Actions Semiconductor Co. Ltd. Q2 2010 Earnings Call Transcript

Aug. 3.10 | About: Actions Semiconductor (ACTS)

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

Q2 2010 Earnings Call

August 3, 2010 05:30 pm ET

Executives

Niccolo Chen - Chief Executive Officer

Patricia Chou - Chief Financial Officer.

Grace Reyes – Investor Relations, The Blueshirt Group

Analysts

Bill Lu – Morgan Stanley

Doug Whitman - Whitman Capital.

Rick Fearon - Accretive Capital Partners

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Actions Semiconductor Second Quarter 2010 Earnings Conference Call. During today’s presentation, all participants will be placed in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

This conference is being recorded today Tuesday, August 3rd of 2010 and I would now like to turn the conference over to Grace Reyes, please go ahead.

Grace Reyes

Good afternoon and thank you for joining us on today’s conference call to discuss Actions Semiconductor second quarter 2010 financial results. This call is being broadcast live over the web and can be accessed on the Investor Relations section of Action’s website, www.action-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 second quarter ended June 30th, 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, Action’s 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 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 Patricia Chou.

Patricia Chou

Thank you for participating in Actions’ second quarter earnings conference call. We appreciate your continued interest and support for Actions. Similar to our last earnings call, I will provide the business update and discuss financial results for the second quarter as well as the expectations for our future results. And Niccolo 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 to deliver a slightly better than expected results for the second quarter. We continued to experience solid demand across our product lines during the historical slow season.

Shipment volumes increased by 26% even with higher volumes in our low end products targeted at the automotive and the boom box sectors of the market the decline on our branded ASPs was relatively small and we sustained our gross margin.

In the second quarter ended June 30th, 2010, we recorded revenue of $9.7 million compared to $7.9 million in the first quarter. Our gross margin for the second quarter was at 39.6% compared to 39.6% for the first quarter. We were pleased that we maintained our gross margin at consistent levels through first quarter as our cost down activities helped offset the ongoing presence of ASP pressure and we continued to benefit from revenue contribution from our high end products.

For the second quarter, total stock based compensation expense amounted to $0.9 million compared to $1 million in the first quarter. R&D expense was $4.4 million or 45.9% of revenue for the second quarter, which was slightly lower than the first quarter of $4.6 million. We continue to expect our R&D expense to represent a high percentage of 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 second quarter, we hired approximately 35 engineers to strengthen our R&D capability.

G&A expense was $2.4 million in the second quarter or 24.3% of revenue as compared to $1.7 million in the first quarter or 22.1% of revenue in the first quarter which included receiving the annual ADS related expense reimbursement from our depositor bank.

Sales and marketing expense was $0.3 million in the second quarter or 3.2% of revenue compared to $0.2 million in the first quarter. We continue to tightly manage the expense levels in these categories as a result of our [high] employees across non-engineering functions and the salary cuts in management level.

Operating loss was $2.9 million for the second quarter compared to operating loss of $3.3 million for the first quarter. We continue to focus on the sequential improvements in profitability and our persistent cost management in the second quarter.

Net average income of $0.5 million was recorded in the second quarter as an end result of the foreign exchange gain and lost on Renminbi and renewed Taiwanese Dollars versus U.S Dollars. This compared to other income of $31,000 for the first quarter also related to a net foreign exchange gain.

Interest income was $2.2 million for the second quarter, slightly down from $2.4 million in the first quarter. Loss before taxes was $0.2 million for the second quarter as compared to a loss of $0.7 million in the first quarter.

Net income tax credit was $64,000 for the second quarter compared to income tax expense of $30,000 in the first quarter. The income tax credit resulted from China’s preferential R&D expense pre-tax reduction available for certified high tech companies after the annual income tax return filed in May each year.

Net loss attributable to Actions Semiconductor on a U.S. GAAP basis was for the second quarter was $0.4 million or $0.01 per diluted ADS compared to net loss of $0.9 million or $0.01 per diluted ADS for the first quarter.

Included in the calculation for the second quarter’s net loss was stock based compensation expenses of $0.9 million and depreciation and amortization expenses of $0.9 million or in total, a non-cash loss of $0.024 per ADS for the quarter.

Moving to the balance sheet, cash and cash equivalence together with fund deposits, trading securities and both current and non-current marketable securities totaled at $245.5 million as of June 30th, 2010 compared to $247.8 million at the end of the first quarter.

