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

Executives

Bertrand F. Cambou – President and Chief Executive Officer

Dario Sacomani - Executive Vice President and Chief Financial Officer

Linda Rothemund – Investor Relations

Analysts

Analyst for Glen Yeung – Citigroup

Daniel Amir – Lazard Capital Markets

John Pitzer – Credit Suisse

Ryder Campbell – Barclays

Sundar Varadarajan - Deutsche Bank

Eric Reubel - MTR Securities

Joe Galzarano – Murray Capital

Spansion Inc. (SPSN) F1Q08 Earnings Call April 16, 2008 4:30 PM ET

Operator

Good day and welcome, everyone, to the Spansion First Quarter 2008 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Linda Rothemund, Investor Relation Spansion. Please go ahead.

Linda Rothemund

Good afternoon, everyone, and welcome to Spansion’s First Quarter 2008 Earnings Conference Call. Joining me from Spansion is Bertrand F. Cambou, President and CEO; and Dario Sacomani, Executive Vice President and Chief Financial Officer. Bertrand will talk about the highlights of the quarter and add some commentary around our wireless and consumer businesses. Dario will then provide more details on our financial performance in Q1, and Bertrand will conclude the call with the business outlook for the second quarter and fiscal year.

Before I begin today’s call, I will read the “safe harbor” statement. During this call, we will make forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding future capital spending, anticipated positive free cash flow, expected second quarter and full year 2008 net sales, future 65-nanometer MirrorBit products, reduction of outside expenses, and expected net sales from SP1.

Investors are cautioned that the forward-looking statements in this conference call involve risks and uncertainties that could cause actual results to differ materially from the Company’s current expectations. For risks that the Company considers to be the important factors that could cause actual results to differ materially from those set forth in the forward-looking statements, the Company urges investors to view in detail the risks and uncertainties in the Company’s Securities and Exchange Commission filings, including but not limited to the Spansion Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

This conference call, including audio and presentation slides, is also available on Spansion’s website at www.spansion.com. If you have not had an opportunity to review the first quarter 2008 financial press release, it is also available on our website. The audio replay of this call will be available for the next month. The replay number is 888-203-1112 and the pass code 6364185.

Now let me turn the call over to Bertrand F. Cambou, Spansion's President and CEO. Bertrand.

Bertrand F. Cambou

Thank you, Linda. Good afternoon and thank you for joining us. During the first quarter of 2008, the NOR Flash segment’s typical average 5% to 10% seasonal decline was magnified by a challenging business environment, in particular soft demand in Greater China. Despite this industry softness, Spansion’s intense focus on operational efficiency and manufacturing improvement minimizing the impact on our business, we improved gross margin year-over-year and believed that we have gained again market share compared with last quarter.

During the second quarter, we expect to complete our planned capital spending for SP1 positioning Spansion to achieve positive free cash flow in the second half of the year.

Now let me comment on the performance of our two main divisions: While net sales for Wireless Solution Division, WSD, went down 8% sequentially, we believe we outperformed the industry in this market segment and gained share in the quarter. As we have mentioned previously, a top priority for WSD is to grow our share of the world top handset OEMs. In line with that goal, we increased aggregate net sales to these customers compared to the previous quarter. Looking forward, our booking rate in those same account is strong and we expect to continue to increase sales of these customers.

Blended ASPs in wireless increased 7% from the previous quarter mainly due to stronger product mix. Wireless Division is now deeply engaged in the qualifications of multiple 65-nanometer MirroBit solutions, MirrorBit NOR and Eclipse, which are produced at SP1 and are ready for productions, or aimed for production the second half of ’08, as well as 65-nanometer MirrorBit ORNAND, which is currently in production.

Our second division, Consumer Set Top Box and Industrial Division, CSID, met its forecasted sales of $270 million due to better than expected seasonal growth in the America, Korea, and Europe with slightly higher blended ASPs. The strength in these regions was offset by weakness in China, in Greater China, and the expected Japanese gaming weakness market. We believe that we maintain a significant position in this segment.

During the first quarter, as a result of increased output at 525, the startup of SP1, a new testing capability, including wafer-level test, we reduced external foundry and subcontractor expenses by $52 million compared with Q4 2007. Expenses relating to wafer foundry services declined from 46% of total wafer manufacturing spend in Q4 to 33% in Q108. Our goal by Q408 is to continue to reduce our services to less than 20% for total wafer fabrication spend.

The ramp up of SP1 is on track and ahead of schedule with a run rate of more than 25,000 with the start to quarter. We realized our first sales from this facility in the quarter and we are exceeding expectations in terms of costs and yields. We are on track to organize full revenue at the rate of 2,000 wafers a week by the end of this quarter.

