Actions Semiconductor Co., Ltd (ACTS) Q3 2014 Earnings Conference Call November 4, 2014 8:00 AM ET
Executives
Zhenyu Zhou - Chief Executive Officer
Nigel Liu - Chief Financial Officer
Chung Hsu - Action’s Director of Investor Relations
Analysts
Rick Fearon - Accretive Capital Partners
Bob Schnell - Dougherty
Zhenyu Zhou
Thank you for participating Actions Earnings Conference Call. We appreciate your continued interest in the company. I will provide an overview of our performance in the third quarter of 2014 along with some operational 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 US$13.1 million coming in towards the low end of our expectations and down US$16.9 million in the third quarter of 2013. This was primarily due to supply shortage of 8-inch wafers for multimedia products from our foundry. Gross margin was 14.6% reflecting intense competition in the worldwide tablet markets which kept selling prices and margins low, along with the net inventory write down and reduced margin by nearly 7%.
Over the last few quarters, we have writing down certain lower margin inventory in accordance with our account policies. A portion of this was recovered during the quarter.
Lower gross margin, combined with mask expenses associated with our new application processor enabled by 28 nanometer process technology and expenses related to our Dutch auction tender offer contributed to the net loss attributable to Actions of US$9.2 million or $0.137 per basic and diluted ADS compared to net loss attributable to Actions of $0.2 million or $0.002 per basic and diluted share in the third quarter of 2013.
As we approach the end of 2014, we believe we are through the most challenging period in our tablet business, and are preparing to harvest our investment in 28 nanometer process technology and 64 bit architecture in the year ahead. We recently launched our first 28nm OWL series chipset, the plan to introduce the 64 bit solution by year end. In our multimedia business, our new Bluetooth BoomBox 4.0 dual mode solution reached the volume shipment during the quarter and we expect to launch our RF and audio processing integrated single chip SoC for Bluetooth BoomBoxes and headphones in early 2015.
Now I will provide some details about our tablet and multimedia business. Tablet and car connected devices. During the third quarter of 2014 tablet shipment increased more than 50% from the second quarter of this year. Our dual core solutions led by the popular ATM7021 accounted for the majority of tablet shipments during the quarter. We also saw a two fold increase in shipments of our quad core solutions primarily the ATM7029b indicating of the accelerated migration from dual core to quad core solutions in the low end of the market.
While we experience the higher shipment during the quarter competition in the worldwide tablet market remains intense. Major players Intel and Mediatek have pushed our selling prices and margins as they aggressively crop market share. As a result, the price of tablet SoCs is down significantly from year ago levels and entry level tablets are now selling below $50, down 75% year-over-year. We anticipate another sequential increase in shipments in the fourth quarter which is typically the peak season for consumer electronics. Although we do expect continued pressure on selling prices and margin in the near term.
Though we are facing some tough competitors in the tablet market, we continue to believe is a comparing market that we can compete in successfully. This market is still expanding. Primarily driven by sales to emerging markets where there is still a strong consumer appetite for tablet. More mature markets are expected to remain flat as the growing popularity of tablets and the low price notebooks has reduced demand. Our current view of the worldwide tablet market is for low single digit growth in 2014 with a slight improvement in 2015.
2014 has been a year of the investment for Actions and we are now at the point where we will reap the benefit of our investment in 28 nanometer process technology and 64 bit architecture in this year ahead. Just a few year ago -- just a few weeks ago, we launched our first 28 nanometer OWL Series Chipset the ATM7059, a quad-core solution that balances high CPU performance and functionality with our innovative low power architecture to provide an enhanced user experiences, faster processing speed and the longer battery life. The ATM7059 offers very attractive performance to price and performance to power ratios of the low end and mid-tier of the market. We will soon introduce our 64 bit CPU, also enabled by 28 nanometer process technology allowing us to capture the industry wide transition from 32 bit to 64 bit architecture for smartphone and tablet which is being supported by all the major players including Apple at an early stage. We will share more details when it is rolled out.
We expect the ATM7059 and our new 64 bit CPU to be major revenue drivers in 2015. More importantly, by deploying 64 bit architecture and 28 nanometer process technology, we are in the position to gain market share quickly and commend higher saving price and better margins. We expect our tablet business to return to a healthy track by mid-2015. We continue to explore opportunities to expand our business beyond tablets to include other cloud connected devices such as OTT capable devices. Our existing product or OTT set-top boxes has already made some headwind in penetrating the Chinese market and as we expect our new products will help us make further inroads in 2015. However, China's OTT market is still in a very early stage and the recent policy changes and the restrictions improved by the PRC Government may impact the upside.
