Earnings Call: Q3 2016

Nov 14, 2016

Ladies and gentlemen, thank you for standing by, and welcome to AAC Technologies 2016 Q3 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. I must advise you that this conference is being recorded today and lasts for 1 hour. We'd now like to present opening remarks. We are happy to have Mr. Benjamin Pan, Chief Executive Officer Mr. Richard Mok, Managing Director and Ms. Connie Chien, Head of Investor Relations with us today. And I would like to turn the conference over to your moderator today, Ms. Carly Chen. Please proceed with your introduction. Good day, everyone. Thank you for joining AEC Technology 2016 Q3 results investor webcast and conference call. This is Connie Chen, Head of Investor Relations. 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 announcement, results presentation and press release are all available from our website, www.aettechnologies.com. We would also like to draw your attention to the following disclaimer. Some information 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. 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 Q3 and the 9 months results before we open up the call to questions. AAP Technologies has record historical highs in both quarterly sales and earnings for the 3 months ended 30th September, 2015. Overall, Q3 revenue and net profit increased 39% 50% quarter on quarter, respectively. In the acquisition segment, we were able to ride on a significant emerging industry trend for upgrading the audio quality of smart devices, which enable us to drive dynamic component sales up by 25% sequentially. Our non acoustic segment also enjoyed continuous growth momentum with sales up 63% over Q2. Thanks to our strong execution of our strategy and sustained progress of effective cost control measures, ToC gross profit margin rose to 41.8% and net profit margin improved to 26.2%. We had solid growth across all major business lines over the 9 months of the year. Revenue and net profit for the 9 months rose 24% 17% year on year respectively. Sales of the dynamic components and non acoustic sales increased by 30% 34% year on year contributing 57% 38% of our total sales, respectively. Overall, gross profit margin stabilized at 41.4%. Continued momentum in non acoustic solutions coupled with our leading technology position of the acoustic business delivered these strong results and a 27.5 percent annualized return on net income for the 9 months of 2016. Looking ahead, we expect to drive more technology upgrades in the accretive business in the market to reinforce our competitiveness and strengthen revenue streams in the coming years. We believe our innovative platform integrated solutions will enable us to further penetrate wider industry segments and sustain long term growth. With our strong design and production capabilities backed by a consistent high level of investment in R and D and Technology Innovation, we are well positioned to stay ahead of industry and consumer trends and to capture the promising market opportunity. That brings the end of our introduction. We just like to remind you that we have set aside around 1 hour for this call. Now we will start the Q and A session. Thank you, Connie. The question and answer session will be conducted electronically. Your first question comes from the line of Arthur Hsieh of UBS. Thank you. Please go ahead with your question. Hi, thank you for taking my question. My first question is with regard to the Art Mechanical business. I think there has been considerable concern about your exposure to Chinese Internet customer. Could you let us know what is the current situation in terms of the AR and also in terms of the future product development? That's the first question. And second question is with regard to the future competition in both the acoustic and the haptic product line. I think one of your competitor Would you agree with that? And do you think that's potential increasing in price competition going forward and how do you defend your current position? And same thing for haptic, another competitor obviously climbs there much better in automation. So, it would be great if you can share your view about those 2 product market development. Thank you. Hi, Arthur, it's Richard. I think you so in your two questions, you've actually touched upon 3 areas, mainly in one of the Chinese specific customers and then the acoustic outlook and the kind of haptic sort of production competitiveness landscape looking forward. For the CNC Mechanical Business this year, 2016, I think generally, we have achieved what we have set out to do as of today because after all, this is our 1st year of our RF mechanical business, really launching ourselves into, as we have said, for the whole year 20 projects and really focusing only on a small number of customers based in China. So I think we have achieved what we set out to do from the early part of this year, which set up a very strong solid base for us to perform even better, I think in 2017. But referring to the specific customer, I believe on two levels. I think first of all, most of our projects with this particular customer have been completed. And on our financial statements, we have, as usual, in common with many of our Chinese businesses, they are, in a way, adequately covered by collateral or insurance. But we believe that this customer have already stated that for 2017, smartphone business will still be one of the major important business that they will embark on. Being an important strategic supplier to them, we believe the current outstanding balances, we do not think is kind of it should not require outright significant provision against it's a matter of kind of negotiation, reorganizing. So we are at this moment, we are quite confident that the receivables will become good. It's just a matter of maybe it takes a little bit longer than usual. I think in your question, you also asked about the change or the outlook for acoustic landscape in terms of price competition, etcetera. I think what we have seen in 2016 is a very clear, very