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

Q2 2011 Earnings Call

August 9, 2011 5:30 p.m. ET

Executives

Ellen Davis – Investor Relations, The BlueShirt Group

Patricia Chou – Chief Financial Officer

Niccolo Chen – Chief Executive Officer

Analysts

Rick Fearon – Accretive Capital Partners

Bob Snell - Daughtry

Operator

Good afternoon, and welcome to Actions Semiconductor’s second quarter 2011 earnings conference call. (Operator Instructions).

I would now like to turn the conference over to Ellen Davis with The BlueShirt Group. Please go ahead.

Ellen Davis

Good afternoon, and thank you for joining us on today’s conference call to discuss Actions Semiconductor’s second 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.action-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 the second quarter ended June 30th, 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 415-217-7722, and we will email 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 further 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 file from time to time with the SEC specifically the company’s most recently filed forms F-1, 20-F, and 6-K’s. 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.

Patricia Chou

Thank you for participating in Actions’ earnings conference call. We appreciate your continued interest in Actions. I will provide a business update and discuss financial results for the second quarter of 2011. As well as 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 comment on the press release issued today announcing the CFO transition. Effective August 31st, I will be stepping down and Nigel Liu will be promoted to the job of CFO.

Nigel has been with Actions since 2007 in several finance-related functions. The Board of Directors and the management team are confident that his experience will provide a seamless transition for the position.

I have enjoyed my nearly five-year tenure with the company. And I continue to be optimistic about Actions long-term growth prospects. I will remain an adviser to the company following my departure.

Now, moving on to our financial results for the second quarter. As a reminder, our financials are reported in accordance with U.S. GAAP.

For the second quarter that ended June 30th, 2011, we reported a revenue of $10.5 million compared to $9.4 million in the first quarter of 2011. Our gross margin for the second quarter was 37.9% compared to 39.1% for the prior quarter. This slight decline in gross margin was mainly due to the higher volume of lower margin products sold.

For the second quarter, total stock-based compensation was $0.7 million compared to an expense in the first quarter of $0.6 million.

R&D expense was $5.6 million or 53.4% of revenue for the second quarter compared to $5.1 million in the first quarter. 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 initiatives. In addition, we are focusing more than half of our R&D resources in high-end new product development.

G&A expense was $2.2 million in the second quarter or 21.2% of revenue compared to $1.7 million in the first quarter.

In the first quarter, G&A expense was lower due to the annual [inaudible] expense reimbursement from our AES depository bank.

Note the marketing expense was $0.3 million in the second quarter or 3.1% of revenue compared to $0.3 million in the first quarter. We continue to tightly manage expense levels in this category and maintain a hiring freeze for non-engineering functions. And it’s not because of the management and executive level.

Operating loss was $3.8 million for the second quarter compared to a loss of $3.1 million for the prior quarter. As noted last quarter, as the result of the continued depreciation of the Chinese yen against the U.S. dollar, non-recurring engineering charges in developing new high-end products, and a comparative compensation in China’s talent markets, we expect our operating expenses denominated in Chinese yen to increase gradually.

Net other income for the second quarter was $1.3 million as a net result of foreign exchange gain of $1.1 million and a total yen of one of [inaudible] invested companies of $0.2 million.

Other income of $1.1 million for the first quarter was over related to a net foreign exchange gain.

Dividend income from other investments was $0.4 million for the second quarter representing last year’s earnings distribution from one of our top method invested companies.

Interest income was $3 million for the second quarter, up from $2.8 million in the first quarter as a result of the interest rate increases in Chinese yen as it relates to 2010.

Income before taxes was $1 million for the second quarter compared to income before taxes of $0.8 million in the first quarter.

Net income tax expense was $21 million for the second quarter compared to income tax expense of $0.3 million in the first quarter.

Net income attributable to Actions Semiconductor on the U.S. GAAP basis for the second quarter of 2011 was $0.5 million or $0.07 for diluted ADS compared to net income of $500,000 or $0.00 per diluted ADS for the first quarter of 2011.

