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Spansion (NYSE:CODE)

Q1 2013 Earnings Call

April 30, 2013 8:00 am ET

Executives

Rahul Mathur

Randy W. Furr - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

John H. Kispert - Chief Executive Officer, President and Director

Analysts

Blayne Curtis - Barclays Capital, Research Division

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Monika Garg - Pacific Crest Securities, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Quarter One 2013 Spansion Incorporated Earnings Conference Call. My name is Kathy, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Rahul Mathur, Vice President of Finance. Please proceed, sir.

Rahul Mathur

Thank you, Kathy. Good morning, and thank you for joining us on today's call to discuss Spansion's first quarter 2013 financial results, and the acquisition of Fujitsu's Microcontroller and Analog business. With me today from Spansion are John Kispert, Chief Executive Officer; and Randy Furr, Executive Vice President and Chief Financial Officer. We issued 2 press releases that are available on our website, the earnings release and a joint release with Fujitsu. Also on our website, we have 2 slide presentations that we will refer to today, one on the earnings, and one on the acquisition.

Before we move on, please note the Safe Harbor statement on Slide 2 of today's earnings presentation. During the course of this meeting, we will make forward-looking statements regarding future events or the financial performance of the company. Such statements are based on assumptions as of the current date, and these forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those statements. We urge you to review in detail the risks and uncertainties discussed in our filings with the Securities and Exchange Commission. We disclaim any duty to update forward-looking statements.

Now, I would like to turn the call over to Randy Furr, CFO of Spansion. Randy will discuss our Q1 results and then turn the call over to John, who will discuss Q1 as well as our planned acquisition.

Randy W. Furr

Thanks, Rahul. As I discuss the Q1 financial results in more detail, I will be referring to the Q1 financial results presentation we posted to the Investor Relations section of our website.

On Slide 3, let me start with a summary of our fiscal Q1 2013 operating results, which were generally in line with the guidance provided during our Q4 earnings call. Sales were $190 million, non-GAAP gross margin was 28.6%, and non-GAAP diluted EPS came in at $0.03. This excludes expenses related to the transaction we announced earlier today. If you include those acquisition-related expenses, non-GAAP diluted EPS would have been $0.02.

We are pleased to report that even at what we consider to be the low point of the current semiconductor cycle, we were able to maintain a profit. Additionally, we were able to continue our market leadership and focus on execution, announce 32-nanometer NOR Flash memory development, announce our 40-nanometer embedded Charge Trap technology, which is optimized for high-performance, low-power and ease of integration with advanced logic process in SoC products. We're able to recognize $11 million of revenue from our embedded SoC NAND and we continued our strong design win momentum for NAND and our first 8 gigabit, 45-nanometer Parallel NOR product.

On Slide 4 of the presentation, you will see the breakdown of our sales by end market and geography. For your reference, this is based on ship-to location. Revenues of $190 million were close to the midpoint of our guidance. As we predicted and discussed during last quarter's call, Japan come in lower as a result of traditional, seasonal Q1 softness compounded by the product transition to the next generation of our new 45-nanometer 8-gigabit gaming products. As we expected, we saw a significant pullback in this segment in Q1 related to the transition of the gaming business to the 45-nanometer. This segment resulted in overall revenue being worse than our typical 10% Q1 declines. And also as expected, we saw softness in Asia-Pacific related to the Chinese New Year in Q1.

Overall, the consumers stayed flat as a percentage of revenue in Q1 as the quarter-over-quarter decline related to seasonality matched our overall decline due to low demand after the major holidays. We expect to see strong rebound in Q2, with increased revenue and design wins in NAND and SPI.

We had growth in Americas driven strong performance in our automotive industrial markets and we expect to grow auto industrial in Q2 as a percentage of revenue. We also saw record revenue for the quarter in Korea and good progress there in the multi-market NAND.

Q1 had $11 million of NAND revenue, in line with our expectations. This was also the first quarter of revenue for 32-nanometer NAND, almost $3 million. We secured design wins at major industrial customers and we continued to expect NAND to grow through the year, with further growth in Q2. The net result is that seasonality-weak Q1, which is historically 10% down from Q4, was down 15% this quarter.

Turning to Slide 5. We will review the income statement highlights.

Non-GAAP gross margin was 28.6% in Q1 as utilization of our internal fabrication facility averaged just under 70% for the quarter as we reduced manufacturing activity in line with the lower revenue. Gross margin was just above the high end of our guidance, as we were able to lower cost with an intense focus on spending. Furthermore, our percentage of 65-nanometer revenue grew again from 31% in Q4 to 33% in Q1.

