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

Q3 2011 Earnings Call

November 8, 2011 5:30 p.m. ET

Executives

Ellen Davis – Blueshirt Group

Nigel Liu – CFO

Niccolo Chen – CEO

Analysts

Rick Fearon – Accretive Capital Partners

Operator

Good day, ladies and gentlemen. Thank you for standing by.

Welcome to the Actions Semiconductor Third 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. If you have a question, please press the star followed by the 1 on your touchtone phone. Please star 0 for operator assistance at any time. For participants using speaker equipment, it will be necessary to pick up your handset before making your selection.

This conference is being recorded today, Tuesday, November 8, 2011.

And 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 third quarter 2011 financial results. This call is being broadcast live over the web and can be accessed on the Investor Relations section of Action's website at www.actions-semi.com for 90 days.

On today's call are Niccolo Chen, Chief Executive Officer; Nigel Liu, Chief Financial Officer; Dr. Zhenyu Zhou, Senior Vice President; and Chung Hsu, Director of Business Development and Investor Relations.

After the market closed in the US today, Actions issued a press release discussing the results for its third quarter ended September 30, 2011. The press release was also filed on Form 6-K with the US 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 email you a copy.

We would like to remind you that during the course of this conference call, Action's management team may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are simply estimates and actual events or results may differ materially. We refer you to the documents that Actions files from time to time with the SEC, specifically the company's most recently filed Forms F-1, 20F and 6-K. These documents identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

And now I'd like to turn the call over to Nigel Liu. Nigel?

Nigel Liu

Yes. Thank you.

Thank you for participating in Actions on this conference call. We appreciate your continued interest in Actions. I will provide a brief update and discuss financial results for the third quarter of 2011, as well the expectation for future performance. Later, Hsuan-Wen will be available during the Q&A portion of the call.

First, I will comment on the press release issued today announcing the CEO transition. Effective November 13, 2011, Niccolo Chen will be stepping down as CEO of Actions Semiconductor. Dr. David Zhou will be promoted to the role of CEO effective December 1, 2011. Since 2010, David has been Senior Vice President at Actions Semiconductor, and prior to that, he served as CEO of Mavrix Technology, which he founded in 2005. Mavrix was acquired by Actions in 2010 and is now a subsidiary of Actions Semiconductor.

A native of China, David attended (inaudible) in the United States and received his PhD from the University of Southern California. He has over 15 years of senior management experience both in the US and China. The board of directors and the management team are (inaudible) his experience and strong understanding of our business will ensure a smooth transition.

Niccolo will assume the role of Chief Strategy Officer where he will focus on the company strategy investment. The board of directors and the management team (inaudible) Niccolo for his strong contribution to Actions Semiconductor over the past two years, particularly in building out our product portfolio. We look forward to his continued participation in the growth of the company.

Now, moving on to our financial results for the third quarter, just a reminder, our operations are reported in accordance with US GAAP.

For the third quarter ending September 30, 2011, we recorded revenue of $15.3 million compared to $10.5 million in the second quarter of 2011. Our gross margin for the third quarter was 14.6% compared to 37.9% for the prior quarter. For the third quarter, total stock-based compensation expense was (inaudible) from the original 10% and [15%], compared to expense in the second quarter of $0.7 million.

R&D sales was $5.5 million or 35.5% of revenue for the third quarter compared to $4.6 million in the second quarter. We anticipate our R&D expense to continue to represent a high percentage of the revenue. We increased R&D talent to focus on our diversified product development initiatives. In addition, we are focusing more than half our R&D resource in high-end new product development.

G&A expense was $2.4 million in the third quarter, or 13.6% of revenue, compared to $2.2 million in the second quarter. Sales and marketing expense was $0.3 million in the third quarter, or 1.9% of revenue, compared to $0.3 million in the second quarter. We continue to tightly manage expense level in this category and maintain a high (inaudible) in the executive and management level.