Before I let Dario present in the financial, I like to mention a couple of significant announcements for the quarter. But first the closing of the acquisition of Saifun Semiconductor: This transaction is going to allow us to enter the licensing business and strengthen our engineering team; and second we announced a strategic broad-based patent cross-licensing agreement with IBM, the first step in what we envision will be a long-term strategic partnership between the two enterprises.

Now let me turn over to Dario.

Dario Sacomani

Thank you, Bertrand. I’ll talk a little bit specifics about our financial performance for the quarter. Net sales for the quarter were $570 million, a decrease of 13% compared to net sales of $653 in the fourth quarter of fiscal ’07. In Q108, overall price per bit was up 11% versus Q4 of ’07. On a mixed adjusted basis, the price degradation was moderate at down 3%, and mix was favorable. As discussed on prior calls, normal price degradation is approximately 6% to 7% per quarter; therefore, the 3% in the quarter demonstrates stability in the pricing environment.

First quarter gross margin was 17% compared with 19% last quarter and 14% a year ago. Although our gross margin was generally in line with our expectation, the amount of cost expected for SP1 in cost of goods sold was actually charged to R&D due to the timing of product validation. This resulted in depreciation of $12 million versus the anticipated $25 million and an increase in R&D of approximately $15 million. Therefore compared to our expectations, the volume miss of approximately of $40 million had about 50% fall through to gross profit or negatively impacted gross margin by approximately 230 basis points.

Pricing favorably impacted margin expectation, partially offset by lower density mix, resulting in a favorable gross margin impact of about 100 basis points, of course the lower SP1 costs of $15 million had a positive 230 basis point impact on the gross margin. Compared to Q407, our gross margin is down 320 basis points; volume down $83 million in revenue cost us about 430 basis points of gross margin; price and mix about 340 basis points down in gross margin compared to Q4; SP1, although it was lower cost than anticipated, quarter-on-quarter cost us about 120 basis points; and these were offset by supplier pricing negotiations which favorably increased gross margin by 190 basis points and improved productivity and yield in our factories which saved us about 340 basis points.

R&D expenses were $120 million, which was higher than our expectation, and the delta was primarily due to the timing of production validations in SP1. Acquisition in process R&D charges are associated with the closing of the Saifun transaction and represent typical IPR and D levels for a purchase of this nature.

SG&A expenses of $65 million were slightly higher than expected due to some incremental legal expenses.

Interest expense was up $5 million from Q4 due to the $10 million capitalized interest adjustment we made in Q4. This quarter we booked about $5 million of capitalized interest, and this is the last quarter that we will be booking any capitalized interest.

Net income for the quarter was a loss of $118.5 million or $0.85 per share, including $12.7 million of acquisition-related charges which were not included in expectations. . .

Moving on to the balance sheet, DSOs were up slightly to 54 days from Q407 of 53. Days payable were also up slightly to 91 days from 89. Inventory days were 121 for Q108, up from 102 days in Q407. While it is normal for us to build inventory in Q1 of any year, business conditions this quarter resulted in inventory levels that were higher than we desired. This increase included the ramp of SP1, but was mitigated by significant reduction of foundry and subcon support. The inventory build was staged at dye [sic] as backend inventory drained giving us flexibility to divert product to a variety of different customers. We’re focused on reducing our current inventory level to improve cash flow from ops in the second half of 2008.

Cap ex for the quarter came in at approximately $227 million, up from $151 million last quarter, as we continue to spend on our SP1 facility. Approximately 75% of the CapEx spend in the quarter was for 65/45-nanometer development at 300-millimeter wafer diameter. At the end of Q108, our cash and short-term investment balances were $455 million, which included $121 million of auction rate securities. We continue to classify these investments to short-term with no impairment due to the solid AAA rating on these government batched student loans.

Net debt was up about $200 million due to additional borrowings of $130 million from our revolvers, $55 million from our GE term facility in Japan, and $50 million from a capital lease. Revolver capacity at the end of the quarter was approximately $102 million bringing total liquidity to $557 million, which is in line with our expectations. EBITDA for the quarter was approximately $52 million, down from $83 million in Q407, driven by the sales in margin declines.

Cash flow from operations in Q1 was approximately $56 million which compares to $14 million in Q4 of ’07.

The last comment that you’ll see on our balance sheet, you will see the Saifun balance sheet has been consolidated for Q108 as evidenced by the intangibles and goodwill added in the current quarter.

I’d like to reiterate Bertrand’s comment that we are intensely focused on cash management and profitability. We’re focused on maximizing cash which has allowed us to rapidly ramp SP1 to 2,000 wafers a week.