As we ramp utilization back to approximately 85% in Q2, we expect to see our margins improve. Additionally, the migration towards our newer products will continue to be a tailwind for margins.

Moving to operating expenses. R&D decreased by $2 million from Q4. During the quarter, we released 5 new products and we're well on our way to our target of 14 new products in 2013.

SG&A decreased by $3 million sequentially. Our emphasis on spending is responsible for the decrease in both R&D and SG&A, as we put in tight controls on hiring, instituted company-wide shutdowns and managed discretionary expenses. The result is that total operating expenses were $44 million, a decrease of over $5 million, or 11% sequentially. This is almost $12 million lower than our operating expenses in Q3 of 2012, which shows our management team's ability to manage expenses in line with our business. This translates to non-GAAP operating income of $10.6 million compared to last quarter's $32 million. Non-GAAP operating margin decreased sequentially from 14.3% in Q4 to 5.6% in Q1, again, on 15% lower revenues.

We incurred $6.6 million in interest and other nonoperating items. In Q1, we saw a benefit or a gain of approximately $1 million related to the sale of auction rate securities. For the remainder of 2013, we're looking at approximately $7 million to $7.5 million a quarter in other non-operating expenses.

Our income taxes in Q1 were $2.4 million. As a reminder, we have significant U.S. and California NOLs and the $2.4 million in tax expense in Q1 primarily relates to foreign taxes. Going forward, we should see taxes in the $2.4 million to $2.8 million range per quarter.

Adjusted EBITDA was $23 million, or 12.2% of sales. Our non-GAAP diluted EPS was $0.03 in Q1. Again, this excludes roughly $0.5 million of acquisition-related expenses.

On Slide 5, we've added a column, 4, titled Acquisition-Related Costs. This is where we will show you the cost related to the transaction we announced earlier today. Column 5 of Slide 5, takes the GAAP results listed in Column 1 and that's the non-GAAP adjustments to get our non-GAAP results for Q1. The Q1 results listed on Column 5 here relate to the financials depicted on Slide 6, which we've included to show our quarterly apples-to-apples comparison going back to Q1 of 2012.

I'd now like to turn the conversation to the balance sheet. Please refer to Slide 7, and I'll start with cash.

We ended the quarter with cash, cash equivalents and short-term investments of $309 million. This is down slightly from Q4's $314 million, as operating cash flow of $7 million was offset by a capital spending of $12 million.

With respect to working capital, trade accounts receivable was flat quarter-over-quarter at $107 million. DSO, or days sales outstanding, increased sequentially from 43 days to 51 days due to changes in shipment primarily. While ending inventory for Q1 was down roughly $2 million quarter-over-quarter to $180 million, we ended with 114 days of inventory, up from 109 days in Q4 due to lower Q1 revenues. Accounts payable was $71 million at the end of Q1 and this equated to 39 days. While the growth in inventory days was the primary cause of an increase in net cash cycle days from 108 in Q4 to 126 in Q1, we're comfortable that this will improve in subsequent quarters as revenue begins to grow again.

I'll turn the discussion to guidance for Q2. Please refer to Slide 9.

As we show in our earnings release, the expected range for Q2 net sales is $200 million to $220 million. Without stock-based equity compensation and IP amortization, we expect non-GAAP gross margin to be 34% to 36%, translating to non-GAAP diluted EPS in the range of $0.16 to $0.23. This guidance excludes roughly $1 million of expected expenses related to the integration of the business we plan on acquiring from Fujitsu. At the midpoint of our range, we anticipate approximately 11% increase in revenue quarter-over-quarter, which is higher than our seasonal average.

The market environment is still challenging and we continue to be cautious. The international macroeconomic indicators remain mixed, as China just reported disappointing GDP news and Japan is still working on improving their economy.

We expect improvement in gross margin as we ramp utilization back to the approximate 85% level and we will maintain our focus on managing spending and other factors within our control. We'll focus on new product introductions, and again, we're on track for 14 new products in 2013.

We expect to see revenue, gross margin and profit improvement in Q2 and we continue to cautiously monitor our environment.

Slide 10 lists our second quarter 2013 focus areas, which include to drive top line growth and continue to lead in Flash memory for embedded; accelerate adoption of our new products; continue growing incremental revenue for NAND and 8-gigabit 45-nanometer NOR; drive design win momentum for NOR, NAND, and Acoustic Coprocessor; and continue to focus on cost reductions and operational efficiencies.

Slide 13 is presented to help in reconciling historical GAAP and non-GAAP.

With that, I'd like to turn the call to John to discuss the Fujitsu transaction in more detail.