Multimedia business. In our multimedia business, our performance has hampered by a shortage of 8-inch wafers from our foundry. This shortage has slowly improved in Q4 2014 and should be fully resolved in early 2015. While we continue to experience a drop-off in sales of certain traditional multimedia and gaming products, the wireless connectivity enables multimedia markets particularly Bluetooth presents a major growth opportunity for Actions.
According to ABI Research, shipments of Bluetooth chipset are expected to surpass 3 billion units in 2015 and 4 billion units in 2018. Furthermore, the recent acquisition of the two leading Bluetooth voice and music companies by a large U.S. firms opens up huge potential for new players in the market. We plan to capitalize on our leading position in the non-Apple portable audio and video market to establish a strong firm foothold in the high end of the Bluetooth voice and music market.
Our Bluetooth 4.0 dual mode BoomBox solutions reached volume shipments in the third quarter of 2014. And we are excited about upcoming launch of our RF and audio processing integrated single chip SoC for boomboxs and headphones early next year. We expect Bluetooth solutions to become the major revenue driver in our multimedia business in 2015 and beyond.
Conclusion. We believe we have made it through the most difficult period in our tablet business and are approaching the point where we will reap the benefits of the investment that we have made in our future. Our new tablet products employs 64 bit architecture and 28 nanometer process and will be key revenue drivers in 2015 offering attractive steady prices and margins.
We expect a low single digit growth in worldwide tablet market in 2014 with the slight improvement in 2015. We anticipate our tablet business to return to a healthy track by mid-2015. We expect steady growth in shipment from the OTT set-top box market. The Bluetooth voice and music market presents a major growth opportunity for Actions. We expect our Bluetooth boombox solutions to be the major revenue drivers of our multimedia business in 2015 and beyond. Now, I'd like to turn the call over to Nigel Liu our CFO who will review our financial results for the third quarter.
Nigel Liu
Thank you, Dr. Zhou. As a reminder operations are recorded in accordance with U.S. GAAP. For the third quarter ended September 30, 2014 we recorded revenue of 13.1 million compared to 12 million in the second quarter of 2014. Our gross margin for the third quarter was 14.6% compared to 18.4% for the prior quarter a steady industry we recorded a net employee write down which reduced gross margin by nearly 7%. For the third quarter total stock-based compensation expenses was $4 compared to $5 in the second quarter of 2014. And our current employee stock option program is approaching its end date.
R&D expense was 10.7 million or 81.4% of revenue for the third quarter compared to 6.6 million in the second quarter of 2014. The increase is primarily associated with mask expenses related to our new 28 nanometer application processor. G&A expense was 3.1 million in the third quarter or 23.9% of revenue compared to 2.8 million in the second quarter of 2014. The increase was primarily the result of 0.5 million in the expenses related to our Dutch auction tender order.
Sales and marketing expense was 0.3 million in the third quarter or 4.2% of revenue compared to 0.6 million in the second quarter of 2014. Operating loss was $12.4 million for the third quarter of 2014 compared to an operating loss of 7.7 million for the prior quarter. Net other income for the third quarter was 0.8 million compared to net other income $7 in the second quarter of 2014. The increase was due to the price appreciation in the RMB related to U.S. dollars.
Interest income was 2 million for the third quarter down from 2.8 million in the second quarter of 2014 due to low cash and interest bearing securities from the Dutch auctions in the quarter. Last, deferred tax was 9.6 million for the third quarter compared to a loss before tax of 4.6 million in the second quarter of 2014. Income tax credit was 0.4 million for the third quarter compared to an income tax credit of 0.9 million in the second quarter of 2014.
Net loss attributable to Actions Semiconductor on a U.S. GAAP basis for the third quarter of 2014 was 9.2 million or 0.137 per basic and diluted ADS. This compares to a net loss of 3.5 million or 0.05 per basic and diluted ADS for the second quarter of 2014.