With that, I’ll turn it back to Bertrand to provide the outlook.

Bertrand F. Cambou

Thank you, Dario. It has been a long, hard journey in the last 2 years since our IPO. The consolidation of the NOR industry has been brutal. In spite of the constant unit growth, fierce competition has destroyed ASPs severely damaging the sector. Now this era of consolidations is largely over, only few corporations remain; and Spansion has gained substantive market share from about 25% to approximately 35%. Going forward, we see ourself in much more solid situations with lower ASP erosions, a good cost structure to pursue market share gain. We expect net sales to be slightly up in Q2, and then increase in the second half to put us in the $2.5 billion range in revenue for the year. We are particularly excited by the prospect in CSID and at the top cell phone OEM customers where we are getting share.

In the last 12 months, we also had to face the challenge of the overall crisis of the banking sector while making a major SP1 300-millimeter investment. As we speak, the spending, as we stated, with this investment is largely behind us and the ramp up is progressing well. We are now in the position to benefit from the only 300-millimeter factory in the NOR industry and to outperform our competitions on unit cost. In the second half of ’08, we believe that we are in a position to be free cash flow positive; and this is a major milestone for the Company.

Going forward, our focus will be on doing three things well. First, continue operational and cost management improvements. Second, ramp up of SP1. Third, to develop families of new product that are intended to reenergize our business and the north segment. This includes the new 65-nanometer and then 45-nanometer NOR, the Eclipse family that is combining NOR/ORNAND into a single dye, and more entry into memory such system for data centers which is expected to quadruple server memory without increasing energy consumptions.

I will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Well take our first question from Glen Yeung with Citigroup.

Analyst for Glen Yeung – Citigroup

Hi. This is Analyst for Glen Yeung. I wanted to ask about I guess start with China, so that was the source of weakness this quarter. Can you talk about how you see that potentially if it does come back in 2Q and if not in 2Q like how you see that potentially coming back for your handset business?

Bertrand F. Cambou

Yeah, we think Q2 is looking like well recovering. The issue of China was essentially due to a poor customer consumer spending during the Chinese New Year. That has been the subsequent of a normal ice storm in the southern China, and then the lower than expected revenues has been creating a soft March. But definitely the economy in China is strong; the consumer spending is strong. We see the Q2 becoming back to normal here, which means that as we far as we can see it, this (inaudible) of China was well understood and Flash inventory appears to be very low.

Analyst for Glen Yeung – Citigroup

All right, so as China comes back, help me then think about as I see pricing was up 7% blended quarter-on-quarter. I’m guessing some of that was due to (inaudible) in China not being there. Should I be thinking that pricing could be down a bit more than usual in second quarter as China comes back?

Bertrand F. Cambou

It is a fact that we launched it in Q1 of very high density. We have a 2-gigabyte ORNAND, a 65-nanometer out of SP1 in volume productions producing high-end MCPs or 19-nanometer and so on and so forth and we have a stronger mix that has been driven that. In Q2, we expect in those type of products to increase as well, which mean that the Chinese business is going to re-bounce somewhat, but we are still looking at the top OEM being very strong as well in the quarter, which we don’t see as a trajectory here some difference than what we are in Q1.

Dario Sacomani

Yeah, I was just going to add to what Bertrand said. I mean in the first quarter, the price degradation per bit was down 3% and so we continue to expect normal pricing degradation of 6% to 7% going into Q2, so we continue to anticipate normal.

Bertrand F. Cambou

Thank you, Dario

Analyst for Glen Yeung – Citigroup

Actually can I ask just one other follow-up? This was actually on, looks like you made a capital addition on a lease $50 million. Is that for SP1? Is that for the 45-nanometer? Can you give me any color around that? I was actually expecting a little bit higher capital spend in Q1, was the ability to get the lease, is that why it came in a little bit lower?

Dario Sacomani

Actually again, you’re looking at the $227 million of CapEx for Q1.

Analyst for Glen Yeung – Citigroup

Yeah, and then there was a $50 million, I see in a footnote, capital additions.

Dario Sacomani

Yeah, that was actually included in the $227. When you actually see the cash flow statement, it’ll be down by that $50 million and actually that was a piece of equipment that was for 45-nanonmeter development in the design center here in Sunnyvale.

Bertrand F. Cambou

Yeah, this is the (inaudible)…, the $50 million monster. We need it because right now we’re starting a process integration of the 32-nanometer and the 25-nanometer technology and actually we currently have (inaudible), but we needed an (inaudible), but this is the less generation here that is required for product line.

Analyst for Glen Yeung – Citigroup

Great. Thanks.

