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

Q2 2013 Earnings Call

August 7, 2013 08:00 AM ET

Executives

Elaine Ketchmere - IR

Dr. Zhenyu Zhou - CEO

Nigel Liu - CFO

Analysts

Rick Fearon - Accretive Capital Partners

Operator

Ladies and gentlemen welcome to the Actions Semiconductor Second Quarter 2013 Results Conference Call on August 7, 2013. Throughout today's recorded presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions).

I would now hand the conference over to Elaine Ketchmere. Please go ahead madam.

Elaine Ketchmere

Thank you operator. And good morning ladies and gentleman and good evening to those of you joining us from China. I would like to welcome you all to Actions Semiconductor’s earnings conference call for the second quarter of 2013. 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 Dr. Zhenyu Zhou, Chief Executive Officer; Nigel Liu, Chief Financial Officer and Chung Hsu, Director of Investor Relations.

Before the market opened in the U.S. today, Actions issued a Press Release discussing the results for its second quarter ended June 30, 2013. The press release was also filed on Form 6-K with the U.S. Securities and Exchange Commission. The Press Release is accessible online at the Company's website as well as the SEC’s website or you can contact Compass Investor Relations at 310-528-3031 and we will 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 actual results to differ materially from those contained in our projections or forward-looking statements.

And now I would like to turn the call over to Dr. Zhenyu Zhou.

Dr. Zhenyu Zhou

Thank you for participating in Actions' earnings conference call. We appreciate your continued interest in the company. I will provide an update on our second quarter performance. Later on the call Nigel Liu, CFO will discuss financial results for the quarter. I will be available for the Q&A portion of the call along with Ms. Nigel and Chung Hsu, Actions' Director of Investor Relations.

Quarter overview; our second quarter revenue was $18.5 million, in line with our expectations, growing 13% quarter-over-quarter and 46.5% year-over-year. Our top line performance was driven by strong sales of our first OWL series chipsets, supported by the launch of our new dual-core ATM7023 chipset in April of this year.

Revenue from tablet products accounted for almost half of the total revenue during the quarter. We also saw a sequential increase in shipments from our traditional portable audio products and sales growth from newer products, such as our extended line of high definition video products, inspired by our HD portable media player.

Gross margin was 32.2%, below our expectations of 36%., primarily due to $0.6 million write-down of obsolete inventory, representing 3.1% of total revenue. We expect our overall gross margin to approach the mid to low 30 as we aggressively build market share in the Whitebox tablet market and ramp up volume.

We view this as an investment in our future and a strategy to gain market share that will position the company to grow revenue to the point where we return to operational profitability and set the stage for further profitable growth.

Net income attributable to Actions was $0.7 million or $0.01 per ADS for the second quarter of 2013, compared with a loss of $0.6 million or $0.008 per ADS for the second quarter of 2012 and net income of $0.4 million or $0.006 per ADS for the first quarter of 2013.

Now I will discuss our strategy in the Whitebox tablet market and our traditional portable audio and video products business. Whitebox tablet markets; although the growth rate of the overall Whitebox tablet market has slowed slightly, it is still a very significant market with a lot of room for us to gain market share.

Our strategy for the Whitebox tablet market involves developing SoC solutions that address each segment of the market from entry level to high end and aggressively gaining market share and building volume.

During the second quarter, we made good progress in further penetrating the Whitebox market. We began volume production of the second chipset in our OWL series of products ATM7023, which has a dual-core CPU and a powerful GPU core with advanced multimedia capabilities at a compelling price to performance ratio and targets the entry level tablet market.

We will soon roll out our second generation low cost dual-core chipset which, will provide us with an effective weapon to gain shares at the expense of single core CPU based SoC. We expect the new dual-core products to make a meaningful contribution to revenue, while sales ramp up in the fourth quarter of this year.

Our quad core chipsets target the relatively higher end of the Whitebox tablet market. During the quarter our ATM7029 continued to gain market share and we added a number of new customers including various name brands in China and Overseas customers. The tablet market demands the latest process technology and our aggressive R&D investments reflect that.

During the quarter, we invested $1.7 million in cost expenses related to the development of our second and third generation quad core chipsets. Our new high performance series of quad core chipsets will have more powerful CPU and GPU cores, more advanced media capabilities and utilize 40 ARP and 20 ARP process technology for better performance power and performance cost ratio.

