Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Bob Okunski - Director of IR

Bertrand Cambou - President and CEO

Dario Sacomani - EVP and CFO

Analysts

Michael Masdea - Credit Suisse

Glen Yeung - Citigroup

Aaron Husock - Morgan Stanley

Alex Gauna - UBS Financial

Pranay Laharia - Deutsche Bank

Shawn Webster - J.P. Morgan

Joanne Feeney - FTN Midwest

TRANSCRIPT SPONSOR
Better Than AdSense

Spansion, Inc. (SPSN) Q4 2006 Earnings Call January 29, 2007 4:30 PM ET

Operator

Good day and welcome everyone to the Spansion Fourth Quarter 2006 Earnings Results Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to the Director of Investor Relations, Mr. Bob Okunski. Please go ahead sir.

Bob Okunski

Thanks, Tom. Good afternoon everyone and welcome to Spansion's fourth quarter 2006 Earnings Call. This is Bob Okunski, Director of Investor Relations here at Spansion. Joining me are Bertrand Cambou, President and CEO; and Dario Sacomani, Executive Vice President and Chief Financial Officer.

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

But before beginning today's discussion, I need to spend a few minutes reminding you of the Safe Harbor limitations of our discussion. During this call we will make forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding future development, adoption and deployment of MirrorBit technology, expected first quarter sales, improvement in gross margin, increases in market share, expected 2007 costs in research and development, sales general and administrative costs, interest expense and capital expenditures and projected revenue growth, as well as handset shipments.

Investors are cautioned that the forward-looking statements in this conference call involve risks and uncertainties that could cause actual results to differ materially from the company's current expectations. For risks that the company considers to be important factors that could cause these results to differ materially from those set forth in the forward-looking statements, the company urges investors to review in detail, the risks and uncertainties in the company's Securities and Exchange Commission filings, including but not limited to the company's quarterly report on Form 10-Q for the quarter ended October 1, 2006 and the company's registration statement on Form S-1A dated November 03, 2006.

Finally, a copy of the press release is available on our website and this live call is being recorded for replay purposes and can be accessed on our Investor Relations website at www.spansion.com. A telephone replay will be available for seven days following this call and can be heard by dialing 888-203-1112 with the passcode 4341667.

With that I'd like to turn the call over to Bertrand Cambou, Spansion's President and CEO. Bertrand?

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Bertrand Cambou

Thank you, Bob. Good afternoon and thank you for joining us. I will focus my comments on the status of the business, and results for the fourth quarter and for 2006. Following my comments, Dario will go through the financials.

Overall, the fourth quarter was mixed. On one hand we were disappointed by our financial results, greatly due to business conditions we saw during the quarter. On the other hand, we accomplished major achievements in the quarter that will position us for stronger 2007. I will address our results in the context of three business segments. First, the traditional non-wireless business; second, the emerging MirrorBit ORNAND based solution; third, the embedded CSID business.

First, the traditional non-wireless business performed well below expectation, with revenue dropping from $420 million in Q3 to $360 million in Q4, mainly due to a mix change toward low margin business. What we saw was an unexpected postponement of higher margin business to Q1, due to the drastic reduction in year-end inventory at certain customer, as well as end-market consumer preferences for low end devices.

Fortunately, the bulk of this high margin non-wireless business will be available for us in Q1. In addition, we successfully added new wireless customer during Q4 that will ramp up hard in 2007.

The second business segment is the emerging MirrorBit ORNAND solution business for wireless that jumped from less than $5 million of revenue in Q3 2006, to more than $60 million in Q4, primarily in Japan.

As forecasted, this higher margin business was impacted at the beginning of the quarter with non-recurring startup costs related to the abrupt ramp up. The current cost structure for MirrorBit ORNAND based solutions is very competing, and we have a strong backlog to grow our business in the higher end wireless segment, first in Asia, then in the rest of the world. Additionally, we already have working 65-nanometer wireless ORNAND devices in Fab 25 and intend to apply it as soon as possible to enrich our solutions and further improve our margins.

The third segment, our embedded CSID business, grew also to about $260 million, further gaining share, in particular, taking away high density sockets away from competitions, in a very aggressive pricing environment. While Q1 is typically seasonally down for the embedded market, our strategy is to push harder on higher density MirrorBit, 256 megabit, 512 megabit and 1-gig product in all regions to mitigate these seasonal effects.

Altogether, the combination of the three segments, produced a down quarter for the gross margin, as the strong MirrorBit ORNAND and embedded businesses were not able to offset the sharp drop in the traditional wireless NOR business.

Let us now reflect the overall performance for the entire 2006 year. Spansion's revenue grew 29% compared with 2005, up almost $600 million year-on-year, while reducing operating losses at [custom] parameters by approximately $200 million. Excluding stock options, accumulative operating losses for the entire year were below $80 million. We continue to gain NOR segment share in 2006, as both businesses were up 5% in share over 2005, and we leverage MirrorBit sales that jumped from approximately $460 million in 2005 to $1.3 billion in 2006, and reached 63% of net sales in Q4.

Due to highly disciplined cash management, prudent spending on SG&A and R&D, reduction of inventory, and improved DSO and completion of term loan, we positioned the enterprise to end the year with almost $900 million in cash.