specific trend for not only the high end phones to go after migration of higher acoustic performance. We've seen stronger positive feedback from the market on acoustic upgrades, including dustproof, waterproof or dual source stereo sound showing up on smartphones. And it has received a very positive feedback from the consumer point of view. And we believe this is only a beginning. So in terms of competitiveness, we believe it's not about pricing competition for the going into 2017. Rather, it's an ongoing roadmap of delivering what we call customized acoustic upgrades for different customers to continue to bring our differentiation, including acoustic specification performances, which fit into different customers' product design. I think in the last couple of months, we already have seen some very interesting new devices from our customers, which have embarked on the acoustic upgrade roadmap. And we believe this roadmap actually put challenges on acoustic suppliers, not on the pricing, but on the continued efficiency, continued kind of smart production and good solutions to bring out the differentiation for customers. At the moment, we don't see any significant change in terms of our leadership in the acoustic upgrade roadmap. And we believe 2017 actually give us a very good opportunity to carry on and to show our leadership in the acoustic specs upgrade trend. Finally, I think you talked about a little bit about I think you asked a little bit about haptics as well. Again, I think the recent launch of the latest haptics solutions has already proven that in addition to a tactile sensation, the haptics actually serves more than that. It helps it gives more flexibility into the kind of upgrade of product design overall. We believe haptics in 2017 beyond will continue to challenge capable suppliers from all over the world to prove that they are coming up with differentiating exciting solutions, not only to give a haptic feedback, etcetera, but in order to fit into all sort of product designs that our end customers are thinking of. Again, I think 2017, we believe our haptic business will perform well. We do not see any changes in terms of big kind of new competition coming into this market. Thank you very much. Thank you. Your next question comes from the line of Jerry Ma of CLSA. Thank you. Please ask your question. Hi, Benjamin, Richard and Connie. Congratulations to the fantastic results. My first question is related to the growth outlook. On your presentation slide, you mentioned that the 4Q peak season is propelled by high demand from diverse customer base and potentially elongating to first half next year. Could you elaborate further on the growth outlook for 2017, please? Jerry, it's Richard. Thank you for asking that question. I think looking ahead, 2017, as I said, for the CNC for the RF mechanical business and also the haptics, I've already described, we have achieved a very good base. From there on, we believe some of our solutions actually will already which have already been stopped by customers. And some of these customers' products have been launched in the second half. And it seems reading from the current momentum, the market is reacting very strongly. Some products are still not immediately available. We believe this kind of sales momentum would actually extend into possibly the 1st few months of 2017. And that's why I think our growth opportunity, despite the forthcoming not forthcoming, but the current Q4 we are in is the peak season. But also, I think some of the what we call tail end momentum possibly will elongate it into the first half of next year. I think overall, the impact is for the last few years, we have seen first half, second half split being second half a much stronger kind of tilt because of our customer. But in 2017, at this moment in time, I think it's obviously, it's maybe a little bit too early to confirm what will exactly happen. But we do see opportunities that the first half somehow some of the tail end momentum of the second half of this year will extend into the first half. Thereby, some of the customers will perform quite strongly in the first half next year. That's what we mean by potential elongating into the first half of the twenty seventeen. That's very clear. Thank you. My second question is for haptics. You mentioned on the slide again that there's a clear And what do you think the adoption rate could be in 2017? I think the adoption of haptics by Android customer has not spread all throughout the portfolio of Android customers, but we already have seen some Android customers picking up some sort of haptic solution in the year 2016 already. What we are seeing and due to the kind of the effects of haptics on not only on helping on creating user experience, but on the design of the device. I think some of the Android customers have taken up or raised their level of conversation on how sophisticated on how or how strong haptic solutions that delivered by AAC can actually deliver further than, as I described, as a pure tactile effect in addition to vibration. So some of the customers, I think, have already, as I said, have already adopted solutions in 2016. And in addition to these existing customers, there are some other Android customers have expressed more kind of deeper conversation as to what are the potential user experience of the haptics. But overall, I think, in the first question, I think I've said that we do expect in the year 2017, haptics business for AAC should still perform well, I. E, I think we should still see some growth in haptics business in 2017. Thank you, Richard. Thank you. Your next question comes from the line of Wei Ben of Goldman Sachs. Congrats on the strong showing of 3rd quarter results. I'm interested to get more information on lens and 3 d glass business in terms of capacity and revenue contribution. Looking at your Q3 results, the other revenues still remains very small, very similar to Q2. So can you talk about some of the timing of these new businesses and also the capacity you're planning for 4Q and also