Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

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

Q1 2010 Earnings Call

May 13, 2010 5:30 pm ET

Executives

Pia Kristiansen – Blueshirt Group

Niccolo Chen - CEO

Patricia Chou – CFO

Analysts

Bill Lu - Morgan Stanley

Rick Fearon - Accretive Capital Partners

Operator

Welcome to the Actions Semiconductor first quarter 2010 earnings conference call. (Operator Instructions) This conference is being recorded today, Thursday, May 13, 2010. 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 first quarter 2010 financial results. 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 Niccolo Chen, Chief Executive Officer and Patricia Chou, Chief Financial Officer.

After the market closed in the U.S. today, Actions issued a press release discussing the results for its first quarter ended March 31, 2010. The press release is 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 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 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.

Now I would like to turn over the call over to Patricia Chou.

Patricia Chou

Thank you for participating on Actions’ earnings conference call. We appreciate your continued interest and support for Actions. Similar to our first earnings call, I will provide the business update and discuss financial results for the first quarter as well as the expectations for future results. Then Niccolo Chen, our CEO, will be available during the Q&A portion of the call where I will translate from Mandarin to English on his behalf. As a reminder, our financials are reported in accordance with U.S. GAAP.

We were pleased that we saw some improvement in demand in the consumer electronics market as we entered 2010. A few positive indicators show that we continue to be well positioned to benefit from the anticipated market rebound in 2010. Our first quarter results reflect the solid demand for our high end products, particularly our Series 13 and Series 25 products [inaudible] in the QVGA and D1 segments respectively.

In addition to our traction in sales diversification, we saw an improvement in our ASP, unit cost and gross margin, a decrease in our operating expenses and continued preservation of our cash position.

Our results for the first quarter exceeded our guidance for the quarter as we began to see some positive indicators for a rebound in PMP demand. For the first quarter ended March 31, 2010 we recorded revenue of $7.9 million compared to $7.9 million in the fourth quarter of 2009. Our gross margin for the first quarter of 2010 was 39.6% compared to 34.9% for the fourth quarter of 2009. We are pleased to see continuing improvement in our gross margin has increased the shipments of our Series 13 and Series 25 products to a more favorable shift in our product mix and offset ASP erosion during the first quarter.

We remain committed to our cost down activities which also contributed to improving our results although we expect that margins will remain [inaudible] in the near-term due to the ongoing presence of ASP pressure and competitive pricing. For the first quarter of 2010 total stock based compensation expense amounted to $1 million compared to $0.9 million in the fourth quarter of 2009. R&D expense was $4.5 million or 57.8% of revenue for the first quarter of 2010 which was flat with the fourth quarter of 2009. We expect our R&D expense to represent a higher percent of our revenue as we expand our resources by growing our pool of engineering talent working on next generation PMP products and new business initiatives.

During the first quarter we hired approximately 10 senior engineers who strengthened our R&D credibility. G&A expense was $1.7 million in the first quarter or 22.1% of revenue as compared to $2.2 million in the fourth quarter or 27.7% of revenue in the fourth quarter due to receiving the ADS related expense reimbursement from our depositor bank in the first quarter.

Sales and marketing expense was $0.2 million in the first quarter or 3.1% of revenue, flat with the fourth quarter of 2009. We are pleased to see these categories trending to lower levels as a result of our hiring freeze and salary cuts imposed on non-engineering functions.

Operating loss was $3.3 million for the first quarter of 2010 compared to operating loss of $3.7 million for fourth quarter 2009. This is related to the sequential improvement in profitability and our continued cost management in the first quarter. Net income of $31,000 was recorded in the first quarter of 2010 as a result of a foreign exchange gain on Renminbi and Taiwanese Dollars versus U.S. dollars. This compares to other income of $29,000 for the first quarter 2009 also related to foreign exchange gains.

Interest income was $2.4 million for the first quarter of 2010, slightly down from the $2.7 million in the fourth quarter of 2009. Fair value change in trading securities was $131,000 for the first quarter as a result of partial disposal of our traded securities. Loss before taxes was $0.7 million for the first quarter as compared to a loss of $7.4 million in the fourth quarter of 2009.

