Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

China Techfaith Wireless Comm. Tech. Ltd (NASDAQ:CNTF)

Q2 2006 Earnings Conference Call

August 14, 2006, 7:00 pm ET

Executives

Defu Dong - Chief Executive Officer

Gilbert Lee - President and Chief Operating Officer

David Pasquale - The Ruth Group

Christopher Patrick Holbert - Chief Financial Officer

Analysts

Adele Mao - Susquehanna Financial Group, LLLP

Tienyu Sieh - Merrill Lynch

Brian White - Jefferies & Company, Inc.

Li Tang - Pacific Crest Securities

Chang Tiu - Foreign Technology Research

Sandeep Sagar - Global[ph]

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the China TechFaith Q2 Earnings Conference Call. My name is Cammie, and it would be my pleasure to be your operator today. [Operator Instructions]. I would now like to turn the call over to Mr. David Pasquale of The Ruth Group. Please proceed sir.

David Pasquale - The Ruth Group

Thank you, operator, and thank you everyone for joining China TechFaith’s Q2 2006 Earnings Call. With us today from the company are Chief Executive Officer, Mr. Defu Dong; President and COO, Mr. Gilbert Lee; and recently appointed CFO, Christopher Holbert.

After management’s prepared comments, we will have time for any questions. If you have not yet received a copy of today’s results release, please call The Ruth Group at 646-536-7003, or you can get a copy of the release off of China TechFaith’s website.

The Company’s attorneys advise that this call will contain forward-looking statements. These statements are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as “will”, “expect”, “anticipate”, “future”, “intends”, “plans”, “believes”, “estimates”, and similar statements.

Among other things, the business outlook and quotations from management on the call, as well as TechFaith’s strategic and operational plans, contain forward-looking statements. TechFaith may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission on Forms 20-F and 6-K etc., and in the annual report to shareholders, in press releases and other written materials, and in oral statements made by its officers, directors, or employees to third parties. Statements that are not historical fact, including statements about TechFaith’s beliefs and expectations are forward-looking statements.

Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risks and uncertainties include, but are not limited to: TechFaith’s limited operating history; mobile handset brand owners discontinuation or reduction of the use of independent design houses; TechFaith’s ability to retain existing or attract additional international customers; TechFaith’s earnings or margin declines; failure of competing against new and existing competitors; and other risks outlined in TechFaith’s filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F.

TechFaith does not undertake any obligation to update any forward-looking statements except as required under applicable law. All information provided at this conference call and on these statements are as of August 14, 2006 and China TechFaith does not undertake any obligation to update on such statements.

I would now like to turn the call over to Mr. Defu Dong. Please go ahead, sir.

Defu Dong - Chief Executive Officer

Thank you, David, and welcome to our Q2 call. Since we issued a press release in July, we’ve kept our commitment that we will allow more time for your questions. We have not released with our quarter. Revenue and net income are well below what our business conveys. Yes, the transition is taking longer, we are adding three or four more quarters on to the tradition and customers are taking longer to approve. We must work through the process as we are. We are confident that we will get approval and resume our growth, as these are process issues and not a technology issue. We have a strong desire under software development team worldwide. Our results are in place and we can run our business without adding heavily on the cost side.

However, please remember three things. First, we are not happy with our Q2 result, but we are confident to beat the process, we must work with the process as we are. Second, the condition process will be three to four quarters longer than we thought. It will be taken -- our results until we emerge and retain our growth momentum. Third, we have the strong desire under software development obligation with over 2,600 people onboard. We have (inaudible) customers. We have the influence in order to build our global market sale. So our near term outlook is not great, our long-term outlook remains positive. We have the results, experience and the customers to win. Q3 (inaudible) but over the long-term we will succeed and we will return to the growth we are capable of. We seek for your support and hope you will continue on with Techfaith.

Let me now turn the call over to Gilbert Lee, on the future layout to the business, Gilbert please go ahead.