into 2017? That's my first question. Thank you for asking that question. We believe this year, we have very good preparation internally, including further R and D design work on plastic lens and wafer level lenses. And in addition, we've briefly talked about the potential of assessing our capability to go into the market of supplying or delivering 3 d covered glass. I think as of today, we are on track. We are now preparing some what we call, I wouldn't say very large quantities, but meaningful mass production projects on both 3 d cover glass and the lens. I think in 2017, we have intention to be qualified or to be making shipments on both lenses and 3 d cover graph. What we are doing now is preparing to get on to establishing production capacity, possibly it will be small projects to start with, but significant in terms of design, in terms of production efficiency. I think overall, I think we are looking at in 2017, small percentage, single digit percentage contribution to our revenue, but we do hope to commence mass production in the year 2017. Understand. Just a follow-up. And can you also elaborate on the profitability of the lens and 3 d Glass business comparing to your current return profile? I mean, you're doing very well. You're delivering over 27% return on equity. How does these new businesses enhance or dilute your returns going forward? Yes. I think when we looked at investment into new projects or what we call sustainable platform, I think in the past and as you have observed our historical performance on the financial returns, when we have now, I think, for example, in the Q3, we delivered something like for the 1st 9 months of this year, we delivered something close to 40% of our revenue coming from what we call new nonacoustic business, whereby the investments profile for this new business are different. But we have maintained a respectable, what we call, return on equity on an annualized basis as of today. And we do intend to maintain and keep that return on equity ratio when we looked at opportunities in the new segments like lenses and 3 d glass. What is important is that we believe the strategy of investing or opening up our internal capabilities on technology platforms have remained unchanged. These should be sustainable platforms. There should be quite clear roadmaps to differentiate to bring or to deliver differentiating solutions to the market and the financial margins that we are after. I think if we look at current margins that we are delivering, including from contributions from what we call new business non acoustic lines, we have insisted on delivering about 40% gross margins. In fact, I think for the 1st 9 months, we delivered something like more than 41%. So including in our assumptions and our targets, I think both lenses and 3 d covered glass, we do intend to leverage on the invested resources in not in the last 2 years, but I think we make our investments back in the year 2,009 in order to gain knowledge about design and production of wafer level lenses. And at the same, I think and also, we have invested in a Japanese land design company, I think, at least 5 years ago already. And those preparations, I think, are beginning to be paying out. And we believe one of the messages that we have repeated reiterated rather is that, AAC, we should have our own unique proprietary in terms of design and kind of automation production in terms of when we approach 3 d graphite and lenses. We intend 1st of all, we intend to fully leverage our existing automation knowledge in Acoustics, but we will apply this to automation production to make sure that even in the 1st phase or the 1st year of us launching into what we call smaller amounts volume projects, we should be able to deliver these margins. And these margins, I think when we embark on expanding the business, we would be able to maintain the return on investment. So it is important also to, again, to repeat the message that in the past, our CapEx investment in the Optics sector in the Optics segment has not been the largest portion of our annual CapEx budget. Rather, we have been watching the development of our production capability. I think when we now said we are ready to see Optics delivering mass volume production projects, again, we are also expecting to improve on our production processes, our production efficiency, our production return as we expand our business. So that's the way we are preparing to maintain our return overall. But it is important that 2017 would still remain as kind of start 1st phase, 1st year for us in the new optics business. But when the opportunity arise, when our capability reach a level that we are confident, I think we will be making more CapEx investment and to leverage the automation production approach and to maintain the margins that we seek or we have thought in the past. Okay. Understand. I really appreciate the detailed explanation, Richard. Your next question comes from the line of Dennis Chen. Hi, congratulations on another good quarters. Can we talk about 4th quarter a little bit more? I understand that 4th quarter is a traditional quarter. Can we quantify the growth a little bit? My understanding from what Richard just mentioned is that haptic is we're seeing some haptic model, but it's not widely adopted yet. For ARC mechanical, we're positive and we achieved our target. We don't expect to take any provisions this year. Can I understand that the momentum that's standing into first half of next year, would that come from the acoustic then? Would that be the correct way of understanding it? Thank you for your question. It's Richard. I think first of all, I think 4Q would be a very strong quarter. I think we expect to see kind of double digit percentage growth on a Q on Q basis, very strong Q4. As of today, we are now like mid November. So we don't see any kind of changes to our expectation. And I believe, we early on, we have already given a full year forecast. I don't think we do not see any changes to that either. When we talk about business elongating into Q1 next year, I