Ladies and gentlemen, thank you for standing by, and welcome to AAC Technologies 2017 first quarter results investors webcast and conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question- and- answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today and lasts for about one hour. I would now like to present opening remarks. We have to have Mr. Benjamin Pan, Chief Executive Officer, Mr. Richard Mok, Managing Director, and Ms. Connie Chin, Head of Investor Relations with us today. Now, I would like to turn the conference over to your moderator today. Ms. Connie Chin, please proceed with your introduction.
Good day, everyone. Thank you for joining AAC Technologies 2017 Q1 results investor webcast and conference call. I am Connie Chin, Head of Investor Relations, and joining me on the call today are Mr. Benjamin Pan, our CEO, and Mr. Richard Mok, our Managing Director. Before we begin, we would like to remind you that the copies of our results announcements, results presentation, and press release are all available from our website, www.aactechnologies.com. We would also like to draw your attention to the following disclaimer. Some information that you may hear during our discussion today may contain forward-looking statements. This information includes revenue, gross margin, operating expenses, other income and expenses, taxes, future products, and capital allocation plans. Actual results or trends could materially differ from what you hear today. As always, we intend to update you with any new information or future events and developments at the appropriate time.
We will now briefly review Q1 results before opening up the call to questions. We have gathered growth momentum from last year, achieving a strong start to 2017, which actually represents the most profitable Q1 performance in our history. Overall sales jumped by 66% year-on-year. Thanks to our wide customer base for the RF mechanical business and the company's leading position in haptic solutions, sales from the non-acoustic segment increased by 225%, accounting for 52% of total sales. Our upgraded acoustic solutions, which have higher dollar content, received encouraging market response, enabling us to successfully increase the adoption of speaker ports among Chinese customers and has driven higher dollar content. Acoustic sales grew by 14%, accounting for 45% of total sales. Gross profit margin improved by 1.1 percentage point to 41.6%, which was supported by our enhanced product mix.
Despite the traditional low season, there were several new Android phones launched with high-spec acoustic solutions, as well as more RF mechanical projects, which helped to alleviate the impact of the market gloom. Although sales dropped by 27% quarter-on-quarter, we still managed to maintain the overall gross profit margin at 41.6%, which is similar to the outstanding performance achieved in Q4 of last year. It is worth noting that non-acoustic sales continued to exceed acoustic sales for the second consecutive quarter and delivered more than half of total sales. This shows that AAC has successfully evolved from an acoustic component supplier to an integrated miniature technology solution provider. Lastly, sustainability is an important part of our business, not only to address today's pressing issues, namely climate change, talent acquisition, and corporate transparency, but to create value for our operations.
Our detailed ESG performance was published at noon today in our 2016 Sustainability Report, which can be found on the website of Stock Exchange and the company. This is our fourth sustainability report. We welcome you, our shareholders and investors, to provide your feedback in regards of the report. That brings an end to our introduction. We would just like to remind you that we have set aside around one hour for this call. Now, we will start the Q&A session.
Thank you, Connie. The question- and- answer session will be conducted electronically. As a reminder, each participant should limit the number of questions to two in each round. You will have to queue again if you would like to ask more questions. If you are using a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Now, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from Charima of CLSA. Please ask your question.
Hi. Thank you for taking my question, and congratulations on the great results. In the announcement, you mentioned that gross margin improvement was due to better product mix. Is it possible to give us more color on what was better? Besides product mix improvement, were there margin improvement on each of the product lines, especially RF mechanical? Will it be a trend that the margin will continue to improve in the second quarter?
Yes. Thank you for your question. I think overall in the first quarter, we have seen improvements in the, what we call, first of all, in the non-acoustic mainly. I think we deliver slight less improvements in the acoustic. More of the improvements come from the non-acoustic sector. Whereby, again, I think due to two factors as well, better efficiency and also higher, kind of wider base of customers in new businesses, enable us to, again, go higher on the efficiency curve, delivering better margins.
What is important is that, I think like any other years, our second quarter and the quarters following the second quarter, we are aiming as business continue to grow, as our efficiency on the existing processes like RF mechanical, as we have mentioned last time, we are looking at ways to improve automation process we can build in the RF mechanical process. Also, I think in the third and fourth quarter, there are continued exciting opportunities on new acoustic specs, components or solutions. I think the pattern of quarterly improvement on the gross margins would happen like previous years.
