We’ve been looking at a small Chinese semiconductor company that has some interesting product lines and what appears to be pretty strong operating management. It’s been an ugly transition as the company has the core market of multimedia SoC products has left them at a much lower revenue run rate ($40-50M/year) then they have enjoyed in the past. However the company has taken steps to dramatically reduce costs and yet invests a staggering portion of revenue in R&D and has massively increased their capabilities in other areas like higher end multimedia and also new markets like automobiles.
The company completed their IPO in December of 2005 and a secondary offering in September of 2006. As a result they enjoy a cash balance of over $250M but suffer with a market capitalization of $193M. As the chart shows the stock had a good debut and in 2007 all the underwriting analysts initiated the stock with positive ratings. The company was positioned in the hot multimedia chip space and at the time had a strong position in the portable media player space. At the time there were a handful of other companies in this space that were also doing quite well and trading at rich valuations.
It’s not worth stepping through the whole history of the space but the wheels came off thanks to heated competition, shifting design wins and patent disputes. The other players in the space, notably Sigmatel (SGTL at the time) and Portal Player (PLAY at the time) fell on hard times and were acquired by Freescale Semiconductor (now owned by Blackstone) and Nvidia (NVDA - $13). Actions Semiconductor however has remained independent but has understandably languished from lack of success and attention from analysts who have all left the company for dead. The company also discontinued their investor relations programs and hasn’t made it appealing for investors to follow what is going on.
We have been lured into taking a closer look for the simple reason that the company is trading well below net cash value, management has shown a tenacity and ability to cope with the difficult times they have had in the past two years, they are based in China where opportunities continue to expand and finally, and if they can get themselves into one or two minor growth areas like power management then company results would improve. Because of aggressive expense management the company has come close to a break-even level of operation with a $44M annual revenue run rate (down from a peak of $170M in 2006 and a $100M run rate a year ago.)
There’s no way to tell right now if we have reached the nadir of company revenues or not. However looking at the most recent quarters the company reported $12.2M in revenues for March 2009 and $10.5M for June of 2009. The company just reported September quarter revenues of $13.4M versus their guidance for the quarter of $11M to $13M. In addition gross margins were a bit better than their forecast for flattish gross margins between 25% and 30%. For some internal and external reasons revenue guidance for next quarter is for a small sequential decline but it is still in the “range of stability” for company operations.
Unlike some other broken IPO stocks that we have looked at management is at least aware of and appears to be doing the right things. During their last conference call they enumerated their play:
“As part of our near-term business strategy, we are committed to executing the following actions. First, enhancing our position in the P&P market with a complete and competitive product for the full year. Second, controlling the costs through our expense reduction program. Third, investing in R&D to build up a world-class team. Four, increasing efficiency in product development with a focus on interfusion products with more cost-effective features and addressing the faster growing segments. Fifth, preserving our balance sheet and strong cash positions. And six, repurchasing shares to increase [shareholder value].”
And actions like reducing management compensation by 20% at the start of the year, spending 47% of revenues on R&D and buying back stock at depressed prices have all provided some evidence that the management group is serious about execution.
Business Conditions
Based on the still-iffy global economy and price competition, conditions for the company remain difficult. Price competition is intense and new product lines require more ramp time before they can reach lower unit costs and contribute to higher gross margin. That said the company has cut costs aggressively. They are expanding engineering resources somewhat but part of that will help them to further shrink die sizes and improve efficiency.
Business has also continued to shift to multiple industries and help diversify sales away from just media players. Automotive and lower-end consumer products are absorbing more production now. Getting into the details just a bit the company is reducing their stake in a firm (Actions Beijing) that they were consolidating. This business accounted for $1.3M of the $10.5M for the June 2009 quarter and would have provided $2M and a small loss in the quarter ending December.
The fact is that the company continues to operate in difficult markets and won’t enjoy positive YoY growth until the December 2009 quarter at the earliest. Given the lack of enterprise value afforded them in the market right now two or three quarters of stability is worth noting. The company did just replace their CEO and needs to keep executing on getting more market share and improving margins. If they can demonstrate some sequential growth in 2010 and earn even a little money they should at least get a positive enterprise value.
[Disclosure: Research 2.0 owns a small equity position in ACTS at the time of this writing.]
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