believe I referred to the sales momentum, tail end sales momentum of some customers' products. I've also mentioned that some products are not still not immediately available. I think, in a way, that has reiterated and reaffirmed AAC now, our diversification and our customer portfolio strategy has worked very well because different momentum of our customers have served us in the different kind of quarters. And we expect some quarters to drag over to the following quarters. And in this particular case, in this forthcoming case, we are talking about a year end cycle, which leads over to the following year. It could be any quarter slipping into the subsequent quarter. So it's not a strange surprise that our business kind of had this impact by the sales or what we call tailwind sales momentum of our customer. I believe that in Q1 next year, I think particularly strong segments will be our acoustic and haptics as well. But then again, I think we have discussed the pattern of RF mechanical business. They are much more kind of evenly spread out. And the RF Mechanical Business, especially, I think, we still have kind of what we call opening up new customers, projects to do and they are possibly some projects have already started in this quarter. I think some will be starting in Q1. So RF mechanical business does already have a kind of spreading out evenly effect pattern anyway. So that's why I think 2017 in terms of looking at first half against the second half, kind of we don't we do still expect a stronger second half, but maybe a less kind of tilt to the second half. And I think, overall, the in summary, I think the impact of the contributions to that factor comes from all three segments, the Acoustic, Haptics and the RF mechanical business. Got it. Thank you. Can I just get a quick update on our CNC machine capacity plan again? I remember last time we updated our CNC, how many we outsource, how many we have, etcetera. That's it for me. Thank you. I think we are embarking on how to fully combine the resources of the business strategy. As we said earlier this year, Some CNC capability, we have assisted. We outsource some of the long core activities. But I think we do have also mentioned that when the appropriate time comes, when we review our strategy going forward, maybe we would consider adding more machines, etcetera. So as of today, we have a total number count of around 4,000 I think more than 4,500 to 5000 CMC machines. Yes, I think going forward, I think we are still going to increase gradually these machines, but I think at a level not as fast as in the pace we have seen earlier this year. Sorry, just to clarify, $4,005,000 include the outsourcing partner or it does not include the outsourcing partner? It doesn't. These are the machines that we owned. Got it. Thank you. Thank you. Your next question comes from the line of Sam Li of Credit Suisse. Please ask your question. Benjamin, Richard, thanks for taking my question. My first question is about the non acoustic business, about the seasonality in second half. Of course, we know every year it's going up quarter by quarter, but I'm just wondering for this Q3 and Q4 in 2016, comparing with last year, would it be more lean towards the Q4 or it's just as normal seasonality? That's my first question here. My second question is about gross margin trend. Would it be better to have a more a little bit more color by segment? I mean, the gross margin trend for each segment, That's the 2 those are the 2 questions for me. Thank you. We expect Q4, actually the sales pattern to remain similar to previous years because I think in Acoustic, the projects in 4Q were not kind of any significant new projects about or starting in Q4. I think we will also continue the, what we call, haptics momentum over to the Q4. So, contributions from acoustic and haptic, the growth in the 4th quarter remains very strong. So I think the variance here is the RF mechanical structures. But as we have said earlier this year, the RF mechanical business will kind of be more even. And we did already said that, I think, over interim period, the second half, we are still going to fulfill some of the new customers and we're going to penetrate and start new business. So, in the Q4, we would have ended some of the projects that we started early this year, but we will continue on starting new projects. So the 4Q momentum in terms of RF, when we compare to last year, we could say the RF has contributed a little bit more. So Q4, as I have just said, the Q on Q growth for the Q4 is a strong double digit. Partially, the additional incremental growth will be due to the new business of RF mechanical structures. Can I ask a little bit more here? Then what about the haptic business? I mean, it seems like the client shipment is a little bit, I don't know, a little bit delay due to the supply restriction in certain component. Does that reflect in our shipment or pretty similar to last year? We would not like to comment on specific incidents, but I believe like most other projects that AAC embarked for major customers, for major projects, I think AAC does have the strength to accommodate any changes in shipment volumes or variation or any changes in the customer mix overall in the smartphone market. So when we look at our capability or our arrangements for production, we don't talk about we don't do this internally on a short term basis. And I think it's of the benefit to demonstrate that AAC does have the capability to do with any kind of request or convey any customers or any changes in projects, no matter they are the acoustic or the new non acoustic business as well. So I think it reflects kind of capability of AAC. But I want to carry on answering your questions about the potential kind of margins of the different business segments. I think clearly, if we start off looking at Acoustic, Acoustic, as we have said, AAC is definitely a firm to be the established leader to deliver solutions to differentiating products or acoustic specs and we believe the trend will continue in 2017 beyond. If