China TechFaith Q4 2006 Earnings Call Transcript

Feb.16.07 | About: China TechFaith (CNTF)
TRANSCRIPT SPONSOR
ChinaDirect Logo
Click to enlarge

China TechFaith Wireless Comm. Tech. Ltd. (NASDAQ:CNTF)

Q4 2006 Earnings Call

February 15, 2007 7:00 pm ET

Executives

David Pasquale - The Ruth Group

Defu Dong - Chairman of the Board, Chief Executive Officer

Gilbert Lee - President, Chief Operating Officer

Christopher P. Holbert - Chief Financial Officer

Analysts

Li Tang - Pacific Crest Securities

Adele Mao - Susquehanna Financial Group

Tien Yu Sieh - Merrill Lynch

Jason Tsai - Montgomery & Co.

Brian White - Jefferies & Company

Chang Qui - Forun Technology Research

Julie Chen - Brean Murray, Carret & Co.

Frederick Wong - BNP Paribas

Presentation

Operator

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

A replay will be available approximately one hour after the call today throughout midnight Eastern Time on February 22, 2007. The replay dial-in number is 888-286-8010 and +1-617-801-6888, with passcode 81859968. The replay will also be accessible at www.techfaithwireless.com.

I would now like to turn the conference over to David Pasquale. Please go ahead.

David Pasquale

Thank you, Operator, and thank you, everyone, for joining China TechFaith’s fourth quarter 2006 earnings call. With us today from the company is Chief Executive Officer, Mr. Defu Dong; President and Chief Operating Officer, Mr. Gilbert Lee; and Chief Financial Officer, Mr. Christopher Holbert.

After management’s prepared comments, we will have time for any questions. If you have not yet received a copy of today’s results release, please call 646-536-7003, or you can get a copy of the release off of Techfaith’s website.

The company’s attorneys advise that this call will contain forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as "will", "expects", "anticipates”, "future", "intends", "plans", "believes", "estimates" and similar statements. Among other things, the business outlook and quotation from management on this call, as well as TechFaith's strategic and operational plans, contain forward-looking statements.

TechFaith may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission on Forms 20-F and 6-K, et cetera, in its annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties.

Statements that are not historical facts, including statements about TechFaith's beliefs and expectations, are forward-looking statements. Forward-looking statements involve a number of inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risks and uncertainties include, but are not limited to, TechFaith's limited operating history, mobile handset brand owners' discontinuation or reduction of the use of independent design houses, TechFaith's ability to retain existing or attract additional international customers, TechFaith's earnings or margin declines, failure of competing against new and existing competitors, and other risks outlined in TechFaith's filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F. TechFaith does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

All information provided on today’s conference call is as of today’s date. China TechFaith does not undertake any obligation to update any forward-looking statements again as required under applicable law.

I would now like to turn the call over to Mr. Defu Dong. Please go ahead, sir.

TRANSCRIPT SPONSOR

China Direct Logo

China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

To sponsor a Seeking Alpha transcript click here.

Click to enlarge

Defu Dong

Thank you, David, and welcome to our fourth quarter call. 2006 was an encouraging year for us. We moved our company forward as we made tough decisions to help our future.

We believe we will be a long-term winner and this is why we made the right business choice. We are not worried about the [soft times,] ups and downs. We hope they are not going to have long-term.

We ended the year in a strong position. Our business is moving forward with nice momentum in the module, Smartphone, and the feature phone areas. Our customer base is strong. Our balance sheet is strong. We have high expectations for 2007.

In terms of the fourth quarter, our results came in as expected. We believe the downturn in our business has been stopped with many good things underway. We accomplished an [incredible] amount in 2006, as we expanded internationally, significantly diversified our customer base, enriched our product portfolio by taking advantage of our handset design expertise, and made substantial progress in our advanced technologies.

Looking into 2007, we expect steady growth on a quarterly basis in our Smartphone business now that we have addressed most procurement and logistic problems. Our feature phone handset solution started to contribute with contracts from regional distributors and the recently announced new international carrier contracts.

On the customer diversification front, we successfully expanded globally beyond Japan and the historic base of domestic Chinese companies. We ended the year with 16 international customers compared to 7 in 2005, with 66% of revenue coming from international customers compared to 64% in 2005; revenue from international markets was 38% in 2006 compared to 5% in 2005.

