Actions Semiconductor's. (ACTS) CEO Zhenyu Zhou on Q2 2014 Results - Earnings Call Transcript

Aug.15.14 | About: Actions Semiconductor (ACTS)

Actions Semiconductor Co. (NASDAQ:ACTS)

Q2 2014 Results Earnings Conference Call

August 15, 2014, 08:00 AM ET

Executives

Elaine Ketchmere – Compass Investor Relations

Dr. Zhenyu Zhou – Chief Executive Officer

Nigel Liu – Chief Financial Officer

Chung Hsu - Director of Investor Relations

Analysts

Richard Fearon - Accretive Capital Partners

Bob Schnell – Dougherty

Operator

Please stand by. Good day and welcome to the Actions Semiconductor Second Quarter 2014 Earnings Conference Call Today’s conference is being recorded. At this time, I would like to turn the conference over to Elaine Ketchmere. Please go ahead.

Elaine Ketchmere

Thank you, operator. Good morning ladies and gentlemen, and good evening to those of you joining us from Asia. I like to welcome all of you to Actions Semiconductor’s earnings conference call for the second quarter of 2014. This call is being broadcast live over the web and can be accessed on the Investor Relations of Actions’ website, www.actions-semi.com for 90 days.

On today’s call are Dr. Zhenyu Zhou, Chief Executive Officer; Nigel Liu, Chief Financial Officer; and Chung Hsu, Director of Investor Relations. Before the market opened in the U.S. today Actions issued three press releases discussing the results for the second quarter ended June 30, 2014 recent corporate initiatives and Dutch auction tender offer buyback program. The press releases are accessible online at the company's website or you can call Compass Investor Relations at 310-528-3031 and we will e-mail you a copy.

We would like to remind you that during the course of this conference call, Actions’ management team may make projections or other forward-looking statements regarding future events or the future financial condition of the company and 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 with the company's most recently filed Forms F-1, 20-F and 6-K. 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 like to turn the call over to Dr. Zhenyu Zhou.

Zhenyu Zhou

Thank you for participating in Actions' earnings conference call. We appreciate your continued interest in the company. I will provide an overview of our performance in the second quarter of 2014 along with some operational and corporate updates. Later on the call, Nigel Liu, CFO, will discuss financial results for the quarter. I will be available for the Q&A portion of the call, along with Nigel and Chung Hsu, Actions' Director of Investor Relations.

Quarter summary. Revenue for the quarter was $12 million, down from $18.5 million in the second quarter of 2013. Our performance in this quarter reflects challenging and unfavorable conditions in the worldwide tablet markets.

Overall growth in the tablet market has slowed much more quickly than anticipated and competition has become fiercer, with formidable players rapidly carving market shares in the white box tablet market and putting downward pressure on selling prices. The combination of soft sales and an inventory write-down which reduced gross margin by over 7% contributed to the net loss attributable to Actions of $3.5 million or $0.05 per basic and diluted ADS compared to net income attributable to Actions of $0.7 million or $0.01 per basic and diluted share in the second quarter of 2013.

On a positive note, our multimedia business saw a good seasonal rebound in both -- attributes and revenues from the previous quarter and our new Bluetooth boombox solutions made additional gains in market share during the quarter.

We continued to invest in the research and developments pushing purchasing IT rebates through our new products to enable to buy 28 nanometer process technology and 64-bit CPU and developing a new RF and audio processing integrated single chip SoC for Bluetooth boomboxes, which will be instrumental to our future success.

We are also undertaking several concrete actions that will ease the real benefits of our shareholders. Now I will provide some details about our tablets and the multimedia business.

Tablets and Cloud connected devices. In the second quarter of 2014, conditions in the worldwide tablet market worsened. Growth in tablet events has slowed dramatically in the recent [months] as customers are holding on to their existing tablets, lockers and petty purchase, new orders. The growth in popularity of tablets and the low cost note books is also impacting demand. At the same time, the competitive environment has become much more intense, with players like Intel and MediaTek aggressively covering share to a whitebox tablet markets and pushing up selling prices.

Action was not being immune to these factors, and we saw a sequential decline in branded shipments of about 6% in the second quarter along with lower selling prices that have driven down gross margin. Previously we expected an uptick in shipments of our second generation dual-core tablet solution, ATM7021, in the second quarter which would position us to capture demand from tablet manufacturers as we migrated from single core to dual-core solutions for the entry level products.

