Spansion's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Jan.26.12 | About: Cypress Semiconductor (CY)

Spansion (CODE) Q4 2011 Earnings Call January 26, 2012 4:30 PM ET

Executives

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

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

Ajay Bhatia -

Analysts

Daniel A. Berenbaum - MKM Partners LLC, Research Division

David Silverman

Atif Malik - Morgan Stanley, Research Division

Monika Garg

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Spansion Inc. Earnings Conference Call. My name is Tahisia, and I will be your operator for today. [Operator Instructions]

As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Ajay Bhatia, Director of Investor Relations. Please proceed.

Ajay Bhatia

Thank you, Tahisia. Good afternoon, and thank you to everyone for joining us on today's earnings conference call to discuss Spansion's fourth quarter 2011 financial results. We hope you saw our earnings release issued today and posted to our website. I wanted to let you know about our upcoming speaking engagements in the first quarter. In February, we will present at the Morgan Stanley TMT conference in San Francisco. In March, we will present at the Wedbush tech conference in New York, the ROTH Annual Conference in California, and the Barclays syndicated loan conference in Arizona. We hope to see many of you in the coming months. With me today are John Kispert, Chief Executive Officer; and Randy Furr, Executive Vice President and Chief Financial Officer.

Before we begin, please note the Safe Harbor Statement on Slide 2 of today's materials. During the course of this meeting, we may make forward-looking statements regarding future events or the financial performance of the company. Such statements are based on assumptions as of the current date, and you are cautioned that these forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those statements. We urge you to review in detail the risks and uncertainties discussed in our Securities and Exchange Commission filings, including our annual report on Form 10-K for the fiscal year 2010 and the Forms 10-Q for the first, second and third quarters of 2011. The company disclaims any duty to update forward-looking statements.

Our agenda for the call today is as follows: John Kispert will discuss key highlights from the quarter and fiscal year, then Randy Furr will review the quarter from a financial perspective and provide the forward-looking guidance. Our Q&A session will follow and John will close the call with some remarks. An audio replay of this call will be available for one month by accessing the Investor Relations page at spansion.com or by dialing 1-888-286-8010 and using the passcode 45968394.

Now I would like to introduce John Kispert, CEO of Spansion.

John H. Kispert

Thank you, Ajay. Good afternoon, and welcome to our Fourth Quarter and Full Year 2011 Earnings Conference Call. Against the backdrop of a difficult macroeconomic environment, 2011 was a challenging but transitional year for Spansion. Intense product development and design win growth of 70% over 2010 levels were some of the milestones we achieved. We believe the fourth quarter marked an important turning point for the company. For the fourth quarter, we achieved solid financial results at the midpoint of our guidance, and we are well-positioned for the future as the restructuring that we announced last quarter is proceeding as planned, and our 2012 new products are on schedule. My comments today will be organized as follows: first we will recap our financial results; next I will outline the status of our restructuring program; then I will update you on what we are seeing in the market and the latest developments across our various businesses; and finally, I will review our design win progress. Then, of course, Randy will give you the fourth quarter financial details and the outlook for the first quarter. After which, we'll field your questions.

So for the fourth quarter, we achieved revenues of $220 million at the midpoint of our guidance. Non-GAAP gross margin was 24.2% and non-GAAP adjusted operating income was $3 million or 1.5%, and non-GAAP adjusted EBITDA was $25 million. Randy will go into more detail in the financials, but on a high level, we achieved solid financial results in Q4. With our wireless business exit largely behind us and with our product roadmap execution and strong customer engagements, we are well-positioned to capture growth in the future. Capitalizing on our leadership position in the embedded Flash memory market.

Now I'd like to give you an update on the progress we are making with our restructuring program. The closure of our Kuala Lumpur assembly and test facility remains on track, and we expect to complete the production transition by the end of March. With the majority of this transition behind us now, we are beginning to realize the financial benefits from these actions during the first quarter of 2012. We expect annual cost savings of approximately $30 million. Randy will review the financials around this in more detail later in the call.