Based on strong demand in 2006, we are now accelerating the ramp-up of a highly competitive Spansion One, 300 millimeter facility that we intend now to use at 65-nanometer in the second half of the year, then quickly transitioning to 45-nanometer and 4-bit-per-cell in 2008. We firmly believe that such a strategy will position us as the clear industry leader in NOR segment of the flash market, in market share, in technology leadership, and in cost structure.

With that I'd like to turn over the call to Dario, our CFO, to discuss our financial performance in greater detail. Dario?

Dario Sacomani

Thanks, Bertrand and good afternoon everyone. I'd now like to review the specifics of our P&L performance for the quarter. Specifically, net sales for the quarter were $687 million, up 16% or $95 million versus Q4 of 2005 and up 2% versus Q3 of '06. Gross margin for the quarter was 19% compared with 21% in Q3 and a 16% gross margin in Q4 of 2005.

As Bertrand mentioned, the gross margin decline was directly impacted by the postponement of higher margin wireless NOR products, and aggressive pricing environment in embedded, we sled to an overall lower margin product mix in Q4 of '06. While our margins for the MirrorBit ORNAND solutions were strong at the end of the quarter, the steep learning curve associated with our ramp at the beginning of Q4 kept this from offsetting the loss of the higher margin, high density custom solutions that Bertrand discussed earlier.

With the improved MirrorBit ORNAND learning curve through the fourth quarter, we expect this to have a positive impact on the Q1 2007 margins. Additionally, we believe that increased sales of our 90-nanometer products and improvements in our test costs will also positively impact our gross margin in Q1, slightly offset by typical Q1 seasonality.

Research and development expenses were $81 million compared to $90 million last quarter. The reduction in R&D expenses was due our successful sale and recycling of our 200 millimeter equipment, as well as option expense adjustments. On a normalized basis, R&D expenses would have been $93 million, in line with our expectations.

We expect our R&D investments to remain flat through 2007 as a percent of revenue, as we accelerate our 300-millimeter, 45-nanometer, and 65-nanometer initiatives. Q4 sales marketing, general and administrative expenses were $64 million, up $2 million compared to the previous quarter. We expect that Q1 SG&A expenses will be down slightly on an absolute basis.

Net interest expense for the quarter was $13 million, up from last quarter due to the closing of our term loan in November. We anticipate that net interest expense will rise as we go through 2007.

Taxes for the quarter were a benefit of $3 million, as we made yearend adjustments to our allowances. Q4 net loss was $25 million. This compares with a loss of $48 million in the fourth of 2005, a year-over-year reduction of 47%. Q4 loss per share for the quarter was $0.19.

For the year, operating loss was $91 million including $17 million in option expense, a 68% improvement compared to a loss of $285 million in fiscal 2005.

Moving on to the balance sheet, our focus on cash management continues to show solid results, as we recorded approximately $160 million in cash flow from Ops. DSOs improved to 53 days from 56. Inventory days also improved 75 days down from 80 in Q3 of '06. Days payable were essentially flat with Q3 at 61 days, resulting in a cash conversion cycle reduction from 73 days in Q3 of '06, to approximately 66 days for Q4 of '06 and compares to 99 days in Q1 of '06.

CapEx for the quarter came in at approximately $246 million, as we continue to fund our next generation backend test strategy, the node migration to 90-nanometer and 65-nanometer, as well as the 300-millimeter, 45-nanometer development. With demand remaining robust and continued solid execution, on our next generation technology roadmap, we have decided to move forward with equipping 300-millimeter 45-nanometer SP-1 facility starting this quarter. Capital expenditures for 2007 are anticipated to be approximately $1 billion, as we ramp the new facility. And as Bertrand mentioned, we now plan to start volume production in SP-1 with 65-nanometer on 300-millimeter wafers in late 2007.

With the pending sale of our JV1 and JV2 facilities, recently completed term loan, and cash flow from operations, we're well positioned to fund our SP-1 facility at low cost. As always capital expenditures, plans for 2007, remain dependent on future demand and business conditions.

At the end of Q4 2006, our cash and short-term investment balances were $886 million, up $508 million from Q3, as a result for our term loan, secondary proceeds and further improvement in our cash management. Debt for the quarter was $1.1 billion, up $500 million, again due to our term loan.

Ending net debt for 2006 was up approximately $200 million from Q4 of 2005. EBITDA for the quarter was approximately $115 million, a year-over-year quarterly increase of 26%, on an increase in revenue of 16%, demonstrating the improvement in our operating performance.

Now I would like to turn it over to Bertrand to discuss our expectations for Q1. Bertrand?

Bertrand Cambou

Thank you, Dario. In the first quarter 2007, we are forecasting sequentially flat revenue in operating performance, while we believe the overall industry will be down. As a result, we expect to gain share in particular in our traditional wireless NOR segment, with a richer mix of product with opportunity to improve our gross margin.

For the full year of 2007, we believe that we will outgrow the NOR market with revenue growth in the range of 10% to 15% versus 2006. This growth will be driven by large revenue increase at certain major wireless customer, the success of MirrorBit ORNAND based solutions, and the continued penetration of higher density MirrorBit solution into the embedded CSID space.

