Actions Semiconductor Co., Ltd. Q4 2008 Earnings Call Transcript

Jan.21.09 | About: Actions Semiconductor (ACTS)

Actions Semiconductor Co., Ltd. (NASDAQ:ACTS)

Q4 2008 Earnings Call Transcript

January 21, 2009 5:30 pm ET

Executives

Pia Kristiansen – IR, The Blueshirt Group

Nan-Horng Yeh – CEO

Patricia Chou – CFO

Chung Hsu – Director of Business Development

Analysts

Bill Lu – Morgan Stanley

Rick Baron [ph] – Assertive Capital [ph]

Jay Srivastav [ph] – Euro Pacific Capital

Operator

Good day, ladies and gentlemen, and welcome to the Actions Semiconductor

Fourth Quarter Fiscal Year 2008 Earnings Conference Call. My name is Krista, and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this call. (Operator instructions) I will now like to turn the call over to Ms. Pia Kristiansen with The Blueshirt Group. Please proceed.

Pia Kristiansen

Good afternoon and welcome to Actions Semiconductor fourth quarter and fiscal 2008 earnings conference call.

This call is being broadcast live over the web and can be accessed on the Investor Relations section of Actions' website www.actions-semi.com for 90 days. On today's call are Nan-Horng Yeh, Chief Executive Officer; Patricia Chou, Chief Financial Officer, and Chung Hsu, Director of Business Development, and Jimmy Liu, Investor Relations Manager.

After the market closed in the U.S. today, Actions issued a press release discussing their results for its fourth quarter fiscal year ended December 31, 2008. The press release was also filed on Form 6-K with the U.S. Securities and Exchange Commission. The press release is accessible online at the company's website as well as the SEC's website, or you can call The Blueshirt Group at 415-217-7722, and we will fax or e-mail you a copy.

We would like to remind you that during the course of this conference call, Actions management team may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are simply estimates and actual facts or results may differ materially. We refer you to the documents that Actions files from time to time with the SEC, specifically the company's most recently filed Form F-1, 20-F and 6-Ks. These documents identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

Before I turn the call over to management, I would like to mention that Patricia Chou is losing her voice, and that Chung Hsu will be reading her prepared comments today. Patricia will be available during the question-and-answer portion of the call.

Now I would like to turn over the call to Actions' Chief Executive Officer, Mr. Nan-Horng Yeh.

Nan-Horng Yeh

Thank you for joining us on Actions fourth quarter and fiscal year 2008 earnings conference call. We appreciate your continued interest and support of actions. First, I will review the business highlights and then Patricia Chou, our Chief Financial Officer will discuss the fourth quarter and fiscal year 2008 financial and forward guidance. Then we will open up the call for questions.

2008 was a fairly challenging year for the global economy and Actions business was not excluded from the reverberations of the worldwide financial and credit crisis. Our fourth quarter and full-year operating results reflect the impact of lower sales related to the decrease in the demand across our end market, fierce competition in the low end segment of our business, ASP erosion and fluctuations in foreign exchange rates.

In the fourth quarter of 2008, Actions’ revenue was $16.1 million and net income was $0.5 million or $0.01 per ADS. Gross margin for the fourth quarter of 2008 was 44.7% and operating margin was negative 5.7%. For the fiscal year ended December 31, 2008, revenue was $95.1 million and net income was $26.1 million or $0.31 per ADS. We recorded gross margin of 50.2% and operating margin of 17.8% for fiscal 2008. As economical conditions continued to worsen, we have limited visibility of our operations in upcoming quarters. In the near term, we expect our sales to remain rigid due to this continuous slowdown of demand in the consumer electronics market. We also expect approximately 20% to 30% price erosion in 2009.

As we continue to price our product at a level that will enable us to remain competitive and maintain our market share in PMP market, we will continue to aggressively manage costs and we expect that our operating margin will remain under significant pressure in the next few quarters. In light of this circumstance, in early January, we implemented a 20% compensation reduction for our senior management team. We have sketched a plan of cost reduction in place and we continue to monitor the situation. If unfavorable conditions continues, we will consider certainly reduction at the managerial level at the end of the fourth quarter, and if appropriate about further costing measures in the second quarter of 2009.

