead. Your next question comes from Tim Savageaux from Northland Capital Markets.

Your line is open. Please go ahead..

Okay.

Can you guys hear me?.

Yes loud and clear Tim..

Hey Tim, how are you doing..

Sorry about that, I am doing well thanks, and congrats on the strong quarter in Q3. Wanted to ask a couple of questions, first and I think William you mentioned the ability, developing ability to address new set of customers. I don’t know if you were talking specifically about backhaul.

And I also want to relate that to the new product release, new products that you announced as well and also talk about -- you didn't seem to have some pretty compact platforms there whether you might be targeting kind of the datacenter interconnect or cloud carriers as well as your traditional telecom carriers in terms of this new customers groups you may be able to address and I've got a follow up or two after that..

Okay. Thanks Tim, to address the product areas and also particular to the NGPTN that we also released today, there is two new entries to our portfolio. The first one is the Layer3 solution.

In the past most of our solution offering were staying within Layer2 and below and we've heard a lot of requests from customers, they need Layer3 solutions, but not necessarily the complete Layer3 solution like a regular heavy duty routers that you have.

So as such we’ve leveraged the SPN platform that we’ve established and announced in the earlier part of the year and developed a whole slew of Layer3 services, one of which is the Layer3 VPN services that we’ve just introduced as a second service that sits on top of our SDN platform.

So these are in essence Layer3 services that is in high demand coming from our customers who is using our solution and particularly looking for the mobile backhaul and metro aggregation area. So that address one of the very key need for lot of customers across.

Second with respect to the number of products that we announced today, the 701B, 703A and 704A, these are a whole slew of next generation PTN products per se, where in essence we bring in a lot of compacted features and at the same time at a much higher cost efficiency to our customers.

And a number of that was aimed at a lot of emerging markets as well as countries like India, where they want a lot of different support and so forth and the PTN products, but at the same time they won very cost effectively solution that enabled them to deploy their new networks. So that was how it was done specifically.

So with this two recently launches, not only expanded our market segment that we cover, but also gives a lot of potential towards a lot of emerging country customers that we're also quite busy engaging with these days..

Okay, and if you could address what is the other products that you've launched today, what is the planned availability for shipping of these products and then I had a couple of follow-up questions on the financials, one I think OpEx came down pretty sharply here in the quarter, I wonder if you could talk about where you would expect that to go directionally in Q4? And finally you mentioned that Virtual Gateway Lab is getting a little traction, I wonder if you can cover kind of what the capitalization that entity as you mentioned you spun it off, I imagine you maintained an order ship stake have they raised external financing where is that valued etcetera?.

Okay. I'll take the first question and then I’ll let Min take the rest. First of all on the next generation PTN products that we announced today, they are available now okay. We have been doing early release during the July timeframe. So these products are ready to ship.

And on the Layer3 new addition there on our SDN platform, we are doing early release now to some customers and at the same time, we're adding services as we speak depends on additional customer or customized demands. So they will be rolling out over different phases for the Layer3 services offering there.

Min?.

So for OpEx for the non-GAAP OpEx this quarter was $6.7 million and I would say for the next quarter we're looking at either flat to slightly up operating expenses due to kind of some of the -- for the end of the year we always have some extra OpEx happening. So that’s what we're expecting for Q4.

And so I’ll say with that level, we're definitely on track to achieve 10% year-over-year OpEx saving for the second half. For the ownership structure for VGL UTStarcom owns 75% of VGL and the rest of 25% its owned by the employee and the family members of the company.

Did I answer all your questions?.

Yes. That’s great. I’ll pass along. Thank you very much..

Alright, thank you Tim..

Thank you, Tim..

Your next question comes from Jun Zhang from Rosenblatt Securities. Your line is open. Please go ahead..

Okay. William, thanks for taking my question. So my first question is how much further down the cost you can save -- the operating cost you can save going forward? You target 10% year-over-year declining of operating cost in the second half, but my question is how much further you cut down in the next couple of quarters, thanks..

So as I mentioned earlier, for Q4 we're actually expecting flat to slightly up sequentially and looking into 2016, I’ll say again we actually mentioned in the last few quarter we're at a pretty efficient level right now and what we're trying to do is that we will leverage the resources we have. We’ll try to achieve more.

So basically we are trying to grow our revenue, grow our gross profit and maintain the current operating expense. So hopefully we can achieve pretty good operation leverage in the next year..

Okay. Thanks.

My second question is the -- with the new products launched should we expect gross margin re-bounce in next one or two quarters?.

Jun, thank you.

Actually, as we've seen with our current realignment strategy of our product mix actually in the third quarter, we're already seeing lot of improvement versus the first half of the year and now that for example our flagship products, the TN765 is in the beginning of volume production, so you would expect to see better margin compared to the second quarter and so forth moving forward.

And with the new product that we've launched it will take a little time before they tick into full blown deployment within our customer, but as they begin to grow in volume and in fuel shipment, those would also bring in good high margins because these are our traditional PTM products that we always bring in pretty good margins..

Okay, Jun just to add a few points that although we're seeing solid adoption of our new products and we're seeing favorable product mix, I will say we haven't seen a solid trend yet. So we still see a lot of volatility. So that's why when we provide Q4 guidance, we're still a little bit cautious. So we're still providing $18 million to $22 million.

So I will say at this point I wouldn't expect a trend there. So we're still going to expect some level of volatility in both gross margin and revenue. So however I do believe we are seeing some improvement, so the margins should be better than first half..

Okay. Thanks. My last question is with the strategic investment from the China company and you expected to close pretty soon, what kind of a chance that investment going to bring to the company and because I believe they are, their strategic investor now have pretty good local relationship in China.

So do you expect you can start expanding your business in China market or any kind of a chance that could bring to the company? Thanks..

Yes, we do expect synergies between the new investor strategic investor and the company. I think one of the point is what you hit on, the China region, with their strong presence in China, we expect that we can grow our business in China.

At the same time, there is also new market segment that we believe we can leverage and expand the company into those new segments example, like datacenter area, which team had asked the question earlier regarding DCI. So it's a good potential for us to get exposed to this new segment.

And to the other even extreme, there are other obviously opportunities with respect to things like smart cities and so forth within China..

Okay. That's great, thanks. That's all my questions, thanks..

Thank you, Jun..

Thank you, Jun..

[Operator Instructions] Thank you. There are no further questions at this time. I will turn the conference back to the host for closing remarks..

Okay, thank you for joining us on our third quarter 2015 earnings conference call. We look forward to updating you on our fourth quarter 2015 results in a few months' time. Feel free to get in touch with us any time if you have further questions, concerns or comments. Thank you everyone..

That does conclude our conference for today. Thank you for your participation. You may all disconnect..