Gilbert Lee - President and Chief Operating Officer

Thank you Mr. Dong, and good evening to all friends in US. Mr. Dong in his earlier earnings release outlined the Q2 and Q3 trends; I will let that stand as it is. Before our new CFO, Mr. Christopher reveals the financials; I will like to take a few minutes to answer a few of the most commonly asked questions. Investors are trying to understand how tax rates changed over the short-term from fast growth to slow growth and by the way I told you about it.

First, our business model is not broken we are confident that this is a short-term transition, long-term way we are on track we’ll continue to set. It will simply take us longer to get there than we initially thought. This is common which all-new industries, as the situation change. As the leader, Techfaith is always entering new areas. The progress we have made on the vender approved upfront will be a big advantage for us to navigate future’s adoption cycles. Talking about our business composition, in 2005 our customer base was concentrated much simpler than today. We had big orders from large Japanese customers, which makes our business more predictable. Apart from Japanese customers, we mainly service domestic market, which has the shorter acceptance period ranging from six to nine months for each project. As we are going into international market and again orders from first-tier customers with more advanced technologies request. The preparation phase, including technical information exchange, certification finalization and the first round sampling cash before contract signed tend to be longer than we initially expected.

We also need to carry more paper work, such as risk management, and the human right management, which are also, time consuming just before signing the contracts. Until commercial contract assign we cannot recognize revenue. And as we have more diversify customer base and more cumbersome process to go through in dealing with those first-tier customers it is more difficult to predict. We have also (inaudible) about G&A and R&D levels, the reality is that even though we have gone from only a few hundred to 2,600 professionals, G&A expenses has remains relatively stable but R&D spending is an investment in our feature and it is strategic. Remember those G&A and R&D expense including I just mentioned those technical information those technical information exchange, specifications, finalizations, and sample testing.

As we are targeting the international market with more advanced technologies we must build up the expertise in order to exceed customers’ expectations. The expertise is an asset and will become our competitive advantage. The investment in talent is to ensure that we can also be leaders in the new platform arena. We will not sacrifice our long-term business opportunities just to make the short-term financial data look nice. Moreover, our financial status is very healthy. We are always assessing, evaluating, and monitoring our investments levels, and how they fit into our overall strategy and on the business environment in which we operate. We believe that these investments are strategically important, critical and will give us a competitive edge. We are already seeing the payoff from our investments in the context that we have been able to secure due to confidence that our customers have in us.

Finally, we are (inaudible) about competitive trend, the simple answer is we are not seeing higher competition. Techfaith remained the leader in the international market because we are the only one had more than 23 engineers to do the software and the handset design. Consequently, our business model gives a lot of business pressure to many other parties in value chain.

Let me now turn to call over to our CFO, Chris Holbert, who is onboard on July 1st, for our review of key financial points, Chris?

Christopher Patrick Holbert - Chief Financial Officer

Thank you, Gilbert. This morning I will provide some color on certain Q2 key results. I will also provide financial guidance for the Q3 of 2006. Our total revenue for Q2 was $21.8 million, which represent a decrease of 3%year over year, but a 70% increase sequentially. Two of our customers contributed 35% to our total revenue. As noted in our release, $4 million approximately 18% of Q2 2006 revenue originated from a technology transfer transaction in which TechFaith sold pre-existing technology to a customer with a 100% growth margin. Excluding this non-return transaction revenue would have been $17.9 million with a net loss of $2,00,000.

Design fee revenue for Q2 was $12.7 million; this represents a decrease of 16% year-over-year but a 30% increase sequentially. Two of our customers contributed 45% to our design fee revenue; the year-over-year decrease as a result of the ongoing transition in which we are shifting our focus to international customers. The longer acceptance period characteristic of international market is having an adverse affect on our design fee revenue recognition. Product sales revenue for Q2 was $6.9 million, revenue from smart phone sales contributed $1.9 million and TCBA sales contributed 2,71,000 to our top line in Q2. These are new revenues streams, which did not exist prior to Q2. Wireless module revenue was $2.8 million in Q2, which represents an increase of 334% and 113% year-over-year sequentially respectably. Other components revenue was $2 million in Q2 which represent an increase of 81% and 186% year-over-year and sequentially respectably. The increase in our lower margin product sales revenue and decrease in our higher margin design fee revenue has resulted in a lower growth margin for the quarter of 41% compared to 63% in the year ago period and 44% in the previous quarter. Research and development expenses for Q2 was $3.6 million, this represent a 398% increase year-over-year and a 34% increase sequentially. Moving to our balance sheet, cash and cash equivalent as of June 30th was $148.9 million. During Q2 we experienced a net increase in cash of $1.8 million.