we look at the potential specs upgrades, which is the major factor when we consider changes percentage uplift on the ASP, we do see our automation production are well suited for the acoustic upgrade product. So we don't really expect any kind of effort changes to the margins of our Acoustic business. But then again, we have already, as you recall, we have already established Vietnam facility, whereby we are implementing different kind of production process and delivering different pricing solutions from our VINAM facility. I think AAC not only is now firm as a leader of the kind of acoustic specs upgrade, but also in terms of our capability to deliver different quality production solutions, I think we does have the kind of alertness to move very quickly as well. So that would help us not only to maintain the margins, but we will see the opportunity if they arise to uplift the margins on acoustic. But I think you will possibly note that within our acoustic dynamic components business, we always have talked about different transformation of different standalone components. For example, the receiver going into a higher spec design and speaker turning up to be a stronger kind of performance, etcetera. So we and on the overall, I think, although our automation production works kind of differently for different product lines, our overall margins, I think, are well maintained by our capability by applying knowledge and production process to each of the lines. So Acoustics business, we are very confident that going further, definitely for the year 2017 and most likely in the years after 2017, our margin definitely should be able to see well above 40%. In our I think, in the newer acoustic business, I think, overall, I think we are comparatively in the comparatively to the acoustic segment. We are still in the beginning phases. I think there are rooms for improvement. We will continue to strive. But I think AAC so far, as we have seen for the 1st 9 months, we are still as a combined business of new and old business, we still are managing to deliver margins of about 40%. We do expect to work hard like that. Thanks for that. Just a final follow-up, you mentioned about revenue guidance for 4th quarter. So what about the gross margin for 4th quarter? Still expect it to be stable, a little bit higher and still guide the full year to be a little bit higher than last year? Sam, thank you for this question. I think as in the past, when the peak quarter comes, we will strive to uplift the margins. But then again, I think there are also other challenges happening in the Q4 as well because, as I mentioned, we have already kind of been delivering a platform, started well fully stretched out in the Q3, maybe some of the automation benefits are less obvious to climb further in terms of efficiency percentages. So overall, our 4th quarter margins, we believe we will strive to lift them, but I think the room of lifting up further, a lot of percentage are limited. Possibly, I think, we will be able to definitely, if not improve, but maintain similar margins. Okay. Thank you. Thank you. Thank you. Your next question comes from the line of Jasmine Lu of Morgan Stanley. Please ask your question. Hi. Thanks for taking my questions. So first question, just wonder, I think the next year for the smartphone, the industry wide, I think the biggest trend is that most of the customers that you have is shifting to MLA plus the glass casing design. So just want to know that what does that imply for your major product line from acoustic, haptics and even in terms of the eye mechanical solution in terms of the design and also the pricing trend? That's my first question. Thank you for your question. The changes in design materials that our customers choose for the end products in our track record and our observations that in the past have led to higher kind of design inputs and more complicated production process. I believe you mentioned about glass casing design, but I think there are possibly more than the glass casing design that comes into place, perhaps we heard about other different materials like ceramics, etcetera. But whatever I think the customers are working on in generating a better user feel, which is overall creating overall to a user experience, I think you mentioned about acoustic, haptics and RF mechanical structures, I think and to some extent optics as well. These four segments have clear functionality and value that user identified for creating or putting up with replacing a new device. So the glass casing design, along with other design, first of all, we challenge AAC to come up with different solutions. Different solutions meaning overall a consideration for raising the specs, use of different materials to integrate well with the new materials and also the chance of redesigning the form factor. I think those are the issues that our end customer will recognize that suppliers or capable suppliers are investing or preparing for good quality efficiency production. And with that possibly come a long opportunity of raising ASP. And from raising ASP and coming up with higher specs, usually, AAC could further prove we are the leaders, not only in acoustic, but in terms of coming out with interesting solutions, such as more integrated solutions that we are helping our customers with their casing and better with antenna design. And also, we mentioned the fact that in haptics, not only we are delivering a vibrating textile effect sensation, but we in fact, we are helping customers to think about different potentials of the use of haptic solutions. So glass ceiling design, I think internally, I think we are one of the better world present suppliers to take advantage of this change in design, but it will challenge us not only in terms of our design capability, but how we can leverage on existing, what we call, core production competency and apply them in new solutions. But I think from our various interactions on different segments of projects we embark with customers, we sure are placed in a very advantaged position that