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

Q2 2009 Earnings Call

August 18, 2009 7:00 pm ET

Executives

David Pasquale - Global IR Partners

Defu Dong - Chief Executive Officer

Yuping Ouyang - Chief Financial Officer

Jay Jie - Senior Vice President

Analysts

Jimmy Tan - Matrix Brand Communications

Mike Tenenberg - Analyst

Mark Hicks - Hicks Capital Management

Michael Yang - Analyst

Patrick Macow - Analyst

Operator

Welcome to the Trina Solar second quarter 2009 conference call. (Operator Instructions) I would now like to turn the call over to Mr. David Pasquale, Global IR Partners.

David Pasquale

Thank you, Operator. Welcome, everyone to China Techfaith's second quarter 2009 results conference call. Joining us from the company today are the company’s Chairman and CEO, Mr. Defu Dong; Chief Financial Officer, Yuping Ouyang; and SVP, Jay Jie.

We will have time for your questions after review of the quarter’s results and the company’s outlook. If you have not yet received a copy of today’s results release, please email Global IR Partners at cntf@globalirpartners.com, or you can get a copy of the release off of the investor relations section of 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 under the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intend, plans, believes, estimates, and similar statements. Among other things, the business outlook and quotations from management today on the call, as well as the company’s strategic and operational plans contain forward-looking statements. Techfaith may also make written or oral forward-looking statements in its period reports to the U.S. Securities and Exchange Commission on Forms 20-F, 6-K, et cetera, and in its annual report to shareholders and press releases, and in other written materials and in oral statements made by the officers, directors, employees to third parties.

Statements that are not historical facts, 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 statements.

Potential risks and uncertainties include but are not limited to Techfaith’s limited operating history, Techfaith’s ability to effectively manage its rapid expansion, loss of Techfaith’s customers and claims against Techfaith due to defects in its designs or other reasons, Techfaith’s limited insurance coverage and its exposure to product liability and product recall, Techfaith’s ability to retain existing or attract additional domestic and international customers, Techfaith’s earnings or margin decline, failure to compete against new and existing competitors, mobile handset brand owners discontinuation or reduction of the use of independent design houses, 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 statement except as required under applicable law. All information provided on today’s conference call is as of today’s date. References to U.S. GAAP are to generally accepted accounting principles as practiced in the United States of America and references to the lawful currency of the United States of America.

Before turning the call over for formal comments, please note that Techfaith’s management will be in the United States for investor meetings in September. If you are interested in a one-on-one meeting, please email your contact information and availability to investor relations using the email cntf@globalirpartners.com.

I would like to now turn the call over to SVP, Jae Jie. Please go ahead, sir.

Jay Jie

Thank you, David and welcome all to our second quarter 2009 financial results conference call. Results came at the high-end of prior guidance in what is not typically a seasonally strong quarter. We continue to gain traction in our core business area as we further improve and build out our long-term strategy by leveraging our ODP business, our branded mobile phone business, and our online and PC gaming business.

Demand in our core ODP cell phone business is being lapped by the China domestic 3G market, as well as the EVDO and HSDPA data card business, and the [inaudible] feature phone sales. And while growth in the 3G rollout has been strong for the past few quarters, based on forecasts we and many others expect an easing in Q3 as consumers and business digest already available inventory.

We expect the domestic China 3G growth will rebound on a long-term basis. However, given the considerable pent-up demand in China and executive market growth worldwide.

Looking at Q2, revenue from the ODP business was $48 million, similar to Q1. Smartphone revenue was $23 million in Q2, or 46% of total revenue. This compares to $27 million in Q1, or 46% of total revenue. We shipped 148,000 smartphone units in Q2 compared to 104,000 units shipped in Q1.

Smartphone ASP was above $156 in Q2, compared with $261 in Q1. The ASP drop in smartphone selling price and revenues was mainly due to a higher mix and division from smartphone [inaudible] shipped into the domestic China market, which have lower ASP than the final product.