Our commitment please to provide you a complete product portfolio, visually and technology basic SoC will not be a promise as we imagined during this downturn. We believe that this is a key component to our success competitively and to maintain our market leadership. We continue to work on expanding our market share in the current PMP segment. We serve and remain encouraged by the long term opportunities that the installations of application will present. Also we remain committed to introducing new applications and exploring additional end markets for our products such as automotive, GPS, MPEG readers, mobile TV and digital photo frames. However, we do not anticipate that this area will represent a meaningful portion of our business in the near term.

Let me now give you a brief update on the traction of our product line during the quarter. Our shipment for the gift and automotive market continues to track well during the fourth quarter. We believe that this gift and automotive segment continued to drive the PMP market growth, and now represents a significant portion of the overall market. Our goal is to continue gaining market share in this segment. In the mainstream segment, we have successfully completed our products introduction to the Series 11 chipset from Series 9. We have shipped over 10 million units to the mainstream market since this introduction. In the high-end segment, while the shipment of our Series 13 products continue to run more slowly than expected, we recently saw feedback from our Series 13 featuring more service functions. We remain committed to growing our business in this market segment and are optimistic about our ability to secure design ins for this product line going forward.

And regarding to cash usage, we ended the year of 2008 with $266 million in cash, time deposits, restricted cash, marketable securities and trading securities. We will continue to manage our cash prudently. In light of the current market conditions, Actions has sharpened its focus on making smaller investments. We are closely aligned with its core business. We have particular focus on synergies, value creation and technological innovation. As announced earlier, we withdrew the investment in Taiwan based thin film technology company, and we made two new strategical investments in the fourth quarter. In this environment, we have continued to aggressively repurchase shares, and we significantly increased our participation in our buyback program in the second half of 2008. In addition to approving a recent extension of the programs through 2009, the Board of Directors also just approved an add on to our current program which Patricia will discuss in detail.

In addition, we view the economical downturn as a good opportunity for us to recruit high quality talent at more competitive salary levels. We plan to add approximately 140 talents in 2009 to strengthen our R&D workforce in Zhu Hai and Shanghai. We believe it is more critical to focus on investing in and upgrading our engineering team in this environment in order to be better prepared to capture the next wave of success. We will continue to evaluate our hiring trends throughout the year, taking into consideration business trends.

As we enter 2009, uncertainties still remain worldwide. Despite the challenging environment, we believe that Actions is well positioned to managing the downturn. As we continue to conduct regular comprehensive review of our current business model in the interest of maximizing cost savings and longevities of our operations, we believe Actions is uniquely positioned relative to its peers. I would like to highlight some of the metrics that sets Action apart. Number one, Actions is the largest PMP provider worldwide. While competitive prices have forced Actions to forego some of its profitability, we're proud of our ability to maintain market leadership in the highly competitive consumer electronics market segment; number two, Actions has a strong cash position and balance sheet; number three, our conservative business model with stringent attention to cost control; number four, our competitive IP and best in class engineering talent in China; and number five, as the core SoC provider, we are positioned at the center of China's consumer electronics industry with strong upstream and downstream partnerships and great market potential. Looking forward, we believe that the difficult environment will persist and that visibility will remain low in the near term. I am confident of the ongoing commitment of our management team and in the ability to continue executing our long-term strategies during these challenging times.

Lastly, before I turn the call over to Patricia, I would like to address the frequent questions we get regarding our strong cash position and future plan for its utilization, especially in the current environment. While we value opportunity to maximize shareholder value on a regular basis, we've strongly believe that maintaining a high cash position best serves the shareholders. Our strong cash position maximizes our operating flexibility in the long term. We believe that our cash position is a clear differentiator for Actions, particularly in this challenging economic environment. I would like to highlight our direction of cash usage which I believe is consistent with shareholders long-term interests. Number one, continue investing in R&D; number two, share repurchase; number three, mergers and acquisitions.

And at this time, I would like to turn the call over to Patricia Chou, our CFO, to discuss the details of our financial results.

