UTStarcom Releases Financial Results for the Second Quarter 2011

BEIJING, August 9, 2011 /PRNewswire-Asia-FirstCall/ -- UTStarcom Holdings Corp. ("UTStarcom" or "the Company") (NASDAQ: UTSI), a leading provider of interactive, IP-based network solutions in iDTV, IPTV, Internet TV and Broadband for cable and telecom operators, today reported financial results for the second quarter ended June 30, 2011.

Second Quarter 2011 Highlights

• Total revenues were $92.5 million, a 26.4% or $19.3 million increase from the corresponding period in 2010.
• Gross margin for the second quarter of 2011 was 37.6% as compared to 31.3% in the second quarter of 2010 and 31.1% in the first quarter of 2011. Gross profit was $34.8 million in the second quarter of 2011 compared to $22.9 million in the corresponding period of 2010.
• Net income attributable to UTStarcom's shareholders for the second quarter of 2011 was $11.6 million or basic earnings per share of $0.07, as compared to a loss of $9.0 million, or a loss of $0.07 per share in the second quarter of 2010.
• Net cash provided by operating activities was $12.0 million in the second quarter of 2011 compared to net cash used in operating activities of $39.4 million in the first quarter of 2011.

"With a significant boost from the equipment business, UTStarcom obtained our first profitable quarter after 24 consecutive quarters of losses. It is a very important milestone for the new management team to achieve after a long process of restructuring and reorganization. I am happy that our efforts have started to gain some traction," said Jack Lu, President and CEO of UTStarcom. "However, there were significant items which had positive impact on our results this quarter. We understand that it will require more discipline and more meaningful progress on the top line to achieve sustainable profitability."

Mr. Lu continued, "These results demonstrate that our aggressive restructuring and the three point strategy are providing the foundation that UTStarcom needs for the future. We are capitalizing on this in our efforts to achieve the full year outlook."

Edmond Cheng, Senior Vice President and Chief Financial Officer added, "Our Q2 results show our team's ability to execute. We have successfully improved our gross margin and hence profitability, while simultaneously addressing cost structure issues."

Continuing, Mr. Cheng said, "We also want to thank our shareholders for supporting our transition to Foreign Private Issuer status. This affirmed management's three point strategy and will allow us to achieve cost efficiencies in the company's compliance reporting processes. Although as a foreign private issuer the format of our disclosures will change, we remain absolutely committed to providing the information that our investors rely on to track our performance and to maintaining a robust standard of corporate governance."

Second Quarter 2011 Results

Revenues

UTStarcom's total revenues for the second quarter of 2011 were $92.5 million, representing an increase of 26.4% year over year. Total revenues for the six months ended June 30, 2011 were $153.8 million, representing a decrease of 0.1% year over year.

Three months ended June 30, 2011 and 2010

• Net sales from equipment for the second quarter of 2011 were $81.3 million, representing an increase of 29.9% relative to the corresponding period in 2010. The increase was driven by the $7.4 million of equipment revenue recognized on the Jersey Telecom Limited contract upon the receipt of final acceptance certificate in the second quarter and increased sales of PTN products in Japan, partially offset by the decrease resulting from the wind-down of our handset business and decrease in sales of other major product lines compared to the same period in 2010.

• Net sales from equipment-based services for the second quarter of 2011 were $11.1 million, representing an increase of 4.7% relative to the corresponding period in 2010. The increase was primarily driven by the $3.9 million of service revenue recognized on the Jersey Telecom Limited contract and increased sales in Japan partially offset by fewer iPAS maintenance contracts due to the anticipated phase out of PHS in China in 2011.

• Net sales from operational support service for the second quarter of 2011 were $0.1 million from an IP Signage revenue sharing project.

Six months ended June 30, 2011 and 2010

• Net sales from equipment for the six months ended June 30, 2011 were $134.2 million, representing an increase of 1.8% relative to the corresponding period in 2010. The increase was driven by the$7.4 million of equipment revenue recognized on the Jersey Telecom Limited contract upon the receipt of final acceptance certificate in the second quarter and increased sales of PTN products in Japan, partially offset by the decrease resulted from the wind-down of our handset business and decrease in other major product lines compared to the same period in 2010.

• Net sales from the equipment-based services for the six months ended 2011 were $19.4 million, representing a decrease of 12.6% relative to the corresponding period in 2010. The decrease was mainly due to fewer iPAS maintenance contracts of the anticipated phase out of PHS in China in 2011, partially offset by increased international service contracts.

• Net sales from operational support service for the six months ended 2011 were $0.2 million from IP Signage revenue sharing project.

Gross Profit

UTStarcom's gross profit was $34.8 million, or 37.6% of net sales, for the second quarter of 2011, compared to that of $22.9 million, or 31.3% of net sales, for the corresponding period in 2010. Gross profit was $53.8 million, or 35.0% of net sales, for the six months ended June 30 2011, compared to $50.1 million, or 32.5% of net sales, year over year.

Three months ended June 30, 2011 and 2010

• Gross profit and gross profit as a percentage of net sales from equipment increased to $31.6 million and 38.9%, respectively, for the second quarter of 2011, from $19.1 million and 30.5% for the corresponding period in 2010. The increase was primarily due to the higher product gross margin generated from the equipment revenue of $7.4 million recognized on the Jersey Telecom Limited contract and increased sales of PTN products with higher gross margin in the second quarter of 2011.

• Gross profit and gross profit as a percentage of net sales from the equipment-based services increased to $4.3 million and 38.7%, respectively, for the second quarter of 2011, from $3.8 million and 35.8% for the corresponding period in 2010. The increase was primarily due to the higher product gross margin generated from the service revenue of $3.9 million recognized on the Jersey Telecom Limited contract and increased sales in Japan with higher gross margin in the second quarter of 2011.

• Gross loss from operational support service was $1.1 million as a result of amortization of costs of a revenue sharing project for the second quarter in 2011.

Six months ended June 30, 2011 and 2010

• Gross profit and gross profit as a percentage of net sales from equipment increased to $48.6 million and 36.2%, respectively, for the six months ended 2011, from $42.0 million and 31.9% for the corresponding period in 2010. The increase was primarily due to the higher product gross margin generated from the equipment revenue of $7.4 million recognized on the Jersey Telecom Limited contract and increased sales of PTN products with higher gross margin during the six months ended June 30, 2011.

• Gross profit from equipment-based services decreased to $6.5 million, or 33.5% of net sales, for the six months ended June 30, 2011 from $8.1 million or 36.5% of net sales for the corresponding period in 2010. The decrease in gross profit percentage was primarily due to lower renewal rate of iPAS service contracts driven by the anticipated phase out of PHS in China in 2011 while services fixed cost remained relatively constant.

• Gross profit from operational support service was negative $1.3 million as a result of amortization of costs of a revenue sharing project for the six months ended June 30, 2011.

Operating Expenses

Operating expenses were $25.1 million in the second quarter of 2011, a decrease of 10.3% compared to $28.0 million in the corresponding period in 2010. Operating expenses were $55.3 million for the six months ended June 30, 2011, a decrease of 25.2% compared to $73.9 million year over year.

Three months ended June 30, 2011 and 2010

• SG&A expenses were $18.4 million in the second quarter of 2011, representing a decrease of 13.1% compared to $21.2 million in the corresponding period in 2010. The decrease was primarily due to a decrease in personnel cost as a result of our restructuring actions and consistent cost control to reduce the travel expense, software license expense, insurance expense and the use of outside services, which was partially offset by an increase in facilities related expenses due to the overlap payment of our old and new Hangzhou office facilities, professional fees and the provision for the allowance of doubtful accounts.

• R&D expenses were $6.7 million in the second quarter of 2011, representing a decrease of 26.2% compared to $9.1 million in the corresponding period in 2010. The decrease was primarily due to a decrease in personnel cost as a result of our restructuring actions and consistent cost control to reduce the use of outside services, software license expense, travel expense as we continued to streamline our operations and product focus, partially offset by the increase of facilities related expenses due to the overlap payment of our old and new Hangzhou office facilities.

• Amortization of intangible assets was $0.3 million in the second quarter of 2011 as a result of the amortization of intangible assets acquired in the iTV Media investment (formerly Stage Smart) for the three months ended June 30, 2011. There was no amortization of intangible assets in the same period in 2010.

• There was no gain on divestitures since there were no significant divestitures activities in the second quarter of 2011. This compares to a $2.1 million of gain related to the sale of our non-core IP Messaging and US PDSN assets and RAS product line in the second quarter of 2010.

Six months ended June 30, 2011 and 2010

• SG&A expenses were $37.7 million for the six months ended June 30, 2011, representing a decrease of 26.5% compared to $51.4 million in the corresponding period in 2010. The decrease was primarily due to a decrease in personnel cost as a result of our restructuring actions and consistent cost control to reduce the travel expense, software license expense, insurance expense, and savings from reduction in the provision for the allowance of doubtful accounts, and reduction in professional fees, which was partially offset by the increase in facilities related expenses due to the overlap payment of our old and new Hangzhou office facilities and outside services.

• R&D expenses were $14.3 million for the six months ended June 30, 2011, representing a decrease of 25.1% compared to $19.1 million in the corresponding period in 2010. The decrease was primarily due to a decrease in personnel cost as a result of our restructuring actions and consistent cost control to reduce the use of outside services, software license expense, travel expense as we continued to streamline our operations and product focus, partially offset by the increase of facilities related expenses due to the overlap payment of our old and new Hangzhou office facilities.

• Amortization of intangible assets was $0.6 million for the six months ended June 30, 2011 as a result of the amortization of intangible assets acquired in the iTV Media investment (formerly Stage Smart). There was no amortization of intangible assets in the same period in 2010.

• Restructuring cost were $2.7 million for the six months ended June 30, 2011, representing a decrease of 63% compared to $7.3 million in the corresponding period in 2010. The decrease was primarily due to the restructuring cost related to the latest restructuring plan in 2009 almost coming to an end in the second quarter of 2011. We do not expect to incur additional significant restructuring charges in the remainder of 2011 related to the previous restructuring plans.

• Gain on divestitures was immaterial as no significant divestiture activities occurred for the six months ended June 30, 2011, compared to $3.8 million of gain recognized in the corresponding period in 2010 related to sale of IP Messaging and US PDSN assets and the sale of the RAS product line.

Other Income (Expense)

Three months ended June 30, 2011 and 2011

• Net other income was $3.1 million for the second quarter of 2011 compared to net of other expense of $4.8 million for the corresponding period in 2010. Net other income for the second quarter of 2011 primarily consisted of $3.0 million foreign exchange gain attributed to the appreciation of RMB and JPY against USD in the quarter. Net other expense in the second quarter of 2010 primarily consisted of $4.9 million of foreign exchange loss as a result of depreciation in INR against USD in the quarter.

Six months ended June 30, 2011 and 2010

• Net other income was $4.1 million for the six months ended 2011 compared to the net other income of $0.1 million for the corresponding period in 2010. Net other income for the six months ended 2011 primarily consisted of $3.7 million of foreign exchange gain attributed to the appreciation of RMB and JPY against USD in the first six months of 2011. Net other income for the six months ended 2010 primarily consisted of $0.9 million of foreign exchange loss as a result of depreciation of INR against USD in the first six months of 2010, partially offset by the proceeds of $0.5 million received from dismissal of legal proceedings between MRV Communications ("MRV") and its former shareholders.

Net Income/Loss

The above resulted in an income from operations of $9.7 million for the second quarter of 2011, compared to a loss from operations of $5.1 million in the same period of 2010.

Net income attributable to UTStarcom shareholders for the second quarter and first half of 2011 was $11.6 million and $1.3 million, respectively, compared with a net loss of $9.0 million and $24.9 million in the corresponding period in 2010. Basic earnings per share for the second quarter and first half of 2011 amounted to $0.07 and $0.01, respectively.

Cash Flow

Net cash provided by operating activities for the second quarter of 2011 was $12.0 million. During the three months ended June 30, 2011, the results of our operating activities were significantly impacted by the following:

• Net income of $11.3 million adjusted for non-cash charges of approximately $2.2 million resulting in a net cash in-flow of $13.6 million. The non-cash charges were primarily the provision for doubtful accounts, depreciation and amortization, and stock-based compensation cost, partially offset by the amortization of deferred gain on sale-leaseback in the second quarter of 2011.