And although dual-core solutions are now bench driven products specifications we faced intense price competition in the second half of the market. To put this into perspective, the price of dual core SoC today is down almost 50% compared to a year ago. According to Credit Suisse, May 2014 Action Semiconductors sent the report.

In terms of the mid-to-high ends of the market, our quad-core solutions ATM70209B and ATM7035 are placed to capture the quad-core’s tradition from dual-core to quad-core solutions. We expect the shipments to improve in the second quarter of the year as customers in North America and Europe begin gearing up for their peak season. However, we are still in touch of our competitors in the second half of the markets, and we expect that traditions do remain challenging.

Our current expectation is for modest growth in the overall tablet market in 2014 with flat shipments in the whitebox segment. As a result, we anticipate revenue in the second half of the year to be slightly below year ago levels with the continued pressure on margins.

As we navigate our way through the difficult periods which we believe is temporary, we are taking action to improve our competitive position by investing in R&D, spending into adjacent markets and continuing to position our tablet products beyond the high cost segment to further progress in the second half of the markets.

(Indiscernible) where we are seeing strong potential in the market for OTT capable devices, which is [hugely] directed in the early stage and enjoying strong growth shipments at attractive selling prices. Last quarter, we introduced a new solution for OTT set-top boxes and advanced multimedia features based on our OWL series products. We have seen a solid drop in shipments in this market and expect acceleration in shipments drop from our current -- in the months ahead.

We also tried to take advantage of this industry wide transition from 32-bit to 64-bit architecture for smartphones and tablets which is in supported by all the major players, including Apple. While we launched our new product enabled device 28-nanometer process technology and a 64-bit CPU later this year, we aimed to be among the first companies in China to offer chips of this caliber.

Our new product will target not only branded and high end whitebox tablets, but also chrome book and OTT set-top box manufacturers.

Our attention to the industry wide trend was 64-bit architecture at an early stage. We believe, we have the opportunity to expand the chips strong position in the market and reap the benefits of weather prices and margin out in the future. We’ve had to introduce our products towards the end of the year and we expect it to be a key revenue driver in 2015. We will share more details once it is rolled out.

Multimedia business. In our multimedia business we saw a good seasonal rebound from the previous quarters in both shipments and the revenue in the second quarter. The wireless connectivity enabled what multimedia market continues to demonstrate in a strong growth trend and we are leveraging our leading position in non-Apple portable audio products and portable video players to meet this demand.

Our Bluetooth boombox solutions gained additional market share in the second quarter, following the launch of our Bluetooth 4.0 dual mode boombox solutions. At the same time we are experiencing a faster than anticipated drop out in sales of certain traditional multimedia and gaming products as consumers migrate to alternative devices such as tablets.

Although we expect our boombox, Bluetooth boombox solutions along with other new wireless connectivity enabled media solutions to make a strong contribution to our to our revenue in 2014. Our current expectation is that revenue from our multimedia business will be slightly below 2013 levels.

We will continue to invest in Bluetooth and plan to launch a new RF and audio processing integrated single chip SoC for Bluetooth boomboxes, and we expect the shipments to accelerate directly in 2015.

Business update conclusion. Although Action is facing a very challenging period for new, for next few quarters. We believe it is temporary, and why our business -- hard to improve our position and a set up cost for future success. Although -- levels are expected to increase in the second half of the year, market conditions will make it difficult. We now expect the revenues in the second half of the year to be slightly below year ago level.

We are taking action to improve our competitive position by investing in R&D and positioning our products to target broader range of clouds connected to multimedia devices. We plan to capture the industry wide transition from 32-bit to 64-bit architecture at an early stage allowing us to establish a strong market position and enjoy better saving prices and the margins for an extended period.

Our new product enabled by 28 nanometer process technology and a 64-bit CPU for whitebox and branded tablets our high-end OTT set-box will be key revenue drivers in 2015. We expect a strong growth achievements from the OTT set-top box market with additional growth opportunities available from applications for property books.

We expect the newer multimedia products such as our Bluetooth 4.0 dual-mode boombox and our upcoming RF and audio processing integrated single chip SoC for Bluetooth boomboxes, are to drive shipment growth in 2015. Now, I’d like to discuss a number of important corporate initiatives we are taking, some of which needed and received approval by our directors early today.

Corporate developments. During recent months we have been receiving a number of enquiries from our investors seeking to have more clarity on the success of R&D efforts which is likely driving driven by intense competitive pressure in the tablet market. While we continue to believe Actions has succeeding this market, we acknowledge that our [PMPs] seems to be undervalued. Having validated our cash position, business operations, future outlook, acquisition strategy, existing and anticipated -- structure and variety of alternatives for using our available financial resources.

