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

Q1 2011 Earnings Call

May 10, 2011 5:30 PM ET

Executives

Ellen Davis – Investor Relations, The BlueShirt Group

Niccolo Chen – Chief Executive Officer

Patricia Chou – Chief Financial Officer

Analysts

Rick Fearon – Accretive Capital Partners

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Actions Semiconductor First Quarter 2011 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded, Tuesday, May 10, 2011. At this time, I would like to turn the conference over to Ellen Davis of The BlueShirt Group. Please go ahead, ma'am.

Ellen Davis

Good afternoon and thank you for joining us on today's conference call to discuss Actions Semiconductor's first quarter 2011 financial results. This call is being broadcast live over the web and can be accessed on the Investor Relations section of Actions website at www.actions-semi.com, for 90 days.

On today's call are Niccolo Chen, Chief Executive Officer, and Patricia Chou, Chief Financial Officer. After the market closed in the U.S. today, Actions issued a press release discussing the results for its first quarter ended March 31, 2011.

The press release was also filed on Form 6-K with the U.S. Securities and Exchange Commission. The press release is accessible online at the company's website as well as the SEC's website or you can call the Blueshirt Group at area code 415-217-7722 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 performance of the company. We wish to caution you that such events -- such statements are simply estimates and actual events or results may differ materially.

We refer you to the documents that Actions files from time to time with the SEC, specifically the company's most recently filed Forms F-1, 20-F and 6-Ks. These documents identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

And now, I'd like to turn the call over to Patricia Chou.

Patricia Chou

Thanks for participating in Actions earnings conference call. We appreciate your continued interest in the Actions. I will provide a business update and discuss financial results for the first quarter of 2011 as well as the expectations for future performance. Niccolo will be available during the Q&A portion of the call, where I will translate from Mandarin to English on his behalf.

First, I would like to discuss our financial results for the first quarter. As a reminder, our financials are reported in accordance with the U.S. GAAP. While the first quarter ended March 31, 2011 we've recorded revenue of $9.4 million compared to $10.7 million in the fourth quarter of 2010.

Our gross margin for the first quarter of 2011 was 39.1% compared to 37.1% for the prior quarter. For the first quarter, total stock-based compensation expense was $0.6 million compared to a credit for the fourth quarter of $0.2 million, which included a true-up of underestimated forfeiture rate.

R&D expense was $5.1 million or 54% of revenue for the first quarter compared to $4.4 million in the fourth quarter, which included the impact of the true-up of underestimated forfeiture rate. We anticipate our R&D expense to continue to represent a high percentage of revenue as we increase R&D talent to focus on our diversified product development initiative.

G&A expense was $1.7 million in the first quarter or 18.1% of revenue, which was lower than the fourth quarter of $2.2 million, mainly due to the annual listing expense or reimbursement for our [ADS Depositary] Bank. Sales and marketing expense was $0.3 million in the first quarter or 2.8% of revenue compared to $0.4 million in the fourth quarter.

We continue to tightening manage the expense levels in this category as demonstrated by our higher increase of growth, non-engineering functions and the salary cuts of the executive and the management level. Operating loss was $3.1 million for the first quarter of 2011, compared to operating loss of $3 million for the prior quarter. As a result of their continued appreciation of the Chinese Yen against the U.S. dollar and their competitive compensation in China talent market, we expect our operating expenses denominated against Chinese Yen to increase gradually.

Net other income was $1.1 million as a net result of a foreign exchange gain. Other income of $0.8 million for the fourth quarter was also related to a net foreign exchange gain. Interest income was $2.8 million for the first quarter, up from $2.5 million in the fourth quarter as a result of the interest rate related in Chinese Yen starting in late 2010.

Income before taxes was $0.8 million for the first quarter as compared to income of $0.3 million in the fourth quarter. Net income tax expense was $0.3 for the first quarter compared to income tax expense of $0.1 million in the fourth quarter.

Net income attributable to Actions Semiconductor on a U.S. GAAP basis for the first quarter of 2011 was $5,000 or $0.00 per diluted ADS compared to a net loss of $115,000 or $0.00 per diluted ADS for the fourth quarter of 2010.

