Actions Semiconductor Q1 2007 Earnings Call Transcript

| About: Actions Semiconductor (ACTS)
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Actions Semiconductor Company Ltd. (NASDAQ:ACTS)

Q1 2007 Earnings Call

May 10, 2007 5:30 pm ET

Executives

Pierre Christenson - Blueshirt Group, IR

Nan-Horng Yeh - CEO

David Lee - CFO

Chung Hsu - Director of Business Development

Calvin Lau - Director of IR

Analysts

Daniel Amir - RW Hambrecht

Heidi Poon - Piper Jaffray

Randy Abrams - Credit Suisse

Adele Mao - Susquehanna Management

Bill Lu - Morgan Stanley

Jay Srivatsa - Roth Capital Partners

Timothy Lamp - Citigroup

Li Tang - Pacific Crest Security

Craig Berger - Wedbush

Presentation

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2007 Actions Semiconductor Earnings Call. My name is Melanie and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session at the end of this conference. (Operator Instructions). As a reminder this call is being recorded. I would now like to turn the call over to Ms. Pierre Christenson with the Blueshirt Group. Go ahead ma'am.

Pierre Christenson

Good afternoon and thank you for joining us on today's conference call to discuss Actions Semiconductors first quarter fiscal 2007 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 Nan-Horng Yeh, Chief Executive Officer; David Lee, Chief Financial Officer and Chung Hsu, Director of Business Development and Calvin Lau, Director of Investor Relations. After the market closed in the U.S. today, Actions issued a press release discussing their results for its first quarter fiscal year 2007. We also filed the press release 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 4015-215-4961 and we will fax you or 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 recent Form F-1 and any Form 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 would like to turn the call over to Actions' Chief Executive Officer, Mr. Nan Yeh.

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Nan-Horng Yeh

Thank you, and welcome to Actions first quarter 2007 earnings conference call. We appreciate your interest and support of Actions. I will first review the business highlight from the first quarter then David Lee our CFO will review the financials and forward guidance. We will then open up the call to your questions.

First - During first quarter '07 we attained revenue of $30.3 million in line with the updated guidance we provided last month. Importantly, we were able to maintain our gross margin of 52.7%. We continue to gain market share. But we are disappointed that the top line revenue growth was not as strong as our original expectations. The PMP market has continued to grow and we were able to maintain unit shipment growth year-on-year in the first quarter of '07. However, market growth came primarily from the high end and with the roll out of our Series 13, Series scheduled for further quarter '07. We were we were unable to capture this segment of the market growth at the beginning of the year.

Action still dominates the mass market for PMP SoC’s but unfortunately due to stronger and expected competition, ASP for the low end of the market have dropped more quickly than we had anticipated in the first quarter '07. We expected annual price erosion to be in line with street estimate of between 20% to 30%. But ASP in the low end of the market already dropped by 20% in the first quarter of '07. So our volume was still up year-over-year. Disappointingly, a severe erosion of our ASP impacted our first quarter revenues substantially.

We also had to grapple with a number of other external factors including the volatilities of NAND Flash price and pronounced the effect of the late Chinese New Year holidays and the shortage of TFT display modules. [Cumulatively] the net effect is that we had expected growth in the first half of 2007 to be behind our original expectations. We had executed according to our original plan in first quarter 07, but unfortunately our plans could not follow changes in the market quickly enough.

Second in order to maintain our dominant procedure in the PMP, SoC market, we had begun to adjust our target for the mix. In order to fill gaps in our product portfolios, we have already the products, which we will target and even lower end of the volume market.

We anticipate the adjustment of our product lines will be completed by the end of second quarter '07. We were focused on maintaining our margins on these products by further migrating to 0.16 micron process technology in the further quarters. We successfully completed the transition to 0.18 micron process technologies during the first quarter. Chips manufactured on 0.16 micron process technology accounted for 58% of total unit shipment for the quarter. Thus enable us to continue to enjoy cost savings and maintain our gross margin at a higher end 50%, despite the severe erosion in our ASP in the first quarter.