Patricia Chou

Thanks, Nan, and thank you for joining us today on our fourth quarter and full-year 2008 earnings conference call. After reviewing the fourth quarter financials in detail, I will discuss our forward guidance for Q1 2009 and then we will open the call for Q&A. As a reminder, all financials are reported in accordance with the US GAAP.

For the fourth quarter ended December 30, 2008, we reported $15.1 million in revenue. This is in line with our revised expectations and reflect the decreased demand across our end market as a result of the current economic crisis. Our gross margin for the fourth quarter of 2008 was 44.7% compared to 50.7% for the third quarter. The sequential decrease in gross margin is in relation to significant ASP erosion which was in part offset by our FX compensation in the fourth quarter. Slowing demand and expectation of more severe ASP erosion will impact margins going forward. In the near term, our sales are muted by the challenging market economic conditions. We will implement stringent cost control and continue our conservative approach to spending.

R&D expense was $5 million or 31.4% of revenue for the fourth quarter of 2008 as compared to $4.8 million or 17.7% of revenue in the third quarter. R&D expense was slightly up on an absolute dollar basis representing a higher portion of our total revenue when compared with historical levels. As we continue to navigate through this downturn, we will conservatively invest in R&D to improve our competitiveness by maintaining a strict focus on the cost control, including a significant pay cut in the senior management effective January 2009 and subsequent review company wide.

G&A expense was $2.7 million in the fourth quarter of 2008 or 17.1% of revenue as compared to $2.9 million or 10.7% of revenue in the third quarter. Sales and marketing expense was $0.4 million in the fourth quarter of 2008 or 2.8% of revenue compared to $0.4 million or 1.5% of revenue in the third quarter. Operating loss was $0.9 million for the fourth quarter of 2008 compared to third quarter operating income of $5.7 million. Net other expense of $0.4 million was recorded in the fourth quarter of 2008, mainly related to foreign exchange loss. This compares to other expense of $0.8 million for the third quarter which also results from the foreign exchange loss. Interest income was $3.1 million for the fourth quarter, which decreased slightly from $3.4 million in the third quarter of 2008, but continued to be a benefit related to our high cash position and our efficient financial management.

Profit before tax was $1.9 million for the fourth quarter of 2008 as compared to $8.4 million in the third quarter. Income tax expense was $1.2 million for the fourth quarter of 2008, which increased from $1 million in the third quarter. This less proportional income tax expense in the fourth quarter was due to a full valuation allowance of deferred tax assets on a subsidiary’s net operating loss. Equity in net loss of a affiliate was $22 million in the fourth quarter of 2008, which relates to an accounting payment change on a cost method to equity method applied to our long-term investments in mobile digital TV and a multimedia IC design house. As previously announced, Actions invested an additional $3 million in this company during the fourth quarter. This additional $3 million investment caused a change in its accounting treatment and has retroactively impacted our 2008 and 2007 financials. The total increase in equity in net loss of the affiliate was $0.6 million in each of years 2008 and 2007.

Net income on US GAAP basis for the fourth quarter of 2008 was $0.5 million or $0.01 per diluted ADS compared to $7.3 million or $0.09 per diluted ADS for the third quarter. Net income was a negative impact during the fourth quarter of 2008 by lower than expected sales and exchange rate fluctuation. As a reminder, cash expense based compensation expense was $29 million or approximately $0.01 per ADS for the fourth quarter.

Moving to the balance sheet, cash and cash equivalents together with time deposits, trading securities and marketable securities totaled $265.9 million at December 30, 2008, compared to $258.3 million at the end of third quarter of 2008. Of this total, $155 million was in cash and short-term interest bearing investments with (inaudible) in Greater China area. That generally has no more than three months term and can be redeemed at any time. The remaining $111.4 million was in marketable securities. That will principal guarantee investments with high interest rate and a three to 12 month term. This marketable security was issued by the top five state held banks in China. We continue to believe that our solid balance sheet and strong cash position sets Actions apart from its peers and will enhance our ability to weather the current global economic downturn.