Included in the fourth quarter of 2009 loss was an impairment loss of $6.4 million as a result of the estimated amount to be realized from these investments below their carrying value which we identified and recognized other than temporary impairment for certain long-term investments accounted under the [inaudible] during the preparation of our financial statements that were included in the Form [inaudible] for the year ended December 31, 2009.

Net income expense for taxes was $30,000 for the first quarter 2010 compared to income tax credits of $0.2 million in the fourth quarter of 2009. Net loss attributable to actions [inaudible] our U.S. GAAP basis for the first quarter was $0.9 million or $0.01 per diluted ADS compared to net loss of $7.5 million or $0.10 per diluted ADS for the fourth quarter of 2009. Included in the calculation for the first quarter net loss was stock based compensation expense of $1 million and depreciation and amortization expenses of $1.1 million or in total non-cash expenses of $0.028 per ADS for the quarter.

Moving to the balance sheet, cash and cash equivalents together with fund deposits, trading securities and both current and non-current marketable securities totaled $247.9 million as of March 31, 2010 compared to $251.6 million at the end of the fourth quarter. The sequential decrease in our cash balance as of March 31, 2010 was mainly due to payment of $1.6 million for the construction in progress of our new headquarters in Zhuhai and the additional $2.6 million of share repurchase.

Of the $247.9 million total, $100 million was in cash, time deposits and short-term interest bearing investments that were generally issued by large domestic banks in China for terms no more than 3 months and can be redeemed at any time. $147.9 million was in trading securities and marketable securities, current and non-current, which were principle guarantees or [inaudible] investments with higher interest rates and a minimum term of 3 months. These marketable securities were mainly issued, managed or guaranteed by top ranking, state owned financial institutions in China. We continue to believe our ability to preserve a strong balance sheet through this prolonged economic fluctuation is a significant differentiator for the company.

Accounts receivable and notes were $3.1 million at the end of the first quarter, up slightly from $2.9 million at the end of the fourth quarter 2009 mainly due to the relatively high level of sales in March 2010. Inventories were $3.6 million at the end of the first quarter, down from $4.5 million at the end of the prior quarter. Compared with the prior quarter, our relatively low inventory balance in the first quarter directly correlated with our cost reduction efforts to gradually lower the unit costs of our existing products. Our inventory levels may fluctuate as we ramp our advanced, higher cost products and make adjustments relative to the tighter foundry capacity.

We continue to buy back shares, spending approximately $2.6 million on share repurchase program during the first quarter of 2010 compared with $2.8 million in the fourth quarter of 2009. Our repurchase activity remains restrained by trading volumes and the blackout periods for our 10B-18 program as well as limited activity in block trading.

At the end of fiscal 2009 the company had invested approximately a total of $28.8 million in the program representing approximately 12 million ADS shares. Under the current program we may repurchase up to another 8 million ADS shares through the end of the year.

I would now like to discuss our progress in each of our product categories during the quarter. The automotive and boom box product segment in the low end continues to be a source of growth for our business. This products represented approximately 20-25% of our total shipments during the first quarter. As expected, overall demand for automotive and boom box products continued to grow in 2010. We are pleased with our ability to build our share in this market and continue to see opportunities to expand in these end markets.

For the first quarter, sales to the mainstream segment of the PMP market serving the no-display, mono display and small color display media products decreased as a percentage of our total shipments. As shipment volumes of our low end and advanced product lines addressing faster growing markets continues to expand, we expect that our mainstream product lines will continue to represent a declining portion of our sales.

Even though the mainstream market side has been cannibalized by the high end and low end products we still are enjoying a leading position in market share of this category by winning over customer’s demand from competitors regularly. Our historical strength in the mainstream has allowed us to establish ourselves as the largest non-Apple PMP [inaudible] provider in the world providing a solid platform and customer base to build out our diversification efforts.

The MP4 market has continued to be a strong end market with potential growth opportunities for Actions. Shipments of our products serving the QVGA MP4, D1 PMP and high definition PMP segments increased to approximately 15-20% of our total shipments and approximately 30% of our total sales amount in the first quarter. In the first quarter we made solid traction in ramping sales of our Series 13 and Series 25 products [inaudible] the QVGA and D1 MP4 segments respectively.