As for the market and business update across our various markets, first, the wireless handset market, which continue to face challenges and as we expected, we saw declines in our wireless business. It's important to note that we remain committed to supporting our wireless customers with our future products. However, we are reducing new development activities at our older MCP business and the financial impact of this segment will soon be insignificant as we integrate wireless into our consumer segment. Our focus on the embedded market is yielding positive results. During the fourth quarter, we maintained our leadership position in this market. We continued momentum across all of our businesses. We anticipate that over time with a greater emphasis on embedded markets, our business should become more stable and predictable given the longer product life cycles inherent in this business, combined with our diversified customer base. We saw particular strength in Japan in the gaming segment, where customers are relying on our high-density products, such as our 4 gigabit NOR device, which went into production in Q4. We continue to lead in the automotive market, and I will share some of our design wins in all of our segments shortly. With widespread adoption of connected feature-rich embedded devices on the rise, we are working closely with existing and new customers to design and deliver high-density, non-volatile memory products that enable faster, interactive and high performance electronics. We're continuing to make steady progress in executing our strategy for the embedded business. We can achieve a higher return on investment, focus on cash generation and expect to improve profitability throughout this year. We will do this by maintaining leadership in Parallel NOR, growing Serial NOR, delivering NAND, expanding licensing and developing and introducing a new category of products to embed MirrorBit and logic for memory-intensive processing applications. I will now cover each one of these strategic areas.

In the area of NOR expansion, we will leverage our strategic relationships with customers and partners, as well as our mid- to high-density leadership to grow our core business in parallel and serial across all segments. We continue to achieve cost advantages with our mid- to high-density 65-nanometer products and are aggressively migrating customers to our newest generation of parallel and serial products. This is a strategic priority for the year with approximately 1/3 of our 2012 revenues expected to come from new products. In Q4, we went into production with 128 megabit and a 256 megabit FL-S product, the fastest and most advanced serial product in the market. It secured our first production design wins. We will begin sampling the 512 megabit device next month, and we'll introduce new low-density serial products in the coming weeks, which we will target to new customers, particularly in the consumer market and in Greater China. We are on track with the 45-nanometer MirrorBit NOR technology qualification on the on 300 millimeter wafers with our manufacturing partner, SMIC. Our upcoming products on 45-nanometer will allow us to maintain and extend our leadership in high-density NOR in the industry. In the area of NAND development, we are making progress and are well-positioned to meet a growing requirement among embedded customers for SLC NAND. Our strategy is to bring to market a family of NAND products that solve specific needs of our embedded customers. They need stable longevity of supply, and that will allow Spansion to grow profitably over the long term. With large cut consumer focused NAND players discontinuing their support for low-density products, we expect the demand to increase significantly. Embedded applications such as set-top boxes and network routers, for example, have recently begun to adopt low-density SLC NAND. We will have products in the market by the second half of the year with a strong product roadmap, customer relationships and the right business model. IP licensing is another strategic area for us, in which we have built a solid foundation to increase revenue this year. By licensing our MirrorBit technology, we are on track to announce at least one more MirrorBit technology license in the first half. Additionally, we expect to build upon our success in licensing our patents, like we did with Samsung last year, to secure new revenue from others using our IP, and we are actively engaged today in negotiations. Lastly, in an effort that will demonstrate the value of embedding our MirrorBit technology and logic chips, we are developing a new category of products for the embedded segment that significantly accelerates memory intensive processing applications. Our first product will go into production later this year. As I mentioned last quarter, we have interest from a number of automotive OEMs in our solution. You will be hearing more about our plans in the coming weeks.

Turning to our design wins, and that's our future demand, we continue to see strong momentum across all embedded segments. In gaming, we secured 6 new GL-S wins, 2 for our new 4 gigabit device for Japan gaming applications. In automotive, we secured approximately 50 new design wins, primarily for entertainment applications. But we continue to see opportunities for thin-film-transistor displays for instrument clusters and advanced driver assistance systems or ADS, which is growing rapidly. In advanced driver assistance systems, automotive OEMs are embedding innovative safety features that require higher densities of Flash memory to build reliable systems to process information about the drivers' environment, such as changing road conditions, where we now have the flexibility to influence the braking system as the roads change. Spansion is well-positioned to meet the requirements with our high-density products. In industrial, we saw similar trends at last quarter, with a total of 80 design wins, primarily driven by smart energy, surveillance cameras, medical and machine-to-machine applications. Smart meter adoption and home and office automation are creating enhanced requirements for flexible communications and stronger security.