John H. Kispert

Thanks, Randy. Since Randy covered the first quarter financials, my comments today will address our strategy and our design win progress. I will then walk through the acquisition details and how this demonstrates our commitment to expanding our leadership position in Flash memory-based embedded systems and accelerates our system-on-a-chip strategy.

As Randy said, the first quarter played out much as we expected, with seasonal softness, particularly in Asia and Japan. We executed well and remain profitable on a non-GAAP basis in a challenging quarter. Our strategy to generate cash and to continue to improve our profitability remains consistent in these 3 areas: First, maintaining leadership in Flash memory; second, delivering and growing our NAND business; and finally, driving momentum for our embedded system-on-a-chip solutions that we call programmable systems solutions. Randy covered our progress in each of these areas.

Allow me now discuss to our design win momentum. Like last quarter, we saw new levels of growth, increasing interest in our NAND products and saw momentum in new design wins in our newest Flash products. Graphic-rich displays, leading embedded performance and quality continue to be key for next-generation applications.

In Consumer, we secured approximately 215 design wins, of which 90 are for higher-density products. With our NAND and Serial Flash offerings, we are enabling customers to move to new architectures in set-top boxes and home gateways. We expect to continue accelerating our conversion rate to design wins and expanding our market share in set-top boxes with NAND, as well as in home gateways with some key additions to our Serial Flash memory product line.

In Transportation & Industrial, we secured over 170 design wins, with strong growth in Transportation. These wins are primarily for infotainment, instrument clusters and safety. For Industrial, we saw a majority of the design win activity in factory automation, robotics and security surveillance. The first quarter is typically soft, with more design win activity ramping in the second half.

In the area of Gaming & Communications, design wins were up to approximately 90 in the first quarter. In Gaming, our designs wins are primarily for our new 8-gigabit 45-nanometer product with a high-density and fast random read access is required for richer displays and interactivity.

In Communications, many customers are upgrading their networks in response to increasing demand for broadband and higher bandwidth to handle more data and video traffic. As a result, we are seeing increased demand for our Flash memory products and we are well-positioned in the global rollout of 4G Long-Term Evolution, or LTE.

In summary, we executed well in the first quarter in a challenging environment, which we believe will improve in the second quarter. Looking to the second half, we expect further improvement in the market in general. And we are very encouraged with the traction of our new products and design win activity. We are also excited about the new opportunities the acquisition we announced today will bring to Spansion and our customers.

So turning to the acquisition. At a high level, with the acquired Microcontroller and Analog business, we are broadening our product portfolio, growing revenue and significantly expanding our served markets in automotive, industrial and Consumer. In addition, we will accelerate new product development in embedded system-on-a-chip solutions or programmable systems solutions.

Starting on Slide 3, on the transaction overview, we have signed a definitive agreement to acquire Fujitsu's Microcontroller and Analog mixed signal businesses for approximately $175 million, which includes approximately $65 million, or about 1/4 of inventory. We expect the transaction to be immediately accretive after close and bringing the additional $450 million to $550 million in revenue in the range of 37% to 40% gross margins and EBITDA of $40 million to $60 million in 2014. This translates to approximately $0.40 to $0.60 of EPS in 2014.

Moving to Slide 4, in the strategic rationale. This acquisition extends our core competency in Flash memory and accelerates our embedded system-on-a-chip strategy, which combines our leading-edge non-volatile Flash memory with Microcontroller and Analog technology, as well as software. Flash memory is a rapidly growing component of embedded system-on-a-chip solutions. And being the leader in Flash memory for embedded markets, we are well-positioned to take advantage of this trend. Spansion's embedded Charge Trap technology, or eCT, is competitive and scalable and will be a critical differentiator for the integration of Flash with Microcontrollers.

Building off our Flash memory leadership, we will increase the silicon content in our embedded segments and expand our addressable market to approximately 30 billion in 2017. With the existing Microcontroller and Analog business primarily sold in Japan today, Spansion will be able to expand the business into other regions of the world, which we already serve with our Flash business.

And finally, our asset-light strategy remains a priority and a differentiator. The multiyear supply agreement we have with Fujitsu will have minimal capital expenditures. Randy will go into more detail shortly.

Slide 5 summarizes the strategic synergies and our ability to accelerate our Flash memory-based embedded system-on-a-chip strategy. You can see compelling reasons for this transaction. Both companies have leadership positions in the Automotive, Industrial and Consumer markets. Spansion is #1 Flash supplier for the embedded markets and Fujitsu has strong position as a #2 supplier in microcontrollers for automotive in Japan. Our embedded Charge Trap technology provides differentiation for microcontrollers as it is optimized for combining Flash and logic and duration on a single chip, providing faster access, lower power and a lower-cost solution. The Spansion Acoustic Coprocessor, which we launched last year, was our first implementation of Flash logic and software integration.

