Actions Semiconductor's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Actions Semiconductor Co., Ltd. (ACTS)
by: SA Transcripts

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

Q3 2013 Earnings Conference Call

November 06, 2013 09:30 AM ET

Executives

Elaine Ketchmere – Investor Relations

Zhenyu Zhou – Chief Executive Officer

Nigel Liu – Chief Financial Officer

Analysts

Bob L. Schnell – Dougherty & Co. LLC

Richard Fearon – Accretive Capital Partners

Edison Chu – G2 Investment Partners

Operator

Ladies and gentlemen thank you for standing by and welcome to the Actions Semiconductor Third Quarter 2013 Results Conference Call on the 6th of November, 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.

Elaine Ketchmere

Thank you, Ana. Good morning ladies and gentlemen, and good evening to those of you joining us from China. I’d like to welcome all of you to Actions Semiconductor’s earnings conference call for the third 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 open in the U.S. today, Actions issued a press release discussing the results for its third quarter ended September 30, 2013. The press release was also be filed on Form 6-K with the U.S. Securities and Exchange Commission. The press release is accessible online at the company's website or you can call 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 call, Actions’ management team may make projections or other forward-looking statements regarding future events or future financial performance of the company. We wish to caution you that such statements are simply estimates and actual events and results may differ materially. We refer you to the documents that Actions files from time-to-time with the SEC, specifically the company's most recently filed Forms F-1, 20-F and 6-Ks. These documents identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

And now, I’d 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 third 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 Nigel and Chung Hsu, Actions' Director of Investor Relations.

Quarter overview; our third quarter results were impacted by lower than expected overall demand for white-box tablets during the third quarter. Significant DRAM price increases and a slower than anticipated adoption of quad-core solutions in overseas markets, resulting in a sequential decline in revenue and a net loss for the quarter.

Revenue for the third quarter was US$16.9 million, up 6.9% year-over-year and down 8.8% from the previous quarter. The gross margin was 33.2%, slightly below our expectations of 34%.

Net loss attributable to Actions was US$0.2 million, or $0.002 per basic and diluted ADS for the third quarter of 2013, compared to net income attributable to Actions of US$0.7 million, or $0.01 per basic and diluted ADS for the second quarter of 2013. And net income attributable to Actions of US$0.7 million, or $0.01 per basic ADS and $0.009 per diluted ADS for the third quarter of 2012.

Now, I will discuss our Whitebox tablet solutions and our traditional portable audio and video products business. Whitebox tablet solutions; during the third quarter, we completed the OWL series chipset product [indiscernible] In August, we introduced our second generation dual-core product ATM7021 targeting the low-end of the tablet market. The low-end market is primarily located overseas and are comfortable that largest of audio of the overall Whitebox tablet market. This market we are seeing a strong trend [indiscernible] waiting from single core to dual core solutions.

By altering powerful dual core fulfillment set of single core cuts. ATM7021 is an attractive option for tablet manufacturers, seeking to have a more competitive offering in the low-end markets.

Since this introduction shipments of ATM7021 have erupted quickly. We expect ATM7021 to make a meaningful revenue contribution in the fourth quarter. As we take a very aggressive pricing strategy to quickly cover market share from the single-core [indiscernible] low-end market. Our gross margin will be impressive in the near-term. We believe it is an important element in our strategy, direct volume and an increased market share and help us to return profitability.

In 2014, we expect ATM7021 to be a significant revenue growth driver for actions as we gain additional market share and more and more tablet manufacturers migrate to dual-core lithium based SOC for a single product. While the migration from single-core to dual-core is an industry trend at the low-end of the tablet market, core of our solutions are well covered by Chinese domestic [indiscernible] end market.

Our first generation quad-core SOC solution ATM7029 was the main revenue driver for the first half of the year. During the second half of 2013, due to the increase in U.S prices and other factors, the adoption of quad-core solutions were slower than expected by oversea markets during its peak season, resulting in lower than expected revenue in the third quarter. We believe this is a temporary delay due to issues like DRAM price increases. And that migration from dual-core to higher performance core chipset is confidential and real dominant the mid to high-end of the tablet markets in 2014, especially in North America and Europe.