Account receivables and notes receivables were $4 million at the end of the fourth quarter from $5.21 million from the third quarter. The decrease in accounts and notes receivables mainly reflect the sales to Hitachi [ph] in the late fourth quarter in 2008. Inventory was $8.7 million at the end of the fourth quarter, up slightly from prior quarter. Due to the macroeconomic slowdown, our expected sales revenue declined in December 2008 has impacted our current inventory to overweight. However, we will continue to aggressively manage inventory by (inaudible) and further collaborating with our manufacturer partners.

As mentioned earlier in this call, during the quarter, we withdrew an investment in a Taiwan based company and received a refund proceed from the company. During the fourth quarter, we also entered into an agreement to invest an additional $3 million in a fabless semiconductor company that provides SoC solution to the mobile digital TV and the portable multimedia market, as a follow on to an initial investment of $2.3 million in the company in 2007. Actions also entered into an agreement during the fourth quarter to invest $3 million in a China based web site that hosts video and audio content to further its strategy to address adjacent markets and capitalize on its strength in portable consumer electronics. As we have previously discussed, we continue to evaluate mergers and acquisitions opportunities on an ongoing basis and we remain focused on finding the best opportunity for the long term synergy and value creation as well as technology innovation. In the current environment, we will maintain a conservative approach to evaluate potential transactions.

We spent approximately $3.1 million on a share repurchase program during the fourth quarter of 2008. The acquired shares will be used in connection with the company employee stock-based compensation plan, and other general corporate purposes. In the fourth quarter of 2008, the Board Of Directors authorized a one-year extension of the share repurchase program for up to the initial 8 million units of the American Depositary Shares, ADS, representing $48 million ordinary shares, which will now expire on December 31, 2009. As of the end of the fourth quarter, the company has invested approximately a total of $60 million in the program, representing over 5.1 million ADS up to date with the initial 8 million units complete. Earlier in the first quarter of 2009, the Board Of Directors approved an add-on share repurchase program under which the company may repurchase up to 12 million additional ADS representing 72 million ordinary shares through December 30, 2010

Next I would like to comment on the our view looking forward. Looking ahead, like most companies, we continue to be cautious as the macroeconomic environment and consumer spending worldwide continue to trend downwards. In addition, the first quarter typically has some seasonal weakness as we hit the holiday season and our Chinese New Year. As such, we currently expect the first quarter 2009 revenue will be in the range of $8 million to $11 million; gross margin 30% to 35%; and operating expense relatively lower on an absolute basis than 2008 annual average; a first quarter estimate including share-based compensation expense of approximately $1.1 million to $1.2 million.

And now we will open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Bill Lu with Morgan Stanley. Please proceed sir.

Bill Lu – Morgan Stanley

Yes, hi. Excuse me, good morning. I have got a couple of questions. One is if I was just looking at the overall pricing and margin trend, I think Nan has said that expectation is for pricing to drop by 20% to 30% by 2009, but if I look at your margin guidance in the first quarter alone, it seems like pricing has already dropped that much in 1Q. Is that the right math and can you just talk about that a little more? I mean do you expect the pricing to be more front end loaded when you are looking out and beyond 1Q?

Patricia Chou

Hi, Bill. This is Patricia. I'm sorry, I'm losing my voice. As far the ASPs, your analysis is very much realistic in the current situation, because in the fourth quarter we have adjusted our ASP to keep competitive and secure our market share under the economic crisis. So in the first quarter, we do not expect to continue to further adjust our ASPs too significantly.

Bill Lu – Morgan Stanley

Okay. I guess I'm not real clear because gross margin is going to drop from 45% to about 30% to 35% in 1Q, what is causing that?

Patricia Chou

The fourth quarter ASP is at an average selling price, so the further drop, say in the first quarter against December’s selling price is not significant compared with say the October's selling price which is right before the sudden frozen market in December. That could illustrate the big difference.

Bill Lu – Morgan Stanley

Okay, got it. That is very clear. So I guess the question is, you know, given how much it dropped recently, can you give me some confidence that that 20% to 30% drop for the full-year is realistic?