In the third quarter of 2011, Actions recorded an impairment charge of $88,000 for goodwill in the purchase of R&D technology related to the acquisition of Mavrix Technology in August 2010. The original technology acquired by Mavrix was an earlier generation of (inaudible) for PMP and tablet products in 2011. This result in (inaudible) and related solution. Based on our assessment (inaudible) of the corresponding (inaudible) corresponding to the (inaudible) adjustment of R&D work.

Operating loss was $2.1 million for the third quarter of 2011 compared to operating loss of $3.8 million for the prior quarter. But (inaudible) as a result of the continued non-recurring engineering charge in developing new high-end products and comparative compensation in Chinese [yuan] market. We expect our operating expense denominated in Chinese [yuan] to increase gradually.

Net other income for the third quarter was $1.6 million as a net result of foreign exchange gain. Our income of $1.2 million for the second quarter was also related to a net foreign exchange gain, as well as the disposal gain of one of our (inaudible) investing company.

Interest income was $3.3 million for the third quarter, up $3 million in the second quarter, as a result of the interest rate increase in Chinese [yuan] starting in late 2010. Income before tax was $3 million for the third quarter compared to income before tax of $1 million in the second quarter. Income tax expense was $0.4 million for the third quarter compared to income tax expense of $0.1 million in the second quarter.

Net income (inaudible) US GAAP basis for the third quarter of 2011 was $2.6 million or $0.04 per diluted [share] compared to net income of $0.5 million or $0.007 per diluted [share] for the second quarter of 2011.

Now, moving to the balance sheet, cash and cash equivalent together with received cash, trading securities and both current and non-current marketable securities totaled $222.8 million as of September 30, 2011 compared to $17.3 million as of June 30, 2011. Of the $222.8 million total, $17.7 million was in cash and short-term interest-bearing investments that was generally issued by large domestic banks in China for terms no longer than six months and can be redeemed at any time. $152.1 million was in Chinese currency and marketable securities, both current and non-current, which (inaudible) investment with high interest rate and minimal terms of six months. The marketable securities were mainly issued, managed or guaranteed by top-ranking (inaudible) financial institutions in China.

Our short-term borrowing totaled $12 million in the end of the third quarter. Instead of using our R&D (inaudible) in China (inaudible) cash needs. This of course can help us take advantage of low interest rate in US dollar loan, favorable exchange rate of RMB versus US dollar, and ability to continue to earn higher interest rate on RMB denominated investment.

Accounts receivable were $2.9 million in the end of third quarter of 2011, up $2.2 million in the end of second quarter which were then due to the increased revenue in the third quarter. Inventories was $8.4 million in the end of third quarter, up from $8.1 million in the end of the prior quarter.

Our high (inaudible) in the end of the third quarter compared with the prior quarter continue to be a result of our strategy arrangement with the (inaudible) partners to secure preparation (inaudible) and the capacity for certain (inaudible) products and also correlated with expected higher shipment (inaudible) at more advanced (inaudible) fourth quarter.

We continue to buy back shares, spending approximately $0.4 million under the share repurchase program during the third quarter, compared with $1.4 million in the second quarter. Our repurchase activity remains constrained by changing (inaudible) for our (inaudible) program as well as the limited activity in block trading. As of September 30, 2011, the company had investment approximate total of $14.2 million in the program, representing approximately 17.1 million ADS shares.

I will now -- let me discuss our progress in each of our product categories during the quarter.

First, on the automotive and the (inaudible) low-end market segment remains the largest contributor in the third quarter, as demand for our (inaudible) continue to increase. During the quarter, we experienced continued interest in this segment for domestic and international (inaudible) customers. Those products represent more than 40% of our total shipment during the quarter.

In the third quarter, our sales for the mainstream segment of MP3 market, serving the non-display, mono-display and small color display media products continue to maintain the leading position in market share of this category. For example, we enjoy more than 15% of market share, and there's a high gross margin in the small color display MP3 segment. So, overall, MP3 segment market share was over [25%].

The MP4 market continues to be a key segment for Actions, accounting for nearly half our total revenues during this quarter. Shipment of our product (inaudible) the QVGA, MP4 [D1] PMP, and the high (inaudible) PMP segments increased during the third quarter.