In case you did not see, according to the latest data from research firm Gartner, following the smartphone sales grew 27% year over year in the second quarter, surpassing 40 million units and representing the fastest growing segment in the mobile phone developed market.

Volumes are expected to continuing growing, led by exciting new applications ranging from Apple and BlackBerry to other third parties like Techfaith. Importantly, the demand is giving the segment very favorable ASPs compared to other mobile segments. In terms of our feature phone revenue sales, Q2 revenue was $60 million or 32% of total revenue in Q2. This compares to $20 million in Q1, or 41% of total revenue in Q1. We shipped a total of 108,000 features phones in Q2 compared with 160,000 units in Q1. The average feature phone ASP was $148, compare with $126 in the previous quarter. The ASP increase was mainly due to a higher volume of 3G product sales in China.

Data [inaudible] revenues was $9 million in Q2, compared to $600,000 in Q1. The big increase was due to the shipment of more than 200,000 units of EVDO and HSDPA data [inaudible] into the China market.

Revenues from our design business were $1.7 million in Q2, which came from international customers.

Gross profit for the second quarter of 2009 was $9.5 million, a 7.6% increase from $8.8 million in the previous quarter. The gross profit improvement is mainly due to the better performance of data card sales and [the realized design revenue].

Net income for the second quarter of 2009 was $4.5 million, including $2.1 million of change in fair value due to the convertible debt that was issued to IDP received partners in June 2009.

In the second quarter of 2009, gross margin was 19%, up from 18% in the previous quarter. The improvement was due to higher sales of our new smartphones and feature phones, as well as 3G product sales in China. The smartphone gross margin in the second quarter was 25% compared with 24% in the previous quarter. The [inaudible] from gross margin was 15% compared with 14% in the previous quarter.

Moving on to our product value and market, we launched the six new products, including the HSDPA based Windows smartphone, a video feature phone for the China market and a dual-mode WCMA plus a GSM phone. We launched a GSM based phone with PC remote [inaudible] functions [inaudible] and motion [sensibility in-phone]. We also launched an EVDO data card for the China market.

Finally, we launched and shipped an HSDPA data modem for the U.S. market, marking another significant milestone for Techfaith.

In terms of our separate gaming business, we remained active in the quarter, [inaudible] pre-launch promotions for several of our pending [inaudible] launches and are working very hard to finalize our reverse route of games. 15 mobile smartphone online multi-player real-playing games are now available on our Chinese mobile games website, [www.798uu.com]. Separately, MMORPGs games on our website, www.798games.com, have been moved to the first quarter to ensure successful launches. This type of moving launch targets are common in the gaming industry, even common [inaudible] in France, finishing on schedule.

Given our positive outlook for this part of our business, we set up another studio to accelerate our games development. With that said, we are very pleased with our progress in the gaming business with our successful third-party funding a few months ago, we are able to grow [inaudible] entertainment as a standalone business with significant potential future upside.

In summary, we are pleased with our second quarter of 2009 results. The results demonstrated the success of our ODP mobile phone strategy. We will continue to work to improve our profit margin while launching a steady catalog of new products into the market. We also expect further gains in our greenfield gaming business over the coming quarter.

Now let me turn the call over to our CFO, Yuping Ouyang, for further review.

Yuping Ouyang

Thank you, Jay and thank you to all for joining our second quarter of 2009 earnings call. Let me quickly review some key operating points and our outlook before taking Q&A.

First, total revenue for the second quarter was $15 million, a 2.4% increase from the previous quarter. Our product sales were $48 million, which remains the same as the previous quarter. The better performance of the 3G wireless data modem sales and the realized design revenues helped us to overcome the regular seasonality effect.

We saw further improvement in the overall profit margin for the second quarter at 19% compared to 18% in the previous quarter. Smartphone profit margin was 25% and feature phone profit margin was 15% compared with 24% and 14% in the previous quarter. Data modem profit margin was 7% [inaudible] negative margin in the previous quarter.