Moving to the balance sheet, cash and the cash equivalents together with restricted cash, trading securities, and both current and non-current marketable securities totaled $217.3 million as of June 30th, 2011 compared to $218.5 million as of March 31st this year. Of the $217.3 million total, $30.7 million was in cash and a short-term interest bearing investment that was generally issued by large domestic banks in China for terms no more than three months and can be redeemed at any time.

$186.6 million was in trading securities and the marketable securities both current and non-current, which were principal guaranteed or [inaudible] investments with higher interest rates and amendment turns of three months. These marketable securities were mainly issued by management or guaranteed by top-ranking financial institutions in China.

During the second quarter, we increased our investments in main capital by ingesting $7.1 million to fund the construction of Actions’ Zhuhai headquarters. [Inaudible] is a private investment holding company in which Actions hold 40% non-computing interest.

Our short-term borrowing totaled $12 million at the end of the second quarter. Instead of using our available our [inaudible] in China, we [inaudible] on our insured line of credit for U.S. dollar cash need. This approach can help us obtain advantage of low interest rates in U.S. dollar loans, favorable exchange rate of [inaudible] versus U.S. dollar, and ability to continue to earn higher interest rates on our nominated investments.

Accounts receivable was $2.2 million at the end of the second quarter, 2011, down from $3.2 million at the end of the first quarter.

Inventory rates were $8.1 million at the end of the second quarter up from $5.3 million at the end of the prior quarter. Our higher inventory level at the end of the second quarter compared with the prior quarter was a result of our strategic arrangements with the [Inaudible] to secure preparation wafer bytes and [inaudible] for [inaudible] popular products. And also co-related to the expected higher shipment volume and more of the products ringing up in the third quarter.

We continue to buy back shares making approximately $1.41 million on the share purchase program during the second quarter compared with $3.3 million in the first quarter. Our repurchase activity remains constrained by trading volume and the [inaudible] for our [inaudible] program as well as limited activity in block trade.

At the end of June 30th, 2011, the company had invested approximately a total of $39.9 million in programs representing approximately $16.9 EDS shares.

I am pleased to report that the construction of our new headquarters campus in Zhuhai was completed. And we moved into the new facility during the second quarter.

I would like to take a moment to comment on the recent events with other U.S. vested Chinese companies. Actions Semiconductor has always followed the highest extenders for accounting integrity and corporate companies. Things going public in November, 2005, as the new [inaudible] providing transparency to the investments communities. And the regulatory bodies has been a top priority to the board of directors and management teams. We are confident that our practices and extenders are of the highest quality.

I would now like to discuss our program in each of our final categories during the quarter.

Volume shipments of the automotive and the boom box products continued the fasted growing low end market that remains our largest contributory in the second quarter as demands for our volume and the value oriented products for diversification continued to increase in what was typically a [inaudible] lower quarter. During the quarter, we experienced the continued interest in the shipments from domestic and international brand end customers. These products represented more than 45% of our total shipment volume during the quarter.

In the second quarter, our sales [inaudible] segment of the MP3 market serving the notice [inaudible] and the small colored display media products continued to maintain the leading position in market share of this category. For example, we enjoyed more than 60% of market share in the height of gross margin in the small colored display and P3 segments. The overall MP3 segment market share was about 35%.

The MP$ market continued to be a key segment for Actions accounting for nearly 50% of toal revenue during the quarter. Shipments of our products serving the QBG MP4, the B1 PMP, and the high definition PMP segment failed slightly in the second quarter due to seasonal slowing. Because of the unstable economic situations in the U.S. and Europe, the international market, which typically has sales peaks for high end PMP products in the third quarter may be impacted more than we anticipated this year. However, we do expect that our high end products will generate meaningful revenue in the second half of this year as more and more of our high end products such as our high definition PMP, gaming PMP, and the newly promoted Series 70 android MIB are penetrating into the Chinese brand new market based on our complete product offering and outstanding product performance.

Working our MP4 market segment, sales of QBG MP4 was [inaudible] in the center continued to represent a large portion of MP4 sales. And captured over 50% market share in the quarter.

In the D1 segment, our Series 25 was getting reputation continued leading market share was more than 70% for the quarter.

In our high definition segment, our Series 27 with 27P, G1000 gaming, and the Series 28 with ten AP products are penetrating into the most events of importable video device markets. Offering the [inaudible] and the cost of competitive total solutions.