Now moving to the balance sheet, cash and cash equivalents together with the time deposits, trading securities and both current and non-current marketable securities totaled 161.3 million as of September 30, 2014 compared to 189.5 million as of June 30, 2014. Of the 161.3 million total, 117.7 million was in cash with a short-term interest period investments together with time deposits that was generally issued by large domestic banks in China for term no more than three months and can be redeemed at any time. 43.6 million was in trading securities and the current and non-current multiple securities which were principle of guarantees of pledged investment with higher interest rate and the minimal returns of three months less marketable securities while many issues manage or guaranteed by top ranking state owned financial institutions in China.
Our short-term borrowing totaled 33.5 million at the end of the third quarter, down from 34.5 million at the end of the second quarter of 2014. Accounts receivable was 5.6 million at the end of third quarter of 2014 compared to 6 million at the end of the second quarter of 2014. Accounts receivables includes amount due from a related target and equity method investees. Inventory was 22.8 million at the end of the third quarter, down from 27.2 million at the end of the prior quarter.
We continue to buy back shares, spending approximately 25.9 million during the third quarter including 25 million representing the equivalent 10 million ADS which were already [indiscernible], a part of our Dutch auction tender offer in September 2014. As of September 13, 2014, the company had invested approximately a total of $8.9 million in the program, representing the equivalent of approximately 33.7 million ADS shares.
And now turning to our outlook. Based on our current market trends, we expect revenue in the fourth quarter of 2014 to be in the range of 14 million to 16 million. We expect a substantial improvement in shipment in the fourth quarter of 2014 a lower currency transition in the tablet market which continuously impact revenue and margins in the near term.
And now, we like to open the lines for questions.
Question-and-Answer Session
Operator
And we’ll take our first question from Rick Fearon with Accretive Partners.
Rick Fearon - Accretive Capital Partners
Good evening gentlemen. How is it at all possible I just can’t get my head around our just spending $11 million this past quarter in R&D and why are -- with revenues down and with this expectation that revenues will be down toward at least several periods ahead of us why are we not taking any action to reduce R&D expenses it’s within our control it’s unfathomable right now that we are running with $11 million of R&D. What happened this last quarter and why are we not taking any steps to reduce R&D?
Zhenyu Zhou
Well, this is the kind of nature of the semiconductor design house. The term of a development of product is much longer than the regular other business. As we mentioned in the earnings call this quarter we have taken out two 28 nanometers product which result in higher R&D expenses for this quarter. As usual, most of the semiconductor company like us have to invest heavily in the future in order to return to kind of better profitable and revenue side.
Rick Fearon - Accretive Capital Partners
Then we can’t possibly continue to spend at this R&D level and the company has been well over $100 million in the past seven years and has declining revenue since then to show for $100 million spent on R&D. In 2006, the company was operating with $170 million in revenue and R&D expense was $10 million. Today, R&D expense is more than four times that and based on this quarterly run rate and revenues are a 10th of that.
Zhenyu Zhou
Well, certainly we also want to have higher revenue and the only way to get higher revenue is have creation and develop new products at investing our technologies. As the number you sided which reflect a lot of different factors including inflations, including cost of the labors, including the cost of the process difference. Of course, with all of that, the cost of the investment in future products is much higher than like four or seven years ago which is if you examine similar product company I think the trend is all the same. But certainly meanwhile we love to make every effort to increase our revenue to justify such spending.
Rick Fearon - Accretive Capital Partners
Okay. It’s just that these shareholder assets are being invested in terrible investments when it comes to R&D it is not yielding return for us. And I once again I am going to say, this has to be brought in, the R&D expense needs to be right sized and brought in line to where it should for company of this size. And shareholders just can’t continue to sit around and wait for this to happen.
I see that we have another R&D or I am sorry inventory write-down this quarter, I thought we talked about this last quarter. Is this an ongoing thing that we produce product and then just or we have working process that then just gets written down each quarter or are we continuing to do this? Is this going to be expecting next quarter as well?
Zhenyu Zhou
We don’t know about next quarter yet, but certainly nobody likes inventory write-down we don’t either. As we mentioned several quarter ahead we’re in a very difficult situation for the tablet market. And the pricing erosion is much heavier than we anticipated as the conservative accounting policy inventory write-off based on many different factors which could be the duration of the inventory that could be due to the ASP or the gross margin of the inventory. As the Board of Directors instruction Action is always taking a very conservative accounting policy and we discussed such policy with our auditor Company as their recommendation based on this market situation and our inventory level. So at this moment I cannot tell whether next quarter there will be requirement of inventory write down but we will always follow the general accounting practice at auditor Companies review and recommendations to have to make conservative accounting practice.
