When, in April 2003, Alameda, California-based UTStarcom, a supplier of wireless and wireline access and IP switching solutions, reported record revenues and earnings for its first quarter of $330.5 million, such was the response that the company could have been forgiven for thinking that – rather than presenting its 13th consecutive quarter of profitability – it had instead handed the markets a rank and slightly soiled handkerchief.

Quarterly revenues, in fact, were up by 79.9% on the same period in 2002 and represented a sequential rise of 9.8% over the previous quarter. In addition, and most crucially, UTStarcom’s results were 4.6% up on market expectations of $301.1 million, the 14th consecutive quarter that such expectations had been exceeded.

What then, the company must have wondered, did it have to do in order to gain some respect? UTStarcom’s shares, following the announcement, dipped slightly and in fact were well below 2002 levels, despite the company’s undeniably excellent performance during the previous year.

Facing the sceptics

According to an exasperated Tim Donovan, UTStarcom’s director of international marketing, UTStarcom does indeed have many sceptics to deal with – in common, the company believes, with many public companies. And yet, asks Donovan, “Are we actually failing the market with consistent quarter over quarter growth, being cash flow positive, profitable and diversifying our revenue stream. I think not.” And clearly this scepticism rankles with the company. “When I see headlines like ‘UTStarcom Disappoints Markets’ - instead of reacting, I would prefer to educate,” says the spokesperson. “UTStarcom is growing fast and strong,” says Donovan, “This is a very smart company with good management and a great market opportunity.”

UTStarcom, which states, “We have optical products but we are not an optical company”, says that it focuses on ‘real world communications’, by which it refers to the process of making communications accessible to the masses.

The company has a market capitalization of around $2.64 billion and annual revenues of approximately $1.2 billion, a level that, says the company, “We expect to surpass this year.” UTStarcom also claims that it had $605 million in backlogged orders at the end of 2002, a 67% increase on 2001 levels. In addition, stresses Donovan, “We are one of only three profitable companies in our sector, the others being Cisco and Nokia.”

So where then is the respect? “We have a lot of proving to do, certainly,” says Donovan, “There’s a lot of economic distrust out there at the moment.” And yet, the company claims, “Our performance isn’t at issue – it’s the stigma of being a telecoms company in the post dot.com era.” Added to this, the company believes, “People are hesitant about China, particularly now given SARs.”

Part of the reason for this, says Donovan, is China’s reluctance to talk about what is happening internally, a negative quality that Donovan admits could also be applied, to an obviously lesser degree, to UTStarcom itself: “We’re an engineering organization and perhaps we haven’t communicated our message to the masses – that has to change” Donovan says. But, adds, “We build more credibility each time we announce earnings. I feel good about our direction but we know we have a lot of work ahead of us.”

China focus

While UTStarcom has made moves into other regions – including Japan, India, and Vietnam – the company remains heavily dependent on the Chinese market. In addition, there is a clear perception that the company offers only a narrow range of equipment in the form of an interim low-cost solution that, while ideal for China and other similar markets, is considered to have little application in many other - dare one say it? – more advanced countries.

Indicating its particular interest in the country, UTStarcom has 2,500 employees in China and a 1m sq ft manufacturing centre as well as R&D resources. No doubt accounting for this level of investment in the country is the fact that, during 2002, mainland China accounted for more than 80% of UTStarcom's $981.8 million revenues.

And yet, says Iain Stevenson, Research Director at telecoms consultancy Ovum, the company’s structure and focus are more likely to be at the root of its troubles with perception. “Part of the problem is that people don’t understand them or their business model,” says Stevenson. “It’s unusual for a company to have such a combined China/U.S. focus and again that confuses many people.”

Also, adds Stevenson, “We’re used to seeing U.S. and European telecoms vendors talking endlessly about their plans for succeeding in the China market, about ‘going east’, and here we have UTStarcom talking about its plans to go west, to enter new markets outside of China, Vietnam and India.”

While success in China is something of a holy grail for telecoms vendors, such singular success in the Chinese market is possibly a double-edged sword; the company’s numerous contracts in the country are effectively counting for far less than equivalent contracts in more developed markets. According to Stevenson, “In the minds of many people the Asian market is a bit of backwater. People don’t see it as anywhere near as important as the U.S. or Europe and really, a huge contract in China carries less weight than a much smaller contract in the U.S., for example.”

Nonetheless, in a world where the number of US corporations to have made a success of their China operations can be counted on one hand (and that a hand previously involved in a nasty industrial accident), what then accounts for UTStarcom’s somewhat more than successful dealings in the country?