During the second quarter, Actions income [inaudible] and the neat technologies announced the collaboration to bring Android at 3.0 also known as Honeycomb a new 1.3 gigahertz mid-spaced [inaudible] for Actions.

The Series 18 product family moved into modern production with collective customers in the second quarter. This product family provides a powerful platform that can be competed as a PMP game console or multi-media TV.

Our Series 28 customers are using our ICH for E-book, portable DVD, and the portable additional video recorder application. While the segment insurances is slowing in May and June, we are very happy to announce that our Series 27 and the 28 received the [inaudible] from first and second year resident customers in China. With this success for the down winds in the quarter, we anticipate to increase our market share to more than 30% in the high definition segment next year.

Series 28 has also teamed up with a top tier brand name customer and will be in final production in the third quarter. Increase of sales in this category should enable us to favorably ship our product mix to the higher margin and the faster growing segment of the market. Thereby partially upsetting ever present ASP lotion in the overall PMP market.

We also recently announced that the production of our new Series 70 android MID product family to address the fastest growing android basis marked hand held device markets such as mobile hand held device, MID, and intelligent multi-media players related to IPMP.

Following the success for a sampling program, the new Series 70 product family has been adopted by top Europe and Chines brand new customers with market production starting in August.

We currently find the total addressable markets for non-Apple products by segment as follows: Overall PMP total addressable market in 2011 estimated at $406 million in which Android MID, $150 million, Feed Box, $56 million, PMP and the relatives, $106 million, MP3, $43 million, and automotive boom box, $41 million.

During the second quarter, 21 [inaudible] process technology accounted for almost of our shipment volume in the current inventory. We have successfully migrated our volume products for .16 microns to .15 micron in technology.

We are pleased to see advantages in wafer prices and [inaudible] capacity by using .15 micron process technology, which keeps benefitting the company’s gross margin. And has stabilized the inventory supply. As planned, we continue to rev up our .15 micron [inaudible] adoptions rapidly in the quarter.

Furthermore, our advanced products are using 55 millimeter production technology in the second half of 2011.

Historically, our sales have followed a pattern of [inaudible] softness in the first two quarters of the year leading a stronger second half. However, the typical analogy may not occur this year due to unstable economies worldwide and inventory adjustments industry wide now. Factoring in the criticalness of our new product in high end segments affected by the less typical [inaudible] in the second half of the year, our guidance for the third quarter of 2011 is revenue in the range of $12 to $13 million. Gross margin of approximately 40%. And operating expenses at 25 higher on a sequential basis.

Third quarter 2011 estimates include share based accommodation expense of approximately $0 after netting out the adjustment of [inaudible] rate.

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

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from the line of Rick Fearon from Accretive Capital Partners. Please go ahead.

Rick Fearon – Accretive Capital Partners

Hi, good morning Patricia and Niccolo.

Patricia Chou

Good evening, Rick.

Rick Fearon – Accretive Capital Partners

Thank you. I wanted to start off by saying thank you, Patricia, for your financial controls over the past five years and working with the company, and I appreciated you’re working on our behalf of the shareholders.

Patricia Chou

Thank you so much, Rick. Appreciate your continued support to the company and myself too.

Rick Fearon – Accretive Capital Partners

And I – I don’t know much about the individual who’s taking over your position as CFO, I was just curious, does he – will you be continuing to conduct conference calls and will he be able to host those?

Patricia Chou

Yes. He will take over my functions starting in September 1. So after that, you can contact him for questions just like what I have done with you.

Rick Fearon – Accretive Capital Partners

Okay, great. And so he’s fluent in English or his he Mandarin?

Patricia Chou

Well, for this part, if you have any concerns, I guess we already prepared the support for him in the communication side. If you would like, you can contact [inaudible] first and [inaudible] and her team will help coordinate all the details.

Rick Fearon – Accretive Capital Partners

Okay, great. Thanks. So it sounds like with $217 million of cash and equivalence, roughly what it was a the last quarter, I think 218 or so – is- and the share count only slightly reduced. Is the cash and equivalence per share still around $3.10?

