Spansion Q2 2007 Earnings Call Transcript

Jul.19.07 | About: Spansion Inc. (SPSN)
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Spansion (SPSN)

Q2 2007 Earnings Call

July 19, 2007 4:30 pm ET

Executives

Bob Okunski - Director, IR

Bertrand Cambou - President & CEO

Dario Sacomani - EVP & CFO

Analysts

Amit Saraf - Credit Suisse

Glen Young - Citigroup

Pranay Laharia - Deutsche Bank

Adolin Lee - FTN Midwest Research

Aaron Husock - Morgan Stanley

Eric Rubel - Miller Tabak Roberts

Joseph Osha - Merrill Lynch

Presentation

Operator

Good day, and welcome everyone to the Spansion Second Quarter 2007 Earnings Results Conference. Today’s call is being recorded and at this time for opening remarks and introductions, I would like to turn the program over to the Director of Investor Relations, Mr. Bob Okunski. Please go ahead, sir.

Bob Okunski

Thank you, Nelson (ph). Good afternoon, everyone, and welcome to Spansion’s second quarter 2007 earnings conference 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 additional color on our performance, and then turn it back to Bertrand for guidance. We will then open up the call for questions.

So before beginning today’s discussion, I need to spend a few minutes reminding you 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 the expectation at wafer level test will positively impact our cost structure in Q3.

The planning volume production at SP1 in late 2007 plans to keep R&D investment and SG&A expenses spend for the quarter. Expectation at net interest expense will be approximately $20 million in Q3 and CapEx will be $1 billion for the year to believe that revenues will increase sequentially and that leading edge manufacturing and new architectures will allow us to out perform our competition and achieve our long-term model.

Investors are cautioned that the forward-looking statements in this 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 actual results to differ materially from those set forth, 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’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 it could be accessed on our Investor Relations website at www.spansion.com. Now let me turn the call over to Bertrand Cambou, Spansion’s President and the CEO. Bertrand?

Bertrand Cambou

Good afternoon. Thank you, Bob. Thank you for joining us. Spansion in Q2 have the strong operational performance. We improved sequentially gross margin on relatively flat revenues with this improvement in operating and bottom line performance. Our ASP’s were under current pressure doing the quarter. Cost per bit improvement was greater than ASP per bit decline resulting in the higher margin. Dario will go back to this point in details shortly. Let me now start to describe how our two businesses perform.

First our CSID business, that focus on consumer smart card industry and automotive market had achieve significant growth, with revenue of $271 million, up 13% sequentially. It is important to know that the size of this CSID business is now almost the size of a wireless business, providing for more balance company performance.

The key to our growth and share gain in CSID have being the aggressive transitions to MirrorBit technology, which in this particularly business is about 50%of revenues. High density MirrorBit experience roughly big growth and increase in revenue 40% sequentially. It is particularly not worthy because historically CSID serve customer primary with treating edge, floating gage technology at lower density products. This is than the result of a successful transition.

Towards the North East, the CSID is an area of investment for enterprise. In addition of growing MirrorBit high density NOR sales, we are now using MirrorBit to enter the Serial Peripheral Interface SPI market, was too big to serve focusing on high density. As a result SPI revenue doubled in Q2 compared with Q1.

In the wireless business revenue was $338 million, down 13% sequentially due to ASP erosion, while unique shipment was relatively flat. Our flash memory content as a percent of revenue increased due to the decrease shipment of high density RAM bundled in multi-chip package. Other results, Spansion Flash memory content excluding bundled RAM experienced a more moderate decline of 8% quarter-on-quarter in wires. Average density was up driven by an increase in MirrorBit ORNAND solutions sales, which grew 40% quarter-on-quarter reaching 83% and totaling 25% of Spansion’s wireless sales for the quarter.

Let, me now give you some few general update on the quarter. In Q2 we further rent 90 nanometer manufacturing in Fab 25 resulting in a more than 60% sequential increase in 90-nanometer, revenue, excluding bundled RAM. We also started volume deployment of increased with a lab test and important milestone to significantly reduce test cost, improve productivity and quality. This program will positively impact our cost structure as early as Q3.

During the second quarter we produced as well our first yielding 300-millimeters, 65-nanometer wafers at Spansion 1 in Japan.

Volume production is still on track for the latter part of the year, including 65-nanometer MirrorBit ORNAND and NOR devices. Also plan for production at Spansion 1is a recently announce MorrorBit Eclipse solutions combining MirrorBit NOR and ORNAND on a single die in a software to configurate the lucky picture, delivering a highly flexible one chip solutions to reduce the handset memory bill of materials.

Finally, we are own track to deliver on our previously announced $50 million to $100 million reduction in cost, in 2007 plan expenses. Top of this cost reduction initiative we are streamlining the executive team for maximum efficiency by reducing approximately nearly 15% of all our VP positions in the company.

With that I like to turn the call over Dario our CFO.

