Actions Semiconductor Q4 2006 Earnings Call Transcript

Feb. 6.07 | About: Actions Semiconductor (ACTS)
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Actions Semiconductor Company Ltd. (NASDAQ:ACTS)

Q4 2006 Earnings Call

February 6, 2007 5:30 pm ET

Executives

Pierre Christenson - Blueshirt Group, IR

Nan-Horng Yeh - CEO

David Lee - CFO

Chung Hsu - Director of Business Development

Calvin Lau - Director of IR

Analysts

Daniel Amir - WR Hambrecht

Quinn Bolton - Needham & Company

Bill Lu - Morgan Stanley

Pe Chen - Credit Suisse

Andrew Lu - Citigroup

Adele Mao - Susquehanna International Group

Jay Srivatsa - Roth Capital Partners

Chang Qiu - Forun Technology Research

Heidi Poon - Piper Jaffray

Presentation

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2006 Actions Semiconductor Company Ltd. Earnings Call. My name is Danielle and I will be your coordinator for today. At this time all participants are in a listen-only mode, and we will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Pierre Christenson with the Blueshirt Group. Please proceed.

Pierre Christenson

Good afternoon and thank you for joining us on today's conference call to discuss Actions Semiconductors fourth quarter and fiscal 2006 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 Nan-Horng Yeh, Chief Executive Officer; David Lee, Chief Financial Officer; Chung Hsu, Director of Business Development and Calvin Lau, Director of Investor Relations. After the market closed in the US today, Actions issued a press release discussing their results for its fourth quarter and fiscal year ended December 31, 2006. We also filed the press release on Form 6-K with the US Securities and Exchange Commission.

This 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 4015-217-4961 and we will fax you 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 recent Form F-1 and any Form 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 would like to turn the call over to Actions' Chief Executive Officer, Mr. Nan Yeh.

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Nan-Horng Yeh

Thank you, Pierre, and everybody welcome to Actions fourth quarter and full year 2006 earnings press conference call. We appreciate your interest and support of Actions. I will first review some today's highlight, then David Lee, our CFO will review the financials and forward guidance. And we will then open up the call to your questions.

Throughout the course of the year, we accomplished many important milestones and I would like to briefly review with you. First, we achieved another year of record results with revenue of $170.4 million, gross profit of 55.5%, and an operating margin of 44.7%. Second, we continue to call market shares and maintain our number one position in terms of PMP SoC units shipped worldwide in 2006, which we believe give us a market share of over 50% of the so called an iPod market.

We successfully continued our product migration to Series 9 product, which account for over 60% total shipment in fourth quarter 2006.

Four, we continued our track record of innovation and broadened our product and technology platforms with the successful launch of our Series 7500 product, recently designed into a major US brand name manufacturer. And our Series 13 with full video functionality opened up additional higher end market to penetrate.

Fifth, we commenced a transition to 0.18 micron technologies, which will help us maintain our efficient cost profile. We will further move down to 0.16 microns in second quarter 2007 and 0.13 microns. Six, we expand our distribution network with the addition of GMI and World Peace WPIG as distributor for Actions, broadening our reach in the Asian market as well as increasing our business momentum worldwide.

2006 was a very successful year for Actions. We continue to be the clear leader. We believe our total shipment for 2006 would account for approximately half of the total worldwide PMP market. And also going to continue the increasing demand for Personal Media worldwide.

Based upon data available to-date, we expect the standalone PMP market to grow by approximately 20% in 2007. Driving this growth is demand in Europe and Asia as well as the US. (Inaudible) would continue to increase market penetrations, where our chip provides a compelling cost and performs advantage over our competition.

In addition to a list key accomplishment, earlier this year we were notified that SigmaTel dismissed without prejudice, they have filed a lawsuit against Actions. As you may recall this lawsuit was originally filed in January of 2005. We believe the lawsuit was without the mandate and we are pleased to put this litigation behind us. In the meantime, we continue to take appropriate legal action to defend our intellectual property right, and we are maintaining our course of litigation against the SigmaTel in China. Above all we believe that the steps we are taking best serves the interest of our customers.

While our competitors continue to strive to get ahead, we believe that our comparative advantages ecosystems with our extensive infrastructure and network of key development and supplier relationship, coupled with the continuing robust growth of the PMP market worldwide, both in pure unit demand as well the increasing complexities, bode well for a positive year ahead.

