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Executives

Nan-Horng Yeh - Chief Executive Officer

Patricia Chou - Chief Financial Officer

Jimmy Liu - Investor Relations Manager

Analysts

Bill Lu - Morgan Stanley

Adele Mao - Susquehanna Financial Group

Jay Srivatsa - Euro Pacific Capital

Actions Semiconductor Co., Ltd. (ACTS) Q1 2009 Earnings Call May 6, 2009 5:30 PM ET

Operator

Good afternoon and thank you for joining us on today’s conference call to discuss Actions Semiconductor’s first quarter 2009 financial results. 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 Jimmy Liu, Investor Relations Manager.

After the market closed in the US today, Actions issued a press release discussing the results for its first quarter ended March 31, 2009. The press release is also filed on Form 6-K with the US 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 events 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 Forms 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.

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

Nan-Horng Yeh

Thank you for joining us on Actions’ first quarter 2009 earnings conference call. We appreciate your continued interest and support of Actions. I will review the business highlight and then Patricia Chou, our Chief Financial Officer, will discuss the first quarter 2009 financial and forward guidance. Then we will open up the call for questions.

Our first quarter results came in slightly above original expectations. A sales of our low end products continue to ramp during the quarters and we experienced an upside relating to the one-time effect of inventory rebuilding in [inaudible] after the Chinese New Year.

In the first quarter of 2009, Actions revenue was $12.2 million and net loss was $1.5 million, or $0.02 per ADS. Gross margin for the first quarter of 2009 was 33.6% and operating margin was negative 24.5%. The decrease in gross margin was related to continued ASP erosion, comparative pricing pressure and our change to a bottom mix were higher volume of low margin product sales, such as Series 13 and our gift and automotive products.

While we are delivering more cost effective products we input in margins. We anticipate the operation pressures were persisted for few quarters before the cost down measures take into the effect.

Our operating results continued to reflect the impact of the global economical crisis, which has decreased the demand in our end market, further fueling of ESD comparative environment. The price and supply fluctuation in this place and other relevant component continued to limit our demand recovery and makes forecasting future operation very difficult.

In the near terms we expect our sales to continue to be impacted by the slowdown of demand in the consumer electronic market. ASP fluctuations further pressures our product pricing and margins of the toxic metals 12% decline in ASP during the first quarters.

We continue to comparatively adjust our price to maintain our market shares in the P&P market. Cost reduction remains the focus for Actions. In addition to the 20% composition reduction for our sales measurement teams we announced in January. We will be reducing the salaries for both of our VP and Department Head as part of another step in our cost reduction plans in the second quarter.

As we continue to implement this phase to plan our cost reduction, we will more interpret in this condition and consider our toppings, personal cost saving measures in the second half of 2009.

Our commitment to providing a complete product portfolio featured in technologically innovative associate will not be compromised as we match this downturn. In support of this effort to continue building and improving our product portfolios. We will continue to invest our R&D work force. We are proceeding with our plan to add 140 talents in 2009. And we hired approximately 30 engineers to our Zhuhai and Shanghai teams during the first quarters.

The global recession has presented us with a good opportunity to record high quality talent at a low comparative service levels. We strongly believe that to continue investment in our R&D, our engineering teams and improvement of our product offering, our key component were competing successfully and to maintain our market leadership.

On an ongoing basis, we evaluate our spending plans in these areas in the context of color market dynamics. Let me now give a brief update on the attraction of our product lines during the quarters.

Our shipment for the gift and automotive market continue to learn well during the fourth quarter. This shipment now represents a larger portion of our shipments and continues to drive the P&P market growth in many of the geographies we served.

We continue to expand and improve our product offering in this segment and are working diligently to further our goals of gaining market shares. We recently announced that we have two new products in this segment that we have commenced volume shipment this month.

The Series 11 product lines we have been featuring in auto, audio media player and personal media products with mono display and featuring a highly integrated design and think of being compatibility with Series 11 product line, which reduce material cost R&D effort for those in custom, and time to market.

We seriously increased power efficiency by over 30% featuring a new USB function and enhance the transfer the speed. Actions’ new Automotive Series featuring a 48-pin cost effective design and is compatible with all of the three storage bases typically in the automotive segment.