The sequential decrease in our cash balance as of June 30th, 2010 was mainly due to $2.4 million used for the share buyback program. Of the $245.5 million total, $71.4 million was in cash, time deposits and the 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.

$174.1 million was in trading securities and marketable securities, both current and non-current, which were principle guaranteed or pledged investments with higher interest rates and the minimum terms 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 that our ability to preserve a strong balance sheet through this prolonged economic fluctuation is a significant differentiator for the company.

Accounts receivable, amounts due to our related party and amounts due to our equity measured investees totaled $2.7 million at the end of the second quarter, down from $3.1 million at the end of the first quarter.

Inventories were $3.4 million at the end of the second quarter, down from $3.6 million at the end of the prior quarter. Compared with prior quarter, our relatively low inventory balance in the second 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 tight foundry capacity.

We continue to buy back shares, spending approximately $2.4 million on the share repurchase program during the second quarter compared with $2.6 million in the first quarter. Our repurchase activity remains restrained by trading volume and the blackout periods for our 10B-18 program as well as limited activities in block trading.

At the end of June 30th, 2010 the company had invested approximately a total of $31.2 million in the program, representing approximately $13.1 million ADS shares. Under the current program and the board’s current -- recently -- approval to extend the expiration, we may repurchase up to another $6.9 million ADS through the end of the year in 2012.

I would now like to discuss our progress in each of our product categories during the quarter.

Sales of the automotive and the boom box products targeting the low end market segment improved sequentially and these products represented around 30% of our total shipments during the second quarter. We are pleased with our ability to build our share in these markets.

Looking into the third quarter, nano-flash memory shortages that developed in late June may have some impact on shipment margins in the low end market segments. With higher nano-flash prices, we anticipate the percentage of shipments in this market segment to decline in the third quarter.

In the second quarter, sales to the mainstream segment of the PMP market serving the no-display, mono-display and the small color display media products increased in absolute volume but slightly declined as a percentage of our total shipments.

Even though the mainstream market size has been cannibalized by the high end and the low end products, we still enjoy the leading position in market share of this category by winning over customer demands from competitors gradually.

Our historical strength in the mainstream has allowed us to establish ourselves as the largest and [non-Apple] PMP controller IC provider in the world providing a solid platform and a customer base to build out our diversification efforts. We continue to believe the MP4 market has strong growth opportunities for Actions.

Shipments of our products serving the QVGA MP4, D1 PMP and high definition PMP segments declined to below 20% of our total shipments but still contributed close to 30% of our total sales amount in the second quarter.

Our shipments in MP4 segments did not grow as fast as expected. The financial weakness in Europe which accounts for one of our major end consumer products has negatively impacted our MP4 product penetration there. Our market share in the segment of QVGA MP4 with CMOS image sensor continued to be the market leader in the quarter.

In the D1 segment, Series 25 high quality product device and the comprehensive customer support are continuing to help us win over more market demands in 2010. Our series 27 chips were high definition 720P products are planned for sampling in the third quarter.

While this is a quarter behind our original schedule, we strongly expect to append meaningful revenue contribution from this new product line in first half of 2011.

As we ramp cost down versions of this advanced product family and roll out new product introductions, we expect this product category to be a key contributor to our business. Increase in sales in this category should enable us to favorably shift our product mix to a higher margin and a faster growth direction, and partially offset ever present ASP erosion in the overall PMP markets.

During the second quarter, 0.15 micron process technology was used for about 40% of our shipment volume and some 70% of our current inventory. On top of our success percentage from point 0.16 micron to 0.15 micron in laser processing technology, we plan to kick off our 0.11 micron pilot run in the second half of 2010 and continue to expect to migrate our mass production technology to 0.11 micron in 2011.

We have been pleased to see stabilized wafer prices by using 0.15 and 0.16 micron process technology which has benefited the company’s gross margin this year. Until the ramp second quarter prices for our components including colored TFT LCD display and 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. We continue to believe the high end market segment offer significant growth opportunities for Action. To build on our initial success in the advance of PMP MP4 product segments that supports QVGA, D1 and high definition, we have continued to evaluate opportunities to further penetrate new high end applications in the market segments.

Extending our engineering resources to attain these goals has been a top priority for the company. The early third quarter, we made a tender offer to acquire a 40 person engineering team. If successfully completed, the total acquisition cost should be no more than $2 million. The engineers are seasoned and have been working together as a cohesive team, focused on developing products using the Android platform for Mobile Internet Devices or MID.