Operator

We’ll go next to Daniel Amir with Lazard.

Daniel Amir – Lazard Capital Markets

Thank you for taking my call. I mean just following up on the previous question here, a bit about June and kind of the second half, if you include the Saifun acquisition and you include the revenues that are coming from Saifun for the June quarter, it does suggest that your organic growth in June is somewhat flat or maybe even down. So can you a bit clarify the comments here that you think business is picking up, but it doesn’t really reflect much in your revenue guidance here?

Dario Sacomani

Well the Saifun revenue actually is anticipated for Q4 in the $4 million range, so it’s not really a big number in Q2.

Daniel Amir – Lazard Capital Markets

But you just guided to being flat to slightly up for June so… I mean can you maybe give a little more indication of what June is?

Dario Sacomani

All I was saying was I just wanted to make it clear that Saifun’s really not a factor.

Bertrand F. Cambou

We’re talking about the organic business to be flat to slightly up, of which you cannot the $4 million of Saifun.

Daniel Amir – Lazard Capital Markets

So maybe I’ll ask this question differently. If you look at the second half of the year, I mean you’re basically saying that you expect around $2.5 billion I guess for ’08 which is somewhat flat, that would suggest based on your guidance a second half that’s probably 30% over first half, in that range?

Bertrand F. Cambou

Exactly, and the reason…

Daniel Amir – Lazard Capital Markets

How do you exactly get there considering the past two quarters? I mean what’s going to make… What gives you confidence that we’re going to see a second half like that?

Bertrand F. Cambou

We have a couple of reasons. One of the reasons is currency coming with the market with a high density, high performance offering from SP1 that we didn’t have in the past. We are currently looking at the socket win at the major OEM that they essentially adopting that SP1, which is SP1 coming here is going to create an upside and that is a big traction for us. Now at the same time, you have to expect 10% seasonality of site. If you just look at the last 10 years, the second half is easily 10% to 15% higher. Then the third reason is currently in particular at the top five OEM, there are a couple of customers that was solely by our competitor that are currently adopting us and we have that demand on the book, and we are currently aiming to serve that. That is acquisitions of those three reasons that is making us the SP1 offering, the seasonality issues and the market share gain of this account that was not Spansion that the reason that we are guiding you that way.

Dario Sacomani

I just want to ask a question. Actually the second half at 2,500, I thought I heard you say 30%. It’s more like 15%.

Daniel Amir – Lazard Capital Markets

Well my reflection is the second half revenues over first half assuming maybe first half is around flat 570. So in order to get to your second half… In order to get $2.5 billion, at least $2.5 billion if not more, on your guidance you would more need second half of a first half in the high 20s.

Bertrand F. Cambou

Yeah, we understand. We believe, like we said, that Q2 are going to be slightly up and so on and so forth. But definitely what we are trying to tell you here is we currently have a disruptive second half with our new technology and the market environment around this.

Daniel Amir – Lazard Capital Markets

Just one final question then: Can you give just a bit visibility on kind of the op ex? So I guess now going forward it’s in the 180 million is for June. I mean so should we be looking at the R&D to be in the $120 million range going forward or is this changing or not?

Dario Sacomani

No, it’s about… Actually what it is is it’s about, it’s an expectation. Like I told you, we charged R&D this quarter with about $20 million worth of SP1 and so it’s going to go down to about 10 in Q2, but then you add Saifun of 7 and that’s pretty much the range of R&D.

Daniel Amir – Lazard Capital Markets

Great. Thanks a lot.

Dario Sacomani

Sure.

Operator

Next we’ll go to John Pitzer with Credit Suisse.

John Pitzer – Credit Suisse

Guys, thanks. Just really quickly some questions about the second (inaudible) quarter, what can we expect for CapEx in Q2 and I guess what would be the expectation from cash flow from operations? Then I have a follow-up.

Dario Sacomani

Well let me give you a couple of components. We’re expecting CapEx to be in the 170 to 200 million range, which is in line with what we talked about last quarter which is that the CapEx is significantly front end loaded. Depreciation for the second quarter is going to be about 160 million plus. We’ve got another $3 million worth of amortization.

John Pitzer – Credit Suisse

Then just relative to that CapEx schedule and I guess just expenses in general, are they all geared to kind of meet that mid to high teens half-on-half growth that you’re talking about to get to 2.5? I guess if that revenue doesn’t materialize, what kind of levers do you guys have on the cost side to try to ratchet things back and preserve some cash?

Dario Sacomani

I’ll make one comment and that is that although we have significantly reduced the amount of external manufacturing that we do, we’ve dropped that number significantly from where we were in Q4. But it’s still going to run us about $103 million in Q2. So that’s… For one, that’s a big lever that we’ve got.