Dario Sacomani

Thanks, Bertrand. And good afternoon every one. Thanks for joining us today. I’d like to now just review the specific of our financial performance for the quarter. Net sales for the quarter were $609 million, which was down slightly by 3% compared to the first quarter of 2007. More specifically as Bertrand mentioned bundled RAM as a percent of total Spansion revenue dropped from approximately 15% of revenue in Q1 of ’07 to 11% in Q2 of ’07. Therefore, the sales dropped for the quarter was all bundled RAM. Sequential flash revenue excluding its bundled RAM actually increased about a percent.

The branded ASP degradation of 11% from Q1, ’07 was also heavily influenced by the dropping price density and volume of bundled RAM and was only 7% on the flash revenue content.

Unit shipment rose 9% sequentially and total bit shipped grew 19% compared to last quarter and 66% over the second quarter of 2006. 90-nanometer MirrorBit shipments again excluding the bundled RAM increased 64% sequentially as customers continued to adopt our high density solutions, resulting in a 9% increase in overall average density.

To put the pricing decline as the prospective on a year-over-year basis, we reduced our branded cost to bit by 40%, which is better than Moore's Law. This is actually been a tremendous accomplishment as it includes our low density offerings, which do not typically cost reduced at the rate of higher density solutions. Over the same time period ASP per bit declined 45% compared to an average historical decline for our portfolio were about 30% to 35% year-over-year. Despite the fact that we improved our cost per bit better than Moore's Law this irrational ASP environment has pressured margin performance.

Though we experienced an 18% erosion in ASP per bit from Q1, gross margin for the quarter rose 340 basis point to 17% from 14%, as we benefited from several items. We shipped to lower mixes as we’ve talked about of pass through bundled RAM contact which led to approximately 380 basis points of improvement.

We improved manufacturing efficiency on 90-nanometer production which accounted for approximately 140 basis point increase, a richer mix of high density MirrorBit product in the embedded market segment for a 100 basis points.

Overhead cost savings and gains associated with the sales of JV1/JV2 contributed about 210 basis points. We got 100 basis points improvement due to increased final test efficiency and about 200 basis points related to variable cost savings associated with our initiative to reduce $50 million to $100 million of planned expenses.

For Q3, gross margin is contingent on the ASP environment which remains challenging. We have an intense focus on the things we can control including the following key cost reductions. Final test scrap reduction and throughput benefits associated with Q2 implementation of increased wafer level test, continued maturity and output of 90-nanometer products, further variable expense reduction associated with our cost control program and increased back-end utilization in lower sub kind cost.

Absent in improving ASPN environment, we do not anticipate improvement in gross margin in Q3. If trends improved pricing returns in more normal patterns we could have an opportunity. Finally, it should be noted that the gain on the sale of JV1 and 2 approximately $70 million would be recognized over the life of the foundry agreement which is anticipated to continue into 2009.

Research and development expenses were $111 million or 18% of revenues compared to $102 million last quarter. The sequential increase in R&D was primarily the result of our acceleration of our 300-millimeter initiative at SP1, as well as one time cost associated with our operations consolidation.

As we’ve indicated on prior calls until we go into production at SP1, all start-up cost will be reflected in R&D. With volume production at SP1 anticipated in Q4 of 2007, we expect R&D investment to remain essentially flat as a percent of revenue for Q3.

Q2 sales marketing, general and administrative expenses were $61 million up slightly versus Q1 due to higher legal expenses. We expect SG&A expenses to go down on an absolute basis and as a percent of revenue for the third quarter. Operating loss for the quarter was $65 million down from $70 million last quarter as we benefited from our gross margin improvement.

Net interest expense for the quarter was down $9 million primarily related to the gain on the sale of real estate in Asia. We anticipate that net interest expanse would be approximately $20 million in Q3. We also recorded a tax benefit of $4 million for the quarter, as we adjusted allowances in Japan, due to anticipated 2007 profits in the region. We expect taxes to be low in Q3. Q2 net loss was $67 million compared to a loss of $75 million in the first quarter of ’07. Q2 ’07 loss per share for the quarter was $0.50.

Moving on to the balance sheet, we remained focused on cash management. DSOs were up slightly at 58 days. Inventory days were at 87 days up from 81 in Q1 ’07 as we prepared for anticipated seasonal strength in the second half of the year. Days payable increased to 72 days as a result of our capital spending for SP1. Approximately 300 million of the $400 million increased in accounts payable was associated with the large capital deliveries in Q2 of ’07, and we’ll be paid over the next two quarters.

CapEx for the quarter came in at approximately $595 million up from a $175 million last quarter and represents to both of our CapEx spend for SP1 this year. Approximately 80% of the CapEx spend in the quarter was for 90-nanometer production, 65-nanometer and 45-nanometer development at the 300-millimeter way for diameter, as well as our improved testing initiatives. We still anticipate CapEx to be in the billion dollar range for the year.

At the end of Q2 ’07, our cash in short term investment balances were $717 million, up $15 million from Q1 ’07. Net debt was up $58 million driven by incremental borrowings associated with the issuance of our floating-rate notes and the use of JV1 and 2 proceeds for SP1 capital investments. Revolver capacity at the end of the quarter was a $170 million as well as another $400 million available to us by year end under our GE Trans facility. EBITDA for the quarter was approximately $72 million compared to $61 million last quarter.