In machine-to-machine, which represented 10 of the 80 design wins, applications are being used for navigation, public safety, 2-way radio systems and wireless LAN communication for transportation. In healthcare, more reliable and smaller packages and lower power devices will be required in the future to address the growth in Telehealth, portable imaging and monitoring systems.

In communications, we secured over 70 designs, driven by base stations and infrastructure to support 4G, Long-Term Evolution networks, the communications segment continues to see increasing demand from consumer and cloud computing driven usage models.

In consumer electronics, we maintained our leadership position in the consumer market with approximately 100 wins overall, half with set-top box providers and more than half above the 128 megabit density range. Other applications in this segment include home gateways, digital cameras, with DSLR, that's digital single lens reflex cameras for higher resolution, and many other electronic, electrical consumer devices, all require higher density products such as a 2 gigabit for high-quality sound.

We expect the consumer and gaming design wins to translate into revenue in the next few quarters. Whereas, automotive, communications and industrial will take longer, probably up to 15 months but, of course, those have longer product cycles and the support requirements sometimes up to a decade. So overall, we are well-positioned in the embedded market, 2012 will be a year of acceleration in the use of Flash memory as a critical component of wide range of systems and applications.

In summary, our growth strategy for 2012 is underpinned by the following goals: First, leverage our core NOR business to expand into new markets; second, delivering our new products; third, growing our market share; and fourth, building upon the success in our licensing business. We are confident about our ability to execute on these plans. And with that, I'll turn it over to Randy.

Randy W. Furr

Thanks, John. Again, let me start with the summary of our fiscal Q4 2011 operating results, which as John indicated earlier, well for the most part in line with the guidance provided during our Q3 earnings call. Please note that for my prepared remarks, all references to non-GAAP information are our normal non-GAAP basis financials plus I have excluded inventory reserves related to restructuring. On a non-GAAP basis, sales were $220 million, gross margin 24.2%, adjusted operating income was $3 million equating to a margin of 1.5% and adjusted EBITDA was $25 million.

For the full year 2011, net sales totaled $1.1 billion. On a non-GAAP basis, adjusted operating income was $143 million and adjusted net income was $92 million. As I discuss the financial results in more detail, I'll be referring to the presentation we have posted to the Investor Relations section of our website. On Slide 4 of that presentation, you will see a breakdown of our sales by end market and geography. As John mentioned, we experienced particular strength in our high-end gaming business with absolute revenues growing approximately $12 million quarter-over-quarter to $42 million in Q4. Because many of these customers are in Japan, the Japan region correspondingly showed strength. Total net sales declined 14.8% from the prior quarter. Excluding the $30 million of Samsung royalties from Q3, revenues declined only 4.1% sequentially, again on an apples-to-apples comparison, which was in line with expectations. And in our core embedded business, where we're focused, revenue declined only 1.1%, and we're guiding up about 3% in this area for Q1. Again more on guidance later.

