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Executives

Shubham Maheshwari - IR

John Kispert - CEO

Randy Furr - EVP & CFO

Analysts

Atif Malik - Morgan Stanley

Krishna Shankar - ThinkEquity

Rajiv Gill - Needham & Company

Joe Stauff - Susquehanna

Michael Cohen - MDC Financial Research

Spansion Inc. (SPSN) Q3 2010 Earnings Call October 26, 2010 4:30 PM ET

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2010 Spansion Earnings Conference Call. My name is Alicia and I will be your coordinator today. (Operator Instructions).

I would now like to turn the call over to Mr. Shubham Maheshwari, FCP, Investor Relations. Please proceed.

Shubham Maheshwari

Thank you and welcome to Spansion third quarter 2010 earnings conference call. On the call with me today are John Kispert, CEO and Randy Furr, CFO of Spansion. We will be referencing a slide deck during the portion of today’s call. You can download a copy of these slides from investor relations section of our website at www.spansion.com under events and presentations.

Our call will be approximately 60 minutes in length. There will be an audio replay of this call. You may access that by dialing 1-888-286-8010, pass code is 37158275. A webcast replay will be available on the company’s website throughout this year. Please note the following Safe Harbor statement. During the course of this meeting, we may make projections or other forward looking statements regarding future events or the future financial performance of the company or the industry.

We caution you that such statements are based on current beliefs, assumptions and expectations as of the current date and involve risks and uncertainties that could cause actual results differ materially from our current expectations. We encourage you to review our filings with the SEC where we discuss the risk factors that could cause actual results to differ materially from our current expectation and those in the forward looking statements. You will find detailed discussions of these risk factors in our most recent SEC filing which include Spansion’s quarterly report on Form 10-Q for the fiscal quarter ended June 27, 2010 and annual report on Form 10-K for fiscal year 2009. The Company disclaims any duty to update forward looking statements.

With that I will now turn the call over to John.

John Kispert

Thank you, Shubham. Good afternoon and welcome to our fiscal year 2010 Q3 earnings conference call. Today I will highlight our results and update you on the market and our strategy, then Randy will give you the financial details for the quarter and the outlook for the fourth quarter and then finally we will field your questions.

And high level, we delivered another solid quarter executing against our plan and achieving improved results in a number of areas. We continue to improve non-GAAP earnings and achieved our fourth consecutive quarter of revenue growth in the embedded market. Our embedded revenues were up 15% over Q2. We also experienced an improvement in productivity as measured by output from our flagship manufacturing facility in Austin. In addition, we had all time highs in new age shipments out of all our final manufacturing facilities. This in course includes our back end partners.

Before I get into market segment trends and design wins, I’d like to address last Friday’s ITC Judges Initial Determination ruling. Some perspective first, these are only two patents of 16 patents we have assorted against Samsung and only two of our expansions overall 2300 patents. Second, these patents are not part of the four separate cases scheduled to go to trial over the next 18 months.

Since 2008 when we actually filed these first two patents we’ve discovered even stronger evidence of patent infringements. We will continue to fight against the misuse of our patents. Protecting our IP is a critical piece of our licensing strategy. We must defend the interest of our employees, customers, partners and licensees who have all put significant investment in our technology.

Now moving to revenue for specific segments and regions, we saw consistent growth and well as the first [flight] growth across all of our core embedded markets. You can slide four our revenue break downs by segments and by region. Expansion brings the unique focus to the embedded market by understanding the specific customer requirements and supporting their legacy as well as their next generation designs.

With hardware, software and off course system solutions. For the quarter, we believed we have gained 2 to 3 points of market share over the June ending quarter. In addition, we secured a number of new customer design wins across existing and new markets. For instance in the video entertainment segment, we have secured 10 new customers. Some of our customers are starting mass production later this quarter. With our 2 gigabyte MirrorBit Eclipse product we have demonstrated a high quality video experience for rich interactive graphics. The entertainment systems high quality graphics with two dimensional is soon to be released. 3D visual graphics require fast random reads and our 2 gigabyte equips NOR flash product with its fast random read speed is the best solution in the market for high definition video and Spansion is the only supplier with a 2 gigabyte NOR ready for production in the market today.