With that I’d like turn it back over to Bertrand to discuss our expectations for Q3. Bertrand?

Bertrand Cambou

Thank you, Dario. In the third quarter and we anticipate revenues increased -- to increase sequentially, leveraging the continued success of our CSID business where we have a strong backlog of high density MirrorBit order and for the RAM of our new products.

On the wireless side, we expect the business contributions to be relatively neutral, anticipate continued pricing pressure. Right now, in wireless our first priority is operational excellence and accelerating the high volume RAM of new technology to allow us to succeed in a highly competitive environment.

In conclusion, so far this year our CSID business has being executing extremely well and producing new product, leveraging high densities and gaining share. The wireless environment has been suffering for, the more than anticipated price pressure negatively impacting our financial results.

We believe our commitment to leading edge manufacturing was 300-millimeter, 60 and 45 nanometer note and new architecture like MirrorBit Eclipse. We allow us to our performer competitions and achieve a long term financial model.

With that I would like to open up the call for question. Thank you.

Question-and-Answer-Session

Operator

(Operator Instructions) Our first question will come from Micheal Masdea, with Credit Suisse.

Amit Saraf - Credit Suisse

Yes. This is Amit Saraf, calling in for Michael Masdea. Could you elaborate a little more into the gross margin benefits for the quarter, specifically could you elaborate on any of these items, more non-recurring in nature and then talk about what type of cost savings or if you can quantify, we could expect for Q3?

Bertrand Cambou

Okay, I am going to -- we’ll give you more detail. But the company has, I would say a brutal focus on cost and cost per bit reductions. And then definitively in Q2 we had some benefits with that, obviously, we are kind of also affected by an ASP that is also sliding very hard. This is what you see here is just on one hand, the balance of the cost reductions per bit versus the ASPs.

And like we told you going forward, we please, anticipates to be maintaining, in fact accelerating our focus on cost to bit. But the price environment is very unclear and is really hard to see, if we are going to have a better situations in Q3 than Q2.

Now, we had like every quarter, good in bad news that kind of and I’m going to let Dario to see, he has few more a detail to give on that one.

Dario Sacomani

Yes. Thanks for trying. Just to be specific I mean a big chunk about as I quoted about 140 basis points of the improvement is based on, the efficiency on 90-nanometer production and that’s going to continue and increase as the product matures and as we begin to sell more and more 90-nanometer.

Also I mentioned we’ve got great penetration on high density MirrorBit in the embedded space and that accounted for about 100 basis points which again I anticipate to continue. I made the comment about JV1 and 2. We got overhead cost savings associated with the sale as well as gains on the sale of JV1 and 2 which I commented approximated about 210 basis points and I also made the comment, did that gain is going to be recognized over the life for the Foundry agreements. So that cost reduction continues as well as 100 basis points due to the increased final test efficiency and the 200 basis points related to variable cost savings I anticipate we go up to the neighborhood of 300 basis points in Q3. So the majority of everything that we’ve seen has been solid execution which should continue into the upcoming quarters.

Amit Saraf - Credit Suisse

Thank you. Okay and then just a quick follow-up. Could you discuss a little further the pricing dynamics by NAND especially on the wireless side? So what are the factors driving the pricing pressure and then also if could just comment on the recent consolidation by severe competitors and how and when that might affect the ASP environment and overall market environment?

Bertrand Cambou

Well, I think the things that we’ll comment on ASP, is a clearly expansion on hard gain in the virus space so much market share that the competition had to fight back. And the Intel-ST campus as well as others has been fighting back. I don’t believe that being that’s successful by doing that and I believe that, the kind of the role did they owned margin to appoint that’s quite frankly, if you look at what has been announced yesterday is kind of clear indication that their cost structure is clearly higher than us which means that based on that consideration here we believe, that’s to once a ten degree reason we prevail. And that’s we should at one point to have an environment that is more rational. And that’s an obviously the fact that those people are not going to beneficiate from big broad or deep brocket. We should get more reasonable. We believe that the right focus for our enterprise it brutal focus on cost reductions pushing technology ahead successful good years, putting 300-millimeter factory first and so on and so forth MirrorBit and our sales, worker (indiscernible) to train our left guy. We told you that since the beginning of the year this is the battle and we’re going after it and you are going to see our team here that is laser focused and again we believe the ASP environment will reason we prevail down the road.

Amit Saraf - Credit Suisse

Understand. Sounds good. Thank you.

Bertrand Cambou

Thanks.

Operator

Our next question will come from Glen Young with City.

Glen Young - Citigroup

Thanks. You know Bertrand you just mentioned that you thought your cost benefits would accelerate in the third quarter. Just want to make sure that I heard that right and then Dario, if you could maybe explain how does you are going to accelerate versus, it’s unlike you are just expecting to maintain the card saves into the third quarter?

Bertrand Cambou

What I mean accelerating; I mean very clearly that, I just have discussed this thing here that if you look at the bit, the network value was alluding to or cost per bit blended for the entire enterprise including the ten year old automotive part. We were able to reduce it by 40% year-on-year and it is definitively we’re stepping up our cost reductions program here. We’re kind of everything we can. We talk about cutting overhead, cutting executive as a percent of employee. We’re cutting everything that can be cut right now and we’ve seen that this momentum is yet. We’re going to focus on what we’ve done controllably and that’s what I was trying to say and as we go on to second half of the year and Dario got here a list of ideas here, but definitely really 90-nanometer when I see the small portion of the company, the new test increased wafer level testing has not being seen in our -- yielding result yet and so on so forth, which we are happy to NAND at the end of the year Glen, a lot that is cooking. That is going to allow us; we are convinced to keep -- to keep up the pace. Dario is going to answer the question now.

Dario Sacomani

Well, I just Glen, I just want to make the comment. I didn’t mean to suggest that they were just going to continue and I think they are going actually increase and Bertrand pretty much said. We are just starting to see, the benefit of increase wafer level test, we’re not going to see the full impact of that until we get in to Q3 andQ4. So we’ve got more cost reduction powder in the gun coming up. I also think like Bertrand said continued maturity and increased output of 90-nanometer its going to contribute more and more cost reduction as well as variable cost reductions that we negotiated with our suppliers which are on a step-down pricing basis quarter-on-quarter. So I don’t just expect them to continue to point I was trying to make was, they are not really one off, they are all on going, but I expect them to intensify and continue to give us increased cost reduction leverage.

Glen Young - Citigroup

That’s very helpful. I appreciate that.

Bertrand Cambou

Thanks.

Glen Young - Citigroup

The next question I had is really leveraging about your competition had to say about the NOR flash business. The other night they were suggesting that in the second half it was going to look better than the first half and I hear your comments about pricing and I recognized that it’s always difficult to predict pricing. But do you think the rate of price decline is starting to slow, is part one of this question and then the second part is, how much do you attribute in one positive outlook by your competition based on the ability to write down some assets which is going to happen when they merge?

Bertrand Cambou

Clearly, there is a seasonality pattern in our business where the second half as you are getting close to the holiday seasons is creating an up environment here, which essentially maybe very helpful and we are seeing that may happen. Now on the other hand, if I look at my competitions the way they are behaving right now is not rational and I’m not going to speculate about and are they going to became as rational or not because in the quite frankly right know I don’t get it. I don’t understand, why they are doing, what they are doing right now. And that’s where we are going to be very conservative, in predictions here because unless I see some rational behavior there I don’t believe that would be appropriate for us to, to guide you one way the other way. That’s -- that’s why we’re putting a guidance that way here, Glen.

Glen Young - Citigroup

That’s so nice and I appreciate that. The two -- last quick ones. One, can you give us a sense to where you think inventories are at the channel for your NOR flash product. And in secondly Bertrand maybe your insight on this man sizing is going on and that can sometime have an impact on NOR demand. And want to know if you are seeing anything in that regard?

Bertrand Cambou

At first the inventories concern right now as we’re looking at the inventory. It depends on the region. We find that the Beijing Olympic that is going to happen next year is creating some excitement in some of the regions. We see, we’ve actually observed some of very positive. In fact in Japan, in Korea, in China, all over Asia in general we see some very positive here. Now to balance that, we’ve observed that in some of the widest account in Japan, perhaps they have a little build up in Q2. That is going to be a resolved, correcting the bit in the second half of the year here. But with that exception of this, which is a very punctual built up in general we’ve the sense that the China is very low right not and that we see some tension already here and there ties to some of the, more the consumer hand of the space and this is why today that we are so excited by the CSID business. This business is already now we are receiving some clear sign that; one, we have the right product at the right time and the race with Amkette starting to happen here which mean that this is a space here where we really feel that we’ve a very, very good feeling here going forward.

Glen Young - Citigroup

Okay. NAND?

Bertrand Cambou

NAND pricing is healthy. But when the NAND was going down it was hurting us and if NAND can’t to -- can increase a bit it is going to help us.

Glen Young - Citigroup

Great.

Bertrand Cambou

Thank you so much.

Glen Young - Citigroup

Thank you.

Bertrand Cambou

Thanks.

Operator

Our next question comes from Pranay Laharia with Deutsche Bank, your line is open.

Pranay Laharia - Deutsche Bank

Yes. Hi, Bertrand I’m little bit confused about your statement, you said that you are on track to deliver $5,200 million reductions in plant expenses for 2007, but 3Q OpEx will barely be down from 2Q. So I’m confused when we will see the cost reduction come through your income statement?

