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Executives

Ellen Davis – The Blueshirt Group

Zhenyu Zhou – Chief Executive Officer

Nigel Liu – Chief Financial Officer

Analysts

Rick Fearon – Accretive Capital Partners

Actions Semiconductor Co., Ltd. (ACTS) Q2 2012 Earnings Call August 7, 2012 5:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Actions Semiconductor second quarter 2012 earnings conference call.

[Operator Instructions]. This conference is being recorded today, August 7 of 2012.

And I would now like to turn the conference over to Ellen Davis with the Blueshirt Group.

Ellen Davis

Good afternoon and thank you for joining us on today's conference call to discuss Actions Semiconductor's second 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 Investor Relations.

After the market closed in the US today, Actions issued a press release discussing the results for second quarter ended June 30, 2012. 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 415-217-7722 and we will email you a copy.

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

And now I'd like to turn the call over to Dr. Zhenyu Zhou.

Zhenyu Zhou

Thank you for participating in Actions' earnings conference call. We appreciate your continued interest in the company. I'm pleased to be able to share with you an update on our second quarter performance as well as discuss our strategy for the second half of 2012. Later on the call, Nigel Liu, CFO, will discuss financial results for the second quarter. I will be available for the Q&A portion on the call along with Nigel and Chung Hsu, Actions Director of Investor Relations.

And now for our update on our business. We were pleased to report revenue growth of 20.7% year over year and 17.8% from last quarter. In the second quarter of 2012, Actions revenue was $12.6 million and net loss was $0.56 million or $0.01 per ADS.

Gross margin in the second quarter increased 37% from 34.9% in the first quarter. Our more value-oriented solutions such as boom box products continued to comprise the largest portion of our product mix during the quarter. In addition to the continued strength in the boom box segment, we maintained our leading market share positions in the mainstream portable video and portable audio products.

We are proud of our market leadership positions and continue to believe it provides a strong platform for growth. Actions owns the dominant market share in non-Apple audio products and video players with gaming and video capturing functionality, and we continue to gain market share in the advanced high-definition portable video market. Our growth initiatives remain largely focused on penetrating and gaining tractions in the mobile internet enabled multimedia market. As we move through the second half of the year, we will continue to invest in R&D for advanced products and we'll maintain prudent management of our operating expenses.

Creating long-term shareholder value remains a top priority for the company. In the second quarter we spent approximately $1.4 million on the share repurchase program, compared with $1.0 million in the first quarter. As of June 30, 2012, the company had invested a total of approximately $43.9 million in the program, representing approximately 19.1 million ADS shares, which is close to the previously approved 20 million ADS cap of the existing buyback program. Therefore we are pleased to announce that today the Board approved an increase of 10 million ADS to the existing buyback program.

During the second quarter, we faced the additional headwind of RMB exchange rate volatility and recorded an exchange rate loss. Although we anticipate continued RMB volatility for the remainder of the year, by leveraging the RMB-denominated yields, we still enjoy a high return from our RMB-denominated assets.

And now for a detailed look at each category. Portable audio, during the second quarter we maintained our leading positions in the mainstream audio boom box market category. Volume shipments of our audio boom box products increased in the second quarter. We continue to secure design wins for our boom box products with large branded customers in China and we are beginning to penetrating international branded customers. In the second quarter, our sales to the mainstream segment of the MP3 market serving the non-display, mono-display and small color display media products continued to maintain the leading position in the market share of this category.

Portable video, overall shipments in the video category including our standard definition D1 and high-definition HD PMP and gaming products decreased in the second quarter as the market moved towards adoption of tablets. Video continues to be a key category for Actions, and as we move through the second half of 2012, we are focused on increasing our contributions from our newer advanced products in the video category.

Mobile internet devices or media tablets, as we have noted over the past few quarters, we believe the most important growth segment for Actions is the low-end tablet market. We announced the launch of our ATM701x product family targeting the tablet market last quarter and we commenced the shipment in May. This is our first product offer, planned family of products, addressing the tablet market. The ATM701x uses a single-core CPU, and we have developed plans for following -- follow-on tablet products using advanced semiconductor process with single [view] or core CPU.