As such ATM7029 is well positioned to capture additional market share in 2014, once the migration from dual-core to quad-core accelerates. In September, we completed our [indiscernible] ATM7039. Our second generation high performance quad-core tablet SOC. Targeting the mid to high-end of the tablet market, ATM7039 was for high resolution LCD displays, and provides users with the first rate [indiscernible] experience, including the support of the new introduction of standard [indiscernible] to 65. ATM7039 is still in an early stage of introduction. And we expect to begin initial production and shipments during the fourth quarter.

Our product family of ATM7021, ATM7029, and ATM7039 SOC solutions addresses each segment of the market from low to high end. Under these weapons, we are excited about the opportunities in the large and growing white-box tablets markets and believe that we are well positioned to gain additional market share in 2014 and beyond.

We continue to stay ahead of the technology curve and are currently developing our third generation high performance quad-core chipset with features more powerful CPU and GPU cores, more advanced media capabilities and utilizes 28nm process technology for better performance, power and performance cost ratio.

We will introduce our third generation chipset in 2014, target Tier 1 and Tier 2 name brand customers. We will share additional details with investors as we roll it out.

Traditional products; in our traditional portable audio and portable video products business, we saw a sequential increase in shipment of audio products shipments or shipments of video products declined slightly. We continue to see good performance from some of our newer highly differentiated products such as our extended to line of high definition video products inspired by our HD portable media player.

However, our current expectation is that revenue from the traditional portable audio and the portable video business in 2013 will be below 2012 levels. Although the overall markets or traditional portable audio and portable video products maybe shrinking, this is due an important part of our business that generates profitable cash flow and diversifies our revenue stream and the market leader, now have the portable audio products and portable video player via streaming and video capture.

We are in an advantageous position while introduces new cutting edge products with differentiated features. Going forward, we will continue invest in R&D to support our new product development initially and growth strategy.

In conclusion, in summary, despite soften, the anticipated third quarter sales, we hope positive outlook for the future. Following several months of slower growth Whitebox tablet market is post for resurgence and strong growth in 2014. Whitebox tablet manufactures are rapidly migrating to dual core skill set for their low end products and we significantly increased the use of quad-core solutions, but they are meant to high-end models in 2014.

With the additions ATM7021 and ATM7039, we have a complete products portfolio ready to beat these needs and we are aggressively seeking to increase our share of the Whitebox tablet market in 2014 and beyond.

We are contracted to achieve our revenue growth target of at least 25% for the full year of 2013 and we continue to mindful of cost as we will carefully manage our cash resources with the goal of achieving operational profitability.

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

Nigel Liu

Thank you, Zhenyu Zhou. As a reminder, all financials are reported in accordance with U.S. GAAP.

For the third quarter ended September 30, 2013, we reported revenue of $15.9 million compared to $18.5 million in the second quarter of 2013. Our gross margin for the third quarter was 33.2% compared to 32.2% for the prior quarter. For the third quarter, total stock based compensation expense was $0.1 million compared to $0.1 million in the second quarter.

R&D expense was $6.5 million or 38.8% of revenue for the third quarter compared to $7.3 million in the second quarter. R&D expense improved $0.3 million in managed expense relating to new products compared to $1.7 million in the second 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 third quarter or 13.6% of revenue, unchanged on the second quarter. Sales and marketing expense was $0.4 million in the third quarter or 2.6% of revenue, due to liabilities from the second quarter. We continue to timing mainly depends therefore and sales in the third quarter by increasing the efficiency of our workforce and that activity our overall process.

Operating loss was $3 million for the third quarter of 2013 compared to an operating loss of $3.9 million for the prior quarter. Net other income for the third quarter was $0.2 million due to foreign exchange benefit compared to net other income of $1.2 million for the second quarter also related to a foreign exchange benefit.