Turning to Slide 5. We will review the income statement highlights. While overall product mix in Q4 was favorable, internal manufacturing capacity utilization impacted our non-GAAP gross margin resulting in a gross margin of 24.2% in Q4. Compared with 36.2% in Q3. Overall, the product mix in Q4 was positive or favorable with high-end gaming, as well as the auto and industrial sector showing quarter-over-quarter percentage increases. In addition, I will add that standard margin or the margin between our sales price and standard cost was on par and consistent with prior quarters. What primarily negatively impacted and accounted for the decline in gross margin was our internal manufacturing capacity utilization. During the first 3 quarters of 2011, our wafer fabrication facility loaded equal to 100%, however in Q4 this changed. As we mentioned during last quarter's earnings call, with the steep reduction in the wireless revenue and with the significant inventory positioning exiting Q3 and with our decision to work down or reduce our inventories, our internal manufacturing facilities loading dropped significantly. In fact, Q4 loading at our Austin fab was approximately 70%, and this drove the unfavorable variance in our gross margin. In response to this situation, during Q4, we implemented a number of actions to significantly improve our internal facility loading. One, we implemented a restructuring, which will result in the closing of one of our final manufacturing operations. Our Kuala Lumpur operation will be combined with our Bangkok operation. This will reduce our manufacturing expenses by $30 million annually, and we will start to see those savings in Q1 with the full savings from this action realized by Q3. Secondly, we renegotiated our manufacturing agreements with our external partners with the largest near-term favorable impact coming from renegotiation of the Texas Instrument wafer fab foundry agreement. This was the former Spansion Japan JV 3 site. Now the final wafers from this site will be in March as opposed to June, and the volume in Q1 will be less than the old agreement called for. All of this demand will now be transferred to our internal fab operation in Austin, Texas. So the combination of reduced expenses going forward as a result of the restructuring, along with higher loading as a result of what used to be partner-produced services is now going to be internally produced, we will be able to improve gross margin even in a flat top line environment. Again, I'll talk more about forward guidance later in my prepared remarks.

Also here, I will comment on our Q4 restructuring charge. As we indicated during Q3's earnings call, and as just mentioned, our consolidated or we consolidated our final manufacturing operations and reduced worldwide headcount to align the company with current revenue levels. This resulted in a Q4 charge of $57 million, of which $12 million was cash, primarily relating to severance and asset transfer cost, and $45 million was noncash, of which $33 million related to the write-off of wireless inventory. The restructuring charges show up on Slide 5 with everything except the inventory related to restructuring shown in Column 4. And the inventory in Column 6. I will add that the restructuring actions were implemented as planned.

Moving to operating expenses. R&D ticked up a bit in Q4, as we accelerated our new product introductions. Total operating expenses of $50 million translated to a non-GAAP operating income of $3 million compared to last quarter's $47 million and last year's Q4 of $64 million. We incurred $5 million of interest and other nonoperating items, and our income taxes in Q4 were $6 million. Again, we have significant U.S. and California NOLs, and all of the $6 million represents foreign taxes. Adjusted EBITDA was $25 million or 11.3% as a percent of sales. Non-GAAP basic and diluted EPS was a negative $0.12 in Q4.

So still on Slide 5, Column 5 takes the GAAP results listed in Column 1 and that's for the non-GAAP adjustments to get non-GAAP results for Q4. We've added Column 6 and 7 to reconcile Q4 results net of the inventory charge related to the wireless business restructuring. The Q4 results listed in Column 7 here relate to the financials depicted on Slide 6, which we have included to show a quarterly apples-to-apples comparison going back to Q4 of 2010.

Before I move to the balance sheet, I again want to make a quick note that all references to non-GAAP information are our normal non-GAAP basis financials plus I have excluded inventory reserves related to restructuring.

So let's turn to the balance sheet. Please refer to Slide 7, and I'll start with cash. We ended the quarter with cash and cash equivalents and short-term investments of $263 million. During the quarter, we paid $20 million for capital purchases, and we paid $8 million to our partner, SMIC, for our previously announced partner agreement. This is our final payment to SMIC per our current agreement. With respect to working capital, trade accounts receivable was $110 million, DSO was up 9 days to 46 days, reflecting a mix change of greater revenue from regions with generally longer payment terms. Inventory for Q4 was down quarter-over-quarter to $174 million, and we ended with 73 days of inventory. Accounts payable was $80 million at the end of Q4 and this equated to 37 days. Cash cycle days was down to 82 days in Q4 compared to 94 days at the end of Q3.

We did not include details related to financial claims and share distribution this quarter because we're down to only 2 claims of over $1 million. This means we resolved 3 significant claims last quarter and distributed those shares. To date, we have distributed a little over 85% of total shares to be distributed. The 2 remaining significant outstanding disputed claims are to Sarub [ph] and Nokia and we're actively working both claims. However, at this time, it's difficult for me to project the timing of having either one of these settled or resolved through the court process.

