UTStarcom Holdings Corp. — FY2017 Form 20-F Summary
Reporting period: Year ended December 31, 2017. This is an annual filing, not a standalone Q4 report. Financial statements are prepared under U.S. GAAP; amounts below are U.S. dollars.
Business context
UTStarcom supplies broadband telecommunications network equipment, software and related services, including packet transport and aggregation, broadband access, carrier Wi-Fi, network synchronization and SDN solutions. Sales are concentrated in Asia, particularly Japan and India. Products and services generated 79% and 21% of FY2017 sales, respectively.
Key financial metrics
| Metric | FY2017 | FY2016 | FY2015 |
|---|---|---|---|
| Net sales | $98.3 million | $86.5 million | $117.1 million |
| Gross profit / margin | $33.1 million / 33.7% | $28.4 million / 32.8% | $27.9 million / 23.8% |
| Operating income (loss) | $6.5 million | $1.7 million | $(5.0) million |
| Net income (loss) attributable to UTStarcom | $7.0 million | $0.3 million | $(27.2) million |
| Operating cash flow | $3.8 million | $5.7 million | $(11.6) million |
| Cash and cash equivalents at year-end | $79.7 million | $83.9 million | $77.1 million |
- FY2017 basic and diluted earnings per share were $0.20 and $0.19. Working capital was $78.5 million; total assets were $187.0 million and shareholders’ equity was $91.0 million.
- The company reported no short- or long-term debt. Cash fell $4.2 million during 2017; investing activities used $10.1 million, partly offset by operating cash generation and a $2.1 million favorable exchange-rate effect.
- FY2017 SG&A was $16.8 million and R&D was $9.9 million. Net investment impairment was $1.7 million, versus $5.3 million in 2016 and $16.3 million in 2015.
Material changes versus prior periods
- Sales increased 13.6% in 2017 from 2016. Equipment sales rose to $77.3 million, primarily on increased 100G PTN sales in Japan and third-party sales in India. Services revenue declined to $21.0 million, mainly because 2016 included higher one-time India services revenue.
- Gross margin improved to 33.7% from 32.8%; operating income increased to $6.5 million from $1.7 million. Lower SG&A partly offset higher R&D spending.
- Japan and India generated 50% and 43% of revenue in 2017. SoftBank and affiliates contributed 40% of sales, down from 50% in 2016; India’s BSNL and affiliates contributed 39%, up from 35%.
- Operating cash flow declined to $3.8 million from $5.7 million. Cash used in investing activities was $10.1 million, compared with $7.3 million provided in 2016, including a $6.2 million increase in restricted cash.
Outlook, risks and unusual items
- Management stated that it expected available liquidity to fund working capital and capital expenditure for more than 12 months after the financial statements were issued, and concluded there was no substantial doubt about continued operations. This depends on operating plans, customer collections and expense control; management said additional cost actions may be needed if sales fall short. No specific revenue or earnings guidance was provided.
- Management expected 2018 shipments to increase for India PAN products and MSAN, and anticipated orders and shipments for the TN705E and commercial deployment of its SDN controller. These are forward-looking expectations, not reported results.
- Customer concentration is material: SoftBank and BSNL together represented approximately 79% of 2017 sales. A loss, delay or reduction of business from either could materially affect results and liquidity.
- At year-end, $7.9 million of cash was held by China subsidiaries and subject to local transfer and currency controls. The company also disclosed $20.9 million of letters of credit and $106.3 million of purchase commitments, including cancellable commitments; these are not reported as debt.
- Internal control over financial reporting and disclosure controls were deemed ineffective at December 31, 2017 because the company lacked sufficient personnel with appropriate U.S. GAAP expertise for complex accounting. Management described remediation steps, including hiring, training, peer review and external consulting. The auditor’s report covered the financial statements, not internal-control effectiveness.
- FY2017 included a $1.7 million gain from releasing cumulative currency translation adjustments on liquidation of an entity. The company expected adoption of revenue standard Topic 606 in 2018 to increase opening retained earnings by a cumulative $7.4 million, primarily related to contracts with acceptance provisions or variable consideration.
- Grant Thornton became auditor in 2017 after Crowe Horwath’s dismissal. The filing says Crowe had been examining complex accounting matters, including deferred revenue and costs and India contracts, and had communicated material weaknesses; it was dismissed before issuing an audit report.
Most important facts for investors to verify
- Whether revenue growth and the expected 2018 product deployments materialized, and whether major customer contracts remain in place.
- Cash collection, customer acceptance and recoverability of deferred costs; $10.6 million of finished goods was at customer sites at year-end without revenue recognition.
- Progress in remediating the material weakness and whether subsequent filings report effective controls.
- Actual liquidity available across jurisdictions, restricted cash supporting guarantees, and the timing and nature of purchase commitments.
- The realized financial effects of Topic 606 adoption and any further investment impairments, tax adjustments or other nonrecurring gains.