Our board of director has determined to that the self tender offer is approved as the use of our available cash and effective means of providing value to the holders of our ordinary shares at ATS. Earlier today, our board of directors approved a self tender offer to repurchase a portion of our Ordinary Shares and ADS for cash which will hedge up or around August 2014.

Please see our press release and the Form 6-K filed with the SEC today for further details. In addition, we also announced earlier today that we are in the process of reorganizing our subsidiaries. During the past few years, we have established several sales at the research centers throughout Greater China. Our primary concern was to locate our manufacturing and the research centers in close proximity to engineering talents and our sales structures via our customers.

As our business expanded from PMPs into tablets, this group structure has become increasingly complicated. As a result, we have decided to streamline our corporate structure both in terms of reporting lines and re-designating several sales and research entities under our principal operating entity, Actions Zhuhai Technology Co., Limited "Actions Technology". Our new group structure can also be found in Form 6-K we filed with the SEC today, which is also available on our website.

The tablet device market continued to face tremendous pressure as each of the major players has stepped up their IP efforts or formed a joint venture for technology partners. We believe our newly streamlined corporate structure will give management better access to our various product development and the intellectual property portfolios and it puts us in a better position to explore opportunities in package and license deals, joint lectures and various forms of strategic alliance with other industry players.

We are also mindful of the increased competition in China for (indiscernible) to management and business. In our new corporate structure and a reported likes will allow to devise an incentive program that can better trap and reward our employee for their contributions.

Earlier today, our compensation committee approved the establishment of an option plan based on awarding the shares of Actions Technology to our employees. This option plan envisions awarding our employees up to 15% of the equity of Actions Technology over the next five years.

While we have no current plan for a new listing or to list any of our subsidiaries, as there are substantial legal obstacles to overcome, we are actively evaluating these options for our subsidiaries.

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

Nigel Liu

Thank you, Dr. Zhou. As a reminder, all financials are reported in accordance with U.S. GAAP. For the second quarter ended June 30, 2014, we recorded revenue of $12 million compared to $11.3 million in the first quarter of 2014. Our gross margin for the second quarter was 18.4% compared to 23.1% for the prior quarter. As Zhenyu mentioned, we recorded an inventory write-down, which reduced gross margin by about 7%.

For the second quarter, total stock-based compensation expense was $500,000 compared to $600,000 in the first quarter of 2014. And our current employees perhaps (indiscernible) total is approaching it end.

R&D expense was $15.6 million or 55.2% of revenue for the second quarter compared to $6.8 million in the first quarter of 2014 and it includes licensing fees for intellectual property such as with our view simply for (indiscernible) and strong growth.

G&A expense was $2.8 million in the second quarter or 23.3% of revenue compared to $2 million in the first quarter of 2014.

Sales and marketing expense was [$0.3] million in the second quarter or 5.3% of revenue compared to $0.4 million in the second quarter of 2014. The increase was primarily due to an increase in the price strategy. Operating loss was $7.7 million for the second quarter of 2014 compared to an operating loss of $6.1 million for the prior quarter.

Net other income for the second quarter was $7,000 compared to a loss of $2.5 million in the first quarter of 2014, due to an unrealized non-cash foreign exchange loss associated with the depreciation of the Chinese RMB against the U.S. dollar.

Interest income was $2.8 million for the second quarter, down from $3.1 million in the first quarter of 2014.

Loss before tax was $4.6 million for the second quarter compared to a loss before tax of $5.7 million in the first quarter of 2014.

Income tax credit was $0.9 million for the second quarter compared to income tax credit of $0.2 million in the first quarter of 2014. Net loss attributable to Actions Semiconductor on a U.S. GAAP basis for the second quarter of 2014 was $3.5 million or $0.05 per basic and diluted ADS. This compares to a net loss of $5.5 million or $0.08 per basic and diluted ADS for the first quarter of 2014.

Now moving to the balance sheet. Cash and cash equivalents together with time deposits, trading securities in both current and non-current marketable securities totaled $189.5 million as of June 30, 2014 compared to $219.4 million as of March 31, 2014. Of the $189.5 million total, [$78.7] million was in cash and short-term interest-bearing investments together with time deposits that was generally issued by large domestic banks in China, for terms no more than three months and can be redeemed at any time.

$95.8 million was in trading securities in the current and the non-current marketable securities, which were principal guarantees or pledged investment with higher interest rate and minimal returns of three months less marketable securities, while many issue manage or guaranteed by top ranking state-owned financial institutions in China.