we understand the roadmap of our customers in thinking about new design. And we I think we internally, we are well prepared on the R and D and the design and new materials and production process and also some of the arrangements of our existing production facilities to take advantage of these opportunities. Thank you, Richard. So my second question is more specific for the 3 d cover glass. Just wonder whether you can just update a little bit in terms of the exacting CapEx that we already putting to this product line and also the guidance for next year? And also, I think you mentioned at the call earlier that you will start from the small project initially. So is that fair to say that the customer that you are engaged right now is following what the IVE Mechanical solution that's starting from the Internet based the OEM? Thank you. We believe internally, we have plans to establish production capacity monthly capacity of 500,000 in the first two quarters next year. But whether we will continue to embark on further investment or expansion, we are really looking at how the Android market will kind of develop falling on new designs. Possibly, you mentioned about OLED design. But in OLED design, we should also pay considerations for its scarcity. I think the supply kind of will affect the overall availability of the solution. So that would also impact on adopting our 3 d glass solution as a market. Our consideration for 3 d Glass, I think, it's not being impacted as such, but really, it is part of the available opportunity when OLED is limited to become the cover. So our 3 d cover glass focus is I think next year, our plan is to supply at the back casing rather than a full blown solution for the front display. We believe most likely in the first half of next year, the interaction or the inter bedding design of how RF mechanical will interact with 3 d cover glass, which requires some of the metallic kind of mechanical structure business will continue and be much more sought after overall in the second half and further could elongate it into the first half of twenty eighteen. But our consideration for expansion of our investment in the 3 d Covered Glass, to some extent, will not be kind of altered by opportunities like the change of the OLED design, we still have opportunities to grow that business. We have seen valuable business that contribute by what we call or what Jasmine you described as Internet Phone Company this year. But we believe by Q4 this year and Q1 next year, AAC will have already successfully penetrated in most of what we call the Android portfolio customers. That would be a very interesting kind of situation for AEC to be at because in our 1st year this year, we don't really have the luxury or the time to cherry pick different kinds of projects. I think in the year 2017, definitely, we will have more resources to carefully assess in different kind of business opportunity that we could embark on the RF mechanical business. But I think we are still expecting kind of our capacity with the around 4000 machines that I mentioned earlier. Our capacity next year, possibly around 40,000,000 to 50,000,000 pieces, whereby I think in the first half, we are still focusing on what we call metallic casing projects. But gradually, I think in the second half, the market will cause for or create opportunities that AAC can participate, whereby these projects will be mixed with kind of 3 d cover glass design as well. And hence, looking at the growth overall, I think CN's RF mechanical business, this year, no longer, I think going forward, no longer is kind of dictated by Internet phone company as such, but really is how AAC have proven itself to be a solid supplier in this space and be able to have penetrated every potential customer in the Android phone and ready to kind of also to be an important contributor in the new design of in the new design involving glass design. Thank you. Thank you. Your next question comes from the line of Ken Wei of Yai. Please ask your question. Growth into 2017, I think same time last year, you were able to tell us that you saw 20% growth in revenue for this year. Are you able to tell us some specific number again for next year? That is my first question. Ken, thank you for asking that question. But I think you're right in saying so. I think we are ready to talk about that as well. I think most likely 20%. Okay. Thank you. And then my second question is related to the product mix. I think so far this year for the 1st 9 months your acoustic and non acoustic business the growth similar about 30%. Should we expect quite even growth between these 2 segments into next year or you will expect some changes into in terms of the product mix? I think in 2017, we are still expecting these three segments to contribute growth overall. But I think the largest percentage kind of growth expecting is the RF mechanical business. As we embarked, as we have talked about during this phone call, the opportunities to deliver exciting solutions to all, I think, Android phones in China, I think, including outside China as well actually. But I think that would be our largest kind of base growth percentage wise. But in terms of Acoustic, as we have discussed, we believe the upgrade trend will continue to last. We are still very hopeful for quite a significant growth, but we it's very difficult to give you exact percentage number. Possibly, I would say, it's an interesting growth percentage that Acoustic can deliver in 2017 as well. CEO would like to see the contributions from non acoustic business to be more than the acoustic business for 2017. Just to clarify, that's it for full year basis, right? Yes. Correct. So but at the same time, you also expect growth in acoustic, would you be able to tell us whether you are able to see double digit growth in acoustics for next year? I think we will see we will try our best to deliver double digit percentage growth. As I already said a number for the total kind of percentage we're expecting. I think electricity is an important part of that. But whether