I will now review TechFaith’s financial guidance for Q3 2006. We expect revenue to be flat to slightly lower compared to Q2 of 2006. The combination of the unfavorable revenue mix, longer approval processes and higher investments are expected to result in a net loss. This is primarily due to the extension of the acceptance process, which is characteristic of our international customers. We do not expect any platform transfer sales in Q3 as in Q2, which carried high margins.

Operator, that concludes our formal comments, we are now ready to take all questions.

Question-and-Answer-Session

Operator

Operator instructions.

[Operator Instructions]. And your first question comes from the line of Adele Mao with Susquehanna Financial Group, please proceed.

Adele Mao - Susquehanna Financial Group, LLLP

Hi, thank you. I have a few questions, first of all, on the -- I was wondering gross margin on design revenue if you take out $4 million in one time sales of a particular technology you end up with 15% gross margin, am I getting it right?

Gilbert Lee

The gross margin of handset design is maintained above 50%, not 15%.

Adele Mao - Susquehanna Financial Group, LLLP

Okay, but where does this $4 million go in your revenue mix?

Gilbert Lee

Because the results for Q2 and the forward-looking numbers for Q3 are based on the different product mix, we have higher sales of lower margin components and a lower design revenue, which has a higher margin. So, for example in Q2 we have a less (inaudible) offset by low margin PCBA and wireless module and we have a more R&D investment. That’s the reason you will see the bottom line is much lower than previous quarters.

Adele Mao - Susquehanna Financial Group, LLLP

Okay, in terms of smart phone revenue contribution, you guys had about $1.9 million and it appears a little bit under what I have modeled. Are you still sticking to your $30 million, sort of above 150 case shipment units for 2006?

Gilbert Lee

Yeah, in the general trend as we’ve said, for those ODM model we’re expecting the revenue income higher than before. The job is on the handset design portion, so yes, to answer your question it’s higher than 30 million.

Adele Mao - Susquehanna Financial Group, LLLP

Okay, so we are going to see most of this kick-in in Q4. So, it will be switch back and loaded for the smart phone, right.

Gilbert Lee

Yeah.

Adele Mao - Susquehanna Financial Group, LLLP

Okay, can you also talk about your top international customers in the quarter, if there are any new design wins during the quarter?

Defu Dong

For the international customers, surely now our base is more bigger than before, and I think also including now we have project under development for the top five and also some Europe and Japanese new customer and also US new customer, but the developing cycle trend is longer than before. Before usually, the project usually five to six months finish one project, now go to international market the development cycle usually 10 to 40 months one project. So, actually that’s also the reason why we have to delay our transition.

Adele Mao - Susquehanna Financial Group, LLLP

Okay, great thank you. Can you -- one last question, can you give us the rationale sort of behind your entry into PCBA business since it appears to be a strategic move and how should we expect contribution from this business line going forward? I mean it’s relatively small at this point, but you know I just want to see what your forward-thought for 2007?

Defu Dong

I want to explain what is PCBA. Actually, PCBA is the content of our transition for the design business. Now we still have total 15 customers and 10 is international customers and five is local. On the 14 customers we only design CDMA wireless and the WCDMA product for local customers. All the GSM products will go to PSBA business. Actually PCBA business is also design business, but yes this design business PBA is only still with China customers because China customers today -- players to GSM business. If we do design business for them too difficult, so we do PCBA business, we have standard PCBA for all the customers. All Chinese players they use our PCBA -- so I think PCBA is -- the design -- we turned our service model for local customers. Under -- for our target, we think this can work, but actually have less to undertake another four months to work. So I think October will be okay for China --.