In the second quarter of 2013, the company has realized $0.5 million in dividend income from other increment, representing that it has earned distribution from one of our invested company. No net income was reported in the third quarter of 2013.

Interest income was $2.9 million for the third quarter, down from $3 million in the second quarter. Loss before tax was certain to solid for the third quarter, comparable income before tax of $0.6 million in the second quarter.

Net income tax credit was $0.2 million for the third quarter, compared to net income tax credit of $0.3 million in the second quarter. Net income attributable to Actions Semiconductor on a U.S. GAAP basis for the third quarter of 2013 was $0.2 million or $0.002 per basic and diluted ADS. This compares to net income of $0.7 million or $0.01 per basic and diluted ADS for the second 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 $215.7 million as of September 30, 2013 compared to $220.3 million as of June 30 of 2013. Of the $215.7 million total, $89.3 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.

$126.4 million was in trading securities and the current marketable securities which was principal guarantee or price investment with higher interest rate and the minimal returns of three-months, less marketable securities, while many issue manage or guarantee by top rating status on financial institutions in China.

Our short-term borrowings totaled $13.5 million at the end of the third quarter, up from the $35.5 million at the end of the second quarter. We continue to utilize the agreement we entered into earlier this year that allowed us to borrow the U.S. dollar and lower 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. dollar cash needs. This approach have us take advantage of lower interest rates on U.S. dollar loans by enabling us to continue earning high interest rate on all RMB denominated investments even considering short-term exchange fluctuations.

Accounts receivable was $7.4 million at the end of the third quarter of 2013 compared to $6.9 million at the end of the second quarter. Accounts receivable includes amount due from deposits and interest fees. Inventory was $25.4 million at the end of the third quarter, down from $27.8 million at the end of the prior quarter.

We continue to buy back shares, spending approximately $0.8 million on the share repurchase program during the third quarter compared with $0.6 million in the second quarter. Our repurchase activity remains constrained by [indiscernible] as well as limited activity in the quarter.

As of September 30, 2013, the company had invested approximately a total of $48.6 million as appropriate representing approximately 21.4 million ADS shares.

And now, turning to our outlook, first on our current market trends and the company expect revenue in the fourth quarter of 2013 to be higher than the third quarter of 2013, which is comparing to the company’s historical seasonal sales forecast. Our guidance for the fourth quarter of 2013 is for revenue in the range $13 million to $19 million.

And now we would like to open the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Thank you. The first question comes from Bob Schnell from Doherty. Please go ahead.

Bob L. Schnell – Dougherty & Co. LLC

Hello gentlemen, Zhenyu, I wanted to get some of your thoughts on the tablet market for 2014 in terms of what you estimate growth maybe and then maybe share with us some of your goals for actions of market share?

Zhenyu Zhou

Hi Bob, this moment is very hard for us to predict with exact close number of the total market in 2014, but what we know is that the normal market due for in the lower half of the portion will be significantly increased and also the quad-core portion for the total market will be at least increased by 50% to 100% next year, especially with the markets like North America and Europe.

For this year, the quad-core will be less than 10% of the total market. And we will give more detail of the overall year target in our next quarter earnings conference call. At this moment what I have to say is, we see significant play potential of our growth of revenue in both dual-core and quad-core area.

Bob L. Schnell – Dougherty & Co. LLC

Okay, that’s helpful. And the traditional audio and video business has been slightly declining, some of your thoughts for 2014 if that continues to slightly decline?

Zhenyu Zhou

Well, we certainly hope this stays at the same level, but we do expect or prepared for – and they have this slightly decline.

The traditional market consist of several different sectors the audio, the video and the boombox. We do believe that MP3 is more or less a fairly stable market and possibly with a small amount of decline. Boombox itself the traditional bloombox were definitely set for decline. But in the meanwhile, we are already cautioned so called Bluetooth box. And the Bluetooth box in longer return, we all filling the gap, potential for the decline of the traditional 10 box.

The video we expect is more or less flat to decline, so overall I believe we have a chance to be flat. That there is a possibility of the declining slightly in the next year as well.

Bob L. Schnell – Dougherty & Co. LLC

Okay, and on the tablet side, now that you semiconductor chips have gotten smarter and moved higher end. Can you give us any update on your ability to target some of the branded tablet makers in Asia?

Zhenyu Zhou

In Asia, we are confident – we already have additional two tier-1 Chinese domestic brand as our payback customer, hopefully we can announced our initial production very soon. We also have the intention to take 7039 to work with higher tier international brands. At this moment I cannot assure any names or any project yet. But we work much hard to get design win or designing in higher end branded customers. We’ll up-date once any news available.

Bob L. Schnell – Dougherty & Co. LLC

And when you say very soon I knew that something that you hope maybe by year end or is that too soon?

Zhenyu Zhou

This too we are seeing for data as you know upper ends they usually have a lengthy design cycle, so at this moment, it’s very hard to predict whether we can make such announcement.

Bob L. Schnell – Dougherty & Co. LLC

Okay, the company just a point from press releases from the past couple of years has made significant strides in terms of revenue growth and new products. You have to stock market here in the United States hasn’t given me much credit for it. How do your – any updated thoughts on your cash balance and the potential to use it in a much more material buyback.

Zhenyu Zhou

I will turn this question to [indiscernible] to talk about. We are looking to several options certainly we will continue our aggressive share buyback program, and we also looking to the possibility of making a tender offer. So I cannot just talk to give you a little bit update on what we’re working with.

Zhenyu Zhou

Hi, Bob. I think we have talked before and discuss that before and I mean for the past two three months we have been talking to different banks, and getting detail. They are in positive putting a proposal for us. Now we like ratios proposal and when we issue a proposal actually real report directed for the…

Bob L. Schnell – Dougherty & Co. LLC

Okay, I appreciate it. Good luck gentlemen, thank you.

Zhenyu Zhou

Good.

Operator

Thank you. The next question comes from Rick Fearon from Accretive Capital Partners. Please go ahead.

Richard Fearon – Accretive Capital Partners

Hello, gentlemen, this is Rick [indiscernible] as you know Rick is in China at this time and I’m filling in for him. We would like to congratulate you and support you in this Action to pursue option tender offer and we continue to show your support for that auction. We would like to know and I’m curious if you could share with us that the shares that are being purchased by Actions still be retired to low the total shares outstanding on that value for remaining shareholders?

Zhenyu Zhou

We would like to know that the shares that are being purchased by Actions will be retired. So it’s lower to total shares outstanding.

Nigel Liu

Hello. We are in the part of – which seem because couple of share where actually will be issued to the employee for the employee option. So but currently right now.

Richard Fearon – Accretive Capital Partners

Okay. Have you given any thought to reducing R&D spending to bring cost in line with revenue in the industry averages right now it looks like Action’s R&D is currently around.39% of revenue. If you look at the rest of the fables semiconductor industry the average is closer to 26%.

Zhenyu Zhou

Okay, yes, we are trying very hard to control our R&D expenses. But in the meanwhile as you know we aggressively pursue new market directions, such as tablet and grows our market share. We are pursuing higher end process technology like a 28 nanometers and all these require significant investment.

So as in this moment we don’t expect our R&D expense having been either significant translate reduced but in the meanwhile we also prevent the R&D expense includes significantly. So we expect the expense to be more or less flat in 2014?

Richard Fearon – Accretive Capital Partners

Okay, well thank you.

Zhenyu Zhou

Well thank you.

Operator

Thank you. The next question comes from Edison Chu from G2 Investment Partners; Please go ahead with your question.

Edison Chu – G2 Investment Partners

Good evening gentlemen. I had a question on the new 7021 duel-core could you provide a little bit more color on the reception and then design win traction of that product since you have launched at I understand you have had a close relationship in the past with two domestic Chinese OEMs is what I’m wondering if you are starting to see broader adoption across a larger number of customers with this new product.