Bertrand Cambou

Yes. What we heard in Q2, we are pretty hard some impact on from the cost reductions, we’re very significant here. We are also hard because we did reduce the size of our executive team. We had some Severance package that there is being kind impacting Q2 and we had some of the one time expense in the legal department where we actually had non-related to those cost when the significant increase in the quarter here for legal fees here, which been that if you were to take those legal fees increase and those severance package away and if you look at the fact also and the cost reduction is also impacting the margin and big piece of the 5,200 is not the SG&A, it’s the margin and you can see here in the industry right now that this is currently suffering on the price margin. Our company is being able to make progress and that was being obviously starting to beneficiate for some of those are very bigger reduction there to engaging. I think that as far as $50 million to $100 million if anything we are well positioned to realize it.

Pranay Laharia - Deutsche Bank

So, what will your SG&A, it will be down to in 3Q?

Bertrand Cambou

Well, like we said, we expect it to go down on an absolute basis and as a percentage sales but again like Bertrand said, I think it’s of note that the significant majority of the cost reduction during COGS and in quarter-on-quarter cost of good sold was down over $30 million and this variable expense reduction that we’ve been talking about particularly at the analyst day for example, it was related to direct materials that we purchase from our suppliers and that’s where we are getting the biggest thing for we bought.

Pranay Laharia - Deutsche Bank

Okay. And then what was the ORNAND revenue for the quarter?

Bertrand Cambou

$83 million.

Pranay Laharia - Deutsche Bank

83 and what do you expected to be exiting the year, say in 4Q?

Bertrand Cambou

What we are expecting right now, we are going to have the transition of ORNAND between 90 and 65 nanometer and in the second half of the year, we are going to probably pause it a bit and to be in a much either at 65 nanometer. In the strategy was to start to populate the market at 90, but now we know we have to go to 65 as quickly as we can which has -- we may have some kind of a propose before we bound at 65 because never ever our intention was to go too fast, too big at the 90 and there quiet frankly, if you think about the fact that this is a business who essentially compared to quarter grow at zero, the fact that we generate significant amount is obviously a sign of these technology has been very good for us as far as positioning us in the segment of the market who were absent in the past.

Pranay Laharia - Deutsche Bank

And then just lastly, how big was your SPI for the quarter? You said it doubled but can you give us some absolute number?

Bertrand Cambou

That was about 10 million bugs.

Pranay Laharia - Deutsche Bank

Okay. Great, thank you.

Operator

And at this time we will go now to JoAnne Feeney with FTN Midwest Research.

Adolin Lee - FTN Midwest Research

Hi guys. This is actually Adolin Lee (ph) calling in for JoAnne Feeney. My question is first of all can you give us some detail on handset unit shipment?

Dario Sacomani

You’re talking about what we did or what the industry did?

Adolin Lee - FTN Midwest Research

What you did, and also the industry if you could?

Dario Sacomani

Okay. I think the industry is above right now, quarter of a medium (ph) and as far as what we did, it is still in the mid-low 80’s, we -- it’s about $80 million to $85 million which is about the same number that what we did last quarter.

Adolin Lee - FTN Midwest Research

Okay. And can you give us more colors to, in what segments the low-end, high-end and can you break it down?

Bertrand Cambou

As far as door office goes on, we had a successful low-end, all high-end; all very high-end which mean that one has been kind of helping us a lot. The low-end as being as solid as were. In between has been in sometimes a problem and it’s not being something that it’s kind of -- for now we have that is being kind of -- perhaps a bit to beetle, what we are hoping to see.

Adolin Lee - FTN Midwest Research

Is that related to your customers, your number one, number two customers and your relative exposure to them?

Bertrand Cambou

The way now Spansion is servings the top ten account. And we have a pretty nice diversification here. We are working with number one, number two, number three, number four, number five, number six, number seven and so on and so far. We’re very strong in Japan which means it is very hard to say, I think this is also due to our own success, a portfolio march to what the customer wants, it is a cycle of design of a 90-nanometer and is not really try to one or two particular customer here.

Adolin Lee - FTN Midwest Research

I see. Can you, tell us about the prism of NOR flash enhance that units. Are they rising for you?

Bertrand Cambou

Well, we don’t said anything else but NOR which mean that’s we are essentially NOR company, we have bundling ORNAND which is essentially a NOR who is NAND footprints, which is also offering NOR type of quality who is footprint that is on the NAND that’s we are bundling in the cell phone market here which means that’s our company is a today is not in a NAND space.

Adolin Lee - FTN Midwest Research

I mean, the same with NOR and hence its -- is it…

Dario Sacomani

As an industry? Because for expansion, we are or all we do is NOR, we don’t have any -- we don’t participating into the NAND for now. The percentage of NAND strongly nice still you know is still in the 10 to 15% range and this is kind of the meet to high-end.

Adolin Lee - FTN Midwest Research

Okay. Thank you.

Bertrand Cambou

Thank you.

Operator

Our next question will come from Aaron Husock with Morgan Stanley.

Aaron Husock - Morgan Stanley

Great. Thanks for taking my question. I guess, you were talking about wireless being relatively neutral for you in 3Q but I mean in general -- handset market should grow in 3Q versus 2Q and you have been gained share, add a couple of major accounts. Can you kind of walk me through what’s going on to in units versus ASP declines in 3Q or you actually getting that unique growth and maybe just a big offsetting ASP decline?

Bertrand Cambou

Yes. Right now if we look at those parameters here at the backlog -- the big performed ASPs and so on and so forth. If we’re looking at the revenue outlook for the next quarter compared with Q2, we see the business roughly being the same size because of all of those factor sighting and this assume that the ASP is going to have a very steep decline which means at the ASP and the battle that is currently happening between NOR and NOR player is very intense in that spaces and we’re assuming some kind of an aggregate for, between our share and so on and so for which is it going to yield you know business it’s going to be the relatively constant and obviously like I’ve said in my guidance here, the CSID on the contrary. We are able to achieve unit growth, market share growth and then because we are putting bigger amount of bit shipment which have 613 identity that essentially counter balanced the erosions which mean that we see the guidance for Q3 and CSID as being net positive year with way that it’s hard to call type of things.

Aaron Husock - Morgan Stanley

Okay. Great. Can you explain why you think RAMs shipments were down so much in 2Q? Was there a change to sort of how you are going to run that?

Bertrand Cambou

As much of principals, we like it to be as small as possible, because we are not in a business here of setting a RAM because we don’t reduce RAM we are doing some pass through, we’ve seen that definitively, widest team is trying to work with our customer to see for example if the NCP that rebuilt will be RAM 3 or with a small RAM, that will be the type of thing that you are trying to do. Now turn out that we were quite successful and the market was such that was possible in Q2 and that’s kind of quite frankly reduce our liability and so and so forth. Now like Dario say the interesting pieces, if you look at the Flash contents. Q2 was actually a tough quarter for us, if you just deep bundled the RAM and the revenues were up, went slightly up and if you just want to look at the gross margin and so and so forth, we don’t get rewarded for being somebody else’s distributor and which mean that’s this has been kind of positive for us. So I am going to say that bundling RAM is bad thing because else some positive things. We have a software and software, a very, very sophisticated software that we are essentially giving to our customer that allow them to handle the stock memory, that allow us to going to memory solutions which may not we -- it’s not that if we dislike putting RAM there are also some positive pieces as we are the best producer on MCP in the industry line thus putting that at the high yield and high quality, mastering the non-good day program. So it’s not like -- I don’t want to give the message here that we like bundling the RAM but we don’t want to put too much as well.

Dario Sacomani

And just one last comment just at a high level of the majority of the bundled RAM that we sell is either wireless space or as the CSID business becomes a larger component of total expansion that also affects the fact that there less bundled RAM for total expansion.

Aaron Husock - Morgan Stanley

Okay, okay great. But that 11% of total sales in bundled RAM might be have a bit of a low number here as far as what we should generally expect going forward, do you think we see a little bit of an uptake in that yet. Maybe that doesn’t go back to 15 but goes up a little?

Bertrand Cambou

Yeah, that is grew fixed rate quarter-on-quarter as a function of what the customer need and perhaps as we are going to get close to the end of the year some of the high end form may require more RAM that is something that may happen. Again we are going to follow all of that and serve the market as better as we can that for Q2 we had some kind of good factor here that we mentioned.

Aaron Husock - Morgan Stanley

Okay. Get just one last one from me. You talked about how it will be difficult for the U.S. margin to go up in 3Q unless you see meaning from previewing the pricing environment, could the gross margin actually go down in 3Q versus 2Q, if the pricing environment basically stay at the same, this is difficult as it is now?

Bertrand Cambou

Yes. To the fact of the matter is that, so far we’ve not being able to find an ASP environment that is washing up. And then we have the company as we are looking at Q3; we are looking at the scenario where gross margin will go down because ASP will be further deployed. Now, that being said as a defensive to that one, we are pushing even harder our cost reductions to which mean that we are assuming the worse case and going to, trying to work very hard in that environment to out perform our competitions by having the best cost structure. But again like we discussed early on to one of your colleague here, perhaps the environment -- competitive environment is going to be different and we’re going to have something that is better, it is going to give us a better gross margin. And that’s why we cannot help you in and give you a new guidance here on the mark during Q3.

Aaron Husock - Morgan Stanley

Okay, great. Thank you.

Bertrand Cambou

Thanks, Aaron.

Operator

And we’ll take our next question from Eric Rubel with Miller Tabak Roberts.

Eric Rubel - Miller Tabak Roberts

Good afternoon gentlemen. Thanks for taking my call. Bertrand, question for you. Looking at your blended bit cost reduction of about 40% year-over-year and specifically that you were also able to achieve these results even in say parts that were 10 years old. As you look at across the CSID landscape one that’s been kind of crowded and more around the lower density of the segment. How do you see the competitive landscape planning out into the back half of the year and where our density is going in that market?