Adele Mao - Susquehanna Financial Group, LLLP

Okay and what’s the gross -- okay I’m sorry.

Gilbert Lee

Yeah, let me add up those things a little bit. Yeah, to the bottom line if there is no change in our overall corporate strategy, our core business is still handset design. In the past four years we are able to provide a full spectrum of technology from 2.5G to 3G and we have experience in dealing with top international clients. So we realize that a large portion of those design solutions can be reused in the product sales. This will leverage the R&D and significantly reduce the cost of our product sales, which is the ODM model. Consequently, getting to careful select niche market in domestic with product sales business will ensure our competitive edge, cover a wider customer base and to maintain our leadership by making full advantage of our core business. I think that is fundamental behind the product sales in the PCBA business.

Adele Mao - Susquehanna Financial Group, LLLP

Okay great, would you just -- what’s the gross margin on PCBA business?

Defu Dong

Gross margin is above 20.

Adele Mao - Susquehanna Financial Group, LLLP

Okay thank you.

Operator

And your next question comes from the line of Tienyu Sieh with Merrill Lynch, please proceed.

Tienyu Sieh - Merrill Lynch

Good morning, a couple of questions. The first is with regard to the extension of the development cycle time for the WCDMA handsets. What has been the customer feedback? Is it something you know, what do they think?

Defu Dong

For the WCDMA business I think very clear is increased, but WCDMA -- have one difference with GSM, WCDMA need operator -- but I think the customer now -- for the WCDMA recruitment has increased.

Tienyu Sieh - Merrill Lynch

So does that mean that the longer than expected cycle time that you are experiencing is not a negative as far as your customer activity or your customers’ expectations or concern?

Gilbert Lee

You are right. Actually we just meet their requirements. We are not behind the schedule according to customer’s base.

Tienyu Sieh - Merrill Lynch

So your delay -- just to be very, very clear, your delay in revenue recognition is not leading to delays in customer launches?

Gilbert Lee

No, no.

Tienyu Sieh - Merrill Lynch

Okay. Secondly, in terms of your headcount, you mentioned that you had 2,300 engineers, what is your hiring rate now and what are you on track to have by the end of this year?

Gilbert Lee

By end of this year we are still -- plans for 3,000 people.

Tienyu Sieh - Merrill Lynch

So, there has been no change in your hiring forecast, right?

Gilbert Lee

Yes, because of workload that we are facing. The contract we have signed a lot in the pipeline so we are still full speed to hire quality people.

Tienyu Sieh - Merrill Lynch

All right. On your smart phone business can you share with us some of your customer feedback on the different models? I believe you had -- last announced you had nine customers, (a) do you have more customers now and (b) you know, of those original nine customers, have they placed follow-on orders, what has been the feedback from them as far as far as the handsets that you have supplied to them so far?

Defu Dong

Actually for the customer base for the smart phone now has increased very fast and actually now we have customer base, for example, for Europe and Middle East and different countries now in Europe, North America, South Asia, Russia, now we have customers. So, I think I think the trend is very clear -- we have more customers. And for the smart phone business, the market recruitment is big but we also -- first one question is operator test, usually the -- market usually don’t need the operator test and in Europe -- because outside China usually is operator -- market. All the products have to pass the operator test.

Tienyu Sieh - Merrill Lynch

So, can you tell us how many customers you have now in terms of shipping or orders for smart phones, and also which markets have you actually -- you know, launched smart phones into the end market.

Defu Dong

Well, roughly we have two customers, and for Europe we have two customers, and South Asia we have three customers, and China we have three customer.

Tienyu Sieh - Merrill Lynch

So you have 11 customers now, is that right?

Defu Dong

Yes.

Tienyu Sieh - Merrill Lynch

Okay, and how many of them have actually put phones into the market?

Defu Dong

Now we have two phones, further we have 18 phones under developing.

Tienyu Sieh - Merrill Lynch

Okay, the two phones that are in the market, which country are they in? Is it china or is it anywhere else?

Defu Dong

China, Russia and Europe.

