Actions Semiconductor Co., Ltd. Q3 2009 Earnings Call Transcript

| About: Actions Semiconductor (ACTS)

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

Q3 2009 Earnings Call

November 5, 2009 5:30 pm ET


Niccolo Chen - CEO

Nan-Horng Yeh - Former CEO

Patricia Chou - CFO


Adele Mao - OLP Global

Rick Hearn - Credit Capital Partners


Welcome to the Actions Semiconductor Third Quarter 2009 Earnings Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for question. (Operator Instructions). This conference is being recorded Thursday, November 5th of 2009.

I would now like to turn the conference over to Ms. Pia Kristiansen. Please go ahead ma’am.

Pia Kristiansen

Good afternoon and thank you for joining us on today’s conference call to discuss Actions Semiconductors third quarter 2009 financial results. This call is being broadcast live over the web and can be accessed on the Investor Relations section of Actions’ website, for 90 days.

On today’s call are Niccolo Chen, Chief Executive Officer, Nan-Horng Yeh, Former Chief Executive Officer and Patricia Chou, Chief Financial Officer.

After the market closed in the US today, Actions issued a press release discussing the results for its third quarter ended September 30, 2009. The press release is also filed on Form 6-K with the US Securities and Exchange Commission. The press release is accessible online at the company’s website, as well as the SEC’s website or you can call The Blueshirt Group at 415-217-7722 and we will fax or e-mail you a copy.

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

Now I would like to turn over the call to Mr. Nan-Horng Yeh, Nan.

Nan-Horng Yeh

Yes, thank you for joining us on Actions’ third quarter of 2009 earnings conference call. We appreciate your continued interest and support of Actions.

Before we discuss the business highlight, I would like to comment on today’s announcement regarding the transition of the CEO lieu. I resigned as CEO and I have decided to step away from and operating lieu in order to pursue personal interest. Niccolo Chen has been appointed by the board to replace me in lieu of CEO.

Niccolo has been now identified as the likely successor for the CEO lieu. You see the board and I strongly believe that his technical and operational expertise will be a significant asset for the next phase of development for Actions.

Niccolo had joined Actions as the General Manager in early 2009 and he was promoted to Chief Strategy Officer for the company in 2009. His strong engineering and technical background has been instrumental in developing and lending up Actions second generation architecture for SoCs, combining both DSP and mixed.

During his tenure with the company, he has expanded the R&D team to 450 from 220 engineers. Actions had successfully developed a strong IP portfolio and we have made a great stride on the cost reduction initiative.

At early stage, the company will benefit from a leader with strong technology vision to drive the long-term growth strategy. Niccolo’s R&D and operational expertise will be a valuable asset for the next growth phase of the company. I will remain our Actions’ Board of Directors and continue to be a shareholder in the company.

Now we will move on to the business highlight and then Patricia Chou, our Chief Financial Officer, will discuss the third quarter 2009 financial and forward guidance. Then we will open up the call for question.

In this third quarter of 2009, Actions revenue was $13.4 million and net loss was $0.6 million, or $0.01 per ADS. Gross margin for the third quarter of 2009 was 13.8% and operating margin was negative 13.7%.versus, as expected we began to zip a positive impact from our cost reduction activities, which contributed to the increase in gross margin, also as the cost conversion of our low end and advanced product line began to realize scale of economies. We are able to manage the decline in ASP.

During the third quarter, even while we continue to see our product shift to increased the sales of our faster growing low end product and advance product. We continue to believe that the comparative pricing our product in the current environment is the best approach to secure our leadership position, cost restructure and market share.

As an ongoing investment in our R&D workforce is imperative to maintain being our current comparatives and to secure long-term success for our company.

This year we have hire approximately 84 engineers through our Zhuhai and Shanghai team through the third quarter. We are committed to establish a world-class mixed single team and strong IP portfolio in order to be well proficient for the company in market demand.

As mentioned, we began to see the benefit of our cost down initiative during the quarter. During the third quarter approximately 6% of our shipment used .15 micron process technology and the new 0.11 micron SoC has been tabled in third quarter, and we expect to deliver samples to our customers by the end of this year.

We also lowered cost down version our low end and the advanced product line in the quarter and anticipated cost saving benefit once this product ramps.

We have continued to optimize design for a small die size, decrease the (inaudible) cost and lowered deliver and packaging outsourcing charges. Our cost down initiative remains a critical component of our cost down, cost and management strategies.

Now I would like to give a brief update on the traction of our product categories during the quarter. The gift and all the relative product segment continue to grow as a percentage of our business with the increase in demand and expanding market share in this segment contributing to our result for the third quarter.