As I mentioned earlier, market data today point to annual growth of 2007 of approximately 20% for the stand-alone PMP market. Our two recent distributor relationship we have secured with WPIG World Peace and GMI, in additions to design wins such as our win with Coby Electronics should be instrumental in helping us to continue our growth. Thus the market for audio only SoCs become more fully developed. We expect Actions to be well proficient for the emerging Media Player business as well as opening new applications for our platform designs such as Video Games, GPS and Mobile TV.

As we move into 2007, the growth of the overall PMP market continue and we intent to invest in the necessary infrastructures to support our growth. In particular, we're continuing to invest heavily in engineering and research talents in order to solidify our leadership positions in the consumer electronic media space. With our migration to 0.18 micro technologies, we will be well proficient to maintain our superior cost structures, to ensure, we maintain our leadership in the market without sacrificing profitability. We plan to further shrink some of our volume product to 0.16 in second quarter '07, and further plan to 0.13 towards the end of the year. We believe our scale and resource give us much room in maintaining our industrial leading network of profitability.

Recently we announced the key designs wins with Coby's, which we will utilize our Series 7500 chipset in their product, we sold it in the US market. This is a significant step forward for Actions, because this reaffirm our customer's confidence in Actions product and set a stage for our next phase of growth.

Looking forward, we anticipate additional partnership with both downstream and upstream that will continue to enhance our total solutions and enable our end market customer to more conveniently enjoy a high quality portable media.

Now let me turn the call over to David Lee our CFO to discuss the detail of our financing results.

David Lee

Thank you, Nan and thank to all of you for joining us today on our fourth quarter earnings call and full year's 2006 conference call. We are very proud to report record result again for our fourth quarter and full year 2006. I will take you through a closer look at the fourth quarter financials and with our forward guidance for Q1 2007 before turning the call over to Q&A.

As a reminder all financials are reported in accordance with US GAAP. As Nan mentioned, our fourth quarter ending December 31, 2006 was another record quarter. $49.5 million in revenues truly positioning Actions again, as the leading semiconductor company in the personal media, PMP, SoC market. Driving the results for the quarter is the continuous growth in the PMP market, coupled with strong seasonal demand.

Our gross margin for the fourth quarter was 51.9%, which as expected, was lower than the third quarter's 56.7% due to the change in product mix, yield issue encountered, when we migrated to 0.18 micron process node. As Nan mentioned, this yield issue are typical at this stage of new product ramp, and are expected to be resolved in the near-term.

As we mentioned last quarter, in order to continue to execute on our growth strategy, we are strategically increasing spending in several key areas of the company. R&D expense was $2.1 million or 4.3% of the revenue for the fourth quarter as compared to $2.8 million or 6.1% of revenue in the third quarter of 2006.

As a reminder, we currently do not have a stock-option plan and that our compensation is primarily cash based. G&A expense was $2.2 million in the fourth quarter or 4.4% of revenue. Approximately, the same level as the third quarter's $2.3 million or 5% of revenue.

Sales and marketing expense was $0.5 million in the fourth quarter or 0.9% of revenue. Again approximately, the same as the third quarter of 2006, which was $0.5 million and 1% of the revenue respectively.

Operating income was $21.4 million or 43.2% of revenue for the fourth quarter. Compared to the third quarter of 2006, operating income was $20.7 million or 45.2% of revenue.

Other income, net was $1.5 million in the quarter, this compares to $1.3 million in the third quarter of 2006. The increase from quarter-to-quarter reflects the interest earned on higher cash carrying bank balance for the full effect of the quarter.

Profit before taxes was $22.9 million or 46.2% of growth revenue for the fourth quarter of 2006. This represents an increase of $1 million from the third quarter of 2006.

Net income on a US GAAP basis for the fourth quarter of 2006 was $21.1 million or $0.25 per diluted ADS compared to $20.5 million or $0.24 per diluted ADS for the third quarter of 2006. We would like to remind you that the fully diluted ADS account used in here is 86 million shares for Q4 2006, and for the full year of 2006.

Moving to the balance sheet, cash and cash equivalents together with time deposits totaled $183.5 million at December 31, 2006 compared to $261.5 million at the end of the third quarter of 2006. However, remember that after deducting funds payable to the selling shareholders in the recent secondary offering, cash and cash equivalents together with time deposits totaled $184.1 million at the end of third quarter.

Accounts receivable was $6 million at the end of fourth quarter, up $0.8 million from the end of third quarter of 2006.

The Average Day Sales Outstanding for the quarter was approximately 11 days, as compared to 10 days from the prior quarter. As we grow the business and broaden our customer base, we expect the DSOs to increase overtime.

