Gary Dvorchak - Managing Director, The Blueshirt Group Tim Ti - CEO Eric Lam - VP, Finance.

Analysts:.

Hello, ladies and gentlemen. Thank you for standing by for UTStarcom's Fourth Quarter and Full-Year 2016 Earnings Conference Call. Please note that we are recording today’s conference call. I will now turn over the call to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group. Please go ahead, Mr. Dvorchak..

Thank you, operator, and good morning everyone. Welcome to UTStarcom's fourth quarter and full-year 2016 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 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. Tim Ti, Chief Executive Officer, and Mr. Eric Lam, Vice President, Finance. Before we get started, let me refer you to the Company's advisory on forward-looking statements on slide two.

This call will include forward-looking statements relating to the Company's business and strategic initiative. 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’ latest annual report on Form 20-F and the current reports on Form-6K filed with the Securities and Exchange Commission.

All forward-looking statements included in this call are based upon information available to the Company as of the date of this call; that information can change, if so, the Company will assumes no obligation to update any such forward-looking statement. I will now hand the call over to UTStarcom's CEO, Mr. Tim Ti..

Thank you, Gary, and thank you everyone for joining our call today. I appreciate your interest in UTStarcom. As Gary mentioned, you can download the call presentation from the Investors section of our website. Please note that unless otherwise stated, all figures mentioned during this call are in U.S. dollars.

I’ll begin our call with an overview of our financial and operating highlights for the fourth quarter of 2016. Next, I will provide an update on our strategic initiatives and near-term business outlook. Then, I will turn the call over to our VP of Finance, Eric Lam, who will present the financial details.

Now, let me provide you with the summary of our overall Q4 results. Starting on slide three. Our first quarter results were positive as we continue to execute our business strategy. Fourth quarter revenue was $21 million, up significantly but down year-over-year. Revenue was ahead of our expectations coming in above the high-end of our guidance range.

We remain on track with our strategy of focusing on high value, higher margin products. In Q4, we achieved a gross margin of 32% that is up both, significantly and year-over-year. This is encouraging as we continue to direct our efforts and resources to higher margin product sales. We also continue to manage our expense in a prudent manner.

As a result, we achieved positive operating income in the fourth quarter. Finally, we remain highly focused on cash generation and maintaining our strong balance sheet. We generated positive operating cash flow and ended the quarter with higher cash position than the prior quarter.

Our cash balance including short-term investments was $84 million and we had to no debt. Now, let me walk you through some of the key operational highlights from the fourth quarter. Please turn to slide four. First, we continue to focus on high margin revenue opportunities in the broadband business.

This remains an important near-term driver for us around the world. Our product revenue in the quarter was primarily from our classic PTN product line. Sales of this product continue to be stable in Japan as the move from 10G to 100G metro networks is underway. We also anticipate meaningful sales opportunities in India, an early adopter of 100G.

Additionally, we are working on incremental revenue opportunities in other geographies in the years ahead including Taiwan and Brazil. In sum, it’s very early in the global 100G growth cycle. 2017 will be a pivotal year as we upgrade and transition our product capabilities to support next generation networks.

As we mentioned on our last earnings call, we introduced a new product called SyncRing that addresses the mobile backhaul market. We designed SyncRing for evolution of the mobile networks to LTE and LTE advanced. As the world moves to LTE advanced mobile networks, we continue to see significant opportunity for SyncRing.

Speaking of R&D, we remain committed to our R&D spending, as we believe it is essential to continue to develop and introduce new and improved products to strengthen our competitive position. I am encouraged we have effective R&D team in place and continue to execute our strategic plan to develop next generation products.

We intended to invest more in R&D resources in 2017, in order to reduce product cost and improve performance. We believe this can result in better pricing and higher margins. Finally, let me reiterate our commitment to shareholders who are the owners of the Company and our partners.

Operating efficiently and profitably is our primary goal, which we believe can drive a higher valuation for the Company over time. In addition, a prudent return of capital also reflects our commitment to shareholders. We did this again in the fourth quarter when we repurchased 238,000 shares at a cost of $474,000.

Since inception of the repurchase program through today, we have bought back approximately 3.8 million shares at a total cost of $8.3 million. Now, let me turn the call over to Eric who will walk through our financial performance in more detail.

Eric?.

Thank you, Tim, and thank you everyone for joining us on the call today. I’ll take you through the financial performance for the fourth quarter and full year 2016. Let me start with slide number five. Q4 non-GAAP revenue was $21 million, which exceeded our guidance of 15 to $20 million.

Non-GAAP gross margin improved 140 basis points to 32% from the same period last year. The increase in gross margin was primarily due to favorable product mix. Non-GAAP net loss was $1 million or $0.03 per share in the quarter; this compares to a non-GAAP net loss of $15 million or $0.40 per share in the same period last year.

Cash provided by operating activities in the quarter was $1.4 million. Our cash, cash equivalents and short-term investments at the end of the quarter were $84 million, up from $81 million in the prior quarter. And as Tim mentioned, we continue to have no debt. Now, please turn to slide number six for a non-GAAP revenue review.

Please note that non-GAAP revenue excludes IPTV revenue. In the fourth quarter, total non-GAAP revenue was $21 million, which compares to $16 million in Q3 and $26 million in the same quarter last year. As mentioned earlier, Q4 revenue came in above the high-end of our guidance range.

The sequential increase in revenue was largely due to higher revenue in Japan. Japan accounted for about 59% of the total revenue, India about 25% and the rest 15%. Full year 2016 non-GAAP revenue was $80 million, down 21% from prior year. The decline was in line with our strategy to reduce lower margin product sales.

