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Executives

Ellen Davis – The Blueshirt Group

Zhenyu Zhou – Chief Executive Officer

Nigel Liu – Chief Financial Officer

Chung Hsu – Director of IR

Analysts

Rick Fearon – Accretive Capital Partners

Actions Semiconductor Co. Ltd. (ACTS) Q3 2012 Earnings Call November 6, 2012 5:30 PM ET

Operator

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

During today's presentation, all parties 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, November 6 of 2012.

And 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 third 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 third quarter ended September 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 area code 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 files 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. Dr. 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 and update on our third quarter performance, as well as discuss our strategy for the remainder of the year. Later on the call, Nigel Liu, CFO, will discuss financial results for the third 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, for an update on our business. We were pleased to report sequential revenue growth of 24.9% and an improvement to gross margin and our bottom line. In the third quarter of 2012, Actions' revenue was $15.8 million and net income was $0.66 million or $0.01 per ADS. Gross margins in the third quarter increased to 37.6% from 37.0% in the second quarter. Our results were in line with our guidance for the quarter.

Our more value-oriented solutions such as boom box products continue to comprise the largest portion of our product mix during the quarter. In addition to the continued strength in the boom box products segment, we maintained our leading market share position in the mainstream portable video and portable audio products. Our market-leading leadership position provides a strong platform for growth. Actions owns dominant market share non-Apple audio products and video player with gaming and video capturing functionality, and we are continuing to gain market share in the advanced high-definition portable video market.

Our growth initiatives remain largely focused on penetrating and gaining traction in the mobile internet enabled multimedia market. As we move through the fourth quarter of 2012, we will continue to invest in R&D for advanced products and we'll maintain prudent management of our operating expenses.

Creating a long-term shareholder value remains a top priority for the company. In the third quarter, we spent approximately $0.9 million on a share repurchase program compared with $1.4 million in the second quarter. As of September 30, 2012, the company invested a total of approximately $44.8 million in the program, representing approximately 19.7 million ADS shares. Last quarter we announced that the Board approved an increase of 10 million ADS to existing buyback program. Our repurchase activity remains constrained by trading volume and blackout periods. However, management and the Board continue to evaluate opportunities to enhance shareholder value.

And now, for detailed look at each product category. Mobile internet devices, media tablets. During the third quarter, we ramped the shipments of our first product family target the tablet market, the ATM701x family. We were pleased that our shipment exceeded 200,000 units during the quarter, which we believe demonstrates the solid traction we gained in the new market segment. We were pleased to begin shipping our first tablet products to some brand-name customers during the quarter, including Polaroid and the Duo in Europe, and [Stark] in Latin America.

The customer response has been very positive. Our goal has been to provide customers with a powerful solution, with differentiated features, and the most competitive total bill of materials, BOM, costs. We believe we offer the most compelling price performance ratio for the product in the market.

We recently announced at the last show our second product family targeting the tablet market, ATM702x family, and plan to commence the shipments in the first quarter of 2013. Our ATM702x product family supports the latest version of the Android operating system, Android 4.0, the Jellybean. The ATM702x SoC includes an ARM Cortex multicore CPU at a very powerful GPU Core, providing unprecedented levels of performance and power efficiency, allowing viewing a full spec 1080p video encoder and decoder engine, and USB 3.0 PHY integration.

ATM702x brings faster high-speed multimedia capabilities to tablets. We're excited to provide a high-performance tablet SoC multicore CPU, and importantly, to be one of the first companies to integrate USB 3.0 PHY into SoC's. We are particularly enthusiastic about the growth of [inaudible] opportunities for the next-generation product and believe it will be a main driver of growth for Actions in 2013. Looking into next year, we anticipate a significant revenue contribution from our family of tablet products.

Portable Audio. During Q3 we maintained our leading position in the mainstream audio boom box market category. Volume shipments of our audio boom box products increased in the third quarter. We continued to secure design wins for our boom box products with large brand customers in China and we are beginning to penetrating international brand customers. With the continued sales growth to the mainstream segment of the MP3 market serving the non-display, mono display and small color display media products, we have maintained our leading market share position in the category. We also saw an increase in shipment volume for these products in the third quarter.

Portable video. Overall shipment in the video category, including our standard definition D1 and high-definition HD PMP and gaming products increased in the third quarter. Video continues to be a key category for Actions, and we remain focused on increasing our contributions from our newer advanced products in the video category.

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

As planned, our advanced high-definition products are being 0.11 micrometer process. Furthermore, we are launching our advanced product using 55nm process, and we are aggressively moving towards launching 40LP and 28LP advanced process for our future tablet products.

