Here’s the entire text of the Q&A from China Techfaith Wireless’ (ticker: CNTF) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies – if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

    Questions and Answers

    Operator

    Ladies and gentlemen, at this time we will be conducting the question and answer session.

    Operator Instructions Our first question comes from Mr. Brian White with Kaufmans.

    Brian White

    Yes, good morning. Wondering if you could talk a little bit about health in the domestic vendors that you’ve seen. It sounds like you’re saying business has stabilized with some of the Chinese vendors. Could you expand on that, and do you expect this business to actually grow sequentially in the December quarter?

    Bob Huo

    Talking about the local market. We have expanded our service run. Actually before we got the service top 10, now we service top 15. This is the first strategy. Second, we also, through cooperation with chipset provider, do turnkey solution for small customer. So even Chinese, the big brand, top 10 brand companies face the challenge. We are certainly now looking very well. I think for the next year-end of December, our customer is increasing so I think that the revenue is stable.

    Brian White

    Okay, the revenue is stable. Could you talk a little bit about number — how many customers did you have over 10% of revenue in the quarter, and maybe name those customers?

    Eva Hon

    We have not recorded this information on the analysis and therefore we will not provide a name. But in this quarter, we have two customers who have revenue contributions over 10% of total revenue.

    Brian White

    Okay. And Eva, could you give us those percentages without naming the customers?

    Eva Hon

    One is 14%, and one is 10%.

    Brian White

    About 10%. And could you just remind us what percent of sales were from international customers, if you look at your total sales in the quarter? I think in the June quarter, it was 68%. What was it in the September quarter?

    Eva Hon

    For this quarter there is 56% from international customers, and the rest is from domestic.

    Brian White

    Okay. Thank you.

    Operator

    Our next question comes from–

    Bob Huo

    As you know quarter-by-quarter may be different but the trend in the international consumer this year is increasing, actually.

    Operator

    Thank you. Our next question comes from Marian Dolan of Moon Capital.

    Marian Dolan

    Hi. Congratulations on your quarter. I just had a follow-on to Brian’s question. On the domestic customers, what type of 3G design activity are you seeing? Are you seeing an increased number of phones going 3G designs, or is it still nothing happening because of the Chinese market not moving forward?

    Bob Huo

    For 3G technologies, usually is Europe company, Japanese company, and American company, got the interface to do this kind of technology. I think in 2006, the UMTS and the EVDO revenue will increase very quickly. Because we think the global market increased, and the full domestic market and because of the Chinese government license issue, we thought that our outlook for customer waiting for license, so if license is released, I think many contractor benefit. But anyway, we needed to waiting for license.

    Marian Dolan

    Great, thank you. Also, could you comment on new features being designed into the phones, like removable storage, Flash cards, MP3? Do you see what type of design phones are going to become with these new additions?

    Bob Huo

    Sure. Actually in terms of the mobile TV, the mobile flash, and some new functions like as positive to 3G, like the radio polyphonic new technology 3G games and high-resolution camera.

    Marian Dolan

    Okay. Could I ask you, on the mobile Flash, do you think that is a separate card going into the phone, or do you think they put the Flash embedded in the phone?

    Bob Huo

    Yes, embedded in the phone.

    Marian Dolan

    Embedded.

    Bob Huo

    Actually, some of the Korea phones, we have already implemented the Flash UI and implemented a lot of the Flash in the phone. I think it is changing

    Marian Dolan

    Whose phone was that, excuse me?

    Bob Huo

    Some Korea company, not specifically in U.S. He was a local customer. We began to design Flash UI for them.

    Marian Dolan

    Okay. And then my last question is on the international customers at 56% of sales, down from 68% in June. Is there any change going on with those customers, and do have any new customers maybe joining?

    Bob Huo

    I don’t think so. From our contracts in hand I thing that the trend is also the international customer sale will increasing with quarter by quarter. Maybe if that influences, we have a difference. But the firm contract we undertaking we had contract we have in hand, I think that in the future, the international customer sale will be increased.

    Marian Dolan

    Right. Thank you very much, I appreciate it. Congratulations. Thank you.

    Bob Huo

    Thank you.

    Operator

    Operator Instructions Our next question comes from Tienyu Sieh with Merrill Lynch.

    Tienyu Sieh

    Hi. I was just wondering if you could give us a sense as to how much, how many man-hours are going into developing a 3G handset versus developing a 2G handset, and particularly in terms of the incremental software that goes into a 3G handset versus a 2G handset.

    Bob Huo

    Actually for the first 2G products, usually we use 50 people under eight months for the total new platform. And subsequently work is 70%, I think. With opposed to 3G, it usually needs more than 100 software engineer and 10 months for the new platform. The second project for 2G may be 20 people and four months for software solution. For 3G, the real platform may be 40 people and six or seven months. Actually, From TechFaith we understand all handset is done. The main work is software development. Actually, you know all hardware from GI, Philips, and this kind of handset provider. Under handset design, they are 10%. They write software in handset design. So I think for handset design, the main work is software development.