Rick Fearon - Accretive Capital Partners
And is this inventory write-down related to bad inventory or is it related to ASP erosion?
Zhenyu Zhou
It’s a combination of both, it’s not bad inventory there are long leave inventory plus ASP erosion. But I will say ASP erosion is a primary factor in consideration.
Rick Fearon - Accretive Capital Partners
And what gives Zhenyu what gives us confidence that we’re going to be able to compete with Intel now that they’re in the market. And why are we not seeking just a sale of the company to someone like Intel that has just invested in the Spreadtrum RDA deal at a very favorable multiple of sales. Why are we not just seeking a buyer of the company at this point?
Zhenyu Zhou
Well we’re always open, we’re very open to any merchant acquisition opportunities and certainly Greenfield offers good premium we are open to discuss.
Operator
(Operator Instructions). And we’ll take our next question from Bob Schnell with Dougherty.
Bob Schnell - Dougherty
I was just wondering your opinion on the Dutch tender, it appear that there were a number of ordinary shareholders based in Asia who tendered in, and just interested in your thoughts on the amount of shares tendered was a surprise to me. Because I think a concern in the past had always been would the company be able to get enough shares in tender, it seems there were almost double the amount of shares that you’re looking for.
Zhenyu Zhou
Well certainly we have the same concern before that not enough shares to be tendered but the result is just what it is, so in this moment I am not able to give too much insight of what is all these investors thought. But the numbers are like you mentioned.
Bob Schnell - Dougherty
Do you have relations and discussions to some of your ordinary shareholders or are they folks that aren’t really associated with the company anymore?
Zhenyu Zhou
I don’t think we’re allowed to access such information. We will not be informed who tendered, who sold how much and who intend to tender, we don’t have such information and we don’t allow to access to such information.
Bob Schnell - Dougherty
And in terms of the R&D spending as Rick alluded to SIMs elevated, is there any way you could break down of the 10 million or so spent this quarter. What percentage was sort of allocated to different product lines or to different future product lines?
Zhenyu Zhou
Although we don’t usually breakdown any detail, but for this particular quarter I can give you little bit more detail. First of all our regular R&D expense about I would say $5 million to $6 million which is our typical quarter average expense. For this quarter there is an extra spending as I mentioned in the earning call, 28 nanometer process technology two three products. Each product the get together is close to $3 plus million, close to $4 million. Then there is other expenses along that line.
Bob Schnell - Dougherty
So do you expect then in Q4 R&D will come back down to that $5 million, $6 million range?
Zhenyu Zhou
We don’t have another 28 nanometers [tape-out] for this quarter or the coming quarter. Next question.
Bob Schnell - Dougherty
And you highlighted some Bluetooth products and audio products as growth drivers, did you recognize any revenue this quarter from those products and when do you think they'll start to contribute meaningfully to the company's revenue?
Zhenyu Zhou
It's a very good question. Actually this is a very fast growth market and we're already penetrating this market successfully and actually there are tons of revenue in multimedia's account for -- by this penetration of the Bluetooth market already. And I understand and you probably realized the revenue is not that high, but please notice there is an important notice in this conference call as we have a shortage of supply, very severe shortage of supply of 8-inch wafer in this quarter.
Bob Schnell - Dougherty
Can you quantify that at all in terms of, if you would have had enough supply of 8-inch wafers, how much more revenue you could have booked in the quarter?
Zhenyu Zhou
No we cannot supply that detail information.
Bob Schnell - Dougherty
And as you look at the profitability of various products, obviously recently the tablet products have been under since of your pricing pressure, do you know that those sort of pressure as well in audio or is that market been a little more rational and do you anticipate to be more rational going forward?
Zhenyu Zhou
I think the audio or the multimedia business is very stable, there is an erosion in the ASP of our margin, but they are no more than ordinary. So a few percent to 10% a year [indiscernible] as worst maybe 20% for some product but not like a tablet like cutting in half or more like over one year. So much less than severe it's a more stable business.
Bob Schnell - Dougherty
And you mentioned in your commentary that it sounds like maybe things have stabilized, they're stabilizing in the tablet markets, have you seen prices stabilized recently or do you anticipate more erosion throughout the rest of the year?