Our short-term borrowing totaled $34.5 million at the end of the second quarter, down from $14.5 million at the end of the first quarter of 2014. We continue to utilize agreement we entered into that allowed us to borrow the U.S. dollars at a lower interest rate in Hong Kong currency by all RMB deposits in Mainland, China.

Additionally, as they are using our RMB funds in China, we drew down our offshore line of credit for U.S. dollar cash needs. This approach have us take advantage of lower interest rate on U.S. dollar loan, -- to continue earning higher interest rate on all RMB denominated investments even considering the short-term exchange transactions.

Accounts receivable was $6 million at the end of the first quarter of 2014 compared to $7.6 million at the end of the first quarter of 2014. Accounts receivable includes amount due from a related party and equity method investees. Inventory was $27.2 million at the end of the second quarter, up from $25.3 million at the end of the prior quarter.

We continue to buy back shares, spending approximately $1.5 million on the shares repurchase program during the second quarter compared with $1.1 million in the first quarter of 2014. Our repurchase activity remains constrained by shrinking volume and the blackout periods for our 10B-18 program, as well as limited activity in block trading.

As of June 31, 2014, the company had invested approximately a total of $53 million in the program, representing approximately 23.3 million ADS shares.

And now turning to our outlook. Based on our current market trends, we expect revenue in the third quarter of 2014 to be in the range of $13 million to $15 million. Although we expect shipments to improve in the second half of 2014 consistent fierce competition in the – markets where cost revenues in the second half of the year to be likely throughout year ago levels.

And now, we like to open the lines for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question comes from Rick Fearon with Accretive Capital Partners. Please go ahead.

Richard Fearon - Accretive Capital Partners

Hi, good evening gentlemen.

Zhenyu Zhou

Hello Rick, how are you doing?

Nigel Liu

Hello.

Richard Fearon - Accretive Capital Partners

Fine. Obviously read the press releases with interest in Dutch. I would ask that maybe you clarify the press release regarding the Dutch auction tender? It makes no mention of what is the intension for the repurchased shares? And can you just help us understand what the plan is for the $60 million repurchased ordinary shares?

Nigel Liu

Hi, Richard, be to the point straightforward, the reason we’re doing this is under the light of financial advisors and lawyer and consider all the condition as mentioned by Zhenyu. And that actually is a good value and could maintain the shareholders value. So that’s why we do intend to alter. And total amount is if we translate into 8 years where this [long] 10 million share or 50 million ordinary shares.

Richard Fearon - Accretive Capital Partners

Nigel, the 60 million ordinary shares translates into 10 million ADS shares?

Nigel Liu

Yeah. Yes.

Richard Fearon - Accretive Capital Partners

Okay. And those 10 million ADS shares, so the company intent to spend $25 to $28 million to repurchase 10 million ADS shares equating to just under 15% of the company, and are those shares then going to be retired and is that how we are going to create shareholder value as accretive capital partners as proposed? There is no mention as to what the use of the shares will be -- we have been advocating the retirement of repurchase shares which to-date we have not seen. We’ve seen shares reissue to employees. Is that the intension of these to create the shareholder value you mentioned?

Nigel Liu

Yes. That’s our intension to -- yeah, we are going to retire the shares.

Richard Fearon - Accretive Capital Partners

Okay. Well that’s wonderful use of capital and we’re obviously pleased to read the news. I wanted to focus on another point which is the -- what sounds like an increasingly complicated structure to manage and that understandable as Actions has grown over the years and operating entities have been formed and there’s -- it sounds like the hope is to simplify that and we certainly support that.

Yet the Board of Directors is now proposing, carving out 15% of the equity for employee compensation-related to one operating subsidiary, which is one of several operating subsidiaries and is not the whole company which is what shareholders own. And it’s not even a publicly traded security. So I guess, I’m wondering how that is going to create incentive for employee when they can’t see the value of that security and I’m...

Operator

Mr. Fearon. This is an operator.

Richard Fearon - Accretive Capital Partners

Yes.

Operator

I apologize. It looks like the speaker line has disconnected. I’ll just ask you to pause for one moment while we resume.

Richard Fearon - Accretive Capital Partners

Absolute, absolutely.

Operator

Thank you so much, sir, one moment. And everyone again, please standby as we reconnect our speakers. Please standby.

Nigel Liu

Yeah, I’m back to the line.

Zhenyu Zhou

Hello.

Nigel Liu

Hi. We’re back on line.

Zhenyu Zhou

Hi. Good.