In summary, we're pleased with our third quarter performance. Our product strategy introduced at the beginning of the year has allowed us to concentrate on growth to our tablet business, while preserving our leading market share position in our mainstream portable audio and portable video products. While we have advanced our product strategy for addressing the tablet market, like the others serving our [inaudible] markets, the global macroeconomic headwinds will somewhat damp demand for our products in the fourth quarter. Our fourth quarter guidance calls for around 15% year-over-year growth. However, it does not result in as strong growth for the full year as we have earlier anticipated. That said, we remain encouraged by the progress we have made year to date in expanding our comprehensive product portfolio and believe it provides a strong foundation for growth as we look ahead into 2013.

Before I turn the call to Nigel, I want to mention that I will attend CES at Las Vegas this January. Furthermore, I plan to return to the United States for additional investor marketing in 2013. We will provide updates on the company's US marketing plans as we develop. Now I'd like to turn the call over to Nigel Liu, CFO, who will review our financial results for the third quarter.

Nigel Liu

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

For the third quarter ended September 30, 2012, we recorded revenue of $15.8 million compared to $12.6 million in the second quarter of 2011. Our gross margin for the third quarter was 37.6% compared to 37% for the prior quarter. The increase in gross margin was primarily due to the change in our product mix.

For the third quarter, total stock-based compensation expenses were $0.2 million after an annual review and adjustment to the estimated stock-based compensation expenses which compares to $0.4 million in the second quarter. R&D expense was $6.2 million or 39.3% of revenue for the third quarter, compared to $5.6 million in the second quarter. We anticipate our R&D expense to continue to represent a higher percentage of revenue as we continue to invest on the results in high-end new product developments.

G&A expense was $4 million in the third quarter or 12.9% of revenue, compared to $2.1 million in the second quarter. Sales and marketing expense was $0.4 million in the third quarter or 2.3% of revenue, compared to $0.3 million in the second quarter. We continue to tightly manage the expense levels in this category by [inaudible] the efficiency of our current workforce and optimizing our working process.

Operation loss was $2.1 million for the third quarter of 2012 compared to operating loss of $3.2 million for the prior quarter. Although we need to provide a competitive compensation to attract and generate talent, we expect our operating expense to remain stable by optimizing our workforce and the working process.

Net other loss for the third quarter $0.2 million due to a negative foreign exchange impact. Other loss of $0.4 million for the second quarter was also related to a negative foreign exchange impact.

Interest income was $3.4 million for the third quarter, up from $3.1 million in the second quarter. Income before tax was $1 million for the third quarter, compared to loss before tax of $0.5 million in the second quarter. Net income tax expense was $0.6 million for the third quarter compared to income tax expense of $0.04 million in the second quarter.

Net income attributable to Actions Semiconductor on a US GAAP basis for the third quarter of 2012 was $0.66 million or $0.01 per diluted ADS, compared to net loss of $0.56 million or $0.01 per diluted ADS for the second 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 $213.4 million as of September 30, 2012, compared to $218.9 million as of June 30, 2012. Of the $213.4 million total, $40 million was in cash and 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. $173.4 million are in trading securities and marketable securities both current and non-current, which was principal guarantee of pledged investments with high interest and in minimum terms of three months. Net marketable security was mainly issued, managed and guaranteed by top-ranking state-owned financial institutions in China.

Our short-term borrowings totaled $12 million at the end of third 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 was $3.1 million at the end of the third quarter of 2012 compared to $2.4 million at the end of the first quarter. Accounts receivable includes notes receivable, amount due from related party as well as amount due from equity method investees.

Inventory was $11.7 million at the end of the third quarter, up from $10.6 million at the end of the prior quarter. Our higher inventory level at the end of the third quarter compared with the prior quarter continues to be a result of our strategy arrangements with foundry partners to secure preferential rate of price and capacity for certain targeted products, and also correlated with the expected higher shipment volume and more advanced products ramping up in the fourth quarter.

We continue to buy back shares, spending approximately $0.9 million on the shares repurchase program during the third quarter, compared with $1.4 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 September 30, 2012 the company had invested approximately a total of $44.8 million in the program, representing approximately 19.7 million ADS shares.

And now, turning to our outlook. Our guidance for the fourth quarter of 2012 is revenue in the range of $13.5 million to $14.5 million. We expect gross margin for the fourth quarter to be approximately 37%.

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions].

Our first question comes from the line of Rick Fearon from Accretive Capital Partners. Please go ahead.

Rick Fearon – Accretive Capital Partners

Hi guys.

Zhenyu Zhou

Hello, Rick.

Nigel Liu

Hi.

Rick Fearon – Accretive Capital Partners

The product development of the ATM702x just sounds very promising and exciting expansion of the family. I was just wondering if you could share a little more about how significantly this could contribute to the growth of 2013 revenues. I mean, I know in the past conference call you've thought that you could see some very significant growth exceeding 100%. Is that sort of a 2013 possibility still? And I know it's hard to know until you have the orders, but just curious what your general thinking about the product line is at this point.