In terms of new technology, our TD-SCDMA effort is on track. EDGE, HSDPA and EVDO handsets were launched in the fourth quarter. Importantly, we continue to make inroads with Tier 1 customers and expect to achieve sustained profit and revenue growth in 2007.

We are also optimistic that we will be able to finalize [inaudible] process with another Tier 1 customer in the first or second quarter of 2007. In the meantime, however, we are already winning contracts without such approval. As we look forward, we are conservative but remain positive about the future for TechFaith. We remain dedicated to producing results in order to return the strong [volume] we have always enjoyed with investors.

Our goal remains the same as always; to build one of the world’s strongest handset application software and solution companies. We are well along the way and expect the results will start to better reflect our true [grade]. This should start with marked improvement in Q4.

We thank you for your support and hope you will continue on with TechFaith. Let me now turn the call over to Gilbert Lee for a further review of the business. Gilbert, please go ahead.

Gilbert Lee

Thank you, Mr. Dong. Good morning, and good afternoon for everyone. Revenue in this quarter came in as we expected and hit historical records. Revenue mix in Q4 was quite different from that in the previous quarters. Product sales were about 80% of the total revenue. This is mainly a result from the ramp-up of the Smartphone and the module business.

On the cost side, we are implementing cost-down measures and much of the higher costs in Q4 were due to non-recurring issues. We had about $1.4 million in one-time expense related to the write-off of leasehold improvements, and a $1 million loss [forfeiture], and a $2.2 million in bad debt expense, and $1.2 million foreign exchange currency loss due to the appreciation of the RMB against the U.S. dollar.

A majority of the exchange loss is the result of the company depositing U.S. dollars in a local PRC account as part of its investment in one of our local joint venture entities. Because of PRC foreign exchange restrictions, the money remained denominated in U.S. dollars. U.S. GAAP required us to translate this balance into the functional currency of the local entity, which is RMB, which results in an exchange loss.

Based on the current forecast of customer orders and our business momentum, we believe the transition period is approaching an end. Looking into 2007, we are confident in our outlook and believe the trend of our sustained growth will continue.

We remain very positive on the Smartphone, feature phone, tailor-made handset solutions, and global handset OEM opportunities because of the increased transactions we have established in these important segments.

Due to our first market expansion into high-gear, high-ASP, we are targeting for Smartphones and tailor-made feature phones to contribute more than 50% in the revenue mix in 2007.

For our Smartphone business, seven models were launched in Q4. We expect to launch another six models in Q1 this year, with a target of 30 to 35 models for the full year 2007. This compares to the 14 models we launched last year. There will be some logistic issues to deal with including, for example: one, materials to buy and the corresponding quality control; second, the on-time delivery of EMS. However, we are currently addressing these issues and experience significant improvement month by month.

As more Taiwan and Chinese Smartphone vendors are entering the market, ASP erosion is an unavoidable trend. However, we estimate we will ship more high-end Smartphones in 2007. ASP will be maintained at [or above] $200 per unit, with gross margin above 25%.

Feature phone revenue should start to grow in Q1 2007. We launched a total of 12 models in 2006. Six of them are 3G phones. Please note that we do not intend to get involved with the low-end feature phone segment. We have seen strong demand of our product from regional distributors and carriers. Besides, QUALCOMM has been a great partner and will continue to support TechFaith both in the area of marketing and technology for the long run.

Our PCBA business, due to the low margin and fierce competition, the company will control the shipment of PCBA and phase the business out gradually. For the Chinese domestic market, we will continue to serve our key customers in the form of handset design, the project design. The ODM model and the open [bound], which is the package to collect royalties based on the shipment of PCB, not PCBA.

Module business will also keep a steady growth rate in 2007. Customers will have a wide choice of three different formats, like PC call, USB call, and Express call, covering 2.5G to 3.5G in 2007. We believe the gross margin will remain at around 15%.

Our balance sheet remains strong, with a balance of $118.4 million in cash, cash equivalents and restricted cash at the end of the fourth quarter of last year. This balance is after the repurchasing of 577,000 ADRs and an investment of $10 million in our new facility to house the company for years to come.