Thank you. My second question is on the non-acoustic segment. Can you share with us what happened with the non-acoustics, with especially RF mechanical in the first quarter, number of projects that you commenced producing, and even if are we starting to produce products for Huawei and Samsung, which we started qualification by end of last year? Thanks.
The first quarter, in a way, as we are focusing on what we call Android customer from China in the first quarter, it's a slightly more quieter kind of season for new Android Chinese customers to launch new devices. Nevertheless, I think new projects are on track. We have, again, small projects. ASP is very respectable, and our existing platform for one other Chinese customer, ASP, is in the range as we have indicated. We believe the shipments for the first quarter is on track as expected. Again, I think more interesting things are happening in the second quarter, whereby we will see something like four to five new customers coming in the second quarter on the RF mechanical.
That's very exciting. Thank you very much.
Your next question comes from the line of Arthur Hsieh of UBS. Please ask your question.
Hi, this is Arthur Hsieh from UBS. Thanks very much for taking my question. The first question actually is with regard to the market concern. I think the company has already issued an announcement to clarify. I think it would be good if you could take the chance to provide more details to address the concerns that's being alleged by some investment company. I think that would be very helpful.
Thank you, Arthur, for giving us the opportunity to talk a little bit more. I think what's, as most of you, our investors and analysts, have understood from our business strategy in the past, also very importantly, our very focused business model, it's built on technology platforms and what we are capable of delivering advance, what we call new customers or user experience for our customers. I think in the past, we've discussed briefly how to look at our gross margins, because we believe on the industry side, we are doing better than the kind of norm for the industry for two reasons, because first of all, we have a premium in recognizing the design specs that we could specifically work with customers or deliver over customers' new design module.
The second factor is our proprietary automation production efficiency that help us to deliver an extra 10%-15% in gross margins premium. I think that kind of triangular, it's the kind of structure how we have kind of delivered this level of gross margins on a sustainable period of time. When we look at, when we penetrate and we start on the non-acoustic business, which we said the non-acoustic business for 2017 will most likely outweigh the contribution from acoustic. The same approach, the same kind of target to deliver 40% above gross margins comes from the same components reason. Other than that, I believe there is no other kind of strange or accounting practices, et cetera.
As we have said in the past, we view gross margins target as a very important indicator of whether we have selected or based our technology business at the right penetration. For us, 40% or above gross margins is an important part of our DNA business focus. In fact, when we looked at some of the other leaders in the other technology supply segments, some of the other suppliers have also delivered not more than the level that AAC is delivering at this moment. In a way, there is scope for AAC to even deliver better gross margins, which we are striving to deliver, not only on the acoustic, but the new non-acoustic business as well.
The second point I'd like to talk about is, I think, in recognizing the growth of our portfolio of customers since IPO, we have kind of matched the growth of not only international customers, international and also domestic customers in the smartphone sector. I think, in the industry, it is recognized that the stringent requirement comes not only from international customers in terms of looking at how suppliers discharge their corporate social responsibility features. Even domestic customers are now adopting even higher standards, higher requirements. I think our business strategy is not only coming up with the matching advanced design and the user experience and improvement in efficiency.
The kind of, for example, in the HR aspects, the health and safety, the kind of training and development, the benefits, the remuneration structure, et cetera, are all very important features that not only our customers, but AAC to be a successful leader, taking part in a major kind of supply chain, have to recognize and adopt early on, and we have been quite successful. Our track record speak for the fact that not only we maintain international customers, but also we grow on new international customers in the new addressable markets as well. I think that's a very strong testimony that we respect and we adopt very high standard in corporate social responsibility, especially in the HR aspect. I think our annual reports disclose not only the workers kind of numbers, but also in the sustainability report that Connie mentioned in the opening statement that we filed.
This is the fourth year we address our HR matters seriously. We try to come up with interesting kind of indicators of how we perform, et cetera. We do admit, we are not the best kind of sustainability supplier, but there are things to improve. Nevertheless, we would never be short of expectations or standards set by our customers. I'd like to talk, I think the last point is about compliance of listing rules and regulations. I think, again, it's a very important part of our listing. We recognize that it's a serious duty being a public company, and thereby, I think right from the very top structure of having the right professional constituting our independent board of directors and improving, making suggestions on how to improve on internal processes related to corporate governance.