Inventories were $6.3 million at the end of fourth quarter, down $3 million from the prior quarter, as we've run down our stock of order series 5 and 8 chips. Our inventory turns was approximately 24 days, as compared to 43 days from the prior quarter. Again, longer-term we expect to have higher figures here as we grow the company.

And now let me comment on our view looking forward. I currently expect that our first quarter 2007 revenues will be in the range of $34 million to $37 million, reflecting the seasonality of calendar Q1 that is customary to the time of the year. We anticipate earnings for the first quarter to be in the range of $0.15 to $0.19 per diluted ADS.

As a reminder, our long-term financial targets are gross margin of 50% to 55% and operating margin of 40% to 45%. I would like to remind everyone that our policy is not to provide quarterly guidance to our gross margin and operating margins.

Overall the products have been migrated to a 0.18 micron process node. And we anticipate that we will be able to begin enjoying the cost saving from first quarter of 2007. This will help us to continue to deliver our target level of profitability.

To summarize the financial highlights for the fourth quarter; first, we have record revenues of $49.5 million. Second, we successfully executed our unique business plan and continue to deliver industrial leading margins, 51.9% and 43.2% for gross and operating margins respectively. Third, net income for the quarter was $21.1 million or $0.25 per diluted ADS.

Before we begin our Q&A session, I would like to remind everyone that we will be presenting at the upcoming Credit Suisse Digital Media Memory & Storage Conference in Boston on February 14th, the Roth Capital Conference on February 20, and at the Morgan Stanley Technology Conference on March 8th.

And now we'll like to open the lines for questions. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Your first question will come from the line of Daniel Amir with WR Hambrecht, please proceed.

Daniel Amir - WR Hambrecht

Thanks a lot and congratulations on a good quarter.

Nan-Horng Yeh

Thank you, Daniel.

Daniel Amir - WR Hambrecht

Couple of questions here. First of all, as we look at your business here in 2007. Clearly Q1, you're seeing quite a seasonal drop. Could we expect your unit growth to exceed the 20% of the market? And what type of ASPs do you feel that's going to play out here in 2007?

Nan-Horng Yeh

The first quarter of 2007, actually we already experienced a weaker than expected demand. It has primarily resulted in the inventory consumption, in the lower part of the supply chain from the fourth quarter of 2006, as well as stronger than expected NAND price -- NAND Flash price drops, which put our customer in a wait and see attitude at this moment. But we expected the volume of shipments was starting to picking up in the later half of the quarter. So at this moment we are expecting to see the higher drop of the total demands of the markets, comparing to the previous two years in the first quarter's seasonality. But you still see -- in our point of view, 20% to 25% will be the range. And in terms of ASP, we typically don't disclose the detail of the ASPs change to the public. But in general, we expect that in 2007, we are pretty much in line as we expected previously, 20% to 25%. our current products ASPs dropped for the whole year. So we will probably see 5% to 7% typically for the quarter.

Daniel Amir - WR Hambrecht

So basing on that assumption, we really are not experiencing much revenue growth here in 2007. What can you do in your business to really accelerate your revenue growth. I mean what things can go right here and -- which leads also to potential acquisitions as well?

Chung Hsu

Hi Daniel, Hsu Chung. Basically I think, probably relate to the (inaudible) questions right. In fact, shipment rose to about 30% to 35%. Okay. Revenue, our ASP declined about 22% -- maybe 20% to 25%. So, if we can maintain our market position and have new products such as 13 Series and push out, eventually we hopefully we will see ASP improvement in later of 2007.

Nan-Horng Yeh

With that, we are continuingly gaining the market share from our competitor. And for the mass market I think SigmaTel is our competitor, they are continuously losing so much market share in all the major brands, customer they are talking to us. So, we believe that more and more design wins we can get. So, we are confident that we will continue to grow in this percentage.

Daniel Amir - WR Hambrecht

Okay, one more question then I will pass it on to next person. You announced a couple of new distributors in Q4. When should we start seeing that, it starting impact your business, considering the size of those distributors?

Nan-Horng Yeh

I think, actually we announced that, but people have been working with us for sometime. So, in fact starting from fourth quarter of 2006 the volume is already starting to pick up. Since then our competitor is continuing loosing the market share, we think that this momentum will continue.

David Lee

Now taking the example of the two newly joined as our distribution partners, World Peace, WPIG, they have joined us as our distributors started from the November of 2006. For the December month alone, they already accounts for around 4% of our total sales. So, some of our newly joined distributors actually are starting to developing new markets and bringing new end customer for us. We are also very excited that some of them are actually helping us using our 7500 Series to enter the US market. So, we expect to see the rise of our sales percentage into the US markets continuously.