This market share growth will require the ramp-up of a manufacturing engine that we intend into a switch hard to advanced technology nodes, 90-nanometer, 65-nanometer. We will also take full advantage of our outsourcing strategy of older technology to TSMC and Fujitsu, and plan to leverage the first 300-millimeter NOR factory in the world, Spansion-1.

In conclusion, we endured a difficult business environment in Q4. However, the company is delivering in its long-term goal and as the opportunity in 2007 to build on the momentum of 2006, with continued market share growth, delivery on its leading edge technology roadmap, and intensified focus on cost reduction.

With that I would like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). We will go first to Michael Masdea with Credit Suisse.

Michael Masdea - Credit Suisse

I guess my first question is around visibility, can you give us an update on what's happening with your lead-times first and your customer's inventory and finally whether that translates in terms of your turns required this quarter versus last quarter?

Bertrand Cambou

The first question I believe was about the inventory?

Michael Masdea - Credit Suisse

Yes. Customer inventory.

Bertrand Cambou

As Dario told you, our own inventory went down even more. As far as the customer is concerned, some of our major customer took some drastic actions to reduce their own inventory at yearend. We believe that this is a great opportunity for us, because this very low inventory is going to require, then to [user part]. We believe that the end-market is actually very healthy, and that the manufacturing OEM cut down inventory and that has been kind of a late bad news for us in December, because we were not expecting the customer to take such drastic actions on their inventory. Of course, right now, as we are already a month in our new quarter. As expected, we see for us, great opportunities to have richer mix of products in Q1, and to recover some of the lost ground that we had in Q4.

Michael Masdea - Credit Suisse

Have your lead times or turns requirements changed much then or because of that, or not?

Bertrand Cambou

Right now what's going on is -- we are being supply constraint and we are kind of pushing as hard as we can on cycle time of manufacturing. The lead time has been very constant, in the last three to six months.

Michael Masdea - Credit Suisse

And then -- the obvious follow-up is, is there any risk then since we have had the sustained supply constraint, that we have some double ordering going on and as the risks that we see has just started to ramp-up this new capacity, some of those orders start to fall off?

Bertrand Cambou

Well right now this is kind of the opposite, because like we told you some of our customer inventory management has been extremely tight. And the visibility we have is actually that the situation is very nice, it's well balanced. Obviously, like we discussed on this call, one of the excitement in Q4 for us is we got some of the major success into winning new sockets, into major wireless accounts and we see an opportunity in 2007 to penetrate those accounts, where we were very, very weak, is non-existent in the past, which is going to give us another great opportunity for '07.

Michael Masdea - Credit Suisse

Great. Just one more quick one if I can sneak it in, lot of noises last quarter, it was phase-change RAM. Just want to get your high level thoughts on that and what the risk is to your business from phase-change RAM and do you have any plans to go in that direction at all?

Bertrand Cambou

Well, what we are talking about is a long-term research that we are actually conducting. We have a team that is obviously very, very active in this type of research. This is more for 2012 type of technology. We think that what is going to happen before that is going to be a niche. But this is important to keep pushing technology, and we have, a product line team that is doing similar work right now.

Michael Masdea - Credit Suisse

Great. Thank you very much

Bertrand Cambou

Thank you for the questions.

Operator

We'll take our next question from Glen Yeung with Citigroup.

Glen Yeung - Citigroup

Thanks. Can I start just by asking Dario? You mentioned what your R&D numbers would look like for the year and net interest expense. Did you comment at all about SG&A, maybe I didn't hear you and can you also give us an update on what you think depreciation will be for '07?

Dario Sacomani

Yeah, I think the comment I made on SG&A was that we expect it to come down in Q1 on an absolute basis, and I expect that depreciation will be roughly flat from what it was this year to next year in 2007.

Glen Yeung - Citigroup

Okay. So maybe then going to the guidance that, Bertrand, you talked about. You suggested that revenues would be flat. And I think I heard you say that you expect operating performance to be flat, but at the same time you seem to think that gross margins may be up. I just wanted to clarify that you think gross margins will sequentially increase in the first quarter?

Bertrand Cambou

We had some health in Q4 and some of our R&D of course that was down and we think that was onetime event that the R&D cost is actually going to be up.

Glen Yeung - Citigroup

Right.

Bertrand Cambou

But that the margin would improve.

Glen Yeung - Citigroup

Okay.

Bertrand Cambou

And at that point if we look at the combination of one versus the other ones, they are a cross-chord, it seems to be that one is going to compensate the other one.

Glen Yeung - Citigroup

Understood. Okay. So, then if we think about your targets for a return to profitability, has that -- has that changed now? It looks like we are looking at a slightly different operating profile margin through this, starting at lower points and revenues which actually look like they will be ramping. Can you give us your best guess as to what you need to see the return of profitability and when do you think you might see that?

Bertrand Cambou

Well, the best guess we have is as far as 2007, we don't see any major changes. The biggest issue we had in Q4 was being the delay of some of these high margin business, but because of the new customer that we are in, because of the replenishment of the inventory, we think that we are -- in 2007, we are in the [past], which is the same and then let us say three -- six months ago that has been unchanged. The Q4 event was an industry -- customers took some drastic actions and we respect that, we believe that they did a good job to manage their own supply chain. But now we are starting the New Year with at least as many opportunities as we had last year.