Bertrand F. Cambou

Yeah, we still have quite a bit of valuable manufacturing built in which means that we have quite a bit of flexibility there. We have between in-house and external manufacturing instincts was to (inaudible) and we will reduce. We look also at risk factor here for the second half more on the commodity piece where actually we are very much dependent on things that we don’t control. But on the other hand, if we look at acquisitions with the top account where we are now currently very much entrenched, we feel that the (inaudible) has been essentially taking sockets away and being awarded the new phone on that particular piece. We feel (inaudible) less exposed to (inaudible). I also want to add here that we also quite diversified to all the top five which we’re not betting on of one them going up and the other one going down type of thing, so we are not balanced here and (inaudible) that’s on aggregate or risk of being spread. Now to add as far as risk mitigation here or CSID business has been a joy because it is a business here where we used to have small piece of Spansion and almost as big as wireless. In this particular segment, we have essentially diversify (inaudible) multiple segment at the top OEM and again we have a much. much better visibility on that one and the situations of that business is less which mean that due to the (inaudible) of our customer away from commodity and so and so forth, we have take some mitigation (inaudible). Back on your question here, we do have some variable in the system that we can actually exercise just that was to be softer than we think.

Dario Sacomani

If I could just add one other thing and that is that the capital’s behind us. I mean we don’t have a lot of scheduled capital coming into the second half. I mean we just did 227 in CapEx anywhere between 170 and 200 for Q2 leads us back to about $35 million a quarter in the second half. So we don’t have a lot of capital commitments which from my perspective creates a significant amount of flexibility.

John Pitzer – Credit Suisse

Then guys, just relative to the issue that cropped up in China in the March quarter, how confident are you that sort of the lack of sell through because of some of the weather conditions over there has clearly worked its way through the inventory and won’t have a residual effect into the June quarter? Then I have a follow-up.

Bertrand F. Cambou

What we did as far the Q2, we took a particular (inaudible) and we said that we are not looking at Q2 being driven by that particular region. So far all the probing we did is the Flash inventory as being quite low and the consumer spending has been quite solid which mean that we still believe that Q2 is going to be higher than Q1. Now we’re not betting and we’re not assuming bullish Q2 in China if that was the question.

John Pitzer – Credit Suisse

Then lastly guys, to date in general what’s been going on in the macro hasn’t had a real tangible impact on your ultimate verticals and I guess I’m kind of curious as how we should think about the macro relative to sort of your half-on-half growth and whether or not you guys have disconnected some of your expectations to be a little bit conservative on the macro front?

Bertrand F. Cambou

Like Dario said, right now we are in position here in the second half we are essentially not going to spend cash any more. It is going to be a very different company because please remember during the last year-and-a-half to 18 months we have been putting $1.1 billion last year of capital and we are going to do about $400 million in the first half of ’08; this is $1.5 billion. That has been creating a lot of risk, a lot of investment, installing all of that. Right now all of that is behind us. We have no more spending of significance anymore between now and the end of the year.

Now, on the macroeconomic standpoint, yesterday Intel announced and based on the reading we have -- we are not celebrating yet because we want to have the official award here -- but it seems that Spansion took the lead in the NOR business in Q1. For us, we find that is an incredible story because the Numonyx Intel-ST association quite recently was twice as big as we are. Now it seems that in Q1 they are smaller; we took the lead.

We think that on the macroeconomic standpoint those people are not capitalized; they are below us, which means below the critical mass and they have to go to an integration which we all know is painful because we went through that, as you know, between the AMD and Fujitsu days, we had to go through the blood and sweat of creating one company and we still have [inaudible] on our back on that one.

I know that our friends from Numonyx are going to find that creating one company is very disruptive and in this kind of macroeconomic environment here you have a corporation that is losing market share, that is going down, that is not capitalized, that don’t have 300 millimeter; where we have the opposite: we have a stable executive team, we have now made some drastic progress on our cost structure, we don’t have to spend cash any more. We don’t have to go to the capital market for raising money to build on our facility here which means that to one certain degree is the macroeconomics get to be tougher we think that we are going to be the company capable of taking advantage of the situation.

But that being said, believe me we are, with Dario, we are driving cost reduction and prudence and freezing recruiting and looking at all opportunity here. We shutdown a couple of design centers in Q1 for cost reductions. We had, after the merge with Saifun we had eight design centers in the company and we are now down to six. We are going to close more operations going forward which means that we are not assuming easiness and we are going to essentially go after costs to be sure that of we are in a situation we don’t spend money, we don’t spend cash and we start to cut and we are the powerhouse segment, we think that we are the one that are going to advantage of the macroeconomic environment.

