UTStarcom Defies Gravity

While its competitors rail at it for flooding the market with cheap gear at low margins, UTStarcom Inc. (Nasdaq: UTSI) continues to prove that there's plenty of money to be made in affordable equipment for broadband connections and wireless phone networks.

UTStarcom reported third-quarter earnings of $59.1 million, or 46 cents a share, on revenues of $584.4 million for its third quarter, ended September 30. Analysts, again, were surprised as they expected UTStarcom to earn 45 cents a share on revenues of $570.96 million. A year ago, the company reported earnings of $30.8 million, or 27 cents a share, on revenues of $265.5 million.

The company ended the quarter with about $441.4 million in cash and investments.

Why the upside surprise?

For one thing, UTStarcom's PAS (Personal Access System) wireless/radio phone business is going nuts. The company shipped five million PAS handsets in the third quarter and reported 16.7 million PAS subscribers on its networks. By the end of this year -- that's less than three months away, if you're scoring at home -- the company says its PAS subscribers in China will hit about 30 million.

In Japan, Yahoo BB has more than 3.2 million signed up for broadband services, which are running over UTStarcom's DSLAMs and other gear.

Outside Asia, the company is counting on its partnership with NEC Corp. (Nasdaq: NIPNY; Tokyo: 6701) to help it move broadband gear in Brazil. Also, it recently nabbed a contract for its PAS systems in Mali, thanks to AfricaCom, its contractor there that has a relationship with Sotelma, one of the region's largest carriers (see UTStarcom Wins in Africa).

UTStarcom CEO Hong Lu also says that the company shipped about 800 optical nodes to customers in China during the quarter, a sign that the company is having some success with its NetRing optical transport products, the product family it forgot to announce at Supercomm (see UTStarcom Tiptoes Into Transport).

In August, the company filed a shelf registration with the SEC so that it could periodically sell up to $500 million in debt, stock, and other securities. With a registration on the shelf, the company can quickly raise money when market conditions are right.

Some investors were concerned it was a sign that UTStarcom was anticipating being strapped for cash. CFO Mike Sophie, however, says today that the move was taken to give the business "flexibility... should opportunities present themselves in the future."

Given that UTStarcom has solid earnings and cash in the bank, the shelf registration -- and Sophie's explanation of it -- may or may not be shorthand for "looking for an acquisition."

For the fourth quarter, UTStarcom expects to earn 50 cents a share on revenues of between $635 million and $640 million.

For the full year 2003, UTStarcom now expects that it will earn $1.61 or $1.62 a share on revenues of between $1.96 billion and $1.97 billion. The company's previous full-year 2003 forecast said that revenues would be in the range of $1.80 billion to $1.82 billion (see UTStarcom Profits, Revenues Growing).

Next year, UTStarcom says its revenues will be in the range of $2.4 billion and $2.5 billion, a prediction Pacific Growth Equities Inc. analyst Joe Noel nailed in June (see UTStarcom Climbs on Estimate Boost).

CFO Sophie says that wireline equipment -- IP DSLAMs and other broadband gear -- will make up 12 percent of the company's revenues next quarter and 15 percent of revenues during 2004.

UTStarcom shares fell $0.74 (2.13%) to $34.06 in trading on Thursday. Even as the price slipped, UTStarcom shares are trading up some 110 percent percent on their year-ago price.

— Phil Harvey, Senior Editor, Light Reading