In the mainstream segment, we have successfully completed our product transition to the Series 11 chipset from Series 9. We have shipped over 50 million units to the mainstream market since its introduction, and continue to receive positive feedback on this product line.

In the MP4 segment, we saw increasing momentum in the shipment volume of our Series 13 products and recorded over 70% growth in volume sequentially from the fourth quarter. We are encouraged by the overall growth in this market segment during the first quarter and pleased to report that our market share in this segment has increased.

In addition to further diversifying our sales, increasing volume in this market segment at higher ASP should help to offset some of the extreme pricing pressures, we are seeing in the lower segment of our business.

We remain committed to growing our business in this market segment and plan to make new introduction of high end product or D1 solution in the second half of 2009 and for our high density product in 2010. We are optimistic about our operatives to secure the high yields by leveraging our sole customer relationships for this product line going forward.

We have closed the first quarter of 2009 with $252 million in cash, cash equivalent and deposit, trading security in current and non-current marketable security. This is done approximately $4 million from the prior quarter a decrease is mainly attributable to the $5.5 million spent on our share repurchase of during the quarters.

We continue to be committed to using our cash to bolster shareholders values, so we aggressively repurchase of our shares. As of March 31st of 2009, we have invested approximately $21.6 million in our shares repurchase program representing over $8.9 million American Depository Shares, ADS.

In light of the current market conditions, Actions continue to use its cash conservatively and has to sharpen its strategy to focus on market to making investments. They are closely aligned with this core business with a particular emphasize on synergies, value creation and technological innovations.

In the near-term, we expect this challenging operating environment to persist. We are taking a proactive approach to best mention, our business see downturns with a particular emphasize on maintaining our comparativeness and preserving our market shares. So, we can be best at position for return to growth.

We would like to retaliate our commitment to executing the following actions. Controlling the cost through our expense reduction programs, strengthening our R&D teams, strengthening our market conditions; we’ll complete a comparative product portfolios, preserving our balance sheet and sound cash positions, increasing efficiency in product development, we will focus on more cost effective features addressing the faster going statements and executing our shares repurchase program to increase the shareholder’s value.

I continue to be called out to due diligence and commitment exhibited by our management team as it may be in the business solely in these difficult times. We remain focused on our business fundamentals as we walk toward our low employment growth strategies.

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 first quarter 2009 earnings conference call. I will review the first quarter financials in detail and then discuss our forward guidance for our second quarter 2009. After that, we will open the call for Q&A. As a reminder, our financials are reported in accordance with US GAAP.

For the first quarter ended March 31, 2009, we recorded $12.2 million in revenue. This was slightly above our original expectation and driven by a ramp in search of our low range of products during the quarter.

Our gross margin for the first quarter of 2009 was at 33.6% compared to 44.7% for the fourth quarter of 2008. The sequential decrease in gross margin was related to continued ASP erosion, competitive pricing pressure and our trending to a kind of mix shifts to a higher volume of low margin product sales.

The unprecedented challenges in the global economy and the slowing demand in the consumer electronics segment has created a highly competitive environment for us to operate in. In the near term, we continue to expect muted result as a result of this condition. As Nan mentioned, we remain committed to ongoing cost reduction initiatives and to our conservative cash management.

R&D expense was $4.7 million or 38.5% of revenue for the first quarter of 2009, as compared to $5 million or 31.4% of revenue in the fourth quarter of 2008. R&D expenses were down slightly on an absolute dollar basis, but continued to represent a higher portion of our total revenue when compared with historical levels.

As we have previously stated, while we continue to cut discretionary spending, we will keep on investing in R&D for next generation development initiatives. As part of our ongoing cost control efforts, we announced a significant pay cuts for the senior management at the beginning of the year, and we will be conducting constant subsequent expense reduce company wise.

G&A expense was $2.4 million in the first quarter of 2009, or 19.4% of revenue, as compared to $2.7 million, or 17.1% of revenue in the fourth quarter of 2008. Sales and marketing expense was $0.3 million in the first quarter of 2009 or 2.4% of revenue compared with $0.4 million, or 2.8% of revenue in the fourth quarter of 2008.

Operating loss was $3 million for the first quarter of 2009, compared to operating loss of $0.9 million for fourth quarter ‘08. We were focused on further reducing our product costs and managing our operating expenses to the best of our ability in order to effectively navigate through the economic crisis.