Challenges clearly remain, but we are very optimistic about our prospects in 2007. We expect the first quarter to be flat with revenue in the range of about $28 million to $30 million, mainly due to a short quarter related to the traditional Chinese New Year. Otherwise, we should expect a good growth again.

There are still some one-time expenses in Q1 2007. We will see the contribution of the [Pan-four] transition that happened in 2006 and to the end, the contribution of the [Pan-four] transition, and a return to profitable to our bottom line in Q2.

Operator, that concludes our formal comments. We are now ready to take any questions.

Hello?

David Pasquale

Gilbert, wait one second. It sounds like they are trying to patch people in.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Li Tang with Pacific Crest Securities. You may proceed.

Li Tang - Pacific Crest Securities

A question on your Q1 guidance. Your guidance seems to be a little bit better than a typical seasonality. What gives you the confidence in your Q1 guidance?

Gilbert Lee

For Q1, the EMS is completely shutdown in February, so we keep saying we have a shorter quarter. In general terms, our ODM model, the sales revenue should be down a little bit. However, we come out a very strong demand for modules and for the feature phone, so generally speaking, we will maintain the flat revenue on that side.

Also, on the design revenue side, we will see a big growth in Q1. That is why we have a very high confidence about our Q1 revenue.

Li Tang - Pacific Crest Securities

Okay, the second question is TD-SCDMA. We have learned the China Mobile will start its handset procurement in Q2. When do you think you will sign your first design contract on TD-SCDMA?

Gilbert Lee

First of all, let’s talk about the China 3G license. Many, many investors keep asking this question. I do not have an authority, so I would like to take this chance to explain to everybody. There has been much speculation around the 3G license grant for a long time. Like other governments, China is like other governments. The government operates at its own pace and acts when ready.

While we do not have any say in the timing, we do have control over 3G in other global markets. That is what we are focused on. We have launched WCDMA, EVDO, and HSDPA in the last year and our international customers contribute 73% of the revenue.

The 3G license in China will not affect TechFaith much. However, TD-SCDMA will be a benefit to us. We have signed an MOU with our top five customers. We believe we will get one contract of TD-SCDMA in Q1, even if the Chinese Government delays the issue of other 3G license.

Li Tang - Pacific Crest Securities

Just looking into 2007, what is your estimate right now on how many contracts you will get on TD-SCDMA and what kind of contribution that will be for you?

Gilbert Lee

It is still too early to say, but currently we already have four domestic customers that have a contract or MOU with us. I just stated we have one top five customer will sign a contract in this quarter. We already tried to sign it before the Chinese New Year, due to so many people are on vacation or over at 3GSM, so we will delay that toward the end of February or beginning of March to secure that contract.

Li Tang - Pacific Crest Securities

Great. One last question for Chris; what is your guidance on your capital expenditure in 2007?

Christopher P. Holbert

Approximately $10 million.

Li Tang - Pacific Crest Securities

$10 million -- is that mostly for equipment or for infrastructure, like a new building?

Christopher P. Holbert

Mainly for building.

Li Tang - Pacific Crest Securities

Okay. Thank you.

Operator

Your next question comes from the line of Adele Mao with Susquehanna Financial Group. You may proceed.

Adele Mao - Susquehanna Financial Group

Hi, good morning. I have several questions. Number one is related to the design revenue. It looks like although you have increased the number of international customers to 16, revenue from international customers actually has been shrinking every single quarter. Can you just talk about why there is a disconnect? If revenue has been minimal for the new customers, do you foresee any meaningful ramp up in 2007 along the design side?

Gilbert Lee

Design revenue was less due to the longer project phase with international customers. Contracts in the pipeline have not made any revenue contribution yet. Consequently, the revenue seems to be shrinking every single quarter, but actually in the pipeline, we have so many projects that we start to recognize in Q1 and Q2.

Also, we think the increasing number of international customers was also caused by the Smartphone business. In the transition of the past three quarters, we start to ship Smartphones in Q3 and the growth in Q4 looks nice. From Q1 this year, each product line will become more solid. Design fees should be booked on a more regular base due to a more diversified customer base. Smartphone and the feature phone will ramp up with more than 80% of revenue coming from international markets.