Daniel Amir - WR Hambrecht

Okay, thanks a lot.

Nan-Horng Yeh

Thank you, Daniel.

David Lee

Thank you.

Operator

Your next question will come from the line of Quinn Bolton with Needham & Company. Please proceed.

Quinn Bolton - Needham & Company

Hi. You guys had mentioned the manufacturing transition and some yield issues. I was wondering if you might be able to sort of quantity that impact on gross margin. And then give us a sense, are you now mostly through the transition of 0.18 or you are half way? Can you just sort of give us an update as to where you are in that transition?

Nan-Horng Yeh

We have actually, Quinn, we have to actually complete our transition to 0.18. The shipment numbers shown in the fourth quarter, there is more than 60% of our shipments are in 0.18 product. But actually going into the first quarter, in terms of manufacturing process, all of our products will be in the 0.18. Of course, in order to continue to reduce our manufacturing cost we are talking with existing foundry partners as well as a new foundry partners to expand our technology advancements into the shrinking of the knots. So, we were expected to have further swing to 0.16 micron process starting from the second quarter already in this year. And also we are discussing with our potential shrinks in the later half of this year to 0.13.

Quinn Bolton - Needham & Company

Okay so the -- let me ask just, do you feel that at least on a 0.18 process now that you are sort of backup to more mature yields, are the yield issues behind you?

Nan-Horng Yeh

Yes we believe so. We encounter some process problem when we went to 0.18 with our foundry partners in the fourth quarter. But this has already started the delivery of satisfactory results from the end of the last year. So, we expect to see the full swings our better than expected yields from the mid of this quarter already.

Quinn Bolton - Needham & Company

Okay, so the combination of the better yields on 0.18 to migration to 0.16 and ultimately moving to 0.13 later in the year, you think you can reduce cost by say 20% to 25% or keep the cost reduction in-line with the ASP reduction you are forecasting?

Nan-Horng Yeh

We believe in our more conservative estimation of the shrinking economies, 15% also will be our target.

Quinn Bolton - Needham & Company

On the cost reduction side?

Nan-Horng Yeh

Right.

Quinn Bolton - Needham & Company

So, I guess, if margins are in the 51.5% range, and you think ASP is declining faster than gross profit, I mean than cost, does that mean gross margin is trending down towards the 50% the lower end of your target range, or just trying to think about gross margin for the year?

Chung Hsu

Quinn, we always mention above our range, about 50% to 55%. We don't decide like we know like particular percentage.

David Lee

But we expect to have a little bit of recovery from the lower end to the middle of the range going through the year.

Quinn Bolton - Needham & Company

Okay. Second question is just wondering if you might have a sense of sort of the mix of your product that are MP4, video-enabled versus just audio, and if you could sort of talk about whether you are seeing in to your Taiwanese competitors, are they moving up and competing more aggressively in the video-enabled segment of the market or are you just seeing sort of the real aggressive pricing down near the audio only segment of the market?

Chung Hsu

Could you repeat the question again?

Quinn Bolton - Needham & Company

Sure, just trying to get a sense of the mix of your business that's audio-only versus say video, and if you could just kind of talk about the competitive environment on the video side for the video-enabled players?

Chung Hsu

Okay. Well, this maybe in the market -- right now, last year the total market, by the end of Q4, about 50% of MP3 product comes with a video function and since we are the market leader, so that's roughly, that is what we have, in our ocean as well. The other part is, for all the competitors, basically we don’t discuss our information in public of our competitor right now, in--

David Lee

I think in terms of our product mix, we are actually matching the end customers' demand. For example, our largest geographic market in Europe, we still see very strong demand from our audio-only players. In that part actually, we will continue to see new market development outside of the Europe as well, like some other emerging markets. And comparing to our competitor, actually we are trying to offer the full range of the products from audio-only to the newly launched 13 Series which is the so called full video function players. So, we try to penetrate into the different segments of the PMP markets. Even though some of our competitors, like you mentioned the Taiwanese competitor, is trying to expand their niche from the lower end audio only into the video. But so far we have seen very little visibility in the market size at this moment.

Quinn Bolton - Needham & Company

Okay. And so, just to clarify, did you say that video was 15 or 50% of revenue as of the end of the fourth quarter?

Chung Hsu

Well, 50.

David Lee

50.