Patricia Chou

During 2008, in fact it’s before the financial crisis, we had kept our ASPs quite stable. For example, in the first three quarters, each quarter, we tried to keep the ASPs within 3% to 5% reduction. Unfortunately in the fourth quarter, to be competitive in the financial crisis and also leading to the lack of consumer confidence, we had adjusted our price very dramatically. But overall, the ASP erosion for the whole of 2008 was still within the range of 20% to 30%. So for 2009 based on our experience in the past several years, we believe that 20% to 30% reduction should still work. And also when we were in the price range of say $5 to $6 (inaudible) it was relatively easy to drop the price by say 10% in a year or 20% in a year. But now since we're talking about much less than $2 ASP, it would be getting harder and harder to cut off another 20% to 30% a year. So we believe this range will be realistic.

Bill Lu – Morgan Stanley

Okay, great. And just one last question on the margin ASP issues, so if I get to the flip side of the coin, is how much can your cost come down in 2009? You talked about some effort to reduce shrink with your foundry customers, can you just talk about if I was to look at the cost side, how much that might improve in the next 12 months?

Patricia Chou

Okay. In 2008, we had gone through a very successful cost reduction program by migrating our processing technology from 0.18 microns is 2.16 microns. That is why although the ASP dropped significantly during the fourth quarter, our gross margin got a relatively smaller impact. In 2009, when we further migrate our processing technology from 0.16 microns is to 0.15 and then to 0.11 microns, we believe that our continued sharpening in our processing technology on the design side will keep our cost reduction effective and also because of our continued engineering investments in IT designed, we will keep our die size competitive in the market.

Bill Lu – Morgan Stanley

Okay, great. Switching topics for a bit here, you made some investments in other related companies. Look, I appreciate the fact that using a strong balance sheet to strengthen the company longer term, but I think it would be helpful if a bit more details of how these companies may help with your business. You should look at what size for instance are you interested in, are there plans to work more closely with them so that your chips can display their content better in exclusive deals, something like that. Can you just talk about kind of the rational behind these deals? And then related to that, if I look at your balance sheet, there is a line item with trading securities increased by about 10 million, hope you can tell me what that is as well?

Patricia Chou

Okay. For your first question about our investment in the fourth quarter, we made two investments. One is an additional $3 million investment in one of our existing invested firms with a focus on mobile digital TV and portable multimedia SoCs. We have been promoting our PMP driver ICs with the application of the mobile digital TV for a while, and this company can collaborate with our core business in the PMP driver IC at the high-end. So we believe our further investment in this business will help us operate our business in the high-end. And the other one as you mentioned is with content on audio and video side. We believe our leading position in the PMP market is very valuable intangible asset and that we should be able to make it better on the top of direct IC sales. That is the reason why we have high interest in this content service provider and we believe the collaboration of this content and our IC will provide more market attraction to the PMP overall business. In the interest of our trading securities, the increase of almost $10 million in the fourth quarter is mainly the refund of the investment around the Taiwan-based company, the thin film technology.

Bill Lu – Morgan Stanley

Okay, got it, got it. Okay, great. Thank you very much.

Patricia Chou

Thank you.

Operator

Your next question comes from the line of Rick Baron [ph] with Assertive Capital [ph]. Please proceed.

Rick Baron – Assertive Capital

Hello. Hi, Patricia. Hi, Nan. How are you?

Patricia Chou

Fine, thank you.

Nan-Horng Yeh

Good.

Rick Baron – Assertive Capital

Nice to see the cash per share increasing as to now tell me if my numbers are correct, but you are up around $3.28 of cash and marketable securities per share with 81 million shares outstanding?

Patricia Chou

Well, the number as of December 31 of 2008, cash balance per share is very close to $3.20.

Rick Baron – Assertive Capital

Okay. And did I hear you correctly, or maybe it was Nan who said this that now, as of today, you have gone through the 8 million initial share repurchase program, that that program is fulfilled?

Patricia Chou

Yes. Today we have pretty much completed the initial 8 million shares repurchase program.

Rick Baron – Assertive Capital

Okay. And as of December 31, you are at about 5.1 million shares. Is that also correct, I saw that you spent 16. So over the past couple of weeks, the shares repurchased have been almost 3 million shares?

Patricia Chou

Yes. Less than 3 million.

Rick Baron – Assertive Capital

That's very good news because these prices are extremely attractive and therefore as of today your cash per share might even be higher than is reported as of December 31, since the share count has decreased?