Adele Mao - Susquehanna Financial Group

Okay, great. Your design gross margin is about 33% for the quarter. Is that a fair range to work with, or do you foresee improvement in the near future?

Gilbert Lee

The design revenues gross margin in our eye is not only 33. If you combine NRE and [inaudible], the gross margin of the design was 53% in Q4. That is the highest last year. As the transition approach ends, and as an intensive R&D investment in new technologies turns to the normal and stated level, I think and I believe our team has very high confidence gross margin will resume to around 50% through this year.

Adele Mao - Susquehanna Financial Group

Great. The other question I have is related to your expense. It looks like last quarter, 3Q, 4Q and possibly 1Q will be hit by a bunch of non-recurring items. How do we think about your operating expenses as a percent of revenue going forward, as a run-rate?

Gilbert Lee

In Q4, the G&A increase by $3.2 million over Q3, the main reason are the following: provision of $1.4 million for leasehold improvement of old office building; I explained earlier an exchange loss of $1.2 million; and also we had $2.2 million in bad debt.

All those things should be, in a non-financial term, one-time. We do not anticipate any big number like this one down the road. In that way, we should control our G&A down a lot from Q1 this year.

Adele Mao - Susquehanna Financial Group

Okay, so if I understand it right, although the RMB will most likely appreciate over the next few quarters, the expense, that exchange rate hit you took is only related to --

Gilbert Lee

Could you repeat your last statement?

Adele Mao - Susquehanna Financial Group

Most likely, RMB will appreciate over the next few quarters. Is this a fair assessment -- you are only getting a hit on RMB appreciation for this quarter and we would probably not see an exchange rate hit in the next few?

Gilbert Lee

Correct. We already started to convert all our U.S. dollars in Chinese entity to RMB in this quarter. So in this quarter, you will not see that line item.

Adele Mao - Susquehanna Financial Group

Okay, great. Thanks very much.

Operator

Your next question comes from the line of Tien Yu Sieh with Merrill Lynch.

Tien Yu Sieh - Merrill Lynch

I am just wondering if you could provide a bit more detail on the Smartphone business in terms of past as well as anticipated mix in terms of technology. What is the mix of 3G shipments that you are expecting for ’07? Also, a rough outlook in terms of mix by geography in terms of historical as well as outlook. And then, an update on the numbers of shipment by quarter?

Gilbert Lee

Let’s run down some basic numbers first. By the end of last year, we launched 14 models. We plan to launch around 30 to 35 models in this year. About 15 of them will be 3G. Currently, we have nine international customers from North and Latin America, Southeast Asia, Europe and Russia, and three Chinese customers.

We cannot give you a detailed guideline for every quarter’s unit shipment because that is ODM and we have to secure the contracts month by month. However, based on our current business momentum and all of the customers continue to submit their new PO, and all our previous customers submit a new PO in this quarter too, so based on this kind of momentum, this trend, we think this year, very conservatively, we will ship 400,000 units in ’07.

Tien Yu Sieh - Merrill Lynch

Can you elaborate a little bit in terms of the customer feedback that you have been getting on your Smartphone products as far as quality, the reorder rate in terms of are they ordering bigger volumes sequentially? Can you give us a bit of detail on that?

Gilbert Lee

Our customers generally reply back to number one, the software works smoothly. There are not any bugs, and number two, because in the old phone, the complication of Windows Mobile, the phone in the general term would slowly respond to any input, a little bit slow. The third one is they continue to submit new purchase orders, repeating new orders coming in, so we do not see slow down for the Smartphone business.

Tien Yu Sieh - Merrill Lynch

To your last point, are they ordering more units than they have, say for example, migrated customers from trial orders with fewer units to now more regular larger volume orders? Is there any acceleration in the order patterns that you are seeing with your customers?

Gilbert Lee

We are just picking up, so we review the picking up upward is all because new customers and old customers are repeating purchase orders.

Tien Yu Sieh - Merrill Lynch

One other question, can you update us on your headcount at the end of ’06 and what your planned headcount will be in ’07?

Gilbert Lee

At the end of ’06, the exact headcount is 2,305 staff -- 2305. This year, we continue to [inaudible] our [inaudible]. I think we are [inaudible] as of this moment, based on our workload. In the meantime, we already collect enough experience for different platforms, so even this year, we have much more business, much more revenue, and a diversified business model. We will ship around our staff. We do not intend to have a big increase in the staff.