Our market share in the segment of QVGA MP4 was [inaudible] has gone over 50% in the quarter. In the DI segment our high quality product designs and comprehensive customer support are helping us win over more market demand in 2010. Our shipment in D1 products has achieved a meaningful milestone with our sophisticated value-adding features. We plan to begin assembling our Series 27 chips for high definition products in the second half of this year and expect to obtain meaningful revenue contribution from this new product line in 2011.

As we ramp cost down versions of advanced product family and build our new product introductions we expect this product category to continue growing as a key portion of our revenue. Increasing sales in this category should enable us to favorably shift our product mix and partially offset ever present ASP erosion in the sector.

During the first quarter approximately 40-50% of our shipment volume made by 0.15 micron process technology. We have used the 0.15 micron process to reduce the maturity of all current and new products starting in the second quarter 2010. We plan to kick off our 0.11 micron pilot run in the second half of this year and expect to migrate our mass production to 0.11 micron in 2011 as the current tight foundry capacity for 0.11 micron will actually impact pricing [inaudible] this year. We are pleased this has stabilized the wafer pricing by using 0.15 and 0.16 micron process technology which will benefit the company’s gross margins this year.

During the first quarter prices for our components including [inaudible], LCD display and the nano flash memory were also relatively stable. We remain committed to diversifying our business and strengthening our financial position to prepare the company for long-term growth. Our initial success in ramping new chips for the advanced MP4 product segment that support VGA, D1 and high definition demand in the first quarter bodes well for the remainder of 2010.

In the low end product categories we see a number of opportunities to grow our business by expanding our offering in the automotive, car stereo, entertainment, boom box and home appliance end markets. We believe that continued investment and innovation in R&D will help us best address the [inaudible] in the portable multimedia player market and improve our ability to contract and expand our market position.

Our investments have allowed us to increase efficiencies in product development, shorten our time to market and introduce products with more cost effective features. From a financial perspective our priorities continue to address recent challenges of our environment and remain focused on first managing costs due to consistent expense reduction while continuing to recruit talent selectively. Second, preserving our balance sheet and its strong cash position. Third, repurchasing shares to the best of our ability to increase our shareholder value.

We believe the positive momentum in the first quarter is an encouraging indicator of a gradual turnaround in 2010. Our guidance for the second quarter reflects our belief the PMP market will continue to improve relative to recent quarters. As such, we currently expect that second quarter 2010 revenue will be in a range of $8.5-9.5 million. Gross margin of approximately 35% and operating expenses will be slightly higher on a sequential basis. The second quarter 2010 estimates include share based compensation expense of approximately $1 million.

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

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Bill Lu - Morgan Stanley.

Bill Lu - Morgan Stanley

If you look at the guidance for the second quarter and sequential growth for revenues can you talk about what segment that is mostly coming out of?

Patricia Chou

As we mentioned earlier the growth mainly came from the lower end products and the advanced MP4 products. For the lower end products we expanded our product offering to cover automotive, boom box, entertainment and home appliance markets based on our existing products and for the advanced MP4 segment we ended our offering from the basic MP4 players up to the QVGA D1 advanced applications.

Bill Lu - Morgan Stanley

I think you said for the high end of the market that was [30%] of revenues in the first quarter. What do you think it is going to be in the second quarter and where is it going to be by the end of the year?

Patricia Chou

In the first quarter the high end product lines accounted for around 30% of our total revenue and we expect the percentage will continue to go up while we keep ramping up more volumes in our existing advanced products and also newly developing products which will join the product portfolio in the second half of this year.

Bill Lu - Morgan Stanley

If I look at your margin guidance for the second quarter, down a little bit quarter-over-quarter and if I look at the mix I guess high end and low end both growing would be sort of offsetting for me. Is that just conservatism or what is driving the margin downside?

Patricia Chou

For the first quarter compared with the previous quarter last year, the gross margin has been going up.

Bill Lu - Morgan Stanley

I meant guidance for the second quarter.

Patricia Chou

Oh. The guidance we said approximately 35%. Of course it is not exactly 35%. If you really want a range, I would say 33-38%. But we don’t really have a full [inaudible] on the ASP so we would like to just use the average. For the second quarter we believe we have good position to stay similar in the gross margin to the first quarter.