I would now like to turn the discussion to guidance for Q1. Please refer to Slide 9. As we show in our earnings release, the expected range for Q1 net sales is $210 million to $230 million. This is essentially flat from Q4. However, given that historical cyclicality averages a decline of about 11% from Q4 to Q1, we believe this illustrates the overall strength in the business. We're guiding GAAP net loss per share to be in the range of $0.21 to $0.34, included in this guidance as outlined in Column 4 on Slide 9 are restructuring charges anticipated to range from $4 million to $8 million. Again, this is related to and associated with the restructuring activities announced in October and in line with the guidance provided during last quarter's earnings call. Without the restructuring charge, stock-based equity compensation and fresh start adjustments, we expect non-GAAP gross margin to be 29.5% to 31.5%, operating income in the $11 million to $14 million range, translating to an operating margin of 4.5% to 7% and EPS to be from $0.1 to $0.07. This is a nice quarter-over-quarter improvement in profitability. We expect to achieve this by a number of factors. And these factors include: Increasing our internal operations capacity utilization, beginning to realize some of the benefits from our restructuring, and by increasing our high-margin royalty income by approximately $5 million. All of these will favorably impact gross margin and the result is gross margin should improve by about 6% quarter-over-quarter.

Slide 10 list our 2012 focused areas, which includes growing our core embedded business, staying on track with our new product roadmap, continue to improve internal loading as the benefits from our recent contract negotiations and with our partners and our restructuring efforts begin to kick in, focus on lower operating cost and finally, to continue to generate interest in licensing Spansion's IP.

Slide 12 is presented to help in reconciling historical non-GAAP to GAAP. With that, I'd like to thank you for your time and turn the call over to Tahisia for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Daniel Berenbaum from MKM Partners.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

John, can you comment on the state of your partnership with Elpida? It's obviously been fairly well publicized that Elpida is having some difficulties, widespread media reports are talking about Elpida seeking some kind of partnership with others. How does that impact both a potential royalty stream from licensing MirrorBit to them for their own NAND manufacturing? And how does it impact your specialty NAND manufacturing, what you're planning to do there?

John H. Kispert

Yes Dan, thanks for the question. I don't see an impact. Let me explain. First to say that the relationship with Elpida, the design and development level and now into production level has just been tremendous. This is a great relationship. Our development and production agreement allows for production well beyond 2012. So the agreement's in place. We've always had the ability or the right to move or expand our manufacturing into other locations. So we have a lot of flexibility not only with our own resource base and capability on resource base, but also within the agreement for us to transition in a timely manner. We're qualifying into production over the next few months, and we have larger flexibility to do other things, and we're in continuous contact with the team in Hiroshima. I would say for everybody that my experiences in situations like this is, which are relatively recent is that, there's going to be new rumors every day and new thoughts every day. In situations like this, there's a large groups of people that change their minds everyday on how business plan should be put together for Elpida going forward. So I wouldn't get too carried away with the news on a day-to-day basis. So suffice to say, we have really a good relationships and things are moving forward quickly.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

So then -- on the specialty NAND piece you had talked previously about $50 million to $100 million worth of specialty NAND product in 2012, do you still think that's a good level?

John H. Kispert

Yes, I think by the -- for the second half of the year, I think we're off the top end of that range, the $100 million range, but certainly opportunities out there for us. It's a matter of us getting into market, and I think it's key. I think everybody understands for us, it's not just having NAND. It's faster, lower power, temperature scalability NAND, that's really focused on the embedded space and that's really what we're trying to get done here, not compete in the higher-density race. We're focused on specific segments, auto, networking, communications, where we know we can provide a bunch of value. And that's what we've been working on, and that's what we will have out by midyear into the second half of the year.

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Okay. And then just last question for me, it sounds like wireless is effectively going to be de minimis from Q1 forward, is that the right way to think about it?

