Actions Semiconductor's CEO Discusses Q42011 Results - Earnings Call Transcript

Jan.19.12 | About: Actions Semiconductor (ACTS)

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

Q42011 Earnings Call

January 19, 2012 - 5:30 p.m. ET

Executives

Zhenyu Zhou - Chief Executive Officer

Nigel Liu - Chief Financial Officer

Ellen Davis - The Blueshirt Group, Investor Relations

Analysts

Richard E. Fearon, Jr. - Accretive Capital Partners

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Actions Semiconductor Fourth Quarter 2011 earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Ellen Davis of 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 fourth quarter and fiscal year 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 Dr. Zhenyu Zhou, Chief Executive Officer; Nigel Liu, Chief Financial Officer; and Chung Hsu, Director of Investor Relations.

After the market closed in the U.S. today, Actions issued a press release discussing the results of its fourth quarter and fiscal year-end December 31st, 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 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 Dr. Zhenyu Zhou. Dr. Zhou?

Zhenyu Zhou

Thank you for participating in Actions' earnings conference call. We appreciate your continued interest in the company. This marks my first earning conference call as CEO of Semiconductor -- Actions Semiconductor, and I am pleased to be able to share with you an update on the business, as well as discuss our strategy for 2012.

Later on the call, Nigel Liu, CFO will discuss financial results for the fourth quarter and the fiscal year of 2011, as well as provide guidance for the first quarter. I will be available for the Q&A portion of the call along with Nigel and Chung Hsu, Actions' Director of Investor Relations.

And now, I want to update on our business. For the full year 2011, we were pleased to achieve 26% revenue growth, significantly improve our profitability and an increase in shipment by 23%. Our fourth quarter operating results were in line with the expectations and reflect the current demand environment in our end market.

In the fourth quarter of 2011, Actions revenue was $12.3 million and net loss was $0.1 million, or $0.00 per ADS. Gross margin for the fourth quarter of 2011 was 37.6%. For the fiscal year ended December 31st, 2011, revenue was $47.5 million and net income was $3.1 million or $0.04 per ADS.

I was excited to transition into the role of CEO of Actions Semiconductor. I believe Actions has a great platform from which to build. We are the market leader in portable multimedia SoCs and have a solid track record of product migration, successfully transitioning from the portable audio market into the portable video market.

Actions hold the dominant market share in non-Apple audio products and in video players with gaming and video capture functionality. In 2011, our demand for high definition portable video products gained significant traction, giving us the leading position in the overall portable video market category.

We continue rapidly getting market share in the advanced high definition portable video markets, as well as the automotive audio and boom box market. Our portable audio products have had successfully adopted by large OEMs worldwide.

Over the next year, we plan to leverage the strong product portfolio we have to maintain our market share and further extend our leadership in these established markets. Our growth initiative will be largely focused on penetrating the mobile internet enabled multimedia market.

Connectivity is bringing new life to audio and video players, such as Bluetooth-enabled MP3, boom box and WiFi-based streaming video players. The most important growth element we have identified is the entry-level mobile internet devices, MIDs or media tablets.

We believe this product category represents the strongest growth potential and [views] [ph] on the development work we have done leveraging the Android platform. In these product segments, we can leverage our core technology strengths in multimedia and gaming.

As we move forward and pursue these products as a strategy, we remain focused on driving strength and financial discipline. We will continue to invest in R&D for advanced products, and we will look to lower operational expenses.

Creating long-term shareholder value will continue to be the top priority for the company. In the fourth quarter, we spent approximately $1.2 million on the share repurchase program, compared with $0.4 million in the third quarter.

As of December 31st, 2011, the company had invested a total of approximately $41.4 million in the program, representing approximately 17.7 million ADS shares. Management and the Board will continue to evaluate opportunities to enhance shareholder value, including alternatives to the current buyback program.

In an effort to more effectively communicate our products going forward, we have refocused our top portfolio into the following three categories: portable audio, portable video and mobile internet devices, MID or tablets.

During the fourth quarter, we were pleased to see an increase in shipments in our advanced high definition product video -- portable video products, while shipments of our audio boom box products declined slightly in the fourth quarter. We still maintain a leading position in the mainstream audio boom box market category.

Despite the challenging economy our portfolio diversification and international marketing efforts have allowed us to steadily grow the shipment volume of our ultra-low-end and advanced product segments. And we expect to see further opportunity for growth in these areas in 2012.

