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Spansion Reports Second Quarter Fiscal 2008 Results | Cypress Semiconductor

Spansion Reports Second Quarter Fiscal 2008 Results

Last Updated: July 15, 2008

SUNNYVALE, Calif., July 15, 2008 -- Spansion Inc., the world's largest pure-play provider of Flash memory solutions, today announced results for the second quarter ended June 29, 2008.

Net sales for the second quarter of 2008 were $613 million, up 7 percent compared to net sales of $570 million in the first quarter of 2008 and up from net sales of $609 million in the second quarter of 2007. Spansion MirrorBit(R) solutions as a percentage of net sales reached an all time high at approximately 80 percent.

Gross margin increased to 17.8 percent in the second quarter of 2008 compared to 16.6 percent in the first quarter of 2008. The improved gross margin was primarily a result of increased sales of higher margin Spansion MirrorBit solutions, growth of 90nm product sales, continued improvement of the company's internal manufacturing, and a reduction of external foundry purchases. The manufacturing improvements more than offset incremental start-up costs associated with SP1. A decrease in non-SP1 inventory offset the increase of 65nm SP1 inventory, resulting in a decline in days of inventory compared to the first quarter of 2008. Blended average selling prices decreased two percent in the second quarter of 2008 compared to the prior quarter.

During the second quarter, Spansion engaged in restructuring activities which resulted in a $10 million charge. Including the restructuring charge, the operating loss was $77 million in the second quarter of 2008, representing a 24 percent improvement compared to the operating loss of $101 million in the prior quarter. Net loss for the second quarter of 2008 was $101 million, or $0.63 per share, compared to a net loss of $118 million, or $0.85 per share, in the first quarter of 2008. EBITDA for the second quarter of 2008 improved to $88 million, or 14 percent of net sales, compared to 9 percent of net sales in the first quarter of 2008. Refer to accompanying table for a reconciliation of non-GAAP measures to their related GAAP measures.

"The company's results were above our expectations, mainly driven by strong performance in the consumer segment. We also held our position in the wireless segment, despite the difficult business environment," said Bertrand Cambou, president and CEO, Spansion Inc. "With the continued ramp to production of multiple product families at SP1, we are reaffirming our full-year business outlook."

Division Highlights

The company's Consumer, Set Top Box and Industrial Division (CSID) reported an increase in net sales of 14 percent to $312 million for the second quarter of 2008, compared to $274 million in the first quarter of 2008 resulting in segment share gains. Acceleration of high density MirrorBit sales was the driving force for growth in CSID with MirrorBit solutions accounting for the total sequential net sales increase.

The company's Wireless Solutions Division (WSD) reported flat sequential net sales for the second quarter of 2008 of $296 million. Increased sales of 65nm solutions from SP1 resulted in higher average densities compared to the prior quarter. The company continued sampling MirrorBit Eclipse solutions into multiple key accounts with customer qualification expected in the third quarter of 2008.

    Additional Highlights
    -- A heightened focus on the alignment and restructuring of the company to
       improve operating efficiencies and cost structure by:
        - accelerating the transfer of positions to more cost effective
          regions including China and Malaysia
        - establishing strategic partnerships in technology development and
          manufacturing
        - reducing approximately 500 regular and contract positions globally
    -- A revolutionary new memory solution, called Spansion EcoRAM(TM), that
       extends the applicability of the company's technology beyond
       traditional Flash memory segments into higher margin markets:
        - enabling high performance instant search capability in Internet
          servers
        - significantly reducing energy consumption and total cost of Internet
          data centers
    -- Successful integration of Saifun Semiconductors Ltd., now operating as
       wholly owned subsidiary of Spansion:
        - leveraging Spansion's large IP portfolio to drive new licensing
          revenue streams
        - significantly expanding design expertise for MirrorBit-based product
          development
    -- Approximately $75 million of second quarter planned capital equipment
       will be delivered in the second half of 2008. Total capital
       expenditures in the second quarter of 2008 were $110 million


Spansion's outlook for the third quarter of 2008 and fiscal year 2008 is based on current expectations and subject to various factors including those set forth in the Cautionary Statement below.

    Third Quarter of 2008 Outlook
    -- Net sales for the third quarter of 2008 are expected to increase
       slightly from the prior quarter
    -- Gross margin for the third quarter of 2008 is expected to increase one
       to two percentage points from the prior quarter
    -- SG&A and R&D expenses are expected to be flat compared to the prior
       quarter
    -- Capital expenditures for the third quarter of 2008 are expected to be
       relatively flat compared to the prior quarter


    Spansion's outlook for full year fiscal 2008
    -- Net sales for fiscal year 2008 are expected to be flat to slightly up
       compared to fiscal year 2007 and financial performance is expected to
       improve
    -- Capital expenditures for fiscal year 2008 are expected to be less than
       $500 million, a greater than 50% reduction from fiscal year 2007
    -- Spansion expects to be free cash flow positive during the second half
       of the 2008 fiscal year (Note: free cash flow positive, an alternative
       non-GAAP measure of liquidity, is defined as net cash provided by
       operating activities minus capital expenditures)


Investor Conference Call

Spansion will host a conference call today, July 15, 2008, at 1:30 p.m. PT/ 4:30 p.m. ET to discuss the quarterly results. A live audio-only web cast of the call will be made available in the Investor Relations section of the company's web site at http://www.spansion.com. In addition, we are providing a slide presentation regarding our quarterly results and other financial information, which will be posted to the company's web site immediately prior to the conference call. The slide presentation will be available for viewing in the Investor Relations section of the company's web site at http://www.spansion.com although we reserve the right to discontinue that availability at any time. A replay of the call will be made available on the company's investor relations web site at http://www.spansion.com following the call.