I think hopefully readers of our annual reports would have seen how we improve on the disclosure and how we keep on managing to improve better and better compliances and also reporting. For that matter, I think on the matter of related party transactions, in our meetings with investors, in our requirement of the stock exchange listing rules, we believe our communications with our stakeholders or shareholders have exceeded kind of connected party transaction. Obviously, our independent auditor have carried out review and discussed their annual report in a way with our audit committee. In the past many, many years, it has never been shown in any of their reports, any information that arouse alerts for our audit committee to believe our internal compliance system are faulty and are not working.
In other words, our independent review by the auditors have reviewed that we have a good system in place, and we continue to make improvement on that system. We believe being a company that doing international businesses and in the forefront of technology, and especially in a very tight, highly regulated stock exchange in Hong Kong, I think listed issuers like ourselves, we are placed to not only comply, but also to be kind of set ourselves with higher standards. I think in our announcement yesterday, hopefully the message is clear that we strongly deny or we do not accept. We think the content of that report is inaccurate and misleading, especially in terms of compliance of listing rules.
Yeah. Thank you, Richard. I think some of these listing rules are quite well-publicized, so it just seems bizarre that they came out with such allegation. Sorry, Benjamin, you were going to say?
我觉得我要补充一下。其实你看AAC上市从2005年到现在十多年了，我们一直追求的还是努力获取在市场的一个技术地位，而且努力去调整我们产品的一个这种结构，在行业里的，从而来保证我们的毛利率。在这样的基础上去获取公司的增长，这个是我的一个基本对公司的一个定位。所以你从技术的来说，你可以看到我们声学，我们taptic，我们在整个行业是领先的。我们是通过领先这种技术，通过这种管理来保证我们的一个利润。所以这个也是我觉得只要我们这个公司发展下去，这个策略我们应该不会变，也没必要变。另外一点，就从管理上来说，你说我们这个十年来这么多年的一个自动化的努力，也是为了在人工不断的——因为我想五六年前我们就建议中国的人工会很快上升，所以我们是不断地通过自动化，通过管理效率的提升，从而来保证我们这个毛利率目标的一个达到。然后另外一个，从大家从产品结构上来看，你看我们在五六年前，好多年前，我们还有做耳机，还有做一些像那个的antenna，但是在做的过程中间，我们发现我们没法找到技术的立足点，没法来必定这个technology，也没法控制这个技术标准，所以我们也找不到我们能保证我们毛利率的一个地方，所以我们就把它放弃了。所以我觉得随着我们声学taptic，还有RF mechanical，一开始在做的时候，我们就一直讲过，我们进入这个市场是希望获取RF mechanical的一个平台，然后在跟Android系统这些客户打交道的时候，我们在前端客户的手机或者是mobile device的设计的时候，我们就可以获取更早的information。然后我们在这中间，我们只是挑有价值的一部分，然后再通过我们提升我们RF mechanical的这种技术，才能获取我们想要的一个毛利目标。所以这个方向，我们虽然没有达到我们的毛利目标，但是我们还在努力的过程中间，所以这个就是我们在产品线调整的时候的一个基本概念。所以我要想再强调的是，AAC的一个基本的一个策略，或者说最主要的策略是通过努力提高我们的技术水平，然后来控制或者影响技术标准，来提升最终用户的体验，从而来保证我们的一个毛利目标或者存量目标的一个达成。在这种基础上的增长，我们认为才是健康的。
Benjamin confirmed or pointed out that since IPO in 2005, it is quite clear that AAC has set out a very clear what we call positioning in terms of what we want to achieve in the delivering technology solutions. In the many years since our listing, I think it's now 12 years. Through adjusting the product mix, structure, composition, we are striving that we would maintain to deliver a sustainable growth margins. Through that adjustment, for example, we have seen in the current series of technology platforms in haptics, we are definitely leading the design. Through management of such evolvement, we keep on and continue to deliver such high level of growth margins. We believe this kind of pattern or this strategy is sustainable, and we are unlikely to change this roadmap of how we could get to the growth margins where we set out.
I think we've discussed this five or six years ago. We operate our factories are in China, and we noticed and we observed that it was very likely that labor cost in China will keep on rising. This is looking at five, six years ago when we are assessing what's happening to the labor market in China. We have invested, I think, in developing not only the automation production, but what we call proprietary internal automation system and skill sets that enable us to apply automation not only on single what we call product family. That has helped us to deliver what we call our target gross margins. That is not the sole way that we have learned in the past.
