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Spansion, Inc. (SPSN)

Q1 2007 Earnings Call

April 18, 2007 4:30 pm ET

Executives

Bob Okunski - Director of IR

Bertrand Cambou - President and CEO

Dario Sacomani - EVP and CFO

Analysts

Glen Yeung - Citigroup

Michael Masdea - Credit Suisse

Aaron Husock - Morgan Stanley

Pranay Laharia - Deutsche Bank

Mehndi Hassan - JP Morgan

JoAnne Feeney - FTN Midwest

Kevin Rottinghaus - Cleveland Research

Presentation

Operator

Good day and welcome everyone to the Spansion First Quarter 2007 Earnings Results Conference Call. This 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

Thank you, Justin. Good afternoon everyone and welcome to Spansion's first quarter 2007 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 Q2 expectations. 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 reductions of planed expenses and other cost control measures, expectation of future revenue from certain products, reduction of cost per bit and increases in bit shipments; expectations concerning future manufacturing production and products; expected R&D investment, SG&A expenses, net interest expense and net debt and movement of ASP's. As well as our ability to executive consistent with our financial modeling plans and finally our ability to meet expected gross margins.

Investors are cautioned that the forward-looking statements in this conference call involve risk 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 Spansion Inc's annual report on Form 10-K for the fiscal year ended December 31, 2006.

A copy of this press release is available on the website and this live call is being recorded for replay purposes and can be accessed on our Investor Relations website at www.spansion.com.

Finally Spansion would like to announce that it will be holding its first analyst day on Thursday May 17, in New York City at the NASDAQ market site. We'll be discussing our vision for the future for the NOR market as well as detailing our latest product innovations and customer successes. Details will be announced shortly in the near future and we look forward to seeing everyone there.

With that I'll like to turn the call over to Bertrand Cambou. Bertrand?

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Bertrand Cambou

Thank you, Bob. Good afternoon and thank you for joining us. I am going to focus my comments on the status of the business, and Dario will go through the financials.

During the first quarter, Spansion was faced with business conditions that were worse than we anticipated. Overall demand was inline with our forecast and we shipped units to plan with rising bit density per devices. Altogether total bits shipped increased sequentially leveraging the satisfactory transition to advanced technology.

However the price per bit decrease was abnormally steep, greater than the typical pattern and intensified at the end of the quarter. The decrease was much more than we forecasted and was most intense for high density NOR products. We attribute the steep ASP erosions to factors that also affected ASP’s of other memory segment, like NAND and DRAM, as well as the impact of excess inventory build by some of our competitors.

As a result of this environment, sequential revenue was down 8.7%, and our margin declined by 500 basis points. Specifically, the greatest impact was in our consumer general CSID business as revenue declined 11% quarter-on-quarter. While the wireless, WSD business had a smaller drop of 6%. The wireless business experienced robust demand for higher density solutions, such as our newly introduced MirrorBit ORNAND solutions that mitigated the stiff ASP erosion that we had in other part of the business.

MirrorBit ORNAND solutions revenue was flat quarter-on-quarter at $60 million and ASP’s decline for MirrorBit ORNAND solutions was less intense than the overall ASP decline we saw in the quarter.

While we do not have yet a full view of the market, it seems that we held our share in the CSID business and gained share in wireless with the penetrations of strategic accounts, and stronger acceptance of high-density solutions.

Q1 was from an operational standpoint a solid quarter. Example of our achievements include the qualification of 90-nanometer MirrorBit at major OEMs, we also shipped samples of our 65-nanometer MirrorBit ORNAND product wireless OEM ahead of schedule, a large offering in this successful segment and we also became the first company in the memory industry to organize cells of four-bit-per-cell technology with first revenue for MirrorBit Quad in Q1.

We are not pleased with market conditions that negatively impacted our financial performance. Given this challenging environment, we are taking vigorous actions to respond and position Spansion to a successful path.

First, we have identified major cuts through 2007 planned expenses in the order of $50 million to $100 million, which Dario will explain later in the call. These cuts as you know are always difficult. However, we are going to maintain our priorities around our long term strategy and improve operation excellence.

Second, in the short term we will fully capitalize on the qualification of 90-nanometer product and rapidly accelerate the conversions from 110 to 90-nanometer technology. As a result we are now planning to double shipments from our 90-nanometer product which will increase the percent of revenue from 90-nanometer from 12% in Q1 to 25% in Q2. This will reduce cost per bit ahead of the industry learning curve and allow us to increase bit shipment quarter-over-quarter utilizing the same set of factories.

To notice that TSMC is qualified at 90-nanometer on 300 mm wafers and we have the opportunity to increase 90-nanometer shipments even more than planned. The market conditions are here. Third, we decided to go full speed on our 300 mm investment at Spansion One in order to widen our manufacturing advantage versus our competition in the NOR segment.

I am glad to announce that as we speak, we are running the first 65-nanometer wafer in Spansion One, six months ahead of plan. In our currency planning, volume production at Spansion One in the second half of this year, we would be ahead of our closest competitor at that time as they will be producing in 200 mm factories. The first product on Spansion One to be produced will be 65-nanomater MirrorBit ORNAND, to cost reduce our highly successful 90-nanometer MirrorBit ORNAND solutions for the wireless market. Our entire NOR product portfolio will be deployed in Spansion One as well by year end and these would include our WS, NS and GL family.