John H. Kispert

Yes, we're going to stay very engaged with all those customers. We have a product roadmap that will allow us to reenter and participate with particular customers throughout the second half of 2012, but in the near term, we have MCP technology, because there's a lot need for, and there's -- and we'll continue to work with those customers, but it's not a focus for us at all.

Operator

Your next question comes from the line of Atif Malik from Morgan Stanley.

Atif Malik - Morgan Stanley, Research Division

Nice execution in the fourth quarter in the cost side. John, how should we think about your revenue growth for this year assuming the global economy is kind of flat this year? I mean, how should we think about the growth of your market this year?

John H. Kispert

Yes, that's a good question. We're certainly in the part of the cycle, Atif, where we're spending our time focused on what's happening right in front of us. Really focused on the -- is it -- do we have a demand recovery in front of us that are taking place? Or is it really more of a inventory recovery? And today, what I see and it makes me happy is, is that where we're winning and where our revenue for Q1 is really going to come from, and it'll allow us to grow a little bit quarter-on-quarter is really the newer designs, the newer products. And I tried to point that out in the prepared remarks. The plan that we put in place for the year is, is for second half growth. Everywhere in the world I go, we talk to different customers, and we're told and I feel like the plans are in place for that to happen and to the extent there's any reservation on that, it's the same reservations anybody has of the macroeconomic and there's obviously, still question marks there. But the near-term metrics are showing steady improvement to us, in lead times and inventory levels, et cetera. So our view is that the full year is very much intact, and we're right on plan. This plan we put together about 3 or 4 months ago.

Atif Malik - Morgan Stanley, Research Division

Great. And then, Randy, on the gross margin profile, I mean, the wireless business was a drag on gross margins around 20% versus embedded business which last year got as high as 40% kind of gross margins. So when you think about this year, assuming that the embedded demand gets back to the level that you were at in second quarter of last year, should we be thinking about the ceiling on the gross margins being higher than 40% given some of the improvements you made to maintain utilization or is 40% still the, kind of the ceiling on the embedded gross margin?

Randy W. Furr

Yes, Atif, so good question. Look, I certainly think that if you just purely look at -- if we can get back to the volume we were, and you clearly looked at this, what we think is kind of the standard margin, we can get back to efficient operations. I certainly think we can touch upon that 40% number, may be slightly above that going forward. With that said, we're a little bit cautious, and what we're modeling is where modeling certainly some increase in gross starting in Q2 forward and continuing into Q3 and to Q4. But we're modeling some pretty nice improvements in gross margin on some fairly modest improvements in the overall top line to get back up into that 36% to 38% kind of percent range by the end of the year. And a lot of that's just been driven -- being driven by the benefits from reducing our expenses internally and from the higher absorption rates going forward. So we're able to get that on fairly modest top line income. And we can certainly get back to kind of the revenue run rates that we had going back last year. Yes, there's no reason to think that we won't be back into something that starts with a 4.

John H. Kispert

Atif, just to add, it's John. There isn't a business or a product that we're coming out with, or a market that we're going after, or a segment that we're going after that isn't -- have a gross margin that we believe we can attain that doesn't start with a 4 at least. And one of the challenges for the company, one is, putting that discipline in place. The second one is, wean ourselves out of the businesses that couldn't meet that bar. And that's the transition we were going through in 2011.

Atif Malik - Morgan Stanley, Research Division

Got it. And one last thing on the licensing note on this new MirrorBit opportunity in the first half outside Samsung. Can you help us kind of quantify how big this opportunity is?

John H. Kispert

Not until it's done, Atif. I think -- what's interesting, as we get into this with a myriad of different potential partners is, it really is a matter of how much design development support Spansion can bring and, of course, what's key for us is to be able to do it in a profitable way and leverage the IP. And that's what's taking a little bit longer. I think there are some larger opportunities and then some of it are just more strategic, and maybe aren't as large right now, but will lead us into larger opportunities down the road.

Operator

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

Monika Garg

Could you help explain the $33 million noncash inventory reserve charge in the quarter, please?