While we anticipate the majority of these engineers will continue to focus on MID products, a portion will also be integrated to work on Action’s ongoing product development for the high end market segments such as TV Box, digital video recorder or DV and gaming devices with advanced features of flash UI and touch panel.

We believe that continued investment in innovation in R&D will help us best address the fastest growing segments within the portable multimedia player market and improve our ability to protect and expand our market position. Our investments have allowed us to increase efficiency in product development, shorten our turn 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 we remain focused on; first, managing costs through persistent expense reduction; second, preserving our balance sheet and strong cash position; and third, repurchasing shares to the best of our ability to increase the shareholder value.

During the first half of 2010, we have demonstrated progress in improving both the top and the bottom lines of our business; however, with the delay in introducing our Series 27 products and the economic weakness in Europe, we are not certain that we will be able to attain our earlier revenue growth objectives for the full year 2010. We currently believe revenue will be flat to slightly down for the full year 2010 compared with 2009.

Our guidance for the third quarter 2010 revenue was in the range of 9 to 10 million dollars. Gross margin of flat to slightly lower than second quarter and operating expenses swinging slightly higher our sequential basis without factoring in additional R&D expense for our pending acquisition. The third quarter 2010 estimates into this year based compensation expense of approximately $0.1 million after an [indiscernible] of employee for future rate adjustments. And now we would like to open the lines for questions, operator.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator instructions), and our first question comes from the line of Bill Lu with Morgan Stanley, please go ahead.

Bill Lu – Morgan Stanley

Good morning, I’m hoping you could talk a little bit more about the acquisition that was just announced. I know you said it’s a 40 person team for a total of 2 million but, can you just talk a little more about what this company has, the productivity, where are they today in terms of their own development; that 2 million, is it cash or is it stock? I guest we’ll just start with that.

Patricia Chou

Okay, good morning Bill, those are great questions. We are starting a process of tender offer though we haven’t stopped the solid result on this pending offer. But I can share with you some of the background of this target company. In fact this company has been one of our invested companies for several years and they used to work on the mobile digital TV product lines with some new initiatives in CMB and IMBB. However, as you know, starting earlier this year, we realized that the CMB or IMBB products were not really fly as we expected. So we subjected that they fly different initiatives for their continuous IMD work and they shipped it to the Android platform products and we believe that their current research or IMD topic to be a good compliment to our current product in say MID and TV Box in the long run. So that’s why we would like to take over this around 40 people team to continue their current IMD topic in the Android light platform.

Bill Lu – Morgan Stanley

Okay, got it, so this is one of the companies you talked about previously in terms of making investments. So I guess, what was your investment previously, what percentage did you hold and the additional 2 million dropped by what percentage?

Patricia Chou

Before this tender offer, we already held around 20% and this no more than $2 million budget is not only for acquiring the rest of their shares but also taking care of their investing expenses and some liabilities. .

Bill Lu – Morgan Stanley

And have you talked about what did you pay previously for that 20%?

Patricia Chou

We paid more than $5 million for the 20%.

Bill Lu – Morgan Stanley

Okay, so with this new engineering team, how much was your R&D budget increase in the third quarter?

Patricia Chou

For this quarter, which I don’t see a significant impact since we will not migrate their engineers in-house until we complete this pending tender offer. So the increase in the R&D expense associated with this new 40 people team will probably come out in the fourth quarter.

Bill Lu – Morgan Stanley

So I guess when it’s all finally integrated on the ongoing, what’s the incremental increase in R&D expenses with this team?

Patricia Chou

We don’t really see too much for two reasons, number one, our current headcount is more than 600 people. So 40 people versus our current overall headcount is not too significant. Number two, we have our own recruitment plan where this 40 people team coming in at one time, we will probably push out some other recruitment plans in the second half this year. So this sort of replacement or acceleration of our recruitment for this year, and the benefit of this team is that they already have their R&D focus and they have already worked together as a cohesive team for years. They are well trained and very concentrated on what they have been doing. So we appreciate this kind of teamwork and believe the value of this work force is much higher than what we can get for the different new hires for our original plans.

Bill Lu – Morgan Stanley

One last question if I may also on the same topic is, I think one of the issues with the MP3 MP4 play market is that more and more people now have smart phones that do similar functions so it’s replacing the stand alone with a video player. With this team that has some experience in doing Android is – should that read that this means Actions will eventually being in the upper processes of the market for mobile phones or is that the wrong interpretation?