Cautionary Statement

This release contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding the expectation of customer qualification of MirrorBit Eclipse solutions with multiple key accounts in the third quarter of 2008, the expectation that Spansion EcoRAM will enabling high performance instant search capability in Internet servers and significantly reduce energy consumption and total cost of Internet data centers, the expectation that Saifun will drive new licensing revenue streams, the expectation that net sales: (i) for the third quarter of 2008 will increase slightly from the prior quarter and (ii) for fiscal year 2008 are expected to be flat to slightly up compared to fiscal year 2007, the expectation that gross margin for the third quarter of 2008 will increase one to two percentage points from the prior quarter, the expectation that SG&A and R&D expenses will be flat compared to the prior quarter, the expectation that capital expenditures: (i) for the third quarter of 2008 will be flat compared to the second quarter 2008 and (ii) for fiscal year 2008 will be less than $500 million, and the expectation that Spansion will be free cash flow positive by the end of the 2008 fiscal year. Investors are cautioned that the forward-looking statements in this release involve risks and uncertainties that could cause actual results to differ materially from the company's current expectations. Risks that the company considers to be the important factors that could cause actual results to differ materially from those set forth in the forward-looking statements include demand for the company's Flash memory products will be lower than currently expected; that average selling prices may decline; loss of key intellectual property arrangements creates a greatly increased risk of patent or other intellectual property infringement claims; the high cyclicality of the Flash memory market which has experienced severe downturns; that adverse financial market conditions may impeded access to or increase the cost of financing operations and investments; that Spansion may not be effective in expense reduction efforts; that OEMs will increasingly choose NAND-based Flash memory products over the company's MirrorBit architecture-based Flash memory products for their applications; that the company has a significant amount of debt, and such debt could subject us to restrictive covenants; that the company may not achieve facilities and capacity implementation schedules as a result of factors such as insufficient cash flows and unavailable external financing; that the company may lose a key customer, or experience a reduction of demand from a key customer; that the company will not successfully develop, introduce and commercialize new products and technologies or to accelerate our product development cycle; that competitors may introduce new memory or other technologies that may make our Flash memory products uncompetitive or obsolete; that the company may fail to successfully develop next generation products; customers' ability to change booked orders may lead to excess inventory; that the company's investments in research and development may not lead to timely improvements in technology; that the company may experience manufacturing constraints or fail to achieve manufacturing efficiencies; the company may experience manufacturing disruptions of suppliers interrupt supply or increase prices for raw materials; that Spansion may not realize the expected value of Saifun's NROM technology; the merger with Saifun may not result in benefits that Spansion anticipates as a result of integration or other challenges; and intellectual property claims or litigation could cause the company to incur substantial costs or pay substantial damages or prohibit sales of its products. The company urges investors to review in detail the risks and uncertainties in the company's Securities and Exchange Commission filings, including but not limited to the company's Annual Report on Form 10-K for the fiscal year ended December 30, 2007 and the company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2008. The company assumes no obligation to update any forward-looking statements or information included in this press release.

About Spansion

Spansion (Nasdaq: SPSN) is a leading Flash memory solutions provider, dedicated to enabling, storing and protecting digital content in wireless, automotive, networking and consumer electronics applications. Spansion, previously a joint venture of AMD and Fujitsu, is the largest company in the world dedicated exclusively to designing, developing, manufacturing, marketing, selling and licensing Flash memory solutions. For more information, visit http://www.spansion.com.

Spansion(R), the Spansion logo, MirrorBit(R), MirrorBit(R) Eclipse(TM), ORNAND(TM), ORNAND2(TM), HD-SIM(TM) and combinations thereof, are trademarks of Spansion LLC in the U.S. and other countries. Other names used are for informational purposes only and may be trademarks of their respective owners.