On the right, you can see Fujitsu is well-positioned in 8-bit, 16-bit and 30-bit (sic) [32-bit] proprietary core processors, in the 32-bit ARM solutions, as well as analog and mixed signal. The valuable talent and intellectual property we are gaining will strengthen our R&D capabilities, adding approximately 1,100 employees worldwide, including 850 R&D engineers worldwide, 1,200 patents and over 5,000 products.

Moving to the strategic opportunities for the acquisition, on Slide 6. Embedded memory is one of the most important components for microcontrollers and we now have the opportunity to address the growing memory requirements ranging from 1 megabit up to 128 megabit. Embedded memory in a chip offers several advantages such as higher speed and lower power and enhanced security with both code-in data in a monolithic system-on-a-chip solution.

For higher-end applications like engine control in cars, high-density Flash is needed, increasing from 32 megabit in 2012 to 128 megabit in 2017. This is in addition to the 5 to 7 Spansion standalone Flash memory chips already in car spec. We plan to work with customers to meet their varying system requirements and applications for both standalone Flash memory as well as embedded-in microcontrollers.

Now moving to Slide 7, with respect to Microcontroller opportunity and portfolio. The overall market opportunity for Microcontroller is expected to grow to $14 billion, with the acquired businesses revenue currently at approximately $425 million. The acquired Microcontroller business has a rich portfolio of 32 bit ARM, and 8-bit, 16-bit and 32-bit proprietary products widely used in automotive, Industrial and Consumer applications. They have a strong reputation worldwide in the automotive sector, particularly in auto clutch displays and body control.

32-bit ARM, the industry-leading highly configurable processor for high-performance real-time applications, is the fastest-growing market and requires embedded memory at advanced notes. Spansion's embedded Charge Trap has a competitive advantage with its ability to scale the technology, and especially beyond 40 nanometers. This will be a very key differentiator and allows us to lead the industry in transitioning to advanced notes.

Now turning to the analog and mixed signal portfolio on Slide 8. This business is very complementary very to the Microcontroller business, with an overall market opportunity of over $7 billion in 2017.

Revenue for the acquired Analog business is estimated at approximately $75 million at this time. This business is well-positioned in power management integrated circuits, or PMIC products, in analog, digital converters and also in power management searches. With this business primarily focused on consumer today, Spansion has the opportunity to expand the analog and mixed signal products into automotive and industrial markets. The over 100 dedicated and experienced analog engineers will give us the ability to innovate in the analog mixed-signal and power management arena, with CMOS, BiCMOS and other analog mixed-signal technologies.

On Slide 9, you can see the leading brands these acquired businesses have these customers. The combination of Spansion and Fujitsu customers in the distribution channel will provide us cross-selling deeper engagement and new revenue opportunities. While we have common customers, there are also many customers currently served by these businesses, of which Spansion does not currently serve, and of course, vice versa.

Now moving to Slide 10, in the key components and critical technologies are essential to extending our nonvolatile memory expertise into embedded system-on-a-chip solutions. You can see the areas we both bring our logic, IP, development tools and software, as well as systems integration expertise. Spansion brings more advanced nonvolatile memory, which I mentioned earlier, and that is increasingly becoming an important part of the embedded designs. As on this transaction, we are acquiring Microcontrollers, Analog and some mixed-signal intellectual property. By integrating these together, we have the ability to be one of the leaders in this market and deliver even greater value-added products and solutions to our customers.

Moving to Slide 11. The strategic synergies across Automotive, Consumer, and Industrial markets are strong.

Today, Spansion is providing Flash to these segments. And now, with the Microcontroller and Analog added to our portfolio, we will extend our footprint into existing and new platforms in each of these market segments. For example, in Automotive, Spansion already provides discrete Flash memory for a number of applications such as safety cameras, infotainment, clusters and power train. The acquired business is strong in cluster and body control and audio. An embedded system-on-a-chip solution requires tight integration of high-density memory with microcontrollers and other technologies. Opportunities for these embedded system-on-a-chip solutions are growing embedded markets like automotive, where we generate revenue today and understand the requirements well.

Whatever the application needs are, Spansion can provide the solution in either a discrete or integrated offering and bring the same level of support, quality, reliability and differentiation we've been delivering to customers in automotive, industrial and consumer markets for years.