Patricia Chou

Yes.

Rick Baron – Assertive Capital

Okay. It is nice to hear that you have accelerated the stock repurchase. Is that something – I know that you have gone ahead and instructed your brokers to go ahead and purchase during black out period, is that also to be expected in the first quarter?

Patricia Chou

I'm sorry, Rick. Just back out a little bit, for your comments on cash the value per share, I think our first 8 million stock – sorry, 8 million share buyback program is mainly to facilitate our stock option plan. So at this moment, yes, the number of outstanding shares has decreased by the amount of share buyback volume. However, when we vest those options to our employees for our stock option plan, the outstanding at this year end will increase later on.

Rick Baron – Assertive Capital

Understood. But that stock option plan and all those options were granted a while ago has been exercised, priced higher than today's price of around $3.40, isn’t that correct?

Patricia Chou

Yes, that's correct.

Rick Baron – Assertive Capital

Okay. So the shares that are contributed to the employee stock option plan, I understand the share count isn’t reduced, but those shares aren’t exercised until the stock price is above $3.40 or somewhere thereabouts?

Patricia Chou

You understand, it makes sense.

Rick Baron – Assertive Capital

I commend you for the increased stock repurchase program and for the shares that have been repurchase of late, these are extremely attractive prices and that is good news.

Patricia Chou

Thank you.

Rick Baron – Assertive Capital

I have a few questions that relate to the previous callers questions and that is with respect to these investments that are being made, the $3 million add-on investment in the mobile digital TV opportunity, that brought 5% to the company, so that implies about a $60 million valuation. Is that fair to say?

Patricia Chou

The holding percentage structure, ours being held in add-on investment is much higher than that. That is the reason why we changed our accounting treatment of this investment from cost method to equity method.

Rick Baron – Assertive Capital

Okay. Did I read the thing currently though it sounded like the ownership went from 14.4% to 19.8%?

Patricia Chou

That is correct.

Rick Baron – Assertive Capital

Those $3 million increased the ownership by 5% implying – which to me would imply $60 million valuation of that company?

Patricia Chou

We didn't really evaluate this thing this way. So that – let me double check with our investment team members so I can clarify this issue with you, but basically the $3 million additional investment held was to gain more holding in this company.

Rick Baron – Assertive Capital

Okay. Maybe I'm oversimplifying, perhaps that investment was in a common stock investment, but if you were buying common stock for the $3 million, that would be the implied valuation of the common stock?

Nan-Horng Yeh

Yes, you're correct.

Rick Baron – Assertive Capital

Okay. And I'm guess I'm curious, Nan, about the valuation methodology that you used to help arrive at a $60 million valuation for what sounds to me like a development stage business?

Patricia Chou

Yes, that is an early stage company.

Rick Baron – Assertive Capital

Right. And as we think about, we as shareholders who have a claim on our proportionate share of the cash, as we think about how our cash is being spent, it is helpful to understand how some of these early stage, almost venture capital investments are being analyzed and how they are being made and why they are being made, whether there is a return that justifies a $60 million valuation on an early stage business?

Patricia Chou

We have high interest and expectations in this mobile digital TV market. Based on this, we treat this as a very attractive investment in this company. And the mobile digital TV function is in high demand, for example, say the potential market size could be more than one billion units.

Rick Baron – Assertive Capital

Okay. I understand and I understand that it's been a focus for the companies for some time now, and I also know that you have invested in the company's own R&D to advance those efforts. And I am just trying to understand the thought process to investing $3 million outside of the company into a separate business, how that $3 million or 5% stake of that other business was going to be worth significantly more anytime soon, because the $60 million valuation just seems like – there must be some very high expectations for this business that you have just invested in?

Nan-Horng Yeh

Rick, I think the best investment is the investment into the R&D. However, we also like the second best investment is investment in buying back assets or shares. However, the company also still needs going forward. We are looking – we are really looking at the long-term view. So this allows a potential and a faster design house, or faster design teams that we really invest. And since I'm looking at a cash base of $266 million, with owner’s equity around $219 million, seriously the company should do some investment, why not invest timely for investment, not to keep all the cash, as you mentioned, several time before.

