UTStarcom, Inc.

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UTStarcom, Inc.

1275 Harbor Bay Parkway
Alameda, California 94502
U.S.A.
Telephone: (510) 864-8800
Fax: (510) 864-8802
Web site: http://www.utstar.com

Public Company
Incorporated: 1991 as Unitech Telecom, Inc.
Employees: 8,200
Sales: $2.7 billion (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: UTSI
NAIC: 334119 Other Computer Peripheral Equipment Manufacturing; 334290 Other Communication Equipment Manufacturing; 541512 Computer Systems Design Services

UTStarcom, Inc. designs and manufactures telecommunications equipment, selling its gear to telephone companies primarily in China. The company's products and services, which aid in the installation and operation of its gear, are designed to work with existing infrastructure to provide low-cost voice, data, and video services to underserved customers in fast-growing markets. UTStarcom's success in China has encouraged the company to target other vast markets such as India where substantial percentages of the population do not have access to telecommunications services. The company historically has generated approximately 90 percent of its revenues from China, but expansion into Africa, India, Central and Latin America, and the Middle East is expected to reduce its dependence on China. UTStarcom maintains research and design operations in North America, China, India, and Korea.

ORIGINS

Hong Liang Lu found inspiration from a trip abroad, turning his impressions of his ancestral home into a billion-dollar entrepreneurial creation. The UTStarcom founder was born in Taiwan, but spent much of his youth in Japan before moving to the United States, where he earned an undergraduate degree in civil engineering at the Berkeley campus of the University of California. Lu founded a software development firm in Berkeley named Unison World, Inc., starting the company in 1983. In 1986, Unison was acquired by Kyocera International, Inc., the U.S. arm of Japan-based Kyocera Corp., a technical ceramic producer that manufactured a diverse range of components. After the acquisition, Lu became president and chief executive officer of the majority-owned subsidiary created by the deal, Kyocera Unison. Lu was serving in this capacity when he took a trip to China in 1990, a trip that led to the formation of UTStarcom. "It was very eye-opening," Lu said of his trip to China in an October 15, 1999 interview with Inc. magazine. "I never thought China was so lively," he continued. "Everyone seemed happy, very busy, full of energy, walking quickly, riding bicycles, smiling, hurrying to do something."

Lu was in Shenzhen, a city near Hong Kong in the midst of phenomenal growth that saw its population swell from 100,000 to three million in little more than a decade. The city was a bustle of activity, but as Lu discovered, Shenzhen, like the rest of China, lacked the telecommunications infrastructure to support its surging growth. "China had only five or six digits for telephone numbers," Lu recalled in his interview with Inc. "If you wanted to make a call from Beijing to Shenzhen, you'd have to hire a secretary to keep dialing until a call went through." Lu sensed a great business opportunity, an opportunity he would take advantage of once he returned to the United States.

Lu set out to serve the underserved, deciding to sell telecommunications access equipment and services to the most populated country in the world. He recruited ten former Bell Labs engineers who were willing to help him start a business and formed Unitech Telecom, Inc. in 1991, basing the start-up venture in Oakland, California. Lu attempted to gain his first foothold in China by entering Beijing, but his small company was overwhelmed by bureaucratic barriers and overshadowed by much larger competitors such as Lucent Technologies Inc., Siemens AG, and Motorola, Inc. who were battling against one another in Beijing. Unable to stand out from the crowd in the country's capital, Lu turned his focus elsewhere, deciding in 1993 to establish an initial presence in a mid-coastal city named Hangzhou. With a population of one million, Hangzhou was an ideal proving ground for Lu's start-up venture, boasting an educated workforce, 30 universities, and less restrictive bureaucratic barriers. Unitech Telecom completed its first full year of production the following year, in 1994, selling $4 million worth of telecommunications gear primarily to China's two massive telephone companies, China Telecommunications Corp. and China Netcom Corp.

Not long after carving a niche for itself in Hangzhou, Unitech Telecom joined forces with another company, a transaction that gave birth to the UTStarcom name. In 1995, the company merged with Starcom, Inc., a telecommunications software company founded by Ying Wu and a colleague. Wu, raised in China and educated in the United States at the New Jersey Institute of Technology, became vice-chairman of the combined entity, UTStarcom, and chairman and chief executive officer of its UTStarcom (China) subsidiary. Lu served as chairman, chief executive officer, and president of UTStarcom.