Operator

And Rick, please go ahead we are reconnected.

Richard Fearon - Accretive Capital Partners

Great. I’m not sure where we dropped off gentlemen.

Nigel Liu

Could you repeat the question, I mean, you’re saying here, yeah, we plan to retire the share, and what did you say afterwards?

Richard Fearon - Accretive Capital Partners

Okay. So the ADS shares that have been repurchased would be retired?

Nigel Liu

And what was your question after that?

Richard Fearon - Accretive Capital Partners

Okay. The second part of my question that I think you may have missed was relating to the difficulty of managing the complexity as the -- as a number of operating entities have grown over the years at Actions Semiconductor and its understandable that management would like to simplify that into motivate employees appropriately, more directly with what they are doing, their accomplishments as individuals.

Yet I don’t understand how the Board of Directors proposal to carve out 15% of the equity of one of the operating subsidiaries accomplishes that, because I don’t see employees being able to measure the value of the operating subsidiary when its owned by Actions Semiconductor as a whole.

And I also equally importantly don’t see how shareholders are going to benefit from this given that employees now are motivated to see that that operating subsidiary performs well and possibly at the expense of other operating subsidiaries which as a whole impacts shareholder value. So by focusing employees on just one operating subsidiary possibly at the expense of the other operating subsidiaries I don’t see how this aligns the interest of the company which shareholders and I wondered if you could just comment on that?

Zhenyu Zhou

Okay. Rick, so let me comment on that question. First of all, this reorganization is a vertical reorganization, so we have much better clarity of the operation itself especially under the situations into one-time joint venture or other options. We have much better structure to work with. And from the company perspective, because we have this -- achieve this reorganization. The incentives for to give out 15% of options for that subsidiary can get the employee understand what’s their contributions and the value of their contributions based on the performance of that particular subsidiaries.

We are very open for options in the future for any either joint venture due listing or migrating, listing of subsidiary under a share or other market. So, at this moment you’re right. It’s not clear what is the value of that 15% but we are working hard to improve the performance of that particular operation to improve the value and clarity of the value of those incentive plans.

And direct or indirectly or directly by maximizing the subsidiaries values through incentive plans is indirectly maximize the value of the overall operation of the NASDAQ public listing companies which will benefit the shareholder of the NASDAQ ACTS shareholders.

Richard Fearon - Accretive Capital Partners

Zhenyu thank you for explaining that. I appreciate that. And has there’s been any thoughts out to this idea of getting a large group of the company focused on the performance of one operating entity because that will span out and that’s where they’re going to make there -- they’re going to enjoy some compensation. But the other operating entities may just be total ignored in the shareholders own the whole company.

Is there is all sorts of transfer pricing issues? It just a -- it seems that it does not align employees with shareholders when you start talking about spinning off a division where the benefit to employees and the whole company’s success in the employees compensation are no longer correlated. It seems that -- as you seek to make this more simple to manage and operate, you maybe creating more issues and headaches down the road with the structure like this. Certainly if the entity is sold, then those employees they go along with it are to be compensated directly with what shareholders own there. But the concern that I have is that you’re aligning their interest with the performance of one portion of the company possibly at the expense of the company as a whole?

Zhenyu Zhou

Well, first of all, Rick, although we give all the options, but there’s no definite plan of spin off at this moment. So, I don’t think that we should perceive this spin off in the near future or anything like that. But we are lining up the incentive plan for the employees pertaining to subsidiary, but that subsidiary is a primary operational subsidiary for the entire semiconductor business. So it is quite transparent of the performance of that subsidiary to the overall operation.

Richard Fearon - Accretive Capital Partners

Okay. Well, I just encourage you to think through the just the -- what you may create here if you go down my path, but because I understand, I can certainly identify with what you’re saying about the complexity of managing actions currently. What might also be helpful is just some -- if you can add a little color about some of the licensing and joint venture opportunities that are being considered and how those might work just to understand the future structure of Actions?

Zhenyu Zhou

Yeah. We don’t have anything to share at this moment. But again we explore all kind of opportunities.

Richard Fearon - Accretive Capital Partners

Okay. In so doing, Zhenyu, have you and the management team given any thought to exploring opportunities to sell the company as a whole that you could present to the Board? Have you put any fillers out and in particular given the extraordinary purchase price that recently being paid for a number of Actions’ competitors which the purchase price averages about 2.7 times trialing revenue paid over the last 12 months for several competitors that I know you are familiar with. And has any thought been given to joining up with another enterprise and selling the business as a whole?