In set-top boxes, part of our consumer segment, we secured over 20 designs from the Top 8 world wide set-top box OEMs and we see new opportunities in emerging markets in China, eastern Europe, South America and India. The automotive segment here focuses on infotainment. Electronic clusters, navigation and of course under the hood applications across the entire range of cars from petrol to electric cars. This quarter we had secured an additional 15 new automotive design wins.

In the area of auto safety, advanced driver assistance systems are the next wave of innovation into auto electronics. These systems actively help drivers avoid accidents by taking over the control from the driver. We are [parting] with customers and partners that enables secure and reliable solutions for the cameras that will be used for blind spot monitoring, lean departure warning systems and night vision applications.

We are also continuing our focus efforts in aligning with leading chipset designers. Through our focused engineering efforts and our ability to have the right technology for the right application available today, Spansion has increased its chipset reference design by 18% over the last quarter. We also recently announced a collaboration with Freescale to bring cost effective and reliable high performance to all next generation dashboards. These dashboards will improve safety and driving experiences to a new high resolution color, thin film transistor screens.

In our industrial segment, memory demand will continue to increase for applications such as smart meters and infrastructure for smart grid next generation energy networks. The participants in these markets are looking for reliable flash memory. And with our commitment to product longevity and our commitment to industrial temperatures to power these meters and networks. We recently secured a new design with the leader in smart metering.

We work with the customer on a custom multi chip package solution and we are able to develop the right system at the right cost point to meet their needs. I have estimates that show like $200 billion investment over the next four years for the global smart grid. This will require a leading communications, energy management and industrial control solutions from companies are major partners suspension.

And finally the communication segment, while still early in the market deployments we are starting to win designs in emerging application such as the femtocell. We believe this will continue to grow over the next few years. In the area of products execution as we discussed last quarter, we continue to make progress, we recently launched two new product lines. A new serial peripheral interface flash memory product line, these product lines had small sector architecture and expand our SPI product portfolio significantly.

We now offer SPI products for intensity from 4 megabit up to 256 megabit. The key here has been introducing faster raise times that improve system performance for low density applications that also require storage of small blocks of code and data. There is a growing demand from customers particularly in market such as consumer printers, DSL and cable modems, DVD players, LCD TVs and set top boxes for all these applications. We also introduce more advance 32 megabit and 64 megabit products primarily designed to meet a broad range of automotive, industrial and defense applications or can be used throughout other markets.

Finally in our charge trap, man product development ramp I’d like to update people on which it is well underway. Qualification will be complete in 2011 with a production ramp scheduled for the second half of 2011.

So we expect royalty revenue from (Inaudible) in that period and we expect revenue from ORNAND products in that time frame also. ORNAND products will focus on the embedded markets only targeting application such as navigation systems, digital TVs, telnet, printers, set top boxes and digital still cameras. We are already engaging the current customers who are asking for the same levels support for NAND that they have come to rely on us for with all of our other products.

In summary, we had a solid quarter and continue to be optimistic about the market in growth areas for NOR based and NAND based products. As well as the partnering opportunities we have with other chip companies using our non-volatile memory technology and expertise.

With that I will turn it over to Randy.

Randy Furr

Thanks John. Regarding the summary of the fiscal Q3 2010 operating results. Non-GAAP sales were 320 million and non-GAAP gross margin was 35.2%, non-GAAP adjusted operating income was 48 million including to a margin of 15% and non-GAAP adjusted EBITDA was 76 million.

As we stated last quarter, we are presenting non-GAAP financial information in addition to GAAP in order for you to better understand the operating results of the company. We believe this is important due to the significant impact of fresh start accounting and the predecessor/successor multiple financial statements requirements. Our plan is to continue with this format through our fourth quarter of this fiscal year. By now you should be pretty familiar with the format and our slides.