Tienyu Sieh - Merrill Lynch

Okay, and what is been the feedback on those two models?

Defu Dong

Because you know phones -- and the probably, the main competitor is one Taiwan company, and our customer -- so I think, it’s very clear, our smart -- is not one that probably -- business will be better.

Tienyu Sieh - Merrill Lynch

Apart from (inaudible) is anybody saying anything else about your phones, is the battery life satisfactory, is there been any bugs in the system, can you just give us a little bit more feedback that about how we have done so far?

Gilbert Lee

Yes, this is too early to say, but internally we check all the software. The software is -- we can call it bug free, and as the industrial design and the manufacture quality I think we maintain pretty high. There shouldn’t be any major company around the market. Let’s wait and see.

Tienyu Sieh - Merrill Lynch

And how many customers have -- of those, that have taken these first two models have placed follow on orders?

Defu Dong

These two products all have two customers. One is the local, one is overseas.

Tienyu Sieh - Merrill Lynch

And have they both placed follow on orders for either the same model or for a new model?

Defu Dong

Yes, actually I think our customers, usually our customers, not only they want products. They also have some kinds -- our new developing products.

Tienyu Sieh - Merrill Lynch

Okay, my last question. Can you give us an update on the status of your joint venture with Qualcomm for the software development?

Defu Dong

For the Texas, now we are developing -- now we have called -- which Qualcomm is developing web browser for the Qualcomm new products. Our product will belong to -- under next Q.

Tienyu Sieh - Merrill Lynch

And that’s on schedule.

Defu Dong

That’s on schedule.

Tienyu Sieh - Merrill Lynch

The two on the schedule, no problems, right?

Defu Dong

Yes.

Tienyu Sieh - Merrill Lynch

Right, thank you.

Defu Dong

Thank you.

Operator

And your next question comes form the line of Brian White with Jefferies & Co., please proceed.

Brian White - Jefferies

Yeah, could you talk about may be what you are looking for in terms of smart phone revenue in the Q3 and what are gross margins looking like in your smart phone business?

Defu Dong

Its about 30% gross margin is smart phones --

Brian White - Jefferies

And how should we look at the revenue in the September --

Defu Dong

For revenue Q3 -- for the Q3 our target is $5 million.

Brian White - Jefferies

$5 million and then the December quarter it will go to about what?

Defu Dong

Yes.

Brian White - Jefferies

Mr. Dong, where do you think it will go in the December quarter for smart phone. Smart phone revenue in December quarter will be what?

Defu Dong

About $18 million.

Brian White - Jefferies

And when we look at 3G, and we think about what you had originally anticipated in the September quarter from 3G, what percent of your design did you think was going to come from 3G say, 4 months ago?

Gilbert Lee

Brian, can you repeat your question again?

Brian White - Jefferies

Yeah, I’m just curious if we look back 4 months ago you gave guidance for the year, what were you kind of thinking the September quarter would -- what percent of your September quarter revenue in the design business would be 3G. If we look back 4 months, was that half of your design you thought in the September quarter would be 3G or 75%, what did you think if you look back 4 months ago?

Gilbert Lee

During the 4 months ago we are marketing about 30% of our design revenue as W-CDMA. Presently we, because of the delay we can recognize the revenue is about 25% of our design revenue in Q3.

Brian White - Jefferies

And that 30% is what you thought the September quarter would look like or was at that time, that’s what you generated from W-CDMA?

Gilbert Lee

That is the ballpark we predict in Q3 and Q4.

Brian White - Jefferies

Okay, and just finally, when we bring on all these new employees it looks like you are going to 3,000 engineers from 2300, what type of spikes should we think about in terms of R&D in the September quarter and then in the December quarter, in terms of R&D expense, how much increase are we looking at?

Gilbert Lee

The R&D figure I think it will quite a stable in next two quarters, the reason being once we can risk, we have signed a contract we recognize the revenue although the working progress can be re-categorized into -- good, so we would not be a surge in R&D expense.