Zhenyu Zhou

Hi, Rick. There is no concrete proposal at this moment. So there’s nothing we can share.

Richard Fearon - Accretive Capital Partners

Okay. And I did know Zhenyu, that R&D came down slightly and Nigel you may have made some comments about this, I’m not sure I caught them, but what are the expectations for R&D in the next few quarters, increase, decrease, flat, what is the thinking at this point?

Nigel Liu

We expect our R&D expense to be flat at the current level.

Richard Fearon - Accretive Capital Partners

Okay. So, margins which have obviously compressed substantially and competition, it sounds like is extreme, means that there is no expectation for profitability for at least about another 24, 12, 18, 24 months, what’s the thinking about turning a profit at this point?

Zhenyu Zhou

Well, this is a quite dynamic market. We will try our best to get the best performance. We understand that second half of the year is difficult, but we don’t have a transparent for next 18 or 24 months. We try our best to get back to profitability as quickly as we can.

Richard Fearon - Accretive Capital Partners

Okay. I’ll turn the call over other shareholders. I do have a couple more questions. So thank you.

Zhenyu Zhou

Okay. Thank you.

Nigel Liu

Thank you.

Operator

(Operator Instructions) We’ll take our next question from Bob Schnell with Dougherty.

Bob Schnell – Dougherty

Hello, gentlemen.

Zhenyu Zhou

Hi, Bob.

Nigel Liu

Hi, Bob.

Bob Schnell – Dougherty

First off, I guess I’d like to say that I’m appreciative of the Company’s plan to do the Dutch tender and buyback shares here I think that’s a very prudent use of the company is cash. So I appreciate that? And maybe you could walk through a little bit more detail possible that competitive environment, which it sounds like has become extreme and potentially benefit price to the extent of which competition has entered into the market right now on the tablet side?

Zhenyu Zhou

Sure, there are several perspectives being in this area. First of all, overall tablet market growth slows down. And we expect that this year’s white-box tablet overall shipment is probably flat compared to last year. And there are two major players entering this market and the two big names is Intel and MediaTek.

And so relatively higher end of white-box tablet market, MediaTek has very aggressive pricing [strategy] and equally smart grid and grant probably about one-third about the market shares to fund. And also the phablet which means the tablet plus 3G or 2.5G functions also penetrating this market where MediaTek has a dominant partner share in that area, which is about -- addressing about 30% of the market. So that is white-box about 70% WiFi relate and the pricing in this piece goes down very aggressively.

For example, as we mentioned in main presentation, last year’s dual-core is the high-end and this year dual-core is in the mainstream, but the ASP drops about basically cutting half, okay. So, if the volume remains the same, but the total revenue or total running of is about half in that perspective and the margin is compares to look quite a bit at this moment.

Most of our older technologies are being the older process technology. So now we rely on newer high-end process like 28-nanometers which will help us reduce the cost of the product aggressively and get back as to proper [margin] even at this competition levels. That’s why we’re in long term, we still feel quite optimistic about the future of the product.

Bob Schnell - Dougherty

As relates to gross margins, then as you move to these smaller processes do you expect over the next year or so that gross margins will start to tend higher?

Zhenyu Zhou

We cannot give out any specifics, but this year in general its challenging, but once we start introduce 28-nanometer based upon especially with 64-bit based on the product. We do expect margins start to improve.

Bob Schnell - Dougherty

And when do you expect to be introducing those products?

Zhenyu Zhou

We’ll start somehow by the end of year or the beginning of the next year.

Bob Schnell - Dougherty

Okay. And when you look at -- it doesn’t sound like you maybe done this, but I think it would be an interesting exercise. When you look at the company and the structure and R&D spend and such if there is a target operating model that you feel like the company that can run at where even at these lower revenue levels that you can achieve some profitability or breakeven or have some longer term margin targets, I think it will be helpful for an investors to be able to see that, obviously the numbers have moved around a lot here recently, but it would be helpful to see plan or a goal as Rick mentioned to move towards the profitability even as competition is intense?

Zhenyu Zhou

Well, this industry especially in the marketing sector we are addressing. We always starting towards somewhere between 35% to 40% margin, as a healthy margin, and this 30% to 35% is acceptable margin. So, that’s relatively our target.

Bob Schnell – Dougherty

Okay. I’m sorry. Can you repeat those? You said 30% to 35% this sort of your target?

Zhenyu Zhou

Well, 35% to 40%, we consider as a good margin. And 30% to 35% are considered to be acceptable. So that’s a range we strive to achieve.