The transition to our recently introduced Series 3 and automotive series product line has gone very smoothly and this product now that present approximately 22% of our total shipment.

We are also actively working or developing new product to meet the strong demand in this product categories. Our sales in the mainstream segment of the PMP market serving the mono display and small color display media products continue to that track well in the third quarter.

We believe that our competitive pricing, strong customer relationship and product upgrades continue to drive our sales in this product category. Our sales force is tracking well and we look forward to reaching a economy of scale for this product, where we can see a benefit for our gross margins.

As our lower end and other bunch of product line continue to invent in third quarter. Our mainstream product lines sales remain healthy in terms of actual receipt volumes.

We are experiencing good traction in the MP4 market. Shipment of our products were in the QVGA, MP4, [D1], PMP, and high definition PMP segment increased to approximate 10% of our total shipment in the third quarter.

We continue to get positive feedback from our customer on our technologies. We low out the cost conversion of this product family in the quarter, have a number of new product in development.

We are pleased to have maintained the momentum in penetrating MP4 market during the third quarter. We are on track to start assembling [CU1] solution product in the fourth quarter and high definition products in 2010.

Looking ahead, we believe our ability to protect and expand our market presence is contributing to our continued investment in R&D. We have a number of new products in development targeting the [D1] and high definition PMP end market, and I excited about opportunity that lies in media player [CBS] and gaming segment.

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

Patricia Chou

Thanks, Nan and I thank you for joining our third quarter 2009 earnings conference call. I will review our third quarter financial in detail and then discuss our forward guidance for fourth quarter 2009. After that we will open the call for Q&A.

As a reminder our financials are reported in accordance with US GAAP. For the third quarter ended September 30, 2009 we recorded revenue of $13.4 million compared to $10.5 million in the second quarter.

Our gross margin for the third quarter was 30.8%, compared to 27.7% for the second quarter of 2009. The sequential improvement in our gross margin in the third quarter reflects a benefit from our cost down activities as well as our enhanced market position in a low end and advanced segments.

While we were pleased that the improvement in our margins, we continue to encounter ASP erosion and extremely competitive pricing, which may impact our ability to further improve our margins in the near-term. For the third quarter, total stock-based compensation expense amounted to $0.9 million, down slightly from $1.1 million in the second quarter of 2009.

R&D expense was $5.1 million or 37.8% of revenue for the third quarter, as compared to $5 million, or 47.1% of revenue in our second quarter of 2009. We continue to forecast for our R&D expense to represent a higher percentage of our revenue, as a result of our ongoing investment in engineering talent and next-generation as well as potentially new product development initiative. While we continue to closely monitor discretionary spending in other areas, we do continue the investment in the R&D as critical to our long-term success.

In the first half of the year, we implemented a significant pay cut at the executive level as well as the 20% pay cut at a manager level and hiring freeze for all non-engineering function. We will continue to conduct expense reviews company-wide, as part of our ongoing effort to control cost.

G&A expense was $2.4 million in the third quarter, or 17.8% of revenue, as compared to $1.8 million, or 17% of revenue in the second quarter of 2009. The sequential increase in G&A expense in (inaudible) is related to the one-time sponsorship incurred during the second quarter of this year.

Sales and marketing expense was $0.3 million in the third quarter, or 2.2% of revenue compared with $0.3 million or 2.8% of revenue in the second quarter of 2009. Then, during the disposal of $1.7 million was recorded in the third quarter, as a result of reducing our share ownership in Actions Beijing.

Our holding position in Actions Beijing was diluted from 80% as a subsidiary to 35% as an equity method invested in the company after an aggregate $7.5 million new capital injection this year.

The trend of our controlling power on Actions Beijing was recognized as it being the disposal and resulted in one-time gain to reflect the network increase as a completion of Actions Beijing new capital injection.

Operating loss was $1.8 million for the third quarter compared to operating loss of $4.1 million for the second quarter of 2009. As indicated in our last conference call, we anticipated an improvement in our product cost structure in the second half of this year, as a result of our commitment to cost down initiative.

During the quarter, we ramped production of our low end and advanced product lines, utilizing .15 micron process technology. A shipment in this category strength, we anticipate that economy of a scale will help us further offset ASP erosion.

We firmly believe that our commitment to investing and enhancing our technology will benefit the company in the long-term. However, as the operating environment remain challenging and the global economy unstable [fact] to the managing our production cost and expenses continues to be a top priority for the management team.

Net other income of $42,000 was recorded in the third quarter mainly related to the foreign exchange gain or RMB and Chinese dollars versus US dollars as this currency stabilized. This compared to other income of $161,000 for the second quarter of 2009, which was also related to a foreign exchange gain from the disposal of our new Taiwan dollar position at a rapidly fluctuating mode.