Tien Yu Sieh - Merrill Lynch

Thanks, Gilbert.

Operator

Your next question comes from the line of Jason Tsai with Montgomery & Co. You may proceed.

Jason Tsai - Montgomery & Co.

A couple of questions here for you. You talked a little bit about gross margins for your design business and the target range of 50%-plus. What about for your product sales? What are you guys targeting for that gross margin for this year?

Gilbert Lee

For the product, you are basically talking about three things: Smartphones, feature phones, and the modules. Smartphone, everybody is asking us whether we will see the price erosion margin pressure. As I just explained, definitely when more people jump in this industry, then we will have more ASP pressure. However, we are launching a higher-end model and we will have a 3G model come out. So we think the ASP will remain very solid and the margin is there.

In Q4 last year, the margin is about 30%. In ’07, we plan, for the plan purpose, we have a very high confidence about 25%.

For the wireless module and for the feature phone, our margin is about 15% in ’07.

Jason Tsai - Montgomery & Co.

Okay, so we should expect to see probably overall product sales gross margin to be kind of in the low- to mid-20% range?

Gilbert Lee

Correct.

Jason Tsai - Montgomery & Co.

Okay, great, and then, you talked about 400,000 units of Smartphones shipping in ’07 and you said 15 of the 30-plus Smartphones in ’07 are going to be 3G-enabled. Do you have any sense as to, of the 400,000, what percentage you are going to be looking at for 3G versus non-3G?

Gilbert Lee

To be honest, we do not have exact numbers but based on the customers’ request, and the samples they are requesting for field tests, we believe the 3G will be at least 50% of our total shipment.

Jason Tsai - Montgomery & Co.

Okay, great. Last question here: you had mentioned that you were expecting to get a Tier 1 customer for TD-SCDMA in Q1, Q2. Is that also going to begin shipment around then, or is that a design win or is that going to be a product sale?

Gilbert Lee

It will be a design win.

Jason Tsai - Montgomery & Co.

Okay, so that will probably take, before you finish that contract by the end -- it will probably be toward the end of ’07 by the time you finish that contract?

Gilbert Lee

Right, and we anticipate to start to recognize the revenue of that contract in Q2.

Jason Tsai - Montgomery & Co.

Okay, terrific. Thanks a lot.

Operator

Your next question comes from the line of Brian White with Jefferies & Company. You may proceed.

Brian White - Jefferies & Company

Good morning. Gilbert, you sound a little bit more excited about the design business. Can you give us an idea of what dollar amount you expect to generate in design in 2007?

Gilbert Lee

Generally speaking, if you look at our report this year, the design revenue will remain flat. The main reason is mainly Tier 1 customers plus the carrier, they want our tailored designs. However, they also want the complete product, this data solution, and they organize their own production. So that is why we see very strong demand for Smartphone and feature phones. They are using our R&D task force and expertise to tailor designs from ODM product.

Brian White - Jefferies & Company

In the Smartphone market, Gilbert, how do we think about where this is going in terms of distribution, service provider, OEM; can you give us some type of breakdown of where these phones are going?

Gilbert Lee

Because the volume is small at this time -- I mean, for our company it is large, but for the phone industry, it is small -- it is pretty difficult to give you an exact percentage where the phones are going.

The largest portion will go to Europe. Now we are starting, the second one is Southeast Asia, and now we are starting to ship to Latin America. The States remains the same. We have not -- we only have a very small breakthrough in the U.S. market.

Brian White - Jefferies & Company

Okay, but in terms of -- you are saying 400,000 Smartphone units in 2007. You must have contracts for those, or pretty darn close. I am just curious where in terms of the type of customers, whether it is a distributor, an OEM, a service provider -- just a general feel, not exact numbers, where you think you are selling those.

Gilbert Lee

I think half of them will go to a local distributor and about 25% go to OEM, and some of them will go to carriers directly.

