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Spansion Reports Third Quarter 2008 Results | Cypress Semiconductor

Spansion Reports Third Quarter 2008 Results

Last Updated: October 15, 2008

Company Posts Third Consecutive Quarterly Increase in Net Sales

SUNNYVALE, Calif., Oct 15, 2008 -- Spansion Inc., the world's largest pure-play provider of Flash memory solutions, today announced results for the third quarter ended September 28, 2008.

Net sales for the third quarter of 2008 were $631 million, up 3 percent compared to the prior quarter, and up 3 percent compared to the third quarter of 2007, driven by significant segment share gains in the wireless segment and continued strong performance by the company's Consumer, Set Top Box and Industrial Division (CSID.)

During the third quarter 2008, gross margin was approximately 14 percent. The sequential decline in gross margin was primarily due to a larger than expected drop in ASP per bit at 10 percent quarter on quarter. As a result, Spansion elected to exit its least profitable business, the 90nm content delivery business, monetized the inventory and wrote down related assets, resulting in an approximate $13 million impact to gross profit. Operating loss for the third quarter 2008 was approximately $86 million.

In the third quarter Spansion achieved internal qualifications of multiple MirrorBit NOR devices for wireless applications. Due to the delay of certain SP1 customer qualifications and softness in the Japan handset market, the third quarter revenue from SP1 was lower than expected. Additional qualifications are expected in the fourth quarter including server and CSID products, positioning SP1 to begin to ramp significant NOR revenue in the fourth quarter and for Spansion to take full advantage of SP1 in 2009.

"Our sales growth for the third quarter in this business environment was a great achievement," said Bertrand Cambou, president and CEO of Spansion Inc. "I am pleased with the segment share gains in wireless driven by strength in North America, Korea and Europe. During the third quarter, Spansion had solid improvements in manufacturing efficiency, reduced inventory, and made significant progress in finalizing customer qualifications at SP1. In light of current market conditions, we are taking very aggressive action to considerably reduce our cost structure and enhance our cash position."


Spansion is focusing on its own core competencies and is establishing strategic alliances with industry leading partners in final manufacturing. As part of this effort, Spansion has signed a non-binding Memorandum of Understanding with Advanced Semiconductor Engineering Incorporated (ASE), the world's largest provider of independent semiconductor manufacturing services in assembly and test, to establish a joint venture that will include the Spansion Suzhou, China final manufacturing facility. Upon the completion of this transaction the joint venture is expected to allow management to reduce capital expenditures and increase asset utilization through greater economies of scale. ASE and Spansion plan to complete a definitive agreement in the fourth quarter 2008. The Suzhou facility is Spansion's flagship final manufacturing factory, with approximately 1100 employees.

As a result of the cost cutting programs initiated in the second quarter 2008, Spansion drove down sequential operating expenses by $6 million in the third quarter 2008. During the third quarter, Spansion intensified its cost-cutting activities, with a broad-based set of actions including: salary reductions; cutting capital spending; freezing headcount; cutting research and development projects and reducing administrative expenses.

Division Highlights

In the third quarter 2008, Spansion's Consumer, Set-top Box and Industrial Division (CSID) continued its strong performance, following substantial growth and segment share gains in the second quarter 2008. CSID reported net sales of $305 million for the third quarter 2008, slightly down from the second quarter 2008 and up compared to third quarter 2007. CSID had another strong quarter in a segment where Spansion commands clear segment leadership with noticeable strength in Europe and North America driven by growth in high density MirrorBit Flash memory sales.

The company's Wireless Solutions Division (WSD) reported net sales increased 8% sequentially to $320 million for the third quarter of 2008, and were up compared to the third quarter 2007. Robust third quarter sales in North America, Korea, China and Europe more than offset an industry slowdown in the Japan handset market. WSD experienced significant segment share gains and successfully increased price in select segments. During the quarter, WSD increased total units shipped by approximately 10 million driven by growth in the mid-range handset segment.

Additional Highlights

-- Spansion led NOR Flash memory segment share for the eleventh consecutive quarter with nearly 40 percent share and ranked the third largest supplier in the overall Flash memory market according to market research firm, iSuppli.

-- The company unveiled plans for the industry's first charge-trapping NAND flash memory, the MirrorBit ORNAND2 product family featuring the highest performance in the NAND segment.

As part of this strategy, Spansion established an alliance with SMIC to produce Spansion Flash memory products at a fabrication facility in Wuhan, China, owned by Wuhan Xinxin Semiconductor Manufacturing.

-- Spansion was awarded most innovative Flash memory technology for Spansion(R) EcoRAM(TM) product during the 2008 Flash Memory Summit. Spansion is currently working closely with key end-customers globally to alpha-test Spansion EcoRAM memory-based systems.

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

Bertrand Cambou, president and CEO of Spansion Inc. commented on the outlook for the fourth quarter, "While we remain optimistic about Spansion's long-term opportunity, our expectations for the fourth quarter are tempered due to the uncertain economic environment."