Brian White - Jefferies

Okay and even the people that are working on these 3G projects, that are being delayed you can use some of these people, they don’t have the skills that you need to support other new programs that you are ramping or they are actually going to be busy on these projects that are just taking longer? The revenues are going to be a lot lower than you thought, yet you are still going to add another 700 engineers in the next quarter or two

Gilbert Lee

Now we are adding about 400 more towards the end of this year and as we say we deed those engineers for different projects. We allocate our engineer resource to deepen the platform to the 3G and to the W-CDMA and EVDO, there is two separate teams, but also for the many dual mode phone, we are developing, we are using those engineers to develop new products.

Brian White - Jefferies

Okay, and just to be clear Gilbert, someone has said that there is 2,600 employees today but there is 2,300 engineers and then it was said that there is going to be 3,000 engineers by the end of the year, so is it 2,600 engineers or 2,300 engineers?

Gilbert Lee

Sorry, our total headcount is the 3,000, I stated wrongly. Total headcount is 3,000 compared to the 2,600.

Brian White - Jefferies

Okay.

Gilbert Lee

Engineer is 2,300 as of the date, we are targeting 90% as always, so it should be 2700.

Brian White - Jefferies

Okay, just finally, do you think you can turn a profit in the December quarter?

Gilbert Lee

Yes.

Brian White - Jefferies

Okay, thank you.

Operator

And your next question comes from the line of Li Tang with Pacific Crest Securities, please proceed.

Li Tang - Pacific Crest Securities

One of TechFaith’s value proposition is to finish a product or design more quickly and cheaper then OEM’s, what's you expected delay for some of the 3G products, taking 3 to 4 quarters longer, has your value proposition weakening in 3G or for international customers or, how should we think about it?

Gilbert Lee

No, we are not weakening our position, our quality and the engineer capability, do feel strong. Just because those first tier customers, they have a higher standard and has lengthier process to go through the quality gate, though we are taking longer time to complete the project. I think as I said in earlier statements of all those upfront vendor approval type things process, we are going to just enhance our capability, create more threshold to our competitors to get into this kind of business.

Li Tang - Pacific Crest Securities

So just to be clear, so you are saying this is just a one time effort, so once you overcome this hurdle for the follow on project, you should not see any additional 3 to 4 quarter kind of lengthier qualification process for each of the design?

Gilbert Lee

No, this is not a technical issues, this is a processing issue that we are adjusting our projects cycle time. We say is always will add three to four months, though all those are processing, checking point.

Li Tang - Pacific Crest Securities

Okay, and you know, in 2005, TechFaith has probably delivered some around 85 projects and how many projects you know, when you talk about 2006 the project being delayed, how many are roughly are being delayed and to be recognized as revenue in 2006?

Gilbert Lee

We delivered the first two quarters, we have already delivered about over 25 to 30 different models and over the years, we are close to 60 models. Originally we have plan for like 70 models, now we cut down about 60 models. In the meantime we add up all the smart phone as Mr. Dong just mentioned were delivered, we will complete 18 different smart phone models in this year. So totally we are, again speaking about 18 models in this year.

Defu Dong

And I want to -- and because 2005, our model including Chinese customers, 2006 we turned Chinese service model, and the many-many products from PCBA and for the PCBA size without developing PCBA, our customer -- let have some small models, actually now have 40 to 50 new models on PCBA side and but, next model don’t belong to TechFaith, it belong to our customer. We -- design PCBA. So, I think the model bigger turned to -- run rate -- model and the Chinese customer, we service PCBA not to touch --

Li Tang - Pacific Crest Securities

Okay, just one last question and could you, may be give a little more detailed guidance on Q3 in terms of your gross margin expectation and your total operating expenses forecast?

Gilbert Lee

Yeah. Okay and the margin of the business, like a small phone enhanced design and the components will remain as we said before. Those numbers are not changing. The only thing changing is the mix of the product combination portfolio. Our current assessment shows that the net income was declining in Q3 and we will become a profitable in Q4, but at to this time, we are in learning curve, we are not giving out any forward looking numbers.

Li Tang - Pacific Crest Securities

But just may be in terms of the operating expenses what's your expectation for operating expenses in Q3?