And now for a detailed look at each category. Portable audio; while demand for our value-oriented audio and boom box products slowed in the fourth quarter, volume shipments of these products remained a large value contributor for the fourth quarter.

We are successful in securing design wins for our boom box products with large branded customers in China, and we are beginning to penetrate international branding customers. These products represent more than 40% of our total shipment volume for the fourth.

In the fourth quarter, our sales to the mainstream segments of the MP3 markets serving the non-display, mono display and the small color display media products contributed to maintain the leading position in the market share of this category.

Portable audio -- portable video; video continues to be a key category for Actions and accounted for more than half of total revenue for the fourth quarter. While overall shipments in the video category increased in the fourth quarter, we were pleased to see shipments of our advanced HD products increase sequentially.

We anticipate that our video products, such as our standard definition D1 and high definition HD PMP and gaming products will continue to grow in the first half of 2012. As we move into 2012, we focus on increasing our contribution from our new advanced products in the media category.

Mobile internet devices or media tablet; during 2011, we announced our collaboration with MIPS to bring Android 3.0, also known as Honeycomb, to a new 1.3 gigahertz MIPS-based chipsets from Actions. Now, we are immediately boarding Android 4.0, also known as Ice Cream Sandwich, to this platform.

This platform will also serve as the foundation for targeting the entry-level multimedia tablet market. We expect to launch a 1.2 gigahertz based solution targeting the sub-$100 7-inch capacitive touchscreen tablet market in the first half of 2012 with boarding shipments beginning the second half of the year.

During the fourth quarter, 0.15 micrometer process technology accounted for almost all of our audio shipment volume and current inventory. We are migrating the process of mainstream products from 0.15 micrometer to 0.14 micrometer, which we expect will benefit the company's gross margin in 2012.

As planned, our advanced high definition products are using 0.11 micrometer process. We are seeing a significant revenue contribution from these products. Furthermore, we are launching our advanced products using 55 nanometer process, and we are aggressively moving towards launching 40LP and 28LP advanced process in 2013 for our mobile internet products.

In summary, we have made strong progress over the past year positioning the company for long-term growth. With almost half of the number of working days in January as a normal month during -- due to the timing of the Chinese New Year, we expect a seasonal slow first quarter.

For the full year, we expect to achieve 15% to 20% revenue growth as we shift our focus to high-end products. I am optimistic and confident about Actions' potential over the next several years. I look forward to updating you on our progress.

Now, I'd like to turn the call over to Nigel Liu, CFO, who will review our financial results for the fourth quarter.

Nigel Liu

Okay, thank you, Zhenyu. As a reminder, our financials are reported in accordance with U.S. GAAP.

For the fourth quarter ended December 31st, 2011, we recorded revenue of $12.3 million compared to $15.3 million in the third quarter of 2011. Revenue for the year 2011 was $47.5 million, compared to $37.6 million in 2010.

Our gross margin for the fourth quarter was 17 -- 37.6%, compared to 40.6% for the prior quarter. The decline in gross margin was primarily due to the change in our product mix, higher margin products such as [PMP and boom box] [ph], compared to the lower proportion in the fourth quarter.

In addition, royalty expense was comparatively higher in the fourth quarter due to a [neutralization] [ph] agreement signed in December -- September. For the fourth quarter, total stock-based compensation expenses was 0.16 million compared to nil in the third quarter, resulting from a true-up of underestimated profit rate from the original 10% to 15%.

R&D expense was $6.0 million or 28.7% of revenue for the fourth quarter, compared to $5.5 million in the third quarter. We anticipate our R&D expense to continue to represent a high percentage of revenue as we continue to invest R&D resources in high-end new product development.

G&A expense was $2.5 million in the fourth quarter or 10.1% of revenue, compared to $2.4 million in the third quarter. Sales and marketing expense was $0.3 million in the fourth quarter or 2.5% of revenue, compared to $0.3 million in the third quarter.

We continue to tightly manage expense levels in this category, and maintain a hiring freeze across non-engineering functions and a salary cut at the executive and management level. Operating loss was $3.9 million for the fourth quarter of 2011, compared to operating loss of $2.1 million for the prior quarter.

As noted previously, as a result of continued non-recurring engineering charges in the present new high-end products and the competitive compensation in Chinese talent market, we expect our operating expense denominated in Chinese yen to increase sequentially.