Interest income was $2.3 million for the third quarter down from $3.1 million in the second quarter of 2009 related to lower interest yield as the results of the global interest rate decline since the financial crisis.

Investment yield was $0.4 million for the third quarter as result of one-time dividend income declared by one of our invested companies under cost method. Long-term investment impairment was $1 million to reflect the valuation reduction in one of our financial invested companies under cost method.

Loss before taxes was $0.41 million for the third quarter, as compared to a loss of $0.9 million in the second quarter of 2009. Net income tax expense was $0.4 million for the third quarter compared to income tax credit of $0.2 million in the second quarter of 2009.

In the second quarter of this year, we recorded a net income tax credit related to our preferential tax treatment carried forward from 2008 by realizing April 2009, which entitled certified hi-tech companies to detect if you are qualified R&D expenses by 150% (inaudible) taxable income. This annual R&D tax credit can only be recognized once a year and it was recorded, when we file a tax return in the second quarter of the following year.

Net loss attributable to Actions Semiconductor on the US GAAP basis for the third quarter was $.6 million or $0.01 per dilute ADS compared to net loss of $0.8 million, or $0.01 per diluted ADS for the second quarter of 2009.

As a reminder included in the calculation for the net loss for the third quarter was non-cash valuation allowance of $1 million related to the loss on our long term investment. Our non-cash given dispose of the end of $1 million related to a shareholding change in Actions Beijing as well as the stock-based compensation expense of above $0.9 million and depreciation and amortization expenses of $1.3 million, or in total $0.03 per ADS for the quarter.

Our financial results for the third quarter reflect the sequential increase in shipment volumes as demand levels improved for our low end and advanced product segment. We anticipate that the challenge operating environment and unstable global economy will continue to impact our results.

So, we are focused on fast managing this downturn and in position ourselves for future growth. As previously noted, earlier this year we made decision to decrease our ownership stakes in our subsidiary Actions Beijing to approximately 35% from 80% by limiting our participation in forming to $1.5 million of aggregate $7.5 million.

As planned in late September, our ownership stake in Actions Beijing decreased to 35%. However, as this event took place later in the quarter than anticipated. Actions Beijing’s operation in the net loss were entirely included in our results for the third quarter

Well its assets, liabilities and shareholders equities were [span] off from our balance sheet as of September 30, 2009.

Going forward our financial results no longer included revenue, cost of sales, operating expenses, assets and a liability strong Actions Beijing as a subsidiary and the shareholding is reflected as an equity method investment.

While this official result in segregation of revenue from Actions Beijing, the subsidiary has been operating at loss since its inception and we believe that decreasing our ownership will help improve Actions consolidate net income longer term.

For information purposes, in third quarter ’09, Actions Beijing recorder $1.9 million in revenue and $0.1 million in net loss.

Moving to the balance sheet, cash and the cash equivalent together with fund deposits, trading securities and a both current and a non-current marketable securities totaled at $254.4 as of September 30, 2009 compared to $259.4 million at the end of the second quarter.

The slightly lower cash balance as of September 30, 2009 resulted from the installment payment for our new facility construction in Zhuhai. The additional investment of $1.5 million in Action's Beijing and the spin of its cash balance from our consolidated balance sheet.

Out of the $254.8 million totaled $43.1 million worth in cash, time deposits and a short-term interest bearing investments that are generally issued by large domestic banks in Greater China area for terms no more than three months and it can be easily redeemed at any time. $158.7 million was the marketable securities that were principle guaranteed investments with higher interest rates and a three to 12 month term mainly issued by the top five state-owned banks in China.

During the third quarter, we moved an additional $29.3 million into financial products with terms of one to two years. As discussed in our last call, these products generate a higher yield while maintaining the same low risk profile as our non-current multiple securities.

We continue to believe that our ability to preserve a strong balance sheet during this prolonged economic fluctuation is a significant differentiator for the company.

Accounts receivable and notes receivable were $5.8 million at the end of the third quarter, up from $4.1 million at the end of the second quarter due to the significant jump in those during the month of September.

Inventories that were $4.7 million at the end of the third quarter down $1.6 million from the prior quarter. The decrease in our inventory during the third quarter was in March related to the increase in orders largely we got within China as well as the direct result of our continued efforts to control inventory levels.

We are expecting inventory levels to increase to levels in early this year in the fourth quarter as we prepare to ramp our advanced band higher cost product and than we make the necessary adjustment to support the wafer foundry capacity in late 2009 and early 2010.