If we looked at the product mix changes three, four, five years ago, when we considered new product platforms such as headsets or the NFC antenna, we did not manage to find a sufficiently high, what we call technical industry standard that AAC can lead and set, which makes our target strategy of delivering a sustainable gross margin very hard to achieve. Those product lines are no longer with AAC. What we want to achieve is, again, as we have stated in the past, our penetration of proving value in the Android mobile devices, we could capture what we call an early positioning, i.e., we hopefully could pick out the high-end antenna technology design value projects that AAC would be able to assert to set the standard and improve on the standard.
This strategy of not only setting the standard, but creating the new user experience has, in the past, demonstrated the driver to deliver the gross margins. We believe under this method of achieving a sustainable higher gross margins of 40%+, that this is the growth model that we would adopt when we look at new technology segments, there will be no change to this roadmap that we set out to do.
Good. Thank you. Appreciate that. This is very good. My second question is with regard to the new design. I think for now, the major important projects in the pipeline should have pretty much close to finalization. I would like to know what would be the reasonable expectation for the ASP increase. I think it would be helpful if you can provide some range, like for your speaker box or haptic, say, for the second half compared with last year. Some of our peers are talking about ASP could double for speaker box product. Is there something that you also share the same view? That's my second question.
We are unable to comment specific customers' project. What we have mentioned in the past investor call, that there is already existed a new structure, stereo kind of acoustic speaker box of design that has for Android portfolio of customers, and our group of customers have shown very strong interest in that design because of the performance and the design. We believe the ASP of this new structure box design will be at least 50% more than the previous kind of ASP. This is exactly the kind of business roadmap or strategy that when we answer your first question, we've been striving to have the capability to deliver such design and come up with the user experience defined or sought after by our customer. Only by delivering such user experience, our customer could appreciate the value that AAC is creating for them.
We are very confident that the growth that we see in next year continue on this wave could be even more than what we are seeing this year in terms of this upgrade or extra incremental in the value for our customer.
Thank you very much.
Your next question comes from the line of Ken Hui of Huatai. Please ask a question.
Thank you for taking my question. My first question is, in terms of your full year guidance for revenue and gross margin, are there any changes versus your guidance from last conference call? That is my first question. Thank you.
Thank you for your question. There's no change to what we have provided in the past in this moment.
Thank you. My second question is regarding the lenses. Would you be able to give us some update regarding the latest situation? I think in your PowerPoint, you mentioned something like closely monitoring the CapEx requirement. Does it mean that there is some changes in the progress that you may need to change your CapEx plan? This is my second question. Thank you.
Optical is a very important direction for AAC's layout. If I remember correctly, around 2008 or 2009, we acquired Kaleido in Europe and an ISQR design house in Japan. At that moment, we started to lay out and invest in optical. Judging from today's development, I think our layout seven or eight years ago, almost 10 years, was very necessary. Judging from this year's goal, since ISQR is a plastic lens company, and we acquired them, we integrated them, and we started to collaborate with Europe on some of our own lens assembly requirements. Currently, our 10-million capacity has basically been completed. Of course, there are some groundbreaking technologies to improve this yield and efficiency. Judging from the current situation, we should ship between two to 2.5 million lenses this month.
We hope to fill the 10 million capacity in Q4 this year and turn it into shipment. This is a goal that we are currently working hard to achieve. Since 2008 and 2009, we have shown our interest to learn and to invest in optical-related technology companies. I think the two companies were absolute good investment and vital to our capabilities. Kaleido and the Japanese ISQR, whereby, for example, ISQR provided their strong experience and knowledge on designing plastic lenses. Whereby their inputs on how we should come up with our lens proprietary assembly know-how, and our own kind of assembly system in coming up with a unique approach. It has been a very strong foundation and an important contributor. What we have planned for this year is a capacity of 10 million pieces.
During this process, we will focus strongly on how we could control or maintain or even improve our production yields and efficiency. This month, we are already producing 2 million-2.5 million pieces of lenses, and we believe we are on track of the timetable that we would see the 10 million target. More importantly, we believe by later half of this year, we will look at opportunities where we turn this capacity number into a shipment number, which is a very important kind of testimony AAC has reached such capability.
Okay. A follow-up relating to the optical. I think you're also building a new pillar of growth for AAC, which is what you call sensing. Can you talk about what you plan to do for this particular segment? Thank you.