When I say 400,000 units, I have to repeat, for the ODM business, the visibility is not that long, so I do not have any contract for Q4 this year. Obviously no one would do that, but based on the feedback of customers, based on the business momentum, based on the new purchase order our old customers submitted, and the 3GSM conference Mr. Dong is over -- Mr. Dong is not in Beijing now. He is in Barcelona, Spain. He is contacting -- I should say customers contact him, and now he contacts the customer and is asking for a sample and talking about locking down the contract.

Based on this kind of momentum, we think at least we can ship 400,000 units in this year.

Brian White - Jefferies & Company

Gilbert, what percent of those phones do you think you have contracts for now, of the 400,000?

Gilbert Lee

Of that, about 25%.

Brian White - Jefferies & Company

25%, okay, and finally, can you give us the customers that were over 10% of revenue in the fourth quarter?

Gilbert Lee

You want the design, or overall?

Brian White - Jefferies & Company

Just overall is fine.

Gilbert Lee

Overall, the largest -- number one is a Tier 1 customer. Again, when we say Tier 1, because of contract restrictions, we cannot name the guy, but our definition of a Tier 1 is a top five market share leader globally, so number one is a Tier 1 customer, and the rest of the four are our Chinese customers; Lenovo, Amoi, That is our top five situation.

For the design wins, we are working on that. We have not recognized the majority of the revenue yet. That is why they did not show on the top five list.

Brian White - Jefferies & Company

Okay, and Gilbert, were any customers over 10% of revenue in the December quarter?

Gilbert Lee

For the December quarter, yes, we had three. One is a Tier 1, the other two are domestic Chinese customers.

Brian White - Jefferies & Company

Okay. Thank you.

Operator

Your next question comes from the line of Chang Qui with Forun Technology Research. You may proceed.

Chang Qui - Forun Technology Research

One question: for the feature phone going forward, will you report a separate line of revenues, or in Q4, how much of that revenue it is?

Gilbert Lee

For Q4, we shipped a very minimum Smartphones, so you will see the module and the other component. We are in the early stage of our product sales. To avoid confusion, we will temporarily keep the existing format. When the sales volume of product line are pretty much fixed, we will report the product on a separate line. Definitely, once that number becomes significant for our own internal management purpose, we will do that. So we will expose that separate line to you too.

Chang Qui - Forun Technology Research

Another question, maybe for clarification. In the earlier presentation, you mentioned that there are still some one-time expenses for Q1 of 2007, but later you ruled out foreign exchange, you ruled out most of the lease issues. What other one-time issues do you see here?

Gilbert Lee

For example, we have a joint venture with one of the companies. Because the company didn’t run well and the customer decided to end this joint venture, I think everybody will get a sense, can guess who he is. Recently, his company ended all the business in China. So to wrap up this deal, we will have some write-off for this project.

Chang Qui - Forun Technology Research

I see. Another thing, could you give us some color on your run-rate for product development, or for the research and development line of your spending? I mean in the future, in the next few quarters.

Christopher P. Holbert

We think the R&D run-rate will be running around the same level, actually, in the future.

Chang Qui - Forun Technology Research

As in Q4?

Christopher P. Holbert

Yes.

Chang Qui - Forun Technology Research

All right. Thank you.

Operator

Your next question comes from the line of Julie Chen with Brean Murray. You may proceed.

Julie Chen - Brean Murray, Carret & Co.

Could you give a little bit of color on what exactly you mean by cost control measures?

Gilbert Lee

Yes, we have a big room to achieve cost savings with regard to the supply chain management. We are reducing the EMS manufactured costs, material and component costs, and the inventory related costs are our top priority.

When the shipment volume reaches the economies of scale, we will see the result of our cost-cutting efforts. Besides after heavily investing in human resources and R&D in the past two years, we will focus on a number of stable technology platforms to reach operational efficiency.

Julie Chen - Brean Murray, Carret & Co.

Can you also tell us what is the D&A for this quarter, please? Depreciation and amortization?

Christopher P. Holbert

Our D&A is about $2 million.

Julie Chen - Brean Murray, Carret & Co.

Thank you very much.

Operator

Your next question comes from the line of Frederick Wong with BNP Paribas. You may proceed.

Frederick Wong - BNP Paribas

I would like a little more about the feature phone customization. You mentioned the operator has strong demand for the Smartphone, but how about the feature phone? How is the competition with the Taiwanese peer and the China local peers, say HGC or [Searchtek] and Simtek?

