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

Q1 2012 Earnings Call

May 8, 2012 5:30 PM ET

Executives

Lisa Laukkanen – The Blueshirt Group

Zhenyu Zhou – CEO

Nigel Liu – CFO

Analysts

Rick Fearon – Accretive Capital Partners

Welcome to the Actions Semiconductor first quarter 2012 earnings conference call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, Tuesday, May 8, 2012.

I would now like to turn the conference over to Lisa Laukkanen of The Blueshirt Group. Please go ahead.

Lisa Laukkanen

Good afternoon and thank you for joining us on today’s conference call to discuss Actions Semiconductor’s first quarter 2012 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 Business Development and Investor Relations.

After the market closed in the U.S. today, Actions issued a press release discussing the results for its first quarter ending March 31, 2012. 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 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 I’d now like to turn the call over to Dr. Zhenyu Zhou.

Zhenyu Zhou

Thank you for participating in Actions’ earnings conference call. We appreciate your continued interest in the company. I am pleased to be able to share with you an update on our first quarter performance as well as discuss our strategy for 2012.

Later on the call, Nigel Liu, CFO will discuss financial results for the first quarter. I will be available for Q&A portion of the call along with Nigel and Chung Hsu, Actions’ Director of Business Development and Investor Relations.

And now, for an update of our business. We were pleased to report revenue growth 15% year-over-year despite typical seasonality and fewer working days in the quarter.

In the first quarter of 2012, Actions revenue was $10.7 million and net loss was $0.65 million, or $0.00 per ADS. Gross margin for the first quarter of 2012 was 34.9%.

Our product mix shifted to a higher percentage of revenue from our more value-oriented products such as automotive. However we still maintained our leading market share position in mainstream portable video and portable audio products.

We are proud of our market leadership position and believe this provides a strong platform for growth.

Actions holds the dominant market share in non-Apple audio products and video players with gaming and video capture functionality and we are continuing to rapidly gain market share in advanced high definition portable video market. We saw significant increase in shipment in our HD portable video products during the first quarter.

We continue 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 largely focus on penetrating and gaining traction in the mobile internet-enabled multimedia market.

As we noted last quarter, we believe the most important growth segment for Actions in the low-end tablet market. According to recent reports, China-based wide box tablet market has ramped up their combined monthly shipment to more than 3 million units and total shipments of the tablet by all markers, I expect them to top 50 million units in 2012.

We are excited about the growth potential in the product category. Following the successful shipment program, we recently launched our ATM701x product family targeting the tablet market as planned. The ATM701x family supports the latest version of the Android OS, also known as Ice Cream Sandwich. The ATM701x is commencing volume shipments to selected customers this month.

As we move through the year, we will continue to invest in R&D for advanced products and we will look to lower operation expenses. Creating long term shareholder value will continue to be a top priority for the company.

In the first quarter we spent approximately $1 million on the share repurchase program compared with $1.2 million in the fourth quarter. As of March 31, 2012, the company had invested a total of approximately $42.5 million in the program representing approximately 18.3 million ADS shares. Management and the Board will continue to evaluate opportunities to enhance shareholder value including alternatives to the current buyback program. Despite the challenging economy, our portfolio diversification and international adverts have allowed us to steadily grow the shipment volumes of our low-end advanced product segments. And we expect to see further opportunities for growth in these areas in 2012.

And now for a detailed look at each category. Portable audio; during Q1 we maintained our leadership position in the mainstream audio and boom box market category. Volume shipments of our audio boom box products increased in the first quarter. We continued to secure design wins for our boom box products with large branded customers in China, and we are beginning to penetrate international branding customers.

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

Portable video; video continues to be a key category for Actions. While overall shipments in the video category decreased in the first quarter, shipments of our advanced HD products increased during the quarter.

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 second quarter. As we move through 2012, we are focused on increasing our contributions from our new advanced products in the video category.

Mobile internet devices or media tablet; as mentioned earlier, in April we launched the ATM701x product family, a 1.2 gigahertz CPU-based solution targeting the sub-$100 7-inch capacitive touchscreen tablet market. With a speed of 1.2 gigahertz, a high performance 3D GPU and full spec 1080p video encoder and decoder engine built-in. ATM701x is well suited for the tablet market as well as other Android based application like game console, internet TV box, and automobile applications.