Patricia Chou

That’s correct.

Rick Fearon – Accretive Capital Partners

Okay. And it also sounds like the constraints related to buying blackout periods this part quarter really limited what the company could repurchase. I was only – did I hear it correctly, 1.4 million shares?

Patricia Chou

That’s correct.

Rick Fearon – Accretive Capital Partners

Okay. And you know, it appears that the volume has been excruciatingly low and you know, it’s hard to imagine there being much more opportunity to buy back shares. Is there some consideration? Is there some ability to share with your successor as CFO the strong desires of one of your largest shareholders for the company to buy back shares more aggressively through some other program whether it’s Dutch tender offer or some other means? Has that been shared or would you – can you please share that for us?

Patricia Chou

Sure. In fact, Nigel has been with our Board of Directors for years. So he has been very familiar with the ideas of share buyback and Dutch tender offer as you proposed at almost every quarter. So we will continue to discuss the different thoughts to maximize our long-term shareholder’s interest.

Rick Fearon – Accretive Capital Partners

Okay. Well, I’d appreciate that because it does, you know, appear that with 10 new design wins and with some of the traction that’s being gained on the Android side in particular that you know, there are some very positive things happening and the stock price trading as it has been for a while, $0.60 on the dollar of cash. You know, this situation typically does not last indefinitely. So you’ll continue, or your – your successor will continue to here this from me every quarter until something happens.

Patricia Chou

Yes, I will definitely tell him the situation and I believe the company and the Board will consider all the approaches to maximize the long term shareholders including your interest.

Rick Fearon – Accretive Capital Partners

Okay. Thank you. Can you just discuss a little bit, the ten design wins and how this compares to the existing businesses? Does ten design wins represent a 50% increase in revenue for this new product or is it much more than that, or how does this compare to the existing design wins?

Patricia Chou

Great, good question. First of all, it takes nine months’ time from the design win to generating meaningful revenues. So that’s why I intend to discuss that that’s – these design wins, our high-definition products will help us to increase our market share next year if everything goes well. But in terms of what numbers of revenue we can really get from these ten design wins, I guess it’s too early to discuss it.

Rick Fearon – Accretive Capital Partners

And current revenue from this product, is it – you really don’t have any revenue yet?

Patricia Chou

We are currently in the design win stage, which means we have not sold out any big volume to our customers for a design win yet. But again, it takes time to convert from [inaudible] to a mass production, to revenue-generating process.

Rick Fearon – Accretive Capital Partners

Okay. So this is all incremental growth that will come in addition to what looks like 20-plus percent growth quarter over quarter expected for third quarter. And is that to say since it’s a – I'’m sorry, a 6 to 9 months timeframe for the new design wins to actually convert into revenue, is that to say that the growth coming next quarter is from existing areas, the automotive and boom-box categories?

Patricia Chou

We have injected several new products into the pipeline, so some of our high-end products are generating revenue for the current and next quarters. So as I mentioned earlier, the high-end products accounted for almost half of our current revenue right now. I would say that our product mix is getting better and better with the well-balanced allocation of revenue between the high end and the low end of the automotive and the boom-box products.

But for the current ten design wins, were our high definition products. Their revenue contribution was not too significant at the second quarter.

Rick Fearon – Accretive Capital Partners

Okay, and the projected gross margin back to 40% is primarily a product mix result given that you have more high-end product coming through the pipeline?

Patricia Chou

Yes.

Rick Fearon – Accretive Capital Partners

Okay, great. And how are ASPs holding up with the legacy product, the more traditional MP3 product? Have those flattened at this point ?

Patricia Chou

Yeah, the erosion is getting less critical but the price in general is still declining every quarter.

Rick Fearon – Accretive Capital Partners

Right. And does that – will that improve as the wafer size continues to be reduced?

Patricia Chou

[Inaudible] will improve the product mix to towards a higher end of product to help us offset the normal ASP erosion in each of the categories.

Rick Fearon – Accretive Capital Partners

Okay, great. Well, it sounds like now that your percent of revenue is coming from the high-end product, that the company is really gaining traction with it’s new products and that’s exciting. And I appreciate the hard work that you provide on behalf of the company, Patricia, over the five years that you’ve been there. I appreciate your hosting me calls every quarter. So thanks so much and I’ll look forward to speaking with you on the next call.