Net other expense of $0.9 million was recorded in the first quarter of 2009 mainly related to foreign exchange loss in our position of a new Taiwan dollar, which has evaluated against the US dollar significantly since late 2008. This compared to two other expense of $.04 million for the fourth quarter of ‘08, which also resulted from the foreign exchange loss.

Interest income was at $2.9 million for the first quarter of ‘09, which decreased slightly from $3.1 million in the fourth quarter of ‘08, but continues to be a benefit related to our high cash position and our efficient financial management. Loss before taxes was $1 million for the first quarter of 2009, as compared to a profit of $1.9 million in the fourth quarter of 2008.

Income tax expense was $0.4 million for the first quarter of 2009, which decreased from $1.2 million in the fourth quarter of 2008. The income tax expense for the first quarter of ‘09 was the result of positive taxable income made by subsidiaries within China.

Equity in net loss of an affiliate was $0.2 million in the first quarter of 2009, which related to attribution of an affiliate net loss based on our holding percentage. Net loss on a US GAAP basis for the first quarter of 2009 was $1.5 million, or $0.02 per diluted ADS, compared to net income of $0.5 million, or $0.01 per diluted ADS for the first quarter of ‘08.

During the first quarter of 2009, we recorded a net loss in our financial results continued to be impacted by low levels of demand in the consumer electronics segment. However, even with declining revenues, we were able to minimize cash spend and continue to mend our balance sheet.

As a reminder, we included in the calculation of the net loss for the quarter were non-cash stock-based compensation expense of $1 million and non-cash depreciation and amortization expenses of $1.4 million or in total $0.03 per ADS for the first quarter 2009.

Moving to the balance sheet, cash and cash equivalents together with time deposits, trading securities and marketable securities, current and the non-current totaled $261.8 million as of March 31st 2009 compared to $265.9 million at the end of fourth quarter 2008.

Of this total, $43.8 million was in cash time deposits and a short-term interest bearing investments that are generally issued by large domestic banks in greater China area for terms no more than three months and can be redeemed at any time.

$187.1 million was the marketable securities that were principle guaranteed investment with higher interest rates and then three to twelve month churn, mainly issued by the top five state-owned banks in China.

$7.1 million was in trading securities of new Taiwan dollars (inaudible) were focused on low risk and high liquidated financial product. We also moved $23.7 million into financial product with term of one to two years that generate higher yields while maintaining the same low risk profile as our other investments.

We continue to believe that our solid balance sheet and strong cash position that, Actions apart from its peers and will enhance our ability to weather the current global economic downturn.

Accounts receivable amounted to from a related party and notes receivable was $4.3 million at the end of the first quarter. Rising up $1.3 million from the end of fourth quarter, when we shipped, especially declined during the financial crisis. We expect our accounts and notes receivables to remain at this lower level, reflecting the declining of our shipment volumes as a result of a slowdown in this sector.

Inventories were $6.7 million at the end of the first quarter, down $2 million from the prior quarter. During the first quarter, we experienced a surge in large order which allowed us to reduce our inventory levels during the quarter. We will continue to aggressively manage inventory and have made progress in this effort by converting products version and further collaborating with our manufacturing partners.

As we have previously discussed, we continue to evaluate the merger and acquisition opportunities on an ongoing basis and remain focused on finding the best opportunities for long-term synergy and value creation, as well as the technological innovation.

In the current environment, we will maintain a conservative approach evaluating potential transaction. During the first quarter, we continue to aggressively buyback shares and spend approximately $5.6 million on the share repurchase program.

At the end of first quarter 2009, the company had invested approximately a total of $21.6 million in this program representing over $8.9 million ADS shares. 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 due December 31, 2010. 8 million of the ADS repurchased will be used to offset the diluting effect from our employee stock option program, and the remaining ADS repurchased would be placed in treasury.

Next, I would like to comment on our view looking forward. Given the volatility and the short-term nature of our recent order patterns, projecting future revenues remain challenging. While during the first quarter, we saw an improving sales trend, at this time we do not expect this trend to continue throughout the second quarter. We continue to do our best to mend our business during a downturn and strategically position ourselves for a longer term growth.

As such, we currently expect that second quarter 2009 revenue would be in the range of $9 million to $12 million; gross margin of 30% to 35%, and operating expense slightly higher on a sequential basis.