The product has been well received to date. We commenced the volume shipment in May and with several customer and expect to begin seeking revenue contribution from the new product in the second half of 2012.

During the first quarter, 0.15 micrometer process technology accounted for the majority 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 the second half of 2012.

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 then we are aggressively moving towards launching 40LP and 28LP nanometer advanced process in 2012 for our tablet products.

In summary, we are pleased with our first quarter performance and we believe we are well positioned to achieve 15% to 20% revenue growth for the year as we shift our focus to high end products.

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

Nigel Liu

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

For the first quarter ended March 31, 2012 we recorded revenue of $10.7 million compared to $12.3 million in the fourth quarter of 2011.

Our gross margin for the first quarter was 34.9% compared to 37.6% for the prior quarter. The decline in gross margin was primarily due to the change in our product mix.

For the first quarter, total stock-based compensation expense was 0.5 million compared to 0.16 in the fourth quarter.

R&D expenses was $5.8 million or 53.9% of revenue for the first quarter compared to $6 million in the fourth quarter. We anticipate our R&D expenses 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 expenses was $1.8 m in the first quarter or 50.5% of revenue compared to $2.5 million in the fourth quarter. (inaudible) G&A expenses in the first quarter was due to the annualized (inaudible).

Sales and marketing expense was $0.2 million in the first quarter or 2.3% of revenue compared to $0.3 million in the fourth quarter.

We continue to tightly manage expense levels in many categories and maintain a hiring freeze across non-engineering functions and a salary cut at the executive and management level.

Operating loss was $4.4 million for the first quarter of 2012 compared to operating loss of $3.9 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 China’s talent market, we expect our operating expense denominated in Chinese yen to increase sequentially.

Net other income for the first quarter was $0.5 million as a net result of foreign exchange gain. Other income of $0.3 million for the fourth quarter was also related to a net foreign exchange gain. Interest income was $3.4 million for the first quarter, down slightly from $3.5 million in the fourth quarter.

Interest income was $0.06 million for the first quarter compared to income before tax of $0.3 million in the fourth quarter. Net income tax expense was $0.5 million for the first quarter compared to income tax expense of $0.03 million in the fourth quarter.

Net loss attributable to Actions Semiconductor on U.S. GAAP basis for the first quarter of 2012 was $0.6 million or $0.01 per diluted ADS compared to a net income of $0.1 million or $0.00 per diluted ADS for the fourth quarter of 2011.

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 $221.6 million as of March 31, 2012 compared to $220.6 million as of December 31, 2011.

Of the $221.6 million total, $23.8 million was in cash and the short-term interest-bearing investments that was generally issued by large domestic banks in China for terms no more than three months and can be redeemed at any time. $187.8 million was in trading securities and marketable securities, both current and non-current, which was principal guarantees or pledged investments with high interest rates and minimum terms of three months. 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 first 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 first quarter. Accounts receivable includes amount due from related party as well as amount due from equity method investees.

Inventories was 7 million at the end of the first quarter, down from 7.5 million at the end of the prior quarter. Overall inventory level at the end of the first quarter was directly correlated with comparatively higher shipment against historic performance in the fourth quarter.

We continue to buy back shares, spending approximately $1 million on the share repurchase program during the first quarter compared with $1.2 million in the fourth 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 March 31, 2012 the company had invested approximately a total of $42.8 million in the program, representing approximately 18.3 million ADS shares.

Now, turning to our outlook. Our guidance for the second quarter of 2012 is revenue in the range of $12 million to $13 million. We expect gross margin for the second quarter will be approximately 36%.

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 with Accretive Capital Partners.

Rick Fearon – Accretive Capital Partners

Zhenyu, you had mentioned lowering operating expenses. I wondered if you could share any updates on this initiative.

Zhenyu Zhou

Yes, the most important thing for lowering operating expenses comes evaluating in which are we can have certain optimizing of expenses. For the first quarter we have streamlined our R&D team into a, I can call, (inaudible) or business units into audio/video and tablet product line. Based on that, we are very aggressively trying to optimize our work force as well as other operating expenses. For other detail, you will start to see this contribution probably starting from the second half of the year.