Glen Yeung - Citigroup

Can you remind us what the revenue level was and [what's your] thought, you might be at breakeven?

Bertrand Cambou

Well, what we -- if you remember our guidance last quarter, it was between 710 and 740. Which being at -- as you see, revenue being 637 is significantly below what we were forecasting to get.

Glen Yeung - Citigroup

Okay.

Dario Sacomani

Hey Glen.

Glen Yeung - Citigroup

Yeah.

Dario Sacomani

I was just going to add one thing, the fundamentals of our cost reduction initiatives, that being rapid node migration, the test cost reductions associated with the next generation testers, as well as conversions from 0.25 micron JV1 and JV2 into JV3. Still the basic fundamental cost reduction activities, that we think is going to allow us to continually improve our margins.

Glen Yeung - Citigroup

Okay. So should I think about the revenue, sort of profitability level, at something like 725 a quarter. That really is sort of a static moment in time. Right? I mean you will be improving costs beyond that, such that in future, at 725, you may actually be profitable?

Dario Sacomani

Oh yeah absolutely -- I mean, what you said is right. We are going to continue to march on the execution of our cost reduction plans like, no tomorrow. So obviously we should -- as a result of those initiatives, continue to outstrip any kind of average selling price reductions with cost reductions in order to increase our gross margins.

Glen Yeung - Citigroup

Okay. Just one last question which is the products that you had, the mid-range [parts] that you are expecting to sell in Q4, that you did not. Can you talk about what technology nodes these were manufactured on?

Bertrand Cambou

The mix that we had in Q4 was 110-nanometer.

Glen Yeung - Citigroup

110. Okay. Thank you.

Dario Sacomani

Thanks Glen.

Operator

We will take our next question from Aaron Husock with Morgan Stanley

Aaron Husock - Morgan Stanley

Hi thanks. I guess a couple of questions on ORNAND. First, just kind of a housekeeping thing. You said that you did over $60 million in ORNAND sales to Japanese wireless OEMs? Was that all of your ORNAND sales in the quarter or what was the total number?

Bertrand Cambou

Yes, the ORNAND based solution was essentially in Japan. Not 100%, but close to 100%.

Aaron Husock - Morgan Stanley

Okay. So with the total ORNAND, it has been something like $65 million maybe?

Bertrand Cambou

Yeah, you can say that way. I don't have the exact number here. But what I can tell you that was in this range.

Aaron Husock - Morgan Stanley

Okay. And then, can you just kind of give us kind of a little more color on your progress in ORNAND? How many different handset customers are you working with now? How many models that you designed into, how many of the top five handset vendors are your customers for ORNAND?

Bertrand Cambou

First of all, to notice that our technology has been receiving a lot of acceptance in Japan. And we are not down in Japan. There are a lot of key customers right now that are switching to us. As you know, in Japan there was a huge, huge flash [down] on high performance. And we are currently looking at -- to keep increasing our market share in Japan. Korea is another area of great interest for us, where we are essentially going to come with similar solutions, and we expect to actually do that early on in '07. Then in mid '07, we are looking at going to the western, if I can use that term, western, big account. With some of our -- the same type of solutions.

Aaron Husock - Morgan Stanley

Okay. In case, do you happen have the number of how many handset models you are designed into with ORNAND at this point?

Bertrand Cambou

I don't know how many model we have, but if was to give you a number that will be perhaps a dozen handsets are going to -- are using ORNAND right now. Also to notice that we were surprised by the quality of our 65-nanometer ORNAND. We essentially got working silicon right from the first lot in Fab 25. And this is an ORNAND that has been designed for wireless solutions. It is kind of an entire family of a 2-gig, 1-gig, 0.5-gig, all designed for the wireless telephone and right now what we are going to trying to do is to start to design phones with that part, and obviously a great opportunity for cost reduction. But also expanding our footprint by having monolithic device at higher density, and at the end of '07, putting that particular part of the 300-millimeter, which we intend to do now, is going to really make us looking good on these type of applications, which means that the ORNAND story is very exciting. To be accurate on the ORNAND story, we are -- and that appears to be -- I am not committing on that one, but the team is currently looking right now an opportunity to [trip] out the 45-nanometer this year. And of course, if we have to do that, that will be kind of a spectacular coup. But that's where the team is working very hard. We have a 45-nanometer device out of our private line and as we are talking here, our design team is fully committed and advancing, which means the strategy here, not that the ORNAND has turned from being a Mañana technology to something we have now. Now it's very, very important for us to grow as quickly as we can to next technology node, 300 millimeter and so on and so and so forth.

Aaron Husock - Morgan Stanley

And you talked a little bit about some costs you incurred in ramping ORNAND in Q4. Can you quantify that a little bit?

Bertrand Cambou

Yeah, the thing is, when you move from essentially few millions to $60 million, there is a lot of qualifications to be done, the tooling, everything and that's at the beginning of the quarter. Let us say, the first month or so. We had some significant cost that has been absorbed in manufacturing costs. But like Dario was saying, we ended the quarter on a very nice situation here and we intend to start '07 right now with a family that is about 10% of our company's leading edge, in a space we were not before and with an opportunity to grow. And then obviously the first -- the first months of costs, was [worst] planned that was not the bad news, that was something we were expecting for.