Operator

Your next question comes from Ryder Campbell – Barclays.

Ryder Campbell – Barclays

A question or clarification on the CapEx guidance. Given the $50 million of your current capital additions was actually released, can you give us a little bit of color around what your plans are for future leasing of equipment and how that fits into your CapEx guidance? i.e. when you said less than $500 million of full year CapEx, so the $170 million to $200 million for next quarter, does any of that include or exclude your plans to essentially build out based on leasing now going forward?

Dario Sacomani

Not significantly. I mean, as we talked about before as it relates to liquidity, the front end loading of the capital puts a little bit of pressure on Q1 and Q2 before we get to free cash flow in the second half. All we’ve been trying to do with leasing it’s not, I wouldn’t call it a large component of our financing strategy going forward but as we go through if a good deal presents itself I am tucking it in just to increase our liquidity.

We just ended with about $557 million in liquidity and we need to keep that around $450 million to $500 million. So if there is an attractive deal to be leased we’ll take a look at it but it’s not becoming a huge portion of our financing strategy. I am just doing it to pad us through Q1 and Q2 until we get to the back half.

Ryder Campbell – Barclays

The $102 million of available bank liquidity that you said you have as of the quarter end, where is that exactly with respect to Spansion LLC versus Japan?

Dario Sacomani

Yeah, it’s actually both. In the current quarter we had $130 million of the combined revolvers drawn. We have about $140 million available to us in Japan in total of which we have $80 million drawn so we have $60 million more available in Japan and then we’ve got a total facility in the US of $92 million of which $50 million is drawn leaving us $40 million in the US. So, it splits. The open remaining splits 60/40 Japan/US.

Operator

Next we’ll go to Sundar Varadarajan - Deutsche Bank.

Sundar Varadarajan - Deutsche Bank

Just kind of extending that conversation surrounding capital and CapEx, now your guidance Dario for less than $500 million of CapEx, are you including this $50 million you did in lease as part of that $500 million or would it be a gross number of $550 million?

Dario Sacomani

No, I am calling it the $227 million is what I’m counting in the $500 million. That’s in fact why we put that on the back chart because no, I’m counting it.

Sundar Varadarajan - Deutsche Bank

So, is it fair to say that you had guided to about to $550 million at the end of the last quarter so that’s probably a $50 million net reduction in CapEx?

Dario Sacomani

That’s correct.

Bertrand F. Cambou

in fact we did exactly that; we reduced our capital and because we’re totally focused on cash and now we want to in the second half of the year we want to be sure in the current macroeconomic environment that we are not going to be exposed to any risk and we looked at cutting our spending even more.

Sundar Varadarajan - Deutsche Bank

The other part of that equation would be on your working capital side, obviously inventory went the wrong way. You were looking at the end of the fourth quarter at getting inventory days down to below 90; I think you were looking at a 80 target and that looks pretty difficult now but do you want to reset any kind of expectations in terms of where you can expect your inventory days to end up as you exit this year?

Dario Sacomani

Obviously like I mentioned, I think that the opportunity for cash flow from inventories really is going to be in the second half predicated on the revenue number that we gave you but I do think in that picture you probably end up not at 85 but you probably end up closer to 100.

Bertrand F. Cambou

I just want to make the comment here that as the CEO of the company, I am taking personally the issue of reducing this inventory. For multiple reasons we are where we are; we have strong Flash inventory. This is a good product, that we kept that die that is very flexible and now we are going to essentially look at that as an opportunity going into the second half of the year to be able to increase our revenues if the demand is there without spending money. Which means that to one certain degree that’s an opportunity and of course if the business was a bit softer we would not be as successful to reduce it, but then we will go to the other directions cutting subcontractors, cutting costs here and there to see how we can reduce the inventory from the other directions. At the end of the year we are going to combinations of using that inventory for upside or looking at ways to cut input costs even more to be able to reduce that number.

Dario Sacomani

To your point I think at the end of the day if we were to get the thing to 80 we’d be talking about taking $200 million into working capital and I think it’s probably under this revenue guidance picture it is probably more like $100 million to $120 million.

Sundar Varadarajan - Deutsche Bank

But what’s your normal kind of inventory levels do you aspire to maintain in the longer term? The 100 seems pretty big, right? I mean that’s a whole quarter’s worth of inventory?

Bertrand F. Cambou

We agree absolutely. Now as far as what is the right level is going to be a function of the environment and an oversupply allocation and so on and so far which means that it is going to be very much dependent also on the macroeconomics around us, but we agree with your statement.