Third, we are pleased to report our Series 13 products have already given substantial design wins with our customers and we are still scheduled to begin mass shipment in third quarter '07. We have also finished saving out the Series 13 Plus chips in April.

In other words, by the second half of the year, we will have a complete comparative line of products to cover the absolute low end all the way to the high end, enabling us to target a segment of the PMP SoC market. We have continued to expand our R&D teams to ensure that process technology migration to 0.18 micron and they came out of future products only and firmly on schedule.

To further on peripheral side, Actions Capital, our wholly owned subsidiary has begun to invest in companies with the technologies that complement in longer terms [low med] for Actions Semiconductor. One of these (inaudible) investments cover the mobile digital arenas which enable Actions to further complete its product lines. We believe this new application will help with the proliferations of PMP device in the near future. We are beginning to see that Actions is going beyond its additional audio SoC market and we are confident that our 50% market shares in the so called iPod PMP market give us great opportunities to help drive these new applications into the mass market.

Now let me turn the call over to David Lee our CFO to discuss the details of our financial results.

David Lee

Thank you, Nan, and thanks to those who joined us today on our first quarter 2007 conference call. First, I would discuss the first quarter financials in detail, which will be followed by our forward guidance for the second quarter 2007, and then we will open the call for Q&A.

As a reminder all financials are reported in accordance towards the U.S. GAAP. We recorded $30.3 million in revenues for the first quarter ended March 31, 2007, which is inline with our revised guidance.

Our results for the quarter were impacted by a pronounced seasonality and other factors described by Nan previously. Our gross margin for the first quarter was 52.7% which was slightly higher than the fourth quarter's 51.9% and within our targeted range of gross margins. We are starting to realize the benefits of cost saving by moving to 0.18 microns production note but these savings was slightly offset by no more erosion of our blended ASP.

As we have discussed on previous calls we have increased spending in few business areas which is a calculated component of our growth strategy.

R&D expense was $2.7 million or 8.9% of revenue for the first quarter of 2007, as compared to $2.1 million or 4.3% of revenue in the fourth quarter of 2006.

G&A expense was $2.3 million in the first quarter or 7.5% of revenue, compared with the fourth quarter's $2.2 million or 4.5% of revenue.

Sales and marketing expense was $0.4 million in the first quarter or 1.2% of revenue, up slightly on a percentage basis over the fourth quarter of 2006, which was $0.25 million or 0.9% of revenue, respectively.

The sequential increase in the operating expenses reflects a higher technical, sales and marketing headcount; a result of our commitment to growing our companies by hiring the best available talent.

Operating income was $11.1 million or 36.7% of revenue for the first quarter, compared to the fourth quarter of 2006 operating income of $21.4 million or 43.1% of revenue.

There was additional other incomes of $1.3 million resorted from the non-operating foreign exchange gains in the quarter. Profit before taxes was $11.8 million or 45.4% of revenue for the first quarter of 2007. This represents a decrease of $9.1 million from the fourth quarter of 2006. Our effective tax rate of our primary subsidiaries in Zhuhai China for the calendar years of 2007 is 7.5% and it should remain at it same level through 2008.

Net income on a U.S. GAAP basis for the first quarter of 2007 was $12.7 million or $0.15 per diluted ADS, compared to $21.3 million or $0.25 per diluted ADS for the fourth quarter 2006. We will like to remind you that the fully diluted ADS count used here is 86 million shares for Q1 2007.

Let's move to the balance sheet. Cash and cash equivalents together with the time deposits and a short-term marketable securities, totaled $210.2 million on March 31, 2007 compared to $204 million at the end of the fourth quarter of 2006. Accounts receivable was $5.8 million at the end first quarter flat versus the first quarter of 2006. The average days sales outstanding for the quarter was approximately 17 days, as compared to 11 days from the prior quarter.

As we grow the business we have broadened our customer base, we expect the DSO’s to increase under and the close credit risk management over time. Inventories were $11.4 million at the end of first quarter, up $5.1 million from the prior quarter. As Nan mentioned, we are currently in the process of adjusting our product mix. And in order to prevent any shortage of inventory during the historical sales peak in the second half of this year, we are deliberately building our inventory.