    Spansion Inc.
    CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
    (In thousands, except per share amounts)

                                                     Quarter Ended
                                            Jun. 29     Mar. 30     Jul. 1
                                              2008        2008       2007
                                          (Unaudited) (Unaudited) (Unaudited)

    Net sales                               $612,720    $570,272   $609,172
    Cost of sales (*)                        503,571     475,810    501,033

    Gross profit                             109,149      94,462    108,139
    Other expenses:
    Research and development                 108,303     120,321    110,900
    Sales, general and administrative         68,264      64,764     61,947
    Acquisition related in-process
     research and development                      -      10,800          -
    Restructuring charges (*)                  9,922           -          -

    Operating loss                           (77,340)   (101,423)   (64,708)
    Interest and other income (expense),
     net                                       2,536       3,379     11,672
    Interest expense                         (27,663)    (20,991)   (17,542)

    Loss before income taxes                (102,467)   (119,035)   (70,578)
    Benefit for income taxes                  (1,824)       (564)    (3,676)


    Net loss                               $(100,643)  $(118,471)  $(66,902)


    Net loss per common share

    Basic and diluted (**)                    $(0.63)     $(0.85)    $(0.50)


    Shares used in per share calculation

     - Basic and diluted (**)                160,196     138,765    134,827


    *  Restructuring charges for the quarter ended June 29, 2008 include
       $3,123 related to cost of sales.
    ** Shares used in per share calculation is computed based on the
       weighted-average number of common shares outstanding during the period.
       The shares used in net loss per common share calculation for the
       quarters ended Jun. 29, 2008 and Mar. 30, 2008  included
       22,729 thousand and 3,247 thousand of weighted-average common shares,
       respectively, related to the acquisition of Saifun Semiconductors Ltd.



    Spansion Inc.
    CONDENSED CONSOLIDATED BALANCE SHEETS
    (In thousands)

                                             Jun. 29     Mar. 30     Dec. 30
                                               2008        2008       2007*
    Assets                                 (Unaudited) (Unaudited)

    Current assets:
      Cash and cash equivalents              $240,442    $333,051    $199,092
      Marketable securities                   108,479     121,900     216,650
      Accounts receivable, net                371,399     340,431     379,962
      Inventories                             636,389     633,102     583,869
      Deferred income taxes                    29,133      31,597      26,607
      Prepaid expenses and other current
       assets                                  43,277      51,181      46,452
            Total current assets            1,429,119   1,511,262   1,452,632

    Property, plant and equipment, net      2,365,211   2,488,538   2,271,964
    Deferred income taxes                      40,014      35,640      29,957
    Acquisition related intangible
     assets, net                               60,437      63,113         -
    Goodwill                                   19,289      17,782         -
    Other assets                               85,619      75,947      61,092

    Total Assets                           $3,999,689  $4,192,282  $3,815,645



    Liabilities and Stockholders' Equity

    Current liabilities:
      Note payable to banks under revolving
       loans                                 $128,930    $130,418          $-
      Accounts payable and accrued
       liabilities                            694,255     669,790     643,764
      Accrued compensation and benefits        78,099      71,698      60,778
      Income taxes payable                      4,809       4,267      13,818
      Deferred income on shipments to
       distributors                            46,688      54,629      39,957
      Current portion of long-term debt
       and capital lease obligations          144,767     160,313     101,797
            Total current liabilities       1,097,548   1,091,115     860,114

    Deferred income taxes                       7,023       4,393         186
    Long-term debt and capital lease
     obligations                            1,312,377   1,362,578   1,299,536
    Other long-term liabilities                28,595      24,872      23,361

    Stockholders' equity                    1,554,146   1,709,324   1,632,448

    Total liabilities and stockholders'
     equity                                $3,999,689  $4,192,282  $3,815,645

    * Derived from the December 30, 2007 audited financial statements of
      Spansion Inc.



    Spansion Inc.
    SELECTED CASH FLOW INFORMATION
    (In millions)

                                                      Quarter Ended
                                               Jun. 29,    Mar. 30,   Jul. 1
                                                 2008       2008        2007

    Depreciation & Amortization                  $162        $142      $129

    Amortization of intangibles
     and other acquisition-related costs           $3         $11        $-

    Purchases of property, plant and
     equipment                                   $110        $227 *    $595


    * Purchases of property, plant and equipment for the quarter ended
      March 30, 2008 include non-cash equipment capital leases of $50M.



    Spansion Inc.
    RECONCILIATION OF NET INCOME (LOSS) TO EBITDA
    (In millions)

                                                        Quarter Ended
                                                Jun. 29     Mar. 30    Jul. 1
                                                 2008        2008       2007
    Net loss                                    $(101)      $(118)      $(67)
    Interest expense, net                          26          18         13
    Income tax benefit                             (2)         (1)        (4)
    Acquisition related in-process R&D              -          11          -
    Depreciation and amortization expense         165         142        129
    EBITDA                                        $88         $52        $71


Earnings before interest, tax, depreciation and amortization (EBITDA) is defined by the company as net loss before net interest expense, income tax benefit, acquisition related in-process R&D and depreciation and amortization expense. The Company uses this non-GAAP financial measure to provide meaningful supplemental information regarding Spansion's operational performance of current and historical results as the Company uses this non-GAAP measure for strategic and business decision making, internal budgeting, forecasting and resource allocation process.

Moreover, this non-GAAP financial measure facilitates Spansion's and the investment community's comparison of Spansion's operating results to its competitors' operating results which currently may not include acquisition related expenses therefore making their reported financial information easily comparable to the Company's operating results.

There are limitations in using this non-GAAP financial measure because it is not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for GAAP financial measures. The non-GAAP financial measure should be viewed in conjunction with GAAP financial measures. Investors should review the reconciliation of the non-GAAP financial measure to its most directly comparable GAAP financial measure as provided in the preceding table.

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