Moving to the balance sheet, cash and cash equivalents together with trading securities and both current and non-current marketable securities totaled $218.5 million as of March 31, 2011 compared to $232.6 million as of December 31, 2010. The significant decrease was due to $13.7 million private equity firm investment, which I will further discuss later on the call.

$4.3 million for the ongoing construction of our new corporate headquarters building in Zhuhai, $3.3 million used for the share buyback program and a $2.6 million investment in existing equity method investors offset by our $6 million short-term bank loan. Of the $218.5 million total, $111.9 million was in cash and a short term interest bearing investments that were generally issued by large domestic banks in China for returns no more than three months and it can be redeemed at any time.

$106.6 million was in trading securities and marketable securities, both current and non-current, which were principal guaranteed or pleased to investment were at higher interest rates and a minimum terms of three month. These marketable securities were mainly issued, managed or guaranteed by top ranking state-owned financial institutions in China. Accounts receivable was $3.2 million at the end of the first quarter of 2011, up from $2.5 million at the end of the fourth quarter of 2010.

Inventory were $5.3 million at the end of first quarter, up from $4.8 million at the end of prior quarter. We relatively -- our relatively higher inventory level at the end of the first quarter compared with the prior quarters was the rapidly co-related that was to be expected a higher shipment volume and more advanced products ramping up in second quarter of 2011.

We continue to buy back shares, spending approximately $3.3 million on the share repurchase program during the first quarter, compared with $2 million in the fourth quarter. Our repurchase activity remains constant by trading volume and breakout periods for our 10B-18 program, as well as limited activity in block trading.

Although the current buyback under our 10B-18 program looks passive, it has proven cost savings and it provides lower risk to long-term shareholders and their company than alternative options, particularly at the current stock-trading price. At the end of March 31, 2011, the company has invested approximately a total of $38.5 million in the program representing approximately $16.3 million ADS shares.

To facilitate our growing R&D and operational capability, we began the construction of our new headquarters campus into high in June 2008. And I'm happy to report that we are finally ready to moving during the second quarter this year.

As of March 31, 2011, our total investment in the new headquarters construction project was $23.6 million. The total cost of the project is estimated at approximately $30.6 million. We expect to control the total capital expenditure and wrap up this project in 2011.

As previously mentioned, we've invested approximately $13.7 million in a private equity fund that is focused on investing in IC design houses that based in Taiwan. This private equity fund represents an attractive approach for us to continue our diversified investment plans passively view an external professional team.

We believe this investment complements the in-house capability we have with Actions’ Capital, which focuses on investing in China based IC design houses with prior and existing investment such as (inaudible) and Actions Beijing.

I'm sure many of you are wondering how the tragic events in Japan have impacted our business. We have been actively engaged with our customers and suppliers to identify any potential supply chain it should been from the tragedies in Japan.

During the first quarter, we did not experience any impact to our business from this event. On the supply side, we do not see any new specific procurement issued within the supply chain.

We continue to work closely with our customers to determine if any near-term disruption in our component supply chain will impact their older pattern and the overall demand environment. We will continue to monitor the situation closely.

I will now like to discuss our progress in each of our product categories during the quarter. Volume shipments of the automotive and boom box product targeting our fast growing low-end market segments remained our largest contributor in the first quarter.

As demand for our value-oriented products for these applications made it strong. We have created a leading fact with excellent cost structure and equity -- sorry, quality in mainstream segment to high-end boom box market.

We are experiencing elevated interest in this segment from both domestic and their international brand name customers. These products represented more than 40% of our total shipment volume during the quarter. In our first quarter, sales to the mainstream segment of the MP3 market showing there is no display, mono display and a small cover display legal product increasing volume and as a percentage of our total revenue.

However, we continue to maintain the leading position in market share of this category. For sample in the small color display MP3 segment, we're still are enjoying more than 50% of our market share in the highest gross margin.

The MP4 and the PMP market continue to be key segment for Action. Shipments of our products serving the QVGA MP4, D1 PMP and a high definition PMP segments accounted for almost 50% of our total sales amount in the first quarter.

Within our MP4 market segment, sales of QVGA MPA with CMOS image sensor continued to represent a large portion of MP4 sales and captured to the leading market share in the quarter. In the D1 segment, our Series 25 was a gaming application continued to gaining market share and already won the leading position in the quarter.

