Spansion, Inc. Q2 2006 Earnings Conference Call Transcript (SPSN)

| About: Spansion Inc. (SPSN)

Spansion, Inc. (SPSN)

Q2 2006 Earnings Conference Call

July 20, 2006 4:30 pm ET

Executives

Dr. Bertrand Cambou - President and CEO

Dario Sacomani - Executive Vice President and CFO

Bob Okunski - Director of Investor Relations

Analysts

Peter Kerinaris - Citigroup

Sean Webster – JP Morgan

Amat Cheroff – Credit Suisse

Rene Laharia - Deutsche Bank

Ben Huff – Frasier Capital

Sidney Ho - Merrill Lynch

Umesh Vondari - Wells Capital Management

Operator

Good day, and welcome to the Spansion Second Quarter 2006 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Bob Okunski. Please go ahead, sir.

Bob Okunski

Thank you. Good afternoon everyone, and welcome to Spansion's Second Quarter 2006 Earnings Conference Call. This is Bob Okunski, Director of Investor Relations here at Spansion. Joining me are Bertrand Cambou, President and Chief Executive Officer; and Dario Sacomani, Executive Vice President and Chief Financial Officer.

As for procedure on this call, Bertrand will start out with a high level view of the quarter, followed by Dario who will give some additional color on our performance and then turn it back to Bertrand for guidance. We will then open up the call for questions.

So before beginning today's discussion, I need to spend a few minutes reminding you of the Safe Harbor limitations of our discussion. During this call, we will make forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited, to statements regarding future deployment of MirrorBit technology; expected third quarter sales; increases in sales of MirrorBit-based products as a percentage of total net sales; improvement in gross margins; increases in market share; and, the Company's expectation to accelerate penetration of MirrorBit in the high-end wireless phone segment.

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. For risks that the Company considers to be important factors that could cause these actual results to differ materially from those set forth in the forward-looking statements, 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 25, 2005; period reports on Form 10-Q; and most recently, our 10-Q report filed for the quarter ended March 31, 2006.

Finally, a copy of the press release is available on our website, and this call is being recorded live for replay purposes and can be accessed on our Investor Relations website at www.spansion.com. A telephone replay will also be available for seven days following this call and can be heard by dialing 888-203-1112 with the passcode 4857384.

Now let me turn over the call to Bertrand Cambou, Spansion's President and CEO.

Bertrand Cambou

Thank you, Bob. Good afternoon and thank you for joining us. I will focus my comments on the status of the business and our achievement during the quarter. Following my comments, Dario will go through the financials. For the second quarter of 2006, we recorded strong results across the board and improved our financial performance on a year-over-year and sequential basis.

Revenue for the second quarter was $655 million, up more than 40% versus Q2 2005. Sequentially, revenue grew 17%, which trends across all geographies. Our revenue was higher than anticipated, due to the improved manufacturing execution that enabled us to reduce customer delinquencies. Unit shipments, average density and blended ASP were up.

In total, Spansion MirrorBit products rose to 42% of net sales in Q2, compared with 35% last quarter and 20% a year ago. This increase was driven by a sequence 40% dollar growth in 512 megabit and 256 megabit shipments.

Sequentially, operating loss improved $11 million to $27 million for Q2, our fifth consecutive quarter of operating improved of operating income improvement. We achieved this improvement while we invested heavily in the qualification and high volume ramp up of our 19 nanometer MirrorBit product family, including investment for MirrorBit Quad and also incurred costs to complete the Company's IT separations from AMD.

You will notice, suspension caused increased expenses associated with the 14-week quarter, while only 13 weeks were available for shipment due to the cut over to our own instance of SAP. Most of these costs are now behind us and the hard work in Q2 will position us as a much stronger enterprise going forward.

During the quarter, we also improved our capital efficiency with a successful $207 million convertible note offering enabling us to reduce our pre-tax annual interest expenses by approximately $18 million, or $0.14 per share, starting next quarter.

Let me now give a bit more detail on our two major business segments. Overall, the wireless market remains strong and we still expect 900 million to 950 million handset units to ship in 2006, up from approximately 800 million last year. The emerging markets continued to show signs of strong growth. In the mid and high-end segments, Flash content for phones is growing as OEMs increase their offering of P2 rich products. We gain one-third market share in Q2 2006 and estimate that 96 million handsets will ship with Spansion Flash memory, up from 56 million Q2 last year and 84 million last quarter.