Bill Lu - Morgan Stanley

If I look at the Series 27 which you talked about, is the right way to think about it as this is going to be a replacement market for your current MP4 offerings but you will be able to get a higher selling price on that, or do you think this is going to open new opportunities for you?

Patricia Chou

Our Series 27 is in developing process right now. We plan to kick off the sampling in the early second half of this year. This Series 27 product family is focused on the high definition 720p segment. So they are not really the replacement of our current products but expanding or migrate our high end products to even more advanced segment.

Bill Lu - Morgan Stanley

What I am trying to get at is your market share across the board is pretty high now. I think you just said your high end market share is now about 50%. So for you to get some growth going forward you need this to be basically a new opportunity. If that is the case, do you have a sense as to how big that new Series 27 market might be going forward?

Patricia Chou

Thank you so much for giving me this opportunity to clarify what I just meant in the previous discussion. The so-called 50% is mainly for a new segment within the D1 market. It is not for the overall advanced MP4 market but just special applications within D1 segment. For example, the MP4 player plus [inaudible] feature for that niche segment we have accounted for a very big portion of the overall demand within that niche segment.

Bill Lu - Morgan Stanley

What do you think is your market share in the overall high end segment now?

Patricia Chou

We are a little bit late to getting to the advanced market with video function. So the overall market share for the high end market for us now is less than our average market shares. That is why we believe our growth driver is new markets for us and it is also new market for all of the players in the PMP market.

Bill Lu - Morgan Stanley

So it sounds like you feel like you now have the right products to address that market. How do we think about your market share going forward and the growth in that market going forward?

Patricia Chou

You mean for high end markets? MP5?

Bill Lu - Morgan Stanley

Right.

Patricia Chou

We hope to win over the high end market to be positioned as good as what we have in the overall PMP market.

Operator

The next question comes from the line of Rick Fearon - Accretive Capital Partners.

Rick Fearon - Accretive Capital Partners

Nice to see the continued improvement in gross margin. To follow-up on the previous question, it sounds like at the high end you are continuing to increase the percentage of sales mix. So there is going to be a larger percentage of your sales coming from the high end products and yet you are projecting gross margin to come down slightly from roughly 40% to 35%. Is that entirely ASP erosion driven and is that because you are starting to see the same type of erosion at the higher end?

Patricia Chou

Let me try to clarify the gross margin issue again. The reason we used approximately 35% is because we really don’t have a [inaudible] to our ASP so we use the average of 35% as our guidance. It doesn’t mean we expect the gross margin for second quarter will go down compared with the first quarter.

Rick Fearon - Accretive Capital Partners

So it is conceivable you kind of now are running back at that 40% gross margin level with sales growing once again?

Patricia Chou

For the first quarter we guided also approximately 35% for gross margin. But the actual came out a little bit higher than 35%. For second quarter we believe our business stays very similar with the first quarter. So we again used the 35% as a guidance for gross margin. I don’t know whether my answer helps you.

Rick Fearon - Accretive Capital Partners

I think it does. It is good to be conservative. Last quarter you were expecting sales in 2010 to grow 10-20% versus 2009. Is this still the expectation? Also, do you or Niccolo still expect revenue growth in 2011 and 2012 to be 20% annually?

Patricia Chou

Very good question. First of all in this market we have very limited visibility. It is already very challenging for us to estimate how much we can really make for the current year. So we don’t really have a position to tell you anything longer than a year. At this moment it is too early for us to say we can or we cannot achieve our goal for this year. Basically, based on the historical seasonality in the past years our high seasons are in the second half of each year.

So based on our current actual numbers and near-term projection for the first half this year we believe we have a good position for this year overall. Also, most of our existing products are ramping up well and we will have a few more products in the high end and also low end, the automotive and boom box markets, in the pipeline during the second half of this year. At this moment we feel comfortable with our projection earlier this year.

Rick Fearon - Accretive Capital Partners

Does Niccolo continue to think the primary product line 2-3 years out will be systems on a chip for PMPs or some combination of PMPs, boom boxes, automotive products or are there other new products in the pipeline? You had mentioned household appliances. I am curious what the end products are and whether there are some other higher end products that are in the pipeline.