In the high-definition segment, our Series 27, 720p, G-1000 gaming and newly launched Series 28, 10 ADP products are penetrating into the most advanced portable radio device market by offering differentiation features and our cost competitive TotalSolution. The distinguish had functions of our high end products include the Flash UI, interactive animation, (inaudible) HDMI transmitter and portrait digital video recording.

Following the success of all symbolizing programs and the positive response from both the China based and international customers the Series 28 product family is moving into volume production with collective customers in the second quarter. This product family provides a powerful platform that can be compete toward as the PMP, game control or multimedia TV.

Increased sales in this category should enable us to favorably ship our product mix to the higher margin and a faster growing segment of the market, thereby partially offsetting every-present ASP erosion in the overall PMP market.

During the first quarter, 0.15-micron process technology was used for the majority of our shipment volume and the current inventory. We have successfully migrated our volume product from 0.16 micron to 0.15 micron in technology. We're pleased that to see the advantages in wafer prices and the foundry capacity by using 0.15 micron process technology, which continues to benefit the company's gross margin and has to stabilize the inventory surprise.

As trended we also rent up our 0.11 micron mass production in the quarter. Furthermore, we began to shrink our advanced products to 55 nanometer production technology in the second half of 2011.

Historically, our sales have followed a pattern of -- seeing softness in the first two quarters of the year leading our stronger second half. Factoring and typical seasonality in the first half of the year, our guidance for the second quarter of 2011 is revenue in the range of $10 million to $11 million, gross margin approximately 40% and operating expenses trending slightly higher on a sequential basis. The second quarter of 2011 estimates included a deal share based compensating expense of approximately $0.05 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from the line of Rick Fearon with Accretive Capital Partners. Please go ahead.

Rick Fearon – Accretive Capital Partners

Good morning.

Patricia Chou

Hi, good evening, Rick.

Rick Fearon – Accretive Capital Partners

Thank you. Nice to see the comparable quarter’s sales growth and I'm just curious with the 19% -- roughly 19% growth you just reported. Are you still expecting the overall growth in 2011 to be 15% or so as you'd mentioned in the last conference call?

Patricia Chou

After now, we are comfortable with our existing budget numbers, which includes 10% to 15% growth for sales. And as I mentioned in the forward-looking statement, the typical seasonality for years starts with a relatively soft first half of the year followed with stronger second half. So with our limited visibility as usual, what we can say is up to now we are comfortable with what we budgeted a few month ago. But it really depends on how we can deliver say in the third quarter, which would be very critical to the whole year sales growth.

Rick Fearon – Accretive Capital Partners

Okay. I didn't hear you mentioned the G1000 or Android product, you might have -- you may have thought about the 1000 but you continue just elaborate a little bit, do you expect these to be significant contributors in the latter half of this year, or are you expecting the growth really coming from the Series 28 now?

Patricia Chou

We introduced G1000 in the first quarter. I believe we made a press release for this new product in January this year and the markets response to this G1000 Series has been very positive. And we expect to receive more revenue contribution from this Series in the second half this year.

Rick Fearon – Accretive Capital Partners

Okay. Can you quantify that? What was it for this quarter?

Patricia Chou

I think we are still in the early stage of the net production of this product. So the volume is still not critical comparing with our overall shipments, but G1000 unit price is very high. So we believe on it's grow become one of our major revenue contributors, once we fully ramp up this product into the mass production. So up to now, it has not contribute a lot in our total revenue.

Rick Fearon – Accretive Capital Partners

Okay. By that you mean, say less than half a million for quarter?

Patricia Chou

That's -- we are investing in our light ballpark.

Rick Fearon – Accretive Capital Partners

Okay. And how about the Android product, is there any production of that yet?

Patricia Chou

Not yet. We are probably then launched this Android based new product in the second half or early -- sorry, in the second quarter or early second half this year?

Rick Fearon – Accretive Capital Partners

Okay. And do you expect that to be -- have substantial revenues this year, or is it really the G1000 and then the Series 28?

Patricia Chou

I would say G1000 and the Series 27 and 28 would be a bigger revenue contributors this year than Android based products.

Rick Fearon – Accretive Capital Markets

Okay. And do you have a budget or a plan or expectations of sales that it will be coming from these products, say over the next year, two years or even five years out? Do you expect the G1000 like $10 million annual product or have you done any that kind of budgeting?