In terms of operating costs, it reached $7.3 million compared with $5.7 million in the previous quarter. The increase was mainly due to an approximately $1.8 million bad debt write-off. Minus that, we continue to closely control costs in the second quarter.

Importantly, our cash balance increased by $14 million -- $4 million of the $14 million was from free cash flow. The other $10 million was from the initial recognition of the IDG invest.

Let me now [inaudible] on our outlook for the third quarter 2009. Based on current orders and business conditions, which are subject to change, we expect revenues in the third quarter of 2009 to be in the range of $47 million to $52 million. We expect improving performance from our ODP business due to longer term growth of China’s 3G market and the recovery already underway in the global cell phone market. We also expect [inaudible] in our gaming business in the second half of the year of 2009. And as noted in our press release, we currently expect sequential growth in the second half of 2009 based on [inaudible] the domestic China and certain international markets.

Now, I will talk about our intent to acquire a leading smartphone brand company in China. Techfaith has signed a non-binding letter of intent to acquire 100% of QiGi in the stock plus cash transaction, valued at $12.5 million, comprised of $0.5 million in cash and 65,934,066 ordinary shares of Techfaith, please note one public traded ADS is equal to 50 ordinary shares of Techfaith. The number of ordinary shares to be issued to QiGi’s existing shareholders is contingent on QiGi achieving a net income of over $8 million for the fiscal year of 2010 and over $10 million for the full year of 2011, and will be adjusted if the targeted net income is not achieved. QiGi will continue to operate largely independently and it will be a Techfaith for the QiGi company after the position is completed.

QiGi has grown very quickly to a leading smartphone brand in the China market, especially for enterprise and operator customized user. We believe this transaction will add significant value to Techfaith as we promote and launch Techfaith’s smartphone to the Chinese domestic market and [inaudible], especially for enterprise users and operators.

With the 3G network now in China and future [inaudible] for the 4G network, there were big potential in providing this [inaudible] enterprise solution for [inaudible] government [inaudible].

We are pleased to have reached agreement with several of [QiGi] management, including [inaudible] who will continue to serve as President [inaudible] after the acquisition is complete.

Obviously this will have a [inaudible] on [inaudible] on future business plans. We are very optimistic about the future of the [inaudible] as an important Techfaith brand.

Operator, that concludes our formal [remarks]. We are now ready to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Mr. Jimmy Tan with Matrix Brand Communications. Please proceed.

Jimmy Tan - Matrix Brand Communications

Good morning. I do have a couple of questions regarding Techfaith’s new movement. Excuse me, can you hear me?

Jay Jie

Yes.

Jimmy Tan - Matrix Brand Communications

Okay, what’s your D&A costs for the quarter?

Yuping Ouyang

It’s about $1.1 million.

Jimmy Tan - Matrix Brand Communications

What is your CapEx for quarter two?

Yuping Ouyang

It’s around $200,000.

Jimmy Tan - Matrix Brand Communications

And do you expect an increase in D&A and CapEx in the coming quarter?

Yuping Ouyang

We expect an increase in CapEx, yes.

Jimmy Tan - Matrix Brand Communications

Okay. Now let me move on to my questions about Qigi -- why does Techfaith need to buy Qigi rather than continue inside the company to launch your products?

Jay Jie

Right. First, we see a very good future for Qigi. If we are clear, it will benefit Techfaith a lot from the brand company point and Qigi will be Techfaith’s [inaudible] brand name. That will have Techfaith’s [inaudible] launched product to the market with higher profit margins.

Second, Qigi has made the progress on its brand awareness and [inaudible], as well as for smartphone sales for enterprise users and operators, and that brand name matches our company capability and strategy very closely.

And third, we think Qigi is also focusing on providing more mobile content to the customer, [inaudible] strong help and support from Techfaith and the timing was very good for both sides to join formally together, so we want to acquire Qigi, yes.