We will introduce the second generation chipset in the next few months and the third generation in 2014. The new high performance products target tier 1 and tier 3 international name brand customers. We will share additional detail with investors as we roll them out.

Traditional products, in our traditional portable audio and portable video products business, we are seeing a transition take place as sales of certain products such as traditional PMP and the gaming products has dropped as consumers migrated to alternative devices such as tablet. At the same time, we are seeing good performance from newer, highly differentiated products such as our extended life of high definition video products inspired by our HD portable media player.

Our current expectation is that on balance; revenue from the traditional portable audio and portable video business in 2013 will be similar to 2012. Although, this is not a growing market, it is still an important area of our business that diversifies our revenue stream and generates positive cash flow.

Our strategy is to maintain our leading positions in the market by introducing cutting edge products with differentiated features. That will mitigate lower sales from other products. Earlier this month we introduced a new Bluetooth-enabled Boombox. We’re excited by the potential for this market since the total addressable market is about 8 billion units per month.

We also introduced to market a Google (inaudible) product which is a smaller device that plug-in to a user’s television set and stream online contents and multimedia from a tablet or smart phone using Wi-Fi. Going forward, we will continue to invest in R&D to support our new product development initiatives and growth strategy.

Conclusion; in summary, we’ve made good progress executing our business strategy this quarter. We are aggressively building share in the Whitebox tablet market through new product introductions and further penetration by existing products. We expect further penetration once we roll out our second generation lower cost series of dual core chipsets and high performance series of quad core chipsets utilizing more powerful CPU and GPU cores and more advanced process nodes. We are on track to reach a run rate that approached the 10% of the Whitebox tablet market by year end.

We also maintain our leading market position in the traditional portable audio and portable video business and we are developing new feature-rich and differentiated products in those categories. We believe these initiatives, combined with careful cost control and cash management will move as forward on the path to operational profitability in the future. Before I turn the call over to Nigel, I want to mention that we plan to participate in an investor conference and analyst meetings in Asia in September.

Now, I would like to turn the call over to Nigel Liu, CFO, who will review our financial results for the second quarter.

Nigel Liu

As a reminder, all financials are reported in accordance with U.S. GAAP. For the second quarter ended June 30, 2013, we reported revenue of $18.5 million, compared to $15.4 million in the first quarter of 2013. Our gross margin for the second quarter was 32.2% compared to 36.2% for the prior quarter. As Zhenyu mentioned, gross margin was impacted by $0.6 million write down of obsolete inventory which reduced gross margins by 3.1%.

For the second quarter, total stock based compensation expense was $0.1 million, compared to $0.2 million in the first quarter. R&D expense was $7.3 million or 39.6% of revenue for the second quarter, compared to $6 million in the first quarter. The increase in R&D expense was due to $1.7 million in management expense, relating to new quad core products, up from $0.1 million in the first quarter.

We expect R&D expense to continue to represent a high percentage of revenue as we continue to invent new and differentiated end products. G&A expense was $4.1 million in the second quarter or 11.4% of revenue, compared to $4 million in the first quarter. Sales and marketing expense was 0.5 million in the second quarter or 2.7% of revenue net remained unchanged on the first quarter. We continue to timing maintenance and sales in the second quarter by savings of all (inaudible) force and an (inaudible) on (inaudible).

Our operating loss was 3.9 million for the second quarter of 2013 compared to an operating loss of 2.5 million for the prior quarter. Net other income for the second quarter was 0.2 million due to foreign exchange benefit compared to other income of 0.2 million for the fourth quarter also related to a foreign exchange benefit.

Fixed income from other investments was 0.5 million for the second quarter (inaudible) preventing last year’s earning (inaudible). Interest income was 3 million for the second quarter down from 3.2 million in the first quarter. Income before tax was 0.6 million for the second quarter compared to 0.8 million in the first quarter. Net income tax saving was 0.3 million for the second quarter compared to income tax expense of 0.4 million in the first quarter. Net income attributable to Actions Semiconductor on a U.S. GAAP basis for the second quarter of 2013 was 0.7 million or $0.01 per diluted ADS. This compares to net income of 0.4 million or $0.06 per diluted ADS for the first quarter of 2013.

Now moving to the balances sheet, cash and cash equivalents together with time deposit, trading securities and both current and the non-current marketable securities, totaled 220.3 million as of June 30, 2013 compared to 223.7 million as of March 31st of 2012. Of the 220.3 million total 130.8 million was in cash and the short-term interest bearing investments together with time deposit that was generally issued by the large domestic banks in China, for terms no more than three months and could be redeemed at any time.