Fourth Quarter of 2008 Outlook

-- Spansion expects net sales for the fourth quarter of 2008 to decline slightly compared to the prior quarter;

-- Gross margin for the fourth quarter of 2008 is expected to be flat to up compared to the prior quarter;

-- SG&A and R&D expenses are expected to be down approximately $10 million in aggregate compared to the prior quarter;

-- Capital expenditures for the fourth quarter of 2008 are expected to be approximately $40 million reducing the full year 2008 capital expenditure outlook to approximately $435 million, down from the previous outlook of less than $500 million. Spansion expects capital spending to remain at a maintenance level at approximately $40 million per quarter between now and mid-2009; and

-- Free cash flow is expected to be positive during the fourth quarter of 2008. (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, October 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 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 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 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 under the caption "Fourth Quarter of 2008 Outlook" with respect to Spansion's expectations for net sales, gross margins, SG&A and R&D expenses in its fourth quarter of 2008, Spansion's expectations for capital expenditures in the fourth quarter and on a quarterly basis through mid-2009, and Spansion's expectations to be free cash flow positive in the fourth quarter; statements with respect to realizing NOR revenue from SP1 in the fourth quarter and 2009 and finalizing customer qualifications at SP1; Spansion's expectations with respect to its ability to significantly reduce costs and enhance its cash position as a result of potential strategic alliances and Spansion's other cost reduction efforts, Spansion's expectations regarding entering into definitive agreements with ASE in the fourth quarter and the anticipated benefits from such potential transaction, and Spansion's expectations regarding potential benefits from working closely with key end- customers with respect to Spansion EcoRam memory-based systems. 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; intellectual property claims or litigation could cause the company to incur substantial costs or pay substantial damages or prohibit sales of its products; risks related to the negotiation, entry into and closing of the definitive agreements with ASE and Spansion's ability to realize the expected benefits from such transaction; and risks associated with general economic conditions. 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 June 29, 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

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.
    (In thousands, except per share amounts)

                                                    Quarter Ended
                                           Sep. 28     Jun. 29    Sep. 30,
                                             2008        2008       2007
                                         (Unaudited) (Unaudited) (Unaudited)

    Net sales                               $630,860    $612,720   $611,069
    Cost of sales (*)                        544,273     503,571    499,758

    Gross profit                              86,587     109,149    111,311
    Other expenses:
    Research and development                 106,845     108,303    111,248
    Sales, general and administrative         64,094      68,264     59,193
    Restructuring charges (*)                  1,377       9,922          -

    Operating loss                           (85,729)    (77,340)   (59,130)
    Interest and other income (expense), net   1,432       2,536      6,835
    Interest expense                         (24,853)    (27,663)   (23,628)

    Loss before income taxes                (109,150)   (102,467)   (75,923)
    Provision (benefit) for income taxes       9,583      (1,824)    (4,320)

    Net loss                               $(118,733)  $(100,643)  $(71,603)

    Net loss per common share

    Basic and diluted (**)                    $(0.74)     $(0.63)    $(0.53)

    Shares used in per share calculation

     - Basic and diluted (**)                160,687     160,196    135,049

    *  Restructuring charges included $1,489 and $3,123 related to cost of
       sales for the quarter ended Sep 28, 2008, and Jun. 29, 2008,

    ** 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 Sep. 28, 2008 and Jun. 29, 2008 included 22,729 thousand of
       weighted-average common shares, related to the acquisition of Saifun
       Semiconductors Ltd.

    Spansion Inc.
    (In thousands)

                                            Sep. 28     Jun. 29     Dec. 30
                                              2008        2008       2007*
    Assets                                (Unaudited) (Unaudited)

    Current assets:
      Cash and cash equivalents              $152,107    $240,442    $199,092
      Marketable securities                   107,382     108,479     216,650
      Accounts receivable, net                393,064     371,399     379,962
      Inventories                             614,717     636,389     583,869
      Deferred income taxes                    13,976      29,133      26,607
      Prepaid expenses and  other current
       assets                                  48,903      43,277      46,452
            Total current assets            1,330,149   1,429,119   1,452,632

    Property, plant and equipment, net      2,308,480   2,365,211   2,271,964
    Deferred income taxes                      43,240      40,014      29,957
    Acquisition related intangible assets,
     net                                       57,761      60,437         -
    Goodwill                                   18,506      19,289         -
    Other assets                               81,771      85,619      61,092

    Total Assets                           $3,839,907  $3,999,689  $3,815,645

    Liabilities and Stockholders' Equity

    Current liabilities:
      Note payable to banks under
       revolving loans                       $130,411    $128,930          $-
      Accounts payable and accrued
       liabilities                            685,038     694,255     643,764
      Accrued compensation and benefits        76,960      78,099      60,778
      Income taxes payable                        608       4,809      13,818
      Deferred income on shipments to
       distributors                            52,826      46,688      39,957
      Current portion of long-term debt
       and capital lease obligations          146,831     144,767     101,797
            Total current liabilities       1,092,674   1,097,548     860,114

    Deferred income taxes                       4,260       7,023         186
    Long-term debt and capital lease
     obligations                            1,278,246   1,312,377   1,299,536
    Other long-term liabilities                22,429      28,595      23,361

    Stockholders' equity                    1,442,298   1,554,146   1,632,448

    Total liabilities and stockholders'
     equity                                $3,839,907  $3,999,689  $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
                                     Sep. 28,        Jun. 29,       Sep. 30
                                       2008            2008          2007

    Depreciation & Amortization        $158            $162          $130

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

    Purchases of property, plant
     and equipment                     $110            $110          $195