By the way Spansion One has been designed to accept 45-nanometer and we intend to be ready for it this year. We are glad to report a 45-nanometer wafer was produced by our pilot line last quarter, and we are committed to be in production in Spansion at 45-nanometer by mid 2008.

With that I would like to turn the call over to Dario Sacomani, our CFO to discuss our financials. Dario.

Dario Sacomani

Thanks, Bertrand. Some specifics of our P&L performance for the quarter, the net sales for the quarter were $628 million, up 12% or $66 million versus Q1 of '06 and down 8.7% sequentially, due to the issues Bertrand previously mentioned.

Gross margin for the quarter was 14% compared with 19% in Q4 of 2006 and in the first quarter of last year. The decline was directly related to significant price per bit declines.

Research and development expenses were $102 million or 16% of revenues compared to $79 million last quarter. Just as a reminder R&D expenses last quarter included the successful sale of 200 mm equipment resulting in a one time gain of approximately $12 million. Excluding those benefits R&D would have been approximately $91 million.

The sequential increase in R&D was a direct result of our acceleration of our 300 mm initiative at our SDC center and at SP1. Until we go into volume production at SP1 the startup costs will run through the R&D line. We expect our R&D investment to remain essentially flat with Q1 through 2007, as a percent of revenue, as we accelerate our 300 mm, 65-nanometer and 45-nanometer strategic development.

Q4 sales, marketing, general and administrative expenses were $58 million, down $9 million compared to the previous quarter due primarily to solid expense control. We expect Q2 SG&A expenses to go down as a percent of revenue for the second quarter.

Net interest expense for the quarter was $15 million, up from last quarter as a result of recognizing the first full quarter of interest related to our term loan. We anticipate that net interest expense will rise as we go through 2007 based on CapEx spending. We also recorded a tax benefit of $10 million for the quarter as we adjusted allowances in Japan due to anticipated 2007 profits in the region.

Q1 net loss was $75 million compared to a loss of $52 million in the first quarter of 2006. Q1 '07 loss per share for the quarter was $0.56.

Moving on to the balance sheet, we continue to effectively manage our cash. DSOs were essentially flat at 54 days. Inventory days were 81 days from 75 in Q4 '06, which is more inline with our business model given the current environment. Days payable were essentially flat with Q4 at 61 resulting in a cash conversion cycle of 74 days in Q1 '07, compared to 66 days for Q4 '06 and 99 days in Q1 of '06.

CapEx for the quarter came in at approximately $175 million, in particular to fund our 300 mm development and technology migrations. At the end of Q1, 2007 our cash and short-term investment balance was $702 million, down $184 million. Debt for the quarter was $1.1 billion unchanged from last quarter. Ending net debt for Q1 '07 was approximately $400 million, up from approximately $230 million in Q4 of '06.

With anticipated proceeds from the sale of our JV1 and two facilities in Aizu, net debt could be relatively flat in Q2, 2007. EBITDA for the quarter was approximately $61 million. Finally as Bertrand alluded to, we are aggressively launching cost reduction efforts to reduce planned 2007 expenses in the range of $50 million to $100 million. This will include [tier increases], the consolidation of certain functional operations, supplier cost reductions, elimination of outside services such as consulting and contractors, discontinuation of non-strategic lower margin product lines, further reductions in discretionary spending, sales of non performing assets, and reducing non-SP1 CapEx. I will be personally over seeing these programs to drive results. Now I'd like to turn it over to Bertrand to discuss our outlook for Q2. Bertrand.

Bertrand Cambou

Thank you, Dario. Let us now look forward. One of the key unknowns in our projected financial results is the ASP evolution. Based on seasonal patterns, there is a possibility that Q2 erosions will not be as deep as Q1. Clearly the entire memory industry is not in good shape as prices have come down much faster than costs.

This will support a scenario or proposal in which ASPs will either recover or decline to more moderate levels. On the other hand, the ASP decline in Q1 was not quite rational by its magnitude. And there is a possible scenario that this abnormal pattern will continue, and ASP erosion will not stop. So at this point we will not provide financial guidance for Q2. The enterprise would fully concentrate in what we can control in operational excellence.

Like we said, we are committed to extraordinary cuts, aiming at saving $50 million to $100 million of our plan. Aggressive migration to mode Ones technology to our considerate cost reductions per bit, and bringing as fast as possible, 300 mm, 65-to volume productions to widen our competitive advantage.

In the longer term, we remain fully committed to reach a financial model of 30% to 33% gross margin sometime in '08, as previously discussed. It is important to say that in these difficult times, leading innovation is more important than ever. The recent announcement of our new MirrorBit Eclipse architecture has raised significant customer interest. This new architecture will allow us to integrate into a single die NOR, ORNAND and Quad Bit for multimedia applications.

Altogether, between operational excellence, cost control and leading innovations, we are convinced that we will emerge from this environment stronger than ever, leaner and redefining the NOR flash memory industry. 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) And the first question comes from Glen Yeung, Citigroup.