Quinn Bolton - Needham & Company

50, okay. That’s right, I just wanted to clarify. Thanks and great job on the record revenue in the fourth quarter, guys.

Chung Hsu

Thank you.

Nan-Horng Yeh

Thanks you, Quinn.

Operator

Your next question will come from the line Bill Lu with Morgan Stanley. Please proceed.

Bill Lu - Morgan Stanley

Yes, hi, good morning. I want to go back to your guidance for a second here. If you look at the first quarter, I think it's pretty obvious that you look at Apple and SanDisk and SigmaTel, that everyone seen a weakness that you are seeing, maybe you are actually a little bit better. But I’m a little bit surprised by your long-term guidance. I don’t have my notes right in front of me here, but do I remember correctly that you perhaps said that the overall market grow by 35% before, and now you think is 20%.

Chung Hsu

No, Bill--

Bill Lu - Morgan Stanley

Hello.

Nan-Horng Yeh

Can you hear us?

Bill Lu - Morgan Stanley

Hello.

Nan-Horng Yeh

Hello, we lost him.

Operator

He just lost connection. I will go to our next question. It comes from the line of Randy Abrams with Credit Suisse. Please proceed.

Nan-Horng Yeh

Hi, Randy.

Pe Chen - Credit Suisse

Sorry, this is this is [Pe Chen] on behalf of Randy.

Nan-Horng Yeh

Hello.

Chung Hsu

Hi.

David Lee

Hi.

Calvin Lau

Hi Pe.

Pe Chen - Credit Suisse

With SigmaTel's difficultly are you seeing any relief on the legal front? And what's your outlook for expense per quarter? And where was back-tracking to last year?

Nan-Horng Yeh

I think the -- in terms of the SigmaTel dropped the Federal Court case after they win the ITC's case, there didn’t do something. I think SigmaTel overall legal strategy is changing, and we expect that, there will be no relief from the legal side. More in adding addition to that, I think actually because of our 7500 product is successfully launched into the U.S. market. In fact, I think these cases will not affect our business anymore. But we will continue to pursue our intellectual property right in China and in Europe.

David Lee

I am trying to brief you a little bit about the current cases. First, of course, we have filed complaint against SigmaTel in the course in China for the infringement. And in November, actually we have also filed a petition to U.S. Patent and Trademark Office for the reexamination of certain U.S. Patents from SigmaTel. And January of this year, we already filed the Notice of Appeal to the U.S. Court of Appeals for Federal Circuit for the ITC rulings. So there are several legal battles ahead. We will strongly protect our rights and also our intellectual properties. So, we will still consider to reserve certain budget for this year for the litigation or the legal related issues. Last year, we [continued to spend ] around $3 million on different kinds of legal expenses, and this year we will probably see the similar figures in our budget.

Pe Chen - Credit Suisse

Okay, thank you. And one more question is that there are some talks about more aggressive acquisition strategies. So what are some applications you are targeting and what all criteria you are looking at financially or in the stage of development?

David Lee

We are currently looking at the position and also the further technology spending to possible investments, into the different companies or the R&D teams in China and in the US. Of course, we are looking at mainly, according to our product roadmap, as we have built our platform from our 13 series, which can provide stronger video functionalities. Then we are looking for to develop by ourselves as well as to acquire different functionalities and also applications around that platform. So there are several applications as we mentioned before. The full functions of the video applications and in the areas of video games, in the GPS and also in the Mobile TV areas. So, all of them are in process, in terms of our investments, as well as acquiring the R&D technologies. So those are the more short-term areas. Of course, we will not give up the opportunity to talk with some potential partners or the opportunity to acquire meaningful technology along the way in a significant development or money amount.

Pe Chen - Credit Suisse

Okay. Thank you very much.

Nan-Horng Yeh

Thank you.

Operator

Your next question will come from the line of Andrew Lu with Citigroup. Please proceed.

Andrew Lu - Citigroup

Good morning, Mr. Yeh and David.

Nan-Horng Yeh

Hi.

Andrew Lu - Citigroup

Couple of questions from me, is we see some drop on the operating expenses in Q4 over Q3 last year. Can we know the reason why? And that this -- this is operating expenses, [we are] maintaining throughout year 2007. Can we have a rough budget for operating expenses, especially R&D, and non-R&D portion?