Patricia Chou

Currently we have two major directions for them. Number 1 is to continue their R&D efforts in the Android platform application including the MID which will provide similar functions to say iPhone, but rather than a full function this MID will be equipped with internet access and even the GPS function. But that would be a very good device similar to what iPhone can provide except for the full function and later we will further integrate the Android platform into our MP3, MP4 products. But up to now we haven’t had a clear program to really integrate into the cell phone market.

Bill Lu – Morgan Stanley

Yes, so I know it’s still early but what is the timeline for this team to have a product out there that serves the Android MID market and what is timeline for you guys to integrate Android into your existing MP3, MP4 playing market?

Patricia Chou

For MID we’re set to get some samples next year 2011. For TV Box, it’s a longer term, maybe in 2012.

Bill Lu – Morgan Stanley

Great, thank you very much.

Patricia Chou

You’re very welcome.

Operator

Thank you and our next question comes from the line of Doug Whitman with Whitman Capital. Please go ahead

Doug Whitman - Whitman Capital.

Given the company’s – I mean it’s been asked a bunch of times on your conference call, but given the company’s reluctant to do a real buy back and a meaningful buy back, buying back $2 million frankly is a joke and your stock is below it’s cash value. But the basic question is why don’t you just either return the cash to the investors or do real buy back and do something real with the company? And I also don’t understand why the company has $65,000 in revenues per employee. I don’t think I’ve ever seen such an anemic figure in my life so I’m trying to understand why you have so many employees for the level of revenues that you do.

Patricia Chou

First of all I’d like to clarify – our headcount. We currently have around 600 people. Hopefully I didn’t state it wrong.

Operator

Thank you. (Operator instructions). And our next question comes from the line Rick Fearon with Accretive Capital Partners, please go ahead.

Rick Fearon - Accretive Capital Partners

Yeah, good morning Patricia and Niccolo. I also have some questions about pending acquisitions and so I was wondering if you expect any increase in sales and or Ebitda for the trailing 12 months, or what you’re buying in terms of sales in Ebitda for the trailing 12 months and if you expect some of this to be immediately transferred to Actions.

Patricia Chou

Rick I’m sorry, could you please repeat your question?

Rick Fearon - Accretive Capital Partners

Sure, the question is, I know you’re making a tender offer for the remaining 80% of the company you currently own and was curious what their trailing 12 months revenue are and whether or not there’s any operating income with the business that you’re buying.

Patricia Chou

They do have some inventories and existing business after this ANA but we are still evaluating whether and how long we would like to carry on their current business since to us their biggest value is not their current business but their engineering talent and the workforce. So we would like to keep them concentrated in what we would like them to develop. But for their inventory on hand, we will definitely hope to maximize the benefits from them.

Rick Fearon - Accretive Capital Partners

Okay and is that inventory currently valued at a number larger than $2 million?

Patricia Chou

No. The $2 million is mainly to acquire the rest of 80% of outstanding shares plus taking care of their expenses and some liabilities. We don’t plan to – it’s not our plan to take over their inventory.

Rick Fearon - Accretive Capital Partners

Okay, what I’m trying to better understand is, it sounds like the operating business, the sales and cash flow from this company are very little and it also sounds like – I guess I’m trying to understand if there are any fixed assets that you’re actually buying for $2 million at this point and if not why you wouldn’t just let the company buy the business and then pick up the engineers without paying anything for them?

Patricia Chou

That’s a good idea. However, before we can really allow them [indiscernible] with their cash flow drainage, all of their valuable engineers will be gone even before we can take over then. So that’s why we would like to take over the team intactly before the company really faces their cash flow problem.

Rick Fearon - Accretive Capital Partners

Is there something getting in the way of you just offering jobs to these engineers without having to pay $2 million to existing shareholders for something that doesn’t sound like it has any value?

Patricia Chou

We have _ sorry, let me rephrase it. We ever had this kind of analysis. Your idea is one of the approaches that we could have. But about 2 months ago we already experienced the diminishing of their R&D workforce, so we decided that she’ll stop this bleeding before most of the engineering talents were gone and as you mentioned why we just offer jobs to those people who plan to leave. The situation is that with our current 20% shareholding, the other shareholders may have complaints on us if we simply offer jobs to those engineers.

So to minimize our legal risk we believe it’s better to go through the legal process through the tender offer and integrate the whole team to us in their most effective way.

Rick Fearon - Accretive Capital Partners

Okay and just back to the original question, are there any fixed assets that do come along with the acquisition?

Patricia Chou

There are some but not too significant.