One reason perhaps is that the company seemingly both acts and speaks Chinese. With its many Asian-born executives, UTStarcom is, it seems, effectively able to function as a domestic company. UTStarcom’s CEO, Hong Lu, like the three other founders, is an ethnic Chinese educated in the United States and from this and other elements of the company’s make up stem perceptions within China itself that UTStarcom is committed to the Chinese market and that the company is eager to forge long-term partnerships.

Personal Access System

Essentially, the UTStarcom story, in its abbreviated form at least, is as follows: Returning to China, Hong Lu – a China-born engineer, who studied at Berkeley with the future chairman of Softbank, a future key partner - recognised the seemingly self-evident fact that China is a nation with a huge population and a very low teledensity; most people in the rural areas have no telephones. As a result, Hong saw an opportunity to deliver a low-cost communications solution, and understanding that putting in terrestrial infrastructure would be a problem - developed a PHS based system referred to by the company as Personal Access System (PAS).

This microcell-based technology extends mobility at the local loop and has the twin benefits of being both unreliant on cellular networks and regionally-based. In essence, the company believes PAS, which has in excess of eight million users in more than 300 cities, is successful quite simply because “people who don’t travel don’t need a full cellular system”. And while the technology is over 10 years old, it is far from being obsolete; UTStarcom recently won a new contract in Beijing, reflecting the company’s belief that “The Chinese government selected this technology to be ubiquitous throughout the country.”

According to UTStarcom, consumers pay approximately one third the price of a regular cell phone equivalent for the PAS service and calls are made on the basis of a fixed price. In addition, PAS-based phones enable consumers to - amongst other things - access the Internet and send text messages, all of which adds up to what the company refers to, somewhat hopefully (though perhaps not, given the current poor state of third-generation mobile), as a “3G-like experience.”

Factor in also the company’s claim that the cost of installing a PAS network is approximately half that of building a GSM system and the technology looks even more compelling, particularly given local conditions. In all, UTStarcom estimates that it makes 64-74% of its total revenues from PAS and the associated handsets. Additionally, the company is due to launch dual-mode GSM/PAS phones at the end of the year which, believes UTStarcom, will be successful in markets such as China and Vietnam.

While UTStarcom expects that its non-PAS products will grow in market share terms, it is also of the opinion that, with PAS, it is helped by the fact that it has “zero competition”. And, says the company, “Because our operations are in China we can beat price/performance ratios from anyone.”

Mature markets

So if the markets perceive UTStarcom as a China-focused company, with all the risks and rewards this entails, what is the company doing to broaden its focus? For despite a spate of recent announcements tending to suggest the contrary, in broad terms UTStarcom remains fixated on what it describes as ‘high-growth’ markets, by which it predominantly means developing markets with low teledensity.

However, while, in March 2003, UTStarcom won an unannounced sales deal - said to be valued at more than $100 million - with Reliance Infocomm Ltd of India, the company's single-largest deal, it is increasingly looking at new and more mature markets. And Tim Donovan, who was hired to open operations in territories including Europe, Latin America and Asia Pacific, states, “We’re working with a company called Stellar and looking at giving subscribers another option with a service likely to be called ‘Urban Phone’ or ‘City Phone’.”

In Taiwan, also, another mature market with 100% cellular penetration, the company claims that its service “took off”. Europe, however, is a different story: “We’re looking at Europe but we see a complicated market where the regulatory picture is a mess. Our goal would be to promote our other communications products in this market over PAS.” Indeed, PAS, believes the company, is more likely to take off in Africa and Eastern Europe.

Other technologies

Also indicative of this focus on more mature markets, UTStarcom recently paid $100 million for the assets of 3Com's CommWorks unit, which is seen as offering a complimentary technology. And, in September 2002, UTStarcom established European operations in Frankfurt, Germany to support local carriers in deploying its access solutions, targeting carriers with its IP-DSL solutions - a suite of professional services designed to supports carriers in service and business planning, financial modelling, sales and marketing efforts.

But aside from the issue of the company’s associations with China and the developing world in general, there is perhaps another, more generalized issue of association - or rather the lack of it - faced by the company. For although Donovan, no doubt truthfully, asserts that the company is number two globally in the DSLAM market and number one in softswitches, many potential customers would simply not recognize UTStarcom as being in the top tier of these technologies.

Indeed, according to Ovum’s Iain Stevenson, “In the DSLAM area, for example, the company you would think of first is Alcatel. UTStarcom just doesn’t come to mind when you think about this technology.”