David Lee

For the fourth quarter the detail was -- as we need to accrue some of the expenses from the beginning of the year, monthly or quarterly. So some of the major issues, for example, in the R&D part, the compensations we accrued for the engineers, especially for the bonus part, was evenly spread in the third quarter. But in the fourth quarter, we need to adjust according to the actual numbers. So it's applied to the legal expenses as well. As we accrued more than actual numbers in the first three quarter, we need to adjust it back in the fourth quarter. So, that's why the fourth quarter, some of the numbers actually are especially in the so called compensation bonus part, as well as legal expenses part. We have less booking on the fourth quarter comparing to the third. In terms of the expenses ratio, we still believe as we grow the business, we have certain budget for R&D and SG&A to support our growth. So, usually we expect we will have around 6% to 8% of our revenue for the R&D expenses for 2007 and for SG&A there will be 5% to 6% to the revenue.

Andrew Lu - Citigroup

Thank you. My second question is, I think you guys generate plenty of cash each quarters and then start to buy market security, or whatever, to protect some interest. And can we roughly know what kind of return we can generate on this kind of cash usage. What kind of return we can generate on pure cash. What means on the non-operating side, what's a roughly budget for this year?

Nan-Horng Yeh

For the marketable security, we started to invest in some good liquidity vehicles to enhance our cash returns in terms of the yield. So those are the vehicle, we had to invest in total, around to one year -- six months to one year terms, and then get a slightly better than the so called fixed deposit rate. So in that kind of category, we generally expect in U.S. dollar terms more than 5% of the interest income from those investment vehicles. For the total non-operating income, we will probably see approximately the similar levels comparing to the fourth quarter of 2006.

Andrew Lu - Citigroup

Thank you. We see a lot of cash generating. Any plan to do capital reduction and shares buyback or whatever, a lot of design houses done recently in Taiwan?

Nan-Horng Yeh

Currently, we don't have anything planned yet.

Andrew Lu - Citigroup

You don't have this planned yet?

David Lee

No. Andrew let me explain, as we -- Actions is actually a relatively young company and we went into the [cellular] market as just for a little bit more than one year. So, we just felt in a so called growth and expansion mode of the company's development. So, we see a lot of opportunity to invest, to expand. So the Board of this company actually has, given the directions of the management to further looking at into different areas of expansions. So, besides the fixed assets investment, we booked every year around U.S. $20 million. We still need to reserve a certain cash to prepare for the opportunity to come. So, in the short-term we will probably will not discuss or we're not going to the consideration of the cash dividends.

Andrew Lu - Citigroup

Yeah, my last question is 7500 series, what percent of shipment we had shipped in Q4 on the total shipment side? That's a special focus on U.S. market right?

Nan-Horng Yeh

Our U.S. market is about just a little bit less than 10%.

David Lee

Yes, we just started to ramp-up the volume shipments of 7500 Series. The percentage in the fourth quarter is relatively small. Currently we expect the number was probably going from 2% to 3% of our total shipments into 5% to 6% areas into the middle of this year.

Andrew Lu - Citigroup

Thank you.

Operator

Your next question will come from the line of Adele Mao with Susquehanna International Group. Please proceed.

Adele Mao - Susquehanna International Group

Hi guys. Just a couple of questions. First a follow-up question on the distributor side. You mentioned that WPIG in December already accounted for you, 4% of the total sales. What's your expectation for your contribution to your revenue mix in 2007?

Nan-Horng Yeh

Looks bigger and better.

Adele Mao - Susquehanna International Group

Any idea, will any of these newly announced distributors account for more than 10% of your revenue?

David Lee

Actually, we do have many other existing distributors increasing their sales working with us. The top five of the customers now currently accounts for around 60% of our total sales in the fourth quarter of 2006. As we see more-and-more new partners joined us, we expected to see people like GMI or World Peace Group to increase their volumes, as we continue to offer a full range of our products through the years. So, that kind of -- we don't have to the exact expectation for each of the customer but then we will see. Those new partners will continue to contribute more-and-more volumes through the years.

Chung Hsu

One thing I want to point out here is that whether the engineering team or World Peace and GMI, they will help us to further providing more-and-more firmware and software to our customer, so, the solution for us and to our customer is much better. And then for our competitor, they have shortage of the firmware and software, even for Taiwanese competitors.

Adele Mao - Susquehanna International Group

Okay, great. So, any of these distributors will bring you into new geographic market that you announced strong before?

Nan-Horng Yeh

Yes, we are looking at it, especially new development markets. We traditionally ship majority of our products to Europe and in mainland China, and we have seen the volume starting to pickup from the Taiwan's demand, as well as the US demands.

Adele Mao - Susquehanna International Group

Okay, great. Can you give customer and customer mix by geographies; they are pretty much the same from the last quarter?