Aaron Husock - Morgan Stanley

Okay. Okay. I guess just -- as you think about ORNAND and looking out since you gave for your '07 guidance. What are your thoughts as to where ORNAND could be as a percentage of total sales as you exit 2007?

Bertrand Cambou

Well it's - it's kind of -- the beginning is going to be around 10% of our company. At the end it is going to be a function how successful we are at 65-nanometer, 300-millimeter wafers, which mean that if we cannot actually grow Spansion-1 300 millimeter, 65, we are going to have such competing cost structure that we are going to try to see if we can increase this percentage. But right now, it's a bit premature to give you guidance.

Aaron Husock - Morgan Stanley

Okay great, thank you

Dario Sacomani

Thanks Aaron.

Operator

We will take a next question from Alex Gauna with UBS.

Alex Gauna - UBS Financial

Yes, thank you. I was wondering if you could describe on the ORNAND front, what sort of average densities are you seeing in these lead handsets now and what kind of ASP per handset, and also what you would expect the trend to be going forward here?

Bertrand Cambou

You are asking some information I cannot disclose. But what I can tell you here is, if you look at the Spansion flash content, on some of those MCPs this is -- and we are putting a couple of NOR device, we are putting an ORNAND device altogether it is about to 2 gigabit platform and half being NOR and half being ORNAND. And that's the current [formula]. We are going to design a family of products that are going to be half the density for the high volume, like a 512 ORNAND and then a 512 NOR and then of course in our 65-nanometer, we are going to start to [prepare] a phone, which is twice the density. We are talking about 2 gigabit NOR and 2 gigabit ORNAND. That would be the kind of the mid late 2007.

Alex Gauna - UBS Financial

Okay. And I was wondering, within your guidance for the March quarter, approximately how much of that would you say is the catch-up orders from those delays in Q1 and is all of that effect being taken in the March quarter? There is some trickling into June as well?

Bertrand Cambou

Well, what we expect to do here, is obviously to work extremely hard right now in the supply standpoint, because demand is there. And we have to push very hard in the wireless NOR traditional business, where we have -- actually a big piece of the catch-up is going to be like, let's say, 110-nanometer. And we are talking about here, typical densities 128, 256 megabit, 110 and that's a business that we are growing on right now. In Europe, in China, in Korea and in North America, and which mean that's -- this is the piece that we have to push. We are going to have -- on this traditional business, we are going start to see more 90-nanometer now, starting to come in Q1, which is going to help our margin also.

Alex Gauna - UBS Financial

Okay. That kind of didn't get at the [cart] of what I was looking for. What I am concerned about here is I would assume that we've got some catch-up revenues here in Q1, but we still have normal seasonal decline in some businesses. Looking out to the June quarter, if we have shipped the catch-up business, would we be in a position where we might see a sequential decline at that point?

Bertrand Cambou

That's not the way we are looking at the future. It is too early for me to talk about Q2. But right now what we are looking at is traditional non-wireless business that we missed opportunity in Q4, is going to rebound in Q1. And this is going to offset some of the traditional decline, like we had in the embedded space, where Q1 is traditionally a weak quarter. But as we go to Q2, we have those new customers that are ramping up in North America, in particular, which we think is going to be an engine for growth for our company at that point. But it is too premature for us to guide you on Q2, but we -- at that point at least, we don't see a down quarter at all.

Alex Gauna - UBS Financial

Last one if I could. Is there any sort of gross margin for R&D expense that we would expect to see in the September quarter or second half, when you bring 65-nanometer in line, how should we think about the --?

Bertrand Cambou

What we should have at the later part of the year, we are going to have some costs of brining 300-millimeter capacity. We also are going to get some incremental costs at 45-nanometer. However, our company has been extremely focused and we are discontinuing all 200-millimeter development as we speak. And we think that all the older technology development is going to be behind us, which mean that altogether, we are not going to have that to be a [pure] increment. We are going to look at more focus and to cut some of the traditional product development faster, which mean that yes we expect to have a slight increase, but again it is not going to be a total increase. On the -- at the same time, as we are going to get the 65-nanometer, 300 millimeter out, in NOR, in ORNAND, that is going to be extremely competitive cost structure. And as we expect, we are to take advantage of being more competitive than ever and one will offset the other one.

Dario Sacomani

I will say it, just in a slightly different way and that is, I think that we ran about 13.5% R&D to revenue in 2006. I don't really think that that's going to change as a percent of revenue significantly, but I think what we'll see is that as a result of the acceleration of this, it will probably make it difficult to try to get to our original goal, 12% of R&D in 2007. But I don't expect as a percent of revenue that it's going to grow significantly from 2006, it's just going to mean we will have a tougher time trying to get to the 12% goal that we've talked about before.

Alex Gauna - UBS Financial

Okay. Thank you very much.

Dario Sacomani

Thanks Alex.

Operator

We'll take our next question from Pranay Laharia with Deutsche Bank.

Pranay Laharia - Deutsche Bank

Yeah, hi guys. Can you just talk about what the ASP decline was in the fourth quarter and what the expectation is for 1Q and the full year 2007?