• Changes in operating assets and liabilities of $1.5 million. The increase in sales activities in the second quarter of 2011 was the primary driver of the changes in operating assets and liabilities, aided by a decrease in inventory and deferred cost, accounts receivables and an increase in customer advance and income tax payable, partially offset by the decrease in deferred revenue, settlement of accounts payable and other liabilities as the Company continues to streamline its operations.

Cash used in investing activities for the second quarter of 2011 was $8.5 million, primarily, consisting of a shareholder loan for equity investment made to ACELAND International Limited ("ACELAND") in the amount of $7.1 million recorded in Long-term Investments on the balance sheet, the purchase of property, plant and equipments and short-term investments, partially offset by the changes in restricted cash and proceeds from maturity of short-term investments.

Cash provided by and used in financing activities were immaterial for the second quarter of 2011 and the corresponding period in 2010, respectively.

As of June 30, 2011, UTStarcom had cash and cash equivalents of $313.6 million and $2.8 million of short-term investments.

Business Outlook

The Company reiterates the following outlook for fiscal year 2011:

• Aiming to achieve total revenue for the year in the range of $300-$320 million, which includes PAS deferred revenue through the end of 2011 at the rate of $23 million per quarter.

• Targeting annualized operating expenses of less than $100 million.

• Committed to breaking even in 2011 on a full year basis.

The target to generate 10% of total sales in 2011 from the new Operational Support Service business was based on a level of progress in organic and acquisition activities that may not be achieved in the year. While OSS remains a key focus of the company, the due diligence process and negotiations with acquisition targets and revenue sharing partners have seen delays which may impact the Company's ability to achieve this target for the full year.

This forecast reflects UTStarcom's current and preliminary view, which is subject to change.

Conference Call Information

UTStarcom's management will host an earnings conference call at 8:00 a.m. U.S. Eastern Time on August 9, 2011 (8:00 p.m. Beijing/Hong Kong Time on August 9, 2011).

The conference call dial-in numbers are as follows: United States -- 1-800-860-2442; International -- 1-412-858-4600. The conference ID number is 10002730.

A replay of the call will be available for 7 days. The conference call replay numbers are as follows: United States -- 1-877-344-7529; International -- 1-412-317-0088.

The Conference ID for accessing the recording is 450638.

Investors will also have the opportunity to listen to the conference call and the replay over the Internet through the investor relations section of UTStarcom's website at: http://www.utstar.com.

To listen to the live call, please go to the website at least 15 minutes early to register, and to download and install any necessary audio software. For those who cannot listen to the live broadcast, a replay will also be available on this site.

About UTStarcom

UTStarcom is a leading provider of interactive, IP-based network solutions in iDTV, IPTV, Internet TV and Broadband for cable and telecom operators. The Company sells its solutions to operators in both emerging and established telecommunications and cable markets around the world. UTStarcom enables its customers to rapidly deploy revenue-generating access services using their existing infrastructure, while providing a migration path to cost-efficient, end-to-end IP networks.

Founded in 1991, listed on the NASDAQ in 2000, the Company has its operational headquarters in Beijing, China and research and development operations in China and India. For more information about UTStarcom, visit the Company's Web site at http://www.utstar.com.

Forward-Looking Statements

This release includes forward-looking statements, including statements regarding the effects of the Company's corporate structure, the move to new facilities in Beijing and Hangzhou, expectations from the new Operational Support Service Business and expectations regarding the Company's performance in 2011. These statements are forward-looking in nature and subject to risks and uncertainties that may cause actual results to differ materially. These include risks and uncertainties regard the ability of the Company to realize anticipated results of operational improvements, the Company's ability to deliver and capitalize on the opportunities of the new Operational Support Service Business, revenues and expenses under its business model, and executing on its business plan and managing regulatory matters as well as risk factors identified in its latest Annual Report on Form 10-K, Form 10-K/A, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as filed with the Securities and Exchange Commission. The Company is in a period of transition and the conduct of its business is exposed to additional risks as a result. All forward-looking statements included in this release are based upon information available to the Company as of the date of this release, which may change, and we assume no obligation to update any such forward-looking statement.