Nan-Horng Yeh

Yes.

Chung Hsu

Yes.

Adele Mao - Susquehanna International Group

Alright, also in terms of -- when was the exclusion order effective? Was it in November? For your old products from SigmaTel lawsuit?

Nan-Horng Yeh

The exclusion order is already in effect from November last year.

Adele Mao - Susquehanna International Group

Fourth quarter?

Chung Hsu

Yeah, fourth quarter.

David Lee

Fourth quarter, last year.

Adele Mao - Susquehanna International Group

Right, okay. And you said --

David Lee

Excuse me.

Operator

Your next question will come from the line of Jay Srivatsa with Roth Capital Partners. Please proceed.

Jay Srivatsa - Roth Capital Partners

Yes, thanks for taking my question. Congratulations on beating consensus in Q4.

Nan-Horng Yeh

Hi Jay.

David Lee

Thank you, Jay.

Jay Srivatsa - Roth Capital Partners

Couple of questions from me, in terms of the ASP trends, you've indicated there is going to be some decline of 20% to 25%. Could you kind of tell us with the 13 Series products coming in, how you see your blended ASP moving?

Nan-Horng Yeh

We have started to ship in volume from the middle of this year, for the 13 series product. Of course, as we mentioned, the different applications to build on the 13 series, so there will be a [running of] the periods for different applications, for example, for games, for the GPS, for the pure videos playback players. So, we -- at this moment difficult to see the actual demand for the different applications. But then we will probably see the volume starting to pick up more significantly in the middle of third quarter and getting stronger and develop fourth quarter. As we mentioned earlier, the volume and the speed of the remnant of the 13 series will give the contributions to, so called blended ASP of this company. So, we will probably exceed the ASP and also margins improvements, when we go into the second half of this year.

Jay Srivatsa - Roth Capital Partners

Okay. In terms of backlog going into Q1, given the Chinese New Year and the ramp that happened last quarter, could you kind of share with us what you are seeing out there in terms of your backlog?

Chung Hsu

We believe the financial level in our (inaudible) is still very healthy right now. Actually, most all of these previous small cap company, they don't keep much inventory level in their stock. So, as you can see our number for last quarter, our -- actually our inventory days is even lower than Q3.

David Lee

Going through the first quarter, even though we see the market demand in total is slower, but the market practice in the supply chain will not change. So, even though the total demands are smaller, but the inventory and backlog situation, we have found no change comparing to the peak seasons in the fourth quarter.

Jay Srivatsa - Roth Capital Partners

Okay. In terms of market share with roughly 50% coming out of ‘06 with some of the newer distributors coming in, what is your expectation for calendar ‘07? As you exit ‘07, where do you think your market shares is going to be at?

David Lee

Currently, we believe we have 35% to 40% of the worldwide market share for PMP market, and almost 50% are so called now in Apple's market. So, we have moderate estimation in our sales target to increase that market shares from the so called 35% to 40% worldwide market shares to close to 40% to 45%.

Jay Srivatsa - Roth Capital Partners

Okay. Last question in terms of the yield issue you had in transitioning from 0.25 to 0.18 micron, and as you look ahead to 0.16 micron, what are some of the measures you are taking to avoid any problems that could happen?

Nan-Horng Yeh

The main issue regarding to our process migration from 0.25 to 0.18 is not because of our design problem, but because of the -- our foundry partner Changjiang and our foundry equipment. And they faced some problem in their times. That’s why we have a lower yield in the fourth quarter and delay of foundry migration -- our process migration, that’s the main reason. So -- and we believe that from the 0.18 to 0.16 since our foundry partner is ready now, so we believe will be more smooth than previous quarters.

Jay Srivatsa - Roth Capital Partners

Fair enough, congratulations again.

Nan-Horng Yeh

Thank you Jay.

Operator

And your final question will come from the line of Chang Qiu with Forun Technology Research. Please proceed.

Chang Qiu - Forun Technology Research

Yeah. Good morning and congratulations on a very solid quarter.

Nan-Horng Yeh

Thank you.

Chang Qiu - Forun Technology Research

I have one question maybe just for clarification. You said that your market share for the newer MP4 player is also over 50% for the Q4?

Chung Hsu

MP -- well, the thing we mentioned earlier by Q4, 2006, we believe our market share [to fall] 35% to 40% the total PMP market.

Chang Qiu - Forun Technology Research

I know, but for the MP4 player side what's your estimated market share?

Chung Hsu

Well in China the MP -- so called MP4 basically is obtained by -- the term MP4 in China is mostly like a MP3 player with video function, is that what you mentioned about MP4?