Slide 12 is a familiar slide many of you have seen in the past and shows our growing addressable market. With this transaction, we can expand this addressable market from approximately 6 billion to approximately 30 billion. Our strategy is centered around the following areas: First, in Flash memory, we will continue to drive market share gains in the embedded segments with current and new products. Second, in microcontrollers, we will grow 8-, 16- and 32-bits in a fast-growing 32-bit ARM product line. Third, in analog, we'll expand beyond consumer with automotive and industrial products this year. And lastly, in the embedded system-on-a-chip solutions, we will accelerate product introductions with a new family integrating Flash, microcontroller, analog mixed signal and software onto a single chip. Again, focus on auto, industrial and some consumer segments.

Together, these accelerate the strategy we've laid out for you over the past couple of years and grow our addressable market. And transition the company to a new category or neighborhood where we are well-positioned to become the leader in Flash memory-based embedded solutions.

With that, I will turn the call over to Randy, to discuss more specific on the financials.

Randy W. Furr

Thanks, John. Slide 13, reinforces there's no change in our asset-lite strategy. As part of the transaction, we've negotiated attractive supply agreements which guarantees supply into the future. We have no minimum take-or-pay terms and the transaction terms offers future flexibility to move production to our internal operations or third parties.

It was important for us to be profitable so our negotiated transfer cost is at a price point that we believe we can earn a reasonable profit over the next several years. Additionally, we have a license to transfer process technology into our internal operation or third-party partners in the future. However, initially, Fujitsu will provide wafer, sort and back-end services to Spansion for the MCU and Analog Business.

On Slide 14, we've shown a snapshot of what our P&L might look like with the Fujitsu, MCU and Analog business combined with our existing Flash business. In summary, the MCU and Analog business is between $450 million and $550 million in revenue. With the supply agreements, we believe the gross margin will be between 37% and 40%.

As you can see, the MCU and Analog business have a higher R&D component. However, also as you can see, the incremental SG&A is relatively low as our expenses for distribution through Fujitsu are factored into our gross margin. The majority of the SG&A is in the sales area and we expect to absorb the majority of the incremental G&A into our existing G&A infrastructure. The net is operating margin in the 9% to 10% range and, as mentioned, immediately accretive. Again, this slide is only intended to give you a general idea of how the combined business will look like, and upon close, we will provide you with more specific guidance.

In summary, on Slide 15, we're very excited about welcoming Fujitsu Microcontroller and Analog businesses, people, products and IP to Spansion. The acquisition will strengthen our position in embedded markets, where we already have leadership and now can serve our existing and new customers as the leading provider of flash memory, microcontrollers, mixed-signal and analog solutions. The benefits to Spansion and our stakeholders are accretive in global TAM expansion to 30 billion, strengthen our leading-edge Flash memory leadership to expand our market share; increase silicon content in automotive, industrial and consumer applications; and finally, the acquisition solidifies our position as the Flash memory-based embedded systems leader.

With that, I'll turn the call over to Kathy for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Blayne Curtis of Barclays.

Blayne Curtis - Barclays Capital, Research Division

Congrats on the deal. Quite transformational. Maybe just following up on that, if you could -- you talked about where you plan on bringing the business to going to the embedded SoC and expanding markets and geographies. Could you talk about just the trajectory of the underlying business? It looks like that business -- I think you guided to about $500 million in '14. I think it's a little bit higher run rate now. Are there any headwinds in that business? And then as you bring it forward, I guess the gross margin, if you could just quantify, Randy, the amount of -- the gross margins seems to be a little bit low compared to where MCU and Analog businesses could be and could you bring that higher as it becomes part of your business?

John H. Kispert

Blayne, it's John. I'll take the first part and Randy can do the second part or maybe I'll partially do the second part also. Both businesses are doing fine today. We're -- we've been working on this for quite a while. We know the management team very well. We know many of the R&D teams very well also. So both businesses -- I don't anticipate any severe headwinds, anything more than any of us are facing, any -- in our other businesses. They have some real exciting new products coming out the second half of this year, all ARM-based. There's actually another 200 ARM-based products that they're teeing up for the second half of this year that we're excited about. And I think the second piece on the growth side is just the analog product line. It's really -- it's primarily power management, PMIC, which is a very stable niche that is growing nicely. And there's a very seasoned and committed team on the analog side, group of engineers that have tremendous capabilities. And we think -- today, they've been focused primarily on some smaller segments in Japan and in Asia. We think there are greater opportunities worldwide. So I don't anticipate any sort of slowing in the business over the next couple of quarters and we're going to get in there and move fast and push hard. As far as the margins are concerned, you have to remember that this is -- we're only buying specific assets. We didn't -- it's a variable-cost-based supply contract, and so we didn't get the fabs. There's no take-or-pay contract. So that, of course, gives us a lot of flexibility, much easier to integrate. Of course, Japan auto is not a bad place to start either. So we think on the margin side, we have plenty of opportunities going forward. [indiscernible] for trade here is our starting point, the business that we're acquiring. Does that help Blayne?

Blayne Curtis - Barclays Capital, Research Division

Yes, and then just maybe following up on that, could you talk about the synergies you can get? What's the overlap in your distribution channel? And then conversely, if you could just address, is there any competitive impacts to your discrete NOR business now that you're in an MCU business?

John H. Kispert

Yes. I don't anticipate any impact or discrete NOR business. We're going to continue to focus on that and invest in the product line the way we always have in the past. I think we've, over time, become the leaders there and we're not going to pull back. We continue to see market share opportunities and believe there is still, particularly with NOR, a discrete market that we can do better and better at, both in market share gains, but certainly in profitability. As far as synergies are concerned, your question's primarily around distribution and the sales organization. I think there's tremendous synergies there. The cross-over of customers is really just in Japan and, to a small extent, in China in consumer, really, white goods. Beyond that, we have close to 8,000 customers. There's a lot of open space for us to be bringing more analog technology and microcontroller technology to 7,500 new customers. So we think that's tremendous opportunity for us.

Blayne Curtis - Barclays Capital, Research Division

And just one final one for Randy. You mentioned Industrial and auto would be up in Q2. Is that the only end market that you expect to be growing in Q2?

Randy W. Furr

No, no. We kind of expect -- from -- if you're talking sequentially here, we would expect our consumer business to grow; auto, industrial to grow; and probably the primary areas there. And Gaming is going through a transition. We expect a really strong second half of the year in the Gaming area. But we don't expect Gaming to be down in Q2 either. We just expect it to be essentially flat.

Operator

The next question comes from Daniel Berenbaum, MKM Partners.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

So, John, that $500 million number that you threw out for the business, is that a good trailing revenue number to use?

Randy W. Furr

Yes. It's Randy. It is. It's a good number to use.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Okay. So it looks like you got a fairly reasonable valuation, at least on sales. So, to sort of beg the question, you talked about this being the bottom of the semiconductor cycle and I tend to agree with that, but it sort of begs the questions as why is Fujitsu letting the business go at such a reasonable valuation when it's the bottom of the cycle and things are only going to get better from here? Can you help me understand that?

John H. Kispert

Of course, Dan, you got to ask them. I can tell you, we've been talking about this for well over a year. We're -- given the history of Spansion, we have very strong relationships at all levels between the 2 organizations. The way it's been characterized to me, Dan, is that Fujitsu is -- strategy is as a IT software service company. And very much like IT software and service companies here in the U.S. over the last 25, 30 years, they are looking for ways to become more asset-light and to be more focused on what they do very well. And so, the conversations that we've been having with them have really focused on making it a win for customers, which is we're going to be able to really focus on new products and service from a supplier that they trust. And, of course, Fujitsu is a customer, so that's important to them. I think they were -- they're all obviously focused on their employees. The employees get to join a company that's focused on these embedded markets. So it was a very natural fit there. We're also able, to Blayne's question, to extend the customer set for which they sell products, so that's exciting to them. You got to remember that our distributor in Japan is still Fujitsu, so we're partnered there with them, and that creates more revenue opportunity for that organization. For Fujitsu's customers, which is important, they get a tier-play-embedded company focused on serving them and their applications with the exact same team that's been supplying them and what they -- and who they've been relying for a number of years, particularly in Japan. And that was important to Fujitsu. I think overall, what excites us about it is -- in working with them, is we can put together an accretive deal, new markets, steady growth and profitable growth for the company over time. We're only, as I mentioned earlier, we're only buying specific assets that are needed to support the business, and I think you guys understand it's a variable cost base supply contract, which gives us a lot more flexibility and ability to integrate much quicker. I'll remind folks that know the Fujitsu Semiconductor business, there's a large team in Germany and a large team in China that comes with this, with design inspectors and strong customer base. So we know the senior management team, we have long-term partnerships with them in Japan, we've run R&D programs with them in the past, common customer management, we know the marketing team well. I don't think business continuity is going to be the big issue. I think we're already engaged -- our teams are engaged with their teams, so we're really just focused on getting our product to customers and supporting customers over the next 6 to 9 months. I don't know if that helps.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

And then -- that helps. That makes a lot of sense. And then along those lines, as you expand the markets and you talk about taking the Microcontroller and Analog products into new customers, you're now going to be facing competitors with much more critical mass, like you'll be up against Microchip, Atmel, Texas Instruments. Can you talk a little bit about how you view that competitive landscape and how you plan to attack? Where is the opportunity to expand that market share?