Specifically, total revenue from our top five wireless accounts increased sequentially. Altogether for Q2, our wireless solution divisions grew revenue 15% sequentially with strength across multiple geographies, especially in Korea, Europe, and China and strong demand for high density MirrorBit Solutions.

The ramp of 19-millimeter MirrorBit products remain on track and we continue to secure hand set design wins with the first revenue from MirrorBit OEM solutions recorded this quarter.

The combo offering that include both MirrorBit NOR for code execution and ORNAND for data storage is getting a lot of acceptance and will generate revenues starting in Q3.

On the other hand, our fastest-growing segment this quarter was the non-wireless market, leveraging high density MirrorBit solutions where we were under represented in the past. This business recorded sequential revenue growth of 20% and we gained significant market share. MirrorBit revenue in this segment was also up over 40% sequentially, driven by High Density SIM such as 256 megabit and 512 megabit with demand for our 90 nanometer 1 gigabit MirrorBit NOR as well.

Let me now switch to the manufacturing status. In Q2, we eliminated bottleneck in final manufacturing. We added test capacity, which resulted in reduced customer delinquencies, improved customer satisfaction and higher than expected revenue.

In general, visibility and lead times are much better and we can now more efficiently utilize existing assets to maximize output. Our large-scale transition to 90-nanometer MirrorBit technology at fab 25 is on track, which enabled us to increase density by almost four times for the same die size in this factory.

This 90-nanometer transition includes four product families at 1.8 and 3-volt MirrorBit NOR and ONAND for both the wireless and the general markets.

Fab 25 is running in excess of 10,000 90-nanometer MirrorBit wafers, of which half are ONAND products. We anticipate a quick ramp with half of fab 25 capacity planned for 90-nanometer by the end of the year.

We intend to sample 65-nanometer out of fab 25 this year with production ramp-up in the first half of '07. By the second half of '07, fab 25 will become the main factory for 65-nanometer MirrorBit technology.

Additionally, due to strong demand we announced that we have expanded our existing 110-MirrorBit foundry agreement with TSMC to include 90-nanometer MirrorBit technology on 300-millimeter wafers. 110-nanometer will be in volume production at TSMC in the second half of '06 with 90-nanometer targeted for the second half of '07. This strategy will allow us to use our own capital investment on leading-edge technology such as 45-nanometer MirrorBit technology on 300-millimeter in Spansion One in Japan.

We have started to facilitize Spansion One as a result of strong industry demand and the accelerations of the 45-nanometer MirrorBit technology development, targeting volume production of 45-nanometer mid-2008. In addition, we can potentially start 65-nanometer MirrorBit production as SP One earlier, depending on demand.

Spending for Spansion One will be approximately $1.2 billion for a capacity of 15,000 to 20,000 300-millimeter wafers per month. The cost of the project will be spread over 3 years with 2006 costs already factored into our 2006 CapEx plan of $650 million to $800 million, which remains unchanged. With that, I'd like to turn the call over to Dario Sacomani, our Chief Financial Officer, to discuss the financial performance in greater detail.

Dario Sacomani

Thanks Bertrand, and good afternoon everyone. I'd now like to review the specifics of our financial performance for the quarter. As Bertrand previously mentioned, due to our fiscal calendar year, our Q2 results are based on a 14-week quarter as opposed to a standard 13 weeks. Q2 total net sales were strong as recorded solid year-over-year growth and sequential growth.

Specifically, net sales for the quarter were $655 million, up 42% or $193 million versus Q2 of '05 and up 17% versus Q1 of '06. The revenue benefit of a 14-week quarter was minimized by our transition to our own instance of SAP, which resulted in insignificant billings for the first week of the quarter.

Blended ASP for the quarter was up, compared with last quarter, in line with our forecast and compares with a decline of 9% for Q2 of last year. This stabilization of prices is the result of strong market demand and rapid customer acceptance of our new products. Gross margin for the quarter was 20%, compared with 19% in Q1, and a 7% gross margin in Q2 of '05.

As we discussed on last quarter's call, we invested in our 90-nanometer transition, while benefiting from sequential gross margin increases, due to a higher percentage of revenue from MirrorBit products. Our fixed costs increased approximately $20 million, due to our 14-week quarter. In addition, while we invested in our own test capacity, we also increased subcontractor costs to meet demand, which impacted our gross margin. We intend to reduce the use of subcontractors as our own test capacity comes online.

To summarize, our investment in 90-nanometer, our 14-week cost structure, and our incremental use of subcontractors led to a 25% fall through on incremental sales of $93 million, compared to Q1 of '06.

Looking forward, a 13-week quarter and the ramp-up cost associated with the transition to the 90-nanometer largely complete, we anticipate more normalized fall through on incremental sales.

Research and development expenses were $92 million, compared to $85 million last quarter. The sequential rise in R&D was primarily related to additional labor, and depreciation cost associated with the 14-week quarter. The remaining increase is associated with our investments in 45-nanometer, 300-millimeter development, MirrorBit Quad development, and patent expenses.

As a percentage of total revenue, R&D expenses were down 100 basis points sequentially to 14%. We anticipate the Q3 R&D expenses will be down slightly on an absolute basis.

Q2 sales, marketing, general and administrative expenses were $67 million, compared to $62 million in the previous quarter. SG&A costs rose on an absolute basis due to increased labor costs, related to our 14-week quarter and other selling expenses.

Our separation from AMD is going well, and we have reduced our support fees by approximately 35%. As we discussed last quarter, outside services in IT required to complete the separation are offsetting the savings realized in the service agreement. We anticipate the net cost related to our separation and total SG&A costs will decline in Q3.

Our Q2 operating loss was $27 million, including $6 million of option expense. A year-on-year reduction of $61 million, or a 69% improvement over Q2 of '05, and a 29% improvement over Q1 on higher sequential sales. Interest expense for the quarter was $18 million, down slightly versus Q1.

Other income and expense for the quarter was a net loss of $6 million related to a one-time charge of $17 million for the early retirement of our 12 3/4 senior sub notes originally placed with AMD, offset by a gain of $7 million on our sale of Siphon stock, and interest income of $4 million. As a result of the successful convertible offering, Q3 interest expense, net of interest income, should decline to $11 million to $12 million.

For Q2, we reported a tax benefit of $3 million related to a reserve adjustment, pertaining to a recently concluded audit. For Q3, we anticipate taxes to be in the range of $1 million to $2 million.

Q2 net loss was $49 million, including option expense and the one-time events just described compared with a loss of 86 million in Q2 of 2005. Q2 loss per share for the quarter was $0.38, including approximately $0,13 loss per share for the early retirement of debt, $0.05 for option expenses, and a benefit of $0.05 per share for the sale of the Siphon stock.

At the end of Q2 '06 our cash and short-term investment balances were $364 million, down $86 million. Debt for the quarter was $619 million, down $27 million, holding debt-to-equity at 34%. Net debt increased less than forecasted, up $58 million sequentially to $255 million due to lower capital deliveries and improved cash management. We have approximately $250 million of unused borrowing capacity in our credit facilities. We will continue to focus on improving our capital efficiency and as we approach our targeted profitability cash usage will decline.

Accounts receivable was $443 million, up $32 million from Q1 of '06 with DSOs for the quarter at 62, down from 67 days last quarter. We anticipate the DSOs for Q3 will remain in the 62-day range. Days of inventory on hand declined to 85 days, down from 96 days in Q1, although we increased inventory by $10 million in response to strong bookings for the second half of the year. We anticipate the days of inventory will be around 85 in Q3. Days payable outstanding was 61 days down from 64 days in Q1 '06, pretty much in line with DSOs.

EBITDA for the quarter, excluding the gain from our Siphon sale and charge related to the early retirement of our AMD note was approximately $114 million, up from $93 million in the first quarter and $51 million in Q2 of last year. Year-over-year quarterly EBITDA was up more than 100% on an increase in revenue of 42%, showing significant improvement in our overall operating performance during the period.

Cash flow from operations was approximately $104 million.

Finally, Q2 capital expenditures were approximately $156 million for the quarter. This spend was to support our back-end capacity requirements, 90 nanometer and 65 nanometer production plans, as well as our 45 nanometer 300 millimeter initiatives.

As Bertrand mentioned, CapEx estimates for 2006 remain unchanged at $650 million to $800 million. Depreciation for the quarter was approximately $142 million. Now I'd like to turn it over to Bertrand to discuss our expectations for Q3.

Bertrand Cambou

Thank you, Dario. For Q3 we anticipate revenue to be up and in the range of $665 million to $685 million. We expect MirrorBit product as a percentage of sales to be approximately half of our revenue, driven by high density in the general market and increased MirrorBit in all NAND shipments into new generation cell phones. We also anticipate that revenue for MirrorBit ORNAND based solutions for the second half of the year total will be in the range of $50 million to $100 million range.