Jimmy Tan - Matrix Brand Communications

I see. So in your opinion, what [inaudible] can Techfaith and Qigi accomplish working together at the moment?

Jay Jie

We have been working together very closely since Qigi founded and we have already successfully launched a couple of smartphone models into the China market for public security development and operators, so we did pretty --

Jimmy Tan - Matrix Brand Communications

-- variation of Qigi is $12.5 million or 2.73 per ADS. Are you guys issuing in-stock for this deal?

Jay Jie

Yes, ordinary shares are being considered to be issued.

Jimmy Tan - Matrix Brand Communications

Okay, so what if the breakout of your $12.5 million going -- I mean, who is getting paid?

Jay Jie

Right. The existing shareholders and management of Qigi.

Jimmy Tan - Matrix Brand Communications

Okay, do the managers and founders participating in this deal have legally binding employment agreements to continue working for Techfaith after the acquisition?

Jay Jie

Yes, senior management is want to continue their work by legally binding employment agreements.

Jimmy Tan - Matrix Brand Communications

Okay, so what specifically happens if the net income falls below U.S. [inaudible] in 2010 and what if it forced below U.S. $10 million in 2011?

Jay Jie

Yeah, so that’s the conditions -- for the $8 million in 2010, if the current company fails in this condition, there will be retribution on adjustment to the shares issued to the shareholders of the [inaudible]. Details to be released after further [inaudible] to the proposed deal is reached. For the $10 million in 2011, there will also be restrictions and adjustments to shares issued to the shareholders of the [inaudible].

Jimmy Tan - Matrix Brand Communications

[inaudible] Qigi has advanced in [capital] of $500,000, what is the purpose of this fund?

Jay Jie

Sorry, what is your question?

Jimmy Tan - Matrix Brand Communications

What specifically will Qigi use the $500,000 [inaudible] capital for?

Jay Jie

Right, that’s kind of a regulation from the government. We have to provide that [$120,000] cash for the acquisition.

Jimmy Tan - Matrix Brand Communications

Okay, so what if Qigi acquires additional working capital infusions? Will that come from Techfaith or out of the $12 million in the acquisition proceeds?

Jay Jie

Sorry, can you repeat your question again?

Jimmy Tan - Matrix Brand Communications

Okay, what if Qigi [required missed] another working capital infusion -- will that come from Techfaith or out of the U.S. $12 million in acquisition proceeds?

Jay Jie

The working capital from Qigi's operating and --

Yuping Ouyang

Operating will be invested by Techfaith and also used as working capital for Qigi.

Jimmy Tan - Matrix Brand Communications

Okay, so who are Qigi's main customers?

Jay Jie

Qigi, the customers, they have like distribution, mobile phone shop, online stuff, and also they have a lot of [inaudible] user customer, such as like a public and securities [inaudible] and [inaudible], tobacco companies, banks, operators, and also they have some overseas customers as well.

Jimmy Tan - Matrix Brand Communications

How long has Qigi been in business?

Jay Jie

Qigi was set up in August of 2007 and it has grown very quickly to become a leading smartphone brand in the China market, as well as for the enterprise and operator customized users.

Jimmy Tan - Matrix Brand Communications

How many employees does Qigi have? I mean, how many are there in R&D, how many are there in sales and marketing, and how many are there in the management?

Jay Jie

Currently we do have around 45 employees and four management people and four people for sales and marketing and three for marketing and we have 28 people for the sales and then we have 15 for the [inaudible].

Jimmy Tan - Matrix Brand Communications

Okay, so will all the Qigi employees be staying together with Techfaith?

Jay Jie

Yes, they will stay with us.

Jimmy Tan - Matrix Brand Communications

Okay, so what was Qigi revenue operating expenses, gross margin, and net income for 2008 and what is the expected for 2009?

Jay Jie

In 2008, last year, their revenue was $15 million, operating expenses was $1.6 million, and gross margin was 28%. In last year 2008, 2008 net income was $2.6 million.