Net other income for the fourth quarter was $0.3 million as a net result of foreign exchange gain. Other income of $1.6 million for the third quarter was also related to a net foreign exchange gain. Interest income was $3.5 million for the fourth quarter, up from $3.3 million in the third quarter as a result of the interest rate increase in Chinese yen starting in late 2010.

Income before tax was $0.3 million for the fourth quarter, compared to income before tax of $3.0 million in the third quarter. Net income tax expense was $0.03 million for the fourth quarter, compared to income tax expense of $0.4 million in the third quarter.

Net loss attributable to Actions Semiconductor on U.S. GAAP basis for the fourth quarter of 2011 was $0.11 million or $0.00 per diluted ADS, compared to a net income of $2.6 million or $0.04 per diluted ADS for the third quarter of 2011. Net income for the full year of 2011 was $3.1 million or $0.04 per diluted ADS, compared to a net income of $0.4 million or $0.01 per diluted ADS reported for the full year 2010.

Now, moving to the balance sheet. Cash and cash equivalents together with restricted cash, trading securities, and both current and non-current marketable securities totaled $220.6 million as of December 31st, 2011, compared to $222.8 million as of September 30th, 2011.

Of the $220.6 million total, $33.2 million was in cash and the short-term interest-bearing investments that was generally issued by large domestic banks in China for terms no longer than three months and can be redeemed at any time.

$187.4 million was in trading securities and marketable securities, both current and non-current, which were principal guarantees or pledged investments with higher interest rates and minimum terms of three months. These marketable securities were mainly issued, managed or guaranteed by top ranking state-owned financial institutions in China.

Our short-term borrowing totaled $12 million in the end of the fourth quarter. Instead of using our RMB fund in China, we drew down on our offshore line of credit for U.S. dollar cash needs. This approach can help us take advantage of low interest rates in U.S. dollar loan, favorable exchange rate of RMB versus U.S. dollar, and ability to continue to earn higher interest rate on our RMB-denominated investments.

Accounts receivable was $2.9 million at the end of the fourth quarter of 2011, which is at the same level as the third quarter. Accounts receivable includes amount due from related party, as well as amount due from equity method investees.

Inventories were 7.5 million at the end of the fourth quarter, down from 8.4 million at the end of the prior quarter. Overall inventory level at the end of the fourth quarter compared with our higher range in the third quarter was directly correlated with higher shipment in the fourth quarter and lower shipments expected in the first quarter of 2012 for historical seasonality.

We continue to buy back shares, spending approximately $1.2 million on the share repurchase program during the fourth quarter, compared with $0.4 million in the third quarter. Our repurchase activity remains constrained by trading volume and blackout periods for our 10B-18 program, as well as limited activity in block trading.

As of December 31st, 2011, the company had invested approximately a total of $41.4 million in the program, representing approximately 15.7 million ADS shares. And now, turning to our outlook. Our guidance for the first quarter of 2012 is revenue in the range of $9 million to $10 million. We expect gross margin for the first quarter will be approximately 38%.

And now, we would like to open the line for questions. Operator? Hello? [indiscernible]

Question-and-Answer Session

Operator

I apologize. I was experiencing technical difficulties. (Operator Instructions) Our first question is from the line of Rick Fearon with Accretive Capital Partners. Please go ahead.

Richard E. Fearon, Jr. - Accretive Capital Partners

Hello, Zhenyu and Nigel.

Zhenyu Zhou

Yeah.

Nigel Liu

Hi Rick.

Richard E. Fearon, Jr. - Accretive Capital Partners

Zhenyu, you mentioned cutting operating expenses, and I wondered if you could elaborate on where those cuts -- where you foresee those cuts coming from. Are you looking at scaling back R&D somewhat so that the company's R&D expenses can be perhaps a little more closely aligned to the industry, or where do you anticipate finding those cuts?

Zhenyu Zhou

We mainly try to maintain a very tight hiring and also try to control our investment on the -- like IT purchase and also the company investments. Over the time, we will evaluate more detailed information and share with you more information about how much cut and where it comes from.

Richard E. Fearon, Jr. - Accretive Capital Partners

Okay. And I'm just curious, at this point, how many R&D engineers are on staff?

Zhenyu Zhou

At this moment in overall company, in the three R&D locations we have over 500 R&D engineers.

Richard E. Fearon, Jr. - Accretive Capital Partners

More than 500 engineers?