While we are encouraged by the (inaudible) gain in the segment during the third quarter, we remain cautious as international demand could be softer than normal for the fourth quarter. We do, however, continue to expect our high-end products to generate meaningful revenue as more and more of our high-end products such as our high-definition PMP, gaming PMP and the newly-promoted Series 70 (inaudible) are starting to gain traction in Chinese [brand-name] market (inaudible) product performance.

With our MP4 product segment, sales of QVGA MP4 with the CMOS image sensor continue to represent a large portion of MP4 sales and captured over 15% market share in the quarter.

In the [D1] segment, our sales (inaudible) with gaming applications continues leading market share with more than 70% of the quarter. In the high-definition segment, our sales (inaudible) for 720p (inaudible) G1000 (inaudible) and the Series 28 for 1080p products are penetrating into the most advanced portable video device market (inaudible). During the third quarter, we start shipping our 720p high-definition product to customers.

The Series 28 was (inaudible) as PMP, game console or multimedia TV, the Series 28 products (inaudible) with selected customers in the second quarter. And during the third quarter, we began to work with (inaudible) international brand-name customer and also several tier 1 customers in China. Our Series 28 key customers are using our ICs for e-books, portable DVD and (inaudible) digital video recorder (inaudible).

As we announced last quarter, our Series 27 and 28 received more than 10 (inaudible) second tier (inaudible) customers in China (inaudible) move to mass production in third quarter.

We announced the introduction of our new Series 70 (inaudible) product family last quarter. The Series 70 (inaudible) product family (inaudible) handheld device market, such as mobile internet device (inaudible) portable media player (inaudible) PMP (inaudible) production was to selected tier 1 customer in China in August.

During the third quarter, 0.15 micron process technology account for almost all our (inaudible). We are migrating to process (inaudible) from 0.15 micron to 0.14 micron, which will benefit company's gross margin in 2012. (inaudible) our high-end products using 0.11 micron process has gradually increased, and we expect improving revenue contribution from this product in Q4 of 2011 and Q1 of 2010.

Furthermore, our advanced product (inaudible) nanometer (inaudible) has been (inaudible) and we have targeted the launch in Q1 of 2012.

We are encouraged by the momentum gained in the third quarter and believe we have made a strong progress in positioning the company for long-term growth. However, we are cautious as we enter the fourth quarter. In addition to the macroeconomic uncertainties in Europe and the US, we are also seeing some slowing on the customer demand in China.

(inaudible) has led us to guide to lower revenue for the fourth quarter. Our guidance for the fourth quarter of 2011 is revenue range of $12 million $13 million. (inaudible) in our performance year-to-date with this guidance, we expect revenue for the full year 2011 to increase 26% to 28% compared to 2010.

We expect gross margin for the fourth quarter to be approximately 40% and operating sales (inaudible) higher and (inaudible).

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. As a reminder, if you would like to ask a question, please press the star followed by the 1 on your touchtone phone. If you would like to withdraw your question, please press the star followed by the 2. If you are using speaker equipment, you'll need to pick up the handset before making your selection.

Our first question comes from the line of Rick Fearon with Accretive Capital Partners. Please go ahead.

Rick Fearon – Accretive Capital Partners

Hello, Niccolo and Nigel. Congratulations on a strong quarter.

Nigel Liu

Thank you.

Rick Fearon – Accretive Capital Partners

Can you provide some guidance on what revenue and earnings might look like in 2012?

Niccolo Chen

Hi, Rick Hsuan-Wen Chen.

Rick Fearon – Accretive Capital Partners

Hi.

Niccolo Chen

Yeah. We will announce that in the next Q4 earnings call. Right now, we still try to (inaudible) out the best possible scenario and the best [point] we can. So, that will be next quarter question.

Rick Fearon – Accretive Capital Partners

Okay. Well, third quarter 2011 was an impressive quarter and it's encouraging to see the growth and traction with some of the company's new products. But disappointing that the fourth quarter is kind of reverting back to the previous quarters' levels in 2011. Do you expect 2012 to be growth over 2011?