Patricia Chou

Of course, when we decided to develop any new product series, we definitely need to do this kind of a budget projection. However, it’s really hard for us to really have a great visibility. They took the years ago, since it usually takes us two, three years from taking off the project to the net production stage. Sometimes even longer, depending on how – whether it’s a brand new product family or they are upgrading the version.

So, even though we do have a budget, we are not too confident that we can really deliver that kind of revenue or shipment volumes two, three years down the road. So, -- and for the G1000 gaming products we provide hardware platform for more content developers to join us together for trending up this market acceptance.

So we are not really the only key member to create this new market that -- so I am afraid that it’s really hard for us to share with you how large that market would be relieved in -- say 2, 3 years down the road. It seems, it also depends on content developer’s progress.

Rick Fearon – Accretive Capital Markets

Well, it sounds like we will make the decision to spend money to develop something like the G1000, you do have an annual sales budget in mind with some estimate of what this can produce, can you at least share a ballpark what that was or is?

Patricia Chou

What I can say now is that we're still very positive in confident that G1000 or the gaming product family will be one of our major revenue contributors in the future, say one or two years. But, how successful this process would be is not really questioned that how hard that we will sell this product, but also how fast the game content developers will create their games.

So for G1000 particularly, we don’t really have a very clear projection for the future sales. but internally we believe the market is huge over there.

Rick Fearon – Accretive Capital Markets

Okay. When you say huge, larger than the current sales volume being done at Actions with this existing product, it's this how you mean by huge?

Patricia Chou

It’s definitely bigger than what we are doing. If the 10 total accessible markets is not there -- meaningful site, we would not have invested our R&D resources there. I think the overall gaming market is for this kind of a portable device platform is definitely more than $100 million. But how much we can really access and how soon we can really penetrate into this market, we don’t really have a clear answer.

Rick Fearon – Accretive Capital Markets

What I'm driving at is, with R&D now running at $5 million a quarter or $20 million annually? Does management and the Board still believe this would be the best investment for our cash since -- it really doesn't appear the company is receiving at least a dollar of new revenue for every dollar it spends on research?

Patricia Chou

Rick, I believe we have discussed this issue for several times. For a high-tech company, if we do not continue our heavy R&D investment, we have only one outcome, which is dying out sooner or later. I believe none of our shareholders that would appreciate that we are sitting here without any actions for the time out.

Rick Fearon – Accretive Capital Markets

But we were -- I believe we are one of the largest shareholders and in fact if that -- if the company is spending its money just to run at the current rate. I would rather see the company just shut down in the cash distributed out to investors. So, as a significant shareholder of the company, I don't think you are correct? It's not -- we're not seeing a return on this investment, $20 million annually, we should have -- we should be generating at least $20 million of value.

And in fact if the company can buyback its stock and have cash-on-cash return of roughly 50%. Day one, did they advice back a share of stock, the company ought to be spending money to repurchase stock and not spending money on R&D. It's not the return, we haven't seen the return on this investment that's why I ask, what are the sales budgets related to these new product lines and how much is the company spending to develop a product that isn't really contributing significantly to sales, because if you are spending $20 million in year to generate $5 million of sales, that's really not a good investment.

Patricia Chou

Rick, as one of our significant shareholders in the open market, I believe you are a long-term shareholder and with the long-term expectation on us. Of course, we could have done the financial activities now like you just subjected. However, we do not believe that the only solution for the long run.

We internally have a review of this topic. I would say more than a million times and then we are also challenging ourselves, whether we need to do, we are sure to continue our R&D for each of our product category. We believe all of our product development trend has a legitimate revenue and profitability projection behind us. But looking out, our limited visibility, we don't feel comfortable to disclose so early for any unnecessary miscellaneous.

Operator

Thank you. And at this time I'm showing no further questions. I would like to turn the conference back to management for any closing remarks.

Patricia Chou

Thanks again for joining us on today's earnings call. We appreciate your interest and continuous support of action. We look forward to providing updates on our business during next quarter's call. Thank you.

Operator

Thank you, ladies and gentlemen. If you'd like to listen to replay of today's conference please dial 1-800-406-7325 or 303-590-3030 using the access code of 4435622 followed by the pound key. This does conclude the Actions Semiconductor first quarter 2011 earnings conference call. Thank you for your participation. You may now disconnect.

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