Operator

The next question comes from the line of Mr. Mike [Tenenberg]. Please proceed.

Mike Tenenberg - Analyst

I have a question for you. I understand that you people came out with a 3-gigabyte phone long before Apple ever came out with theirs, and how is it that Apple ended up getting all the recognition and you people didn’t? Is it because you have poor marketing or what?

Jay Jie

Yes, we have been like this kind of mobile phone very early. We don’t think only because of the poor marketing. I think our strategy in high-end phones [inaudible] customization, so yes, our segment volume is not big but that’s our big sites from the global, from our market set side of -- we don’t think our marketing is very big. We have like a lot of revenue of different customers and [inaudible].

Defu Dong

I will answer this question. So for Techfaith [ODP] business is different other Chinese [inaudible]. We focus on higher-end products. Actually, usually focused on your market -- the good is the margin will be better and the volume is certain -- I think [inaudible] our focus on not big volume for the high margin, so I think for the ODP business we still keep this position for the future of the -- we will continue ODP business and we think the future ODP business is also good, so we still keep up -- of the digital in Techfaith. We will still keep our ODP business as our mobile phone [inaudible] business.

First, for the mobile phone business, we do not want to focus on one business model. I think ODP is one business model. For in the future when 3G and 4G come in, China has the new trends -- for example, under priced solutions. We do two years cooperation with Qigi and we do design for them. We understand the banker, the operator, some big customer all have their special requirements, so I think when 3G comes in, some special content and mobile phone come in together will become very popular for some enterprise solution. So I think it’s one of the future.

So for Techfaith’s side, we want to take out the future for the mobile phone business because the mobile phone is our core business, so we will continue to go to -- go on the ODP business and we will go to a smartphone, especially for operator and enterprise solutions.

Mike Tenenberg - Analyst

I had a lot of tech people look at your products and I have to tell you something -- I’ve had limited ability to look at your products but a lot of people in the know have looked at your stuff and they say it’s far superior to anything Research in Motion puts out, far superior to anything Apple puts out and some of your other competitors. So it seems to me that you have a nice upper hand if you are willing to play it and you know, there’s a lot of magazines out there and tech magazines that would be going to promote -- well, not just promote but to write about you people and it won’t cost you a dime and I think you guys -- see, the thing about Apple is they hype themselves eight months ahead of time. Everything is hype, hype, hype and you guys, as far as what I can tell, are far superior to anything they have and you need to start hyping yourself and getting yourself out there because there’s no reason why this stock should be a $1 or $2 stock. Actually, that’s quite embarrassing for you.

Jay Jie

Yes, your suggestion for the brand advertising and marketing is very good. And actually we have already done some marketing promotions.

Mike Tenenberg - Analyst

You need to do a lot more. Okay, go ahead.

Jay Jie

Yes, we need to do more. Even like a -- as well after, we have some subsidy with brand names. Before, we don’t have any brand names so we cannot do a lot of advertisement for end users and market but afterwards we are going to do more, like we have -- going to have the Qigi brand name. So probably you will see more our like brand name products.

Mike Tenenberg - Analyst

Well, you know, I think it’s a cheap shot when you have -- when you guys are basically the top of your game and then you get the rug pulled out from underneath you from somebody like Apple and then they come out and take the credit for -- just on the 3G example, on the 3-gigabyte phone. As a management team, I would be pretty ticked off about that and I would be shoving it right down their throats.

Jay Jie

Yes, you’re right.

Operator

(Operator Instructions) The next question comes from the line of Mr. Mark Hicks, with Hicks Capital Management. Please proceed.

Mark Hicks - Hicks Capital Management

I’ve got a bunch of questions. You closed the Leo Technology, $10 million investment, so is it correct that your actual cash is like $121 million? Is that correct?

Yuping Ouyang

We received $10 million from IDVG, which is related to the investments. We’ve increased our cash in $10 million.

