UTStarcom Cuts Outlook, Shares Dive

UTStarcom Inc. (Nasdaq: UTSIE) announced Thursday it will cut 1,400 jobs, 17 percent of its workforce, as Chinese demand for its handsets falls sharply (see UTStarcom's Chinese Takeout).

Ying Wu, CEO of UTStarcom China, told analysts Thursday that his company expects handset sales to China to fall by 40 to 50 percent during 2005. Handset revenues were roughly $2 billion in 2004, but they are expected to fall to between $1 billion and $1.2 billion in 2005, he said.

On cue, investors began running for the exits after market close Thursday. UTStarcom stock lost 30 percent of its value overnight, most recently trading at $7.30 in mid-afternoon trading Friday.

UTStarcom officials hope the workforce reduction will reduce overall expenses by $40 million per quarter beginning in the fourth quarter of this year. But some analysts are already voicing skepticism.

"The majority of UTStarcom's employees are in China, and even if we assume a very generous $40,000 annual savings per employee (salary + benefits + other), we only get to about $56 million in annual savings,” writes analyst Daryl Armstrong of Smith Barney in a research brief.

UTStarcom CFO Mike Sofie says the layoffs will be spread out geographically. Salary and other labor-related costs make up about 60 percent of UTStarcom’s current expense structure, Sofie says.

"We have to make UTStarcom a leaner, more flexible organization to adjust to the new market reality," Ying Wu told analysts.

The company plans to expand the outsourcing of its supply-chain and IT operations.

UTStarcom believes it controls greater than 50 percent share in China for PAS (Personal Access System) handsets, and 55 percent market share for related infrastructure equipment (see UTStarcom Expands China Netcom).

The restructuring plans were announced during UTStarcom’s first-quarter earnings announcement Thursday. After two disappointing quarters ending 2004 (see UTStarcom Stung Again), the Alameda, Calif.-based company reported solid earnings of 29 cents per share and a 45 percent increase in revenues to more than $900 million (see UTStarcom Reports Q1).

But analysts were surprised by the company’s chilling forecasts for the second quarter. UTStarcom expects losses of 70 to 80 cents per share on revenues of $740 million.

Analysts had expected second-quarter revenues of $857 million, according to Reuters consensus estimates. UTStarcom expects to take a one-time restructuring charge of $20 million to $25 million during the second quarter.

UTStarcom says it will announce during the second quarter which employees will be affected by the restructuring.

"We believe investors should be cautious, since we think the company must produce a couple quarters of solid performance and guidance before investors and the Street can warm up to it again,” Smith Barney’s Armstrong says.

— Mark Sullivan, Reporter, Light Reading