I think in this area, a new technology like 3D, which is optical, we can play a role in the middle, mainly because, as I said before, we acquired Kaleido eight or nine years ago. It makes glass lenses using the wafer-level process. This is a major technical pillar we have in 3D sensing. We have made an investment in Kaleido, which design focus is on the wafer level glass lenses. That has been a very important contributor of our capability to come up with wafer level glass lenses.
Are we able to see any meaningful progress in the near term for that?
I think in terms of the Android system, it will be difficult to see very detailed projects this year. Of course, we are also in specific discussions with some major Android phone players.
一个技巧和谈。应该随着明年如果这方面项目会开始的话，我觉得我们wafer level glass的做成lens在里面会有明显的优势。
I think this year, we spent time to continue our conversation and exchange of design ideas with Android phone players, it will be not easy. In fact, it will be difficult to see the delivery of such components or such solution happening this year. The dialogues with major customers in our space are very positive, and we believe this year provides strong foundation for these wafer-level lens to be part of the important lens structure going forward.
Okay, thank you. Thank you very much.
Your next question comes from the line of Sam Lee of Credit Suisse. Please ask your question.
Thank you. My first question is quite straightforward. I want to know what's our guidance for the next quarter revenue and gross margin. Thank you.
Again, thank you for your question. Our Q2 revenue growth, we believe will be high single digit. Like previous year quarters, I think I've mentioned that in the answers of earlier questions, we believe there's a strong opportunity that we should be able to improve or to enhance the gross margins compared to Q1. It's not going to be a big jump. Like our previous years, we strive to deliver quarter-on-quarter improvement on our gross margins.
That's very helpful. Thank you. My second question might be a little more complicated. For the short selling report. Thanks, Benjamin, to elaborate or expand a lot on our technology strategy and how we pursue and protect all the margins. I think another important allegation from the report would be the so-called related transaction. Could Benjamin probably provide more color or explanation on that part? Thank you. Sorry. Pan Zhengmin [Foreign language]. By the way, for example, there was an entity name or factory name called the Lian Tai, right? This kind of example. Thank you for comment. Thank you.
我觉得所有的关联交易，我们都有按照联交所的规范，也包括通过董事会审查，我们都有这种公告。至于你刚刚讲的联泰，我记得我们在开始做iPhone mechanic的时候，我们就谈过，我们有一些外包，就是做CNC casing的加工的，因为有些很分散，所以我们有要求我们的一个设备供应商或者核心供应商把他的设备放在那里。当然我们包括给他有一些资金上的支持，甚至有一些参与管理，帮我们做加工。当然这种加工的价格是跟我们外面的，就是casing的加工价格有一个很小的折扣，基本上是持平的。所以他纯粹做的就是帮我们做的casing，就casing的加工。我相信，因为这里面有很多行业的分析师也了解这个行业，在casing。有很多casing的工厂，在国内有些是整个外包的。那当然AAC因为是新的参与这个行业，我们需要有自己一部分核心的CNC，包括后道的一个加工处理。但是在CNC这上面，尤其这个，因为这个是大概是两年多前了，我们刚开始进入的时候，我们需要有一些行业懂这个的，而且提供设备的，来提供跟我们的这种合作和支持，所以我们要求他设在了宿迁。他纯粹做的就是casing的一个加工而已。
First of all related party transactions are transacted in accordance with requirements of Hong Kong Stock Exchange listing rules, have been subject to vigorous internal review and approval processes, and appropriate disclosure have been made all the time since day one of our IPO. I think previous discussions or our communications with investors have explained our strategy of what we call using outsourced casing company to help us to prepare what we call the kind of straightforward preparatory casing work that helps AAC in developing our strategy. In the beginning stages, when we have different outsourced suppliers, they are scattered everywhere in China. We have assessed and selected what we call partners when we're considering outsourcing to these kind of CNC equipment providers.
What is important is that we also would be inputting our management supervision, and maybe we will demonstrate financial support so that they can be situated more convenient to our production base. What is important to note is the pricing of such outsourcing service or projects. They are at the same price that we give to all suppliers, maybe to the ones that we give financial support, a small discount. In a way, they are competitive pricing. I think for those who are familiar with the mechanical structure business, it's not unusual even for some of the well-known established players to outsource 100% completely to independent kind of supplier. What AAC has done, I think, as we have entered two years ago, as a new starter, we want to quickly catch up from what we call experienced CNC user.
The best way to do this is to, what we have explained, to outsource what we call the lower-end preparatory straightforward, and retaining the important antenna design, the core value work, and so on and so forth. I think what we have described should not cause any attention as we are kind of practicing anything unusual.
That's very helpful. Very quickly follow up. The report mentioned about Apple doing whatever investigations and this kind of thing. Can I ask whether there is such kind of investigation or whether there will be such kind of investigation?
As we have said and as we acknowledge, all established customers have set very high standards and requirements. AAC is committed to deliver such tangibles in terms of meeting established customer requirement. We have what we call a dedicated team internally to make sure such processes are firmly in place. We are not only setting a standard of meeting those requirements, but like other aspects of our business roadmap, we would like to excel these requirements, that is the only method that we could achieve what we call sustainable long-term value. Otherwise, such efforts are wasted if we or if any supplier, for example, AAC, is only after short-term preparation, kind of superficial work to please customers.
Our next question comes from the line of Tony Chang of BOCI. Please ask a question. Mr. Chang, your line is open.
Hello.
Yes, we can hear you.
Thank you for taking my question. My question is again about the Lian Tai case, this is the only case the short selling report can raise. I want to know whether this is actual subsidiary or outsourced supplier may define it for AAC, they showed a picture with a logo on their building, the logo. On the gate, there is, the name of the company. I want to know what this is actually a subsidiary or supplier, and if this picture is fake?
They allow our suppliers to use our logo on their buildings or in their factory. Also my question is, do we aware their shareholder [Foreign language], is any kind of relationship, family relationship or previous employed relationship with AAC or AAC senior management? Thank you.
我觉得刚刚其实我已经回答了，因为我们在K姓方面，我们在两年多前开始的时候，我们是新进入的。所以我们在做的时候，我们有找设备供应商，一开始这个是设备供应商，就是卖我们这个设备的，他放在那里帮我们加工的。后来我们觉得这种加工模式，它的管理模式，AAC有必要参与，所以我们用了一种方式，我们等于有给它财务的支持，把设备买进来，然后那个是一家等于一个独立的公司，帮AAC进行加工。所以在这个整个的一个过程中间，本身AAC在K姓方面，我们一开始包括投资规模要多大或者什么，我们也都是等于是这个两三中间，一直是一个不断的学习和调整过程。其实上次在conference call的时候，我已经谈过，就是说AAC在K姓方面，我们需要控制规模，所以我们大概就上周应该是五六千台机器的样。
规模。
对，机器的一个规模，我们要控制。而且我刚刚在前面也讲过，我们需要去，怎么讲呢，在里面获取价值高等。随着我们进入的客户越来越多，我们希望做high-end和价值高等。而且在这里面我们希望能够做出AAC技术的一个特色来。所以至于机构方面，对于我们来说，整个还是处于一个发展过程。至于说你刚刚讲的，我也看了那张照片，那个门口，因为那个等于是供应商租的，那个是一个独立的类似于供应源这样的。是加工厂在那里租的厂房。
那潘总，那为什么他们会有一个瑞声科技的logo在上面？那个是真的有那个logo呢，还是假的呢？
Logo 我已经确定了，是真的，但是因为它这个加工是100%给AAC的。所以我觉得我们有一些客户的audit，因为有些管理这些，我们也在管理和控制。所以我觉得可能是我们的市场部基于这个基础，所以把logo放那里，因为它是100%帮AAC加工的，而且它的管理标准，AAC也会去管理和控制。
CEO already spoke related about the strategy of expanding our CNC mechanical structure business. When we started 2 years ago, we wanted to catch up very quickly. We work with, at that time, a provider of such equipment, and give them kind of what we call basic outsource CNC casing work. As we get to know the process and the design better, we put in management input. As we have explained, we assess and identify which are the core kind of outsource partners. To some extent, we may help them out with some financial support in terms of equipment, but they are what we call independent outsource supplier. What is important to understand is that, we review our CapEx, our resources allocation on different businesses, particularly on RF mechanical.
We are prudent, but at the same time, we would want to learn more about how to be able to sustain businesses by capturing the most interesting projects. Hence, I think last time we disclosed the number of machines that AAC owned, we said about a range of 5,000 to 6,000 CNC machines, but thereby we use kind of leverage on the capacity of these outsource suppliers. That in a way, we could elect projects interest of strategic value in terms of building up our technology footprint on the Android devices. I think it has worked well. As I have mentioned in the beginning, that's the second quarter kind of prospects. I think we can confirm that yes, we did see a AAC logo on the building exterior wall.