This afternoon we also announced the share repurchase program. We believe that adoption of this program reinforces our commitment to providing long term shareholder’s value. Moving forward we will evaluate purchasing shares in the open market, based upon market conditions, as well as other factors in accordance with the Security and Exchange Commission’s requirements. Any acquired shares will be used in connection with the Company's future employee benefit plans and the other general corporate purposes.

Before I comment on our guidance, I would like to discuss the current competitive environment first. As many of you are already aware, the environment for low range SOC solutions has become increasingly competitive. As we transition our product mix to increase the contribution from the high end SoC solutions. We expect to experience some impact due to our revenue and margins. We firmly believe that aggressively maintaining our market share with our current product offerings is the best way to keep our next generation of high end SoCs as the industry standard and then to position the company for continuous long term growth.

And now let me comment on our view looking forward. We currently expect that our second quarter 2007 revenues will be in the range of $30.5 million to $32.5 million. We anticipate earnings for the second quarter to be in the range of $0.13 to $0.15 per diluted ADS.

To summarize the financial highlights for the first quarter, first we had revenue of $30.3 million. Second, we continue to deliver industrial leading margins of 52.7% and 36.7% of gross and operating margins respectively. Third, net income for the quarter was $12.7 million, or $0.15 per diluted ADS.

Before we begin our Q&A session, I would like to remind everyone that we will be presenting at upcoming Susquehanna Conference in New York on May 17, and to at Pacific Crest Conference in San Francisco and in Boston on May 22 and at 24 respectively.

And now we'll like to open the lines for questions. Thank you.

Question-and-Answer Session

Operator

Ladies and gentlemen (Operator Instructions). Our first question will come from the line of Daniel Amir with RW Hambrecht. Go ahead.

Daniel Amir - RW Hambrecht

Thanks a lot. Couple of question here. First of all on the strategy here with regards to maintain market share aggressively. How long do you think that the strategy will take place? Is this more of a one quarter thing, is this is a multiple thing, just because it seems like that this is somewhat caught you by surprise and now you are shifting your strategy here a bit.

Nan-Horng Yeh

I think this will be very soon, I think we already adjusted for starting from the first quarter, so I think we can finish the product mix adjustment in two quarters. Actually we just adjust a little bit to extend our product with the low end market and this 13 Series everything is on schedule and is always very strong. So, we believe the complete mix it will really help our second half of our business.

Daniel Amir - RW Hambrecht

So, should we expect more normal second half ramp up on business because the first half here has clearly been disappointing on a year-over-year comparison?

Nan-Horng Yeh

Yes, we believe so.

Daniel Amir - RW Hambrecht

Okay. The other question is, in the past I guess you've commented that you will use some of the cash for potential acquisitions. Is that still on-track following this announcement of buyback and if it is, where do we stand there on targets on potentially diversifying your business?

Nan-Horng Yeh

First; I will say that for all the investment, merger, acquisition plans we are always very cautious. So, actually we are discussing about this for one year, then we adjust to make two to three investment in order to extend our ten largest and diversify our products. Actually, we still stay in our business peripheral, still stay in the PMP peripheral business. So I think we are very cautious on this.

Daniel Amir - RW Hambrecht

So, basically there is nothing on the horizon, on the acquisition is more you are doing small investments is that the way to look at it?

Nan-Horng Yeh

Currently, yes we are looking for the opportunities. However, we are very cautious on any of the merger acquisitions, presently I don't want to spend a couple of hundred million just to acquire a company and six months later all the [engineers lacked]. I don't want to think they are our competitor, they made a mistake. So, we are very cautious of any of the merger acquisitions. But, however, we are still open to any opportunity after that we have revealed more than three cases in the past of merger acquisitions case. But we are still very cautious.

So, while we are using the Actions capital to make the investments, we deeply negotiate and communicate and cooperate with the management team, with the engineering teams. But we are looking for the investment for the long-term deals not for the short-term only.

Daniel Amir - RW Hambrecht

Okay. And then my final question is, as I look at your business here for the next year or so, what type of margins should we be looking at. I mean are you comfortable with the current margin level of your past quarter or should we expect it to increase as the 13 Series roll out?

David Lee

I think, Daniel as Nan mentioned we're probably going in a tougher environment and also inside of the company's restructuring of the product lines. But hopefully, the complete product line will be available to the markets in the second half. And our higher ends, 13 Series will give the real contributions; follow Nan's predictions.

So, the margin situation as we expected will come back to more normal situations in the second half. But I would like to remind you that even though we are trying to continue to improve our technology and provide so called cost saving versions by lowering our manufacturing notes in the quarters to come, but the 50% and above is still our target for the gross margin.

In terms of the operating expenses we expect in future quarters, we continue to aggressively invest in R&D especially in recruiting the talents and other investments. So, we expect though be slowly a decrease of the so called operating margins in our next future quarters to come, but hopefully, the margin will become stabilized by the end of this year.

Daniel Amir - RW Hambrecht

Okay, thanks a lot.

David Lee

Thank you.

Operator

Out next question comes from the line of Tore Svanberg with Piper Jaffray. Go ahead.

Heidi Poon - Piper Jaffray

Hi, this is Heidi Poon calling in for Tore. I just want to dig a little bit deeper in the inventory situation. Could you give us a sense of either the component of the inventory at this level and also give us a sense of your distributors or inventory of your product.

David Lee

Heidi. The inventory in the first quarter of 2007 represented the effect of the first so called old inventory we have in terms of the 5 and 8 Series. We almost completely consumed in the second quarter or currently. The other factors of course like we mentioned we have found that in the previous years. We have faced the shortage and also the difficulty in adjusting the supply part to meet our customer needs in the second half of the year. So, our management has decided that we should have a so called more healthy and sufficient inventory to meet that need. So, currently around two months of that inventories turns is in our target, so, we are close to that level at this moment. And we should be able to maintain that level until the peak season to come.

Heidi Poon - Piper Jaffray

Okay. And can you also comment on your distributor's inventory of your product is there any concern that we should have in the channel?

David Lee

Currently, we still maintain and closely monitor the situation over there, but as we know and markets maintain the same as we expect that according to our business model as well as the market practice, the inventory level at our distributor's level as well as the manufacturing level is very, very low.

Heidi Poon - Piper Jaffray

Okay. So, just to clarify to make sure that I understand your prior comments is that you are expecting the inventory would basically go back to the more normal level in the second half because the inventory is already being consumed in Q2 is that correct?

David Lee

Yes. I think the inventory control would be the policy with the company. So, we are trying to maintain I think the -- at this moment as we can expect that 1 to 2 months of inventory would be healthy.

Heidi Poon - Piper Jaffray

Okay. Secondly could you also give a sense of in your press release you mentioned that you gained share during the quarter? Could you give a sense which segment you are referring to because some of your lower end competitors seem to be recording pretty good numbers?

Chung Hsu

Hi. This is a Chung. Basically we still have been a top player in the so called 1.5 inch and 1.8 inch color display shipment, that’s the way we refer to.

Heidi Poon - Piper Jaffray

Okay. So, are you seeing share loss in other segments or maybe you didn’t gain share in the higher end segments?

Chung Hsu

Well, yes as Nan mentioned earlier we didn’t -- actually the 2.0 inch and 2.4 inch segment is -- I mean that segment is actually the most vulnerable segment in the PMP market currently and since all of our products are ready in the first half. So we didn't gain the market share investment in their segment yet.

Heidi Poon - Piper Jaffray

Okay. But do you think that you have a pretty promising line up of design wins with Series 13, is that, what's targeting the segment?

Nan-Horng Yeh

Yeah, I think our TFT and our customer actually we received strong welcome and about study we are doing already.

Heidi Poon - Piper Jaffray

Are they in the 2 inch to 2.4 inch screen [pattern]?

Nan-Horng Yeh

2.0 inch to 2.4 inch.

Heidi Poon - Piper Jaffray

Okay. Do these include more design wins in the U.S. market as well?

Nan-Horng Yeh

Yes.

Heidi Poon - Piper Jaffray

Okay, great. So where do you see a Series 13 accounting for as a percentage of your volume by the end of the year?

David Lee

I think that’s we’ll probably see starting from the middle of this year, to ship massively, but there is a ramping up of process probably 5% to 7% of the shipments in the second half in terms of our total shipments numbers.

Heidi Poon - Piper Jaffray

Okay, great. Finally could you give us a sense of your ASP erosion for the year, now that Q1 has already dropped pretty significantly?

David Lee

Yes. As Nan mentioned in the presentation that we still expect the single product lines where it erodes according to our expectations in the rest of the year thus probably in the so called 5% per quarters erosion for the single product lines but as you know that we are currently adjusting our product mix we expect that the ASP erosions [effects] will play a slight, [effects] after the second half after our 13 Series and also we believe we have gained the stand of the dominance of the so called mid to lower ends segment.

Heidi Poon - Piper Jaffray

So on a blended basis, you are expecting what percentage of erosions then? You are expecting it to be flattish?

David Lee

I think the blended ASP we'll probably see more stable ASP’s situation starting from the third quarter.

Heidi Poon - Piper Jaffray

Okay great thank you very much.

David Lee

Thank you [Heidi].

Operator

Our next question comes from the line of Randy Abrams with Credit Suisse go ahead.

Randy Abrams - Credit Suisse

Yes thank you I wanted to understand on the competitive landscape where you are seeing the competition. Now is it still some from SigmaTel tell us that more the Asian competitors like [Aeluros] [SyncMOS] or some of the others

Nan-Horng Yeh

Well for the 2.0 and 2.4 segment so called mid to high end level is mostly Chinese competitor local Chinese competitor.

Randy Abrams - Credit Suisse

Okay.

Nan-Horng Yeh

And we are the dominant lead player in the 2 inch below.

Randy Abrams - Credit Suisse

Okay and when you talk about operating expenses ramping up, what percent you expect each quarter around excess starts to increase now?

David Lee

Randy, are you mentioning the components of the operating expenses?

Randy Abrams - Credit Suisse

Yes, for R&D and SG&A, I think you mentioned that it will start to increase now as a percent of sales a bit so just wanted to see magnitude.

David Lee

Yes, we believe it will maintain at the level of the 8% to 10% in the future quarters to come.

Randy Abrams - Credit Suisse

Okay and thanks for that. And the Actions capital, could you talk about the applications or capabilities that you are looking to move in to complement your existing business?

Nan-Horng Yeh

We are still focusing on the Actions PMP platforms, so just to enhance our product proliferations. So, such as the mobile TV for the PMP market came in for the PMP market, just as a product. So, currently we are still focusing on this. However, in the longer terms we were also considering to use our technology on our IP to diversify into new areas.

Randy Abrams - Credit Suisse

Okay, you mentioned TFT panel is one area that was tight in the first quarter and impacted shipments. Do you expect that to continue to be an issue especially as we go in to the high season?

Nan-Horng Yeh

It's very hard to say that. Possibly I believe TFT will be a little bit high for the whole year, we are very cautious on this. But because we are the dominant players, so we will be getting support from all the Taiwanese and Chinese TFT and color CSTN display manufacturers.

Randy Abrams - Credit Suisse

Okay, thanks a lot guys.

David Lee

Thank you Randy.

Operator

Our next question comes from the line of Adele Mao with Susquehanna Management. Go ahead.

Adele Mao - Susquehanna Management

Thank you, hi. I have a couple questions. Number one, can you provide us an update on the two large distributors you signed on at the end of '06. Have they helped you penetrate new customers in new regions?

Chung Hsu

Hi, Adele, I think those (inaudible) of --

David Lee

Around 5%.

Chung Hsu

Around 5% on revenue line now.

Adele Mao - Susquehanna Management

Two of them combined or each of them?

Chung Hsu

Two of them combined together.

Adele Mao - Susquehanna Management

I see, and where do you see that percentage on through the end 2007?

Nan-Horng Yeh

Probably I see they were maintained around its levels.

Adele Mao - Susquehanna Management

Okay, any new regions that you were not in before?

Nan-Horng Yeh

Our designing into this stage is getting and better and actually I think SigmaTel our competitor is fading out, from that business.

Adele Mao - Susquehanna Management

Okay great. And the other question I have you mentioned 20% to 30% year-over-year ASP decline, does that assume that your 13 Series chips is selling at current market price for -- short of competitive to your competitors solutions?

Chung Hsu

Well Adele, could you refer that question again?

Adele Mao - Susquehanna Management

Sure, I think in your presentation you guys mentioned 20% to 30% year-over-year ASP decline rate that short of your expectation. Are you assuming your 13 Series SoC's sort of because it’s ramping up shipment towards the end of the year, and I used to assume that ramp-up will be sold at current on competitors price.

Chung Hsu

Yes.

Adele Mao - Susquehanna Management

Okay, so in other words if your competitors starts to lower prices into inch and above we will probably see a more severe ASP decline towards the end of the year.

David Lee

I think there is a certain degree of natural price erosion that we’ve actually built into our model, and which is, I think looking back is kind of consistent with previous erosion trends back in 2006 [we come to].

Adele Mao - Susquehanna Management

I see. Okay, thank you.

Operator

Our next question comes from the line of Bill Lu with Morgan Stanley. Go ahead.

Bill Lu - Morgan Stanley

Yeah, hi, good afternoon. A few questions from me as well. You’ve just given us quite a bit of a ratio hoping that put it all together. What will be a realistic expectation for unit growth this year versus last year, because you talked about your first half being weak, but second half you are picking up. What kind of unit growth would you expect this year versus last year?

Chung Hsu

Well Bill, usually we do above 40%. I assume that in the first half would be about 60% in the second half.

Bill Lu - Morgan Stanley

Okay, so you think that is still realistic this year then?

Chung Hsu

We think it's at least above 20% growth entire unit.

Bill Lu - Morgan Stanley

20% half on half growth.

Chung Hsu

No, in terms of total unit.

Bill Lu - Morgan Stanley

Year-on-year growth, I am sorry. So 20% year-on-year growth '07 versus '06.

Chung Hsu

Yes.

Bill Lu - Morgan Stanley

Okay, great. And then after that I guess second half of the year roughly 5% to 7% of shipments will be from the Series 13.

Chung Hsu

Yes, that is an atrium projection right now, all focused.

Bill Lu - Morgan Stanley

Okay, great thank you. We talked about this new low end product that’s been introduced. How confident are you that this won’t cannibalize your existing business.

Nan-Horng Yeh

Well, actually that product will focus on the no display and outdoor use only is still is quite popular in some like several countries. So that product still is very competitive in that area for locals and some key, souvenir markets as well.

Bill Lu - Morgan Stanley

Okay, great. And then a couple of questions on the Series 13. Can you help me with your expectations for gross margins in the second half of the year and also, you talked about a Series 13 Plus, can you talk about the difference between that and the original Series 13 as well?

Nan-Horng Yeh

I see, as David mentioned our gross margin, we will focus and try to maintain at 50% above level. That's always our target and the major difference between 13 plus and the 13 is--

Calvin Lau

Is the full video functions that we are up to the European PC market even upper line 2.4 inch or one.

Nan-Horng Yeh

And other thing is H.264 for, but 13 Series is including MPEG4 only, audio 13 plus is a better video function such as MPEG4 plus H.264.

Bill Lu - Morgan Stanley

Okay, got it. And then last question from me, sales by geography, you said about the same as what we've seen before kind of half in Europe and China?

Nan-Horng Yeh

Yes.

Bill Lu - Morgan Stanley

Okay great, thanks very much.

David Lee

Thank you, Bill.

Operator

Our next question comes from the line of Jay Srivatsa with Roth Capital Partners. Go ahead.

Jay Srivatsa - Roth Capital Partners

Yeah, thanks for taking my question. Could you explain to us how the player market looks in the second half I know you have mentioned that first quarter you saw a lot of high end market growth. Can you tell us how you see the market developing in the second half? Do you expect high end to continue to grow or shift more into the low end set the stage for us please?

Nan-Horng Yeh

Well our company's strategy is to dominating the whole segment no matter high end or low end, technology or the PMP market.

David Lee

We believe that your higher end market provides a potential growth opportunity out there through time that’s the reason why we have devoted a lot of resources and efforts to developing a new chip I just mentioned like the 13 Series 13 plus. And we expect even though they are starting volume and would be relatively small to the so called mass markets in the mid to lower ends. But that would certainly provide the revenue growth opportunity over there for us. So going forward into the second half of this year we always use various aggressive strategy to promote this higher end segment to capture the growth opportunity over there.

Jay Srivatsa - Roth Capital Partners

May be you can share some insight there within terms of the existing suppliers into the high end market how do you hope to compete with them is it based on price or is it feature set of the chipsets what's going to differentiate your solution versus with the others?

David Lee

Well it’s overall competition, so of course our price perform ratio will be the best we think among all the competitors.

Nan-Horng Yeh

For example that the most popular products that we announced, we are now working closely with our customers at this moments as product model code 21.35. It's one of the 13 Series products. It will offer 30 frame per second and to support larger than 2.6 inches display. And that way this is very fast flash reading speed and also very low power consumption and very high DB ratio.

So that's a comparable strength competing with our current competitors. In price strategies, we will certainly start with very aggressive entry price to gain the market share over there. So, that -- probably strategy enable us to win the market share in that segment as well.

Calvin Lau

Those are the solution we can provide, it's so complete and we already coupled with many somewhere software so actually its demand is very strong. There also are some new competitor want to get into this high end market. We'll think on that a little bit dominant player in the market of -- in that segment.

Jay Srivatsa - Roth Capital Partners

Okay. Earlier on this year there were some issues with flash pricing falling and I think the recent checks into it indicate they're stabilized. Can you speak to us on what you see out there in terms of flash pricing and how that could impact your future quarters?

Nan-Horng Yeh

Well actually it's sad the flash prices always fluctuate quite dramatically, I mean the -- (inaudible) first quarter Q1 actually built flash price decline something like $7 to $4.5. However, by the end of Q1, the first price increased from $5 to $8. So nobody can protect your short-term [modulation]. Okay, and I think the flash price and the TFT module are the 2 main chip component of the MP3 systems. Therefore we -- as Nan mentioned we will always monitor those two component very carefully according to the market.

Jay Srivatsa - Roth Capital Partners

Okay. In terms of your 0.18 micron mix in the current quarter you said in the March quarter it was 58% what is your expectations for the June quarter and for the full year.

Chung Hsu

Well, after we, as David mentioned we will finish all the [5 and 80] product in June quarter. So, besides that everything else should be in 0.18 micron process. So, I will say above 90% all shipments is in 0.18 in June quarter.

Jay Srivatsa - Roth Capital Partners

In the June quarter. Okay

Chung Hsu

Yes.

Jay Srivatsa - Roth Capital Partners

Alright. Last question on the R&D, the increase was it surely due to head count or were there any tape-out charges, new product related charges. Can you talk to that?

Nan-Horng Yeh

Then there is the engineering, they had [current engineering]. And a little bit for the [tape-out] because we are going to introduce, maybe now we are (inaudible) product, so some taking out the [mix] in charges on that.

Jay Srivatsa - Roth Capital Partners

Okay. Maybe one last question what I know you talked about tax rate for fiscal '07, what do you expect to be the tax rate for '08.

David Lee

'08 is still 7.5%. After that we expect to have the rate of 15%.

Jay Srivatsa - Roth Capital Partners

Okay. Thank you.

David Lee

Thank you.

Operator

Our next question comes from the line of Timothy [Lamp] with Citigroup. Go ahead.

Timothy Lamp - Citigroup

Hi, speaking on behalf of Andrew, hi. Thank you for taking my next call. Quick question here on the inventory, can you comment a little bit on the inventory whether it is for the low-end product or this is for the high-end product beside the 5 and 8 Series?

David Lee

I think it's very consistent with our sales forecast, so there is some more in the so called mid to lower ends at this moment.

Timothy Lamp - Citigroup

So, you are expecting that to be using the second quarter and that number should be pretty much stay on the same level or?

David Lee

Yes. Currently around two months to turnover probably the right figures for the first half.

