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Spansion (NYSE:CODE)

Q4 2013 Earnings Call

February 04, 2014 4:30 pm ET

Executives

Rahul Mathur

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

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

Analysts

Craig Hettenbach - Morgan Stanley, Research Division

Christopher Hemmelgarn - Barclays Capital, Research Division

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

David M. Wong - Wells Fargo Securities, LLC, Research Division

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

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

Ian Ing - MKM Partners LLC

Sundeep Bajikar - Jefferies LLC, Research Division

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Spansion Fourth Quarter 2013 Financial Results Conference Call. My name is Derick, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Rahul Mathur, Vice President of Finance and Investor Relations. Please proceed.

Rahul Mathur

Thank you, Derick. Good afternoon, and thank you for joining us on today's call to discuss Spansion's fourth quarter 2013 financial results. With me today from Spansion are John Kispert, Chief Executive Officer; and Randy Furr, Executive Vice President and Chief Financial Officer. We hope you saw our earnings release issued today and posted to our website. Also on our website is a brief slide presentation that we will refer to during our call today.

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.

Our agenda for the call today is as follows: John will discuss key highlights from the quarter, and Randy will review these from a financial perspective and provide the forward-looking guidance. A Q&A session will follow. With that, I will now turn the call over to John Kispert, CEO.

John H. Kispert

Thanks, Rahul. Good afternoon, and welcome to our fourth quarter, or December ending quarter, earnings call. My comments today will address our fourth quarter results, what we're seeing in the markets we participate in, the latest developments across our various businesses, our design win progress and a summary of our fiscal 2013 results.

In the fourth quarter, we executed well and delivered what we said we would do in the quarter. Our 3 businesses: Microcontrollers, Analog and Flash, performed well and continue to be profitable. We continue to strengthen our position as a global leader of embedded systems solutions in the automotive, industrial, consumer and communications markets.

Turning to our financial results, we achieved non-GAAP revenue of $314 million, that's up 14% sequentially, and up 40% from the December ending quarter a year ago. Also in the fourth quarter, the company had non-GAAP gross margin of 34%, non-GAAP operating income of $26 million, non-GAAP diluted EPS of $0.20. And cash, cash equivalents and short-term investments was $311 million.

And as I mentioned last quarter, due to the acquisition-related costs related to our Analog and Microcontroller business and the restructuring purchase -- and the resulting purchase accounting methodologies, our GAAP gross margin is lower, and will continue to be so for the next quarter or 2 as we sell through the inventory acquired on day 1. Nevertheless, our fourth quarter results clearly demonstrated the earnings power of our combined company.

Our strategy to generate cash and expand our addressable market and to continue to improve our profitability remains consistent in the following 5 key areas: first, growing our Microcontroller business worldwide. This includes 8-bit, 16-bit and 32-bit proprietary and 32-bit ARM-based microcontrollers; second, expanding our Analog business across all markets and regions; third, growing our embedded Flash memory leadership position; fourth, integrating our embedded Flash technology and providing solutions that deliver a broad set of technologies, middleware, security graphics tools and application software to our worldwide customer base; and lastly, commercializing and protecting our intellectual property through licensing.

I will now provide an update on each of these areas. In our Microcontroller business, which represented roughly 40% of revenues, we saw growing interest in our products for automotive, consumer and industrial applications. Our Microcontroller products, used in all automotive electronics and other applications such as building automation, consumer electronics, smart metering and industrial controls, are increasing in capabilities and are more connected. The growing requirement for more intelligence and connectivity will be an engine of growth for our MCU business.

In the fourth quarter, we launched a family of scalable products designed for the Industrial Internet of Things. This family of microcontrollers supports communications interfaces, such as CAN for the auto space, USB for computing space and, of course, the Internet, and has a number of options from low power to industry-leading performance that allows for differentiated features, such as touch, connectivity and inverter drives that can be added into a single MCU for the Industrial and auto segments. We also continue to develop our solutions for enhancing human-machine interfaces, including voice, character and touch, all of which will be integrated into our MCU products.

In our Analog business, we saw very good demand in Japan for console games, digital still cameras and again, a number of automotive applications. When we compared to where the business was 1 year ago, we saw meaningful growth in our Analog business. Additionally, we continue to benefit from new opportunities in LED lighting, energy harvesting and customized companion power management integrated circuit products for our microcontroller devices.

Moving to our Flash business, which represented 55% of revenues, we are encouraged by the improving market conditions and ASPs. Our Gaming business improved substantially as customers increased adoption of our leading high-performance, high-density Flash products.

Also in the fourth quarter, we expanded our serial product line with 2 high-performance product families. First, our dual-quad product, which has the industry's highest read performance and the smallest package footprint. To address the needs of graphic-rich applications like automotive instrument clusters and a number of industrial human-machine interfaces. Second, we introduced our 1.8V SPI product family, which is ideal for a broad range of networking, medical, utility, industrial, automotive and consumer applications.

Turning to our integrated or system-on-chip solutions. We are developing a new family of microcontroller products that use our Flash technology for automotive applications, which we'll introduce in the first half of this year. Additionally, we are developing system-level architectures in new products and solutions that will address complex interfaces, protocols and security requirements.

In the area of commercializing and protecting our intellectual property, royalty revenue represented 3% this past quarter. We continue to be engaged in a number of discussions that we believe will bring new opportunities over the next 6 to 8 months.

In the area of patent licensing, the Internal Trade Commission or ITC's trial date for Spansion's case against a competitor is set for this May.

I will now cover our design win progress. As a reminder, these wins are across all of our markets or segments, and all of our products, including Microcontrollers, Flash and Analog and Mixed Signal. So for our Consumer segment, we secured approximately 280 design wins, primarily in digital TVs, set-top boxes, home gateways, digital cameras, printers and gaming controllers.

In Transportation & Industrial, there were approximately 315 design wins, spanning auto clusters, engine control, infotainment, advanced driver assistance systems in automotive, factory automation, security surveillance, energy, medical and white goods.

Finally, in Communications & Gaming, we secured 70 design wins and continued to seek demand for enterprise switches and routers, base stations and transmission equipment. These wins are mostly for our Flash memory products, with over 60% being for our very high-density products. We also saw an increase in NAND design wins in the segment over the last quarter.

In summary, we are pleased with the results for the quarter.

Turning to our fiscal year 2013 results, we delivered profitable growth, with revenues of $973 million. We maintained our leading market share position in the embedded market. And despite a challenging market in our Flash business in 2013, Spansion performed relatively well, achieving over 8% operating margin and earning roughly $0.75 per share. We launched 14 new memory products and introduced embedded Charge Trap -- our embedded Charge Trap technology, and increased market share in Parallel NOR and NAND, as well as in Communications, Consumer and Industrial Market segments.

Despite a challenging environment, we shipped more embedded NOR units in 2013 than in the previous year. We exited the year with over 10,000 customers and had record design wins at a run rate of over $100 million a year in NAND revenue.

And finally, we expanded our licensing business and successfully closed the acquisition of the Microcontroller and Analog businesses.

Moving forward, we plan to build off these milestones and expect growth in all of our segments in all product lines. Our customers are increasing their designs for smart and connected devices in homes, cars, buildings, cities and on the go with wearables and embedded devices. The systems for these designs are requiring more intelligence, which translates into more processing power and Flash memory, as well as power management operations to manage analog interactions with the external world.

Spansion is well-positioned to address these requirements with our broad range of microcontrollers, analog memory and SoC solutions. We will continue to design differentiated products and deepen our customer relationships, delivering innovative, embedded system solutions for next-generation electronics.

And with that, I'll turn the call over to Randy to discuss more specifics on the financials.

Randy W. Furr

Thanks, John. As I discuss the Q4 financial results in more detail, I will be referring to the Q4 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 Q4 2013 operating results, which were in line with the estimates we provided during our Q3 earnings call.

Revenues were $314 million, non-GAAP gross margin was 34.1% and non-GAAP diluted EPS came in at $0.20. For the full year 2013, non-GAAP net sales totaled $973 million. On a non-GAAP basis, adjusted operating income was $80 million, adjusted net income was $46 million and adjusted EPS was $0.75.

On Slide 4 of that presentation, you'll see a breakdown of our sales by end market and geography. For your reference, this is based on ship-to location. As mentioned, total revenue was $314 million, with $174 million from Flash memory, $130 million from our Microcontroller and Analog/Mixed Signal businesses and $10 million from licensing and other.

What we've done on Slide 4 is present pro forma Q3 to show more of an apples-to-apples comparison with Q4. From an end market perspective, revenue distribution was in line with expectations. As we expected, we saw substantial growth in our Communications & Gaming end markets, as well as our Transportation & Industrial end markets. These markets have been a strength for Spansion historically, as our customers require product durability, quality and reliability, all Spansion differentiators. This growth was fueled by the return of the Japanese pachinko gaming revenue in Q4, just as we had expected.

On a regional basis, our results were in line with our expectations. As expected, we did see growth in Japan, with particular strength, again, in the Japanese gaming, as well as the auto markets. From a business perspective, all 3 of our businesses performed well.

Our embedded Flash business posted a 6% top line increase during the quarter that is generally seasonably flat to down slightly. And our Microcontroller and Analog/Mixed Signal businesses had revenues at the higher end of the range we provided back in early May at the time of the acquisition announcement. If we annualize the first 5 months of revenue for the Microcontroller and Analog/Mixed Signal businesses, the top line works out to just under $540 million of annualized revenue.

Turning to Slide 5, we will review the income statement. We'll start with the far left column, GAAP earnings. This column includes the effects of purchase accounting as a result of the Fujitsu Microcontroller and Analog/Mixed Signal acquisition. As many of you know, purchase accounting requires inventory to be written off essentially to market value. Thus, until the acquired inventory flows through the P&L, our GAAP gross margin will be low.

In Column 2 of Slide 5, we have listed Q4 acquisition-related charges. During Q4, we incurred approximately $3 million in loss GAAP profit due to the amortization of the fair value markup of the acquired inventory. Also during Q4, we incurred approximately $3 million of integration cost.

Columns 3 and 4 are our standard noncash, non-GAAP adjustments. And Column 5 is our defensive litigation accretion of noncash interest associated with the convertible notes and onetime refinancing charge.

A brief comment on the litigation charge in Q4. In August of last year, we filed 2 separate lawsuits against a competitor for infringing upon our IP. And as generally considered normal in such circumstances, that same competitor filed a complaint against Spansion. And during Q3, we took a charge in connection with that complaint. So during Q4, that same competitor filed a second complaint against Spansion. And per our policy, we accrued for the next 4 quarters of expected legal costs related to defensive lawsuits such as this. The $13 million represents the accrual for the second complaint, plus adding 1 quarter to the accrual for the first complaint that was filed. Again, all of this is per our policy.

Column 6, that's non-GAAP. And as you can see, non-GAAP gross margin was 34.1% in Q4. This was 160 basis points above the top end of our gross margin estimates and was driven by favorable pricing. We were pleased with gross margin, considering our internal fab ran at approximately 65% equipment utilization in Q4. This gives us a lot of leverage in the second half of 2014, where we expect fab utilization to improve.

Moving to operating expenses. Obviously, both R&D and SG&A increased as a result of having the Microcontroller and Analog Businesses for the full quarter, and both were in line with expectations. R&D was $40 million or 12.7% of revenue, and SG&A was $42 million or 13.3% of revenue. Included in Q4's SG&A expense is approximately $1.8 million related to the offensive portion of our litigation activities. We expect to incur roughly $3 million of offensive litigation charges in Q1.

During the quarter, we released 4 new Flash platform, bringing the full year to a total of 14 new Flash platforms, achieving our original goal.

In Q4, we also released 9 new products from our recently acquired businesses, including low-power Hynix for energy harvesting, automotive microcontrollers for body control and console applications and a family of flexible microcontrollers for the industrial market or the Internet of Things. This translated to non-GAAP operating income of $25.5 million compared to last quarter's $25.2 million. When you consider last quarter's operating results included $12.5 million of incremental licensing, the $25.5 million posted in Q4 shows a nice overall results and was at the top-end of our Q4 guidance.

Non-GAAP operating margin was 8.1% in Q4. We incurred -- we incurred $9.6 million in interest and other nonoperating items. For Q1 2014, we're anticipating $4.8 million to $5.3 million a quarter in other nonoperating expenses, and this reflects the lower interest from our Q4 refinancing.

Our income tax expense in Q3 was $3.3 million, coming in slightly below our range. As a reminder, we have significant U.S. and California NOLs,, and the $3.3 million in tax expense in Q4 primarily represents foreign taxes. Going forward, we expect to see taxes in the $3.5 million to $3.7 million range each quarter.

Adjusted EBITDA was $39 million or 12.4% of sales. Our non-GAAP diluted EPS was $0.20 in Q4. The Q4 non-GAAP results listed in Column 6 of Slide 5 relate to the financials depicted on Slide 6, which we've included here to show a quarterly apples-to-apples comparison going back to Q4 of 2012.

I would now like to turn the conversation to the balance sheet, so please refer to Slide 7, and I'll start with cash. We ended the quarter with cash, cash equivalents and short-term investments of $311 million. This is up from Q2's $228 million and reflects approximately $21 million of cash flow from operations, which included $9 million of interest payments. Also included in Q4's ending cash is $82 million from upsizing our existing term loan. In January of this year, again, a Q1 event, not a Q4 event, we used the proceeds from this financing along with our own cash to pay off the high-cost senior notes. This was all netted with $13 million of capital payments in Q4 to get our $311 million ending cash.

At the end of Q4, our total debt outstanding was $544 million. This is comprised of the $150 million convert, the $300 million term loan and $94 million in senior notes. But when you look at the balance sheet, you'll only see $405 million in total long-term debt. This is because approximately $97 million shows up as short-term debt, of which $94 million of the senior notes was paid in full in January 2014. And $4 million represents that discount of our term loan, and the remaining $38 million relates to a portion of the convert that is accounted for in equity. Therefore, as of now, our total debt outstanding, and that's as of today, is $450 million, the $300 million term loan and the $150 million convert. After our refinancing activities in 2013, our cash cost of debt drops from 6.5% to 3.2%, resulting in approximately $7.5 million of annualized cash interest savings.

From an operational perspective, operational cash flow was $20.9 million and capital spending during the quarter was $13 million.

With respect to working capital, obviously, the Microcontroller and Analog/Mixed Signal acquisition, trade accounts receivable and trade payables have increased. Trade accounts receivable was $178 million at the end of Q4. DSO, or days sales outstanding, was -- ended at 52 days, flat with last quarter. Inventory for Q4 was $254 million, which equated to 103 days of inventory. Accounts payable was $127 million at the end of Q4, and this equated to 42 days. So net cash cycle days decreased from $107 million in -- or increased, excuse me, from $107 million in Q3 to $113 million in Q4. So in summary, again, a solidly executed quarter.

I'll now turn the discussion to the outlook for Q1, and again, please refer to Slide 9. Let me start with a high-level discussion.

As we show in our earnings release, the estimated range for Q1 net sales is $295 million to $320 million. We estimate non-GAAP gross margin to be 32.5% million to 34.5%, and this would translate to non-GAAP diluted EPS in the range of $0.14 to $0.22. At the mid-point, revenue is down about 2%. But when you consider that normal seasonality experienced in our Flash business, being down at the midpoint of 2%, not only reflects the consistency and strength from the Analog and Microcontroller business, but also reflects our cash -- our Flash business being down more in the 5% range as opposed to the historically 10% range.

Also in Q1, we concluded the sale of our Sunnyvale headquarters campus. That transaction will add approximately $58.5 million of cash, net of selling expenses. Our goal will be to relocate to a smaller site in about a year. Counting the benefit from the interest from the cash that we received, we anticipate the move will be approximately neutral to our bottom line. Because of the 6-month free rent provision we negotiated, the sale will not be recognized in our GAAP financial results until Q3 of this year. But again, you will see the cash reflected in our Q1 balance sheet.

Excluded from the non-GAAP estimates are $2 million to $3 million of expected expenses related to the integration of the Microcontroller and Analog businesses, approximately $4 million related to the markup of the inventory to fair value and again, our newly-acquired Microcontroller and Analog businesses.

Expenses related to restructuring, this could be from $1 million to $2 million in Q1, our normal cash IP amortization and equity compensation expenses, and $4 million to $6 million in defensive litigation charges.

Slide 10 lists our first quarter 2014 focus areas, which include: driving top line growth; accelerating introduction of new product platforms; expand worldwide adoption of Flash memory, microcontrollers and analog; drive design win momentum for all products across all segments; and continue to focus on operational efficiencies.

Slide 13 is presented to help reconcile historical GAAP to non-GAAP.

So with that, I'd like to thank you for your time today and turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will be from the line of Craig Hettenbach, Morgan Stanley.

Craig Hettenbach - Morgan Stanley, Research Division

John, can you discuss the Fujitsu integration just how it's going so far versus initial expectations? And then, any milestones both on revenue and margins we should watch for through 2014.

John H. Kispert

Yes, a good question, Craig. Look, in any sort of M&A or acquisition or partnership, I would say integration is a multitude of pieces. In this case, there's, certainly, I think, people are part of it where you're just integrating people around the world. And I couldn't be happier with how that proceeded after the last 4 months. I would argue in my career that, that kind of integration's never really done. You're always working on it, but we're off to a great start. In fact, Randy and I are leaving this conference call to go meet with the entire leadership team worldwide here in San Francisco to talk about even -- doing more things together. So that -- we're doing really well in the people part of things and that's all always the biggest challenge. Another big challenge in this particular case, given that was a carve-out would be the systems or IT side of things. And we laid out, I think, a very conservative approach to that. And by conservative, I mean, over a number of quarters. We don't want to upset the business, at the same time we want to get everything on to our systems as soon as possible. And we're moving through that. We got a great team on it. Certainly, not done at this point, but moving with great momentum and working very closely with Fujitsu on it. I'd say another piece of integration is always the system side of things, the culture, how do you execute, how do you get product to market, how do you communicate that, how do you price and how do you run a business. That's always ongoing. Again, I'd say that having done this a number of times that both Randy and I couldn't be happier with the management team that we acquired and how willing they are to work not just with us but with everybody else in the company around the world. And I'd say probably, the last part which, in this case, was -- is real estate, really. You got to move people around and in this case, given it was a carve-out, we had to move folks, and we're probably halfway through that, moving folks out of one building across the street to a different building, that sort of thing around the world. And that's moving. But again, it's quite a conservative approach there. All in all, it's about the people, it's about the road map, hitting the milestones, hitting product windows. Very happy with the progress there. We've had to change a bunch of things in the roadmap but that -- those are all lined up right now. I think key for us this -- in 2014 with regards to the Fujitsu acquisition is we have a key set of products coming out midyear in the automobile space, might -- it's a combination of our Flash with ARM controller multi-core processors, MCU. We won a bunch of designs already with it. Our delivery there, I think, will be very key for the company. And that's in a June, July time frame. We have a bunch of power management products that will come out earlier than that but I think it's pretty key for us probably in the April, May time frame. But those -- to me, those are the 2 big milestones. It's about us getting product to our customers on a timely fashion.

Craig Hettenbach - Morgan Stanley, Research Division

Okay. If I can, just for a follow up on the Flash side of the business. Any particular growth drivers you'd like to highlight for 2014? And then on the gross margin side, you mentioned -- or Randy mentioned utilization around 65%. How do you envision that trending as we go through the year?

John H. Kispert

You take the second part and I'll...

I think on the first part of the question, Craig, we feel real good about the Industrial, higher density Industrial and Flash. This is 256, 512 up to 1 gig. It can be 1.8 volt or 3 volt. I think we're doing very, very well, there. And as that ramps under the marking of Internet of Things, we see this across a number of markets in the industrial space. And also in Flash, I'd say auto. I know it gets talked a whole lot about but there's just so many different opportunities for us under the hood, in the body, certainly on the dashboard. All the safety applications and all of those continue to be great opportunities for us that we're very focused on. So I'd say mostly industrial and auto through 2014. You'll see us pick up share, I think, increase the density, which is always good for Spansion. It allows us to do a lot more value add.

Randy W. Furr

Yes. In terms of the capacity utilization, we ended, as I said, about 65%. We expect Q1 to be similar. It's not going to be higher, it's going to be similar to that. Again, as we continue to work out inventory. The inventory didn't came down whole bunch but it did come down a little bit. And bear in mind, we expect revenues to pick up in the second half of the year, so if we can continue to bring revenues down just a bit, I mean, our inventories down a bit like we have, then we expect our revenue to grow. That's going to be a kind of a positive thing in getting our overall inventories in line or what we think we can be. And we expect by the second half of this year that you'll see a fairly decent pickup in the overall capacity utilization for the company, which is, again, a tailwind to improve margins there in the second half.

Operator

The next question is from the line of Chris Hemmelgarn, Barclays.

Christopher Hemmelgarn - Barclays Capital, Research Division

First of all, I was just hoping you could provide a little more detail on how you expect the segments to play out in Q1? Puts and takes there.

John H. Kispert

Sure, Chris. It's John. I think in consumer, it's -- we were always a little bit nervous about both Q4 and Q1, the December and March quarter in China, in particular. I think when you look at our Q4 performance, you can assume that we managed it very closely. We tried not to get into businesses -- low-density businesses and good consumer space that just aren't as much of value add for us or our shareholders or our employees. And you can expect us to do the same thing in Q1. So I think Consumer is probably flat to down in Q1 just because we'll manage it very closely. The Transportation & Industrial, as I just mentioned in the prior question, it is upside in Japan. It is upside in Europe. I think the guidance we just gave you is roughly flat, but we see more opportunities there and volume as the quarter goes on and into Q2. The Communications & Gaming, that's -- it's essentially the networking space and pachinko and gaming console business. Certainly, we think that the Japanese gaming business will improve as the year goes on. It's very clear to us that it is. Always, it -- we've said it before, it's lumpy by nature. Right now, in the guidance we gave you, it's relatively flat but I've been doing this long enough here to know that when things pick up there, they all pick up very quickly. And so we're watching that very closely and staying in touch with all the players. I think Wireless for us is interesting. It's really turned into machine-to-machine business for us which is getting better, improving. I think it's probably about the same rate as it was the last quarter and -- but that one is where we're able to manage it much better for profit than we have certainly in the past. And as far as the Royalty business, we're probably 6 months away from 2 or 3 things that we've been working on for over a year. It could happen soon or it could happen over -- anywhere over the next 6 months. And that's certainly not in the guidance but we're really focused on and working on it. And certainly, we'll let folks know the second we close. Did that help?

Christopher Hemmelgarn - Barclays Capital, Research Division

That's really helpful. So, quick follow-up then. It looks like you're starting to see a bit of a pickup in gross margin. Better numbers this quarter and, I think, better-than-expected guide next quarter. Could you just talk about how you guys are able to achieve that without seeing a real pickup in utilization?

John H. Kispert

Chris, old fashioned pricing and value add. Account by account, I think the newer products that we really focused the last 18 months are getting best-of-breed or, as I call it, category leading products out. That's paying dividends. Boy, if we could fill the factory, our collective IQ would go way, way, way up. But we feel pretty good about the pricing environment that we're experiencing right now and that we experienced, let's say, in the month of December relative to earlier in 2013. We feel much, much better about. And I think it's an environment that allows us to do more creative things and drive more business for everybody across all of our densities. And the same holds for the Microcontroller and Analog business. Just much firmer environments than, I'd say, 3 to 4 months ago.

Operator

The next question is from the line of Suji Da Silva, Topeka.

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

First question on the gross margin. It sounds like you're more bullish into the second half. Can you talk about when the acquired products would be transitioning into the Austin fab timing wise? And how much of a tailwind is that for you guys when that starts kicking in?

Randy W. Furr

Yes, Suji. So, thanks for your comments. So, contractually here, it's -- we have a 2-year agreement that we cannot start selling products that are made in our internal fabs for 2 years from the date of August. So what we've been doing during this period of time is we've been -- already started the transition of the microcontroller and certain analog products into our internal fab. And what we do there is we first port-in the process. And as a general rule, that's about 9 months to fully qualify that process. And then we start transitioning in the products. And clearly, we're going to pick the products that offer us, initially, the highest value. And we anticipate that product qualification with a customer is, again, about another 9 months. So we didn't start this for about 3 months after the acquisition. So now you're up to about 21 of the 24 months and then we can go into production with these which takes another roughly 3 months, 13 weeks. So as you can see, we timed this whole thing for the 2 years because we felt like it would take about that long before we transition and get the benefit. Realistically though, we're not going to see meaningful benefits of this until 2016 -- I'm sorry, 2015 next year. So we'll see some real meaningful benefits of this product being transitioned in there next year. In the meantime, what we're optimistic for is that -- with the new products that we have coming out, with the seasonal uptick that we normally see starting in the mid-Q2 and into Q3 timeframe, we're pretty -- and with working this inventory down, we're optimistic that we'll see that 65% utilization number that I mentioned this quarter creep up at least into the mid- to high 70s and possibly into the 80s for the second half of this year. And that's going to be a meaningful input to the bottom line. So the good news is, is that we posted about 34% gross margin in a quarter where we only had 65% utilization. We feel very, very good as that utilization creeps up, that, that's going to be a tailwind for these margins. And there was no incremental licensing in there, too. And as John mentioned, that's a tailwind on top of this. So we feel pretty good by the time we get into the second half of this year. When that utilization moves up, we start to see maybe some of this licensing deals, that we'll see this gross margin creep up, certainly out of the mid-30s or more it is today to something well north of that.

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

That's perfect color. And my other question is on the IP licensing funnel. It sounds like -- John, you're talking about a couple of large hit opportunities that are coming close to fruition. But is the funnel also expanding for the IP opportunities? Or should I think about just a few targeted opportunities that you're going after?

John H. Kispert

Well, it's -- Suji, like any funnel, I think it's expanded but the closer in ones, certainly, it's a tighter group than for the route, just like the funnel. So it has expanded, let's say, over the last 6 months. But the ones that are closer in are certainly the ones we've been talking about for a while.

Operator

Your next question is from the line of David Wong, Wells Fargo.

David M. Wong - Wells Fargo Securities, LLC, Research Division

You mentioned ongoing integration. Could you give us some feel for what the restructure you expect -- restructuring charges might amount to for the full year 2014? And what sort of pattern will they follow through the year?

Randy W. Furr

Yes, David, I'll take a shot at that. See if this answers. We have a couple of lines that we talked about there. One is integration-related charges with $3 million last quarter. We -- as John mentioned, in terms of the systems integration, we announced this transaction last April 30 and we closed 3 months later on August 1. Pretty phenomenal. The cash register worked, as I said. Everything seems to be going fine. But we haven't totally transitioned off of Fujitsu systems. That's scheduled to occur on April 1 and the team has been diligently working and making sure we have the right infrastructure and that this is a fairly sticky business from a customer point of view. There's over 100 EDI applications or connections that are in place. And all of that gets kicked over on April 1. And we've gone through a series of testing, so we feel pretty comfortable with that. So that's what you're seeing today, primarily in terms of the integration expense. I would expect a similar number of integration expense in the $3 million kind of range here for Q1. And then, that's going to taper off, maybe $1 million or -- in Q2, but you should see that go away. We've also said there's maybe $1 million to $2 million in business alignment. And this is pretty minor. We don't know if we will have that much, but this is basically, if there's any redundancies in the organization that needed to be taken care of, I think most of those have been taken care of. But we've left there a placeholder just in case there's any more as we get the businesses totally integrated which has pretty much occurred, but there could be some charges there. After Q1, I would not expect any more of that. So it's pretty minor. Does that help?

David M. Wong - Wells Fargo Securities, LLC, Research Division

Yes. Great. And these activities, then, do they actually reduce your ongoing operating expenses? So by the time we come to, say, the fourth quarter of 2014, can you give us some idea of what R&D and SG&A might be on a pro forma but also a GAAP basis?

Randy W. Furr

Let me try to help you get there, David, this way, and I'm not prepared to totally predict out what it's going to be that far out. We just guide one quarter at a time but I want to try help you here. We have about $600,000 to $700,000 a month in transition services that we pay to Fujitsu that will go away on April 1. We will incur about another $200,000 to $250,000 a quarter as a result of our cost for going on there. So that's about $350,000 to $400,000 -- I'm sorry, not in a quarter, a month. That's about $350,000 to $400,000 a month that we will save in operating expenses starting in Q2 going forward here. Does that help? Is that -- I know I haven't predicted it but I'm trying to point out that there is somewhere around $1.2 million or so a quarter that we're going to save starting in Q2 as a result of this integration.

John H. Kispert

David, it's John. What I would add is that we're always looking for ways to squeeze and make the business more efficient, lower the breakeven point, just to become more productive. So it's a never ending quest for us. I mean, certainly, we're not going to stop after Q2. Just keep looking for ways to do things quicker, faster, cheaper.

David M. Wong - Wells Fargo Securities, LLC, Research Division

Okay, that's great. And for non-Flash, I apologize if said this and I missed it, but did you say what NAND revenues were in the December quarter? And your March overall revenue expectation, does that assume non-Flash growth in March or declines in March?

John H. Kispert

So I don't know if I did say that but I'll be glad to say that now. Our NAND ended up a little north of $26 million for the quarter. I think earlier in the year, we predicted that we would exit the year at $100 million run rate or better, and I'm very proud to say that we accomplished that goal. And we continue to have design win momentum in that area, and we expect that business in 2014 to continue to grow for us.

David M. Wong - Wells Fargo Securities, LLC, Research Division

Okay, great. But do we get sequential growth in March? Or do you actually get hit with a seasonal pattern?

John H. Kispert

No. I would view Q1 as flat with Q4.

David M. Wong - Wells Fargo Securities, LLC, Research Division

Okay. Excellent. And my last question. You talked about move -- event -- into a couple of years' time, moving your MCU products internally. What gross margin on average would you expect to get for that product line when it was being manufactured internally?

Randy W. Furr

I would expect for -- on an average, for each product, to be anywhere from 6 points to 12 points better than gross margin when you move it.

David M. Wong - Wells Fargo Securities, LLC, Research Division

Okay. Are you -- can you give us an absolute gross margin number? Or are you not prepared to do that at this point?

Randy W. Furr

Well, the reason I can't is because every product is different, David. And even with the gross margins that we have now, some of them would range from 15%, 20% to 60% gross margins. So as we move these, we're going to pick the ones that offer us the best opportunity for improvement. If you're moving off the bottom in one of those basis then you might just get to a 33% gross margin. But if you move off the top end, you might be over 60%. So it's hard for me to give you a total blended rate at this point because it's going to vary over time. I wish I could, but I really can't.

Operator

Your next question will be from the line of Monika Garg, Pacific Crest Securities.

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

Number 1, if I look at the NOR revenues in 2013, they decline almost 29% year-over-year. Kind of -- you talked about Gaming side to pick up. So maybe could you help us how to think about NOR growth for 2014?

Randy W. Furr

Yes. I don't necessarily have that same number to you did, but your question is how to think about NOR growth moving forward? Is that correct?

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

Yes. And then, what is the expectation? Do you think we can see that NOR revenues back at 2012 levels? I'm talking about embedded NOR here only.

Randy W. Furr

Yes, embedded NOR. So as John kind of pointed out in his prepared -- or his -- some of the questions here that he's answered, the pricing environment that we're starting to see is, we feel, I use the saying starting to kind of come to us or start to improve. If you go back in 2010, it was a year where we actually raised prices and the average phone call that come in every day was from a customer who is begging for or requesting for -- to get parts because it was a period of greater demand and supply. That all kind of changed in 2011, and we've had the better part of 3 years with kind of the greater supply than we've had demand. There are a couple of things that are going on out there in the marketplace today, and certainly, one is that, that supply is coming off line. And I think it's well known that Micron is -- has sold one of their -- or transitioned back to Intel, one of their NOR fabs in Israel. We also have -- another competitor has pointed out that they're running in the 90-plus percent utilization range. And what we see that transitioning to is a much more stable pricing environment. If we look at our units for 2013, we actually shipped more embedded NOR units than we did in 2012. But what we've seen is just the impact on pricing as a result of this period of greater supply than demand is taking an impact on the whole industry. We're very proud of our financial performance that we've had. I mean, it hasn't been stellar but when you certainly compare it to a lot of the other folks in the embedded NOR space, I think we've performed pretty well. But the way we view 2014 is similar and that -- in terms of units, and that we expect that the embedded NOR units will grow, but we expect the pricing environment to be better. And we're already seeing, as John pointed out, evidence of that. And we think the net of that is that our NOR revenues in 2014 will be up in the low-single digits range in terms of revenue. And then, of course, we expect our -- to fuel our growth with the Analog and Mixed Signal business. So hopefully, that helps you with kind of how we're thinking about the embedded NOR space going forward.

John H. Kispert

Monika, it's John. The only thing I would add is that there are segments that just weren't as strong in 2012 -- or 2013 as they certainly will be in 2014, and that would be what we call industrial and certainly, gaming, which was just turned off in 2013 and it's clearly, picking up and auto. Those 3 can drive a lot of business for this company. They weren't as a strong. It was just a matter of design-ins in 2013. And now, more production, I would expect, going forward. So, to answer your question, sure, we can expect levels like that before. And underlying all that is the supply/demand picture that Randy is talking about also.

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

That's very helpful, Randy. And then to get on the NAND side. I mean, when you started the year, you kind of guided that we would be NAND at $100 million run rate exiting 2013. In 2014, should we look at NAND on the similar levels? Or maybe slightly higher?

Randy W. Furr

No, I think for 2014, we'll see some decent growth in our NAND. No question about it. I mean...

John H. Kispert

Yes, we have prepared a bunch of new, big design wins. Yes, we'll see growth.

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

Then, the last one here. Maybe could you talk about the margins right now? What you see in your Fujitsu acquisition, and also -- especially the margins in the last quarter?

Randy W. Furr

Yes, certainly. We're not going to -- I mean, let me preface this with -- as John pointed out, we've integrated the organization pretty well, for a lack of a better term here. And there's -- as we go forward, we're not going to report, say, like segment reporting when we report these margins. With that said, I mean, I think from our results, it's pretty obvious that the Analog and Mixed Signal business is operating at the kind of higher end of the range that we provided. Certainly, at the higher end with revenue, it may be slightly over in terms of both, but certainly, in terms of the operating margin there and the gross margin, I would say is, it was within the window of what we provided which I think was 37% to 40%. The operating margin, I think, it was an 8% to 10% window. We're operating slightly over the top end of that.

Operator

[Operator Instructions] Your next question will be the line of Rajvindra Gill, Needham & Company.

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

Randy, just on the OpEx. Can you kind of talk a little bit about OpEx as a percentage of sales? You talked about how the OpEx could start to come down a little bit in the second half as you -- either you implement some of these initiatives. But how should we looking be up at OpEx? Can it get down 25% of sales range or is it still kind of in the 26% to 27% of sales?

Randy W. Furr

Well, I think, based on our first quarter guidance, it's going to be up or even slightly ahead of where we ended Q4. About the same, flat, flat to slightly up. Then you're going to see certainly -- as a percentage of sales, you're going to see a trend down. And by -- maybe by Q3 but certainly by Q4, we should be at or under that 25% range.

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

I see. Okay, great. And on the -- if you could just -- this is more of a housekeeping issue, but what was the actual embedded NOR revenues in terms of dollars? And what was the Flash revenue in terms of dollar, again?

Randy W. Furr

So for the quarter, total was $314 million. $174 million was Flash, $130 million was the Microcontroller and Analog business, and $10 million was from licensing.

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

Okay, got it. And as we go into -- as we progress throughout the year, and you talked a little bit about the growth rate for the embedded NOR, maybe rebounding to low-single digits? If we look at the overall growth rate of the company, if we look at -- how should we look at the Fujitsu business, which is kind of running at the $540 million range? And the SLC NAND business, how much more additional growth come on a percentage basis could that had on an apples-to-apples basis?

John H. Kispert

Raj, I think we got tremendous opportunities out there. I -- it's hard for me to sit there and say it's this number or that number through 2014. I'm focusing it in the products sales, utilizing the distribution we have worldwide, getting more mass market, particularly in the MCU side of the business but also the power management side of the business. I think we can move the needle. It's really hard for us to pick a number for the second half of the year in the Analog and Microcontroller business. We're -- we see lots of opportunities. How quickly can we put them all together really is the question for us. And trust me, we're focused on that.

Operator

The next question will be from the line of Ian Ing, MKM Partners.

Ian Ing - MKM Partners LLC

Just trying to understand this pickup in the second half that you're expecting. How much of it is seasonality of the end markets? How much of it is the design wins you see in the pipeline? And since the Fujitsu integration, could you give us an update on the incremental demand creation opportunities that you've had given that sales can sell more product, basically?

Randy W. Furr

All right. So, excellent question. We -- but, from a quantification point of view, we've only -- we're only giving guidance or estimates for Q1. So I'm not prepared to tell you -- quantify exactly how much of this is growth. I can tell you that in general, probably, more than half of it will be just normal seasonality that we expect in this business to grow. With that said, we do think our new products that we've introduced in 2013 are getting design win momentum. And we think that's going to fuel some growth for us as well. But if you kind of view our numbers, usually, Q1 is the lowest point in the quarter and it starts to pick up around mid-Q2 and in Q3. And so Q2 is higher than Q1, Q3 is higher than Q2. And that should fuel some growth for us next year. Obviously, from a year-over-year comparison growth, having 12 full months of the AM business is going to make the overall year-to-year comparisons look like we're growing at a pretty considerable rate when you factor that in as well.

Operator

Your next question will be from the line of Sundeep Bajikar, Jefferies.

Sundeep Bajikar - Jefferies LLC, Research Division

Can you give us some color on your progress related to cross-selling Fujitsu products to your Flash customers as well as, I think, the planned consolidation of the combined sales force?

John H. Kispert

Yes, Sundeep, it's John. The cross-selling. It's been very good. I -- it's been remarkably satisfying. There are some -- certainly, some customers where we just don't have the right product on the MCU side. What we've really focused on is a combined sale, a companion sale, we call it, which is our MCU, our power management and our Flash. And that has worked well, particularly with the non-MCU or the power management customers. These are longer sale cycles but we're getting the design wins and moving in that direction. The parts of the world would expect that happening the quickest are China and Europe. We have a lot more work to do in the U.S. but we're focused on it. And I would expect, as we get through the year, you'll see more traction for us there. But right now, what our focus really is, outside of Japan, would be China and Europe. And we're happy with the progress we've made.

Operator

Your next question will be from the line of Krishna Shankar, Roth Capital.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

John and Randy, can you give us some sense for the gross margins for the Flash business and the Analog/Microcontroller associated business exiting this year? I'm just trying to get a sense for what the margins could be exiting this year?

Randy W. Furr

So again, Krishna, I'm having a hard time answering this. Are you talking about later? Or can you -- are you talking about something other than Q1?

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Yes. Just -- I mean, you don't have to give a point, I just want to get sort of a band for what the margins could trend towards for the 2 businesses exiting 2014.

Randy W. Furr

Yes. So let me start with the easy one for the AM business. The AM business was purchased on a -- it's a fabulous basis with the supply agreement in place. And we feel, I think it's pretty safe to say, we feel pretty good that based on the trends we have seen and where we started out and what we're looking at in terms of estimates and forecasts, that the revenue in that business will trend at the higher end of that scale that we've given you, possibly even slightly leading to high end of that scale in 2014. The gross margins in that business, and to an extent, pretty much the operating margins, are going to be generally fixed in 2014, same with what they were in 2013 because these -- they're all on a supply agreement basis. And that's going to be the gross margins as we stated in the 37% to 40% range in the operating margin and the 8% to 10% range for that business going forward. Now, we've been trending at the higher end of that, as I've said. And we have no reason to think that we won't do that in the future. The only thing that's going to change that is new products that come out and as we move these businesses outside of Fujitsu, into either our internal fab or into other partners fabs. But that won't benefit significantly 2014, that will benefit 2015 and beyond. And then, when you start getting in that range, we certainly expect those margins to improve from there. In terms of the Flash business, again, if you look at that, and as I've said consistently, part of the key to the overall profitability is the fab utilization. And unfortunately, our fab utilization is pretty low today, and -- but moving that up in terms of utilization can help. In a high level rule of thumb, if you were to improve that utilization by 30%, you're going to see something that's north of $10 million, maybe $12 million a quarter in terms of improvement in overall profitability. So you start looking at that on an annual basis, that's a pretty significant amount, especially for a company that only has 60 million shares outstanding. So again, I think, as you think through this, think through as a very consistent, steady, predictable Analog and Microcontroller business in the 2014, but think of opportunities for the Flash business to grow, both in terms of the new products that come out and in terms of our overall improvement in capacity utilization. So hopefully, Krishna, that helps.

Operator

And at this time, ladies and gentlemen, I would like to turn the conference back over to Mr. John Kispert for any closing remarks.

John H. Kispert

Thanks very much, Derick. Thanks to everybody listening in and the folks who are asking questions. Thanks for joining us today. We appreciate your interest in Spansion. Certainly look forward to seeing all of you at the conferences and road shows that we'll do throughout the rest of the quarter. Go home, get some sleep, have a good evening. Bye-bye.

Operator

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great night.

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