Randy W. Furr

Yes, I want to make sure, Monika, I understand the question. The question is, can I walk you through the noncash restructuring charge for the quarter, correct?

Monika Garg

That's right. Yes, the $33.4 million, which was mentioned in the results.

Randy W. Furr

Yes, so the total noncash charge, just to clarify, was $45 million, of which I said was $33 million was related to inventory. All of that inventory was wireless inventory. So again, kind of going back to Q3, we walked you through on that call, that we anticipate our wireless sales was going to be significantly less starting -- that actually started in Q3 continuing on to the future. And it was a sudden drop off, no question about that. So we ended up at the end of Q3 with a charge for some of that inventory, and we did indicate that there was a potential charge that was going to happen in Q4, and we said that charge could range up to as much as $26 million, and as you can see, it ranged to $33 million, so we're actually over the top end of that guidance. What drove that is at the time, we actually or I actually expected a bit more of that revenue in 2012. We were looking at numbers that were more in the $15 million per quarter kind of range and now, or subsequent to that, we're looking at figures that are going to be more in the $10 million per quarter kind of range for wireless, and that drove a bigger write-off of that, because it's a fairly mechanical calculation on the reserve calculation that looks at future demand, with future demand down, it just drove -- it drove that difference in that write-off. So does that answer your question?

Monika Garg

Yes. It does. And so my next question is kind of a follow-up to Atif's question, if I look at the embedded revenues for Q1, Q2 this year, they were about $240 million kind of range, $235 million to $240 million? So is it possible if the economies may stable that we do see embedded going up to that level by the end of the year?

John H. Kispert

Oh, I think so, Monika. Absolutely. That's an easy one. We're targeting north of that and certainly the opportunities are out there, and the product line is ready to go. So I really think so.

Monika Garg

And just the last one here. Any EBITDA guidance are you providing for the 2012 year?

Randy W. Furr

Yes, so good question. We're not providing any full year guidance. Obviously, EBITDA would be tied to everything else that we do. With the overall kind of macroeconomic conditions and things out there, we're not providing any full year guidance. With that said, and as John said, when we look at Q4 here, our embedded business ticked down just a little bit, as I indicated about 1%. And then if you look at kind of how we're guiding going forward, it's actually up in Q1 slightly. And our overall top line guidance was flat and we're certainly thinking that this is kind of the trough, and Q2 will be better than Q1, Q3 will be better than Q2, and Q4 better even yet. So I think we're expecting growth from here on out. But with that said, we're just a little uncomfortable with providing full year guidance.

Operator

[Operator Instructions] Your next question comes from the line of David Silverman from Eagle Capital Partners.

David Silverman

Just a couple of quick questions for you. Suppose the restructuring and the rightsizing of the business, do you have a sense for what the go-forward maintenance capital spending should be for the business?

Randy W. Furr

Yes, we would model -- we'd recommend you model $60 million to $65 million. That's about -- for our factories, that's about $40 million, $45 million and we're investing another $15 million to $20 million, just in terms of our overall IT infrastructure to -- I think if you look at our working capital, we do a pretty good job in the area of managing inventories, and they're up now, were going to work from down, but I think we have good systems. We're going to continue to invest in those systems because it pays off. But overall, if you were modeling, about $60 million to $65 million.

David Silverman

In that respect, is that a recurring number? So year in, year out you'll be spending $60 million to $65 million to maintain your business or is that for this coming year?

Randy W. Furr

That's for this coming year. It might trend -- it's not going to trend up in the future, it might trend slightly down. But I don't see it being more than about $5 million to $10 million off of that year-over-year.

David Silverman

I see, okay. And then in terms of the restructuring effort, it sounds like you'll get the full benefit by Q3. Do you have a sense for how much of the benefit is in Q1?

Randy W. Furr

Yes, it's in the neighborhood of about $5 million, $4 million to $5 million in Q1.

David Silverman

On an annual basis or $20 million annualized?

Randy W. Furr

That would be a $20 million annualized kind of number.