The second quarter estimates included a share-based compensation expense of approximately $1.0 million to $1.2 million.

Now we will open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Bill Lu - Morgan Stanley.

Bill Lu - Morgan Stanley

Just a couple of questions on the 1Q results, and a couple more on the 2Q guidance, first of all Nan-Horng talked about 1Q benefiting from a one-time inventory replenishment. Anyways you can help us quantify how much that was?

Patricia Chou

Hi Bill, this is Patricia. We are enjoying the [inaudible] showed us right after the Chinese New Year through the end of the first quarter, but we do not expect the same situation happening in the second quarter. So, that’s why we guidance the second quarter range quite similar to the first quarter.

Bill Lu – Morgan Stanley

Okay. So, really the portion that exceeded your guidance is really what you think is the rush orders at the end? Is that fair to say?

Patricia Chou

That’s correct.

Bill Lu – Morgan Stanley

Okay. On your ASP, you talked about 1Q ASP down to about 12%. I guess to be 13%, grew by 70% quarter-on-quarter. Can you help me reconcile that? Does that mean, if I look at ASP for the lower end products, it actually came down a lot more than the 12% then?

Patricia Chou

Yes, it’s pretty much correct. We experienced a severe price pressure in the lower end and also the percentage of our, Series of 13 shipments accounted for the overall, was still relatively low in the first quarter even though were the Series 13 itself, that shipments incurred in the first quarter versus the fourth quarter ‘08 was a big increase.

Bill Lu – Morgan Stanley

Okay, got it. What will be your expectations for ASP declines in the second quarter?

Patricia Chou

Very good question. We have been suffering with a very limited visibility since the fourth quarter ‘08 based on our latest market intelligence up to April. For the second quarter, we might still suffer with around 10-Q, 15% of the ASP erosion pressure.

Bill Lu – Morgan Stanley

Okay. But wouldn’t that imply then that, do you think second quarter units will grow by more than 10% or 15%. And secondly, you were guiding to a flat gross margin. Does that mean you feel you are pretty confident that costs came down by about 10%, 15% in the second quarter?

Patricia Chou

Most likely the volumes. Yes, we expect that the shipment volume in the second quarter would be increased by around 10% versus the first quarter interest of our gross margin. We benefit a portion of our cost beyond our efforts in the second quarter, but not fully yet. We expect to take advantage of the forecast beyond benefit in the second half of this year. However, since we gave out a range of 30% to 35% for gross margin, we believe that we can still stay within this range.

Bill Lu – Morgan Stanley

Okay, great. And then, I guess, a bit of a longer term question. Nan talked about adding 140 heads in 2009. You’ve hired 30 engineers so far in the first quarter. Can you just talk a bit about what are the initiatives for the new hires, what kind of new areas we’re getting into? What are the goals that we’ll get looking at the end of the year for example?

Patricia Chou

Yes, we have been successful in our recruiting project by adding almost 140 people in our R&D centers in Zhuhai and Shanghai. Most of these new hires are contributing into our custom project for our existing product line, and also developing the products in Series 13 with various applications.

As Nan mentioned earlier, we are promoting our new product in Series 3 and also the better version for the low end for automotive applications. So, all of these new products are spread out in our various product lines.

Bill Lu – Morgan Stanley

Okay, great. Thank you. If I can take here one more. What do you think is your current market share now for the MP4 market?

Patricia Chou

MP4 market, we think is about 10%.

Bill Lu – Morgan Stanley

Your market share is about 10%?

Patricia Chou

Right.

Operator

Your next question comes from the line of Adele Mao - Susquehanna Financial Group.

Adele Mao - Susquehanna Financial Group

Thanks. It’s Adele Mao from Susquehanna. For my first question I was wondering we saw some recent MP3, MP4 industry’s statistics indicating unit volume growth in low single-digits for the next couple of years. Wondering, if that’s consistent with your expectation and we also have heard more talks about CMMB mobile handset along with MP3, MP4. I was wondering what’s your thoughts are there, and if any of the R&D resources that you’re adding and are devoted to that effort?

Patricia Chou

Well, great question regarding the overall market. We pretty much agree with the market statistics you just cited. As we mentioned earlier in the conferences in January and March this year, we think that the market for MP3, MP4 will stay flat, or even a little bit lower comparing with prior years.