Slide number seven and eight, we highlight our gross margin and profit. Please note that non-GAAP cost of sales and non-GAAP operating expenses exclude stock-based compensation, legacy IPTV and costs related to legacy India DoT revenue.

In the fourth quarter, non-GAAP gross profit was $6.8 million, up from $4 million in the previous quarter, but down from $7.9 million a year ago. Non-GAAP gross margin was 32%, up from 24% in the prior quarter and 31% a year ago. The sequential and year-over-year margin increase was due to increased sales of a higher margin product to Japan.

Full year 2016 non-GAAP gross profit was $25 million, up from $22 million last year. Non-GAAP gross margin for the full year 2016 was 31%, up significantly from 21% in 2015. Now, slide number nine. We’ll take a look at the operating expenses.

In the fourth quarter, non-GAAP operating expenses were $5.6 million, up slightly from the $5.1 million over last quarter and from prior year. Increase in operating expenses was due mostly to higher payouts with sales incentives and bonuses. Operating expenses were 26% of sales. This compares to 31% and 20% in Q3 and Q4 in 2016, respectively.

Now, we expect operating expenses as a percentage of sales to be roughly at the same level as the first quarter of 2017. Full-year non-GAAP operating expenses were $24 million, down 25% from $31 million in 2015. Next, let me summarize our operating income and net income on slide number 10 and 11.

In the fourth quarter, non-GAAP operating income was $1.2 million compared to an operating loss of $1.1 million in the previous quarter and operating income of $2.7 million a year ago. Non-GAAP net loss was $1 million compared to a net income of $1.5 million in the previous quarter and the net loss of $14.7 million a year ago.

Now, full year non-GAAP operating income was $1.4 million compared to an operating loss of almost $10 million in 2015. Full-year non-GAAP net income was $3.2 million or $0.09 per share as compared to a net loss of over $25 million, which is the loss of $0.69 per share in 2015. Now, slide number 12 summarizes our cash flow.

As discussed earlier, we ended the quarter with $84 million in cash, cash equivalents and short-term investments. We have no debt on our balance sheet.

Cash provided by operating activities in the quarter was $1.4 million; cash provided by investing activities was $7 million; and cash used in financing activities was $0.5 million, which solely related to our ongoing share repurchase program. On slide number 13, we included both, GAAP and non-GAAP key financial highlights for your reference.

With that, I will turn the call back over to Tim for additional comments on the business outlook.

Tim?.

Thank you, Eric. In summary, 2016 was a fruitful year for us as we executed our strategic initiative as stated. We realigned our resources toward our higher margin products and focused customers for whom we created most value. We also streamlined our business, resulting in a meaningful reduction in operating expenses.

We introduced our newest SyncRing product, which provided clinical continuity for next generation mobile platform network. We also strengthened our product portfolio to target the metro aggregation market with our PTN product family. Overall, we achieved a positive operating income and profitability in 2016.

We continue to believe our business strategy is the right one with the intense focus on small set of markets in which we can add most value for our customers. For the first quarter of 2017, the Company expects to generate non-GAAP revenue in the range of $18 million to $22 million.

From the revenue opportunity standpoint, we believe our PTN product line will continue to be the largest revenue contributor and is poised to benefit in 2017 and beyond. From a roll-out of 100G metro networks in the key geographies such as Japan and India, the new SyncRing will make a meaningful contribution to Q1 revenue as well.

We expect 2017 to be challenging as we upgrade and align our main product line to support next generation networks. We will continue to prudently manage our P&L and maintain our balance sheet strength. We believe this will position us for profitable growth over the next few years. With that, Eric and I would like to take your questions.

Operator, please open the line for Q&A..

Thank you, sir. [Operator Instructions] Okay. We will now take our first question; it comes from Craig [ph] from Northland Securities. Please go ahead. The line is open..

Hi, guys. Thanks for taking my questions. I am on for Tim Savageaux today.

First, how do you expect the cash balance to develop during 2017, and will there be any monetization of the investment portfolio?.

Okay. In terms of cash we expect we’d be needing some operating cash in 2017 as we are making quite a bit of -- we would have increased business in India. That’s our expectation. And we would need to finance the inventory. And doing business in India, we also would need some capital or bank guarantees and things of that nature.

So, we would expect that we will require some increased working capital in 2017. In terms of investment monetization, we will recover about -- I think -- sorry. Give me one second.

We have a small investment and I think we are cashing out, actually happened only in January, already happened, but it’s only for $0.5 million, but other than that we don’t have anything major on a portfolio that we’re going to be monetizing..

Okay, got it.

And second, we were wondering if you could comment on the availability and lead times for your 100G components?.

Are you talking about 100G component, the transceiver or which component? It’s all kind of things..

Yes, transceivers will be great. Yes..

Yes. You’re pointing exactly, transceiver now 100G is very, very -- lead time is pretty --considered longer. But actually, we’re working with our primary two suppliers. So, we are able to maintain customer request delivery schedule. So thus, we have ongoing relationship with transceiver supplier also in North America and also in Japan.

So, we can ship, [ph] even it’s really critical; you’re right. 100G is very high in 2017..

[Operator Instructions] We have no questions for the moment. We will just pause for a moment to allow everyone an opportunity to signal. [Operator Instructions] Sir, we have no further questions on the telephone line at the moment..

End of Q&A:.

Okay. That’s fine. I think does conclude the call. Thank you everybody..

Thank you. Again, ladies and gentlemen, that will now conclude today’s conference call. Thank you very much for your participation today. You may now disconnect..