We believe it's an effort of our marketing department to make sure this kind premises is recognizable from the customer's perspective, as AAC has a very strong management input on the quality and the kind of ongoing of the production lines and outputs. Nevertheless, we also understand the business that this outsourced supplier, basically 100% comes from AAC. To capture its essence, basically, first of all, yes, we believe this logo, it makes a lot of sense in terms of getting the business recognition, getting kind of customer's recognition that AAC will put management input. Secondly, I think you also pointed out the photograph that our outsourced supplier actually rent the building from such a kind of business park arrangement. They have this flexibility. Nevertheless, what is important, this is a completely unrelated party.
I have another question, which is what I just asked. Do we know if this shareholder of Lian Tai has any family relationship with our senior management or had an employment relationship with us AAC before?
Lian Tai, as I just said, was originally just one of our equipment suppliers.
Okay.
Yeah. We pointed out, as we have already said, in the beginning when we started this business, this is an equipment provider of such machines. There's nothing kind of related to any member of AAC or related party.
Another question, we mentioned that the company would send management personnel to these companies, to the outsourcer. To what extent do we send them? For example, is it the deputy director or the worker, or is it just three or two managers here? How are the salaries of these managers handled in principle? Thank you.
The kind of processing we assign is based on the level. If its management ability is poor, just like in the beginning, we assigned very few. Up until now, we have assigned quite a lot. Its salary, if we assign it, we are directly responsible for it. If it is theirs, it will be in its processing fee. The question was about the extent of management involvement or participation in our outsourced supplier. I think it reflects the extent of capability of the outsourced supplier, so the situation varies. For example, there are cases that the outsourced suppliers is capable of delivering a kind of consistently high quality and meeting AAC kind of specs, then clearly such management requires less so input from AAC.
Nevertheless, when there are kind of involvement that there are sufficient scope of improvement to the production efficiency, the cost of the workers are already kind of part of the calculation in the fees that we arrange or agree with the outsourced supplier.
Your next question comes from the line of Anne Lee of Nomura. Please ask your question.
Hi. Anne Lee. My first question is very straightforward. Could you give us a quick update regarding the CapEx for this year and what the details for the spending in the CapEx?
Hello?
Hello, Anne. Thank you for your questions.
Hi.
At this moment, there's no change in the CapEx. What we have said, I think, is that we will closely monitor the progress and development of new business, for example, in the optics sector, in the second half. I think we briefly already covered that earlier in the questions that Benjamin spoke. I think we will monitor the progress of optics projects and design requirements. At this moment, no change to CapEx.
Okay. My second question regarding the haptics, because since our major customer started to use haptics, it has been almost three, four years. Gradually, step by step, haptics indeed changing our behaviors on how we use smartphone. I want to hear about what's Benjamin's view regarding how haptics will develop in the upcoming new products and also in 2018.
I think I can answer that for the company. I think haptics continues to play a very important part in any potential new design, because I think the trend is to come up with sleeker and sleeker design with different materials. I think haptics kind of provides alternate very interesting user experience as we have seen, as you have indicated, haptics is now in the third and almost fourth year. I think in each of the year, the performance and the design and the user experience that it managed to create are substantially different from year to year. I think that the trend, especially in the prospects of different material in changing, kind of competing, more sleeker design and perhaps larger display screen, et cetera, haptics continue to play a very important part of a design solution for all mobile phones.
Just a very quick follow-up is, do we see more meaningful pickups from the Android camps from this year?
I think Android phones are now kind of aware of the value of incorporating haptic design in their smart mobile devices. I think this year there will be more devices adopting a higher-end solution. I think the complete solution will involve design, will involve new kind of user experience. I think Android phone, this year's development will be more interesting than last year.
Thank you.
Your next question comes from the line of Kylie Huang of Daiwa. Please ask your question.
Hello, Ben and Richard. Thank you for taking my question. I have two questions. The first question is regarding acoustic. I think Benjamin mentioned we see, for China brands, some acoustic product have ASP increases to around 50%. I was wondering, is it more related to new feature like waterproofing or some new platform driven?