Current backlog for the quarter is very strong and we have the capacity in place to meet our revenue forecast. The second half of the year is traditionally a strong season in Flash including handsets. We expect the second half of '06 to follow this typical pattern.

On an operating basis, Q2 was a transition quarter. Moving forward we expect lower cost due to the completion of our IT separation 90 nanometer ramp, as well as returning to a 13-week quarter. Also gross margins will increase with the expected rise in MirrorBit sets. As a result we anticipate reaching breakeven on an operating income basis in the third quarter.

In summary, we are on track with the plans that we shared with you since our IPO. We gained market share in Q2 again, and we saw revenue increased above expectation across all geographies. Also, we have executed on our transition to 90 nanometer MirrorBit technology in preparing for further shrinks to smaller geometry.

Operationally we have again executed on our initiatives such as successful completion of the IT separation, improving our balance sheet and restructuring our debt. As a result, we think we're well-positioned for success in the second half of the year and beyond.

That being said, we would like to open the call for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll have our first question from Glenn Young with Citigroup.

Peter Kerinaris - Citigroup

Hi. This is Peter Kerinaris for Glenn Young. I just wanted to touch on a couple of things. One is if you could give us a sense of the pricing environment currently in handsets and how you see it playing out going forward?

Bertrand Cambou

Yes. Thank you. We see the blended ASP to be pretty stable between now and the end of the year and essentially an increased density is offsetting the natural decline, which means that, again like we already guided you all year. We see the pricing environment to be pretty stable for us.

Peter Kerinaris - Citigroup

With higher densities, should I assume that's also an increase in multi-chip packages? Should we be thinking about an increase in ORNAND mix along with that?

Bertrand Cambou

Well, absolutely. The ORNAND shipment in the first half of the year was insignificant. But in the second half, like we told you, the ORNAND based solutions are going to be between $50 million and $100 million moving from essentially zero.

A big portion of those sales are going to be combo NOR and ORNAND, by the way, and this is for high to medium range phone, in particular for Asia where we see a need for this type of solution.

Peter Kerinaris - Citigroup

Thank you.

Bertrand Cambou

Great. Thank you.

Operator

We'll have our next question from Sean Webster with JP Morgan. Please go ahead.

Sean Webster – JP Morgan

Yes. Good afternoon.

Bertrand Cambou

Good afternoon.

Sean Webster – JP Morgan

Can you update us on, it seems like you had a bit of a revenue surprise based on manufacturing, can you give us an update on book-to-bill trends in a qualitative or quantitative way? And, where lead times are now versus where you saw them last quarter, and how you expect them to move in the coming quarter?

Bertrand Cambou

Yes. Like you say, our revenues were higher than anticipated, and that has been a [inaudible] the test and the final manufacturing team been done an early job to essentially put the supply in line with the demand. That's allowed us to, essentially, do a solid job as far as revenue management, and more importantly, customer satisfaction.

We think that are ability to obtain revenues above and beyond expectations – we are the first ones surprised. It's giving us a very strong reputation right now in the industry. Like, we know how to respond to the customer needs.

As we speak, the book-to-bill is really strong, greater than one. We have very solid backlog for Q3, with what we think is a capacity in place. As far as the lead time, right it is now pretty stable, for key customers. There are tier 2 accounts, very small accounts that we sometimes have a difficult time to serve. But, for the major customer, we're trying to protect them from a business environment, which means that we see a lead time that would be pretty stable for major accounts, and getting a bit higher for some of the little guys.

Sean Webster – JP Morgan

Can you update me on how your wafer production is moving? What did your wafer production do sequentially in Q2? How do you expect your wafer output to grow year-over-year in 2006?

Bertrand Cambou

From 110 nanometer to 90 nanometer, which is a great productivity enhancement. And we are going to start to use TSMC in the second half, a little bit in this quarter and a bit more in Q4.

Sean Webster – JP Morgan

How do you expect your mix of foundry usage to be when you exit the year?

Bertrand Cambou

Still pretty small. We are using the foundry right now, more of a strategic way to transition from one technology to the other one. We want to have fab 25 to move away from 110 to 90, and in the transitions, we are short of 110-nanometer; and TSMC is helping us there. Next year, we are going to take fab 25 to 65-nanometer, then TSMC is going to help us at 90-nanometer, which, TSMC as a percent is not that high. But, it is significant. It's below 10%, altogether.

Sean Webster – JP Morgan

Okay, thank you.

Bertrand Cambou

Thank you very much.

Operator

We'll have our next question from Michael Masdea with Credit Suisse.

Amat Cheroff – Credit Suisse

Thank you. This is Amat Cheroff calling in for Michael Masdea. Just taking a look at a high level, when you look at 2007 handset design activity, what shift are you seeing in terms of memory mix in the phone in terms of the mix of NOR, NAND, and hybrid memory?

Bertrand Cambou

For 2007 there is a clear, I would say all the developing countries are developing a basic NOR demand, which is increasingly a bit in density as those countries are now getting a bit more feature rich than they used to. You start to have color displays and these type of things which ask for a bit of higher energy. We're talking about 32, 64, 128 megabit NOR here.

In the high end, mid-market here we see the density of NOR becoming mainstream next year, it will be 256 to 512. Then in addition our combo with a gigabit, multi-gigabit embedded on top of it.

If you look at a country like Japan, like Korea, essentially the bulk of those phones are going to be pretty high density including the need for ORNAND. The other developing country like Europe and the US are more segmented where you have very basic phone as well as very high-end phone and everything in between.

The mix as we go for next year is still doubling the flash density every five quarters, which is the trend that we are still observing as far as we can see for 2007.

Amat Cheroff – Credit Suisse

On the manufacturing side, I saw your announcement with TSMC, going forward just in '07, '08, do you expect foundry to gain as a percentage of total manufacturing? What mix of outsourcing are you targeting longer term?

Bertrand Cambou

Right now like we say, we look at TSMC as a buffer to be able to invest into the next fab. The technology now, there is always essentially a need for node and minus one, leading edge minus one. That's what we intend to do. We don't yet have a strategy to use there as anything which is advanced technology, where we do that in house. Altogether we're talking about 10% type of supply from foundry, which is going to oscillate a bit as a function of market demand.

Amat Cheroff – Credit Suisse

Okay, great. Thanks.

Bertrand Cambou

Thank you.

Operator

We'll have our next question from Rene Laharia - Deutsche Bank.

Rene Laharia - Deutsche Bank

Yes, hi, guys.

Bertrand Cambou

Hello.

Rene Laharia - Deutsche Bank

I'm trying to evaluate the risks that you might have for the second half '06. Can you talk about how you feel about the NOR Flash inventory at the customers and in the channel, and also finish good inventory at your customers, and in their respective channels?

Bertrand Cambou

Right now we are watching very, very carefully the Flash inventory at our customer because this is a very, very important to understand what's going on. As far as we are concerned, the inventory is extremely low and the customer – we are delinquent as we speak, which means that we are not able to totally meet the demand right now. We have a level of delinquencies. We have the feeling that the end demand, the handset end demand is still very strong.

Now that being said, there are some players right now that are winning and others that quite frankly are shrinking. You have to go to the totality of the business because some players are getting market share on others.

But on aggregate, as we speak the inventory is extremely lean and we are hand to mouth are far as meeting the demand. As we are looking at the second half of the year, traditionally the second half of the year that is a holiday season is hot and not only hot as far as the number of units but the content reach. This is when suppliers are going to start to put phones for the season and from that standpoint, we see a robust second half as far as we can see it.

Rene Laharia - Deutsche Bank

Last year in the second half you were surprised a little bit by the mix shift. What are the risks that the same thing could happen this year and then what do you really worry about if anything at all in the second half of '06?

Bertrand Cambou

The second half of '06, we have a very solid backlog and based on that backlog we believe we have the capacity in place to deliver, and we see us reaching breakeven at the operating level in Q3.

The major risk we have right now quite frankly, is the 90-nanometer ramp up. This is an area we are currently ramping very heavily. And every time you start to have these transitions, any of glitch and early issues may be a problem for us. We are now looking on an operating piece, the 90-nanometer we need to watch extremely carefully in the second half.

But as far as the demand, the customer, all the backlog, the mix, all these type of issues, we think we have a very good visibility, more so than we used to have in the past of what has to be done to deliver a good next quarter.

Rene Laharia - Deutsche Bank

Fantastic and then just lastly, when do you expect to turn to see cash flow positive?

Bertrand Cambou

Q4.
Rene Laharia - Deutsche Bank

Great. Thank you.