Bertrand Cambou

In the pieces of CSID, let me say something which is a very exciting store here. Our company was kind of using trading ads technology and we were using this JV1 and JV2. And the strategy we had as a company as being to invest in the CSID business into the legacy product. I am talking about the 4 meg or 8 net meg or 16 meg, those all little device and essentially to convert them to advanced technology in such a way that essentially we don’t need JV1 and JV2 anymore which mean that’s as a company we essentially are looking at the how can we be even more competitive in those trading ads technology and we believe that the benefit is not yet totally realized and we are still walking on that one and we are seeing that’s as we are going to grow in the next couple of years and successfully move away from JV1 and JV2. You are going to see us being able to have a better cost structure on the low density. And in many cases using MirrorBit which been on CSID we have on the lower end, we some kind of a very big push as a company into cost reductions. Now where we actually do see price pressure on CSID, interesting enough is in the high density, because in the high density some time our customer are looking at the system solutions and between the NAND-based solutions and the NOR-based solutions and the highest the density the more competitive demand solution is and you will have something in between where essentially you cannot to be go either way. Now, low density has to NOR, high density has to be NAND and there’s some swing in between. And that piece and that has being one of the previous question here, if we turn out back to NAND, is pricing is going to grow up a bit, that is going to help us. Of course, you know, the opposite is also possible, but there is a piece of the segment now. In all to give user in order of magnitude here, the portion of CSID that is essentially sensitive to NAND pricing is very small, perhaps 10% of that business covert to bulk of CSID is actually not and fringing NAND network.

Eric Rubel - Miller Tabak Roberts

So, do you think that this cost reduction that you are aggressively perusing at the 4, 8, 16 megabit part of the market will be effective in changing the comparative landscape at that market segment, which has been pretty crowded historically?

Bertrand Cambou

Absolutely, we believe that and basically the cost reduction is going to grow all the way, right now we are shipping 1 gigabit, we are shipping the entire end. CSID has a strategy of using leading edge technology, MirrorBit from the high end for the mid tier also so we are looking like right now of 32, 64, 128 all being MirrorBit. And then -- shrink on the low end, we seen that’s -- in this particular market we are very, very aggressive in taking the entire portfolio and reducing cost and there is no business we want to leave behind. Many of our customers want to be a single shop they don’t want to have those just surely speaking for them, they want to be able to place order expansion from low density to high density and there was a value there to have a portfolio that is broad and that why we think that’s the only way you’re going nice to have this wide portfolio strategy in case, I did.

Eric Rubel - Miller Tabak Roberts

There was a pretty significant double-digit increase year-over-year, both last year in two Q, is there any seasonal effect here as well or is it just all market share gains?

Bertrand Cambou

We, think that the market share gain has being huge, I think we -- as we are looking at the market share gain as a two businesses clearly right now CSID is gaining every quarter as being a very, very big gain. We have to focus there that because of this is a broad space it has being run now for multi-years in that strategy here and well writing some of the benefits of those multi-years work, which is definitively a market share gains during the CSID as much as we can see. Now on the seasonality issues, I think that the Olympic game is creating some kind of friendliness in the consumer place. We have every thing in place to take advantage of factors, wide customer base, the wide customer product, wide product offering, which will have to -- we may how about to be going forward some help from the industry on the space as well.

Eric Rubel - Miller Tabak Roberts

Great, that’s great. If I can just turn for a while, just for second on ORNAND part, you saw some pretty good growth this quarter, historically or in the past that was pretty much all in Japan. Has there, can you give any the color on the regional sales for the products? And in Japan any color on the number of handset OEMs that are using it? And you did mentioned how many phones you’re in for overall? Can we talk about the number on handsets that you are in for ORNAND?

Bertrand Cambou

Yeah, the strategy has been the following, not through it has been kind of work in process, but what we elected to do as a company is to focus some where, and it has been Japan. And it has been kind of quite successful. Now, when we looked at propagating the success in different places of world, we concluded that we should go to 65-nanometer. And relevant to the volume production at 65-nanometer as you know and 300-millimeter wafers, which is essentially allowing us to have a very, very competitive cost structure.

And as a result we’re not going to be very aggressive to promote ORNAND outside Japan at 90-nanometer. But we intend to be very aggressive at 65 and you are going to see, let us say in ’08. The benefits creating from Spansion 1 and pushing on, on worldwide that between 9 band, we may few socket here and there, but it’s not going to be significant piece of a company’s revenue, for me 31 is profit margin and today 65-nanometer is what you need to be in a good position in 300-millimeter.

Eric Rubel - Miller Tabak Roberts

Bertrand, can you share the number of ORNAND handsets that you are in or is that to competitor?

Bertrand Cambou

Its hard to say, all I can say this is huge ASP’s, this is very, very nice ASP’s, which are, I would say in some cases 10 times higher than the average ASP of the company. And that’s you take that number and you divide that by 83 and you will have your answer.

Eric Rubel - Miller Tabak Roberts

Thank you.

Operator

And our final question will come from Joseph Osha with Merrill Lynch.

Joseph Osha - Merrill Lynch

Last week and under the Hawaii.

Bertrand Cambou

How are you?

Joseph Osha - Merrill Lynch

Just fine, thanks. First, just a simple question you gave us your MirrorBit ORNAND number, what was your overall MirrorBit number?