While we are still in the early stage of customer adoption of our tablet product, we are seeing progress on ramping shipment volumes. We anticipate an increase in contribution from our tablet product in the third and fourth quarters. However, as is often the case in any new product segment, the market dynamics are fluid and we believe the adoption cycle for our solutions could extend beyond our early expectation for the market.

In July, we announced our collaboration with MIPS Technologies to bring the W1 tablet from China-based tablet manufacturer Ramos to market this summer in India, Latin America and Europe. We remain excited about the long-term growth opportunities for our family of tablet products.

During the second quarter, 0.15 micrometer process technology accounted for the majority of our audio shipment volume and current inventory. We're migrating the process for mainstream product from 0.15 micrometer to 0.14 micrometer, which we expect will benefit the company's gross margin in the second half of 2012. As planned, our advanced high-definition products are using 0.11 micrometer process. Furthermore, we are launching our advanced product using 55 nanometer process, and we are aggressively moving towards launching 40 nanometer, 40 LP and 28 LP advanced process in 2012 for our tablet products.

In summary, we're pleased with our second quarter performance. Although we experienced headwind in currency fluctuations during the quarter, leading to a loss, our business fundamentals are improving. Despite the global macroeconomic environment, we continue to believe we are well-positioned to achieve revenue growth of 15% to 20% for this year.

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

Nigel Liu

Thank you, Dr. Zhou. As a reminder, our financials are reported in accordance with US GAAP.

For the second quarter ended June 30, 2012, we reported revenue of $12.6 million compared to $10.7 million in the first quarter of 2012. Our gross margin for the second quarter was 37% compared to 34.9% with the prior quarter. The increase in gross margin was primarily due to the change in our product mix.

For the second quarter, total stock-based compensation expense was $0.4 million compared to $0.5 million in the first quarter. R&D expense was $5.6 million or 44% of revenue for the second quarter, compared to $5.8 million in the first quarter. We anticipate our R&D expense to continue to represent a high percentage of revenue as we continue to invest R&D resource in high-end new product development.

G&A expense was $2.1 million in the second quarter or 16.6% of revenue, compared to $1.8 million in the first quarter. Sales and marketing expense was $0.3 million in the second quarter of 2.4% of revenue, compared to $0.2 million in the first quarter. We continue to tightly manage expense level in this category by [inaudible] the efficiency of current workforce and optimize our working process.

Operating loss was $3.2 million for the second quarter of 2012 compared to operating loss of $4 million for prior quarter. Although we need to provide competitive compensation to attract engineering talent, we spent our operating expense to remain at level by optimizing our workforce and the working process.

Net other loss for the second quarter was $0.4 million due to a negative foreign exchange impact. Other income of $0.5 million for the first quarter was related to a net full-year exchange gain, interest income was $3.1 million for the second quarter, down slightly from $3.4 million in the first quarter.

Loss before tax was $0.5 million for the second quarter compared to loss before tax of $0.06 million in the first quarter. Net income tax expense was $0.04 million for the second quarter compared to income tax expense of $0.5 million in the first quarter.

Net loss attributable to Actions Semiconductor on a US GAAP basis for the second quarter of 2012 was $0.56 million or $0.01 per diluted ADS, compared to net loss of $0.65 million or $0.01 per diluted ADS for the first quarter of 2012.

Now, moving to the balance sheet, cash and cash equivalents together with trading securities and both current and non-current marketable securities totaled $218.9 million as of June 30, 2012 compared to [$231.6 million] as of March 31, 2012. Of the $218.9 million total -- sorry, $58.9 million was in cash and short-term 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. $116 million was in trading securities and marketable securities both current and non-current, which was principal guarantee or pledged investments with high interest rate and minimum terms of three months. These marketable securities were mainly issued, managed and guaranteed by top-ranking state-owned financial institutions in China.

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

Accounts receivable are $2.4 million at the end of the second quarter of 2012 compared to $2 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.

Inventory was $10.6 million at the end of the second quarter, up from $7 million at the end of the prior quarter. Our higher interest rate level at the end of the second quarter compared with the prior quarter continues to be a result of our strategy enrichment with [inaudible] to secure [inaudible] and the capacity for certain products and also correlated with the [inaudible] high shipment volume and more [inaudible] products ramping up in the fourth quarter.