David Silverman

Okay. And then the royalties, the expected royalties in Q1, I just want to separate those in terms of the amount you expect for royalties in Q1. Is it the $6 million number give or take or is it -- it sounded like it might be higher.

Randy W. Furr

No, it's about $6 million, $6.25 million to be specific. Well, actually just a moment, it's between $6 million and $7 million.

David Silverman

$6 million or $7 million, okay. And then I think, I think the last question was -- you talked about incremental gross margin benefit through improved capacity utilization. Is that -- could you achieve that beyond Q1 or is that kind of baked into Q1 and then after that you need to get volume growth for the rest of it?

Randy W. Furr

No, so let me kind of walk you through that and hopefully, this can help. So as you can see from Slide 6, gross margins for the first 3 quarters averaged a bit over 36%, that dropped again to 24.2% in Q4. And as I kind of touched on in my prepared remarks, what drove this decline was the lower utilization of our Austin fab. For the first 3 quarters, we ran at 100% or even actually slightly above, 100-point-something, between 100% and 101% capacity utilization for the first 3 quarters and that fell to 70% in Q4. And as we exited Q3, again we had this higher than normal inventory position. We decided to work it down, and we simply kind of -- I won't say we closed the fab, because we didn't do that, but we significantly reduced the amount of production that we had in this fab, we actually did a 2-week shutdown, and we just run a lot more product through that fab. We did that again to work our inventory down. But as a result of the underutilization in Q4, gross margins were lower than in Q3, as well as the rest of the year. Again I want to emphasize that our standard margin and that's the margin between the sales price, and standard was consistent with the prior quarters. What gives us confidence in the future that this will prove not only Q1, but beyond Q1 is again, we renegotiated these agreements with our partners and that's going to let us put more wafers into our internal fab. Number two, we did make some progress on working down inventories as you could see and that's going to translate in the need for higher demand. A little bit of that in Q1, but certainly by Q2, there's all of these TI wafers come into the fab, that demand is even going to go up even more, actually significantly more in Q2 than even in Q1. Number three, the royalty situation being $5 million more in Q1 is going to certainly help margin and that will continue out into the future. And then finally, our restructuring efforts, which paid some benefits in Q1 will continue to pay benefits out there. And as I mentioned, we'll see more benefits in Q2 and then by Q3, we'll see the full benefits there. So when you put the combination of all those in place, we expect our gross margin -- we're not giving any guidance beyond Q1, but we expect maybe not quite the improvement going from Q4 to Q1, we'll be seeing going from Q1 to Q2, but it'll still be a substantial improvement, Q2 over Q1.

David Silverman

Okay, I see. And then the last one I had was, I know you have a lot of noncash charges, in terms of cash that you'll have to spend for the restructuring over the next year or so, how much cash will actually have to go out the door?

Randy W. Furr

Cash, total cash to go out the door will be in the range of about $8 million more.

David Silverman

$8 million more. And that's net of any residual or recovery value of any of the assets or anything like that?

Randy W. Furr

No, we actually have -- that net does not include recovery value of the assets. And we have some substantial recovery value, both in terms of equipment and in terms of land and building. That will not be realized in Q1 likely, but we're hoping as soon as Q2, we'll start realizing some of those benefits.

David Silverman

Do you have a sense for -- at least in the order of magnitude how substantial that could be?

Randy W. Furr

I'd prefer at this point, because we're in the negotiations for those to kind of save that, but...

John H. Kispert

We're up to our shoulders in the negotiation right now, Dave.

Randy W. Furr

But it will be materially favorable impact on the company.

Operator

Ladies and gentlemen, we have no more people in queue. So I will now turn the conference back over to Mr. John Kispert for any closing remarks.

John H. Kispert

Thank you, Tahisia. We hope to see many of you in the coming months at the conferences Ajay mentioned earlier in the call, and thanks again for joining us today.

Randy W. Furr

Bye-bye.

Operator

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

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Cypress Semiconductor (CY): Q4 EPS of $0.18 misses by $0.11. Revenue of $242.3M (+7% Y/Y) beats by $5M. Shares -0.7% premarket. (PR)