Gilbert Lee

I would say remain the same level.

Li Tang - Pacific Crest Securities

Compared to Q2?

Gilbert Lee

Compared with the Q2.

Li Tang - Pacific Crest Securities

Okay, thank you very much.

Operator

And your next question comes from the line of Sandeep Sagar[ph] with Global, please proceed. Mr. Sagar, please proceed. And your next question comes from the line of Chang Tiu with Foreign Technology Research, please proceed.

Chang Tiu - Foreign Technology Research

Yeah, good morning Defu --

Defu Dong

Hello, how are you?

Chang Tiu - Foreign Technology Research

Yeah, I have a few questions, may be first clarification on the design delay. If the delay is for say full quarter, which means you are -- to recognize revenue in Q2 of the 2007.

Gilbert Lee

Roughly it’s around Q1 and Q2 in 07.

Chang Tiu - Foreign Technology Research

Okay and also for the delay on -- is that just one model delay or just or two model or multiple models?

Gilbert Lee

A multiple models from multiple customers, as we just defined, a first tier customer, its not one customer. We’re facing several people and actually we are working with three out of the top five market leader now.

Chang Tiu - Foreign Technology Research

So, basically the three out of the total five they are all in evaluation process?

Defu Dong

Actually, all types of products are under developing.

Chang Tiu - Foreign Technology Research

Product developing, but like you said before they may plan their launch -- a lot of delay in their launch but only delay that the final contract signing process?

Defu Dong

Yes right they already sign it MOU in a way all the term and condition and MOU is under commercial contract, but anyway it is MOU. So we cannot recognize all those revenue and in a way we respect their opinion, we have to submit the sample we will do more technical information exchange.

Chang Tiu - Foreign Technology Research

Okay, and on the handset design side, how many total customers do you have?

Defu Dong

Totally is 15 customers for the handset design.

Chang Tiu - Foreign Technology Research

For the handset, okay.

Defu Dong

And 10 is international customers and I have mentioned we also have -- developing -- the top five.

Chang Tiu - Foreign Technology Research

Okay, so we can -- if it comes --

Defu Dong

Under this -- that’s the design business. For the PCBA business, we have nearly another 10 customers who do PCBA business. Design business, I think we have two business models, one is design business model it’s usually for international customers, and we also have several Chinese because they do international for example, they have product to -- for example product. It is Chinese product we usually -- they are international product, so we’ve -- design business we have 15 customers total, I have mentioned. Another is PCBA, have many small ones. So all the business model is still in top ten but today you know the market trend -- model for Chinese local. We have another -- about 15 customers.

Chang Tiu - Foreign Technology Research

Okay, that’s great. On the smart phone side also a clarification. You mention that earlier you know you have Q3 revenue expectation of $5 million and then Q4 revenue expectation of $18 million. So if you add it together we will have like $25 million for year 2006. But earlier you also mentioned the year total is like over $30 million, so there is some disconnection here?

Defu Dong

I think it’s also have -- the reason is because smart phone now usually is a Europe market. We also need to operate -- we need to -- you know, the was first time to go to Europe market before we do plan, we did not consider operator test. Operator test usually needs one month or two months for the smart phone -- before we consider it, though I think it also influenced -- have some influence for -- I have mentioned the customer not including smart phone customers, 15 international and 15 local, not including smart phone customers. For smart phone we have another 10 customers. Now, have the MOU contract, we have another 10 customers on the smart phone.

Chang Tiu - Foreign Technology Research

Okay. So which means that the smart phone revenue for year 2006, right now the current expectation should be $25 million?

Defu Dong

Yes.

Chang Tiu - Foreign Technology Research

Okay. For the growth margin side, again for the smart phone you know, in Q4 you are going to have $18 million revenue and you have a 30% margin in Q3, that’s only $5 million revenue. So should we expect higher revenue when you have a higher shipment in Q4?

Defu Dong

Yes.

Chang Tiu - Foreign Technology Research

How, high it can go?

Gilbert Lee

Though we are not -- we will need to keep all those numbers yet because there are so many uncertainties there.

