UTStarcom(UTSI) - 2018 Q4 - Annual Report

Financial Performance - Net sales for 2018 were $115.9 million, an increase from $98.3 million in 2017, representing a growth of approximately 17%[15] - Gross profit for 2018 was $32.3 million, slightly down from $33.1 million in 2017, indicating a gross margin of about 27.8%[15] - Operating income for 2018 was $4.4 million, a decrease from $6.5 million in 2017, reflecting a decline of approximately 32.9%[15] - Net income attributable to UTStarcom Holdings Corp. for 2018 was $4.8 million, down from $7.0 million in 2017, a decrease of about 31.4%[20] - Cash and cash equivalents as of December 31, 2018, were $57.0 million, a decrease from $79.7 million in 2017[16] - Working capital increased to $90.4 million in 2018 from $78.5 million in 2017, representing an increase of approximately 15.5%[16] - Total assets decreased to $177.4 million in 2018 from $187.0 million in 2017, a decline of about 5.7%[16] Customer Dependence - Dependence on key customers: net sales to Softbank were approximately $31.9 million in 2018, accounting for about 28% of total net sales, while sales to BSNL were approximately $67.0 million, representing about 58% of total net sales[31] Strategic Outlook - The company anticipates that its strategic plan focusing on profitable broadband products will modify its revenue profile and improve margins over time[23] - The company is exploring new market segments and product offerings, which may increase operational complexity and present technological challenges[38] - Future product sales are unpredictable, with operating results likely to fluctuate due to factors such as order timing, customer acceptance, and lengthy sales cycles[39] - The company must continually introduce new products and enhancements to remain competitive in a rapidly changing technological landscape[46] Competition and Market Risks - The company faces intense competition, which may lead to reduced prices, revenues, and market share, impacting financial performance[42] - Average selling prices of products may decrease, affecting revenues and gross profit, necessitating the development of higher-priced products[45] Supply Chain and Operational Risks - Key components are sourced from sole suppliers, and any inability to secure these components could harm competitive position and business operations[50] - Currency fluctuations have historically impacted cash flow, with the Indian Rupee depreciating by approximately 9.0% against the U.S. dollar in 2018, affecting financial results[60] - The company does not currently hedge against foreign currency risks, which may lead to significant financial impacts from currency fluctuations[60] Regulatory and Compliance Risks - Multinational operations present various economic, political, and regulatory risks that could strain resources and affect business performance[52] - The company is subject to complex and evolving laws regarding privacy and data protection, which may impose significant compliance costs and operational burdens[82] - The company may face significant costs related to intellectual property infringement claims, which could adversely affect its financial condition[70] Internal Control and Governance - As of December 31, 2018, the company identified material weaknesses in its internal control over financial reporting, concluding that these controls were not effective[86] - The company may not be able to take advantage of acquisition opportunities or achieve anticipated benefits from completed acquisitions, which could limit growth[66] Market Presence and Operations - The company operates significantly in China, making its financial condition and results subject to economic, political, and legal developments in the region[88] - A significant portion of the company's business is conducted in China and India, where foreign-owned entities can convert RMB or INR into foreign currency for "current account" transactions without pre-approval[62] - The company maintains a direct sales strategy in key markets including Japan, India, and Taiwan, supported by local customer service operations[190] Research and Development - R&D expenses increased to $12.7 million in 2018, up from $9.9 million in 2017, reflecting ongoing investment in product development and new technology[196] - The company is actively involved in R&D for new products in areas like smart retail and merchandising machines, leveraging its expertise in optical communications and broadband access technologies[160] Shareholder and Capital Structure - As of March 31, 2019, Shah Capital and other entities collectively owned approximately 57% of the company's outstanding shares, allowing them significant influence over management decisions[137] - The company may require additional capital in the future, which could lead to dilution of existing shareholders if new equity is issued[140] - The company has incurred additional costs due to being a public entity, impacting net income and liquidity[149] Taxation and Financial Regulations - The company is treated as a U.S. corporation for federal income tax purposes, subjecting it to a 30% withholding tax on dividends paid to Non-U.S. Holders[152] - The Value-Added Tax rate for sales and imported goods was reduced from 16% to 13% effective April 1, 2019, which may impact the company's financial condition[98] Product and Service Offerings - The core business focuses on next-generation broadband telecommunication network products, including packet optical and broadband access solutions[158] - The Packet Optical Products line includes the NetRing Transport Network series, which has seen significant demand, particularly for high bandwidth devices like the 100GE TN765[162] - The company has successfully deployed carrier Wi-Fi solutions since 2013, with significant projects in India, including a large-scale rural public Wi-Fi network[175]