Patricia Chou

Thank you. Thank you, Rick.

Operator

Our next question comes from the line of Bob Snell from Daughtry. Please go ahead.

Bob Snell - Daughtry

Hi, Patricia. I guess I’d first like to echo the previous caller’s comments around more aggressive buyback. I think the best way to show the market you are shareholder friendly and you’re focused on corporate conveyance would be to continue to return cash to shareholders in a more aggressive manner. So I think it’s – it will be helpful for you to continue to study that and hopefully do something sooner rather than later.

Patricia Chou

Okay. We’ll keep that in mind. Thank you.

Bob Snell - Daughtry

And then in terms of new products, I guess I didn’t catch it in your discussion, but what percentage of revenue in Q3 will be coming from what you’re classifying as new products and do you expect that percentage to move even [inaudible] Q4?

Patricia Chou

In the second quarter, even though –around 45% of our shipment volume as from the low end product such as automotive and boom box. I think around 50% of our revenue was in fact from the high end product, such as MP4, PMP and high-definition ICs. So we expect the high end product will contribute even a higher revenue percentage in the third and fourth quarter seeings there are various new products in the high end in the pipeline are continuing to generate higher revenue along the line. So this just be a trend.

Bob Snell - Daughtry

Okay. And as it relates to seasonality, you commented on Q3. In terms of your Q4, is there any typical seasonality in terms of the different business lines that you serve into?

Patricia Chou

Well, again, in the consumer electronics industry, our visibility is very limited. Up to know, we feel positive for it – for the third quarter, but there was a bit uncertainty in the worldwide economy especially in Europe and U.S. We tried to become conservative for the fourth quarter but what our complete product offering and [inaudible] product from that on the high end, we believe we will have a fair chance to outperform the general trend if the global economies do not make a big surprise on all of us.

Bob Snell - Daughtry

That seems to change by the day. In terms of a normal Q4, is our business seasonally up, down or flat disregarding what may happen in the broader economy?

Patricia Chou

Our – the typical seasonality usually [inaudible] peak in the third quarter, but because we also support the Chinese market, which had another peak in the Chinese New Year, usually in January or early February so we also enjoy a good time in the early part of fourth quarter.

So I would say in general, the second half performance is much better than the first half of the year. But again, you know, past a few years, this analysis doesn’t really show itself. So it’s really hard to say whether our second half was much better than the first half.

Bob Snell - Daughtry

Okay. In terms of the income you received this quarter from some smaller investments, you know, what types of investments are those in terms of the companies you’re invested and what are they valued at on your balance sheet?

Patricia Chou

I'm sorry, are you talking about our financial investments for cash management, or the long-term investment with the structured plan?

Bob Snell - Daughtry

I think the long-term investments. You mentioned you’d received some income this quarter form some distributions…

Patricia Chou

That’s, okay, now, we invested company focus on the part, meter, ICs, and that company has been profitable for years, including last year. So that company claimed some dividends from the prior years’ income distribution.

Bob Snell - Daughtry

And what’s that investment valued at on your balance sheet?

Patricia Chou

That company, we hold less than 10% [inaudible] in the [inaudible]. It’s not a big amount on our balance sheet at all.

Bob Snell - Daughtry

Okay. All right, well, I appreciate your help and best of luck in your new venture.

Patricia Chou

Thank you. Thank you so much.

Operator

There are no further questions. Management, you may continue.

Patricia Chou

Thanks again for joining us on today’s earnings call. We appreciate your interest and [inaudible] your support of action. It has been my big pleasure to hold the earnings conference call and discuss Actions’ business with you all over the past four years. Niccolo Chen and the new CFO, Nigel Liu will provide updates on Actions’ business during the next quarter’s call. Thank you.

Operator

Ladies and gentlemen, this concludes the Actions Semiconductor’s second quarter 2011 earnings conference call. This conference will be available for replay, the phone number is 303-590-3030, toll free, 1-800-406-7325, conference ID 4459538. Thank you for your participation, you may now disconnect.

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