Rick Fearon - Accretive Capital Partners

Okay and the other part of the question was, will there be meaningful revenue contribution as soon as they join?

Patricia Chou

We are in the process to developing the Android platform MID or _ applications as I mentioned earlier with the belt. The meaningful revenue contribution from their Android MID product will kick in in 2011 and the further integration with our own products in TV Box or other advanced applications will start to come in in 2012.

Rick Fearon - Accretive Capital Partners

Okay. To kind of summarize things, I guess generally speaking when we look at making acquisitions here at Accretive Capital and I think much of the world, you look for some cash flow that’s going to come – meaningful cash flow that will result from the acquisition. A good acquisition might be buying a business at say 4 or 5 times the cash flow. So it’d be nice to think that within a year or so the scheme of R&D people are actually throwing up half a million dollars of cash flow which would kind of mean sales of something, with your business, I don’t know if that’s $5 million of sales.

But it’d be nice to see actions if the intent is to make some acquisitions. Do so of businesses that are already generating cash flow where the company can kind of depend upon rather than a venture capital approach that we hope their technology results in a product that we hope sells.

Patricia Chou

By that we’ll definitely take your advice in mind, thank you.

Rick Fearon - Accretive Capital Partners

I appreciate. I just have a couple of other comments and questions. I guess over the last two conference calls you’ve talked about revenue growth in 2011 and 2012 of potentially 20%. Is that still the expectation for next year and the following year?

Patricia Chou

Rick, it’s really a tough question. At this moment we have very limited visibility on the future growth at this moment. Maybe after we’re finished the current year we would have a better feeling on next year also.

Rick Fearon - Accretive Capital Partners

Okay, that would be great, we’d love to just be kept apprised of what your expectations for the next two years are and then the only other question I have is with respect to the R&D expense which has come down slightly and as you mentioned it sounds like the new R&D people will replace some attrition so you don’t expect it to go up significantly. Has been there any thought put into reducing the R&D further so that spending can be in line with revenue and the company can become profitable in that way rather than dependent on growth in the top line. I mean if you – if the company weren’t spending $19 million of R&D a year but something like more in line with other companies in this industry, $5 million or so this business would be generating lots of cash again.

Patricia Chou

That’s a good thought. However based on our total _ that’s very hard for us to tandem our R&D efforts where the only focus on the existing product since as _ mentioned that rather the new products are coming in to cannibalize on the existing PMP marketing mends. That has been our long term goal to extend our product line outside of the PMP market. So to make it happen in the near future we have to continue our heavy R&D investment. Of course we’ll try that to spend the R&D resources smartly instead of just spending money in. I believe you should have very direct feelings on how we try to manage on costs and spend each penny smartly.

But back to the business, as a high tech company semiconductor industry, the heavy R&D investment is a must for the long term [indiscernible].

Rick Fearon - Accretive Capital Partners

Well we appreciate the management reductions that you’ve taken and it would seem like at the R&D side there might be areas to save some money. I know I sound like a broken record on this point but with the $245.50 million of cash and marketable securities, our company still has more than $3.35 per share of cash and no debt and the current quarterly share repurchase rate continues to be about 1 to 1.1 million shares quarterly which is about a rate of at which it’d take 15 years to repurchase the outstanding shares. And it just seems that at this price in particular that the company can buy shares for $0.65 on the dollar at $2.20.

Buying shares at today’s price represents an immediate 54% cash gain on investment for the company, so we can spend $0.65 to own a dollar of cash which means that we’re getting $0.35 for free and I guess just to reiterate that I think another caller was trying to make, given the restrictions on the buy backs under 10 B 5 dash 1 and 10 B 18, I again strongly encourage the company to consider a Dutch tender offer to repurchase a significant block of shares and as shareholders I think you would get a very, very positive reception. I think it will help you attract R&D people because I know you have a stock option foot program that you want to be beneficial to employees and I think it will be a wonderful solution for shareholders who want to sell and for shareholders who would like to remain long term shareholders with the company.

Patricia Chou

Okay, we will keep your advice in mind again.

Rick Fearon - Accretive Capital Partners

Okay, thanks so much.

Patricia Chou

Thank you.

Operator

Thank you and at this time I would like to turn the conference back over to management for closing comments.

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 does conclude the Actions Semiconductor’s second quarter 2010 earnings conference call. If you would like to listen to a replay of today’s conference please dial 303-590-3030 or 1-800-406-7325 with an access code of 4329720#. We thank you for your participation and at this time you may now disconnect.

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