Glen Yeung - Citigroup

Thanks. I'm looking at pricing that was obviously down in the quarter. Your point to access inventories at a competitor. Your inventories for the quarter are 4.4%, and obviously pricing was a disaster. At what point were you trying to say, maybe, not to be accelerating my spending but maybe pulling it back.

Bertrand Cambou

Glen, right now we are definitely pulling back all investments on material technology. The strategy we have is to go full blast at 300 mm because that is going to give us, we think a clear advantage. It is because, being at 65-nanometer MirrorBit, which is essentially not ahead in cost structure and 300 mm. While our competitor is going to be stuck with floating gate technology which is poor yielding at 200. We think that is going to give us a clear advantage. We don’t want to be (inaudible) forever. You need to know that, the situation we have around us, we have to be very focused here. And we are going to be, I would say more focused than ever, Glen. The price environment here has been worse than I can even remember in my entire career. I don't remember when that happened and at that point, we are committed and we are going to be leading in cost and have to actually pull on one hand and push on the other hand.

Glen Yeung - Citigroup

So, when you are talking about pulling back on material technology, should we then expect to see a reduction in wafers, bits and/or CapEx?

Bertrand Cambou

What we are going to do is to redirect the CapEx as much as we can to accelerate Spansion One and obviously reduce the other one. One of the first things that we're going to do is, right now we have an investment in Texas and others and we're going to pull them in favor of Spansion One.

Glen Yeung - Citigroup

But, we still should expect to see bit production increase substantially?

Bertrand Cambou

The demand is great, Glen. But the point is, the things that we have right now is, there is a strong demand. We are glad, if I look at the backlog, if I look at the customer, we are being kind of very, very successful as far as big major OEM as we tell you. We have a great demand. What we need right now is simply to be ahead of the pack in the cost per bit curve. And that's why we are saying that, right now we have wafers in Spansion One in the line. They are running great. Everything has been installed faster. I would say the manufacturing team has been kind of doing a remarkable job here. The 65-nanometer yielding as we speak, we are sampling online based solutions on wireless as we speak. The customer demand is there for those solutions, which means that we are in there and we are going to get where we want to be by not being a (inaudible) but being ahead.

Glen Yeung - Citigroup

So Bertrand, is there a number that you can talk to us about in terms of cost production per bit as you move from your current manufacturing to 65-nanometer, 300mm?

Bertrand Cambou

Yes, usually when you go from 90 to 65 you double the number of bits on the same square millimeter. When you go from 200 mm to 300 mm, if you incorporate the fact that we are using brand new equipment that is more capable with how you yield, we are going to have about 20% to 30% cost reductions per bit when we do conversions. That's the current model here. We think that by going MirrorBit 65-nanometer 300, it's a major cost reduction. And like I was saying during my prepared remarks, a 45-nanometer right now is also going full blast. We already have wafer out and Spansion One is being built to take 45 nanometer and we are still aiming, I think essentially 45 nanometer this year to a point that we can qualify production by mid '08.

Glen, technology shrinks and we are going to essentially be even more focused than ever here in this strategy.

Glen Yeung - Citigroup

So I guess that what I'm getting to is, you are talking about spending more or spending the same at least to reduce cost and never seeing pricing, sounds like its collapsing around you.

Bertrand Cambou

Yes.

Glen Yeung - Citigroup

Are you able to point to a point where you can get the profitability? Does the math work that you can actually say--

Bertrand Cambou

Here it is. We don't like to be in the situation that we are right now. We are controlling it unfortunately. We are facing right now a competitor that is willing to lose 60% of their revenue. It is not – it’s not sustainable, which mean that we think that that competitor has a really inferior cost structure. And starting in Q2 we're going to see more 90-nanometer, more advanced technology and we are going to take $50 million to $100 million costs away from our structured plan. Which mean that we are looking at the short term getting some help from this. The fact that the ASP right now is terrible and is hard to predict, but what we can predict is we are executing and we have lots to do right now to improve our costs in the short term and we are going to take advantage of any type of potential improvements, that may happen in the environment on that horizon. Which means that, Glen all I can tell you here, we're going to focus on operations and then the ASP environment is going to be the way it is and hopefully we're going to be cutting costs on hand and using or factoring better, be back in line.

Glen Yeung - Citigroup

Okay, thanks.

Operator

Moving on to Michael Masdea with Credit Suisse.

Michael Masdea - Credit Suisse

Yeah, thanks a lot. I know you're not giving financial guidance for the upcoming quarter, but maybe you can give us sort of one-off scenario and help us understand what kind of big growth you're expecting on the unit side? But if we saw our pricing down as much as last quarter and assume maybe that’s like a bad case scenario or worst case scenario, what would your blended pricing be for the quarter, just to give us a ballpark of a bad case scenario?

Bertrand Cambou

If you do the math about what we told you here that we're going to essentially double the 90 nanometer, that gives us an opportunity to increase our bit shipment in the 15% to 20% range quarter-on- quarter with the same set of factors.