Patricia Chou translating for Niccolo Chen

Niccolo just mentioned we expect to obtain about 30-50% of our revenue growing from this new and advanced product family in year 2011 and 2012.

Rick Fearon - Accretive Capital Partners

Is that the focus on high definition?

Patricia Chou

Including high definition.

Rick Fearon - Accretive Capital Partners

So with respect to other products in the pipeline there is nothing to report at this point?

Patricia Chou

We just mentioned our Series 27 which will be ready for the market in the second half and will make meaningful revenue contributions for next year. In addition to Series 27 we are developing even higher end products for the high definition market which will be several months after the series 27.

Rick Fearon - Accretive Capital Partners

I misunderstood. I thought the Series 27 was the high definition product. Is the Series 27 also considered a higher end or higher margin product?

Patricia Chou

Yes. Series 27 is focused on the 720p demand within the high definition market. On top of 720p there is now a higher end within the high definition market which is the so called 1080p. Our newer products after the Series 27 which is still in developing stage will be focused on the 1080p high end within the high definition product lines.

Rick Fearon - Accretive Capital Partners

That is exciting. At the same time on the lower end you are focused on driving down costs by reducing dye sizes with the lower micron size?

Patricia Chou

Yes. As always, our goal is to develop new products to address emerging demand in the advanced and also the lower end and also continue our cost down efforts to existing products and markets.

Rick Fearon - Accretive Capital Partners

It is sort of a global question I would like to ask and I ask it at the risk of being offensive, so please excuse me. Is it really necessary to be spending $19 million a year on R&D which may actually be growing this year when the current run rate gross profit is only about $12.5 million. This extraordinary expense is really what is hamstringing the company right now. Even with the projected growth of 20% this expense won’t allow the company to be profitable on an operating income basis for another three years. So I guess I ask is the $19 million annual R&D expense really a good investment for Actions Semiconductor if it is yielding 20% growth over the next few years and we are still not achieving profitable growth on an operating income basis from that investment.

Patricia Chou

This is really a good question in terms of company long-term strategy. Let me translate your question to Niccolo for him to answer.

Patricia Chou translating for Niccolo Chen

Niccolo just mentioned that our goal is to break-even next year in 2011 and for a high tech company the core value for us is to create innovation. So the R&D investment is necessary and our core value scores. We will not easily give that up. The R&D investment is indeed the source of our growth and value that we can create for our long-term shareholders.

Rick Fearon - Accretive Capital Partners

I will leave that topic alone but the issue of course is the growth and then sustaining the growth without having to continue to plow more money into R&D in order to do so. The company has now repurchased 12 million of the 86 million ADS shares outstanding. With $248 million of cash and marketable securities our company still has over $3.35 of cash and no debt.

As we have discussed before the current quarterly share repurchase rate of 1.1 million shares it will take the company 15 years to repurchase outstanding shares. This in spite of this sort of extraordinary buying opportunity here where the market is willing to share back shares to the company at $0.67 for every $1 of cash or cash equivalents we hold. So buying shares at today’s price represents an immediate 34% cash gain for the company. Given the restrictions on the buybacks under 10B5-1 and 10B-18 on the volume limitations I once again strongly encourage the company to consider a Dutch tender offer to repurchase a significant block of shares as soon as possible. I hope that is something the board can address again.

The last question I have just relates to the amendments of the articles of association. I wonder if you or Niccolo could explain the rationale for amending the articles and removing the right of a 10% shareholder to call a special meeting.

Patricia Chou

We just had our GM yesterday and the voting results of our shareholders for this proposal has passed. I believe the rationale behind this amendment is for the management to focus on the core business without too much interruption from the capital market. Also, even though the board decided to take out these items from our articles does not mean shareholders cannot bring up any issues for the board to call a board meeting or shareholders meeting. If there are really critical issues, I believe our board members will take action to innovate what is the issue based on their duties to all shareholders.

Operator

I am showing there are no further questions at this time. I will now turn the call back to management for any 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.

Operator

Ladies and gentlemen this concludes the Actions Semiconductor first quarter 2010 earnings conference call. If you would like to listen to a replay of today’s conference please dial 800-406-7325 or 303-590-3030 and entering in the access code of 4288259. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Actions Semiconductor Co., Ltd. Q1 2010 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts