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China Techfaith Wireless Comm. Tech. Ltd (CNTF)

Q3 2006 Earnings Call

November 13, 2006 7:00 pm ET

Executives

David Pasquale - Investor Relations

Defu Dong - Chairman of the Board, Chief Executive Officer

Gilbert Lee - President and Chief Operating Officer

Christopher P. Holbert - Chief Financial Officer

Analysts

Adele Mao - Susquehanna Financial Group

Li Tang - Pacific Crest Securities

Brian White - Jefferies & Co.

Tien Yu Sieh - Merrill Lynch

Chang Qiu - Forun Technology Research

Julie Chen - Brean Murray, Carret & Co.

Presentation

Operator

Ladies and gentlemen, thank you for standing by.

(Operator Instructions)

A replay will be available two hours after the call today through midnight Eastern standard time on November 20, 2006. The replay dial-in number is 888-286-8010, and 1-617-801-6888, with the passcode 67185921. The replay will also be accessible at www.techfaithwireless.com.

I would now like to turn the conference over to David Pasquale. Please go ahead, sir.

David Pasquale

Thank you, Operator and thank you, everyone for joining China Techfaith’s third quarter 2006 earnings call. With us today from the company are Chief Executive Officer, Mr. Defu Dong; President and COO, Mr. Gilbert Lee; and CFO Mr. Christopher Holbert.

After management’s prepared comments, we will have time for any questions.

If you have not yet received a copy of today’s results release, please call the Ruth Group at 646-536-7003, or you can get a copy of the release off of Techfaith’s website.

The company’s attorneys advise that this call will contain forward-looking statements. These statements are made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipates, future, intends, plans, believes, estimates, and similar statements.

Among other things, the business outlook and quotations from management on this call, as well as Techfaith’s strategic and operational plans contain forward-looking statements. Techfaith may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission on Form 20-F and 6-K, et cetera, in its annual report to its shareholders, in press releases and other written materials, and in oral statements made by its officers, directors, or employees to third parties.

Statements that are not historical 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; mobile handset brand owners discontinuation or reduction of the use of independent design houses; Techfaith’s ability to retain existing or attract additional international customers; Techfaith’s earnings or margin declines; failure of competing against new and existing competitors; and other risks outlined in Techfaith’s filing with the U.S. Securities and Exchange Commission, including its annual report in Form 20-F.

Techfaith does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

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

Defu Dong

Thank you, David, and welcome to our third quarter call. The third quarter came in as we expected. The key point is the considerable progress we have made this year in our transition to 3G and our international customer base.

We ended the quarter with 37 projects in-house; ten were for 3G and two were for 3.5G. We recently received Approved Vendor status from Philips Consumer Electronics. This was a long and far-reaching process. Our technical and internal management abilities helped us to come through with flying colors.

Philips’ acceptance is an important part for [third-party] guarantees and revenue. It is up to us to get [inaudible]. We finished one project for Phillips and in the process of auditing, we secured another four projects under this [inaudible] route.

We are also optimistic that we will be able to finalize the approval process with another tier one customer in the first or second quarter of next year. In the meantime, however, we are already winning contracts without such approval.

Finally, we continue to win design projects with a third tier one customer, with no audit approval process required.

As we look forward, we are conservative for this year, for the bright future for Techfaith. We understand that we have to produce results in order to regain the strong following we have always enjoyed with investors.

We have worked with a new team here and we have a strong customer base that leads to sales plus results, and we are moving our stream into tier one players.

Our 3G units are expected to grow, particularly as we move through 2007, giving us future confidence.

Our goal remains the same as always: to build one of the world’s global strongest handset applications software and solution companies. We are well along the way and expect our results will start to better reflect our progress. This should start with marked improvement in Q4.

We thank you for your support and hope you will continue on with Techfaith.

Let me now turn the call over to Gilbert Lee for a further review of the business. Gilbert, please go ahead.

Gilbert Lee

Thank you, Mr. Dong, and good morning, good evening to everyone. The mix of our business in Q3 was clearly not favorable from a margin standpoint, with modules far outweighing design revenue.

Design business in Q3 was most affected by the transition. Revenue from Chinese customers was less, and the revenue from major international customers is just starting to be recognized. We have sharply reduced the number of domestic design projects, and have shipped the local customers to our PCBA business. The revenue recognition cycle is significantly slower for our international customers.

Overall speaking, in Q3, we had 37 projects in process. 19 projects made revenue contributions. About 86% revenue of design fees was attributed to international customers.

We expect design revenue will start to gain in Q4, with a more favorable mix helping our bottom line.

For our smart phone business, six models have been launched in Q3. By the end of Q4, another eight models will be launched. In total, we will have 14 models this year.

We have secured 13 international customers, from North and South America, Southeast Asia, European countries, and Russia. Shipments have been made to the above markets in Q3. We have another seven Chinese customers.

We are clearly not happy at all with the Q3 loss of $0.15 per share, and we do not plan to run our business at this level going forward. This means growing our profitable revenue to improve the business, rather than cutting back on investments.

We have reviewed our employee base and do not see this as the time to cut back. Based on customer demand level, we actually expect to hire another 100 to 200 engineers by the end of this year.

On the positive side, we ended this quarter with a balance of $134.3 million in cash and cash equivalents.

We also started our previously announced buy-back in Q3. Given the September approval, it did not get fully underway. We purchased 77,000 shares by the end of September, and then, another 500,000 by today. We will continue to make such open market purchase within a certain price range.

Finally, as we look to the current fourth quarter, we maintain our annual revenue guidance in the range of about $78 million to $80 million for the full year of 2006.

Before turning to Q&A, we noted in our release today that there is a $771,000 decrease in previously reported Q2 net income. Restated Q2 net income is now $3.1 million. A full table is on the release. The revenue restatement was necessary to address an under-payment of employee’s welfare for the historical period ending March 31, 2006. A project code error had resulted in the company’s incorrect reporting of revenue in the second quarter of 2006. On the employee welfare issue, we were informed that Techfaith had previously misinterpreted certain aspects of the PRC employee welfare regulations resulting in the underpayment. We are obviously fixing it.

Operator, that concludes our formal comments. We are now ready to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Adele Mao with Susquehanna International Group. Please proceed.

Adele Mao - Susquehanna Financial Group

Hi, I have several questions. First of all, I would like to talk about smart phone. Could you talk about your smart phone gross margin in the quarter?

Defu Dong

Gilbert, please answer this.

Gilbert Lee

Yes.

Defu Dong

I should answer this question, but today I am on business in Paris, so mainly the questions will be answered by Gilbert. Some questions I will answer. Gilbert, go ahead.

Gilbert Lee

The Q3 smart phone gross margin is about 27%. Because we are a follower in the smart phone business, the major players in Taiwan who dominate a very large market share, so we offer lower price to attract more international customer initially.

Smart phone shipment is just ramping up. We cannot enjoy the economies of scale at this stage. However, we believe that the gross margin will be 30% in the long run, even with some price erosion in the future, due to the high-end product and the 3G products we are going to roll out in the coming quarters.

Adele Mao - Susquehanna Financial Group

Okay. Could you just, since your smart phone business is just ramping up, could you talk about your quarter unit trends and ASP, and your expectation for ASP trends going forward?

Gilbert Lee

We started this business in Q2. In Q2, we shipped about, a rough number is 9,000 units, 9K. In the third quarter, it is 15K. At this stage, we think Q4, to be very conservative, we will ship about 40K, 40,000. I think the number will be above that significantly.

Based on this run-rate, for Q4 and Q1 in ’07, we have ordered about 100K per quarter for these two quarters. We just have a huge backlog. We cannot fulfill those orders. We tried to take them up.

Based on those things and all the learning curve on the procurement, it is a logistic issue. I am thinking next year, the whole year, we are shooting for about 400,000 units for the full year.

The ASP, we still maintain $200. Yes, they will have price erosion due to the competition, but I think this is a newer model, the high-end model, more complicated mechanical design, plus the 3G products rolled in, so I think overall speaking, the whole year, the ASP will be around $200.

Adele Mao - Susquehanna Financial Group

Okay, you guys mentioned before in your pre-announcement that there have been some logistical issues on smart phone. Have you resolved those? If not, what are you guys doing to move ahead?

Gilbert Lee

Yes, this logistic issue includes a component supplier issue, so yes, the past issue, we solved that. In a way, we do not know what will happen in the future. We tried to stabilize and foresee all those risks, and rectify that before hand.

Adele Mao - Susquehanna Financial Group

Also, on design revenue gross margin, I understand why gross margin is like 5% for the quarter, but I would assume your design gross margin should return somewhere to 40%, 50% range. Do you agree with that?

Gilbert Lee

Yes.

Adele Mao - Susquehanna Financial Group

Okay, but what confidence level do you have for the design margin to ramp up into 2007?

Gilbert Lee

In 2007, once revenue from international customers are realized to a certain scale, we are very confident that gross margin will return to around 50%.

Adele Mao - Susquehanna Financial Group

All right. Could you also talk about why your gross margin on PCB, PCBA business?

Gilbert Lee

Okay, the PCBA, our core competencies remain the same in the handset design. We believe staying with technological advancement in handset design will further leverage our core competence in ODM, which is a PCBA model business, which is a PCBA in the Smart phone, in terms of cost efficiency, both time to market and the tailor made offering to operators. We do a PCBA business based on several things, the rationale behind that.

The first one, CSM and the CDMA 1X are mature technologies in Chinese markets. Margin erosion is a fact. As we are serving more international customers, we need to reallocate more resources for international markets. We will not abandon the Chinese market, where we already have a solid customer base.

We believe the better way to serve them is the PCBA. By leveraging our technology leadership, our PCBA is more cost-effective than our competitor. PCBA will not be one of our major businesses. It will not downgrade our product portfolio. We will keep an eye on the price change and accounts for our shipments to a reasonable level. This is more of a strategic movement against our competitors.

Our margin, we are still shooting for 15% in the whole year this year.

Adele Mao - Susquehanna Financial Group

Okay, so that is probably more consistent with some of your competitors out there.

Gilbert Lee

Right.

Adele Mao - Susquehanna Financial Group

Okay, thanks very much.

Operator

The next question comes from the line of Li Tang with Pacific Crest Securities. Please proceed.

Li Tang - Pacific Crest Securities

Thank you. My first question is on operating expenses. Excluding your $1.5 million on your account receivable reserve, your operating expenses look like $15 million this quarter. I understand you spend quite a bit on working with some of the tier one OEMs, but how should we think about it going forward into 2007? What is the quarterly run-rate look like?

Gilbert Lee

If you count as an expense item, I would suggest you combine the R&D plus cost of goods together. If you add those things together, you can see from Q2 to Q3, the number is quite flat. Currently, we have 37 projects in-house, in progress that we are working on, with only 19 projects contributing to revenue. Others have not hit the milestone to allow us to recognize the revenue. That is what we said earlier. Our workload is there. Everybody is busy. The project is there -- it is just the transition. We cannot secure the contract early enough and it is taking a longer time to recognize the revenue.

The cost items, the expense items, I think it will stay quite stable for next year. We will add some engineers, but you will not see a big jump on the expense item. It should be a smooth growth.

Li Tang - Pacific Crest Securities

Just to clarify on that, when you say the growth, the cost of goods sold, actually I think you mean the cost of design fees, because that is where you bill all the engineers. I did that math. It looks like $15 million a quarter. Is that the way to think about it? Your Smart phone business is going to grow, and that gross margin is more on the cost of goods sold, related to the cost of goods sold, so about $15 million spent on a headcount, total headcount. Is that the right way to think about it?

Gilbert Lee

Thank you for your correction. Yes, I mean the cost of goods of our design business plus R&D expense. Its total run-rate is about $15 million. We are scrutinizing that number. We are cost cautious, so even on the $15 million, I think we will try our best to spend that money. Next year, we think it maintains that kind of level.

Li Tang - Pacific Crest Securities

Great. Second question is how much of your Q4 revenue guidance is design fees and royalties?

Gilbert Lee

Okay, at this time, based on the fact that we are making headway into the Japanese market, we believe Q3, we will see a sequential growth in Q4 -- coming off of Q3, we will see a sequential growth in Q4.

We do not want to give a clear number at this time, but we maintain the full-year guideline -- our revenue is around $78 million to $80 million. Also, by coming off the worst quarter in Q3, we continue to grow in Q4. I think the trend will be continued into 2007.

Li Tang - Pacific Crest Securities

Okay, sure, that’s fair. Last question, do you recognize any royalties from your PCB sales?

Gilbert Lee

We do. We do. The PCBA business just started. We do have some royalty recognition from the PCBA business.

Li Tang - Pacific Crest Securities

Okay, so even -- let’s say your design fee is flat next year, and that your PCBA business keeps growing next year, we should see an up-trend for your royalty income next year?