that will be a very high double digit or not, I think we still have to work very hard on. But definitely, double digit percentage is what we are aiming for. We believe the acoustic growth opportunity is a very strong factor. Possibly, we will see the growth from the acoustic content in acoustic segment delivering better growth because it's very clear, there is the Android acoustic market opening up and there are still a lot of customers, new projects are not yet close to upgrading, but we've seen success of these upgrading already in 2016. So I think that the scope is much larger in Android portfolio. Thank you. Your next question comes from the line of Ken Choi of RHB. Please ask your question. Hi, all. Thank you for taking my questions. And congratulations to the robust quarter results. My first question is that, what would you will be your forecast of the waterproof stereo speaker adoption rate among Chinese smartphone bands for next year? Thank you. We believe that Chinese Android customers are now very innovative. We have seen them delivering unseen design and innovation. In terms of acoustic performance, I think it's a very clear specific feature that gives not only functionality, but define the status of the smartphone. We do in terms of marketing research, we believe the opportunity is very great because a lot of the not only mid segment, the high end Android phones have not really adopted a full waterproof and or high aspect what we call dual source solution, stereo sound solution. But in addition, I think the waterproof or the deduct proof solutions have different grading. I think whereby AAC again can have a lot of opportunity, not only opening up the flagship design in flagship models, also in terms of how to propel that momentum in the mid segment. I think as of today, only we have better kind of assessment of the adoption of speaker boxes. As we said in the past, maybe the adoption rate of bigger boxes was something like 15% to 20%. Now we definitely crossed that majority adoption rate already. So it's no surprise that it won't be a surprise to us that if the adoption of higher graded waterproof solution would catch up to more than 50% in a very short period of time. First of all, my second second question will be about the RF plus metal casing solution. Basing on my understanding, maybe your company has already started to deliver a metal casing standalone project with some major Chinese smartphone bands in the Q3 and also the Q4. So will AAC also be providing RF plus metal casing solution as a whole to those customers in the first half of next year and following? Yes. I think we have already done some projects covering metallic casing and also the whole value proposition is that AAC should take very strong inference or what we call managing the roadmap of antenna design within the casing. No, we are not interested just delivering a casing as such. We would add a lot of value in controlling and influencing the antenna and delivering a almost complete what we call almost complete antenna casing solution. As most of those involving resolving antenna design problems with metallic content. Going forward, we believe metallic casing the trend of metallic casing, although with all that screen, etcetera, with potential new design, metallic casing still remain a popular choice among our Android customers, whereby we believe the mid segment would be will show that trend. Definitely, we are prepared to embark ourselves on the metallic casing antenna projects in the first half of next year. Your next question comes from the line of Jim Liu of Goldman Sachs. Please ask your question. Hi, Richard and Benjamin. Thank you for taking my question. So my question is a follow-up on the lens and the 3 d glass 3 d cover glass question. So, I'm curious about the margin because now we AAC delivers very high margin in terms of gross margin. So, I'm wondering where the introduction of these 2 products might lower the gross margin portfolio? And how about also the R and D expenses? So, I would say that R and D expenses in terms of sales is around 7% to 9% in last few quarters. So, will these 2 parallels increase the R and D expenses going forward? Thank you. When we are assessing or embarking ourselves on new frontiers of technology platforms or businesses. We are going after what we call the technology element. And we believe the path we have chosen would create what we call a standard or the industry standard. And not only creating the industry standard, but to maintain and lead and become the top of that leader industry standard. But also, I think we are we do recognize that when we are at the early embryonic stage of these kind of new business segments for a short brief period of time, the achieved margins may be below what we call our average corporate gross margins. But we do after 4 0 kind of understanding of the technology involved in the design and production, we do very confident that as we expand the new business, our margin will improve and we would quickly achieve what we call our average level of corporate average gross margins, which we have clearly demonstrated in the past. What we want to reiterate when we talk about this issue is that this kind of recognizing the technology value of achieving this level of corporate gross margin, give up to we will not give that up for the sake of chasing after growth, I. E, we believe in generating a sustainable technology could a high value of our business. So we will not just blindly just deliver kind of 20% growth for the sake of delivering 20% growth. We do expand when we expand into new business, not only we can deliver that growth, but we would be able to gradually become the industry standard setter and consistently creating, delivering the margins that we have done so in the past. For example, when we talk about 3 d cover glass, the molding equipment design, we own that. We have developed a capability from our investment in a company called Kaleido years ago, whereby it's a proprietary AAC design. We believe this is a differentiating uniqueness