I will start with slide 6. After adjusting for fresh start accounting in Samsung litigation expenses, net non-GAAP sales come in at the high-end of our range at $320 million. Non-GAAP gross margin was 35.2% again reflecting a nice sequential improvement from Q2’s 33.9% and up significantly from last year’s Q3 of 28.3%. Contributing to Q3’s non-GAAP gross margin improvement was both our top-line growth with our top-line being up 9.2% sequentially and a favorable mix with embedded going from 58% of total revenues in Q3 of last year and 74% of total revenues in Q2 of this year to 77% in Q3.

Our operating expense trend was up in Q3. Contributing to this was higher selling expenses associated with the increased net sales, increased expenses associated with our S-1 registration statement filed on September 17 and higher labor cost for the additional folks we have in Japan. We now have a full quarter of expenses after the mid Q2 acquisition of the sales and distribution business from Spansion, Japan.

Although R&D for the quarter was up slightly as a percentage of sales it declined, the net non-GAAP operating income increased $8 million or approximately 20% sequentially and non-GAAP operating margin increased from 9% in Q3 of last year and 13.7% in Q2 of this year again to 15.0%.

This is an appropriate time for discussion on taxes and our tax rate. You might recall from last quarter’s conference call that we communicated and anticipated NOL benefit between $23 million and $28 million per year for the next 20 years. We have completed that analysis and the actual number is $27 million. Again this is an annual amount of available NOL for each year for the next 20 years. So before discounting for the cost of money, this equates to $540 million benefit spread over 20 years.

However, in addition to this annual NOL benefit, during Q3 we had completed the analysis and work on an additional US Federal and California State deduction. This equates to a 2010 tax deduction in the amount from $500 million to $510 million that can be used in 2010 as well as carry over to future years. And again, this is in addition to the annual amount of $27 million for 20 years.

For all practical purposes our NOL of $27 million per year for 20 years or $540 million in total has now increased by an additional $500 million, and we can take this 2010 deduction against the first $500 billion in earnings with no annual limitation. This deduction is related to our former subsidiary Spansion, Japan and it become available upon the cancellation of the shares as a result of this Spansion, Japan bankruptcy proceedings.

Due to this additional $500 million tax deduction, our ongoing cash tax rate will be reduced from the 28% to 32% range communicated on our June 16 call to a range of 5% to 10% going forward. This new tax rate is mainly due to taxes enclosed on our foreign populations. Although there is one critical point with the new $500 million NOL benefit. This benefit could be adversely impacted if there are certain significant changes in the ownership of Spansion in the future. So we will constantly monitor this as we go forward.

Adjusted EBITDA also posted a nice gain during the quarter coming in at $76 million. Our non-GAAP basic EPS was $0.65 and our non-GAAP diluted EPS was $0.64 in Q3. Back to column two, the one label fresh start adjustments. This column lists the principal, financial impact on our third quarter’s GAAP results from fresh start accounting. As we discussed during our second quarter’s call, fresh start accounting has had a material impact upon our operating results.

Let’s turn to slide 7 tilled Q3, ‘10 results, GAAP to non-GAAP adjustments. Here we have further broken down the items from fresh start accounting that impact revenue, gross margin, operating income and adjusted EBITDA. Given that we covered each of these in detail during last quarter’s call and the format is the same and that the Q3 fresh start numbers were generally in line with our guidance provided during quarter’s call, I will not do a deep dive each line item as this should be fairly self explanatory.

Now let’s turn back to slide 6, column 3 is the impact on our financials of our Samsung litigation. Here, we are disclosing that during Q3 we expensed 21 million on litigation in connection. This number is significantly higher than the 3 to 5 million in guidance provided during last quarter’s call.

Clearly what drove this additional litigation is this, what drove this is the additional litigation that Spansion filed began Samsung in our fiscal third quarter. During the quarter we elected to pursue additional litigation after we discovered additional patent infringements upon the part of Samsung.