Niccolo Chen

Yes.

Rick Fearon – Accretive Capital Partners

Okay. And do you -- with ASPs improving, which is also encouraging, do you also expect gross margins to be trending around the 40% range as they have in the past couple of quarters?

Niccolo Chen

Rick, it's always our goal to achieve 40% or more gross margin. So we will try our best to maintain 40% gross margin (inaudible).

Rick Fearon – Accretive Capital Partners

Okay. And I think Nigel may have alluded to some of the product -- specific product sales, but can you just repeat, if you've already mentioned it, what the dollar sales for the G1000 were and the Android products in the third quarter?

Niccolo Chen

Actually, we did not specify the (inaudible) we only say about -- we saw we believe the percentage we have (inaudible) into the market segment. And those -- for example, Nigel has mentioned earlier our, for example, the (inaudible) contributed about 40% (inaudible) value, and the mainstream product about 30%, and the other 40% is (inaudible) product. For example, the MP4, QVGA, and the 720p. So that's about the revenue contribution of our current product lines.

Rick Fearon – Accretive Capital Partners

And is that last portion that you just mentioned, the 40% that is really driving the improved gross margin because that's the higher-end product?

Niccolo Chen

Yes.

Rick Fearon – Accretive Capital Partners

Okay. And would you expect that to be a larger percentage of sales going forward, or do you anticipate the breakout being roughly what it was this quarter?

Niccolo Chen

We believe it's about the same. However, we still try our best to gain more market share in the high-end product. However, I need to remind you, by the end of the year (inaudible) market as well. So, we expect maybe the (inaudible) higher demand in the lower end (inaudible). Also since we are aggressive at the high end products, so they might be (inaudible) a little bit, and so-called (inaudible) a little bit market share.

Rick Fearon – Accretive Capital Partners

Okay. And can you share who the tier 1 customer was that the company (inaudible)?

Niccolo Chen

Since we are under NDA, we are not allowed to announce until (inaudible) from the other side. I'm sorry.

Rick Fearon – Accretive Capital Partners

That's okay. Do you expect to bring on some additional tier 1 customers?

Niccolo Chen

That's always our target, to do it.

Rick Fearon – Accretive Capital Partners

Okay. And regarding the press release about the change in the CEO role, I'm curious, Niccolo, in your role, identifying investment opportunities, do you expect that to be M&A opportunities? Are you -- is the company looking at making some acquisitions? Or are these investments in additional technologies?

Niccolo Chen

Well, we don't rule out any possibility to merge any company or to hire new talents. If you have any idea or any opportunity, please we can talk about later.

Rick Fearon – Accretive Capital Partners

Okay. Well, we do, and there's one that I'll mention, and Nigel, as you know, and Niccolo, for three years now we've been encouraging the company to acquire its own stock and as aggressively as possible. And it looks like Actions was only able to buy back 200,000 shares last quarter, which is simply not taking advantage of this incredible investment opportunity called Actions Semiconductor. And I would strongly encourage the company to initiate buybacks of major blocks of stock which can be achieved through a Dutch tender offer. And this will allow you to overcome the volume and blackout constraints that you had described in your scripted discussion.

Niccolo Chen

Thank you, Rick. That's a very good suggestion.

Rick Fearon – Accretive Capital Partners

Yeah. And as a significant shareholder, we'd just like to thank Niccolo for his tenure at Actions, and to welcome Dr. Zhou to his new position. I hope that he can visit us sometime soon.

Niccolo Chen

Definitely yes. Thank you, Rick.

Rick Fearon – Accretive Capital Partners

Okay. Thanks so much.

Operator

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by the 1 on your touchtone phone at this time. As a reminder, if you are using speaker equipment, you'll need to pick up the handset before making your selection.

And I'm showing no further questions in the queue. I would like to turn the call back to management for any closing remarks at this time.

Nigel Liu

(inaudible) this call. We appreciate your interest and the continued support of Actions. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes the Actions Semiconductor third quarter 2011 earnings conference call.

If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 and enter the access code of 4483427 followed by the pound sign.

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