We believe the waterproof features in the new acoustic specs requirements will ever become an essential feature. With that, I think stereo is also very becoming. I think you mentioned the 50% ASP increase. I think I'd like to clarify that we describe that 50% ASP attributed to a new structure design that we see some of the Android core players will adopt, enhancing kind of capable of delivering close to what we call a mini hi-fi kind of acoustic performance. We're not referring the 50% ASP increase to the waterproof or what you are interested in, the stereo features.
Okay. Thank you. That's very helpful. The second question is about the MEMS microphone. We know previous is quite a margin dragger in terms of overall product portfolio. I was wondering, could you share with us what's the current status about MEMS microphone and any new opportunity or new project in the future you can share with us?
We think the continued importance of analog MEMS microphone will be taken over by what we call a higher signal-to-noise ratio in terms of more closer to definition of digital MEMS microphone. As you know, we have set up our MEMS design center in Singapore. We have capability of a design team coming up with the corresponding ASIC for such digital MEMS microphones.
Just a quick follow-up. For this digital MEMS microphone, will we see a product going out this year or maybe more like next year? In terms of this digital microphone, we will produce the IC in-house or we will outsource?
I think AAC strategy is not to build our own fab or foundry. We will outsource. We see timetable of Q4 this year or early next year for projects related to digital MEMS microphones.
Okay. Thank you very much.
Your next question comes from the line of Jim Yu of Goldman Sachs. Please ask your question.
Hi, Richard, Benjamin. Thank you for taking my question. My question is more about financials. I recognize that in this quarter and also fourth quarter last year, the tax rate seems to be a bit higher than compared to the past. I remember before, two quarters of last year, AAC used to have tax rate around 10% or even below, but now since the tax rate has been increased a few percentage points. Could you elaborate about that? Why does it increase? Is that because of higher earnings or some structural changes in the subsidiaries or
Yes. Thank you for asking the question on the effective tax rate. I think the increase is attributed mostly to the RF mechanical business, which is based in our Suqian district. In the Suqian district area, this new business is paying a relatively higher tax rate compared to the average group effective tax rate. We are working very hard to lower that, but there's a lot of work to be done because, after all, in Suqian, we are known to be a successful enterprise. We have quite good kind of dialogues going on. We believe, for example, a effective tax rate for what we call high-tech enterprise is around 15%. If we are successful in that, we should see that coming in impacting in lowering effective tax rate, possibly not have to wait till next year. Overall, I think there's a trend.
I think we briefly predicted and talk about this. I think not only China, but all over the world. I think profitable enterprises are now under heavy attention from tax authorities, because those enterprises are kind of capable of accepting a higher tax bill as such. I think it's also important to note our overall kind of tax management is not based on a short-term kind of reaction. We do have a kind of long, medium-term plan to manage our effective tax rate. There will be constant efforts to improve on our tax planning and on also, more importantly, communications of investment plans with existing taxation jurisdiction or any new jurisdictions that we have planned that will come into AAC production kind of phases.
Okay, thanks. That's very helpful. Could we expect that the effective tax rate may recover back to around the low teens or 10% around that range?
I think going down to 10% will be very difficult. I think it's also not completely incorrect to say that with AAC product mix changing and the different kind of performance in the different product areas, I think the effective tax rate may be subject to small variation from quarter to quarter. Overall, I think the trend, as I mentioned, will be a small kind of uplift from the previous lower level in the past. That kind of trend is not going to grow very steeply. I think AAC is managing very well. We will continue to try our best in terms of working on lower effective tax rate, but it's not going to be an easy exercise.
Okay, I got it. Thank you very much. I have no further questions. Thanks.
Thank you. We have reached the end of our question- and- answer session. I would like to turn the floor back over to Ms. Connie Chin for closing comments.
Thank you. Consistent with our commitment to building innovative miniature solutions and multi-platforms for enhancing the user experience, we will maintain strong R&D capabilities, which will in turn enable us to build even greater growth momentum for the company. We are also well-prepared to capture the strong demand from the market and to make further inroads in all of our business lines, thereby placing us in an excellent position to be a global provider of integrated miniature technology solutions. To conclude, I wish to thank you all for attending today's webcast and conference call and for your interest in AAC Technologies. Should you have any inquiries, please feel free to contact our IR team. We look forward to speaking with you again and addressing our 2017 interim results, which is tentatively scheduled in August 2017. Thank you.
Thank you for your participation. This concludes today's conference. You may go ahead and disconnect your line.