In terms of the development in the high-end applications such as the Mobile Digital TV or digital photo frame or CMMB, we have teams that are focused on those different applications. They are selling into the different market segments right now.

Adele Mao - Susquehanna Financial Group

Okay. Are you considering acquisition into that area?

Patricia Chou

We already have teams that would focus us in this various applications such as Mobile Digital TV, CMMB, gaming and digital photo frames. If we come closer of better technologies, product ideas, or interesting channels, we are open to these ideas.

Adele Mao - Susquehanna Financial Group

Okay. Looks like you guys put on $3 million in short-term bank loan. I understand the current lending environment is quite favorable in China with very low interest rates like, given your cash balance. Is there a rational behind taking on a small short-term bank loan?

Patricia Chou

There are great catch. I prepared for this question. It’s almost $3 million equivalent RMB loan was mainly to operate a government subsidy in the interest expense. So, for us, it’s cost of pretty money supported by the government. So, that’s why we follow this bond, which is not significant versus our overall cash flow, because it’s free money.

Adele Mao - Susquehanna Financial Group

I see, okay. Lastly, I mean we’re seeing some changes in ownership of your foundry partner HeJian. Does that in any way, impact your business, whether positive or negative?

Patricia Chou

Up to now, we do not expect any changes between our relationship with HeJian and also our business.

Adele Mao - Susquehanna Financial Group

Okay. Just lastly, could you provide the revenue breakdown of the different geographic region?

Patricia Chou

All right, about 20% Spain and China, another 20% South America, 15% in other Asia countries rather than China and another 15% to immediate to market and a 10% in the U.S., another 10% to Europe and the last 10% for the rest of the world.

Operator

(Operator Instructions) Your next question comes from the line of Jay Srivatsa - Euro Pacific Capital.

Jay Srivatsa - Euro Pacific Capital

Hi. Thanks for taking my question. Good quarter in terms of revenues and EPS. I just have a couple of question. Your revenues if I look at year-over-year, it has come down almost 50%. The question is are you seeing any market share loss or is it just a reflection of just the weak macro conditions out there?

Patricia Chou

The revenue as the combination of ASP and the shipment volume as we discussed minutes ago, we do experience a severe a price pressure and rapid ASP erosion in the past quarters. In terms of shipment volume, you are right.

The overall market size is shrinking due to the financial crisis. Also, we may have experienced a little bit more pressure in the shipment volume than the overall market size fluctuations. But again, the market share has been our top priority since day one. So, we’ll definitely try most to maintain or even win over our market shares.

Jay Srivatsa - Euro Pacific Capital

Okay. You mentioned several initiatives you are looking at in terms of growing your business through acquisitions. Two questions there, first is, what’s the timing of it, and secondly have you considered alternative in terms of what you want to do with your cash?

Patricia Chou

We do have a lot of our initiatives in order our cash usage. We would not just put our cash idle forever as we always mentioned that if you have a purchase program as the top priority of our cash management.

In addition to that, merger position would lead to product ideas than the interesting disclosing channel are also our continue objective to increase our long-term synergy and value creation. And also we are expanding our in-house R&D capability, which will use the proportion of our cash, and meanwhile, because of the increase of our headcounts we are building our own headquarters in Zhuhai which we’ll use probably $20 million to $25 million for the construction.

Jay Srivatsa - Euro Pacific Capital

All right. Last question. Given the margins being in the low 30s, as opposed to the 45 that you were enjoying earlier on last year, what is the revenue breakeven run rate you need?

Patricia Chou

In the past quarters, we have experienced this fluctuation in our gross margin. However, even for the first quarter, our cash flow was still positive if we back out the non-cash expenses such as stock-based compensation expense, depreciation and amortization. For cash flow breakeven point, I’d say maybe $10 million to $12 million sales with our limited visibility right now.

Operator

Thank you, management. There are no further questions. You may continue.

Nan-Horng Yeh

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

Operator

Ladies and gentlemen, this concludes the Actions Semiconductor first quarter earnings conference call. If you would like to listen to a replay of today’s conference, please dial 303-590-3030 or 1800-406-7325, access code 4061306. ACT would like to thank you for your participation. You may now disconnect, and have a great day.

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