Zhenyu Zhou

Rick, this is Zhenyu. Yeah, we are remaining very positive about the 702x family, but the detailed number we will, you know, talk about in the next quarter, you know, how many revenue growth and forecast we expect in the 2013. We definitely expect a very significant, not like a few million dollars increase. Okay. But at this moment we cannot comment on the detailed number yet, but when we go into the next quarter guidance, we will give more detailed number.

Rick Fearon – Accretive Capital Partners

Okay. It really, it sounded like you envision those orders coming in for shipment in the first quarter, so you should start seeing the results of some of that revenue contribution in the first quarter of 2013?

Zhenyu Zhou

That too, basically most of our data customer will start their shipment in the Q1. At that time we have much better visibility into the acceptance and the excitement about the product.

Rick Fearon – Accretive Capital Partners

Sure. That makes a lot of sense. And historically, the products that kind of built the extraordinary cash balance that Actions Semiconductor holds today, those products had a lifecycle of three or four years, is that -- do you envision this being a contributor over the next three to four years or longer or shorter, or kind of -- how do you view that?

Zhenyu Zhou

That's a very good question. Yeah. Typically, yes, for a more traditional or classical products, it has a longer lifecycle. But unfortunately, for the tablet market, it changes very, very fast, like starting from single-core CPU to dual-core to quad-core, the process starting from 55nm to 40nm, then 28nm. So I do expect it shorter than three to four years. I cannot have a very accurate lifecycle, but I will, if I make a guess, it will be somewhere between two to three years lifecycle.

Rick Fearon – Accretive Capital Partners

Okay. And presumably this is a higher margin product. Do you envision this driving the overall gross margin up to kind of 40% level again in 2013?

Zhenyu Zhou

That's certainly our expectation, definitely high ASP and high-margin product.

Rick Fearon – Accretive Capital Partners

Okay, great. And this is just a balance sheet question; I think, Nigel, you probably have a quick answer. What was the deposit paid for acquisition of intangible assets of $1.1 million in the quarter?

Nigel Liu

Intangible assets. Let me double-check.

Rick Fearon – Accretive Capital Partners

I'm sorry, I didn’t catch that.

Chung Hsu

Rick, could you repeat that question again?

Rick Fearon – Accretive Capital Partners

There's a line item in the balance sheet that is called deposit for acquisition of intangible assets and it was -- it looks like it was $1 million -- $1,088,000.

Nigel Liu

Okay. Actually from time to time we have our R&D investment, for example we acquired important IP from the [inaudible] based on US GAAP we have capitalized it as a kind of intangible asset. So that's the reason why. So the reason is basically just because of our R&D investment.

Zhenyu Zhou

I think we can give a little bit more specific, but I cannot mention -- because we don’t make announcement, so I won't mention the name, so that's a payment, we licensed a high-end GPU IP.

Rick Fearon – Accretive Capital Partners

Okay. And presumably, there will be some sort of press release at some point?

Zhenyu Zhou

We will think about it.

Rick Fearon – Accretive Capital Partners

Okay. I'm obviously not asking you to divulge something to competition, you don’t want to. Just curious on that.

And then it looks if you do the math on the share repurchase, that you spent $900,000 and you bought 600,000 shares, and is that -- is it correct to assume, I don’t have the exact numbers, I'm just using the rounded numbers from the balance sheet between the two quarters, but it looks like the average purchase price was $1.50?

Chung Hsu

Well, $1.55 to $1.50.

Rick Fearon – Accretive Capital Partners

Okay. Well, that, boy, you're able to get some shares at a pretty good price. Are you able to buy some in privately negotiated transactions or is this -- are these open market purchases?

Chung Hsu

Well [inaudible] but unfortunately not a lot. So actually we just [inaudible] everyday.

Rick Fearon – Accretive Capital Partners

Right. I'm assuming the constraints, the 10B-18 constraints under SEC regulations are really what's limiting that at this point.

Chung Hsu

Yes.

Rick Fearon – Accretive Capital Partners

Okay. Well, I, as you know, I have to say it again for -- just this is a traditional quarter where I remind you the -- there's an extraordinary investment to be made on behalf of shareholders and the Dutch tender offer does seem like that would make a lot of sense, in particular, before the company starts showing this extraordinary growth that we all certainly hope for in 2013. So with that I'll sign off and looking forward to hopefully seeing you, if not next month when you're in the States, but Nigel or Zhenyu, I will communicate with you about the China trip.

Zhenyu Zhou

Sure.

Rick Fearon – Accretive Capital Partners

Thanks so much, and nice quarter, guys.

Zhenyu Zhou

Thank you, Rick.

Operator

Thank you. [Operator Instructions].

And at this time I am showing no further questions in the queue. I would like to turn the conference back over to management for closing comments.

Zhenyu Zhou

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

Operator

Ladies and gentlemen, this does conclude our conference for today. The conference will be available for replay until November 16, 2012 at midnight. You may access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325 and entering an access code of 4569720-pound. We thank you all for your participation, and you may now disconnect.

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