Mark Hicks - Hicks Capital Management

Right, but you put out a press release in July that you had closed the $20 million from Leo Technology and IDVG, so you would now have an additional on top of that, as it stands right now, that additional $10 million, correct?

Yuping Ouyang

Yes, the optional $10 million has been received after the second --

Mark Hicks - Hicks Capital Management

So why do you only have a $7 million some convertible when the investments from IDVGC partners was $10 million?

Yuping Ouyang

Yes, it’s quite complicated question. As it is convertible bond issued to IDVGC, so we need to do some kind of valuation and according to the accounting standard, so finally the result shows that the convertible bond is only $9 million.

Mark Hicks - Hicks Capital Management

Now, you are consolidating One Net, correct? As a -- and then you are just taking that in the minority line for their -- for the non-controlling -- I don’t know what percentage both IDVGC and Leo Technology own in the gaming company but I’m assuming Techfaith owns more than 50%?

Yuping Ouyang

Yes, Techfaith is more than 50%.

Mark Hicks - Hicks Capital Management

But you didn’t change the minority interest line. Anyway, I don’t understand that. It would be better if you could describe that a little bit more fully when you do your Q2 and I would like to continue to urge you as a company to produce a cash flow statement. I appreciate the fact that you indicated that $4 million was from free cash flow. Could you just go over the shipments again really quickly because I didn’t catch the numbers very well? And could you also tell me the shipments for Qigi or Qigi -- I don’t know how you pronounce it.

Yuping Ouyang

The shipments for what?

Mark Hicks - Hicks Capital Management

Smartphones and feature phones from Q2 and then the similar numbers for Qigi.

Yuping Ouyang

Qigi?

Mark Hicks - Hicks Capital Management

No, for Techfaith and Qigi.

Jay Jie

Ah, Techfaith and Qigi.

Yuping Ouyang

The shipments for Techfaith and Qigi? Pardon?

Mark Hicks - Hicks Capital Management

Yes, smartphones for -- for example, smartphones for Techfaith. You already said it but I didn’t catch the numbers completely and I don’t want to wait for the transcript to come out. And then the feature phone shipments for Techfaith and the feature phone shipments for Qigi.

Jay Jie

We have a number for the Q2 and for the smartphone shipments quantities for feature phones, and also for the [inaudible]. We don’t have the number for the quantities to ship to Qigi. And also we have the number for the 3G proportion shipments, so which number do you want to know?

Mark Hicks - Hicks Capital Management

Again, I want to start with the Techfaith numbers -- what were -- you said them but your line was garbled. The smartphone shipments and the feature phone shipments.

Jay Jie

So for the smartphone shipment for Q2, the quantity is around 150,000 units for the smartphone, 150,000 units in Q2. Q1 is around about 100,000 units.

Mark Hicks - Hicks Capital Management

Okay. All right.

Jay Jie

That’s been the increase for the volume side. And for the feature phone, for Q2 we shipped around 108,000 units. But it jumped a little bit compared to Q1 -- Q1 is around 159,000 units, and for also we shipped a lot like data cards for this quarter. Totally we shipped around 265,000 units data cards, which are mainly for the China market. It’s an EVDO and HSDPA data modem. This quarter shipped 265,000 units but the Q1, we shipped only around like 33,000 units. That’s the shipments for different products, so we --

Mark Hicks - Hicks Capital Management

Which was -- you shipped some to the U.S. too, right? So --

Jay Jie

Yes, for the data modem, we shipped data modems, HSUPA data modem for the U.S. market for an operator which in June and it’s available in the U.S. market now.

Mark Hicks - Hicks Capital Management

Now didn’t the SEC ask you guys to break out the countries that you shipped to, or are you only going to do that annually? I thought you were going to start doing that quarterly.

Yuping Ouyang

We will do that annually.

Mark Hicks - Hicks Capital Management

Great. Well, when are you going to start shipping large numbers to the United States?

Jay Jie

It is hard to say now. We still have a lot of potential for U.S. market, as well after our first product shipped to the USA market. It’s kind of a very important milestone for Techfaith to enter into the USA market after that kind of first product into the USA market, we are positive to get more of our product to the USA market. But now currently we don’t have anymore information to disclose, so we are positive for the USA market.

Mark Hicks - Hicks Capital Management

Okay, and then two more questions -- one, when are you going to start buying back shares, which you announced that you were going to two quarters ago?

Jay Jie

Yes, we announced that and it’s still undergoing and once we close that, we will announce when it stops but we definitely want to carry on the program to do the buy-back.

Mark Hicks - Hicks Capital Management

Well, it’s time to start doing it, I think. And then when is one net -- what is your best guess on some numbers on that? You still haven’t got a -- are you producing revenue there yet or are you still in the data stage?

Jay Jie

You mean for the buy-back of -- sorry, are you there?

Operator

And the next question comes from the line of Mr. Michael Yang. Please proceed.

Michael Yang - Analyst

Yes, I do have a couple of questions -- first, you said gross [inaudible] after 6% in Q2 and gross margin was up to 19% in Q2, [inaudible] for [inaudible] this year was feature for wireless [inaudible] of the [inaudible] and [inaudible].

Jay Jie

I am afraid your line is not very good but I can hear you mentioned our gross profit was up 7% in Q2, so yes, our gross margin was better in our product line in Q2 compared to Q1 and we continue to work to improve our gross margin. We are always targeting new product launches in the major to high-end product segments and our smartphone growth carriers upheld margin. This is the prime reason we are [inaudible] on TV as well.

For [inaudible] margin by product area for Q2, our smartphone gross margin was 25%, 25% for smartphone, compared with 24% in Q1. Feature phone gross margin was 15% compared with 14% in Q1. Wireless data card gross margin was 7% compared with a negative 47% in Q1, so our product gross margin for this quarter will improve a little bit. We are pleased with that.

Michael Yang - Analyst

Okay. What is your gross margin [inaudible]?

Jay Jie

Our target is always more than 20% -- 20% is our gross margin -- the goal for our gross margin.

Michael Yang - Analyst

Okay, total for --

Jay Jie

More than 20% -- 25% is our goal.

Michael Yang - Analyst

Okay, that’s great. So on top of the [inaudible], you and the [inaudible] modern for the U.K., which carrier are you working for and do you now have [inaudible] shipping? And this kind of retail purchase of -- do you plan to work other [inaudible] carriers?

Jay Jie

Okay, so before I answer your question --

Michael Yang - Analyst

[inaudible] working for --

Jay Jie

Right, okay, so before I answer -- is there something wrong? Sorry, before I answer your question, I will repeat your first question answer. So our gross margin target is always 25% for the ODP business.

Michael Yang - Analyst

Okay.

Jay Jie

And let me answer the [serious] question for the USA market. Just now as I mentioned, we are working with [inaudible] values. We see the product and because available in the USA market now through Centennial wireless expense, we are also in this with several other regional carriers and we definitely plan to further penetrate the U.S. carrier markets.

Operator

Our next question is from the line of Mr. Patrick [Macow]. Please proceed.

Patrick Macow - Analyst

Thank you for taking my call. Congratulations on a great quarter, and congratulations for finally coming to the States to see us investors here. I think this is a long time coming so we are very excited about that.

A quick couple of questions -- on the cash front, the $4 million of free cash flow, did you guys use any cash to buy back any shares during the quarter? You don’t have to give me an exact number or anything like that but did you buy any stock back?

Jay Jie

Yes, we understand you consider this kind of program but before we close this kind of program, we are not going to disclose any information on that.

Patrick Macow - Analyst

Okay. All right. The second question is what percent of One Net do you guys now own specifically?

Jay Jie

Eighty percent -- well, 81%.

Patrick Macow - Analyst

Eighty-one percent, okay, great. And what valuation did you guys put on One Net entertainment when you raised that $20 million?

Jay Jie

It’s around $53 million.