89.5 million was in trading securities and the marketable securities both current and the non-current which was principle currency or price investment with higher interest rate on the minimal returns of three months, less marketable securities, while many issue manage all currencies out top rating status on financial institutions in China.

Our short term borrowings totaled 25.5 million at the end of the second quarter unchanged from the end of the first quarter. We continue to utilize the agreement entered into earlier this year allowed us to borrow U.S. dollar in a low interest rate in Hong Kong currency by all RMB deposits in Mainland China. Additionally as they are using our RMB funds in China, was driven on all onshore large credits for U.S. cash needs. This opportunity further has to take advantage of lower interest rates in U.S. dollar loans which enabling us to continue earning high interest rate on all RMB denominated investments even considering short-term exchange fluctuations.

Accounts receivable was 6.9 million at the end of the second quarter of 2013 compared to 5.6 million at the end of the first quarter. Accounts receivable includes amount due from (inaudible) amount due from equity measured interest fees.

Inventory was 37.8 million at the end of the second quarter, up from 30 million at the end of the prior quarter. The increase in inventory is primarily due to the fact that our new (inaudible) products have higher unit cost than our traditional products. Furthermore, we have increased (inaudible) in anticipation of strong signals in the second half of the year. We continue to buy back shares, spending approximately 0.6 million on the share repurchase program during the second quarter compared with 1.5 million in the first quarter. Our repurchase activity remains constrained by (inaudible) and the (inaudible) program as well as limited activity in the quarter. As of June 30, 2013 the company had investment of approximately a total of 47.8 million is appropriate representing approximately 21.5 million ADS shares.

And now, turning to our outlook, first on (inaudible) we have observed last three seasons for (inaudible) customer trends in the portable medium (inaudible) a month (inaudible) therefore we expect revenue in the fourth quarter to be higher than the third quarter which is contrary to our historical seasonal. Our guidance for the third quarter of 2013 revenue is ranged 19 million to 21 million. We have made gross margin for the second quarter to be approximately 34% and now we would like the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions). The first question comes from Rick Fearon from Accretive Capital Partners. Please state your question.

Rick Fearon - Accretive Capital Partners

Nice top line growth this past quarter. Just first question with respect to revenue expectations, I know that one of the top tier investment bank has been forecasting growth in the tablet market from 50 million units this past year to 120 million for 2013, 180 million 2014, and 240 million in 2015, with the vast majority of that growth coming from the non-apple and whitebox markets, and I know Zhenyu that you had at one point expressed a goal of achieving 10% market share and that would obviously translate into some extraordinary growth for Actions, I was curious if that’s still your expectations and if you agree with these industry forecast or you have a little bit of different perspective and really just what the big picture next few years may look like from your perspective?

Zhenyu Zhou

Okay, I think we have exchanged that formation in the past that we always believe this year there will be a significant growth from the previous year, but we believe this year we will be around 80 million to 90 million units instead 120 million units for whitebox tablet and based on what we have observed so far we think our number is lot more accurate than that top banker’s prediction.

I believe this year 2013, the whitebox tablet shipment probably somewhere around 80 million units based on what we have observed today. And it will continue growth next year but the growth rate will slow down and will not be as positive what it was as the previous prediction primarily due to some of the brand new customer like Asus or you know various PC OEM/ODM starting to get into this market, and they actually introduce the similar solutions based on similar chipset in the whitebox family, so the line started to get blurred little bit.

Rick Fearon - Accretive Capital Partners

Okay and does Actions have plans for penetrating additional end markets or is the current focus continuing to be on the tablet market and seeing if you can gain more market share?

Zhenyu Zhou

Okay there are two areas; we have talked about 10% market share penetration. As we indicated in the earning conference call, we are on track towards that expectations and we do believe by the end of this year we should be able to reach 10% of the market share, the whitebox family, whitebox market.

In the meantime, as we indicated in earnings conference call as well, we’re aggressively developing you know based advanced processors and better CPU and GPU IPs for more higher performance on us aiming tier I, tier II customers international and then domestic, so we’re not only look at the whitebox market we’re starting to look into branding market as well.

Rick Fearon - Accretive Capital Partners

Okay great and what are your current goals for revenue per employee? And have you set those internally at this point I know…

Zhenyu Zhou

They are protected, right, per person right. Yes, I can answer that, I think, based on the first half at an estimation of the second half of revenue, we are approximately $130,000 per person per year.

