The Lesson Learned From Actions Semiconductor's Q2 2012 Results

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 |  About: Actions Semiconductor Co., Ltd. (ACTS)
by: Maxsoar

Actions Semiconductor Co. Ltd. (NASDAQ:ACTS), reported its second quarter 2012 results on August 7, 2012. The results were close to my estimates in my previous article about the stock. Revenue came in slightly lower than I forecasted, but gross margin was exactly as I predicted at 37%. As I said in my previous article, the second quarter was a rare occasion when the management team's estimates closely matched the actual status of ACTS's business operations. Still, the management team exceeded its estimates again. Updated comparisons of the management team's estimates and actual results for the past 10 quarters, including the just-concluded second quarter of 2012, are shown in Table 1.

 

 

Table 1: Estimated vs. Actual Revenues and Gross Profits over the Past 10 Quarters

(All Numbers in $1,000s)

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Revenue: Management Estimate

7,000

9,000

9,500

9,000

8,000

10,500

12,500

12,500

9,500

12,500

Revenue Actual

7,890

9,662

9,298

10,735

9,366

10,477

15,349

12,293

10,735

12,643

Gross Profit:

Management's Estimate

2,450

3,150

Less than 3,800

3,600

3,200

4,200

5,000

5,000

3,420

4,500

Gross Profit Actual

3,122

3,824

3,724

3,988

3,666

3,971

6,232

4,619

3,747

4,679

Click to enlarge

For the third quarter of 2012, I think the management team's revenue estimate is-once again-way too conservative. The high end of forecast range is $16.5 million, implying only 7.5% year-over-year growth from third quarter of 2011. As my first article for ACTS and Markus's article explained, the market for Android tablets and PMP gadgets in China is already huge and growing fast right now. ACTS's new Android and PMP products that just debuted in China have received great reviews and are extremely popular in China. The most recent Android tablet product using ACTS's ATM7019 chipsets-Miumiu W1-debuted in July and is being reported by many online electronic magazines in China.

In the earnings conference call on August 7, the management team reaffirmed that it expects revenue to grow 15%- 20% year over year in 2012. Based on these reasons, I don't see why its revenue should not grow at least 16% in the hottest season for electronic gadgets in China. My quantitative model calls for revenue of close to $18 million and gross profit of $6.77 million for third quarter of 2012. Second-quarter results did suggest that the management team's effort in cutting operating expenses is reaping fruits slower than I expected. Therefore, I have raised operating expenses for the next several quarters in my forecast. Table 2 shows my updated forecast of the company's financials from Q1 2012 to Q4 2013. Note that the numbers for Q1 and Q2 2012 are actual results.

 

 

Table 2: Actions Semiconductor Pro-Forma Financials for Year 2012 and 2013

(All Numbers in $1,000s except per share numbers and ratios)

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Revenue

10,735

12,643

17,805

15,366

13,956

17,068

24,927

21,513

COGS

6,988

7,964

11,039

9,373

8,373

10,070

14,458

12,262

Gross Profit

3,747

4,679

6,766

5,993

5,582

6,998

10,469

9,250

                 

Opt Exp

7,735

7,835

7,700

7,600

7,500

7,500

7,500

7,500

Opt Income

-3,988

-3,156

-934

-1,607

-1,918

-502

2,969

1,750

                 

Interest Income

3,447

3,118

3,063

2,901

2,828

2,732

2,658

2,622

Other Income/Expense

428

-483

-483

-483

-483

-483

-483

-483

Income Before Tax

-113

-521

1,645

810

427

1,747

5,144

3,889

                 

Income Tax

536

38

541

180

558

210

838

278

Net Income

-649

-559

1,104

631

-131

1,537

4,307

3,612

                 

ADR Shares Outstanding

68,987

69,042

67,042

65,042

63,042

61,042

59,042

57,042

EPS

-0.009

-0.008

0.016

0.010

-0.002

0.025

0.073

0.063

                 

YOY Revenue Growth Rate

14.6%

20.7%

16.0%

25.0%

30.0%

35.0%

40.0%

40.0%

Gross Margin

34.9%

37.0%

38.0%

39.0%

40.0%

41.0%

42.0%

43.0%

                 

Cash Equivalents

221,563

218,756

214,860

209,491

202,360

196,897

194,204

189,815

Net Shareholder's Equity

279,021

277,710

273,814

268,445

261,314

255,851

253,158

248,769

Cash Equivalents per ADS

3.212

3.168

3.205

3.221

3.210

3.226

3.289

3.328

Net Equity per ADS

4.045

4.022

4.084

4.127

4.145

4.191

4.288

4.361

Click to enlarge

At the current stock price level, the company's cash equivalents and shareholders' equity per ADS (American Depository Share) are more important than the company's growth outlook. I have stressed repeatedly that the management team and Board of Directors are very serious about increasing shareholders' value by buying back shares. The company's trading team is limited by an SEC's rule on the amount of shares a company can buy back each day using open market transactions, but ACTS is buying close to the maximum amount of shares it can buy. The company announced in its last quarterly report that its Board of Directors has authorized an increase to 30 million ADS from 20 million ADS for the share repurchase program. If its stock keeps on being unduly depressed below its book value per ADS, I expect the company to step up its effort by adopting more aggressive methods of share repurchasing such as a Dutch auction or a fixed-price tender offer. The bottom line is this: There is no sign that the management team is doing anything outrageous to destroy the current book value of the equity that belongs to all shareholders. Those who fell into the trap of discriminative views and the fallacy of generalizations about Chinese small caps and sold shares before this earning release have already received their first punishment. These people will likely miss huge potential returns when the ACTS stock appreciates to its book value per share in the future.

For me, when dealing with my investments in deeply undervalued companies such as ACTS or Longwei Petroleum (LPH), both with strong brand names and/or business models, I always follow Warren Buffett's two famous quotes: "Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it," and "Ignore stock price and ignore the noise."

When the market is irrational, there is no point in listening to it. Just listen to the inner voice about the true fundamental value of a company. Nvidia (NASDAQ:NVDA) was a $2 stock in 1999 and Kinder Morgan (NYSE:KMP) was a $6 stock in 1997 on an adjusted basis. Back then, few people knew for sure that these two companies would grow to their scales today. Nonetheless, the ones who enjoy the greatest returns are true fundamental investors who did not give up their shares easily during times of turbulence and have been with the companies all the way. Compared to ACTS and LPH, the market at least did not totally lose its composure and sensibility by putting NVDA or KMP at 40% of their book values per share at any given time. Imagine the levels of returns that long-term investors of Apple and Kinder Morgan would have had if they had been given the chances to buy these companies for less than 50% of their book value of equity per share 10 years ago.

Disclaimer: Please read my standard disclaimer for my articles here.

Disclosure: I am long ACTS, LPH.