UTStarcom Is Booming

Access and wireless gear maker UTStarcom Inc. (Nasdaq: UTSI), apparently oblivious to the telecom recession, says the first quarter of 2003 was the best in its 12-year history. The company says its net profits rose 113 percent for the period ended March 31; it has also raised earnings expectations for the remainder of 2003.

UTStarcom reported net income of $37.3 million, or 33 cents a share, compared to $17.5 million, or 15 cents a share for the year-ago quarter. UTStarcom's net sales for the quarter were $330.5 million, compared to $183.7 million for the first quarter of 2002. It expects revenues for the second quarter of 2003 to be in the range of $380 million to $390 million, with earnings per share of either 29 or 30 cents on a GAAP basis.

The Alameda-based equipment maker's success isn't that surprising, considering its roots are about as Californian as The Great Wall. More than 80 percent of UTStarcom's revenues came from mainland China last year, and it's widely known that equipment vendors of all sizes are hustling to get a piece of the explosion in growth of affordable telecom services in Asia (see Will the Asian Migration Be Profitable?).

The company's strength is still in its Personal Access System (PAS) fixed wireless handsets and networking gear. The systems provide cheap, citywide wireless phone and data services, and they allow carriers to see a return on their investment in two years or less, according to Mike Sophie, UTStarcom's chief financial officer.

Granted, PAS systems aren't quite 3G, and they do lack the roaming capabilities that GSM (global system for mobile communications) and CDMA (code-division multiple access) offer. But Sophie says that even after 3G becomes the norm, "there will always be a market that wants basic voice and low-end data (64 kbit/s)" services.

Case in point: The number of subscribers on UTStarcom’s PAS networks in China jumped by 1.8 million to 9.3 million by the end of the first quarter. The company also announced today that it has signed a $17.5 million contract with China Netcom Corp. Ltd. to provide PAS deployments in six suburban counties of Beijing.

The company is making inroads in the Asian DSLAM market as well, where it counts China Telecommunications Corp. (NYSE: CHA) and China Netcom as customers (see UTStarcom Is #2 in DSLAMs). During the quarter, it announced a $100 million extension of its contract with the Softbank company, whose equipment powers Yahoo! BB in Japan, where more than 2 million people have signed up for DSL service (see UTStarcom Scores $100M Deal).

The company raised its full-year 2003 revenue expectations to the range of $1.65 billion to $1.7 billion, up from its earlier guidance of $1.4 billion. It also expects to earn around $1.50 or $1.51 a share for the full year 2003 -- and that includes the 9 cents charge it will take after it completes the purchase of the 3Com Corp. (Nasdaq: COMS) CommWorks unit (see UTStarcom Cops CommWorks). CommWorks will contribute about $25 million in revenues and won't add to UTStarcom's EPS until the fourth quarter of 2003.

Despite its core strength in China, UTStarcom says it is still intent on becoming a bigger player on the international scene, stepping up its competition with Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and other telecom heavyweights. Sophie says that by 2006, the 3,600-person company will draw about half of its revenues from mainland China.

UTStarcom had about $604 million in cash and investments as of March 31, and its market capitalization is now greater than the combined value of Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI), Redback Networks Inc. (Nasdaq: RBAK), Marconi plc (Nasdaq/London: MONI), and Corvis Corp. (Nasdaq: CORV).

— Phil Harvey, Senior Editor, Light Reading

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