Rick Fearon - Accretive Capital Partners

And how is that comparing with industry peers, are you striving for higher revenue per person to really drive down cost?

Zhenyu Zhou

Yes, we have a goal to achieve $200,000 per person. When I became the CEO that’s the goal I set for the company. We is a norm of industry.

Rick Fearon - Accretive Capital Partners

And that seems very much in line with some of the other competitors.

Zhenyu Zhou

Let me put this way, when I step into the CEO position Actions’ revenue per person is below $60,000. Then, I set a goal for the company of $90,000 per person last year and what we have achieved is $89,500 last year, and the goal of this year is $13 million, so we’re probably right on it or little bit higher, and the goal of next year is $200,000 per person.

Rick Fearon - Accretive Capital Partners

That is terrific. Thank you for sharing that and you did allude to reaching return operating profitability but did not mention when, I just wondering, what the current expectations are for achieving quarterly operating profitability, you had a sense of when we can expect to hit back and then if you anticipate additional inventory right downs?

Nigel Liu

Well, we are know you know investor awkwardly always push us to (inaudible) return to reasonable profitability as early as possible that’s also our team’s expectations. At this moment I cannot give you a fix date but I do believe we are on track to achieve that and not in a long-long time.

Rick Fearon - Accretive Capital Partners

All right well, certainly if you hit your revenue per employee goal, it would seem that you will be achieving profitability along the way so that’s good news and it looks like you are able to purchase 200,000 shares last quarter and didn’t know if you could provide any updates on efforts to accelerate the stock repurchase program?

Unidentified Company Representative

Hi Rick, (inaudible) past quarter trading is great thing. We always try our best to buy as much as from a market, that’s another one thing we do as Nigel has mentioned earlier. The other thing, also we talk to our banker, (inaudible) actually one was referred by you, so we are talking to different bankers about (inaudible) things.

Rick Fearon - Accretive Capital Partners

Okay so that’s still under consideration at this point.

Unidentified Company Representative

Yes but we want to get as much as we can but nobody so far can guarantee how many shares we can get it.

Rick Fearon - Accretive Capital Partners

I understand that well, hold a good thought but it seems like a worthwhile effort given that the company is expecting such exciting growth and the stock continues to trade at less than net cash value.

Operator

The next question comes from (inaudible). Please state your question.

Unidentified Analyst

Some year guidance and commentary around Q4 having revenue up from Q3, my back of the envelop looks to be that actions will grow revenue around 45% for 2013 which I believe is ahead of some of your initial targets, am I a thinking about that the right way?

Unidentified Company Representative

Well, I think we make a very conservative number at the beginning say at least 25% growth and based on what we achieved so far obviously we are beyond the 25% and you are correct we already made a projection of somewhere between 19 and 20 and first quarter will be higher than that, (inaudible) it is true.

Unidentified Analyst

Okay, that’s perfect, congratulations on that.

Unidentified Company Representative

Thank you.

Unidentified Analyst

For your next generation tablet processors, do you estimate that you will be able to gain any design wins in some of the more branded tablet maker products?

Unidentified Company Representative

Good question, actually our next generation tablet is just introduced. Honestly you will see press announcement probably just a matter of a few days and the market will see this product sometimes in late August or beginning of September. So, at this moment although we are very excited and optimistic about this product but we are not able to share any firm data or number yet but I am very-very optimistic about this product, it is a very sharp weapon for us to gain much more market share in the second half of this year and beginning of next year.

Unidentified Analyst

Do you expect you will have first revenue from that product in Q4?

Unidentified Company Representative

I think the significant contribution from the second generation we'll see in Q4. You will see something in Q3 but numbers will not be significant.

Unidentified Analyst

Okay and the long-term roadmap of a potential product like this as the line between tablets and smartphone blur. Is it possible to have actions semi-conductor product that would address some of the bigger smartphones out there?

Unidentified Company Representative

Well basically there are two type products in tablets. Some of the tablets like (inaudible) there is a much more easy functions, we do address those kind of market if you call it super phone then we are in it but we are not targeting anything like smaller than 7 inch or 5 inch phone.

Unidentified Analyst

Okay and the inventories, you mentioned in the call jumped up here in Q2, do you expect that will be the peak inventory level for the year and inventories will start to be drawn down from here?