    Tienyu Sieh

    Okay, thank you.

    Operator

    Our next question comes from Leticia Yu.

    Leticia Yu

    Just following on your commentary. Can you walk us through the wireless module strategy again in a bit of detail, and how that fits in with your longer-term strategy?

    Bob Huo

    Our module business actually they do not use the handset industry. They use other industry. For example, PCMCIA card and more on the car phone card. This kind of application. As you know, we provide the GSM module, and the CDMA1X module. Generally we will provide the UMTS module, and next we are also developing EVDO and the HSDPA module. Module based business is truly increasing I think because lots of the industry begun to use wireless technology. So I think they have potential to develop sales. And for revenue, 2006, we hope we can have 100% increase.

    Leticia Yu

    100% increase year-on-year in sales?

    Bob Huo

    Yes. Year-on-year, 100% increase.

    Leticia Yu

    Okay, great. Thanks.

    Operator

    Operator Instructions Our next question comes from Brian White with Kaufmans.

    Brian White

    Yes, Eva I just wanted a couple of follow-ups here. One is, could you just update us on the four RFQs that you had with top five handset vendors?

    David Pasquale

    Yes, actually we have three actual from the top five.

    Bob Huo

    No, I don’t think it is three manufacturer. We are doing a RFQs for them

    Brian White

    Okay, are there any design wins yet?

    Bob Huo

    I think next 2000, we hope Q1, 2006 we have companies confidence to prepare the contract.

    Brian White

    Okay, great. Could you also tell us how many customers in total do you work with today?

    Bob Huo

    Not including Turnkey solutions for small customer, we have nearly 20 customers.

    Brian White

    Okay. How does that break out between Chinese and international? Domestic and international?

    Bob Huo

    I think five is international, others is local.

    Brian White

    And finally, could you just update us on the number of engineers you have, as well as the number of total employees? And where will that number be by the end of ‘05? And where do you think it will be by the end of ‘06?

    Bob Huo

    Now we have 2,000 engineer employees. And 92% is engineer. And end of year our target is 2,100 engineer. And next, for 2006, our target is 3,400 engineers.

    Brian White

    Okay, good. Thank you.

    Bob Huo

    Thank you.

    Operator

    Our next question comes from Chang Tiu with Foreign Technology Research.

    Chang Tiu

    Right. Good morning. I have one question, just to understand your revenue. Say your revenue is that basically depending on the volume of your design. Say if you have one design to one customer and your design fee does that depend on how much of volume those handsets were shipped?

    Bob Huo

    As you know now 50%, that is a one time design fees. And another 50% is design fees as a royalty. But the royalty, we have subsequently control our volumes. These two depends software license from Techfaith. For example, if license come only to 10,000, then they come back they only do 10,000. So usually we use software to control the volume.

    Chang Tiu

    Maybe let’s do it this way, in Chinese. Asked in Chinese

    Bob Huo

    Answer in Chinese

    Chang Tiu

    Okay. Another issue is in terms of competition, where do you stand in China or also in international if you compare to design house from other countries.

    Bob Huo

    I think in China, as you know maybe have about 50 or 70 design houses. But it comes in a total different in China market. Actually, only 10% is own business with TechFaith. But others, for example, other companies, maybe manufacturer base. Maybe component consultant based. But only TechFaith is software ability based. It’s totally different. And we have the ability to provide the different MMI for different operator, even in Chinese local market. Only TechFaith can do Semi Unicom, MMI and the UI. And China Mobile, MMI and the UI. So I think that position in China, no competitor. Because they have only have both GSM and HSDPA and a very good technology. From Knowledge they haven’t a product to go to market. And WCDMA/UMTS also say they haven’t. indiscernible say they haven’t. HSDPA they haven’t. EVDO they haven’t. So from this industry in China, we have total, we have the big advantage other competitor. In the global market, I think China has a big cost, bigger cost advantage in the market. For handset design the main work is the software design. For software engineer the costs are different, the labor costs totally different. For example, year over Japanese and their market, may be 10 times different. So essentially I think TechFaith will maybe two times than them. So then, we have 20 times advantage. This makes us cost advantage in the global market. So it’s very difficult to say we fueled TechFaith sales.

    Chang Tiu

    Okay. All right, thank you.

    Operator

    Operator Instructions Gentlemen, there are no further questions at this time.

    I would now like to turn the floor back over to management for closing comments.

    Eva Hon, Chief Financial Officer

    Thank you for joining our third quarter earnings call. That is the end of today, thank you very much.

    Bob Huo, President

    Thank you.

    Operator

    Ladies and gentlemen, this concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

Related:

    The prepared remarks from this call are here.

    All China Stock Blog articles on China Techfaith Wireless.

    A list of full conference call transcripts available on the Seeking Alpha Network.

    The complete list of China stocks (and links to articles about them) covered by The China Stock Blog.

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