John H. Kispert

Yes. No. That's a great question. As you know, it's not too dissimilar to what we do today. And what we know today, it's about best-of-breed technology, best-of-breed products and best-of-breed support. And so like today in the markets that we compete in, we have a huge competition -- competitors, that throw lots of weight and muscle. In our minds, it's about focus, not trying to be all things to all people, focusing on the market windows and unserved markets, markets where we can absolutely differentiate with our technology and with our people. We're fortunate in that those segments are growing and we think we can get more profitable with them. But in the end, you got to have a better product. It's always been that way. And that's our ethos in running Spansion today and in running Spansion with Microcontroller and mixed signal technology into the future.

Randy W. Furr

I just want to add that like Spansion's Acoustic Coprocessor, where we combined high-density memory and logic, we found a very good spot in the market where we have a competitive advantage. And clearly, combining these technologies of Analog and Microcontroller business with our leading-edge Flash memory technology, we think there's many other areas out there we can leverage that as well.

John H. Kispert

Dan, we get it, it's not going to be handed to us. We know that every day. We're in big competition and the key here is to over deliver.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Right, of course. And then, Randy, maybe just one last question for you. What do you think the balance sheet is going to look like after the close in terms of how much net debt do you think you'll have on the balance sheet?

Randy W. Furr

Yes. So clearly, we will, at a minimum, exercise the existing $50 million revolver that we have in place out there. So at a minimum, we will add $50 million of debt. The debt markets are very attractive today. We'll continue to look at our capital structure and we'll -- I don't want to preclude that there won't be other opportunities that we take advantage of out there in the future, but in the short term, I can pretty much tell you we're going to take the existing liquidity that we have in the revolver and exercise that.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Okay. So then how do you think? I mean, right now, you're about $1.74 net debt per share. What do you think it looks like, ballpark numbers, after the close?

Randy W. Furr

Well, just add $50 million to it right now, unless we make [indiscernible] the capital structure.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Right. But that's just the gross debt, but then there's, obviously, the rest of it is going to come by to your cash position.

Randy W. Furr

That's correct.

John H. Kispert

Dan, we think we're okay with that. As we look at over the rest of this year, we think we have a rich positive cash flow. But that doesn't preclude us from constantly focusing on our capital structure, but -- that we're in good shape with the size of this deal as far as our cash use is concerned.

Operator

The next question comes from Raji Gill of Needham & Company.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

I jumped in a little bit late, so I'm sorry if this question was asked already. But on the acquisition of the business, could you talk a little bit about Fujitsu's market share in the overall microcontroller market? As you know, the question was asked probably before about the competitive landscape is pretty much kind of -- it allows the share to get consolidated at the top, with Microchip, NEC, Renesas and Freescale and Atmel controlling 60%, 70% of the market and it's very fragmented at the bottom. How much market share does Fujitsu have? Where are they strong in the microcontroller market right now?

John H. Kispert

Yes. A couple of different questions there, Raji. Off the top of my head, there's probably about 8 suppliers that make up 80% of the market in microcontrollers. The report said you consistently read on the folks to look at market share, the Fujitsu Microcontroller business is 6%, 7% of the market. I don't see any data that suggests anything different than that. I think what's interesting about where this thing is, is that most architectures that are out there are still proprietary, as you know. And particularly in auto, ARM architectures have had limited penetration, although it is ramping. These guys are well on the way. They had 500 ARM products over the last 18 months or so, and probably about another 200 before the end of this year. So there is a shift in the marketplace, no doubt. I think that these folks got a nice jump start on it. We're going to look for places where we can compete that -- and if you missed the part of the call, we're going to be looking for places where we compete where we can leverage our Flash position. We think our next generation architecture in Flash give us a big jump in embedded Flash in the microcontroller. And as you know, as you look at the growth of sockets and microchip controllers, more and more of the real estate on the chip is moving toward memory. And so, to be able to integrate that will certainly give us a cost advantage, but I think a real advantage when it comes to power, using less power, much higher reliability and much simplicity in how we can deliver to customers. Our focus will be in -- as you know, the Microcontroller business is huge. Our focus will be around auto and industrial markets, medical, the energy markets, automation. In auto, more body electronics, power train and infotainment kind of markets, where they already have a very nice footprint. It is more focused on Japan. They have a tremendous reputation worldwide, a great apps organization. And I think #1 on our list is how do we fan that out to the other parts of the world. I mean, this is a worldwide company. We're not going to just focus on one part of the world. And the team's very excited about that, how do we ramp it in other parts of the world. And of course, the one market I skipped, which is also a great opportunity, just given the architecture, technology and what we can bring to the table is in the consumer, particularly around, say, the home entertainment markets, where we're very focused. And we've been working on that with them for a couple of months now.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Okay. How would you characterize the other competitors in terms of their embedded flash within the microcontroller? What are they doing currently? Are they -- is it internally sourced? Is it through partnerships? And how do you think you'd be able to differentiate on your side -- on CODE's side in that market?