And then most likely, the ASP is not going to degrade by that much, which means that we think that we have an opportunity to improve now. That being said, I don’t have a crystal ball and what we had in Q1 was not expected and that's happened. And that's why we’re not making projections because we don't know if all of that is going to evolve. But we're currently back to the equation here, we're currently shooting at a 15% to 20% bit increase quarter-on-quarter with the same set of factors.

Michael Masdea - Credit Suisse

Got it. And then can you give us an update on the competitive landscape and there are really two angles I'd like you to hit. One is all the speculation about the Intel-ST spin out etcetera. If that were to happen, what's your take on it? What that would do to the competitive environment, first of all?

And second of all, Samsung seems to be making more noise about focusing on the space mainly driven by wireless and just give us an idea if you're seeing any impact from that and your take on that?

Bertrand Cambou

First, on the Intel-ST situation here. Intel announced yesterday that the flash business went down quarter-on-quarter by 19% and that their losses as a percent of revenue was 60%. Now, this is not sustainable if they were to be an independent company. If they were to be an independent company, they would have to have a different strategy on how to run the place, because if you don’t have the deep pocket model, able to swallow these types of losses, you don’t do it. And we think that first what is going to happen is they will have to compete in a different geography. And we think that is going to be helping us.

The second piece is that today you have a long list of customers that are using Intel as a prime source and STM as a second source and we are currently looking with our sales force as a very strong commercial push because most of those customers don’t want to have a single source. And this is going to be an opportunity for us to gain share, which means that on the ST-Intel merger they will have to be more rational, that is going to be good, and they have some commercial opportunities here that we are going to exploit.

Now, on the Samsung situation, Samsung right now is getting killed in that. They announced this week as a matter of fact that their memory divisions quarter-on-quarter lost a 21% of revenue. In fact, the revenue went down by 21%. Now, that is big. That is really a big situation here. They have to sell a story here. Now quite frankly, perhaps NOR is going to help them a lot here, but definitely a lot of bigger fish to fry here. So far we believe that our technology is more competitive than theirs and this is a formidable company here that we respect. But, so far, they have a lot of enemies [to always] and are they going to open another front in that battle, we will see. But, we will do what we have to do here to compete.

Michael Masdea - Credit Suisse

Thanks, very helpful.

Bertrand Cambou

Thank you.

Operator

Next question comes from Aaron Husock of Morgan Stanley.

Aaron Husock - Morgan Stanley

Hi, thanks for taking my call. I guess couple of housekeeping things to start. Could you give your hand at unit numbers in the quarter?

Bertrand Cambou

I don’t have the number with me in units. We went down, I know. This is about, what 10% I guess or less. I don’t have the exact number. I always say that the unit shipment went down a bit. But what we did, the content of what we ship increased in absolute terms, quarter-on-quarter. And I think Bob can give you the information off line. But to make the long story short, we had an incremental shipment of bits with a lower unit -- like I was quoting here, our blended revenue went down by 6%.

And we think that if you look at the ASP environment, which was really bad, and the seasonal Q1 unit, which is less than Q4, we believe that in dollars, we had a great quarter in wireless and TMOS market share. But that information, I don’t have all of that, but Bob will.

Bob Okunski

Yeah, I will get that for you offline.

Aaron Husock - Morgan Stanley

Okay. On the restructuring, can you give us a sense for when you will start to see that savings and what that ramp looks like?

Dario Sacomani

Well I think we are going to start seeing it in Q2. I mean, we are underway already with action, so I expect to start seeing some of the benefits in Q2, but obviously the majority of it is going to come in Q3 and Q4, but I expect to see benefits from that cost reduction activity immediately.

Aaron Husock - Morgan Stanley

Okay. And you mentioned that part of that will be cutting your non-SP1 CapEx. When you talk about that $50 million to $100 million annual savings number, I would assume that that's on the income statement right, not talking about kind of reduced CapEx?

Dario Sacomani

That's right.

Bertrand Cambou

The 50 to 100 in the income statement here, but obviously by cutting some of the CapEx you cut some of the cost installation of equipment, some of the depreciation for the rise on that will contribute a little bit. To get to 50 to 100 is like Dario says a set of actions because one of those actions alone is not going to yield it, but incorporated in the set of actions is this particular one.

Dario Sacomani

Yes, it contributes a little to the P&L but obviously it contributes to the cash.

Aaron Husock - Morgan Stanley

Yes. And then just on ORNAND, I was hoping for a sequential increase. Can you talk about the momentum you have there? Have you started shipping to major customers outside of Japan yet? And how do you think that kind of ramps up in Q2 and Q3?

Bertrand Cambou

The interesting piece here is as you know the entire NAND industry crashed. And the fact in an environment ORNAND-based solution has been flat in an absolute term, we are pretty proud of that achievement. Which mean that we always tell you that this is a differentiated strategy and what we had, we actually had very slight ASP degradations and we had an incremental of customer acceptance and we think that the strategy has been kind of delivering. Even so I don't want to say that we are not lucky here but the first few quarters, when we were starting to put the technology, there was a catastrophe in the ASP environment and that was not expected indeed. But, by any means going forward, we have obviously, the demand is kind of high for Q2, which we have again an opportunity in Q2 and by putting 65-nanometer right there is going to give us another set of opening of new customers that we're going to go after, and like I was saying in my prepared remarks, we are in the process now of sampling a 65 nanometer ORNAND, we have that part working and it's being shipped already to several wireless accounts, and we intend to essentially go straight to production at 300 millimeter as much as we can, which is ORNAND based solutions. All together, I was hoping to have an increment in Q1. But things are the way they are, and all together, we think that that piece of our business has been kind of performing pretty close to our expectation.