To summarize, in August, Spansion filed an additional four separate patent infringement compliance to get Samsung to further address all past and ongoing widespread patent violations in broad and growing range of Samsung flash memory products. Spansion filed the complains with the International Trade Commission or ITC and in the US district courts, in the Eastern District of Virginia and an ITC bureau case in the Northern District of California and in Wisconsin.

As a reminder, Spansion’s accounting policies for litigation is to accrue projected, incremental litigation expenses for the next 12 months. The incremental $21 million is primarily for the four new suits filed during the quarter and is estimated litigation expenses for the period from Q4 2010 through Q3 2011.

Column 4 takes the combined GAAP results listed in column one and that’s for the impacts of columns 2 and 3 to get non-GAAP results for Q3.

If you turn to slide 8, you can see Q3 results listed in column 4 on slide 6 compared to the past five quarters.

I would now like to turn the conversation to the balance sheet. See slide 9, I’ll start with cash. We ended the quarter with cash and cash equivalents of $330 million. This is after paying approximately $30 million for plan of reorganization disbursements netted against the redemption of approximately $28 million in auction rate security proceeds.

Additional items impact in cash during the quarter include capital expenditures of approximately $18 million and the sale of approximately $11 million in surplus used tools.

As a side note, we still have approximately $41 million left going out for a plan of reorganization disbursements which we anticipate the majority of these disbursements will go out in Q4.

Trade accounts receivable was a $148 million. DSO was 42 days using adjusted non-GAAP revenue of $320 million. Inventory for Q2 was $181 million, and this reflects not only the impact of higher standard costs due to asset wide up but also includes the wide up of inventory one hand or in process as of May 10, to its estimated market value less the cost of sale. Accounts payable increased from $31 million at the end of Q2 to $104 million at the end of Q3. This increase was due to three factors, one is our wafer purchases from the former Spansion Japan which at the end of Q2 was considered a relative parting and which is now TI instead of Spansion Japan.

This is now included in accounts payable. The second factor is the receipt of invoices related to the bankruptcy professional fees. These were previously classified as accrued liabilities on the balance sheet and it now moves to accounts payable. And the third factor is now that we are out of chapter 11 we are driving accounts payable terms with our supplier to terms closer to market.

Accrued liabilities decreased from $218 million to a $147 million primarily due to the re-classification of the bankruptcy fees from the accrued liabilities to accounts payable. And again this all as a result of you see that the actual invoices.

Lets turn to slide 10 titled summary of claims and share distribution. In summary you can see that we distributed 26 million for about 44% of the total 59.2 million shares. The 59.2 million was the total shares we anticipated prior to the recently announced Spansion Japan transaction.

Also as you can see from slide 10, now we anticipate retiring some shares as a result of the Spansion Japan transaction. Also, we do have good news and that we resolve two of our largest disputed claims. The first being Chipmos and the second being Spansion Japan. The Chipmos settlement shares will be distributed within the next couple of weeks and the Spansion Japan settlement shares will be distributed in about 45 days. As a side bar both the US bankruptcy court and the Japanese bankruptcy court approved the transaction with Spansion Japan earlier today.

Additional distributions will come as our claims agents settles or litigates the remaining disputed claims. As a result of the recent claims activities, the disputed claims is now down from approximately 1.76 billion at the end of Q2 to a number of approximately 454 million with reserves which should allow for the cumulative distribution of approximately 73% of the new total 53.9 million shares again this distribution to be completed within the next 45 days or so.

As you can see from slide 10, as of today we estimated that we can retire 5.3 million shares related to the Spansion Japan transaction. However, as the footnote indicates we do anticipate that retired shares will likely increase to a number somewhere something between 5.3 and 7.7 million shares. Again this all has to do with the eventual ending size of the total approved claims approval. To help you understand the math we have included two different eventual total claims scenarios; one at 1.2 billion and one at 1.1 billion. As you can see under the 1.1 billion scenario, we will be able to retire approximately 7.1 million shares from the Spansion Japan transaction in the total number of basic shares issued by the company then would become 52.1 million shares.

I’m sure many of you would like more detail on the remaining estimated 454 million in distributed claims. Slide 11 provides you with that detail, again our plan of reorganization a responsibility for the majority of these claims is with our claims agent. Thus, Spansion does not have specific information on the status of any individual claim. So we will not be periodically reporting or discussing the status of any individual claim. But we felt the information provided on slide 11 would help you understand what claims remain.

I would now like to turn the slide 13 titled Q4 outlook GAAP and non-GAAP. Range for adjusted net sales is 320 to 340 million. Gross margin range is 34.5 to 37.5% and adjusted non-GAAP operating income is 45 million to 60 million. Non-GAAP diluted EPS guidance is $0.53 to $0.77 and adjusted non-GAAP EBITDA is 70 million to 90 million. Slide 14 helps in the understanding of fresh start accounting adjustments guidance included in column three of slide 13.

Finally, given our strong non-GAAP operating results and the new news on our tax rate going forward, we felt it appropriate to update our longer term model. Slide 15 provides you with an update our longer term model, slide 15 provides you with an update on this model. We did increase our gross margin guidance and again we did move our guidance for our future tax rate down significantly based on the new news provided to you earlier in this call.

With that I would like to thank you for your time and turn this back over to Shubham.

Shubham Maheshwari

At this point you can open the call for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from the line of Atif Malik of Morgan Stanley, please proceed.

Atif Malik - Morgan Stanley

Hi, thanks for taking my questions and nice execution on quarter and share gains. First question John, if I look at the pie chart couple of segments based on the commentary by other semi-conductor companies like Texas Instruments said there is some sort of weakness in the PC’s and TV segments. If I look at your pie-chart for first half of 011 could you identify the segments where you could see the biggest upside based on the design wins momentum that you have right now. Would auto be a segment that you can kind of outperform Q3 results?

John Kispert

Let me just walk around that pie quickly. As we have a lump in here auto and industrial which includes diagnostics and all the metering that goes on in buildings and the complex things around the home and dealing to medical off course. I see more growth there certainly in Q4 and in the first half of the year.

Other also looks very good, its very similar to the next generation autos, its all about the experience inside the car so more and more video, more and more 3D kind of graphics and everything from climate control to informatics. Beneath that is only called consumer in gaming, we are going to have a lot more growth there to that’s where we look at our segments consumer would be where we have seen some weakness, I think the system with what you are getting from other folks and it’s I refer to it for our business is more in the low end of consumer kind of the appliance side of the business has certainly slowed down a little bit but I think on the gaming side, we are going to see a good first half of the year and certainly good growing fourth quarter as I refer to in my remarks. You know things like cameras and games and printers, toys and appliances might not be as strong but the rest of the higher end if you will, I think it will be fine.

If you are going to the left to that you will see wireless & M2M which refers to machine-to-machine, the wireless business is one that we have I think everybody understands this then we have been very specific and focused on who are working with in that area. We’re focused primarily in emerging markets, around particular phones, particular handsets so that businesses still remains profitable and strategic for us but not a great growth, I wouldn’t anticipate a great first half out of that but what we do see is on the machine to machine side, we are using MCPs neutrally kind of the everybody becoming connected to any part of the world that you know vendor management, supply chain management, asset control, those kind of markets we’re doing very well there.

Will that offset the first half of the year with a wireless shrinking, I am not sure. I know we are doing really well and winning the designs. We will see how quickly different parts of the world start to ramp that kind of remote monitoring and measurement business, which is new and exciting for us.

Above that is what we call other and we’ll break that out a little bit better next time. Its mostly, for us today its around the energy smart rig kind of applications utilities, automation, and as you can see that’s going extremely well and I don’t really see that that’s going to slow down in Q4, Q1. I haven’t spend as much time looking at 2011 at this point but I don’t anticipate us take any steps back there.

And to the right of that is computers and communications, and that’s a big business as you guys will know servers, routers, play stations, anywhere we had access points to the internet. I think it’s a very predictable business for us right now. We are very focused on specific segments now that I think are going to be pretty solid at least for the next six to nine months. Hope that answers it.

Unidentified Analyst

Some of your peer like Macronix in Taiwan are thinking of expanding capacity next year. So if you can update us what’s your mix of 110, 90, 45 nanometers in your Austin fab and how much incremental capacity you can get from just shrink and what kind of CapEx outlay you have in mind for next year?

John Kispert

Let me just go back up on that. I think ramping a 300 millimeter fab at 90 nanometer is pretty expensive. So I think that from a cost standpoint we are many years away from us being in any great parallel, being hit by something at a lower cost position. They are going to have to shrink a lot than your product designs, 300 millimeter to get down to our 45 nanometer, 65 nanometer capabilities.

Now with that in mind to your question, Fab 25, 5% of our output today is 65 nanometer about 40% is 90 nanometer and the rest is 110 nanometer. And for everybody who doesn’t know Spansion should know it’s a fully automotive fab, we can do aluminum and copper, we run in essentially all our devices. We had the to running that out of Boston at this point. We are on a shrink path to put more and more of the capacity to 65 nanometer to [teach] question. Its not a high capital shrink. We can reuse most of the equipment. In fact we’ve already bought most of the equipment we need. You will see that 5%, 65% nanometer growing. I think everybody understands, that means lower, cost point for us as a company as we migrate that 90 and 110 to 65 nanometer.

It’s a year along plan. I think a year from now we’re probably staring at maybe 30% of our output coming at maybe 35% to 65 nanometer. What’s interesting about these markets that we participate in is that customers are pounding the tables saying shrink your frac, in fact rather we didn’t do that. Rather we stayed at the older technology note. We are the ones that are pulling them along and they are just to get the lower cost points in the smaller foreign factors for expansion.

Operator

And the next question comes from the line of Krishna Shankar with ThinkEquity. Please proceed.

Krishna Shankar - ThinkEquity

Give me some sense for the percent of revenues that you have from the new products that you are introducing this year and when will some of the new initiatives in embedded NAND and also licensing contribute to revenues?

John Kispert

For the first part of your question, we’ve introduced three product families if you will over the last couple of months which we’re really excited about. One product is, product family is mainly focused on industrial products. It will be a very small piece of our revenue certainly in 2010. I think if you add the three together, we think its somewhere about 15% to 20% of our revenue in 2011. The adoption is very good, it’s now a matter of a ramp in and a product transition from the older product line to the newer product line and we’re in the midst of that.

In addition we have two more product families to come out early in 2011. These are much bigger product lines as far as revenue capabilities and we are focused higher density products and we’ll talk a lot more about those I’m sure, once 2011 rolls around. And we’re beginning qualification with some customers as we speak on those product lines.

And Krishna the second, and I would imagine that it’s 5% to10% of our revenue for those product line, somewhere in 2011 as we ramp. Again you will have the transition from the older 90 nanometer product line to the 65 nanometer product line and that will take a few months through the year.

And then your second question Krishna.

Krishna Shankar - ThinkEquity

Just wanted to get a sense for when the embedded part of your business with embedded NAND and licensing may contribute to revenues?

John Kispert

I did say that in the prepared remarks. Right now we’re on a plan without (Inaudible) it’s going very well. We’ve made great strides in the last couple of weeks as we ramp it in R&D, qualify to die. The plan right now is for us to start production to customers in the second half to 2011 and start taking revenue in the second half of 2011. It’s a plan that we put together about six to nine months ago and we are right on it, reviewing it weekly, so far so good.

Operator

And the next question comes from the line of Rajiv Gill with Needham & Company. Please proceed.

Rajiv Gill - Needham & Company

Just a question on the ASPs, may be if you could characterize the pricing environment this quarter and what your expectations are over the next couple of quarters. And along those lines kind of what are the drivers of the gross margin expansion over the next few quarters? How do you look at gross margin trajectory?

Randy Furr

The ASPs have been very stable for us. I think it’s a trait of the embedded business you are going for. We see some reduction in terms of just product-on-product from quarter-to-quarter in the ASPs but again we are migrating our weighted average products to higher density products which has given us very stable ASPs; it has for five or six years and its probably going to continue to do that for future. So, we didn’t see anything in the ASP area that was unusual last quarter.

A driver for a continued improvement in the gross profit is a couple of things I would say; one is we tend to be or we are a bit about a higher fixed cost or variable cost business so certainly as we continue to grow the top-line we will see improvements in the gross margin, secondly as we move our products from 110 to 90 and then from 90 to 65 in that migration. We clearly get a lot more die per wafer therefore we have a lower cost per die.

And some of that savings is passed on to the customers as an incentive to get them to continue to requalify our products and move. Move the products but not all of it. And that is a favorable impact in terms of our gross margin. And then I guess the final one is that we are still working to get all the improvements that we think from an efficiency point of view. So we think there is some small improvements that we can continue to make just by improving the overall efficiency in the organization. So those are the primary drivers for improving gross margin going forward.

Rajiv Gill - Needham & Company

If you could talk little about the demand environment, the growth this quarter end and next quarter, was that mainly driven by market share gains, inventory replenishments or kind of just overall end market strength? How would you kind of prioritize that?

John Kispert

I understand the question. Its had a part of it in those three buckets. Certainly you have to think of it as kind of a funnel, the top funnel we want to win everyone of the sockets, if you will there that we want to be designed in to prepared remarks, try to spend some time on that. We are winning the majority of those. Now that they become revenue right away, it could take the pain on the segment or the sector could take a while or could be months away. So I certainly feel like we are gaining market share in all of our analysis as so we’re gaining market share particularly in the embedded market which is one of our focuses, then I said the remarks anywhere from 2 to 3 points from a quarter.

As far as end user demand, my take, I am traveling along and seeing lots of different customers that it’s really segment specific, it is no doubt everybody is nervous about their business on one hand it seems very steady to me in our embedded applications. We talked about them in our earlier questions on communications, auto, industrial, gaining machine to machine some of the medical, I think very steady. I will say that our supply has caught up to demand a little bit so its where we spend Q3 really ramping quickly so we are a little bit more in equal equilibrium now. I like this position and I can’t remember your third bucket but I think demand is pretty general across all the segment steady, predictable and in line with the supply that we have in place for the rest of the Q4 and into Q1.

Operator

And the last question comes from the line of Joe Stauff with Susquehanna

Joe Stauff - Susquehanna

Couple of questions and I apologize I had to drop off the call briefly but just looking at the cash right now, I’m trying to project effectively the pro forma cash that you’ll have on hand so you had 330 obviously at the end of September. How much of that 330 still has repaid in terms of professional fees?

John Kispert

Too much Joe.

Joe Stauff - Susquehanna

Its always too much.

John Kispert

Too much, more than you would ever think.

Randy Furr

About 41 million disclosed here for professional fees and we expect that to be paid in Q4.

Joe Stauff - Susquehanna

Okay, so 41 to be paid and then obviously the 85 million of cash for utilizing for the share buyback?

Randy Furr

That’s correct.

Joe Stauff - Susquehanna

Okay. Now the share buyback obviously given slide 10, effectively you are buying anywhere from 5.3 to 7.1 million shares just based on these scenarios. Let’s just take the mid point basically in pressure buying about 6.2 million shares bask at 13.70 per share, is that the right math? I know there are some mechanics, I know about effectively from an economic perspective.

Randy Furr

Your math is right, but one thing you said it’s a little off, you said 5.3 to 7.1, it’s actually 5.3 to 7.7 we foot noted that on slide 10 and if you really wanted to narrow that window up a little bit more these two scenarios I don’t want to hear. I think would narrow that from about 6.6 to 7.1 so I think if you kind of taken a mid point, you might want to take a mid point of those numbers.