We continue to buyback share spending approximately $1 million on the share repurchase program during the third quarter compared with $0.1 million in the second quarter. Our repurchase activity has been significantly lower than previous levels due to various restriction related to trading volumes and they black out periods for our 10b5-1 program.

This restriction was particularly prohibited in the third quarter when compounded with the decreased availability of [blocks raised] and their higher stock price. We will continue to be focuses on the repurchase in sales through the best of our availability and demonstrating our commitment to our shareholders.

In the context of the ongoing challenging operating environment we also believe that our repurchase program must also be balanced with a prudent approach to preserving our cash balance for a longer-term operating flexibility. At the end of the third quarter 2009 the company has invested approximately a total of $23.4 million in the program, representing over $9.8 million ADS shares. Under the current program we may repurchase up to another $10.2 million ADS through December 31st 2010.

Next, I would like to comment on our view looking forward. We continue to find that the challenging operating environment impact our visibility on our future result. Although, the fourth quarter is historically seasonal where the high demand is related to the holidays, increasing Flash memory price and their pouring of demand from early fourth quarter to late third quarter, both have impacted on our fourth quarter shipment volume.

Our guidance reflects the expectation that the ASP erosion, decreased demand for consumer electronics and a highly competitive marketplace will hinder our ability to significantly improve our operating results in the near-term.

We do look forward to seeing a benefit from longer term improvement in our margins as the cost cut versions are at the low end as the advanced product launch went. As such we currently expect that fourth quarter 2009 revenue will be in the range of $8.5 million to $10.5 million.

Gross margin of 27% to 30% and operating expenses trending slightly higher on a sequential basis. The fourth quarter estimates included a share based compensation expense of approximately $0.9 million to $1 million.

Now I would like to turn the call over to Niccolo Chin. our recently appointed CEO who joined us in early 2007 as General Manager, to introduce himself and give a brief overview of his objectives for the Company. Please note that Niccolo will be speaking in Mandarin and I will translate for him. Then we will open the lines for questions.

Niccolo Chen

[Translated] Thank you, Patricia. I am very excited that you are doing the job of CEO of Action. Since joining the Company in 2007, I have focused on building a workforce R&D team and on creating technology foundation that is the basis for several of the new kind of lines.

We have made strong progress on our product development activities and I believe Actions is well positioned to build on its successful product innovation.

In the currently challenging operating environment Actions ability to sustain or grow market share in each of our market, is a direct result of our continued investment in technological innovation, new product introductions and the successful execution, improving our sales channel and developing new one.

As we continue to upgrade in your challenging environment, we will remain focused on the following: further developments centers on our core competency, and competitive advantages in portable multimedia products; increasing the market share in the automotive and [to advance] in the four segments.

Third, using our pipeline of the advanced products featuring VGA and the high-definition products; and four, managing costs through continued expense reduction in R&D and operations; number five, increasing efficiency in product developments with the focus introducing products with more cost effective features and addressing the effect of growing segments; number 6, preserving our balance sheet and a strong cash position; last, repurchasing shares to the best of our ability to increase the shareholder value.

That’s it for my [hand level] report for today, and now we would like to open the line for questions. Operator?

Question-and-Answer Session


(Operator Instructions). Our first question is from the line of Adele Mao with OLP Global.

Adele Mao - OLP Global

Hi. My first question is related to your guidance for the fourth quarter. If we exclude Actions Beijing's contribution in the third quarter, it still seems that you're factoring nearly 20% sequential decline in revenue. Could you just quantify your expectations for ASP erosion, and maybe discuss how you see the volume trending into the fourth quarter and in 2010?

Patricia Chou

Hi Adele, very good question; first of all as I mentioned in earlier that big difference between third quarter and the fourth quarter is that sales amount is a result of two factors, number one the deconsolidation of Actions Beijing whose impact is about $2 million; and the number two, the demand [that pull in] from early October to late September whose impact was about $0.5 million to $0.8 million. So if we back out these two factors impact, the third quarter's number and the fourth quarter's number are close to each other.

Adele Mao - OLP Global

Okay, so… I am sorry, go ahead.

Patricia Chou

So, for fourth quarter we do expect a further ASP erosion because of the volume reduced from the previous two factors. That’s why the fourth quarter’s top line guidance does look like a big gap from third quarter.

Adele Mao - OLP Global

Okay, so it’s a little bit fast forward, its sort of, you are getting the orders earlier in the third quarter. Could you comment on what (inaudible) as how this volume trend will develop into 2010?