Chang Qiu - Forun Technology Research

Right, right.

David Lee

Okay, this characteristics in the fourth quarter as we went through the Christmas seasons, we actually tend to see more orders for Christmas gifts and souvenirs and toys. And that part is -- or the only -- mainly. So during the fourth quarter, we have seen stronger or bigger percentage of audio-only products. But when we go into a more normal demands worldwide, we will probably see the video functionalities players continue to grow. So, we probably see in the fourth quarter around 30% to 35%, this audio plus video, we called it MP4. The majority of the shipments are still in the so called MP3, the audio-only players.

Chang Qiu - Forun Technology Research

Okay, alright. Thank you.

Nan-Horng Yeh

Thank you.

Operator

Your next question will come from the line of Tore Svanberg with Piper Jaffray. Please proceed.

Heidi Poon - Piper Jaffray

Hi, this is actually Heidi Poon for Tore.

Nan-Horng Yeh

Hi Heidi.

David Lee

Hi.

Heidi Poon - Piper Jaffray

Hi. I just want a clarification. I think earlier in your comment, you mentioned that you think orders or shipments will resume in the second half of Q1. Given that you have pretty short lead times, I mean, what kind of sort of visibility do you have in terms of that kind of pickup. And given that Q1 is seeing a pretty steep drop versus historical pattern, what kind of rebound can we possibly see in Q2 or I are we sort of pinning our hopes on the second half to reach the calendar '07 target revenue growth?

Chung Hsu

Heidi, this is Chung again. Well, basically I think -- actually the (inaudible) in our case should be Q2 -- Q2, we would see the demand pickup maybe later in March, but we will expect the similar pickup in Q2 because mid or first quarter is Chinese New Year.

Heidi Poon - Piper Jaffray

Right, right. That's true. I should know that.

Chung Hsu

Are you a Chinese?

Heidi Poon - Piper Jaffray

But could you give me a sense of then what type of rebound we could possibly see in Q2 then or are we still having -- in order to reach the 5% to 10% revenue growth in calendar '07. Are we going to basically put our growth expectation in the second half or are we seeing a more flattish Q2?

Nan-Horng Yeh

Well Heidi, David and I mentioned to everybody before. We expect above -- we will gain above 30% to 35%, depending on total year unit growth.

Heidi Poon - Piper Jaffray

Right.

Nan-Horng Yeh

But few of our -- [all time] right now.

David Lee

The current expectation for seasonality for whole year, we will probably see a mild recovery in the second quarter, comparing to the first and then stronger third and then continue to be strong in the fourth quarter. So, we will probably see not that much huge growth in terms of shipments, when we go into the second quarter, but certainly, there is certain percentage of growth comparing to the first quarter.

Chung Hsu

Heidi I can provide you a whole -- what happened to us for the past year. Above 40% of our revenue, all come from first half. About 60% come from second half. Some of it actually even go to 65%. So 35% to 40% comes from first half, the other 60% to 65% comes from second half.

Heidi Poon - Piper Jaffray

And one more follow-up question, just a little deeper in terms of the U.S. market share, you mentioned that it could go from 2% to 3%, currently to 5% to 6%, totaling up the year. Is that basically just based on Coby design win or are you accounting -- just budgeting for maybe a few more design wins, out, rolling in this year?

Chung Hsu

As Nan mentioned earlier, actually there are more and more people talking to us. Unfortunately we are not able to disclose their name, because they will not allow us to talk about. But there are more and more design wins for U.S., they are talking to us currently right now.

Heidi Poon - Piper Jaffray

So basically we could have some more upside from the 5% to 6% that you mentioned earlier?

Nan-Horng Yeh

So far, we feel probably quite (inaudible) right now. Although David mentioned earlier.

Heidi Poon - Piper Jaffray

Alright. Thank you very much.

David Lee

Thank you, Heidi.

Operator

I would now like to turn the call back over to Mr. Nan Yeh for closing remarks.

Nan-Horng Yeh

Thank you. As you can see we are very well positioned to catch our growing portion of this exciting market as we move forward, and are optimistic about our momentum and our leading position. We are pleased to [share our press] for the future and the road ahead and look forward to keeping you updated on our progress. Thank you for joining us today, we hope to see many of you when we present at the upcoming conference in the U.S. later in February and March. Thank you.

Operator

Ladies and gentlemen this concludes your presentation. You may now disconnect and have a great day.

Chung Hsu

Thank you.

David Lee

Thank you.

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