Zhenyu Zhou
No, the price erosion certainly won't be cutting half again next year, they're still there but more on a ordinary track. We think we're stabilized in the market -- gets through the most challenging period is because last year there is first of all there is ASP erosion more than that 50%. Second of all, in the first of two quarters, we faced an early intensive competition and even our volume had stopped and as you probably noticed in the report our volume has come back quite significantly starting from the third quarter and it will increase more in the fourth quarter.
But of course these are the order product that was 55 nanometer and their cost is high okay, that's why our margins is very low. With 28 nanometer, we have better performance, better power consumption and also lower cost and so we do expect with a reasonable margin -- I mean ASP erosion, we will achieve much better margin than the current margin with 28 nanometer process.
Operator
And we'll take a follow up question from Rick Fearon with Accretive Partners.
Rick Fearon - Accretive Capital Partners
Can you just update us on some of the efforts with strategic partnerships and the extensive restructuring that was announced last quarter and what the objectives are and where things stand with respect to pushing forward with partnerships?
Zhenyu Zhou
We are as usual we are very aggressively more actively looking for partnership, but at this moment there is nothing material that we can report. So, Action is a very transparent company once there is solid progress in that direction, we will certainly make it available for our investor. In terms of the major restructuring about the last quarter I can -- what I can say is that restructuring is completed and Action technology is starting operating already and the objective is to see as where we adopt earlier to streamline our management and the company structure in the meanwhile looking for other opportunities in the capital market, but this is a long way to go.
Rick Fearon - Accretive Capital Partners
Have you found Zhenyu that the new structure the streamline structure is helpful with your management of the company or is it creating complexities?
Zhenyu Zhou
It won't create any complexity, it's certainly helpful for the management, but the effect certainly won't be immediate or instant, we have to see the benefit and with patience.
Rick Fearon - Accretive Capital Partners
Any is the idea that the Actions technology subsidiary which has the operations now of the company is that where you're exploring capital markets opportunities and the dual listing on the Asian exchange?
Zhenyu Zhou
Well, we don't we don’t rule out any possibilities but at this moment we do have a specific plan from any angle.
Operator
(Operator Instructions). And it appears there are no further questions at this time. Pardon me, we do have a question from [Devendra] [indiscernible] a private investor.
Unidentified Analyst
I am wondering you had this 7039 processor and we didn’t see much tablets out there for that processor. So is there any progress on marketing that?
Zhenyu Zhou
Could you repeat the question again, please, we cannot hear very well. So please repeat the question.
Unidentified Analyst
My question is regarding your ATM7039 processor and you announced that the processor long time ago and we didn’t see many tablets out there for that processor. So I am just wondering are you marketing that or that was just for R&D purpose?
Zhenyu Zhou
You’re mentioning 7039 or 7059?
Unidentified Analyst
7039.
Zhenyu Zhou
Yes, 7039 is due in the marketing, we’re still pushing that and certainly in tablet we have a few customer already shipping that product. In the meanwhile we also are targeting that product into TV set-top box as well.
Unidentified Analyst
Another question I have is, are you planning for any new processor after 7059 or you want to capitalize this now?
Zhenyu Zhou
We certainly will capitalize our product or any of our product but after 7059 as we mentioned in the earnings call we will launch another 64 bit product.
Operator
And we have another follow up from Rick Fearon with Accretive Partners.
Rick Fearon - Accretive Capital Partners
Zhenyu I just have a quick question regarding the Board and you may or may not know the answer to this, but has the board considered bringing any additional independent directors on board or replacing any of the directors with some stronger guidance at the board level?
Zhenyu Zhou
I am not aware of any plans because I’m not part of the Board. At this moment I have no knowledge of that.
Rick Fearon - Accretive Capital Partners
And I say this presumably because hopefully one or all of your Board members actually read the transcripts of the conference calls, but it is something we would strongly encourage them to consider is bringing on stronger guidance at the board level. And I understand you’re not on the Board Zhenyu but I think the company can use some stronger direction.
Zhenyu Zhou
I appreciate your comments, I will relay your information to the Board of Directors.
Rick Fearon - Accretive Capital Partners
Thank you, Zhenyu. And good luck with the quarter and we appreciate your heard work.
Zhenyu Zhou
Thanks again for joining us on today’s earnings conference call. We appreciate your interest and continuous support of Actions. Thank you.
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