Although Lu was able to establish a presence in China, it would be years before his firm began to generate substantial revenues. UTStarcom suffered because of its diminutive size, struggling to secure deals with big Chinese telephone companies and unable to assert itself as a rival to the big telecommunications gear providers, particularly Lucent Technologies. "[Lucent Technologies] could go in with a private jet and see the President of China," Lu recalled in his interview with Inc. "We were nobody," he said. Lu was forced to look for business outside the big cities, where he eked out an existence by soliciting business from rural telecommunications officials. Because venture capitalists had little regard for UTStarcom, capital was hard to come by as well, but Lu benefited from a relationship cultivated during his college years. In Oakland, he had worked at an ice cream parlor with Masayoshi Son, who went on to become chief executive officer of Softbank Corp. During the 1990s, Softbank contributed $166 million of the $220 million raised by Lu, giving his company enough cash to expand at a moderate pace.

COMPANY PERSPECTIVES

UTStarcom has made great strides in its strategy to become a preeminent supplier of leading edge telecommunications products in high growth markets worldwide. While we continue to focus on the tremendous opportunities in Mainland China, we have been able to leverage our success there to promote our products in markets throughout the world.

GROWTH ACCELERATING IN THE LATE 1990S

UTStarcom's stature began to increase during the late 1990s, giving Lu his first sense of leading a company that factored in the telecommunications industry. UTStarcom's fortunes improved after Lu decided to concentrate his efforts on Personal Access System (PAS) technology, which had been introduced in Japan earlier in the 1990s but failed to secure a lasting place in the market. PAS, essentially a scaled-down version of a cellular network, offered telephone service ideally suited to China's population. PAS equipment, which included handsets, towers, and antennas, was roughly half the cost of traditional cellular gear and provided wireless service with limited mobility, enabling a customer to have wireless service within a particular area, a city, for example, but not outside a particular area. Considering that most of China's population rarely strayed far from work or home—UTStarcom figured that 95 percent of people in China never left their geographic area 95 percent of the time—PAS provided a relatively cheap solution to the country's telecommunications inadequacies. UTStarcom marketed the service as "Xiaol-ingtong," or "Little Smart," a name borrowed from a Chinese comic strip character in the 1940s who used futuristic gadgets, selling the service for one cent per minute. By comparison, Global System for Mobile (GSM) cellular service, the leading type of mobile phone service in China, sold for five cents per minute.

The combination of low-end technology and a vast, underserved market enabled UTStarcom to emerge from obscurity. The company's sales began to grow, reaching $105 million in 1998 and increasing to $187 million in 1999. Once his strategy began to deliver results, Lu could turn to Wall Street for the capital needed to expand his business, no longer forced to subsist on the trickle of cash supplied by only a few investors. UTStarcom completed its initial public offering (IPO) of stock in March 2000, ushering in a period of phenomenal growth that made the company the darling of its industry. In 2000, UTStarcom generated $368 million in revenue, nearly double the previous year's total. Lu's decision to build UTStarcom's foundation in China proved increasingly astute as the company entered a new decade. China's telecommunications industry was growing at twice the rate of the overall economy, fueling UTStarcom's growth. In 2001, China passed the United States as the largest market of fixed line subscribers, a year that also saw the country surpass the United States as the largest mobile telephone market. UTStarcom reaped the rewards, reaching nearly $1 billion in revenues in 2001 and, remarkably, doubling the total the following year, when sales reached $1.96 billion.

UTStarcom's financial gains during the first years of the 21st century were astounding. The company went from being a little-known upstart unable to attract anyone's interest to asserting itself as the next telecommunications equipment giant in the space of a few years. Between its IPO and 2003, UTStarcom's revenues increased tenfold, a feat made even more remarkable when the company's results were compared with those of its rivals, the industry behemoths whose sway had once presented formidable obstacles to Lu's small outfit. Lucent, for example, suffered a 78 percent decline in revenues during the period, its sales volume shrinking to $8.5 billion during one of the industry's worst downturns. Lu sailed through the period, marketing a low-cost alternative to telecommunications in a fast-growing market while the industry elite hawked next-generation technology in established markets in Europe and North America. By 2003, he controlled 60 percent of the PAS market for network gear in China, with substantial expansion opportunities being created with each passing year. Major cities, which had once been inaccessible to UTStarcom, were becoming fertile territories for Lu to expand his company's presence. In 2003, for example, Beijing and Chongqing approved the deployment of PAS technology after being convinced that the service did not necessitate obtaining a cellular license.