Bob Schnell - Dougherty

Okay. That’s helpful. And obviously you’re below that now, and you feel that moving to 28-nanometer process will help other things that the company is looking at, doing to help move the margin backup to the acceptable range?

Zhenyu Zhou

That’s good Bob. Actually we should say we have several efforts to achieve better revenue and margins not just tablet. In the tablet area we introduced 28-nanometer process as well as 64-bit CPU-based product to get a spec of better margin and better revenue and better growth. In the meanwhile, we are also addressing another very fast gross margin which is wireless connected boombox market.

We are going to introduce a single chip, which Bluetooth RF and audio processing integrated single chip later this year and beginning or to beginning of next year. There’s another important growth area of our company. At this moment we do had --its relatively healthy and better margin marketing sector.

Bob Schnell - Dougherty

And you anticipate really thing the boombox WiFi products late this year you said?

Zhenyu Zhou

Later this year, yes, we have introduced a two-chip solution product into the market already. At this movement the revenue of what happened to your business already including part of that revenue introductions, but they are two-chip solution has higher prices and lower performance and the higher power consumptions. Once we introduced the next level of single chip which is an all rounded improvement in both area of cost power and the performance. So it’s proving promising is our single chip solution updates introduced the – earlier business that we expect a better return from that product.

Bob Schnell - Dougherty

And do you have an estimate broadly if the size of the market potential?

Zhenyu Zhou

Yes. Let me put this way. The biggest shareholder today is CSR. The [primary] share of CSR is probably more or less 15% and Bluetooth enabled audio products sell by CSR is about US$300 million a year.

Bob Schnell – Dougherty

US$300 million.

Zhenyu Zhou

US$300 million a year, just for one guy and all the rest of the guys made be really comfortable with another [15%] of the shipments that lower ASPs, so maybe $115 million to $200 million. So, roughly our estimate is somewhere around $400 million to $450 million.

Bob Schnell - Dougherty

That’s a very sizeable market. And what’s the realistic target for the company in terms of market share of that space?

Zhenyu Zhou

Be honest it’s too early to make a prediction at this moment, but certainly it is our track record of the order products. We always make a great effort towards the number of once you get the area at least for the so called non-branded or the area in the Chinese market.

Bob Schnell - Dougherty

Right. And that’s exciting. I guess I hadn’t anticipated that market to be that big, so that could be a huge opportunity for you next year?

Zhenyu Zhou

Exactly.

Bob Schnell - Dougherty

And I’m assuming that the estimated gross margin for that business would be immaterially higher than the current corporate average of 18% or whatever was this quarter?

Zhenyu Zhou

That’s fore sure. 18% is definitely a very challenging period which is definitely not our target.

Bob Schnell - Dougherty

Okay. That’s nice to here. I appreciate the answer and I’m going to jump back in the queue. Thank you.

Nigel Liu

Thank you.

Zhenyu Zhou

Thank you, Bob.

Operator

And we do have a follow-up question from Rick Fearon.

Rick Fearon - Accretive Capital Partners

Hi, just following on Bob’s question regarding margins, I think, one point to be made is that, that 80% is impacted by the inventory write-down this past quarter, which obviously a stronger margin, but also is a reflection of something that’s been occurring over the last few quarters?

I think we’ve talked about it last quarter. And reflects that though inventory set ultimately we feel has to be then discounted and that’s disappointing. So I guess, can you just comment on efforts to avoid inventory write-downs going forward and kind of how we ended up with this large inventory write-down this quarter?

Zhenyu Zhou

Yeah, basically we are dealing with those questions based on the auditing firms and CPA’s recommendations. So, its not like those products cannot be sold anymore, they are just products, they are inventory longer than a certain period of time based on concerning accounting practice, we except accounting firms recommendations to write it down.

Rick Fearon - Accretive Capital Partners

I’m glad that we’re doing things right, that the appropriate I just going to be the practice of building inventories have to be written down, because they’re being discounted is something that clearly as a company we want to avoid and I suppose it’s a hard for you to foresee what the next few quarters will hold, but hopefully we’re being taking greater care to build appropriate inventory levels that they don’t have to be (indiscernible)?

Zhenyu Zhou

Sure. We welcome to be very conservative for our inventory, but like we said sometimes we get into effective market conditions in our sales. So we’re in the now expectation and that’s why the inventory selling periods or consumption period will be longer that incentive.