Chang Tiu - Foreign Technology Research

Okay, all right, thanks a lot. That’s clear.

Operator

[Operator instructions]. And your next question comes as a follow-up from the line Tienyu Sieh with Merrill Lynch, please proceed.

Tienyu Sieh - Merrill Lynch

Hi, just one further clarification, can you discuss a little bit about stock repurchase plan and what are your expectations, given your strong cash position at this time, and obviously the share price performance?

Defu Dong

We have not started a repurchase share today because we have to adhere to the regulatory requirements. According to our company bylaws, Techfaith’s stock repurchase program have to be approved by the Annual General Meeting, we call AGM. We are planning to have a AGM in late September but there are formalities we have to settles before we can hold our AGM. The progress is moving along as planned, remember as soon as saw the stock price go to $12 we announced our intention to buy back our shares, because we believe in our business strategy. And therefore I think our stock is undervalued. We still maintain this belief and we’ll start repurchase after we have fulfilled our regulatory requirements.

Tienyu Sieh - Merrill Lynch

Right, thank you very much.

Operator

And your next question comes as a follow-up from the line of Brian White with Jefferies & Co., please proceed.

Brian White - Jefferies & Co.

Yeah, I just wanted to be clear. The technology trends for agreement at 100% gross margin, when you break out you segment the different areas -- you know, like design, royalty, product sales, where would we find that gross profit, where is it buried under?

Gilbert Lee

Okay, that’s in our handset design --.

Brian White - Jefferies & Co.

Okay, so it’s in the handset design. So, if we extracted that, we should be able to extract the revenue from the handset design, we should be able to back into a gross margin with the design benches, is that fair?

Gilbert Lee

I’m sorry Brian, I’m sorry I misspoke on that that’s actually in our PCBA.

Brian White - Jefferies

In the PCBA business.

Gilbert Lee

Yes.

Brian White - Jefferies

Okay, the other thing, if we look at the -- you said three out of the top five customers you are under development, I just want to be clear we did not -- did we generate any revenue from those customers in the June quarter or do we expect any revenue to be generated in the September quarter from any of those three customers?

Gilbert Lee

No, Brian in June quarter we don’t recognize any revenues for them. In September quarter we were small -- small number from them because sample bill they will pay us on -- fees we will see the big revenue recognized in Q4.

Brian White - Jefferies

Okay, in Q4, okay thank you Gilbert.

Gilbert Lee

Yeah.

Operator

And your next question comes from the line of Sandeep Sagar[ph] with Global, please proceed.

Sandeep Sagar - Global[ph]

Hi, good evening, I was just concerned about the stock performance. Can you just give me an estimate like about what time you will be start purchasing the shares back?

Gilbert Lee

We -- as I just say after withholding AGM we’ll work on stock integrity.

Sandeep Sagar - Global[ph]

Well, okay what time do you expect to get that in Q3 or Q4?

Gilbert Lee

Late September we will launch this program.

Sandeep Sagar - Global[ph]

All right, thank you so much.

Operator

At this time there were no more questions in queue, I will now like to turn the call over to Mr. Dong Chairman CEO, for closing remarks, please proceed sir.

Gilbert Lee - President and Chief Operating Officer

Okay, I will speak for Mr. Dong. Thank you everyone and thank you for your long-term support and Mr. Dong and I emphasis that we are still very positive in our business looking forward because we believe our strategy is correct, we will adhere to our core business handset design. If you have any further questions feel free to call us. By the way from the next week I will present in the States, I will hop in Boston, New York City and San Francisco. If I don’t have to wait a long line in the airport for security check, I hope I can hop in more cities.

Defu Dong - Chief Executive Officer

For myself, as the CEO of TechFaith I’m so sorry for taking more time to presentation and influence our event, I’m so sorry. But I have confidence the transition must be successful, it was a good payback for all the investors. Okay, thank you.

Operator

Thank you, for attending today’s conference this concludes the presentation you may now disconnect, good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: China Techfaith Wireless Q2 2006 Earnings Conference Call Transcript (CNTF)
This Transcript
All Transcripts