Dario Sacomani

69%, almost 70%.

Joseph Osha - Merrill Lynch

Okay. And that basically all of your wireless businesses is MirrorBit than about half of CSID right?

Dario Sacomani

Exactly, I think may be, we have backlog there are 85% or 90% of wireless and half of CISD. Other, the CSID couple of quarter grew was mainly Floating Gate.

Joseph Osha - Merrill Lynch

Right.

Dario Sacomani

And with that being new here it has been like -- even source of company, that the percentages is still about 70% but the impact for the CSID is been huge.

Joseph Osha - Merrill Lynch

The dealt is been in CSID. Okay.

Dario Sacomani

That’s right.

Joseph Osha - Merrill Lynch

Secondly, Dario just in terms the cash situation this quarter, did you flow that whole $200 million in the fab sales, cash, through your cash flow statement this quarter?

Dario Sacomani

Absolutely.

Joseph Osha - Merrill Lynch

Okay. So, and then you -- if you can just remind me what was the additional funding that you pulled out of the revolver this quarter?

Bertrand Cambou

Net, net, we took out the $500 million on Term Loan B and we floated $625 million of floating-rate notes and then we -- in addition to that we paid of about $25 million worth of leases and $25 million worth of a revolver in Japan. So net, net GAAP went up $58 million and than in addition to that we have the proceeds of about $200 million from the sale of the land in Asia as well as the JV1 and 2 facility.

Joseph Osha - Merrill Lynch

All right. So, $200 million basically pausing the other, another 58 basically as far you think about it?

Bertrand Cambou

Correct.

Joseph Osha - Merrill Lynch

Okay. All right. Thanks, thanks very much.

Bertrand Cambou

Sure.

Joseph Osha - Merrill Lynch

And then last question on, if I look at just operating cost, obviously we achieved a lot of improvements in gross margin, but just for modeling purposes do you have kind of dollar target for R&D and SG&A in a GAAP basis for 2007?

Bertrand Cambou

The only thing I commented on in the script is that; remember all of the start up cost of SP1 is going through R&D. So, that was about $10 million in the quarter. And like I mentioned I think that, until we turn SP1 on into production which will be until Q4 of ‘07 that’s going to continue in the R&D line through Q3. So I think it’s a percent of revenue, R&D is probably going to be the same. If you look at overall first half of the year, we were about 9.6% SG&A. And I think that, as we go through time I expect this to exit the year end to 8 to 8.5 range.

Joseph Osha - Merrill Lynch

Okay. And so, R&D will decline in Q4 but you don’t how much because you are not quite sure of the timing of this fab switched to production for sale?

Bertrand Cambou

That’s exactly right

Joseph Osha - Merrill Lynch

All right. Any senses to what, how you’re going to budget out 2008 at this point or it’s to early to discuss?

Bertrand Cambou

Yes. It’s a little early. I think, if I could be -- if I would had more clarity on Q3, I might even be able to tell you more about 2008. We’re going in a quarter at a time right now. It’s, you know the environment we’re in, so it’s kind of difficult.

Joseph Osha - Merrill Lynch

Okay last question then in all stop. Now you’ve got obviously your cash situation is fine this quarter, but organically you’re still, you kind in hold, what additional vehicles you have available, do you refer liquidity as the year progresses, is that largely, you got this $400 million revolver still?

Bertrand Cambou

I’ve got the 400 -- we've got the $400 million GE term loan, which is kind of like project financing on the equipment that we received in SP1, that’s why I said we have $400 million available, because it’s contingent on deliveries Japan. But I’ve got -- we've got that, plus we've got a $170 million worth of incremental revolver capacity.

Joseph Osha - Merrill Lynch

All right. And so the $400 million you haven’t drawn yet though, you’re saying…?

Bertrand Cambou

Correct, I haven’t.

Joseph Osha - Merrill Lynch

That’s contingent on equipments delivery, I mean the rest of your $170 million revolver is residual as well?

Bertrand Cambou

That’s correct.

Joseph Osha - Merrill Lynch

And in fact you’ll be at $1 billion in CapEx with the whole year. So, you kind of pull the lot of that into, to Q2, I guess points and that what is taken for access cash? Right.

Bertrand Cambou

Yeah, there’s only $230 million worth of CapEx left for the second half of the year. And like I said, we’ve got all and -- another $570 million of liquidity that’s undrawn.

Joseph Osha - Merrill Lynch

All right. Just assuring, I know the CapEx number or am I off the range there?

Bertrand Cambou

All that’s really going to depend on the at the end of the day. Its all going to depend on demand and affordability. So don’t know, yet

Joseph Osha - Merrill Lynch

Okay, very well. Thanks a lot.

Bertrand Cambou

Thanks Joe..

Operator

And that would conclude our question and answer session. At this time I would like to turn the program back to our speakers for additional or closing comments.

Bertrand Cambou

Thank you, very much.

Dario Sacomani

Thank you.

Operator

Thank you everyone for your participation in today’s conference. You may disconnect at this time.

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