LOOKING BEYOND CHINA FOR THE FUTURE

By all measures, Lu played the leading role in one of the most successful business stories of his time, but if there was one criticism of his company it was its dependence on China. UTStarcom derived nearly 90 percent of its revenue from China, a reliance that raised the eyebrows of skeptics. Lu had an answer to such pundits, however, proposing to move UTStarcom into other markets where much of the population lacked access to telecommunications services. He forged deals in Vietnam, Panama, and India, where a population of 1.1 billion people relied on 35 million telephones. Before the end of the decade, Lu hoped to generate half of UTStarcom's revenue from outside of China, pursuing geographic diversification that would provide a base for the company to become one of the world's largest equipment providers to the telecommunications industry.

KEY DATES

1991:: UTStarcom's predecessor, Unitech Telecom, Inc., is founded by Hong Liang Lu.
1993:: After failing to penetrate the Beijing market, Lu sets his sights on Hangzhou.
1994:: Unitech Telecom completes its first full year of production, generating $4 million in revenues.
1995:: Unitech Telecom and Starcom, Inc. merge, creating UTStarcom, Inc.
2000:: UTStarcom completes its initial public offering of stock.
2003:: Revenues reach $2 billion, a tenfold increase since the company's initial public offering.
2005:: Lu sets a financial goal of $10 billion in revenues by the end of the decade.

Lu's attempts to provide a more stable foundation for UTStarcom went further than guiding the company into other markets. Between 2002 and 2004, he completed a half-dozen acquisitions that moved UTStarcom into the manufacture and sale of PAS handsets, equipment that enabled high-speed Internet access, and into telecommunications services that competed with PAS. Code division multiple access (CDMA) technology, for instance, ranked as the second most popular cellular technology in China. In April 2004, Lu acquired the CDMA infrastructure business for markets outside Korea belonging to Hyundai Syscomm, Inc., paying roughly $12 million to complete the deal. In November 2004, he obtained additional CDMA assets by acquiring the wireless handset division of Audiovox Communications Corporation, paying $165 million for the property with the hopes of taking the business international, particularly into China and India.

As Lu plotted his course for the second half of the decade, he was expecting to draw alongside his largest rivals, matching their stature with the size and capabilities of UTStarcom. By geographically expanding and broadening the company's selection of products and services, he hoped to reach $10 billion in annual revenues, a volume that would make UTStarcom a formidable telecommunications equipment company. In the years ahead, the company was expected to graft his success in China onto other large, underserved countries and to build a greater presence in established markets, developing a balanced stance to battle against its competitors. With revenues nearing $3 billion in 2004, UTStarcom had the size and the potential to become the driving force of its industry, pursuing a goal thought to be unattainable a decade earlier.

PRINCIPAL SUBSIDIARIES

ACD Labs Inc.; UTStarcom International Products, Inc.; UTStarcom International Services, Inc. (China); UTStarcom (China), Co. Ltd.; Universal Communication Technology (Hangzhou) Company Limited (China); UTStarcom Telecom Co. Ltd. (China); Hangzhou Starcom Telecom Co. Ltd.; (China); UTStarcom (Chongqing) Telecom Co. Ltd. (China); UTStarcom Hong Kong Ltd.; UTStarcom Ltd. (Thailand); UTStarcom Japan KK; UTStarcom, S.A. de C.V. (Mexico); UTStarcom GmbH (Germany); UTStarcom Canada Company; UTStarcom Ireland Limited; Rolling-Streams Systems, Ltd. (Cayman Islands); UTStarcom Singapore PTE.LTD; UTStarcom Taiwan Ltd.; UTStarcom Network Solutions—Redes de Nova Geracao Ltda.; UTStarcom Australia Pty. Ltd.; UTStarcom France S.A.R.L.; UTStarcom Korea Limited; UTStarcom Honduras, S. de R.L.; UTStarcom Chile Soluciones De Redes Limitada; UTStarcom Argentina S.R.L.; Telecom Sales and Marketing K.K. (Japan); UTStarcom India Telecom Pvt.; UTStarcom UK Limited; UTStarcom Personal Communication L.L.C.; UTStarcom CDMA Technologies Korea Limited; Hangzhou Starcom CEC Telecom Company Limited (China).