Zhenyu Zhou

Yeah, more than 500 engineers.

Richard E. Fearon, Jr. - Accretive Capital Partners

Okay. Are those engineers focused -- are they more or less evenly split among the three areas that you've now designated within the company or are they -- is there a heavier concentration in one specific area?

Zhenyu Zhou

No, they are divided into three categories but with -- starting from 2012, our main focus or more focused on the mobile internet, media tablets. And certainly, we still have maintained a decent number of engineers on portable audio and portable video area.

Richard E. Fearon, Jr. - Accretive Capital Partners

Okay. And presumably -- as you mentioned, it sounds like you're still working on identifying where those cuts will come from, but presumably some of the areas that are less of a focus may lend themselves to some more cuts?

Zhenyu Zhou

Yeah, we definitely will streamline our product portfolio. As you can see from this conference call, we will focus on these three areas rather than on more product line as we -- just like in the early case.

Richard E. Fearon, Jr. - Accretive Capital Partners

Well, the concept of really defining the areas and defining specifically those areas of focus is good news to hear. I'm encouraged to hear that. I guess just one other question, and as you know for more than three years we've been calling for a Dutch auction tender offer of the shares of Actions Semiconductor so that the company can make a good investment with all this cash, and a good investment when you can buy a $1 of cash for $0.60.

I think universally one would agree that that's a pretty extraordinary opportunity, pretty extraordinary investment. What is the rationale -- we have $221 million of cash and equivalents approximately, and we can buy our own shares at $130 million market cap right now, 40% discount. What is rationale of management and the Board for not trying to do this in a more accelerated fashion and not going out and doing a -- making a tender offer so that we're not constrained by the 10B-18 constraints on volume and blackout periods, et cetera?

Zhenyu Zhou

Okay, first of all, we are in the event and possibility of any alternatives to the current buyback program. So we will not rule out the possibility of any alternatives. But the rationale behind we maintain a reasonable volume of cash is due to our experience of semiconductor business as up and down. So yes, the cycles. For a company, we obviously maintain a good amount of cash to maintain the long-term growth of the company. In the meanwhile, we are not going to miss any good M&A opportunities to grow the company.

Richard E. Fearon, Jr. - Accretive Capital Partners

Has the company -- do you spend any time looking at your competitors and perhaps comparing your ratios versus your competitors', and comparing the cash levels that people -- that companies carry in this industry because for a $15 million revenue business that has anywhere between 30% and 40% gross margins, so you could be making a lot of money if we weren't spending it all on R&D.

It's just irrational to be sitting on $220 million cash. It'd be irrational sitting on $100 million of cash. So I just, as a shareholder of this company, and we as shareholders or the owners of this cash, it's extremely frustrating that this cash is not being invested in a more sensible way, especially when the investment is staring us in the face and yields almost a 70% return to make that investment.

For every share you buy back, you get 67% cash on cash return. That's the part that is -- I hope you can appreciate -- extremely frustrating from a shareholder's perspective?

Zhenyu Zhou

I hear you but the company is definitely not targeting for $50 million revenue. We definitely target for the much larger revenue in the long-term.

Richard E. Fearon, Jr. - Accretive Capital Partners

Okay. Well, I do hope we're going to get there but it seems that we're managing -- that the company is, in fact, managing this extremely high R&D level of 500 engineers without going down on that cash as it is. So I understand the concept of cyclical businesses and cyclical industries not wanting to be leveraged or over-leveraged for that matter, and perhaps wanting a little bit more than working capital to survive a rainy day.

But even at double the sales, even if this were a $100 million revenue business, it still doesn't make sense to have $220 million of cash. And I know you've heard this before, but it's -- I hope now with new stewardship at Actions Semiconductor, new leadership with you taking the reins, that you can address this sooner rather than later on behalf of all shareholders.

Zhenyu Zhou

I understand and we will continue evaluating all these alternatives. Thank you.

Richard E. Fearon, Jr. - Accretive Capital Partners

Thank you.

Operator

Thank you. There are no further questions at this time. I will turn it back over to management for any closing remarks.

Zhenyu Zhou

Thanks again for joining us on today's conference call. We appreciate your interest and continued support of Actions. Thank you.

Operator

Ladies and gentlemen, this does conclude the conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 and entering the access code of 4504471. Thank you for your participation. You may now disconnect.

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