Operator

[Operator Instructions] We'll go next to Ben Huff – Frasier Capital.

Ben Huff – Frasier Capital

Congratulations on a great quarter.

Bertrand Cambou

Thank you.

Ben Huff – Frasier Capital

I wondered if you could help us understand what's happening in the market with Hitachi? Correct me if I'm wrong, they announced that they were decreasing their efforts. What are you seeing as result of that?

Bertrand Cambou

Hitachi. Are you sure?

Ben Huff – Frasier Capital

I probably have the name wrong. It was a Japan-based supplier that said they're scaling back.

Bertrand Cambou

Currently what you have, you have two suppliers of NOR and NAND; actually two Flash suppliers and both of them are in the NOR business; essentially it is [Renesys] and Shaw.

They both are essentially exiting the business. Yes that's an opportunity for our Company and as we speak we're looking at Japan as a very strategic place to grow.

Ben Huff – Frasier Capital

So you're basically just pursuing the customers directly? There's nothing else that has materialized? Their announcement of scaling back?

Bertrand Cambou

Right now what we are looking in Japan is just, as you know, Spansion has a very strong team over there and this is an area of opportunity for our Company. In particular with this competitor exiting the business. As far as the end market in Japan, it's a very stable market, about 55 million handsets a year, strong consumer products, high functionalities, a lot of flash content device. You have consumer DVD's, digital still cameras and games and so on and so forth. We see Japan as an exciting opportunity for our Company.

Ben Huff – Frasier Capital

What will the impact of the TSMC arrangement have on your margins?

Bertrand Cambou

What it is going to do here is essentially giving us an opportunity to pursue a transition of technology to 90-nanometer with existing assets. Fab 25 as you know is a greatly-depreciated factory, the upgrade to 90-nanometer was quite minimum and by using TSMC we can actually keep using that fab at the leading edge. Which means obviously the faster we move to 90-nanometer and 65-nanometer, the faster the margin improvement is going to be.

The arrangement with TSMC has pretty favorable terms here. We are pretty content with the conditions here. They are essentially going to allow us to get good conditions as we are pursuing that strategy.

Ben Huff – Frasier Capital

The last question is, can you just repeat your response to when you are achieving free cash flow?

Bertrand Cambou

Q4.

Ben Huff – Frasier Capital

Q4 this year?

Bertrand Cambou

That's right.

Ben Huff – Frasier Capital

Okay. So we should anticipate that all else being equal and the market staying intact, that you'll be free cash flow positive in '07?

Dario Sacomani

Yes, I think that depends on obviously, I was going to mention to Bertrand's point, he's right about the timing. I think a lot of it is dependent on we've got a wide range of CapEx from $650m to… I mean it's going to depend on how we see demand and when we plan to invest in what.

Like I mentioned before, once we starting hitting the profitability which we're going to break even next quarter and expect to do better than that as we go forward in the quarters, I think that free cash flow is kind of dependent on how aggressive we decide to invest on CapEx.

Bertrand Cambou

You see the situation for us is we think it is in our favor. We are able to grow revenue, we are much stronger and starting in Q3 many of our costs are going down. Interest expense are going down, IT costs are going down and so on and so forth, which means that we believe that with strong revenues and costs that are starting to be curving down. Starting in Q3 we're going to have much more, it is starting to be close to where you want to be.

Of course we cannot predict Q4 yet and it would be irresponsible on my part, if I told you what Q4 is going to be with certainty. But Q4 is traditionally the stronger quarter of the year which means that if we can achieve Q3, most likely Q4 is going to be better than that. We think we are really getting to the point where we can see neutral or positive cash flow.

Ben Huff – Frasier Capital

Understood. Thank you. I guess the issue that I'm focusing in on is your ability to fund your CapEx plan, specifically this new fab, the build out of the new fab in Japan, consistent with your internally generated sources of cash, so that you won't be dependent on third party sources.

Bertrand Cambou

But we understand that you also have to give us credit that this investment has been in our plan all along. If anything, we did scale down the investment. At one point we're thinking more of the $2 billion investment was getting down to $1.2 billion and we believe that as far as the business is concerned, the revenues have been being growing a bit faster than we thought. The new technology which is more productive for us, 90 nanometer and 65 are actually moving faster than we thought; which means that even though we agree with your worries, you have to give us credit here when compared with the previous communications we all had of what we told you we would do.

Ben Huff – Frasier Capital

Absolutely, I totally agree. Thank you very much.