Rick Fearon – Accretive Capital Partners

Okay, great. So that will be an effort to continue streamlining R&D and focusing it as you mentioned on the three product categories and is there really any room on the SG&A side for cuts or is that pretty much – do you expect that to be sort of fixed at this point?

Zhenyu Zhou

Well, I don’t think I can detail the numbers here but we will try our best.

Rick Fearon – Accretive Capital Partners

Okay. And I wondered if you or Nigel might be able to provide a little more granularity on the various product segments. I know last conference call you had provided a little bit more detail with respect to each of those product categories. Now wondered if you might be able to provide sales for example gross margins and perhaps expected growth with each category.

Zhenyu Zhou

Typically we don’t provide a breakdown into detail categories. I can give you a basic idea. Obviously tablet right now is close to zero and it will be a substantial growth through the year. And the audio and video, still the majority of our – vast majority of our topline and roughly they are 50-50.

Rick Fearon – Accretive Capital Partners

Okay. And would you expect tablets to be a similar gross margin as what you have historically been able to achieve with the other products or are you expecting the initial rollout of the ATM701x as a higher margin product?

Zhenyu Zhou

Typically as consumer products, we will enjoy higher margin at the beginning. So there will be higher margin than our every target. It eventually goes down as expected as you know.

Rick Fearon – Accretive Capital Partners

Okay. And how large would you envision the ATM701x product segment to be on an annual basis, let’s say a year from now?

Zhenyu Zhou

At this moment, I cannot share with that number but the total (ten) – of this market ATM701x and its derivative can address – if we – based on the March and April (ten), its 3 to 5 million units a month, that’s the total (ten).

Rick Fearon – Accretive Capital Partners

Okay, and the average selling price is?

Zhenyu Zhou

Being in the low end, somewhere around $5 and the high end somewhere around $10.

Rick Fearon – Accretive Capital Partners

Okay.

Zhenyu Zhou

(Inaudible) market than our traditional audio or video product.

Rick Fearon – Accretive Capital Partners

So in fact that product category alone could double the company’s –

Zhenyu Zhou

It could or more.

Rick Fearon – Accretive Capital Partners

Great. Well, that’s exciting. And Zhenyu, I know it’s been a couple of quarters since you assumed the CEO role, but just wondered if you could, if you had given any more thought to accelerating the stock repurchase program and in particular contemplation of Dutch auction tender. And again, with $230 million of cash and equivalents that has been fairly steady for the past three plus years and our market capital of $117 million, you would be getting close to an immediate 100% cash on cash return on your investment. And it’s just difficult to imagine a more attractive investment on behalf of shareholders.

Zhenyu Zhou

As you noticed, it’s actually my first quarter as CEO. We have heard this feedback quite a while. As we stated in our earnings release, we are continuing to explore alternatives as buyback program and we will continue to do so. At this moment, I still cannot give you a clear schedule or strategy yet. (Inaudible) auctions under evaluation and under serious look.

Rick Fearon – Accretive Capital Partners

Well, it’s terrific that as the new CEO that that is your perspective, that you are seriously considering something to accelerate the buyback because it really is just an extraordinary investment and I can’t imagine anything more accretive for shareholders than buying your stock on behalf of shareholders.

And just one other question, I wondered if you and/or Nigel have any plans to visit the U.S. and meet with shareholders in 2012.

Zhenyu Zhou

Yes, I will make a visit to – two or three visits every year to U.S. My next visit is scheduled in June to July time. So I believe we can talk about meeting or a phone call, whatever that will be convenient for you and other shareholders.

Rick Fearon – Accretive Capital Partners

I appreciate. Please do let me know the dates when you’ve set your plans and I do look forward to meeting. Thanks so much and nice work and congratulations on a nice quarter.

Operator

Thank you. And I show no further questions at this time. Please continue. Gentlemen, there are no further questions at this time, please continue. Gentlemen, please continue with closing remarks.

Zhenyu Zhou

Thank you again for joining us today’s earnings call. We appreciate your interest in and continued support in Actions. Thank you.

Operator

Ladies and gentlemen, that concludes our call for today. Thank you very much for your participation. You may now disconnect.

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