Patricia Chou

In 2010, we believe the volume will continue to grow, but in different segments, and the faster growing segments will be in the automotive and low end products, and also the [advanced] product segments (inaudible) the MP4, specially in [D1] and high definition.

Adele Mao - OLP Global

Okay. You guys mentioned a couple of times about the challenging competitive environment. Could you just provide a little bit more details around that, what type of challenges you are seeing and maybe give us an update regarding the competitive landscape in the PMP market?

Patricia Chou

Sure. Well, the competition is always a issue in consumer electronics world, and that we continue to discuss this key factors for our gross margin and also those dollar amounts.

First of all, the ASP continues to decline as a sort of a result of the severe competition, especially in the low end. After the financial crisis, a lot of design houses in China or worldwide have been looking for new topics to work on, and MP3, especially the low end MP3 has been identified as a sizable and a profitable items for smaller sized design houses.

So we are experiencing a lot of latecomers jumping into the low end. That’s why the ASP in low end products are declining faster than expected, and also, the flash memory price fluctuate has a negative impact on our volumes. At this moment, the flash memory price is going up and up, and this will make our customers hold off their orders to our driver IC.

Adele Mao - OLP Global

Okay, that’s helpful. You mentioned that you guys are actively working to develop some of the new products. Would you be able to discuss some of the new initiatives that you working on, and what your next revenue growth driver could be?

Patricia Chou

Sure, we have a complete product doormap in the low end automotive and high end. In the low end automotive product lines, we have products to address a few features, new demand and better cost effective features.

In high end, as I mentioned in the previous question before we conclude the high end as one MP4 market, and now because it's getting bigger and bigger we started to further classified them into say QVGA, D1 resolution and the high definition resolution product and we are addressing a different demand in the features in this various segments in MP 4 market. They are emphasis now for our new product development in our road map.

Adele Mao - OLP Global

Thank you, Patricia.

Patricia Chou

Just want one add up for the competition. Even though we are facing a lot of late comers newly jumping into the arena most of them do not really enjoy any fair margins. Sometimes they work just for survival without too much margin.


Our next question comes from the line [Rick Hearn] with Credit Capital Partners.

Rick Hearn - Credit Capital Partners

Good morning, I wanted to extend the congratulations to Niccolo and just wondered if Patricia perhaps interpreting for us. If he could share with us some of his specific thoughts about the growth opportunities and where foresees some of the opportunities, whether it’s a high def MP, MP4 or what he is excited about?

Niccolo Chen

Okay, I believe that our major growth initiative growth will come from the D1 and the 720p the high definition product in year 2010, and our higher level product 10 ADP high definition product will be available in year 2011 and in conclusion the advanced product category in MP4 would be our growth driver.

Rick Hearn - Credit Capital Partners

What would you expect the product mix to look like in 2010 from those growth drivers?

Patricia Chou

Niccolo believes that starting in second quarter next year, we will have a fair percentage of revenue from D1 products, and in the second half we would account for about 30% of the market share in D1 segment. In the fourth quarter we hope to ramp up our 720p high definition products. For next year, we hope to ramp up our revenue from the high end, i.e., the D1 720p high definition products will account for around 30% to 40% of our total revenue.

Rick Hearn - Credit Capital Partners

It sounds like the MP4 traction you are already realizing, as it was 10% of the total currently. Obviously the MP4 is a higher margin product. Is that enough to offset some of the ASP erosion, and I know, Patricia, in the past you talked about 40% to 45% gross margin goal for the company. Is that still expected for 2010?

Patricia Chou

For the high end products, for MP4, we expect to get 35% to 40% of gross margin, and for low end products, for the MP3 products, we expect to sustain a 30% to 35% gross margin. So, in total, we hope to work for a 30% to 35% gross margin, depending on the product mix. This is my own adding on following Niccolo’s comments.

All of the gross margin depends on the volume, the so-called 35% to 40%, or 30% to 35% of gross margin were not realized until we move on to the next production stage. Still in early stage of the product lifecycle, we may or may not be able to enjoy the high margins.

Rick Hearn - Credit Capital Partners

That's helpful.

Patricia Chou

Niccolo just mentioned that after we move on to the mass production stage, we will continue the cost down efforts to sustain the 40% to 45% gross margin in the long run, but this will not happen immediately. We will have a better chance to make it two years later.


Thank you. We have no more time for questions. I would now like to turn it back to management for closing remarks.

Patricia Chou

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


Ladies and gentlemen, this concludes the Actions Semiconductor third quarter 2009 earnings conference call. If you'd like to listen to a replay of today’s conference, please dial 303-590-3030 or 800-406-7325 and enter conference ID number 4164742.

ACT would like to thank you for your participation. You may now disconnect.

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