Unidentified Company Representative

Actually what happened is in terms of our non-inventory goes higher than the previous quarter primarily due to our second half of the year. We expect higher revenues and the ESP of the tablet is much higher than before that is why if you store 1 million inventories of one million audio products and one million of our tablet products, the revenue is probably a few times difference. So that’s the reason.

Unidentified Analyst

Okay and I believe you have also mentioned you had about 1.7 million in tape out cost for new products is that something that will not be repeated in Q3 and Q4 then or would you expect some additional tape out costs?

Unidentified Company Representative

I don’t expect anything at that level, that’s still in Q3 or Q4. This is a very advanced product 40 nanometer, 20 nanometers development, those kind of investment we can only afford once or twice a year, not once per quarter.

Unidentified Analyst

Okay and I guess I was glad to hear you from Rick’s last question around more accelerated buyback; it appears you have around $3.20 per share in cash, right now. And how advanced are those potential buyback talks and what are some other company thoughts around it, in terms of how much stock you'd want to buy.

Unidentified Company Representative

(Inaudible).

Unidentified Analyst

Okay that makes sense; I mean the trading volume of the stock has sold materially lately, so I am sure that its hampering your traditional buyback plans.

Unidentified Company Representative

Yes. Correct.

Operator

Your next question comes from Edison (inaudible) Investment Partners, please state your question.

Unidentified Analyst

As we look out to the second half of the year, just a question on the ramp up of new products, it looks like to me your goal of 10% market share in the Chinese tablet market, you do need a little bit of an acceleration in the back half of the year and the fourth quarter, and it sounds like you have the products to get there with the new second generation dual core product. Can you talk about some of the differentiating features that you have with that product and again talk a little bit about customer reception around that product? How confident are you that that will be well received by customers?

Unidentified Company Representative

Very good questions. As said, at the beginning we had four core products which the units number is not as big as the dual core number. So let me give you a little bit flavor of what happened in the market. In the market before today or before second quarter, majority of the shipment is single core area. And it’s very-very clear the single core is migrating to dual core and the speed of that migration is very-very quick.

So we do expect that starting from this half season, or the third-fourth quarter, dual core starting to be the majority of the shipment of WiBox tended to market with quad core and single core both follow behind dual core. And what we offer is dual core is that almost at the cost of a single core SoC what people introduced in the past. So we use this kind of sharp weapon to enable our customer, be able to produce PCBA at all of the same cost as of the time they produce a single core tablet.

But it as dual core performance and also less powerful GPU which gives very good gaming and android (inaudible) compatibility and meanwhile as you maintain very low power, similar to a single core, you know that will penetrate in their markets. So we are very optimistic that we are able to become one of the primary products in this year, introduced to the market to take away the single core market, or at least the significant part of the single core market.

Unidentified Analyst

And the second follow-up question on the inventory, I know you generally have shorter lead times and don’t have a lot of hard visibility from your customers, but I am just wondering the nature of the inventory build and if it’s strategic in the sense that, you’re already seeing very positive feedbacks from customers and that was the reason for the inventory buildup or if you can just provide any other color around the nature of the strategy around the inventory increase.

Unidentified Company Representative

Sure, there are a few reasons that inventory is at this level. First of all is as we mentioned earlier, second half sales that we expected (inaudible) is lot higher than the first half. Like you said, our customers barely give us much of a forecast. So we have to make judgment and based on our own understanding of the market and our customers accept it. In the meanwhile because of the confidence, we are able to sell a certain quantity of the products.

Often time, if we do, let’s say a volume purchase from our supplier we get a little bit benefit in terms of price. So it’s a strategy to build, (inaudible) the first half of the year to make sure the second half we have enough supply.

And also third reason is that generally the second half in the past few years, the capacity is often very tight. And to mitigate our risk at the second half we don’t get enough capacity, we did look at a more aggressive build up of inventory in the first half and that we want to continue build up inventories in the second half.

Unidentified Analyst

Thanks so much and I would account this element from the first two callers that this is a great price to buy the share at net cash levels and if there is any way to accelerate that that would be great.

Operator

(Operator Instructions) There appears to be no further questions at this time. Please continue with any other points you wish to raise.

Zenyu Zhou

Thanks again for joining us on today’s earnings call. We appreciate your interest in and continuing support of Actions. Thank you.

Operator

Thank you, this concludes today’s conference call. Thank you for your participating and you may now disconnect.

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