We continue to buy back shares, spending approximately $1.4 million on the shares repurchase program during the second quarter, compared with $1 million in the first quarter. Our repurchase activity remains constrained by trading volume and the blackout periods for our 10B-18 program as well as limited activity in block trading.

As of June 30, 2012 the company had invested approximately a total of $43.9 million in the program, representing approximately 19.1 million ADS shares.

And now, turning to our outlook. Our guidance for the third quarter of 2012 is revenue in the range of $15.5 million to $16.5 million. We expect gross margin for the third quarter to be approximately 77%.

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

Zhenyu Zhou

Operator?

Nigel Liu

Hello?

Zhenyu Zhou

Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. We have a question from Rick Fearon with Accretive Capital Partners. Please go ahead.

Rick Fearon – Accretive Capital Partners

Hello, Zhenyu and Nigel.

Zhenyu Zhou

Hi, Rick.

Rick Fearon – Accretive Capital Partners

Nice work last quarter, the results look great.

Zhenyu Zhou

Thank you.

Rick Fearon – Accretive Capital Partners

Just a few quick questions on the financial statements. First, on the balance sheet, Nigel, I just -- I may not have heard exactly what you had mentioned, the $11.1 million of marketable securities that are classified as long-term assets were comprised of?

Nigel Liu

Yes. Actually [inaudible] is typically defined by US GAAP and marketable securities should be around one year, a little below one year. Actually the terms of most of our investments is about three months to 15 months. That's our situation.

Rick Fearon – Accretive Capital Partners

And are those also with the state-owned banks guaranteed?

Nigel Liu

Yes, [most of them].

Rick Fearon – Accretive Capital Partners

Okay. And when you say long term, GAAP of course is 12 months or greater, what is the duration of those securities?

Nigel Liu

Excuse me. You mean what?

The terms of our investments are 15 months, only 15 months.

Rick Fearon – Accretive Capital Partners

Okay.

Nigel Liu

Normally the term will be three months through 15 months.

Rick Fearon – Accretive Capital Partners

And what sort of yield are you realizing on those securities just in nominal terms?

Nigel Liu

I think you should understand the interest rate in China is decreasing [inaudible] of our investments, interest rate should be ranging about 6% to 8%.

Rick Fearon – Accretive Capital Partners

Wow. So it makes a lot of sense to the extent you need currency-denominated in US dollars to actually borrow in the US and keep --

Nigel Liu

Right. That's the reason why. Actually the borrowing from the US dollar interest rate is much lower than the return in China, so that's the reason why we have the US bank borrowing.

Rick Fearon – Accretive Capital Partners

Okay. Are there other opportunities to borrow against assets in the United States?

Nigel Liu

Actually we keep trying to leverage this opportunity, but sometimes it's getting difficult. There are limitations [inaudible] the bank, so we work to try.

Rick Fearon – Accretive Capital Partners

And when you repurchase stock, are you having to convert to US dollars first, or is that -- can you skip that step?

Nigel Liu

Yes. Actually yes. We actually have, you know, we have the US dollar on hand and actually invest [inaudible] to the share buyback program.

Rick Fearon – Accretive Capital Partners

Okay. Thank you. And on the income statement, did I hear correctly that the other expense of $445,000 versus the $1.3 million other income was fully related to the exchange rate differential?

Nigel Liu

Yes, that's right.

Rick Fearon – Accretive Capital Partners

Okay. And when you talk about the headwinds facing the company, do you anticipate that other expense line item being significantly more than that next quarter?

Zhenyu Zhou

No, we don’t think so. I think this is just a short-term fluctuation, and you ask all the right questions, we do expect this year the exchange rate to go up and down a little bit, maybe over the full probably close to flat.

Nigel Liu

Yes.

Rick Fearon – Accretive Capital Partners

Great. It looks like you had some good success reducing the operating expenses on both an absolute basis and even more significantly as a percentage of sales. Do you expect this trend to continue? I'm guessing that you've probably wrung what you can out of that, but do you think the operating expenses will be held relatively flat as sales increase?

Zhenyu Zhou

I think it's more or less flat as sales increase.

Rick Fearon – Accretive Capital Partners

Great. So there's a decent amount of operating leverage in particular if you're able to maintain a 37% gross margin level?