John H. Kispert

It's all of the above. Everybody's got a little bit different. Only one has actually something that's homemade. Everybody else is either licensing from a couple of different sources. We absolutely think we have advantages. I mean, this is our business. We can make it so much -- much cheaper, much faster, uses lower power and much higher reliability and integrated, which is really around complexity which is what customers are most concerned about.

Operator

The next question comes from the line of Krishna Shankar of Roth Capital.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Congratulations on the deal, which appears to be very reasonable and accretive immediately. What is Fujitsu's current mix for their business in terms of end markets between automotive, industrial, consumer? And can you also talk about how that will -- what your focus areas will be there?

John H. Kispert

Yes, Krishna, it's primarily automotive in the Microcontroller business, well over 50%. In the consumer business -- in the analog mixed signal business, it's primarily consumer. And as I mentioned earlier, it's primarily in a very stable niche. As you guys all know, analog is a very, very large market and very disparate, so there's a very stable niche that is growing in power management, where they participate in the consumer. Today, they're really only focused in small parts of Japan and in Asia. So I think we have great opportunities there and the team's excited. Does that answer your question or is...

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Yes. And do you intend to focus on the standalone analog business or mainly on mixed signal SoC, which integrate their analog? Or do you intend to expand their standalone analog and power management business?

John H. Kispert

Yes, great question. Thank you. So it's -- we're going to do it in parallel. We're absolutely focused on the standalone business, in growing it. They have a great set of products that, again, we think we can fan out in other parts of the world, in other applications, and there's folks chomping on the bit to work on that. But in parallel, in these businesses, as you guys know, it's all about the roadmap. So how quickly can we combine the MCU technology with the logic technology, with the mixed signal technology, with our memory, with the different I/Os and power components to differentiate ourselves into the future around a more system-on-a-chip memory-centric system on-a-chip business. And there's -- we've identified 20 new applications in the future where we think we'll be in really good shape. We're looking to get those products out the end of next year, early 2015. And so we're starting to work on that right away.

Operator

The next question comes from the line of Monika Garg Pacific Crest Securities.

Monika Garg - Pacific Crest Securities, Inc., Research Division

I think it's just a follow up on the acquisitions with -- it has been asked before, too. So you said -- it seems like the contract with Fujitsu is a variable cost-based contract. So first of all, maybe could you talk about how long do you think your contract is assigned? The question is if -- the reason is, like if Fujitsu's looking to become an IT software company, how long, you think, they can be running the fabs for expansion?

Randy W. Furr

Yes, Monika. Good question. So we have -- the agreements that we have with Fujitsu on the existing products are that -- the supply agreements is that for a minimum of 2 years, we will exclusively use Fujitsu. And we have that contract through a 4-year period but we can extend it at our option for an additional year. So we have a minimum of 2 years and then we can elect to use them as long as 5 years out there. In terms of new products, we can utilize them or we can utilize any other fab. So we're not required to put new products into those operations. So again, we have a lot of flexibility there for moving forward.

John H. Kispert

I think, Monika, it's pretty widely known and reported that Fujitsu is working with large foundry players in running the fabs for a much longer time, too. It's not as though they're itching to get out of the foundry business as much to partner or to sell to one of the larger foundry players.

Monika Garg - Pacific Crest Securities, Inc., Research Division

Okay. And then just you can also talk about the market share in the Analog business of -- the business that you are acquiring from Fujitsu?

John H. Kispert

Yes. Market share in Analog's always kind of interesting, I think. Today, what is it, maybe a $50 billion business in total. We're, with this acquisition, primarily focused on the power management market, which, just off the top of my head, is probably about a $10 billion business. Again, it's got many, many different flavors, lots of niches. And our business is $75 million to $100 million. So we get a good -- and what we did on Chart 12 is we try to size to where we could actually participate with the technology we have. And we show you about a $7 billion market with the technologies that we're acquiring. And today, it's about $75 million to $100 million a year. So I think great opportunities. And in that business, it really is about having a seasoned and committed group of engineers. It's all about design. And I think we got that. In this acquisition, it was important. A group of people there are very focused on success and getting their next-generation products out this year.

Operator

I would now like to turn the call over to Rahul Mathur for closing remarks.

Rahul Mathur

Thank you all, again, for joining us today. We're excited about the future of Spansion and look forward to seeing you soon at conferences and on the road. Have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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