Sundar Varadarajan - Deutsche Bank

Finally on the cost side clearly your R&D is running at like 20%, 21% of revenues right now. What’s the optimum level for you guys from an R&D spend as it relates to revenue? Granted some of that is going to change if you’re able to hit your revenue targets, but even given that $2.5 billion revenue target you are aspiring to it still seems like pretty high R&D spend.

You’ve talked about focus on costs, are there specific areas that you’re looking at? How exactly are you going to get your R&D expenses to be more -- I don’t know what the target is -- but more in the mid-teen type levels or in the 15% to 16% range which you’ve talked about before?

Bertrand F. Cambou

First of all to put things in perspective, a very significant piece of this R&D cost is due to the SP1 startup. Right now, for example, we are doing a risk start classified under R&D which actually is not R&D because it’s going to create sellable wafers. We think this is kind of a phase right now where when I was looking with my team here we currently have half a dozen of new products in that kind of phase of qualification in SP1 and which means that we’re kind of the peak of the spending.

Now that being said, the right level for me in my opinion, the 15% is too high and the model that we are aiming at is 10%. How are we going to get there? Like I said, we already shutdown two R&D centers in the quarter and we are currently looking at doing more. We’re going to reduce the size of our team. We stopped recruiting and we also are looking at moving some of our R&D to areas like China where we have cheaper facilities compared to our position so far where we are expensive. Which mean that’s definitely we are going to take some actions and we already are starting to cut this rate and the 10% is what I’m driving the organization to right now.

Sundar Varadarajan - Deutsche Bank

Can you give us some kind of a sense for where R&D expense should be per quarter when you exit this year?

Dario Sacomani

Well I’m just going to say if you look at where we are at today adjusted for this SP1 thing that we just did, just to make it real quick, like I said next quarter it’s in the 117 range when you include Saifun and that includes about $10 million from SP1 which I think on a normal run rate basis, Sundar, the amount of charges from SP1 to R&D for strict development is going to be about $5 million.

So just normalizing what I just gave you for Q2 it would be a 112. If you look forward consider that on a revenue number of like 650 or 700 I think that’s where you’re going to exit the year.

Bertrand F. Cambou

I don’t know if this is clear or not, but in Q1 we also got the Saifun acquisition and we took an R&D charge.

Dario Sacomani

It was in a separate line though.

Bertrand F. Cambou

That was a separate line?

Dario Sacomani

Yes.

Operator

Your next question comes from Eric Reubel - MTR Securities.

Eric Reubel - MTR Securities

Thanks for taking my question. Dario, in your press release you talked about shipping densities that were slightly lower than average for the quarter. Can you give us a sense of where the sweet spot of the NOR Flash densities are right now?

Dario Sacomani

Well between the two businesses today we are at like 110 megabit overall, but the sweet spot if you really go look at wireless, for example, I would say 128 to 512 is where we’re shipping the most. So wireless is definitely higher overall so obviously the mix of the two businesses has an impact on what the overall density is; but this particular quarter it’s in the 110 range.

Eric Reubel - MTR Securities

Looking to Q2, can you give us some color on between the two businesses CSID and wireless on how you see it? I’m getting a sense that you are feeling more confident about CSID growth and with flat guidance that maybe translates into slightly lower wireless sales for the quarter; am I reading that right?

Bertrand F. Cambou

No you are not. Actually, the way we are looking at Q2 right now we look at the two businesses as being in similar situations with opportunity to increase that is essentially the same in the two places.

If you look at the CSID like I was presenting, we were impacted in China as well and Japan in the quarter; it seems that right now we are going to improve the two at the top OEM as well. I would say that the two businesses appear to be in a similar situation as we enter Q2.

Eric Reubel - MTR Securities

Okay one more question on products if I can. Bertrand, you talked about multiple socket wins for Eclipse and 65 nanometer MirrorBit NOR. Can you talk a little bit more about those when you’d expect those to ramp up and what the risk is with those design wins?

Bertrand F. Cambou

Well as far as the NOR is concerned, we are looking at this quarter at the end of the quarter being the risk start which mean this is going to happen pretty quickly. The Eclipse is going to be a bit later on at the end of Q3, the beginning of Q4 because this is a new technology and it is going to take us a little bit more time essentially to get it qualified, and ORNAND is already in production.

Eric Reubel - MTR Securities

Just one more time on the revenue depreciation and gross margin for the quarter, on roughly flat revenue if you were to put an extra $10 million of depreciation into Q2 that gets you to a gross margin decline; is it fair to say that the improvement then comes from cost efficiencies of SP1 that you should be getting from at least a couple of weeks in the quarter?