Aaron Husock - Morgan Stanley

Okay. Great. Just lastly, what was your options expense in the quarter?

Bertrand Cambou

It was approximately $6 million.

Aaron Husock - Morgan Stanley

Okay, great. Thank you.

Bertrand Cambou

Thank you.

Bob Okunski

Thank you sir.

Operator

The your next question comes from Pranay Laharia, Deutsche Bank.

Pranay Laharia - Deutsche Bank

Yes, hi, guys. Bertrand, can you maybe quantify the customer attrition benefit you might expect from a potential estimate to an Intel merger?

Bertrand Cambou

Yes. What's going on here is the following. Intel had over the years licensed technology and created STM as a second source. Because for many customers, it is important to have two sources, and Intel has been kind of successful in keeping many accounts because of that strategy. Now, some customers have been kind of biting the bullet and qualifying expansion but the entry level has not been that easy here. Which means that overall strategy which is a multi year, has created a set of loyal customer to that circuit and we had some kind of a tough time to get in there.

When you are a customer, why do you want to qualify two sets of memory that are different, or require different hardware, software, maximizing system, this is a kind of [application] of engineering licenses, and for us, if that was to happen, would be right away. We will have the bulk of what Intel is currently doing in STM. We will have the bulk of their account opening up opportunities for enterprise, and we will by the way as we speak, our commercial team is not going to wait for any type of public announcement.

We are already developing a plan and the nanosecond we know this is the case; we are going to launch an attack to capitalize. Now, back to your question, what is the magnitude of it? Well it's very hard to predict but in general, a customer likes to have a 70:30 rules, which means that 30% of their business that will open up, but that's kind of the first step. But the second step, if you have one foot on the door, then we can add product from them at a later date, and perhaps take advantage of the effect of cost and quality is solid.

And our service and our reputation is such that we believe that that will be kind of an entry for us to an entire segment of the market that was closed to us. Which means that we are looking at that as being kind of; it's like merging with your second source doesn't appear to be very additive as a strategy, and is a great opportunity for us indeed if that was to happen.

Pranay Laharia - Deutsche Bank

Anyway you mentioned a couple of key accounts where do you think that opportunity may lay?

Bertrand Cambou

No, believe me, we know who they are. But we are not going to give you that information. I'm sorry.

Pranay Laharia - Deutsche Bank

Okay. And how does the pricing compare in wireless versus embedded? I got the impression it was worse than embedded, is that right?

Bertrand Cambou

No. This is the opposite. This quarter, the CSID price was as expected and wireless was much worse. Our plan was to grow wireless in Q1, believe it or not. That's what we were planning to do which means that we are planning to go down in CSID and up in WSD to deliver a flat quarter. Even so we think that we are gaining big time share in wireless, the erosion was much worse than we thought.

Pranay Laharia - Deutsche Bank

And you said the pricing deteriorated later in the quarter. Can you talk about why you think that might be the case?

Bertrand Cambou

Yes. The way that has happened as being is before the Chinese New Year and after the Chinese New Year. But before the Chinese New Year, a lot of demand, and then accidentally the Chinese stopped buying for two weeks, two vacations. And when they came back from vacation, then things started to panic and a lot it was being built without any home. And the second half of the quarter has been kind of a struggle, particularly in March.

Pranay Laharia - Deutsche Bank

Okay. And then just lastly, some update on manufacturing. Is your FAB 25 now fully converted to 90-nanometer?

Bertrand Cambou

As we speak, I would say the fact that we are starting about 8,300 wafers total in FAB 25 and I believe that 90-nanometer is about 7,500 as far as the start. We keep a little bit of 110 because we have some strategic customers qualify there. And of course, it's going to take us some time before we purge all the 110 nanometer inventory through the system here. But as far as the wafer start, this is about the ratio we have right now. Eventually, we are currently trying to see if we can take whatever is left and to move that to JV3. But that requires some approval from our customer. But we are 90% there, which means it's kind of, I don't want to say good enough, but this is about as we expect it to be.

Pranay Laharia - Deutsche Bank

Okay, and then what were the wafer starts with JV3 and what do you expect wafer starts for SP1 to be exiting 2007?

Bertrand Cambou

The 2007 information will be a function of what capital and demand we will put, and we don't have a number here to give you. JV3 is running about 10,000 wafers a week as we speak.

Pranay Laharia - Deutsche Bank

Okay. So it seems like, part of the problem in this whole NOR industry has just been wafer growth. It seems like you yourself at FAB 25 and JV3 have grown wafers quite significantly over the last 12 to 18 months. When does that stop? What's the plan if you can just highlight for wafer outlook from these FABs, say exiting 2007?

Bertrand Cambou

Well the big thing for us in 2007 between NAND and there was of course there was Spansion One which is kind of the nice thing, because that is 65-nanometer, which is more productive environment here. And then TSMC has been qualified, and that is kind of a nice buffer, because TSMC has qualified and we're very pleased with that. If you qualify the 90 nanometer into 300 millimeter wafers, we already are essentially going to sell 300 millimeter wafers out of TSMC in Q2. And this is kind of a nice story for us because, this market is there, we can actually use that help, and to essentially increase service to customers. Right now the demand is robust. We see a lot of customers, in particular big OEMs are switching to us which means that we have a lot of flexibility here, as far as managing the capacity to match the demand.

Pranay Laharia - Deutsche Bank

Okay. Thank you.

Dario Sacomani

Okay. I was just going to add one thing to that, not to forget that it's really not necessarily as much about incremental wafers as it is about the fact that as we continue to go from 110 to 90 nanometer to 65 nanometer as Bertrand mentioned before, we get twice as much density, so.

Pranay Laharia - Deutsche Bank

Yeah, but the problem though is the wafer overcapacity then any cost benefit you get is just completely overwhelmed by the overall pricing environment.

Dario Sacomani

Well, and again--

Pranay Laharia - Deutsche Bank

And you're contributing to the wafer oversupply, and increasingly so by pulling in all your capacity plans.

Dario Sacomani

But again like Bertrand mentioned, a chunk of it is externally sourced from TSMC, so we have some flexibility depending on how we see market demand.

Pranay Laharia - Deutsche Bank

Okay. Can you just remind me then what the TSMC sourcing for 1Q?

Bertrand Cambou

That was zero at 90-nanometer.

Dario Sacomani

Q1 did you say?

Pranay Laharia - Deutsche Bank

Yeah.

Bertrand Cambou

90 nanometer is just starting right now.

Pranay Laharia - Deutsche Bank

Right, but at 110?

Bertrand Cambou

110, we don't normally know how many buy.

Dario Sacomani

We are not disclosing that.

Pranay Laharia - Deutsche Bank

Okay, that is fine, okay. Thank you.

Operator

We go to Shawn Webster of JP Morgan.

Mehndi Hassan - JP Morgan

Hi. This is Mehndi Hassan calling for Shawn Webster. First, a couple of housekeeping questions; what were your book-to-bill and lead times in the quarter?

Bertrand Cambou

Yes, the book-to-bill we had was slightly below one. Not that much. We actually had a pretty nice booking quarter here. In the current business environment here what you have is the customer is expecting shorter lead time, which means that the customer that has not placed the demand, we know still he is counting on us which means that as we speak, even so that the book-to-bill was slightly less than one, we believe that we have a great backlog for Q2 that we are currently preparing and what we are doing here is in some of our product offering right now we have good supply situation here and we can respond to customer demand. I don't want to say on the spot, but with a much shorter lead-time than we did in the past.

Mehndi Hassan - JP Morgan

Okay. The other question I have is that, can you talk about your demand situation? Are you seeing any difference between demand in wireless versus embedded for us?

Bertrand Cambou

Right now, what we have is in the non-wireless business in the CSID, this is a very conservative business, and in this business, so far, there are being at 110 nanometer. However, some time it will take them as much as a year or two to qualify a new platform and you're talking about automotive, networking, this is very, very conservative. However, we have been accumulating design win at the 90 nanometer, and what we think is going to happen between 90 nanometer at the end of the year, you are going a to see your CSID benefiting from new fresh win at 90 nanometer. We have on the backlog nice upside in Q2 at 90 nanometer wafers for CSID and that will be kind of the first. Because so far we had some that was kind of novice, in the sense that all the 90 we had was in wireless. But we see in Q2 as substantive demand on 90 nanometer and that is going to accelerate. In the general market that we say, high density 90-nanometer and then going to 65 is the opportunity between 90 at the end of the year. We should look very excited by that business. Our team has been kind of very solid grabbing market share, doing that in a very professional way. We think, again that is a very solid business.

In the wireless segment, this is a case where we have been into new sight of customer and even in Q1 we had an upside. Even so we had such a difficult environment in Q1, some of the customers in absolute dollars went up quarter-on-quarter, and we see those customer demand very, very solid between now and the end of the year. Not a wafer, we're talking about leading edge 90 nanometer switching to 65 as quickly as we are ready here. This market is, the qualification time, it will be much less. We're talking about typically six months between start to finish in this market, some time less, and in this case, obviously the new offering is helping. Our ORNAND based solutions are solid, and the demand that we have right now has been quite solid here.

Now, the new architecture that we introduced Eclipse, combining NOR and ORNAND has also created a lot of interest in our partner right now and as we speak, walking with us to co-develop the solution.

Mehndi Hassan - JP Morgan

Thanks. That was very helpful. If I could ask a last question, what was the inventory situation for your customers?

Bertrand Cambou

For customer? Usually, we are quite conservative as you know on the standpoint that we don't push our flash unless there is a demand for it. And we kind of eliminated any type of buy, sell, any type of stuffing the channel that can backlash on us down the road, which is as much as we can watch our customer right now. The way they are behaving with our flash, it seems that they are not building inventory with the flash, and they essentially are pulling as they need it. They have to improve their own financials, as you know, and in particular in the cell phone business, the unit shipment has been kind of quite decent this year again, with the usage of high density Flash, at least a higher density Flash. This means that the response to your question here is, we don't see right now any inventory build of the significant size in the channel appears to be kind of that our customers are doing a good job as they should to keep it lean and under control.

Mehndi Hassan - JP Morgan

Thank you. That's all I had.

Bertrand Cambou

Thank you.

Operator

Next question comes from JoAnne Feeney, FTN Midwest.

JoAnne Feeney - FTN Midwest

Hi, folks. Good evening. Just a couple of questions. Let's get away from ASPs a little bit. How about we talk about the handset market and your view about the second quarter and perhaps the rest of the year? Maybe you could start with describing in a bit more detail where you saw the weakness in handsets this past quarter. Was it low end, high end, was it all of your OEM's? Was it regionally based and then perhaps you could talk a little bit about how you see demand evolving over Q2 and the rest of the year?

Bertrand Cambou

If we look at the aggregate of our customer in Q1, and we saw some of our customer demand getting higher in the plan, order was lower than the plan. But the way we're looking at the handset market in Q1 has been pretty much in line with the forecast we had. This means that if we look at both the unit shipment to the market as well as their ability to move into cell phones has been pretty much per the plan and as you know, we currently have a segment of the market, which is the low end, which has been kind of, I don't believe it's still growing by the way but in 2006 that has been kind of increasing. Now we see it like mainstream phone stabilizing, some of the leading edge stabilizing which we saw, all together if I look at the range of phones that has been built as we see it, seems that the Q1 was pretty much predictable to the past. Now, as we are looking at the outlook, definitely for us it is all about flash density per phone, and to give them more because in three segments they want more flash. In the lower end is not going to be as low end because they are starting to give them a bit more and so and so forth, which means that there is in each of the segment some kind of an incremental request for more flash per phone.

Which mean that we see the 2007 in aggregate is looking like as we expect it now. That being said and I am not going to comment here, clearly some customers are doing better than others. There is obviously for us some kind of need to be flexible because there is a plan and there is the reality and it's kind of some major shifting going on right now between players as we speak.

JoAnne Feeney - FTN Midwest

So, right given the sort of uncertainty in the handset market, are you seeing this competitions sort also materializing as delays in your contract. Because your relationships with the OEMs tend to be longer term contract with prices that are set rather in frequently. So are we to interpret the situation that you faced last quarter as one where they are just delaying, when they are going to engage with you in a contract and that's why they're able to sort of create this more difficult pricing environment?

And when do you think that environment might change, not on the pricing side, but in terms of again the uptake from the handset guys, because we out here are trying to figure out what the handset guys are? When they are likely to turnaround and how quickly we are likely to see an increase in demand and you may have one of the best views into that?

Bertrand Cambou

Yeah I understand your question. It is not necessarily that easy to answer. It seems to me that the pricing environment we had in Q1 as far as the Flash, which was not in line with our predictions was due to some mix to a certain degree which customer takes what, and some region, like for example in China, we observe that after the Chinese New Year, essentially the price just crashed. That has been kind of the step functions. That was before the Chinese New Year, and after the Chinese New Year. And after it was kind of a crash, and that’s kind of propagated around the globe very quickly, and fortunately right now.

Fortunately, you are talking to global companies, and you know what’s going on one side of the world, and want to take advantage of it right away, which means that, that has been what we observe now. You know, quite frankly, like we said this is very hard to predict what’s next but nevertheless, as far as the Flash right now, I will assume the customers in general are not very happy, because we gave so much concessions, that’s – I would not be surprised if those concessions was ahead of the expectation here, and perhaps as we are going through the remaining of the year, we have some opportunities but again, we see what’s going on.

I don’t know if I answered your question. Probably I didn’t, but that was not easy to answer.

JoAnne Feeney - FTN Midwest

Well, it’s a difficult situation. I guess, we are just trying to get a feel for whether the model might be changing away from sort of longer term contracts to more spot purchases?

Bertrand Cambou

No, I don’t think so. I think that our customers are very strategic. We don’t see spot as being something if it’s a reality. This are just pieces of market that has been kind of in the second half of the quarter that was really not normal here. Before we essentially assume this is a trend, let’s us wait a quarter or two here, but we still have some, we have to thanks our customer, they are kind of, we feel that they are treating us very well. We are working with them very well, and wishing that’s – no, I don’t think that this is moving to a spot market here.

JoAnne Feeney - FTN Midwest

Okay. Thank you.

Bertrand Cambou

Thank you, JoAnne.

Operator

The next question comes from Kevin Rottinghaus with Cleveland Research.

Kevin Rottinghaus - Cleveland Research

Thank you. I guess, handset inventories, you feel okay about kind of where those are right now?

Bertrand Cambou

Yes, we are.

Kevin Rottinghaus - Cleveland Research

Okay. And you commented on this a little bit before, but there have been a lot of other semi companies that talk about the mix towards low end handsets. You don’t really feel like that had any impact on you in this quarter?

Bertrand Cambou

Well, yes, that had an impact. I would say, that was anticipated though to a certain degree, but obviously, we like the high end better than the low end. But yeah, that had an impact. If you look at the low end in Q1, I don’t have all the market research worked on here, but my sense is the variation quarter-on-quarter was not necessarily that drastic…

Kevin Rottinghaus - Cleveland Research

As far as the mix?

Bertrand Cambou

I think of course in Q1, you always have more of the Chinese and less of the Western Europe and that type of things, but I don’t think that was that different.

Kevin Rottinghaus - Cleveland Research

Okay. And then the pricing pressure in the quarter, you didn’t feel like that was really from Samsung ramping up? That was more from number two and number three in the market?

Bertrand Cambou

I think, a major competitor is willing to lose 60%, and I am not going to comment here, but I’ve been in this industry a long time, and I don’t remember when I had in front of me, in front of someone willing to go so low, and we gain share. And yes, that has been kind of impacting us a bit. But we gained share against them, which is kind of an indication of some kind of a cost structure that we have compared with them. And also quite frankly that our customers are quite comfortable with us.

Kevin Rottinghaus - Cleveland Research

Okay. And I know you’re early in the quarter and March was kind of where things maybe got a little difficult, but has anything changed at the start of April, maybe have they backed off a little bit now that the quarter is over or--?

Bertrand Cambou

Right now, all I can say here and that was kind of a prepared remark. We see sign of hope on one hand and then the next morning we see the opposite. Which mean that it is a bit early for us to unfortunately predict if reason going to prevail or [patent] is going to be pushed one more quarter, we will see.

Kevin Rottinghaus - Cleveland Research

Okay. And then I think the last call. One of the opportunities that was highlighted for this year is maybe breaking in with the number two handset OEM. Anything that you could talk about there? Is that started, is that still an opportunity for this year? Anything you can kind of update us on there?

Bertrand Cambou

I was already thinking my customer base for the support, the growers in Q1, and I have to say there are some great customers up there that we thank. And like we already said in the past, we are currently doing business with all the top 10 phone companies already. We are everywhere. And many of those people are happy that we’re in and they are kind of giving us an opportunity to do even a higher business. And we expect to work very hard for them and to make them switching to us even more.

Kevin Rottinghaus - Cleveland Research

Okay. Maybe just one more quick one. Just to clarify, I thought I heard you, you said by the end of the year you thought you have availability of all lines through SP1. Is that right?

Bertrand Cambou

Yeah. The current plan that we have is essentially we’re going to start by ORNAND, and then move into switch the entire NOR family to 300 mm 65 nanometer, and this is the WS family, the NS family and the GL family. And the plan is to have all of that released this year. And that obviously, like we already discussed early on, this is kind of a great competitive advantage that we intent to leverage across the board.

Kevin Rottinghaus - Cleveland Research

Okay.

Bertrand Cambou

Of course, there are some low-density, that type of things that we’re not going to redesign. We’re going to go to the mainstream, but they are going to have the entire family there.

Kevin Rottinghaus - Cleveland Research

Okay. And I’m sorry, just one last one.

Bertrand Cambou

And by the way to say here, at 65-nanometer, there is no floating gate, and this is all MirrorBit, which means that Spansion One is going to be 100% MirrorBit factory. The first time that we’re building a factory for MirrorBit, which is another opportunity for us on cost reduction.

Kevin Rottinghaus - Cleveland Research

Okay. And then last one this time, I promise. With QuadBit starting to show a little bit of traction here in the initial revenues, at what point would the cost, your cost structure support starting to go after maybe some of the data storage markets in NAND or at least expanding your base into other markets beyond kind of your more traditional stuff?

Bertrand Cambou

Well, the four-bit-per-cell is a technology that is yielding -- it is an extremely high packing density of data. And one option we have is to do what you just said to go into another company going after the same commodity space, and you know what’s going on in that territory, and how excited we are to go there.

On the other hand, with the technology, like Eclipse, what we intend to do is to be able to actually to use this four-bit-per-cell capability embedded with our solutions on the single dye solutions where we can actually have a code and data storage for multimedia solutions. Which now we said that at this point, the company’s prime strategy is to integrate this capability into single dye with a combination of NOR, ORNAND and Quad. That would be the prime path and we will have standalone four bit to sell and we’ll see what we do with it. But today, unless business conditions change, this is not going to be a large part. And for sure this is not an area we intend to invest our capital to go after.

Bob Okunski

Okay. Thanks, Kevin.

Kevin Rottinghaus - Cleveland Research

Thank you.

Operator

That concludes the question and answer session. I’ll now like to turn the conference back over to you for any additional or closing remarks.

Bertrand Cambou

We would like to thank everybody for their time. We had obviously a difficult business environment in Q1, but I can tell you that we are fully committed to keep advancing our strategies and to deliver the financials. Like we said, the 2008 financial model will remain intact and we are going to keep working very hard to get there. Thank you for your time.

Dario Sacomani

Thank you

Operator

That does conclude today’s conference call. Thank you for your participation.

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