Patrick Macow - Analyst

Okay. Your inventories -- I want to congratulate you guys on keeping yourselves very lean and mean on these inventories. This allows me to believe that you guys are in control of your gross margins. Is this the type of percent that we should look to going forward?

Jay Jie

Yes, we always want to control our inventory risk and at the same time, to improve our product gross margin. That is always our goal, yes.

Patrick Macow - Analyst

Yeah, well, I’m taking notice and you guys are making me very happy by seeing that. Lastly, branding -- you guys came out with the Barbie branding phone. I just want to know if you guys plan on addressing this side of the business aggressively or is this something that we are going to see something trickle in every couple of quarters -- it just seems like a great way to have good margins and to go after some unique opportunities, so is this an area that we should pay very close attention to or is this an area that we should just kind of think of longer term?

Jay Jie

You are very right -- this is a very, very important strategy for Techfaith and we are going to get some authorization from some similar brand names, while using that brand name to help us to [inaudible] very high, like products to keep our product profit margin and also to have a -- yes, you are very right and we are going to do that and currently -- it’s our strategy and probably we are going to make an announcement in September for this kind of strategy, yes.

Patrick Macow - Analyst

All right, so you guys are actually working behind the scenes? That’s good to know. Lastly, is it safe to say that the ODP side of the business has bottomed out and you could put a valuation on this business now of some measure? You guys see the bottoms in in your ODP business?

Jay Jie

Sorry, can you repeat your question again please, sir?

Patrick Macow - Analyst

Yeah, as far as your view, to the best of your ability, the ODP side of the business, the phone business, has the bottom been put in, do you think? Or do you see some choppy waters ahead or is it safe to say that we have some sort of a bottoming process that hasn’t been put in? To me, it has -- I just want to know if you guys see the same thing.

Jay Jie

Well, I think the ODP business is still our core business and so for the ODP business future, we think the future also is good, so we will continue to invest on the ODP business because today, global [have more than] 300 operators. They wall want to [inaudible] operator from, so ODP business, it means we focus on global and also focus on some kind of strategic partner. For example, [inaudible].

And Qigi is our -- another trend. I think in the future, ODP is a [inaudible] for other branding operators. Qigi is different -- there is marketing and branding. We focused on [inaudible] for some under-priced solutions, also some operator for the China market with our [inaudible] strategy.

You also mentioned some [inaudible], so I think Qigi, we content under branding together is our strategy. ODP we do service for others and the mobile phone, another opportunity I think is the small [inaudible] on [inaudible]. For example, today what will be very successful like [inaudible] phone, so we will do some authorization phone for the [inaudible] market.

Patrick Macow - Analyst

Okay, and one quick question -- with the Qigi acquisition, do you think this will cannibalize some customer down the road? And B, are you trying to do some sort of vertical integration with your One Net entertainment with the brand name of a Qigi phone so you can make exciting games and have your phone have the remote control and all the gadgets and all the buttons? Is that the purpose of this Qigi acquisition further down the road?

Jay Jie

It’s not only that provision -- that is one of our future long-term strategy as well, combined together.

Defu Dong

In the future, for the One Net games, our gaming companies we will be do some cooperation with our mobile phone division. As for me in the future, our older phone -- our ODP phone to the China market, Qigi branding and current use our -- the mobile game. So I think content and mobile phone coming together to do our [inaudible] strategy for the future. I think you are right -- we will do this in the future.

Patrick Macow - Analyst

All right. Well, I want to congratulate you guys on the best conference call in many, many quarters. Very upbeat, very thorough and we had a lot of participation, so it makes me very happy. Good work behind the scenes.

Jay Jie

Thank you very much and thank you for joining.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today’s call. I would now like to turn the call over back to management for any closing remarks.

Jay Jie

Thank you, everyone for participating in today’s call. We look forward to speaking with you on our next quarter results in November. Good night, everyone. Bye-bye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation.

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Source: China Techfaith Q2 2009 Earnings Call Transcript
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