Joe Stauff - Susquehanna

6.6 to 7.7. So, obviously that implies even more of a discount in terms of where you are buying back those shares relative to current market rates, lowest 13 exactly as where that math shakes out. So that’s obviously a very good thing. Now, with respect to sort of the legal expectations right that you have I mean you are effectively saving in the context of that in terms of where the market value of the shares are versus where you are buying back. It is just over $30 million of kind of relative discount in terms of your where you’re buying back those shares. Now that is obviously very good, now from a legal perspective you have expanded the scope of your patent suit against Samsung and incurring $15 million more and expenses in the third quarter and could you remind me exactly what now the guidance is for 2011 legal.

We didn’t provide, we are not providing guidance for 2011 at this point or in anything certainly to include the rebuilt.

Joe Stauff - Susquehanna

Okay I am sorry I thought you had mentioned something maybe you are just talking about this year. Your previous legal guidance this year was 26 now it is $15 million higher so is that accurate.

Randy Furr

Lets give or take, you’re in a ball park.

Joe Stauff - Susquehanna

And then as it relates to see there are some dynamics working on so I just want to clear on the math. The guidance at least for full year now is adjusted EBITDA of roughly 285 to 295 is that fair for the full year 2010.

Randy Furr

Yes. And then finally talking about the earnings momentum that you have, you talked about the market share gains obviously that you had won third quarter two to three points. And the second quarter you won points back. You also indicated in the last call that basically you did a pricing increase that started in mid June and I believe that you had mentioned that, I think about three to four months to see if that’s going to stick. Can you reassess or give us some visibility in terms of that price increase sticking or not?

John Kispert

The definition is the stock is interesting but yes, the pricing has been… As randy answered earlier, it’s been predictable and what we anticipate say three to six months ago, in our focused markets which are the embedded markets.

Joe Stauff - Susquehanna

Capacity utilization, does that still remain a kind of near full capacity as it was I guess towards the end of June?

John Kispert

Yes, I think that’s fair. You know we keep adding some capacity here and there either in our own factory or into our partners’ but it starts with a 9 if its not a 100%. Every fab manager likes to say it’s a 100% but I think we’re in the 90% range.

Operator

And the next question comes from the line of Michael Cohen with MDC Financial Research.

Michael Cohen - MDC Financial Research

In your listing of disputed claims, you list Samsung for $75 million and yet during the bankruptcy they were willing to pay you $70 million in cash within a six-month period. So wondering if you could kind of expand on maybe the part of the story I am missing of why they were willing to infuse cash at the same time I think that they were owed money?

Randy Furr

Well I will do the best I can here. So the reserve that has been set aside for Samsung at $75 million was set aside by US bankruptcy Court for, like potentially would be viewed as patent infringements that we would have infringed upon Samsung for the period prior to bankruptcy and the judge set aside a reserve. It doesn’t mean that we owe it; it doesn’t mean that we agreed to it; it just means that Samsung made a claim, the judge made a decision to put a certain number of shares aside or a reserve for a certain number of shares aside, and this only has to do with potential infringements expansion would have had against Samsung prior to the time we entered bankruptcy.

In theory, there is no netting of past versus future so that’s why that claim is set aside. Does that help or do you want me to continue?

Michael Cohen - MDC Financial Research

No, that is very helpful. And my next question is of the $454 million in total disputed claims, will that just be settled with the 14.2 million remaining shares to be issued or is there also a cash amount that might you have to be used?

Randy Furr

There is no cash whatsoever. There is a bucket of shares of 46 million roughly, 46.2 million. These shares were total bucket, the total piece of pie. Its just a question and how that gets distributed and after now settling Chipmos and Spansion Japan, we have this 14.2 million shares set aside to resolve this roughly $454 million.

Shubham Maheshwari

Thanks Randy. With that I want to thank everyone for participating on the call today. We look forward to talking to you again in January of 2011. Thank you and have a great day.

Operator

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

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