Timothy Lamp - Citigroup

And secondly, I have a question on in terms of Series 13, so the current tape-out I suppose, how do you see that, do you see any other issues that maybe making it to be a delay on the current projection?

Nan-Horng Yeh

Well tape-out is for 13 plus not for the 13. Our 13 Series, such as 21, 35 is ready already and we got so many design win and the demand is strong. So tape-out is for 13 Plus our new Series product high end one.

Timothy Lamp - Citigroup

Okay. Thank you. One more question you also comment earlier about the ASP, can you comment on ASP probably you see in second quarter currently?

David Lee

We believe, we still maintain our view on the no more erosions going forward, even in the second quarter, so the current product lines we have around 5% to 7% erosions, as we expected in the second quarter.

Timothy Lamp - Citigroup

Great, thank you very much.

David Lee

Thank you, Tim.

Operator

Our next question comes from the line of Li Tang with Pacific Crest Security. Go ahead.

Li Tang - Pacific Crest Security

Thank you. You talked about the R&D effort and increasing R&D budget, do you have any plan to expand outside of the MP3 SoC market?

Nan-Horng Yeh

Currently we don’t have plans like that, but we have studied all of its abilities. So, currently we still focus on the PNP platform. We well think that the MP3 we’re diversified into audio, video and the gaming and the mobile TV. So, as I mentioned many times, we believe MP3 cannot sync just audio product, in the longer term it will be a personal entertainment center, it’s a platform.

Li Tang - Pacific Crest Security

Alright, and you talked about your price performance ratio being your differentiation to some of your lower end competition. What kind of cost advantage do you have, when you migrate to 0.1 from 1.3 micron, you think you'll be a half generation or a generation ahead of your competition by then?

Nan-Horng Yeh

Yes, and we believe so. We are very focused on the cost savings, we have our own P&L, we have our [authentic] library, and we have our own in-house testing, so, the whole cost structure we are stronger than our competitors.

Li Tang - Pacific Crest Security

Alright, and also you talked about your unit gross projection maybe 20% in 2007. What's your view of the overall market gross and some of your competition commentary is like market going to grow 30% in 2007, what's your view on that?

David Lee

Well actually our internal view is that market's probably still going to grow about 20%.

Li Tang - Pacific Crest Security

Still going to grow 20%. But --

David Lee

20% kind of little bit too aggressive like sort of crossing of that probably talking about iPhone's and stepping into the PNP but that's a totally different application.

Li Tang - Pacific Crest Security

Okay, and so the ASP decline 20% to 30%, is the ASP decline mostly due to the mix of the more lower end, due to the higher end gain of share or its because of the more intense price competition at lower end?

David Lee

The price erosion estimate which we shared here is our view on the current products, single product lines. So, we expect in this that 9 Series our main stream product at this moment will have that kind of price erosions in terms of range, but going forward as our increase, our higher ends products, higher ends in the 9 Series plus 13 Series in to the second half of this year. We have the blended ASP figures, we expect it to be stabilized after the third quarter.

Li Tang - Pacific Crest Security

Okay got it. Thank you very much.

David Lee

Thank you.

Operator

Our final question of the evening comes from the line of Craig Berger with Wedbush. Go ahead.

Craig Berger - Wedbush

Hi this is Stephen for Craig. I just had a quick question, few questions. One was regarding the share count. What are we thinking in terms of share count exiting '07?

David Lee

Currently we don't expect the share counts to change at this moment.

Craig Berger - Wedbush

Okay. And did you provide the segment, revenue segment or segment revenue by maybe microcontrollers and or else can you provide that as well?

David Lee

No. Currently we don't have that product line.

Craig Berger - Wedbush

Okay. Okay great thank you.

Operator

I would now like to turn the call over to Nan Yeh the CEO for closing. Please proceed sir.

Nan-Horng Yeh

Thanks again for joining us on today's call. We are pleased to update you on our progress with our business initiative and to discuss the opportunities we see in this exciting market. We look forward to updating you on our progress next quarter and hope to see many of you when we present the upcoming conference in the U.S. thank you.

Operator

Ladies and gentlemen thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect.

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