UTStarcom Stung Again

Troubles in the Chinese market led to a nasty earnings forecast from UTStarcom Inc. (Nasdaq: UTSI) late yesterday.

For its fourth quarter, which ended in December, the company will come up $135 million short on its expected revenues, with $100 million being delayed until next quarter and $20 million simply not happening due to an unexpected drop in sales of Personal Access System (PAS) wireless phones. The rest of the shortfall comes from charges due to acquisitions and the ramp-up of the company's CDMA phone business (see UTStarcom Lowers Q4 Guidance).

Officials said yesterday they expect to report fourth-quarter losses of 40 to 45 cents per share, as opposed to the break-even quarter analysts were expecting, according to Reuters. Fourth-quarter revenues will be between $740 million and $745 million, officials said. Analysts, going off of UTStarcom's previous guidance, were expecting $864 million, according to Reuters.

UTStarcom stock plunged $3.60 (18%) to $16.34 in after-hours trading. The company will report fourth-quarter results on Feb. 8.

It's the second earnings surprise in a row for UTStarcom. In its third quarter, the company had to defer $290 million in revenues due to the timing of a job for Japan Telecom Co. Ltd. (see UTStar Cuts Estimates, Board Member Resigns).

The $100 million delay for the fourth quarter stems from management changes at "the main carrier in China," CEO Hong Lu told analysts on a conference call yesterday. Lu said the carrier in question -- presumably China Telecommunications Corp. (NYSE: CHA) -- shifted its decision-making to its headquarters, taking responsibility away from regional offices. The changes delayed the signing and execution of contracts during the quarter.

As for the PAS market, Lu said sales took an unexpected plunge of more than 30 percent -- to 12.1 million subscribers in the second half of 2004 compared with 17.5 million in the first half. "That is something none of us could have anticipated," Lu said.

On the bright side, UTStarcom's plan to diversify beyond China is working, officials said. Even as the China market weakens, UTStarcom expects business from other regions to grow. UTStarcom expects to come out even between the two trends and is therefore sticking to its prediction of $4 billion in revenues for 2005.

Yesterday's announcement caps a year that rapidly turned sour for UTStarcom. In August, the company discovered "certain significant control deficiencies" that forced it to restate second-quarter earnings. Then in September, founders of a startup were convicted of stealing Huawei Technologies Co. Ltd. trade secrets, a case that one source says was brought about only because UTStarcom acquired some of the startup's assets. (See UTStarcom Accounts for Errors and Three Jailed for Stealing Huawei Secrets.)

UTStarcom officials expect things to stabilize in 2005 as the company completes its "transformation," as Lu put it. Originally a vendor to China exclusively, the company is diversifying through moves like the acquisition of Audiovox Communications Corp.'s (Nasdaq: VOXX) handset division (see UTStar Buys ACC Assets). China represented 90 percent of UTStarcom's sales in the June quarter, but the figure is looking closer to 50 percent for the December quarter, company officials said.

Analysts have pointed out the need for this kind of change. Back in September, analyst Joe Noel of Pacific Growth Equities Inc. noted a "sharp drop in Chinese sales" was expected "in Q3 and Q4 of this year."

Lu added that UTStarcom is trying to cut costs by consolidating to three business units -- wireless, broadband, and customer-premises equipment -- from the previous "seven or eight." The reorganization has led to some layoffs, including some sales personnel, but officials said the numbers won't be disclosed until UTStarcom's Feb. 8 earnings announcement.

Due to its acquisitions in 2004, UTStarcom expects to incur more non-cash charges in 2005 than in 2004, to the tune of $30 million per year compared with the current level of $15 million, officials said.

— Craig Matsumoto, Senior Editor, Light Reading

dcarini 12/5/2012 | 3:29:53 AM
re: UTStarcom Stung Again We saw this coming a year ago. China's operators have neither the money nor the ability to roll out 3G and still continue to put so many resources towards PHS.

The equipment market just isn't there anymore, and handsets are following suit now that there aren't so many big promotions.

Realistically, the only reason to buy PHS now is if they can interconnect SMS with GSM and CDMA networks. This was supposed to be finished in March 2004 and in January 2005 we're still hearing "it's just around the corner". UTSI better hope its recent purchases pan out, because PHS is over.
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