Bertrand Cambou

The ASP decline that we were talking -- and we need to frame that correctly. On average, our ASP actually did not decline. We had -- blended ASP actually was firm for the quarter. What we had is in some products, in particular the commodity part of our business, we had line by line decline and lower margin business, and that was in the CSID business, the embedded business, and some of the low-end wireless NOR business. To be accurate here, our ASPs do not decline on aggregate. Now as we are looking at Q1, we are going to essentially walk on our mix, and walk on our margin, and we have opportunities on the entire range of density that we have.

Pranay Laharia - Deutsche Bank

So you are saying, Bertrand, ASPs will be higher in 1Q and what's sort the expectation for 2007 -- full year 2007?

Bertrand Cambou

We believe that's altogether, obviously the ASPs that we are guiding for 2007 is flat. Blended

Pranay Laharia - Deutsche Bank

Got you. And flat for 1Q or higher for 1Q, and then sort of start to weaken later on?

Bertrand Cambou

If you take the ASP blended to be flat, that will not be a bad number here. We are going to give you more refinement, but the key is not the ASP. ASP is important, but the most important is the margin. And for us, for example, when we switch -- let us take the example of a 256 megabit, when we switch from 110 to 90-nanometer, the ASP is not going to change, but the margin is going expand, which for us, if we assume a flat ASP environment, then the team has to work very hard by using node migration in the company to expand the room that we get, to be more profitable.

Pranay Laharia - Deutsche Bank

Okay. Now that we are on the gross margin topic, and we've been talking about gross margin improvement for the last four quarters. We are exiting 2006 with lower gross margins than what you entered with. So are you still, in that scenario comfortable with the corporate target of 30% to 33%? Do you still think it's reasonable, and do you have a feel for when you get there?

Bertrand Cambou

To make the [rickrack] straight, I am very disappointed by the gross margin we had in Q4. That was not something we expected, we are disappointed and we explain the reason for it, which is this postponement of our business, and we believe that now the team has an opportunity to be back on the learning curve in Q1 and to show a positive trend in Q1, and at the end of the day, the talking is not going to be useful, the business is going to have to deliver here, and that's what we are committed to do right now.

Dario Sacomani

And if I could just add one thing, to answer your long range question, the answer is, it absolutely does not change our view, that in the long run, 30% to 33% is something that we can achieve and if you will recall, it is predicated on the fact that we will be in this space the only supplier with 300-millimeter, 45-nanometer. That -- and 4-bits-per-cell. So the long range goal, 30% to 33%, I don't hesitate as a result of one quarter's result, to say that, I think that's still our long-term goal, no doubt.

Bertrand Cambou

And this is also one of the reasons that we elected to be more aggressive in the 300-millimeter project. Because at the end of the day this is going to give us the competitive edge and we -- compared with the last call, we are now pulling in that project, we are pulling in the technology and if anything, its this goal is what we want to achieve.

Pranay Laharia - Deutsche Bank

Okay. Sounds like it will be second half 2008 before you sort of get to the corporate target. Is that a fair assessment then?

Dario Sacomani

Absolutely. We've been saying that its really predicated on 300-millimeter, 45-nanometer, a certain amount of 4-bit-per-cell production, which by the way is indeed the back half of '08.

Pranay Laharia - Deutsche Bank

Okay. And then the CapEx guidance that you have given, can you give a little bit of feel for the mix? How much of that is for SP-1, how much is for Fab 25 and front-end, back-end slip and things like that?

Dario Sacomani

Yeah. I mean if you compare -- the amount of money that we are spending on 65-nanometer, plus if you just roll it all in, 300-millimeter, 45-nanometer plus 65-nanometer, you are talking about close to 80% of the CapEx number associated with that, whether that be spent in Fab 25 for some 65-nanometer, or SP-1. SP-1 is about 65% of that number, but its all regardless of the location, when you look at it; its -- 80% of it is 65-nanometer, 45-nanometer, 300-millimeter. It's all leading edge.

Pranay Laharia - Deutsche Bank

Okay. Fair enough. And do you have sort of the revenue guidance that you have given? Can you give us a feel for what's the expectation within that for wireless NOR, embedded NOR and ORNAND?

Bertrand Cambou

ORNAND is going to be -- we believe at least at the beginning of the year about 10% of revenues. We believe, ORNAND based solution, we believe that number is going to go up. We don't know exactly how much. Now as far as the balance, wireless, non-wireless, this is approximately two-third, one-third and at that point we believe that we have the opportunity in each businesses, but both businesses are very vibrant and most likely you are going to keep the ratio as discussed.

Pranay Laharia - Deutsche Bank

Okay. And then just a very last question, where do you expect the MirrorBit mix to be exiting 2007?

Bertrand Cambou

Right now in Q4, we did 63%, which means that pretty soon we are going to get to a point, where Floating Gate is a strategic technology for some applications. For example, Floating Gate is used for some automotive embedded applications, some low densities and which is a good business, which means that -- I would assume that a sustainable ratio would be 80% MirrorBit and 20% Floating Gate. And we probably are going to get to that regime, at the end of '07.

Pranay Laharia - Deutsche Bank

Okay. Great. Thank you.