Zhenyu Zhou

Excellent question that is so let me give you more description about 7021. In general, 7021 is a no attitude core product. It is hard to replace the single-core low end overseas market in general market today is [indiscernible] by single core and 7021 is primary target for the oversea exporting markets. So although our domestic partner will adopt this product as well, but this is not a product targeting for a domestic market.

So for your second part of the question, it’s yes. We have very good attraction for the oversea customers as of today. I cannot give you the number of how much ATM7021 we’re already shifting first months of shipment. It’s a significant number. So far so good I should say for ATM7021 in terms of addressing lowering oversea markets.

Edison Chu – G2 Investment Partners

Okay, great. And you’ve mentioned that the new product and the ramp up of the ATM7021could cause some pressure on gross margins. Can you quantify that a little bit better or give us a better sense of how much pressure that might cause on your margins?

Zhenyu Zhou

Yes. Edison, it’s pretty hard to predict at this moment because the market is very dynamic. There are two reasons it’s hard for us to predict the margin. One, it’s hard for us to predict the relation between quad core and dual core, okay. Second is, we have a very important strategy to get aggressively the market share first before we pursue higher gross margin.

So this is more of us determining about market by not determining by our real. So basically whatever it takes to get better market share we will try our best ATM7021. So at this moment it’s very hard to say why is that whatever – predict will take those two. But I believe this strategy will be very helpful to graph a significant market share, but mean while it will have impact for sure on our gross margin. I can’t tell you how much at this moment.

Edison Chu – G2 Investment Partners

Okay, great. And then…

Zhenyu Zhou

I believe that impact is temporary and eventually while we have the market share it was the higher margin just for market.

Edison Chu – G2 Investment Partners

Okay, great. And can you give a broader sense on the current state of the tablet market in China and the sense that at the beginning of the year obviously there were expectations of stronger growth than what’s turn out to be and that may have led to some inventory built up in some of the supply chain. Can you just give us your thoughts on where we are in terms of inventories in the channel either at retailers, distributors or at your customers or are they cleaned up now or do you think we still have a little bit more to work through before we resume better growth?

Zhenyu Zhou

Okay. So first of all let’s talk about the overall market. Certainly this year it’s Whitebox tablet market. It’s still growing from last year. We do believe this year the overall shipment is expected maybe somewhere around a 100 million units, which is higher than last year, but it’s not as high as many reports – really the picture paint of our [indiscernible] report last year like our 150 million or something like that. So I believe it’s more or less. We didn’t finish the first quarter yet. I do believe as I said it’s the software around has many units plus or minus.

In terms of the pattern on it’s slate, the first quarter and second quarter it is so and third quarter it is really poor, okay, but fourth quarter appears to be much healthier in terms of gross and the demand. So we do see the fourth quarter the overall tablet market become normal than the third quarter, I should say.

Edison Chu – G2 Investment Partners

Okay great and then, one last question on the inventories you had built up some inventories at the beginning of the year or the first half of the year when there is a little bit more tightness at the foundries, can you talk a little bit more about the mix of those inventories and how comfortable you are with your ability to sell those through?

Nigel Liu

Okay, in terms of inventory obviously we do have a little bit higher inventory that probably like to which is related to the expectation of the sales which we kept below that expectation in the third quarter. We are quite confident that process still we measure in competitive in the market and we are able to continue sale in the market.

In the prior quarter and most of the inventory are comp off product and the market is kind of delayed for acceptances in the overseas market, but that acceptance will be searched starting from next year. So we are quite confident that we are able to sale those inventory.

Edison Chu – G2 Investment Partners

Okay great thanks. Thanks for the time and the opportunity to ask questions.

Operator

Thank you (Operator Instructions) thank you sir, there appears to be no further questions at this time. Please continue with any further points you wish to raise.

Zhenyu Zhou

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

Operator

Thank you ladies and gentleman, this concludes The Actions Semiconductor third quarter 2013 results conference call. Thank you for participating, you may now disconnect.

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