Gilbert Lee

When we say, if we are talking about the carrier business, basically the carrier wants the tailored design of our phones. So Smartphone, you just mentioned, we have a strong demand from our customers. For the feature phone side, it is the same thing. Every customer, every carrier, they want an exclusive model, not only on the profile, the plastic housing. Also, because their system parameter is different, so they want a tailored design.

You mentioned a couple of them. One is in Taiwan. Obviously they are the market leader. They are running a very good business. We will follow them. The only difference is we will never promote our own branding, so we will not compete with our customer.

For the other customers you mentioned, I believe they do not have an R&D team as strong as ours. Several people claim they are ODM, but the design portion only is hardware integration. This stage of design handset, we have to spend more than 55%, sometimes even 80% of our engineering resource in the software design. No other guys have as large a team as we have and they never collect as wide an experience as we collect.

In a way, you can see we have a big R&D team, and people say why don’t you cut people? The only thing we can answer is no, every one of them is busy. The only thing we are waiting is they collect experience and once our design business going up and the more ODM product come out, all those interests in R&D will pay for.

Another third-tier company you just mentioned, I do not want to name the company name, but they are a totally different business model from us. What they are doing is cookie cutter. They use a very easy solution, make a PCBA board and they are just repeating the board, changing the housing, and claim they are one form for 10 models. I do not think they are tailor-made for the carrier. That is not what the carrier cares about. In order to do that business, they have to start investing a lot in R&D.

Defu Dong

I want to add something and [table some] information on the 3G congress. Actually, for the feature phone side, including [TD-SCDMA] technology, HSDPA technology, also GSM technology, we are getting healthy feedback from the Europe market, Latin market, Africa market, India market, and Russia market. I think for the feature phone business, including carrier, some local OEM, and the distributor [inaudible].

Frederick Wong - BNP Paribas

Can you give us more color on this? How big is the market in 2007 for the carrier customization, the market size, no matter for feature phone or for Smartphone?

Defu Dong

I think I can give you some information for the big carriers. For example, [Vodafone] and the carrier, Tele-Fonika. To date, they all have their own branding. For example, [Vodafone] has [Vodafone] branding. Tele-Fonika has O2 branding. The carrier wants to have their own phone. I think this is the business of TechFaith.

Also, small operators -- small operators, today they are in trouble because many, many small operators go to 3G. They want to take a service, offer a service but they are a small operator. Usually there is a big OEM to provide tailor phones for them. I think this is also big business for TechFaith.

In the global total, we have 400 small operators, TD-SCDMA, EVDO, or HSDPA, [inaudible].

Operator

(Operator Instructions)

There are no other questions at this time. I would like to turn it over to management for closing remarks.

Gilbert Lee

Let me start first, and Mr. Dong will do the final remark. As we emphasized, the transition is coming toward an end, and the business momentum is coming very strong.

Over here in China, it is Chinese New Year now. Most of the companies are shut down, but our company and our staff will come in automatically, without forcing them to do overtime. They are doing some last-minute work. Even today, and many people will come in on New Year’s eve, which is tomorrow. We are planning with Mr. Dong, we are planning on coming back to work next week. Typically next week will be a holiday week and everybody will enjoy their family life, but I think around Wednesday, about 10% of the people will come back to do planning and toward the weekend, over 60% of our staff will report to work. That is the general mood in here.

In the meantime, we said there is a strong demand, and with all the investors, your support, we are very cautious about our costs. We are trying every method to reasonably cut our costs, [instead of hurting] our growth in the long term.

We are very sincere to see and to say we will have a very strong and a very good year. We will start delivering results. We will see a black bottom line very shortly and give every investor a nice return.

Over here, I will say Happy New Year if there is a Chinese listener, and good evening on the west globe, and good morning for the people in Asia. Thank you.

Defu Dong

And good night in Europe. Gilbert, Happy New Year, and to all our colleagues, Happy New Year, and everybody, Happy New Year!

Operator

Thank you for your participation in today’s conference. This concludes the presentation.

TRANSCRIPT SPONSOR

China Direct Logo

China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

To sponsor a Seeking Alpha transcript click here.

Click to enlarge

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!