Zhenyu Zhou

That's right. You know, overall, the macro environment in China, the labor expenses actually goes higher. And the investment for the advanced products like tablet is also enormous. So while investing in future products and facing the labor cost goes up, we have to do a lot of work in order to make the expense to be flat. So, yes, we try to maintain the expense to be flat while [inaudible].

Rick Fearon – Accretive Capital Partners

Well, nice work on that, and it seems, certainly if you're doubling your sales, that's a very reasonable operating expense line.

And just with respect to the ATM701x, is it -- would you guess that it may be on track to double sales in 2013, to double overall company sales? Or could the revenue growth be more significant than that?

Zhenyu Zhou

That I haven't clarified, okay. There's a potential to double the company sales due to the penetrating of tablet market. But to penetrate such a large market not dependent on one single chip like ATM 1x, we have to develop ATM702x and ATM703x and so on. So, ATM701x is just a very first product to address this market. So there's still a potential for significantly increase our sales due to the success or potential success in the tablet market, but we shouldn't expect ATM701x alone will double the sales of the Actions revenue.

Rick Fearon – Accretive Capital Partners

Right. And so that's the additional product introductions that you were talking about.

Zhenyu Zhou

That's right, that's right.

Rick Fearon – Accretive Capital Partners

And is the ATM product family, this ATM700 product family suited to compete with the Apple TV when that hits the market?

Zhenyu Zhou

Well, it's a different segment, just like the tablet, okay? The tablet itself is not directly compete with Apple iPad either. It address like third-world country or China's low-end market. It is true this such SoC can be used in an internet radio or internet TV or internet movie enabled so-called OTT box. There are customer design and we are shipping such product with not a very high volume, but I wouldn't call it compete with [ITV]. It is a product with similar functionality, but usually the content is a very highly-regulated area in China, so a TV -- internet TV related products like OTT still remain to be seen its potential in the China market.

Rick Fearon – Accretive Capital Partners

That makes sense. So you're really segmenting the market, is what you're doing, and trying to provide a product at the lower end.

Zhenyu Zhou

That's right, that's right.

Rick Fearon – Accretive Capital Partners

Great. Well, yeah, two more questions. One, you probably heard once or twice before, and just curious what your thoughts are at this point and conclusions about accelerating the stock repurchase program via the Dutch auction tender. It is encouraging, I'll add, that you and the Board have increased the share repurchase program by 50%. That's great news. Just curious about your conclusions on something like a tender offer.

Nigel Liu

Well [inaudible] actually we have made a proposal to our Board of Directors, and the Board of Directors decided this is the best option and the best cost-effective [inaudible] share buyback to the market.

Rick Fearon – Accretive Capital Partners

Okay.

Nigel Liu

And [inaudible] to increase additional 10 million shares.

Rick Fearon – Accretive Capital Partners

Okay. I guess just as the results start being realized, that -- and the price starts moving, you kind of lose the opportunity, and I suppose we'll see what happens this quarter, but my guess is that the stock price will be increasing substantially. So, again, I would encourage you, as you think about the costs of something like a tender offer, you might also consider what happens if you wait and the price moves up by 50% or so.

Zhenyu Zhou

Yes. We will definitely consider. Thank you.

Rick Fearon – Accretive Capital Partners

Thanks. And then just the last question, and that's, would love to see both of you, if possible, in the United States sometime soon. Are there any plans to attend upcoming US investor conferences?

Zhenyu Zhou

Yeah. We can discuss about that later. We continue to discuss this with our IR firm about a potential plan, yes.

Rick Fearon – Accretive Capital Partners

Well, terrific. And just once again, congratulations on a great quarter, and really excited about the future.

Zhenyu Zhou

Yes. Thank you, Rick.

Nigel Liu

Thank you.

Rick Fearon – Accretive Capital Partners

Thank you.

Operator

Thank you. [Operator Instructions].

And at this time I am showing no further questions in my queue. I'd like to turn the call back over to management for closing comments.

Pardon me, did you have any closing comments?

Zhenyu Zhou

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

Operator

Thank you. Ladies and gentlemen, if you would like to listen to a replay of today's conference, you may do so by dialing 303-590-3030 or 1-800-406-7325 and entering an access code of 4553189 pound. We thank you for your participation, and at this time, you may now disconnect.

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