Rick Fearon - Accretive Capital Partners

I understand. Nigel you may have commented on this, I’m not sure I got it. But it looks like the company spend about $10 million on investments in equity investees and then almost $9 million on a prior intangible assets and I wondered if you could just comment on each of those line items on the balance sheet, the investment in equity method investees and what that $10 million was used for and the $8 million to $9 million required intangible assets?

Nigel Liu

Okay. It’s Nigel. As you believe from outsiders, we have made investment for our Shanghai office, (indiscernible) in Shanghai. So during the Q2 we made additional capital reductions, the overall to focus, but recent acquired you can see the additional investment in equity.

Rick Fearon - Accretive Capital Partners

And Nigel, in Shanghai which entity?

Nigel Liu

Shanghai office. Obvious it’s located in Shanghai.

Rick Fearon - Accretive Capital Partners

In the office in Shanghai and it was for build out of additional equipment or additional office space or building itself?

Nigel Liu

Yes, office space.

Rick Fearon - Accretive Capital Partners

Office space. And is that Shanghai entity owned by Actions or there are other shareholders of that company? I’m sorry, Nigel, it’s a separate entity?

Nigel Liu

Actually, as you can see, actually we hold 40 percentage of the whole investment. So that is considering -- sales are necessary for us, so we’re all in 40 percentage.

Rick Fearon - Accretive Capital Partners

Okay. So, Nigel, just to clarify, you said that we invested in office space entity that we wholly-owned that Actions wholly-owns?

Nigel Liu

That is a commercial transaction. We basically invested 40% of that company -- that company will build the office space in Shanghai. And other -- there are other investors, financial investors in that company to….

Rick Fearon - Accretive Capital Partners

Is the office space venue for us for Actions Semiconductor employees?

Zhenyu Zhou

Well, let just partially that you’re right. Its certainly it’s a pretty big buildings. Actions not going to be able occupy the whole entire building.

Rick Fearon - Accretive Capital Partners

Okay. And I guess I just the use of cash is clearly a primary focus is one of the largest shareholders and other shareholders I know and I guess I’m just wondering why we’re investing the cash in office space that’s not going to be actified by actions and why we’re doing it in separate entity but it’s going owned by other shareholders and not just doing it outright if we needed just more office space ourselves.

Zhenyu Zhou

We do need a office in Shanghai because we have the employee working in Shanghai. So it sounds like we are not going to use that facility.

Rick Fearon - Accretive Capital Partners

Oh no -- did the question just related to if we need the office space, why we’re just not buying it outright on the balance sheet of Action, why we’re doing it through a separate entity that has separate shareholders that’s not wholly owned by Action Semiconductor, I mean what the….

Zhenyu Zhou

The problem actually reduces – filed, okay actually we need to -- company which is a company they both lend and built the (indiscernible) from scratch. Actually we get very good price for the land, say it’s like a very good price in the tight market. Actually the price of high demand is very reasonable, it is very good price too.

Rick Fearon - Accretive Capital Partners

So your point is that this is a good investment on behalf of shareholders because we brought real estate at a very good price, my question just really just relates to trying to simplify things for everyone involved, shareholders management you know this is a difficult company to understand and we have different operating entities and different groups of shareholders and for $10 million from the balance sheet to be spent into a entity that’s not wholly owned by Actions just creates more complexity that I think the company and the board of director is specifically should be rethinking you know how assets are being allocated on behalf of shareholders because its not making things more simple, its making things more complex. And so I would encourage us to think about that as we are allocating assets in the future, the cash of the company trying to simplify things not making more complex.

Zhenyu Zhou

Hi, Rick and actually our intent we intent to make it simple there, because real estate is not the core business of Action Semiconductor that’s why we have this kind of permitting [ph] the loan into ’15 you know work with other investors in that part of the business.

Rick Fearon - Accretive Capital Partners

Right. And I agree with you Zhenyu 100% in that’s its not a – it really isn’t the core business and so I think as we know as shareholders think about how our assets are being allocated it seems that we should be s ticking to the core business and not running a venture capital fund or a investment fund in various things that aren’t core to our business. And that’s where I’m talking about trying to simplify things and make things easier. But that’s true, it’s a point for the board of directors, I don’t mean to suggest that this is a decision that management may give laterally, it’s just one of the major issues that we have with the way the board of directors is allocating assets for shareholders at this point. But thank you for helping clarify and answering that question, I appreciate that.

Zhenyu Zhou

Thanks for the [compliment]

Operator

And it appears we have no further questions in our queue at this time. I would like to turn the call back over to our speakers for any additional or closing comments.

Zhenyu Zhou

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

Operator

That will conclude today’s conference. Thank you all once again for your participation.

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