Bertrand Cambou

Thanks Pranay.

Operator

We will take our next question from Shawn Webster with J.P. Morgan.

Shawn Webster - J.P. Morgan

Thank you, guys. Can you hear me okay?

Bertrand Cambou

Yes.

Dario Sacomani

Yeah.

Shawn Webster - J.P. Morgan

Okay. On so the -- could you tell me again what your book-to-bill ratio was for the quarter? Or your current book-to-bill?

Bertrand Cambou

I believe that in the CSID business, we were below one. Because the business of CSID is traditionally down in the first quarter. That the ORNAND based solutions is above 1, and as far as the wireless business, it is approximately 1.

Shawn Webster - J.P. Morgan

So wireless is approximately 1?

Bertrand Cambou

Exactly.

Shawn Webster - J.P. Morgan

Okay. And I think this time last year in -- or exiting Q4 and going into Q1, your book-to-bill was above one and your sales were down given the order -- the orders that your book-to-bill ratios you just talked to us about -- what gives you guys confidence you could be above seasonal in Q1 given where your orders are setting?

Bertrand Cambou

What we have right now is we have a lot of hub at key account, and let me explain you the way that works, is they don't book in advance any more. They pull from the hub, [between] some of our major wireless accounts right now are served through a hub, which means that we don't see that the quarter before. And which means that the book-to-bill is more of an indication of the non big wireless account. And right now we essentially expect to grow at least at the beginning of the year into the big wireless account, which we don't necessarily see on the book as this, because of this VMI hub methodology that we have input for the customer.

For the one on the call that are not familiar which is business practice, is the big phone OEM guys are reducing their own inventory and they essentially are putting together a model, where we put materials in the hub for them and they pull as they need it without placing orders. And of course, enough for us this is difficult, because the type of issue we had in Q4, was very hard to predict because essentially it didn't pull what we have. And then it's not like we don't build for order, we kind of replenish the hub. And then that business model is required to become customer supplier of choice in the space and that's what we have endorsed in the model. That is a positive model for us because that allows to have a -- our customer's [zero] inventory, which we think we have a better ideas of what's going on in the end market. There is a lot of positive here. But the book-to-bill ratio is not that significant that was in the past because of that reasons, we feel -- we think that's because we (inaudible) business model, we are in a good position in Q1, stronger actually than last year because of that reason.

Dario Sacomani

Just one technical thing I want to add, I don't want to get too technical, but there is one other aspect of it and that is that a couple of our significantly growing customers, we are having a hard time satisfying all of the demand in the way we work it. If we are not able to actually give a firm date on delivery, it becomes an unscheduled order and as long as it's unscheduled, it doesn't show up as a booking. So I think some of the -- of what you perceive to be weaker book-to-bill, is in reality self-inflicted -- our ability to schedule these orders when our customers want them and make a commitment to that scheduled date.

Shawn Webster - J.P. Morgan

Okay. Yeah, thanks a lot for that. On pricing you have mentioned that pricing was getting a little more competitive in certain areas. Can you elaborate a little bit on that and talk about which areas are seeing more pricing competition than others perhaps, and where pricing is still good for you?

Bertrand Cambou

Yeah, what we did in 2006 and let me talk about our embedded space. In the embedded space we had some kind of humongous market share gain in '06. We really had -- that business has been kind of doing extremely well and what we did very-very well as being to replace competitions. And competition was essentially, owning the high density space, and we went in that space and just took market share. Now of course, the competition is starting to stop us or attempted to stop and there was a piece of the market which is or the mid to high density of the CSID, where actually we have a tougher pricing environment that we had a year ago. And for us, the strategy that we have in 2007 is to convert that business to 90-nanometer and then 65-nanometer to be able to essentially to keep gaining market share, which we think that's the -- one of the tension we had as being in this particular field, in the quarter here.

Shawn Webster - J.P. Morgan

I see. And then turning to a couple of manufacturing questions. What did you -- did you say that your utilization rates were the same in Q4 as they were in Q3?

Bertrand Cambou

Well, backend or test capacity has been doing much better than Q3. We had put next generation tests now in volume production, they have cheaper equipment and that has allowed us to essentially -- an opportunity for us to cost reduce by not using as much subcontractors, which we had that -- on the backend we are in the better situations. The 90-nanometer ramp-up is okay, [our yields] are strong and that gives us some capacity. Quite frankly, where we have tight right now is 110-nanometer, where we still have a very strong demand, some of our customer are not converted to 90-nanometer and this is an area right now, where we are working to expand our 110-nanometer for the short-term. This is an area we are in fact tighter and we expected to be.

Shawn Webster - J.P. Morgan

I see. Are you lowering your utilization rates on your 90 network? Are you still running those fully utilized?

Bertrand Cambou

The 90-nanometer right now is -- all the capacity we are running at full capacity and the biggest option item we have right now, is to convert our customers from 110 to 90-nanometer. And that would be the battle for sales team, our product engineer, hard to essentially take socket-by-socket and to convert to 90-nanometer. That is the biggest single opportunity we have. And right now, we are essentially a bit behind on this 110 conversion to 90-nanometer and that's why we don't want to put too much capacity in place, because as quickly as the customer is switching to 90-nanometer than the 110-nanometer, demand is going to drop very quickly. So, it is kind of transitions of volume for the 110 to 90 that is going to essentially be the challenge for us in the next few months.

Shawn Webster - J.P. Morgan

What was your 90-nanometer mix of wafer production in Q4?

Bertrand Cambou

Fab 25 production was about half, was 90-nanometer, which was good news and essentially at the end of Q2 -- excuse me at the beginning of Q2, Fab 25 is mainly going to be 90-nanometer. But we think -- we have about half of Fab 25 opportunities to switch and that essentially what's the work is all about.

Shawn Webster - J.P. Morgan

Okay. Thank you very much.

Bertrand Cambou

You're welcome.

Dario Sacomani

Thank you, Shawn.

Operator

And we have time for one final question today ladies and gentlemen. It comes from Joanne Feeney with FTN Midwest.

Joanne Feeney - FTN Midwest

Thanks for taking my call. Just a question about margins. I was thinking that one of the impetuses to margin improvement would be the crossover from Floating Gate to MirrorBit and yet from last quarter, from Q3 to Q4, the MirrorBit proportion jumped from 53% to 63% of that margin sale. So, is embedded in the dropping margins, primarily the impact of the delay from your major customer. But if that delay hadn't happened? Would that conversion to higher share of MirrorBit raise gross margin and if so, by how much would you estimate?

Bertrand Cambou

The margin contraction that we had in Q4 was explained by having those higher margin products to essentially be postponed to the beginning of the year. That has been -- or the beginning of 2007. This is why our margin went down. Now, the conversion to MirrorBit is happening for other plan -- but we are using MirrorBit in another range of families of products. And we are also using MirrorBit at 110-nanometer and what we want, is to use MirrorBit at 90-nanometer, where we essentially have a more competitive situation, which is as far as the key and we already at least guided you last quarter. The key for margin expansions right now is to go to 90-nanometer harder, is to go to some of the richer mix of product, including that 110 and then the subsequent quarter to start to switch to 65-nanometer ORNAND, and that's what is going to assist us. Because at the end of the day, when you go from 110 to 90-nanometer the wafer cost is about the same, but you get twice the big density and right now, we are looking at the more higher density device.

Dario Sacomani

And Joanne, just to add to that, what Bertrand said is absolutely right again. But just for clarity, the cost advantage of MirrorBit is really only visible at node parity. So when we're taking market share and we're competing with 90 nanometer on a 110-nanometer, Bertrand's absolutely right. Well, it becomes more important for us now, with respect to margin improvement, it's really the rapid node migrations. The percent of MirrorBit is somewhat contingent on what you were competing against. So for us, it's all about node migrations and test cost reductions.

Joanne Feeney - FTN Midwest

Okay. So I'm just trying to get a little bit of understanding, if we take out that one event, which is a major event, what might have happened to your gross margin besides from that one event, what other mix changes were going on, perhaps you could describe for us? In Q4.

Bertrand Cambou

The mix change that we had to our expectation has been for some of our customer. They essentially reduced the usage of Spansion's Flash because of their inventory variations. And this is kind of cutting into a muscle. We had this -- this is very good business that has been postponed to Q1, and we heard that very late in the quarter, well it is very difficult for us to make the necessary adjusting on the entire supply chain. And obviously right now, that adjusting has been made and we are going to correct the situations in Q1. But in Q4 that was kind of a late news and we did not have the time to correct it, which mean that's again the mix changes we had, was due to the reason we articulated and the remedy is to sell those products and to switch to the next technology node as we already described.

Joanne Feeney - FTN Midwest

And then on the testing the -- I understand that change in your backend testing equipment, is that -- was that in place in Q4, was that reducing your cost or is that something we should expect to contribute in Q1 and them more and more so going forward over the course of 2007?

Bertrand Cambou

The next generation tester capacity at the beginning of Q4 was very small. And as we close the quarter, that was very high, which means that during the quarter, we had some kind of a ramp-up of the next generation tester, which means that it is a fair comment to make that we did not realize the full benefit of the next generation tester in Q4 and that in Q1, we have an opportunity to reduce our unit cost, by leveraging it to a wider extent and then to reduce our dependencies to some of the subcontractor. Which mean that -- as we end the quarter, we had a huge conversion to NGT, but the financial impact has been only fraction of the quarter?

Joanne Feeney - FTN Midwest

And then I understand that it's only going to be something you can use on the newer chip. So what proportion of your product line is amenable to this next generation testing?

Bertrand Cambou

We can actually use the next generation tester on all products as well. We -- obviously our strategy was to glide to high density device, because in the high density device, the cost of testing is very high, and if you are talking about, let's say a 512 meg or 1 gig, the cost of testing could be extremely high, which mean that the strategy we had, was to start to use it at the high density. But then, as we are going to have more capacity, we intend to use NGT to lower densities to further reduce our test costs.

Joanne Feeney - FTN Midwest

Okay, great, thanks guys.

Bertrand Cambou

Thanks.

Dario Sacomani

Thanks Joanne.

Operator

And ladies and gentlemen, this does conclude today's conference call. We appreciate your participation. You may disconnect at this time.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Spansion Q4 2006 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts