UTStarcom Inc.’s $165.1 million purchase of U.S.-based Audiovox Communications Corp.’s wireless handset business establishes the company as a player in the global CDMA market, fulfilling its founders’ original vision.
The company, which always wanted to develop solutions that could be offered to any company worldwide, has long viewed the United States as “one of the biggest and best” markets, said Chesha Kamieniecki, investor relations manager for UTStarcom.
UTStarcom realized that to join the U.S. market, it would have to either buy an existing handset manufacturer or make a solo entrance. “We saw Audiovox as a good starting point,” said Kamieniecki. In addition, the combination makes the Audiovox business stronger because it adds infrastructure to the handset-only portfolio-an essential duo in today’s industry, according to Kamieniecki. “They each drive the success of the other.”
CDMA offerings will bolster UTStarcom’s business in North and South America, as well as in China, where the company already has a strong presence, said Kamieniecki.
UTStarcom hopes to offer high-end, low-cost handsets that can hit the market without subsidies, which U.S. operators increasingly are trying to avoid. The first three handsets, which will be launched in the first quarter of 2005, will sell for $99, $129 and $169 without subsidies. Even the $99 phone will have a clamshell design and feature a color screen, a step up from most phones sold today in the United States at that price level.
Audiovox has 6-percent market share in the United States. Kamieniecki said UTStarcom has not yet projected market-share targets for the business under the new ownership, but it does expect it to grow. The company also is aiming for gross margins to improve from 5 percent in 2004 to 13 percent in 2005.
Audiovox serves carriers throughout North and South America, including Verizon Wireless, Sprint PCS, U.S. Cellular Corp., AT&T Wireless Services Inc., Virgin Mobile, Bell Mobility and Telus, and UTStarcom is working with those companies to try to maintain those relationships. Most contracts are in place through the end of the year, and operators will decide then whether to renew with UTStarcom.
Whether the new handsets will stick with the Audiovox name or switch to the UTStarcom brand has yet to be decided, but the companies do have a five-year trademark agreement for the name, so no immediate switch is necessary.
Research and development and design and manufacturing will stay in China, where UTStarcom solutions are produced. The company will continue to use Audiovox’ existing supplier relations. Also, UTStarcom is leasing all Audiovox properties, namely a plant in Long Island, N.Y., and plans to keep all locations open.
Altogether, 269 U.S. employees were acquired through the acquisition and will continue as UTStarcom employees. Philip Christopher, Audiovox’ chief executive officer, will become head of UTStarcom’s non-Personal Access System handset sales, service and support division in North and South America.
UTStarcom was founded in Alameda, Calif., in 1995 out of the merger of Unitech Telecom Inc. and Starcom Network Systems Inc. and quickly began offering broadband and wireless products in China.
The company gained fame there for its PAS network technology and handsets. The service combines wireless technology with fixed-line networks to enable cost-effective citywide wireless service.
This year, the company announced it would expand its global wireless strategy to include CDMA, W-CDMA, TD-CDMA and TD-SCDMA. To that end, the company signed a partnership and licensing agreement with IPWireless and signed a CDMA subscriber unit and licensing agreement with Qualcomm Inc. The company also acquired a CDMA intellectual property portfolio from Hyndai Syscomm. Prior to the Audiovox acquisition, the company purchased Telos Technology, provider of packet core networks for CDMA2000.
But the company may be in for a bumpy road. Last week, UTStarcom filed for a five-day extension on filing its 10-Q for the second quarter.
The company said it realized before releasing the results that an equipment sale transaction valued at $1.9 million was incorrectly counted as second-quarter revenue. Although the amount was not counted in the company’s second-quarter results, it audit committee did not complete its review of the transaction by the filing deadline for the Form 10-Q.
Wall Street didn’t react calmly. The company’s stock dropped 15 percent Wednesday to trade at a new 52-week low of $14.91. Research firm Oppenheimer downgraded the stock from neutral to sell. The company’s stock began its tumble in late July when its second-quarter financial results reflected challenges, including increased pricing pressure in China.
For the quarter, net sales grew to $689.6 million, a 70-percent increase from the year-ago quarter. Net income reached $43.2 million, or 32 cents per share, compared with net income of $39.4 million, or 33 cents per share, for the second quarter of 2003.
The company predicts earnings will be between 34 cents and 35 cents per share for the next quarter, $1.65 to $1.70 per share for full-year 2004, and $2.20 per share for 2005.