Gilbert Lee

Yes.

Li Tang - Pacific Crest Securities

Okay.

Gilbert Lee

And for accounting purposes, probably for next year, we will take out the royalties line item, the revenue item. We will combine the design business is a design business. When we report design revenue, it will include NRE plus royalty from design revenue. For PCBA, when we report that revenue, it will include the ODM sales plus royalties. It will make the business more clear to everybody.

Li Tang - Pacific Crest Securities

Thanks, that will be great. Thank you.

Operator

Your next question comes from the line of Brian White with Jefferies. Please proceed.

Brian White - Jefferies & Co.

Yes, I am wondering, Gilbert, if you could talk a little bit about profitability in the December quarter. Do you think you will be profitable?

Gilbert Lee

No, it is not clear right now. We are still trying for several design deals. It also depends on how many milestones we hit. I think at this point, these are the two key factors, but definitely the results will be much better than Q3.

Brian White - Jefferies & Co.

Okay, and just on the smart phones, I missed, what did you say you are expecting for revenue in the December quarter in the smart phones?

Gilbert Lee

December I talked about the units and essentially you multiply by $200, you will get the number. The units, I will put it on the planning paper is 400,000 units. I think there is a high chance we will ship more than 400K, but to be on the conservative side, I will put 400,000 units now. So we are talking about $8 million to $9 million, as a worst case.

Brian White - Jefferies & Co.

Okay, and Gilbert, how many smart phone customers are you dealing with today and how many do you expect to ramp in 2007 thus far?

Gilbert Lee

Like I said earlier, we have 13 international customers. They are from North America, Latin America, Southeast Asia, Europe, and Russia, and all of them made revenue contributions in Q3. Also, we have seven Chinese customers. Definitely the customer base will grow. We are trying very hard in North America and we also try to explore in Europe.

Brian White - Jefferies & Co.

Okay, and all of these are smart phone customers, Gilbert?

Gilbert Lee

All those, we are talking about smart phone customers.

Brian White - Jefferies & Co.

Okay, thank you.

Operator

Your next question comes from the line of Tien Yu Sieh with Merrill Lynch.

Tien Yu Sieh - Merrill Lynch

Hi, Gilbert. Could you just recap, what was the smart phone revenue for the past quarter?

Gilbert Lee

For the past quarter? In Q2, it was about $1.9 million, and in Q3, it is about $3.1 million.

Tien Yu Sieh - Merrill Lynch

Secondly, I just want to ask about your TDS CDMA activities and sort of what is the update there. Also, is the business model going to be a design business or is it going to be a component business?

Defu Dong

Gilbert, I think I will answer this question. For the TDS CDMA, today we have also three business models. The first, actually, we have one customer passed the Chinese Government approval test just last week. There is also a top-five branding campaign.

First, we want to ramp CDMA. We also provide ODM business and PCB business, three business models we will all do if the government releases the license.

Tien Yu Sieh - Merrill Lynch

But have you secured your own design approval for your PCBA platform?

Defu Dong

TDS CDMA, We use one top-five branding campaign that passed government approval.

Tien Yu Sieh - Merrill Lynch

But do you have your own platform that needs to get government approval? Because some of your competitors have said that, for example, that they are partnering with a top-five customer. They have just seen approval for that model, but they have their own model which they have also secured government approval for.

Gilbert Lee

We will never promote our own branding, so what we did is a complete 300 sample for both in-house and a field test by MII, which is the Chinese Government, in July and we passed two types of approval. But we are -- I will use the word hiding behind OEM, its name, but we do have our own design model, but not with our brand name.

Tien Yu Sieh - Merrill Lynch

Besides your top-five customer, are you seeing any interest from any of your domestic customers to purchase PCBA solutions for TDS CDMA?

Gilbert Lee

Yes, we have two others, so in total, we have three customers in hand now.

Tien Yu Sieh - Merrill Lynch

Right, I guess the two domestics would be on the PCBA platform?

Gilbert Lee

Right.

Tien Yu Sieh - Merrill Lynch

Okay. Do you have any indication of when you think shipments will begin?

Gilbert Lee

It totally depends on the government, when the government issues the license. Say they issue in Q1, I would say in Q3, Q4, we will recognize significant revenue. For these few quarters, we will just recognize revenue by the simple bill per the ODM model, certain dollars per unit.

Tien Yu Sieh - Merrill Lynch

Right. Any issues with supply chain? Do you think chipset availability, any of that might throw that off?

Gilbert Lee

Going forward, we can communicate with our chipset provider. There is no issue yet.

Tien Yu Sieh - Merrill Lynch

Okay. Thanks.

Operator

Your next question comes from the line of Chang Qiu with Forun Technology Research. Please proceed.

Chang Qiu - Forun Technology Research

Good morning, Defu and Gilbert. A few questions. First one, in your, in this quarter, do you have any 10% customers?

Gilbert Lee

10% customers, I think yes, we do have some. Let me run down the list for you -- Toshiba, NEC, and one Chinese customer, Haier - h-a-i-e-r.

Chang Qiu - Forun Technology Research

Haier, okay, Toshiba and NEC -- so you have three 10% customers?

Gilbert Lee

Right.

Chang Qiu - Forun Technology Research

How much revenue contributions did they have?

Gilbert Lee

We cannot disclose that.

Chang Qiu - Forun Technology Research

Okay, that’s fair. For the fourth quarter, how much should we be looking for in the design plus royalty revenue streams in your mix?

Gilbert Lee

As I stated earlier, we were reluctant to give the exact number, but the number definitely is higher than the number in Q3.

Chang Qiu - Forun Technology Research

I see. Okay, maybe some clarifications here. You mentioned that you have 30 projects right now, and 19 projects are generating revenues for the third quarter?

Gilbert Lee

Correct. 37 projects in process in Q3, and 19 out of 37 have revenue contributions.

Chang Qiu - Forun Technology Research

Okay, and you mentioned 18 projects are from international customers, which means 19 are from domestic customers?

Gilbert Lee

No, I would say 13 projects in total and the 19 is generating revenue. The other 18 have not reached any milestone. We cannot recognize any revenue.

Chang Qiu - Forun Technology Research

Okay. Then, among those 37 projects, how many are by international customers and how many are by domestic customers?

Gilbert Lee

I will say 13 from international customers, three are domestic customers.

Chang Qiu - Forun Technology Research

Okay. Thank you.

Operator

Your next question comes from the line of Julie Chen with Brean Murray Carret. Please proceed.

Julie Chen - Brean Murray, Carret & Co.

Hi, Gilbert, how are you doing? Just trying to get some logistics, if I may. Could I get the cap-ex expense for the quarter, and also the depreciation and amortization for the quarter?

Gilbert Lee

For Q4?

Julie Chen - Brean Murray, Carret & Co.

For the third quarter. Cap-ex for the third quarter and depreciation and amortization for the third quarter.

Christopher P. Holbert

The cap-ex expense is around $13 million for the third quarter.

Julie Chen - Brean Murray, Carret & Co.

And depreciation/amortization, if I may ask?

Christopher P. Holbert

Depreciation is about 600K.

Julie Chen - Brean Murray, Carret & Co.

600K -- could I also get a clarification? On the press release, Gilbert, you mentioned about three tier-one customers. You mentioned about the first one, which I believed you mentioned Phillips. The second one you mentioned, that may be realized in the second quarter of next year, and you also mentioned a third one. Could I inquire when this might get realized in terms of the contract signing for the third tier one customer?

Gilbert Lee

Contract signing should be in Q1.

Julie Chen - Brean Murray, Carret & Co.

The first quarter of 2007?

Gilbert Lee

Right.

Julie Chen - Brean Murray, Carret & Co.

So, if I were to understand the timing of things, would all three contracts start realizing revenue in the first quarter of next year?

Gilbert Lee

Once we sign the contracts, we start performing, we start doing the work, so it takes about one quarter or so to reach the first milestone. I think the latest revenue recognition time will be Q207.

Julie Chen - Brean Murray, Carret & Co.

For all three of them, if I may ask it that way?

Gilbert Lee

Yes.

Julie Chen - Brean Murray, Carret & Co.

Thank you very much.

Gilbert Lee

Yes, I just want to make one thing clear, because I already saw some misunderstanding of my misstatement. I was talking about a smart phone shipment in Q4. I said it was 40K, 40,000 in Q4. I was also saying if you talk about the orders in-house in Q4, that is 100K. We have a huge backlog. We try our best to ship more. Also, in Q107, we already have a 100K order in hand. So, if we are taking this as the run-rate, we can estimate in full year ’07 at least we will ship 400K units.

I hope everybody understands that statement. Sorry for the confusion.

Operator

(Operator Instructions)

Your next question is a follow-up question from Chang Qui with Forun Technology Research. Please proceed.

Chang Qiu - Forun Technology Research

Good morning, Gilbert. This follow-up question is actually regarding your operating expenses. You mentioned earlier to an earlier question that it is about flat to the second quarter, but actually there is quite -- a $1 million difference, even if you take out the $1.5 million bad debt expense. Could you elaborate here?

Christopher P. Holbert

Yes, a portion of that, as you mentioned, is definitely because of the revision for bad debt. Further increases would be actually the result from salary increases that we have for our engineers. Those are primarily the two biggest items that would make up the increase.

Chang Qiu - Forun Technology Research

I see, so in the current quarter, Q4, because you are going to hire more engineers, which means we should be seeing higher product development expense, I mean product development expenditure?

Christopher P. Holbert

Going forward to the Q4, I am not sure you will see that much of a big ramp-up, but in Q4, we will see on the G&A side, we will have a one-time dip as a result of the write-off of some leasehold improvements because we are moving to a new building. You will see that covered in Q4.

Chang Qiu - Forun Technology Research

How much is that?

Christopher P. Holbert

That will be around $2 million.

Chang Qiu - Forun Technology Research

Around $2 million. On the R&D line, how much of an increase should we see?

Gilbert Lee

It should be the bare minimum -- even if we add some people, you will not see the increased level like we had in Q3.

Chang Qiu - Forun Technology Research

I know, but in the dollar amount, it should be up from Q3?

Gilbert Lee

Down from Q3.

Chang Qiu - Forun Technology Research

Okay, I guess I need more clarification here on why you are adding people and then the R&D expense is coming down.

Gilbert Lee

Because we are recognizing the revenue. Once we can recognize more revenue in Q4 on the design business, then we can allocate those R&D costs into costs of goods, so R&D revenue goes down.

Chang Qiu - Forun Technology Research

Okay. All right, thank you.

Operator

Your next question is a follow-up question from Li Tang with Pacific Crest Securities. Please proceed.

Li Tang - Pacific Crest Securities

Thank you. Just a follow-up on the minority interest. Could you give us more clarity on how we should model that going forward?

Christopher P. Holbert

As far as how to model the minority interest going forward, could you clarify?

Li Tang - Pacific Crest Securities

Yes, if you look historically, it has been kind of all over the place, positive, minus, negative. What is driving the difference? Even from Q2 to Q3, there is quite a bit of difference. It is hard to make a difference on the bottom line. I am just wondering, what are the factors that are driving those differences, and how should we think about it going forward?

Christopher P. Holbert

I guess going forward, it really depends on the two joint ventures that we have, one being [TechSoft], which we do not really expect to be profitable until some time in the future, and the other being one that we have with NEC, so it really depends on the results of those two joint ventures.

Li Tang - Pacific Crest Securities

So it is the minority interest you have in your not wholly-owned derivative, is that the way? I guess I am a little bit confused about -- is that going to be incremental to your bottom line, or the other way around?

Christopher P. Holbert

We think that in Q4, it will still add to the bottom line.

Li Tang - Pacific Crest Securities

Okay. Thank you.

Gilbert Lee

Because the new JV, we are losing money, so it will be contributed by our partners, so it is a positive to us on that line item.

Li Tang - Pacific Crest Securities

Yes, okay, yes, I see. Thank you.

Operator

Thank you for your questions, ladies and gentlemen. We will now turn the call back over to management for closing remarks.

Gilbert Lee

As I said earlier, it was definitely not a great quarter, but our team still maintains a very positive attitude and we see every business, from design, from smart phone, and the PCBA and the wireless modules, every one of them getting stabilized, and we have a huge backlog. That is the only word I can describe our business situation, and we will continue to enhance our engineer resources, our engineer capabilities, and we will improve our management infrastructure. We are working for better results in the following quarter and in every quarter.

Thank you, everyone, for your time and for your long-term support. I will wrap up my comments. Anything you want to add, Mr. Dong?

Defu Dong

Thank you so much. Like Gilbert said, I think for the smart phone side, Europe also has a big change, and we [inaudible] Actually, let’s say I meet the four customers, three also that are existing. I hope we can do more better in the future and have good feedback for all the investors.

Operator

Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect. Have a good day.

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