that enable us to differentiate or even to perform better than our competition in this area in terms of production yield, in terms of efficiency and in terms of scalability, flexibility. So yes, so that is kind of the consistent expansion strategy AAC has done in the past and will continue in the future. Okay. Thank you, Benjamin and Richard. That's very helpful. So could you just one more quick follow-up. So can you give any guidance on the operating expense range for next year? I think when we grow our business, clearly, we as we have said in the past, financial discipline to control costs in terms of our operating expenses, which comprises including an element of research and development. In the past few years, we have stuck and held tightly to this discipline and we do not intend to change that discipline next year when we grow our business. So, in terms of OpEx ratios, we do not expect us to see any big changes. Okay, got it. Thank you. Thank you. Your last question comes from the line of Sam Lee of Credit Suisse. Please ask your question. Thank you for taking my question again. A little more follow-up on the related to the margin question. I think company has already give very clear guidance on RF mechanical business, especially on the revenue side. But what about the gross margin trend and the cash flow control, I mean, how to protect the what protections we did or we will do on the receivables and how to control the cash flow risk. And related to this, I know it might be a little bit early, but do we have a little bit visibility on next year's CapEx plan? No need for detailed number, but roughly like meaningfully below this year or just slightly below something like that because this year is really a peak in history? Thank you. Thank you for your question. I think definitely in the past and when we looked at our positions with various customers, financial discipline is something that we have stressed, especially if we had looked at the way we have maintained our gearing and also when we talk about how we open up new business accounts, etcetera. When we looked at CapEx, not only for next year, but in terms of for the last few years, we've seen gradual increase to reflect our kind of grabbing opportunities in the new business segments. But we have stressed out the fact that most of our approach to production, we don't really kind of if we could avoid invest in what we call specific short term one off machineries or what we call specific usage of machineries, what we like to do is to apply our production, integrating with design, how we could make use of what we call all machinery and turn them into more general uses. So in the past, I think, as you recall, we discussed about when we embarked on an automation program, they lasted 3 years. But what we have achieved in the end is not automation specifically for one customer project, but overall automation capability that enables us to apply the skills to new acoustic platforms and also to apply to core segments. So in terms of CapEx, I think to some extent, we are watching how we could continue to maintain the return when we embark on new projects, when we expand. But then again, I think in the past, as you have seen, our track on gearing, we keep a very tight control on that. And including the CapEx, I think next year, we talked about a significant world we haven't talked about, but we are focusing on how we could leverage on already existed invested CapEx resources and how we could generate good returns from that. So next year budget CapEx, at this moment, we are talking about maybe a smaller amount than 2016 level. So I don't have a final, final figure yet, but definitely we are talking about maybe something of the region less than RMB3 1,000,000,000 that kind of range. And that should enable us to deliver the growth we have talked about in this call. Understand, that's very helpful. But for the Alpha Mechanical gross margin, Benjamin talked about the scale effect before. So does that mean we can look for a little bit upside for gross margin for RF mechanical next year, we have probably the near term headwind? I think we also indicated that RF mechanical business is not exactly what we call a platform kind of arrangement production. We are talking about more projects of customized solutions. And each of the projects has a finite kind of timeline whereby machines are arranged almost to the last minute so that we can complete projects and start new projects. So each project has its own challenges. But as we progress or as we go up the learning curve, we do hopefully could generating better, what we call use and production arrangements, etcetera, and whereby, hopefully, all these will generate into better financial returns. But then again, each project is different to the next one. So we will strive. We believe the current margin of above average corporate margins is achievable overall for the 2017 new project that we are embarking on. Great. Okay. Just to double confirm, you mentioned about expected our mechanical business to approach corporate average gross margin, MRI? Correct. Okay. Thank you. Thank you. Clear enough. Thank you. Thank you. Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Ms. Connie Chin for closing comments. Thank you. Building technology platforms for miniature solutions to deliver long term profitable growth has always been our business strategy, which enable us to extend our reach to different applications, featuring all different mobile devices. We are well prepared for growth with a clear solutions roadmap and we'll stay focused on technology development support mobile device to improve and create new new experiences. We are confident that Yireo will continue to be the key major technology solutions provider around the world. To conclude, I wish to thank you for attending today's webcast conference call for your role in the AV Technology. Results tentatively scheduled at the end of March 2017. Thank you. Thank you for your participation and this concludes today's conference. You may go ahead and disconnect.