UTStarcom's "Growth Makes Us All Very Nervous"

CEO Hong Lu explains why the exponential expansion of the past six years is both a blessing -- and a potential curse

Telecommunications equipment manufacturer UTStarcom (UTSI ), belongs to a small minority -- a profitable tech company whose stock is up for the year. The company's stock began the year in the $15 range and now trades near $25. On Apr. 26, the company reported first-quarter earnings of $9.36 million, or 10 cents per share, as net sales increased 103% to $119.2 million.

The Alameda (Calif.)-based telecommunications company manufactures an integrated suite of wireless, wireline, and broadband access equipment for network providers in Asia. The company's systems are based on key international communications standards, which enabled service providers to easily integrate UTStarcom's systems into existing networks.

Until recently, some 99% of UTStarcom's revenues came from mainland China. The company is hoping to branch out and gain 10% of total revenues from outside of China. BusinessWeek Online correspondent Alan Hughes caught up with Hong Lu, president and CEO of UTStarcom, to discuss the present and future of his company. Edited excerpts of their telephone conversation follow.

Q: You compete with big names like Lucent, Motorola, Nokia, and others. What strategies are you using?


We try to avoid the highly competitive markets [product-wise]. And historically, our company is always building something where we're the first company in the market.

Q: High inventory levels for tech companies is old news here. Is that happening in China?


It's not as widespread as in the U.S. China is slightly different.... There are certain market segments [that] are slower-moving but others are in high demand. In our market, we see very positive [trends] so we try to keep an eye on the inventory, but it's moving quite well.

Q: How big is the telecom market in China?


The [capital expenditure for expanding their telecom infrastructure] in China is $31 billion this year, vs. last year's $25 billion. So there's healthy growth.

Q: Looking over your balance sheet, I see that just about all your revenues have been to service providers in China. Why?


There's an interesting story behind that. I was in China making a phone call from Beijing to Shenzhen, [which] is right next to Hong Kong. Literally, I have to dial 100 times to get one phone call through. It means there was a huge demand but the infrastructure was behind. So that's the reason we decided to get into China.

Also, in China, one province could be equivalent to an entire country. Shandong province has a larger market than the entire country of India. Several other provinces [each] are bigger than Thailand, the Philippines, and Vietnam put together. So we decided it was much more economical for us to focus on China than all over the rest of the geographic area. And they also like to try new technology.

Q: Isn't government regulation very stringent there?


Yes, compared to mature markets such as the U.S.

Q: Has that been a large impediment to growth?


Back in 1995, we had $10 million in revenues. Last year, we had $369 million. And this year, we're growing at a relatively good speed, and we've told the market that we'll be able to do about $550 million this year. So even with those kinds of regulatory issues, we still see the market growing quite well.

Q: Has the spy-plane incident between the U.S .and China hindered business?


Not from our point of view. But it did cause a lot of concern from some of our investors in the early stage.

Q: I understand just about all of your revenues come from contracts in China. Do you plan to diversify?


Until last year, 99% of revenues came from China, but we have a target of 10% of revenues from outside mainland China this year, including India.

Q: What major challenges lie ahead?


There are quite a few things that have me worried. Particularly the speed that we're growing.... Just assuming we do $550 million this year, we've grown 55 times since 1995. That kind of growth makes us all very nervous. If we need to grow at that kind of pace, we need a solid team.

Q: How are the company's cash levels?


[In the first quarter] we had $208 million in cash and short-term equivalents. So the cash position is very solid. We raised, net, about $190 million last year on the IPO, so you see we haven't touched the IPO proceeds.

Q: What are your plans for all that cash?


One is to fund our growth, and one is for strategic purposes. We're growing very rapidly and with a company growing that fast you're going to put strains on your working capital. But we also want to preserve a large amount of cash for strategic purposes, and we want to keep our eyes open for ways to expand our market channels as well as technology and products.

Q: Have you issued guidance on this quarter?


We said the top line should between $128 million and $132 million, and bottom line we said 13 to 14 cents earnings per share.

Edited by Patricia O'Connell

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