Rick Baron – Assertive Capital

I agree. It sounds to me like it is a good time to make an investment in businesses that are undervalued, and certainly your own stock is extremely undervalued. It’s just having come from a little venture capital background myself, I was trying to understand the thought process of this investment of a minority stake in a separate business, how that translates into a return on the $3 million investment, because that business would have to be sold for $60 million today to get the $3 million back. Is it going to be worth $120 million in a few years or does it benefit Actions in other ways that makes that $3 million worth $6 million sometime soon, or how do you do get the return on that investment?

Nan-Horng Yeh

The design house really saves you actually the peoples quality, the engineers quality and the IT and potential market size from some of the investments. Although we are very aggressive, we are very shrewd in evaluating other quantitative numbers. We do this and to look to look at the potential of the company. And we look at a design house, to set up a team, it takes three years, and then developing a technology, it takes another two years. So it’s a long term business, not a short term view, not speculative on the stock market.

Chung Hsu

Well, Rick, first of all (inaudible). So the other thing for us, this is more like a fulfilling investment. So we are not only looking at this case only from a pure management perspective, okay? And the other thing, this valuation is not only done by us, it is done by a major VC (inaudible) by a tier 1 VC as well. So, I mean does the valuation actually – the other thing, the valuation you mentioned $60 million, however we would like to (inaudible) mentioned, let me double check with our investment team later and we can get back to you about this issue, okay?

Rick Baron – Assertive Capital

Okay, that would be helpful. So it sounds like there is another investor, a tier 1 venture capital firm that…

Chung Hsu

Yes, the venture capital… actually is the lead investor of this round.

Operator

Your next question comes from the line of Jay Srivastav [ph] with Euro Pacific Capital. Please proceed.

Jay Srivastav – Euro Pacific Capital

Yes, hi. Thanks for taking my question. I wanted to go back to the gross margin topic, if we look past the Q1 quarter where obviously margins are significantly lower than Q4, what do you expect the margin profile to go from here? Do you expect to get back to the mid-40s like you were or do you expect the margin profile to be below that?

Patricia Chou

Hi, Jay. The 40% – can you hear me?

Jay SrivastavEuro Pacific Capital

Yes, I can.

Patricia Chou

Sorry, my voice is horrible. The 40% margin is in fact our long-term goal for 2009. As we mentioned in our first quarter forward-looking guidance, with our limited visibility at this moment, we try to be conservative. That is why we mentioned gross margin of 30% to 35% because as you know very well, the ASP pretty much took in our gross margin in the short period of say a quarter. But in the long run, after we finish or move down to our cost reduction program by migrating processing technology to 0.15 and 0.11 microns later this year, we believe we will eventually get a better gross margin, and on the long run 40% is still our goal for gross margin.

Jay SrivastavEuro Pacific Capital

Okay. Switching to the revenue contribution, can you tell us what portion of your revenues came from the gift and auto segment?

Patricia Chou

With this global and macroeconomic downturn, I believe the current low level of consumer confidence, the other low end and the mainstream segments in the PMP market will still be our bread and butter for the short period of time. So the other low end and the mainstream together we believe will be – account for more than half of our total revenue.

Jay Srivastav – Euro Pacific Capital

More than half, is that what I heard? Better than 50%?

Patricia Chou

That would be more than 50%. The auto and gift automotive will account for say more than 30%.

Jay Srivastav – Euro Pacific Capital

Okay. In the past, you have given EPS guidance but I didn't hear that for Q1. Can you give us a sense for where you expect it to be?

Patricia Chou

Well, based on our limited visibility at this moment, we felt it might be better to give you components for you to come out with the EPS. So that this time we gave out the top line, the gross margin range, and the operating expenses referenced to last year. I believe you can still come out with EPS from these three numbers.

Jay Srivastav – Euro Pacific Capital

Fair enough. Thank you. Good luck.

Patricia Chou

Thank you.

Operator

And at this time, we have no further questions. So I'll turn the call back over to management.

Nan-Horng Yeh

Thanks everybody for joining us on today’s earnings call. We appreciate your interest in and continued support of Actions. We look forward to providing update on our business during next quarter’s call. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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