Bertrand Cambou

Thank you.

Operator

We'll have our next question from Sidney Ho from Merrill Lynch.

Sidney Ho - Merrill Lynch

Hi guys.

Dario Sacomani

How are you doing?

Sidney Ho - Merrill Lynch

Good. A couple of questions. For Q2, can you tell us which one is growing faster? Was it ASP or was it units?

Bertrand Cambou

Unit.

Sidney Ho - Merrill Lynch

It was mostly unit then?

Bertrand Cambou

Mostly unit. The ASP was slightly up, but the unit shipment was really exploding.

Sidney Ho - Merrill Lynch

Got it. Okay, if you had to estimate the missed revenue opportunity Q2, what would that be? You mentioned that there were some delinquency and what not, but do you think they just got pushed out in Q3? Or did they just go to your competitors?

Bertrand Cambou

The point is if you look at our plan, our committed plan, we did better than expected. If anything our customers received more than they thought and that is obviously a credit to us, because our customer went and had a very strong request and they did not have to turn to competition. That is one of the reasons that you saw us pushing for revenues like we did. It's not really for the revenues but it's mainly for securing customer delight and satisfaction going forward.

We believe that whatever we miss is essentially the tier 3 customer, the little account but as far as the strategic account, which essentially are -- the strategy of Spansion is not the spot market, it's not the opportunistic bid. It's the major customers.

Sidney Ho - Merrill Lynch

Is it fair to say that you are not seeing any kind of double ordering?

Bertrand Cambou

Absolutely not because currently a big major customer is essentially what Spansion is doing, they give us great transparencies. We have advanced quarter forecasts for them. Every week we sit with them to see how they are doing. We have strategies in many of them where essentially we watch what they pull versus what we pull. We think that as far as the key accounts that represent the bulk of Spansion's were very tight.

Sidney Ho - Merrill Lynch

Very good. One last question and I'll go away. Have you seen any changes on the competitive front from Intel given their ongoing restructuring?

Bertrand Cambou

Obviously Intel in the last several quarters is losing ground from the market share standpoint - big time. In particular on the distribution front. Some of the big accounts, they lost it. They also are less competitive as far as the technology standpoint, than they used to be. High-density, where they used to dominate. Now, they are essentially losing their edge, which means that we are very respectively watching Intel, in the last several quarters, they have not -- at least to us -- shown evidence that they are fighting for growth.

That being said, believe me, we are going to stay and watch and be sure that we do not get complacent there.

Sidney Ho - Merrill Lynch

Great. Thank you.

Bertrand Cambou

Thank you.

Operator

We will have our final question from Umesh Vondari - Wells Capital Management.

Umesh Vondari - Wells Capital Management

Hi, guys. Congratulations on a great quarter. The point that you touched before, you indicated that there is sort of a change in the competitive dynamics of your customers. Specifically Samsung, down soft numbers, and Motorola had a very strong quarter. How should we view that, and how should we think, in terms of your business?

Bertrand Cambou

Well, the fact of the matter is our business is essentially, we are covering all the kegger. Because we serve them all, we see trends in the market and we see that sometimes one week we get one of them to give us an upside, and the next week, another one is cutting the demand, type of thing. I exaggerate, but essentially the way we see it here, we kind of look at the entire space and try to anticipate, obviously we want to serve each of them the best we can.

But, like I was saying in my commentary here, some of the players are doing a heck of a job right now. They are gaining ground. And others are struggling. The struggling ones are going to fight back. We do not want to judge what is going to happen in the future.

Our Company right now, with the market share we have, just to remind you -- it was 96 million units that we had, but then we assumed this is at least 40%. Which means that Spansion is serving four out of six phones, right now, in the world; four out of ten. We have a pretty good idea of what is going on out there.

All we can tell you is the aggregate of all of that appears to be doing pretty well. This is going to be a stronger year for handsets this year. Now is it going to be 900 million, 950 million, 1 billion? Who knows?

But last year, it was 800 million. On top of that, you have the flash content that is increasing. Between all of us here, you know, we look at the year as being an exciting year.

Umesh Vondari - Wells Capital Management

Great. Thank you.

Bertrand Cambou

Thank you.

Operator

That does conclude our question-and-answer session. I will turn the conference back over to Mr. Cambou for any additional or closing remarks.

Bertrand Cambou

Bye-bye everybody, thank you.

Operator

That does conclude today's conference call. You may disconnect at this time.

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