Dario Sacomani

One other comment on that, Eric. The couple of things as it relates to the input costs, although the input costs of SP1 is in fact going to go up significantly we continue to reduce the foundry. I mean we are still forecasting slightly over a $100 million in external manufacturing support as I mentioned before, but that’s down from like $130 million this quarter.

So as it relates to total input cost as we continue to transition to SP1, we continue to cut external albeit still $100 million but it’s down again from Q1 similar to the fact that it was down in Q1 from Q4.

Eric Reubel - MTR Securities

one last question on inventory if you are running fab and still trying to get cost efficiencies and margin there, do we expect to see inventory again move higher in Q2?

Bertrand F. Cambou

Right now of course the Q2 inventory is going to be a function of the revenue we are going to achieve. If we look at the model of slightly up which is currently the way we are modeling Q2, that seems to indicate that normally the quarter inventories are going to be very similar to what it is right now. We have an opportunity however if we can do a bit more revenues to reduce it; but right now we don’t see inventory to be moving that much which means as far as inventory reductions is going to really happen in the second half of the year.

Operator

Your next question comes from Joe Galzarano – Murray Capital.

Joe Galzarano – Murray Capital

First you gave us three reasons why the second half would be certainly better. I just wanted to touch a little bit on that first reason where you have new product coming out of SP1 and oftentimes there is always a delay. I’m just trying to get how aggressive you are in the estimates for the second half. Did you take 100% of that potential happening on time or did you discount it?

I’m just trying to figure out again how aggressive you are in saying yes, that customer is going to come in, it is going to be perfectly on time, products will be shipped… or are you being a little bit more conservative?

Bertrand F. Cambou

That’s a good question, and actually we’re trying to because you are absolutely right, that traditionally you put your new product, the new product is always late because of things you never know and then your factory is a quarter, or quarter-and-a half behind what your wish is.

What we did very differently we are using a design methodology that is a platform and with this platform technology we essentially introduced multiple products in such a way that because we are now -- multiple product type of companies have been doing that. At the 90 nanometer, the 110 we have the leading product, debugging the technology on the leading product and then at a later date you have… this time we have a family of products, now ORNAND 1, ORNAND, the 2 gig is already in production and generating revenues, we have a family of ORNAND which is 512, 1 gig, 2 gig that is currently already qualified, up and running.

In the NOR space, we have 1.8 family and that one is already looking really good. We passed an [internal qual] as we speak which means we are able to have all the thousand hours, all internal quals have been done, we have been sending that to multiple customers and so far that is moving extremely well.

We also have a 3 volt NOR which already has been sampled, which already has been in the qualifications and is looking really good. Then we are going to have a new one like Eclipse and so on which is going to be a little bit more riskier here, which means that again, multiple product, all of these, some of them in production, already done internal quals which means that we think that because of that very hard work we are going to do better.

That being said, I am not going to sleep at night on that one because I know what that means for any kind of delays, which means that I went and I talked to Jim Doran, our Chief Operating Officer, and about a month ago I took Jim away from his job as usual. Jim has been asked to focus only on that product. We took the best, the strongest operating guy that we have in the company which is Jim Doran and we told him, “Jim, from now on you have nothing else to worry, but the SP1 success.” He is currently -- and he is a very nice executive, he is Chief Operating Officer, he is well known. He has been exposed to [journalists] a few times and he is kind of like the truck. I say that because he is [inaudible] but he is going straight line. Don’t stand in his way.

Between the methodology and the management changes and the focus of the company we think that is going to happen. Like I told you in my prepared remarks, at the end of the day we have three things: maniacal cost reductions and cost control and cash management; SP1 has to happen on time; and then we have to arrive with this new technology that needs to excite our business because the NOR business needs excitement and we’re not going to get it by just shrinking the die and making the same die.

That’s why this is the third focus of the company. Right now we are seeing some very, very positive reactions to our new approach. But I am totally with you, business as usual, a quarter delay is typical.

Joe Galzarano – Murray Capital

You discussed in the second half reducing inventory, that’s your main focus. Should we be concerned, especially since this would be higher than expected, should we be concerned that may have a negative impact on margins?

Dario Sacomani

Well, again like I said, I don’t think at the end of the day that we are going to get ourselves to what we had talked about before of 80 days. So therefore I wasn’t saying that we were going to be doing any thing to extreme measures to monetize so therefore no, I would say the answer to that is no.

Bertrand F. Cambou

Thank you very much for your time and your questions. Bye-bye.

Operator

That does conclude today’s presentation. We thank you for your participation. You may now disconnect.

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

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

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

Source: Spansion Inc. F1Q08 (Qtr End 03/30/08) Earnings Call Transcript
This Transcript
All Transcripts