Spansion, Inc. Q1 2006 Earnings Conference Call Transcript (SPSN)

| About: Spansion Inc. (SPSN)

Spansion, Inc. (SPSN)

Q1 2006 Earnings Conference Call

April 12, 2006, 4:30 p.m. EST

Executives:

Dr. Bertrand Cambou, President and CEO

Dario Sacomani, Executive Vice President and CFO

Bob Okunski, Director of Investor Relations

Analysts:

Ben Lynch, Deutsche Bank

Sean Webster, JP Morgan

Joseph Osha, Merrill Lynch

Randy Abrams, Credit Suisse

Glenn Young, Citigroup

Operator

Please stand by, we’re about to begin. Thank you for standing by and welcome to today’s Spansion First Quarter Earnings Conference Call. This call is being recorded and at this time I’d like to turn the conference over to Bob Okunski, Director of Investor Relations at Spansion. Mr. Okunski, please go ahead.

Bob Okunski, Director of Investor Relations

Thanks Wayne. Good afternoon everyone and welcome to Spansion’s First Quarter 2006 Earnings Conference Call. This is Bob Okunski, Director of Investor Relations here at Spansion. Joining me are Bertrand Cambou, CEO, and Dario Sacomani, Chief Financial officer. As for a procedure on this call, Bertrand will start out with a high-level view of the quarter 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.

Before beginning today’s discussion, I need to spend a few minutes reminding you of the Safe Harbor limitations of our discussions. 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 deployment of MirrorBit technology, expected second quarter sales, increases in sales of MirrorBit-based products as a percentage of total net sales, improving gross margin, increases in market share, and the company’s expectation to accelerate penetration of MirrorBit in the high-end wireless phone segment. Investors are cautioned that the forward-looking statements in this call involve risks and uncertainties that could cause actual results to differ materially from the company’s current expectations. For risks that company considers to be important factors that could cause actual results to differ materially from those set forth in these forward-looking statements, the company urges investors to review in detail the risks and uncertainties and the company’s Securities and Exchange Commission filings including but not limited to the company’s annual report on From 10-K for the fiscal year ended December 25, 2005.

Finally, a copy of the press release is available on our website and this wired call is being recorded for replay purposes and can be accessed on our investor relations website at www.spansion.com. A telephone replay will be available for seven days following this call and can be heard by dialing 888-203-1112 with the pass code 6014071. Now, let me turn the call over to Bertrand Cambou, Spansion’s President and CEO. Bertrand…

Dr. Bertrand Cambou, President and CEO

Thank you Bob. Good afternoon, thank you for joining us. For the first quarter of 2006, we recorded year-on-year improvement in most areas of the business including significant improvement in nearly all our key financial metrics. Revenue for the first quarter was $562 million, up $129 million or 30% versus the first quarter 2005. This reflects the large marketshare gain since the first quarter of 2005 as we leveraged our MirrorBit technology into high-density segments. To quantify this marketshare gain, we estimate that 84 million handsets shipped were powered by Spansion Flash Memory in the first quarter 2006, up from 54 million in the first quarter of 2005. Compared with the fourth quarter of 2005, revenue declined 5%, slightly better than typical seasonal patterns. Industry data for the first quarter 2006 is not yet available; however, we believe that we had a solid performance in the first quarter compared with the market. We recorded gross margins of 19%, representing our fourth straight quarter of improvement compared with 16% last quarter and 0% of the first quarter 2005.

The second improvement was in particular the result of increased MirrorBit deployment, which represented 35% of net sales of the first quarter compared with 30% last quarter and 14% a year ago.

At the current time, ASPs are stable and factory utilization is improving. Excluding our option expense of approximately $8 million for the quarter, our operating loss includes $8 million quarter on quarter, and this is despite the slight decrease in revenue, the result of our gross margin improvement. Let me now comment on our two major business segments.

The general embedded segment which includes consumer electronic, data communication, industrial product, PC peripheral, and other non-wireless applications benefitted from an increase in unit shipment and relatively stable ASPs year over year.

Sequentially, revenue increased compared with the fourth quarter ahead of the seasonal trend. The revenue improvement in this segment was sequential year over year as a result of increased customer acceptance of high-density MirrorBit across multiple applications. We are very excited about our general embedded business segment due to its diversity of application and potential stable growth.

On the wireless side, both the Christmas holidays and Chinese New Year shortened the expected shipping window to OEM impacting slightly shipping potential. In the first quarter our customership was a great percentage of mainstream phones compared with the fourth quarter. While total units shipped to this customer were flat quarter on quarter, these mainstream phones kept the average density of Flash content to phone flat with slightly lower ASPs resulting in a slight decrease in revenue. With flat unit shipment into a seasonally smaller handset markets, we believe we gained marketshare in the wireless segment.

Looking forward, we believe that there will be a continuous trend in the handset market where our customers are increasing their shipment of media rich cellphones while further penetrating the emerging market with basic handsets. We are well positioned for this bifurcations as well leverage single technology to address both markets, a MirrorBit NOR for entry level phones and a MirrorBit ORNANDD for more feature-rich, media enabled handsets in what we believe to be stronger for the wireless industry.

Let me now switch to some status on the products and customers. During the quarter, we announced a number of significant “supply of the year awards? from strategic customers including Cisco, Siemens, BenQ, Samsung, and Lenovo, all major players in their own field and regions. We remain committed to providing total customer satisfaction and to leverage this is as a competitive advantage.

On the product development front, we have already started manufacturing of our 90-nanometer MirrorBit product in Fab 25 due to a very positive response from our customer. The three new 90-nanometer MirrorBit product families include the 3 Volt 1 Gigabit MirrorBit NOR solution for the general market, the MirrorBit ORNANDD solution for the general and wireless market, and the high-performance, low-power 512 Megabit MirrorBit solution optimized for the wireless market. Customer interest in our 90-nanometer MirrorBit ORNANDD product has been strong to date, and in response we already started to ramp production in March. Our field engineering teams are actively seeking qualification for all three 90-nanometer products in multiple sockets as we speak, in preparation for large deployment in the second half of this year.

Also, our 65-nanometer MirrorBit program is on track to sample by year end and we expect MirrorBit ORNANDD to be the first product to ship at the 65-nanometer node first targeting the wireless space.

Spansion has recently achieved a major milestone in the development of our 4-bit cell MirrorBit technology. We plan to sample customers in the second half of the year.

During the first quarter, Spansion signed an important strategic agreement with Qualcomm, where Qualcomm plans to prevalidate Spansion’s MirrorBit NOR and MirrorBit ORNANDD Flash Memory solutions for selected reference designed platforms. Through the Qualcomm collaboration we will be able to offer customer-compatible memory solutions that help streamline the development process for handset design and speedier time to market.

Additionally, we signed another important strategic licensing agreement with ARM as we progress with our system on the chief strategy. We have licensed the ARM processor, a very efficient core, with competitive die size into our technology to integrate with Spansion Flash Memory on a single die. The first application for the ARM core would be Spansion’s MirrorBit high-density SIM, a solution that leveraged logic on Flash capability to deliver added value solutions that enable innovation end products in the wireless market. With MirrorBit high-density SIM, SIM card manufactures can provide 1000 times the current storage capability and deliver new solutions for managing distribution of mobile content, securing delivery of application, and protecting digital right management. With that, I’d like to turn the call over to Dario Sacomani, our CFO to discuss our financial performance in greater detail.

Dario Sacomani, Executive Vice President and CFO

Thanks Bertrand and good afternoon everyone, thanks for joining us today. I’d now like to review the specifics of the financial performance for the quarter. The first quarter total net sales were in line with our seasonal expectations as we recorded solid year-over-year growth. Specifically, net sales for the quarter were $562 million, up 30%, or $129 million versus the first quarter of 2005. Geographically we saw a traditional seasonal pattern with holidays and shutdowns across most regions in the Far East, primarily in the handset segment, which was consistent with our outlook for the quarter.

Retail ASP for the quarter was down 4% compared with last quarter, in line with our forecast and compares with the decline of 17% in the first quarter of last year. This year we did not see the usual level of price erosion due to a robust and market demand and rapid customer acceptance of our new products. Gross margin rose for the fourth straight quarter to 19% compared with 16% in the fourth quarter and a 0% gross margin in the first quarter of ’05. As we recorded higher sales of more profitable MirrorBit products, improved factory utilization and rationalized our final manufacturing capacity. Research and development expenses were $85 million and that includes $2 million of option expense in the quarter compared to $76 million last quarter.

R&D costs rose in preparation for the high volume ramp of our 90-nanometer MirrorBit products, the coming transition to 65-nanometer, and increased depreciation on 45-nanometer 300-mm development tools. As a percentage of total revenue, R&D expenses were up to 15% of net sales versus 13% last quarter. We anticipate that R&D expenses will rise slightly during the second quarter, though remain steady as a percentage of total revenue as we continue our emphasis on these key initiatives.

The first quarter sales, marketing, general and administrative expenses were $62 million, again including $2 million of option expense in the quarter compared to $55 million in the previous quarter. The first quarter of 2006 was Spansion’s first quarter as a standalone company with the added cost of legal and IT necessary for operating independently. During the quarter, we successfully completed our SAP business system separation, which was a major undertaking. It was executed on schedule and without incident. This will allow us to improve our planning and reduce costs in the future. For the second quarter, we anticipate costs will be in the 10-11% of revenue. Our first quarter operating loss of $38 million was an improvement over the fourth quarter ’05 on slightly lower sequential sales if you exclude the $8 million in option expense. This performance is definitely heading in the right direction. We see opportunity to continue this improvement throughout the year with the target of reaching profitability sometime in the second half of 2006.

Net interest expense of the quarter was $13 million, up from $11 million in the fourth quarter and lower than expected as we used some of the proceeds from our IPO to pay down some of our short-term GAAP and recorded interest income on our short-term investments. The second quarter net interest expense will be in the range of $12-13 million.

The first quarter net loss was $52 million including the option expense compared with $109 million in the first quarter of 2005, which didn’t have the comparable option charge in it. The first quarter loss per share for the quarter was $0.40 versus $1.50 loss per share in the comparable year ago quarter.

Turning to the balance sheet, as anticipated at the end of the first quarter ’06, our cash and short-term investment balances were $450 million. We used a portion of the proceeds from the offering to improve our debt-to-equity ratio from 40% to 34% and lowered our overall liabilities, primarily our year-end payables to AMD. In addition, we have approximately $230 million of unused borrowing capacity in our credit facilities. In the second quarter, we expect net debt to increase $110 million. We will continue to focus on improving our capital efficiency and as we approach our targeted profitability, cash usage will decline.

Account receivable was $411 million; that is down $7 million from the fourth quarter of ’05 with DSOs for the quarter at 67, which is up from 64 days last quarter. We anticipate the DSOs for the second quarter will return to 64 days. Days of inventory on hand rose to 96 days, up from 84 days in Q4 as we increased inventory by $16 million to replenish our draw down in the fourth quarter of ’05 and in response to strong booking in the first quarter. We anticipate the days of inventory will be around 88 days in the second quarter.

Our first quarter payment to AMD drove days payable outstanding to 64 days, down from 76 days in the fourth quarter of ’05. Finally, the first quarter capital expenditures were approximately $135 million for the quarter in line with our expectations. This spend was to support our ramp to 90-nanometer and transition to 65-nanometer as well as our 45-nanometer 300-mm initiatives and equipment for final manufacturing. CapEx estimates for 2006 remain unchanged at $650-800 million.

Depreciation for the quarter was approximately $131 million. Now I’d like to turn it over to Bertrand to discuss our expectations for the second quarter. Bertrand…

Dr. Bertrand Cambou, President and CEO

Thank you Dario. Let us now switch to forecasts specifically for the second quarter. We anticipate revenue to be up and in the range of $590 million to $620 million range. We expect further penetration of MirrorBit into the high-density general market and into new generation of cellphones utilizing our latest MirrorBit NOR and MirrorBit ORNANDD solutions. We are observing an overall strengthening in the Flash market environment and we intend to capitalize on this trend.

Switching to our outlook on gross margins, the overall strengths in the market combined with further adoptions of MirrorBit will drive top line growth for the second quarter. At the same time, we will continue to invest in the ramp of 90-nanometer and position ourselves for 65-nanometer for year end. Financially, those two competing factor will balance each other. Therefore, we expect the second quarter gross margins to be above the equivalent to the first quarter 2006.

In relation of the balance of the year, the company remains on track to reach profitability in the second half of ’06, and we anticipate the penetration of MirrorBit will continue to grow and cross the 50% mark sometime this year.

In closing, our first quarter performance shows that the MirrorBit strategy is working allowing us to gain significant market share and improve our financial performance. Key focus for the second quarter is to translate our 90-nanometer ramp into revenue, continued with the hard work in securing design wing for MirrorBit ORNANDD, maintaining technology development of 65 and 45-nanometer nodes, continue options on controlling expenses, operational excellence, and capital efficiency. With that, I’d like to open up the call for questions.

Operator

Very good, today’s question and answer session will be conducted electronically. If you’d like to ask a question, you may do so by pressing the “*? key followed by the digit “1.? And if you’ve been utilizing your mute button you want to make sure that’s disengaged. We’ll pause just a moment to assemble the question roster. Once again, “*? and “1? for a question.

Our first question comes from Glen Young with Citigroup.

Glenn Young, Citigroup

Thanks, good job everyone. I have three questions this afternoon. One is, you had issues at the backend at the end of the fourth quarter. I wonder if you could talk about what progress you’ve made there and how that looks as we move into the second quarter. The second question is, we’ve seen very good progress in gross margins, looks like, as you say, it is flat in second quarter. I wonder if you could break down between what’s driving those margins between MirrorBit growth, better utilization, and the cost you talked about 90 and 65. And the last question is, any thoughts you have on bits-per-phone as we move into the second quarter?

Dr. Bertrand Cambou, President and CEO

The backend situations: We had severe issues in the fourth quarter and that has created some kind of an inventory drain. We had to tap into everything we had to meet the demand. As a result of that, we started the first quarter in the hold. We had to essentially catch up, and as you know the first week of the quarter was kind of a dead week anyhow because it was the week for us between Christmas and New Year, and we had made a lot of progress during the quarter putting the right equipment in place, and as you saw during the quarter we were able to catch up and we in a great position to grow. Going forward, we have what we think is in place to grow as I gave in the guidance in a significant way here, which our team at the backend I have to thank them for recovering what was a very tough situation, and now we believe we’re going to turn that into a competitive edge and we’re in a much better situation. However, to be transparent here, the demand is very strong right now and I’d like to have a bit more capacity and the team is as we speak looking at getting more ____and squeezing more here and there. The demand is not getting lower as the bar is being raised, but we are making progress here.

Now, as far the guidance for the second quarter, as you know, the key for success is the switch to the 90-nanometer high-volume in the second half in the year and to be prepared for the 65. As we are now looking at perhaps a quarter difference between the investment in the far end, the materialization of it, second quarter is the quarter here as you see where we have…in spite of the fact the revenues are growing and we are doing more MirrorBit, we also have to put what we think is in place to have a very strong second half of the year in taking advantage of the strength of the market and the acceptance of the 90-nanometer, which means that we essentially ask our manufacturing team to be ready and as we look at growth factor here, it looks to be about the same. That’s way right now it’s hard to call a prediction here and it going to be about the same, and that’s based on the current outlook.

Now, as far as the bit performance, this is what we consider extremely good news because usually what you have, Glen, is during the holiday season a lot of media reach, fancy phones on the market and people are going to buy as gifts, and when they start in the first quarter they are bit more sober in their taste, where you always have some kind of at least the pros on the new IDs, the new phones into the first quarter that we observed. I think the bit performance did not decrease, it was just opposing a bit this quarter, but I can tell you that between now and the end of the year this is all going up, because all the new phones that are currently under design have an increased appetite as far bit per phone and functionalities, and every OEM maker right now wants to gain market share against each other and they are developing some very ambitious new generations of phone, and we in turn obviously with our higher density NOR and ORNANDD want to capitalize on that. We see the trend this year to be very, very sold on the bit performance.

Glenn Young, Citigroup

Very good, good job again, Bertrand.

Operator

The next question is from Randy Abrams with Credit Suisse

Randy Abrams, Credit Suisse

Yes, good afternoon guys. I wonder if you could expand on that a little bit on the bits-per-phone. This quarter you said there’s a shift to more mainstream handsets but did get strong incremental margins. With bits-per-phone starting to increase over the next few quarter, maybe you can explain why we don’t get more gross margin followthrough as we get this quarter with the low-end mix?

Dr. Bertrand Cambou, President and CEO

Definitively, Dario and I are guiding you that we are still aiming at being profitable sometime at the end of the year, which means the gross margins are going to increase, which means the fundamentals is in place. The second quarter is a quarter of transitions where we are going to essentially be very serious in putting volume production of 90-nanometer, and like all of you know when you have factory that switches to a new technology you have some kind of a lack of efficiency for a few weeks, and this is what we have built into our model, which in this model here you see some kind of opposed bit as we are switching to the 90-nanometer, and then as we’re going to load into 90-nanometer, 90-nanometer have better margins than 110-nanometer, and we are going at the second half of the year with attractions that we will be building on our model here.

Randy Abrams, Credit Suisse

Okay, and if you could talk a bit from 84 million units, looks like you get about 40% share in handsets, could you talk about whether you still seek further gains across overall handsets, and then for high-end, high-density handsets where do you think your share is and where could that go?

Dr. Bertrand Cambou, President and CEO

As far as the marketshare, I don’t have the industry results for first quarter. As you know, it is not available yet, it’s gong to probably be available early May, but definitively this 84 million units is a good achievement for us. The trend is behind us and what you can see here is the success that we had in penetrating the space and in particular the high-end phone where we were not present a year ago. We believe that not only in the mainstream flow but on the high end we are currently starting to have a higher level of participation. And going forward during this year, the strategy is such that we have the ambitions to grow this number of units. We think we have an opportunity to do that. The portfolio is now stronger, which means that the strategy going forward is we think we have an opportunity to continue the progression during the year.

Randy Abrams, Credit Suisse

Okay and may just a last question on turning the production, if you could talk about how much revenue or may be it’s a bit you can get from existing FABs before 300-mm ramps, which provided some timing for ___starts to provide buffer capacity?

Dr. Bertrand Cambou, President and CEO

We have a lot of opportunity to squeeze much more of our factories. The first is, right now we are still running in Fab 25, we are still running a lot of floating gate 110. Just to switch that to 110 MirrorBit is a great enhancement, and then to 90-nanometer is another great enhancement, and then to 65-nanometer and Fab 25 is another great enhancement, which means that if you look at the Fab 25 story, it’s kind of a great opportunity for us with an existing asset to increase shipment and revenues with, quite frankly, very modest incremental investment and that is going to offer us great opportunities. Now in JV3, which is our advanced factory in Japan, that factory right now is ramping up. We are squeezing more equipment there, more productivity, and we’ll also have an opportunity with again a very modest asset here to have JV3 ramp up, and we think that is sometime in the beginning of ’08 where we are going to be in a position of having a new thought up and running, and that’s kind of the type of the horizon we see, which is going to be at the next technology note and giving us a lot of buffer. Now on the question of TSMC, this quarter we are going to start the first step. We’re now doing very well with TSMC, the qualifications are doing well, they did a good job to take over MirrorBit technology, which means it’s going to be small in the second quarter, but quite frankly in the fourth quarter it’s going to be significant and giving us an opportunity to capitalize on the very strong market that we have around us.

Randy Abrams, Credit Suisse

Okay, thanks a lot guys.

Operator

And we’ll next go to the Joseph Osha with Merrill Lynch.

Joseph Osha, Merrill Lynch

Hi guys, congratulations. One or two questions. For starters, in terms of the cash levels here, I see we dropped to sort of around $400 million and change, what is your thought in terms of cash generations,. you said by the third quarter you’ll be generating enough cash flow from operations to cover capital spending requirements and also debt repayment?

Dr. Bertrand Cambou, President and CEO

I’m going to let Dario give you more details, but what I would say is obviously -- “What we presented to you and now you did a good job,? to summarize it was more or less part of the plan, and we elected to run the company that way, and going forward the key here is to reach profitability to stop the drain, which we expect to do later on this year.

Dario Sacomani, Executive Vice President and CFO

I agree with what Bertrand said. I mean, we had a net debt increase in the first quarter of about $165 million and like I said in my commentary we expect that to be around $110 million on the second quarter, and I think as we go forward and start reaching our margin goals and our profitability target, we’re going to see that continue to decline and of course at some point in time start generating.

Joseph Osha, Merrill Lynch

My question is, let me put it you perhaps another way Dario, what’s the minimum level of cash that you think you need to run this company before maybe it gets a little close to bone and think about alternatives, $100 million, $300 million?

Dario Sacomani, Executive Vice President and CFO

I’ll be honest with you I haven’t gotten all of the details with respect to the cash management, but quite frankly it’s not a very difficult footprint that we’re dealing with. I mean quite frankly I think there is more investigation for me to do, but I would say that $100 million of cash on the balance sheet is probably enough to operate with.

Joseph Osha, Merrill Lynch

Okay that’s helpful, and then can you give us a little more color, Bertrand, on ORNANDD and what particular way in terms of customers perhaps we should be looking for thinking about?

Dr. Bertrand Cambou, President and CEO

ORNANDD, we have an internal qualification and we got some very, very good solid results to the point that we committed manufacturing volume to ORNANDD, and we also received very encouraging results from customers, which means that altogether this project is rock solid and the first part that’s creating a lot of interest is obviously as a NAND replacement, and the first usage is going to take an existing phone with NAND and replace that with ORNANDD, and that is obviously something that’s important for a customer because ORNANDD first of all is a solid power, they like it, we’re competitive on price, and they like to diversify their supplier. Perhaps even more exciting here is we’re currently not designing phone but we do a combo between a NOR MirrorBit and ORNANDD MirrorBit, and that one we’re looking very actively on centralized circuits here, and we expect to see that perhaps a little bit later on because it’s a bit more complex to design, but we’re pretty close.

Now, as far as the geography today, the bulk of the activity is in the Far East, between Korea and Japan. This is where we have lot of activity because in these regions the trend to use phones, which is a more media rich phone, and they kind of see ORNANDD as being a good technology for them. However, one thing to notice, several Western companies are currently taking a very serious look at the technology and we expect to have them adopting it. However, it will probably be at a slightly later date. Now that being said, we also are looking at size 12 Megabit ORNANDD as being a very interesting offering in a country like China, and this is a place where they want to have multimedia but they don’t want to pay too much, and size 12 ORNANDD which is also the development that is doing very well is creating a lot of interest in the China, or the OEM has actually wanted to do business in this part of the world, which means that that is going to be another interesting development for us on ORNANDD. Altogether, again, qualification is done, looking solid, starting production, we expect to build this quarter up, and the deployment is happening on multiple fronts.

Joseph Osha, Merrill Lynch

That’s beautiful. Last question, what’s the ’06 CapEx number we should be using, $650 million or so?

Dr. Bertrand Cambou, President and CEO

Unchanged, same guidance like the last quarter.

Joseph Osha, Merrill Lynch

Okay, thanks very much.

Operator

Our next question comes from Sean Webster with JP Morgan.

Sean Webster, JP Morgan

Good afternoon, nice work on the gross margins. Some clarification on the gross margins. If I back out options expense, do I assume that there’s another $4 million sitting in costs to goods sold?

Dario Sacomani, Executive Vice President and CFO

Yes there is.

Sean Webster, JP Morgan

And then for the second quarter outlook, you’re think it’s going to be modest due to…it sounds like factory startup and research costs, when should we expect those to start rolling off, those incremental costs?

Dr. Bertrand Cambou, President and CEO

The third quarter.

Sean Webster, JP Morgan

So, it’s a second quarter temporary thing and then they pull back?

Dr. Bertrand Cambou, President and CEO

The second quarter is exactly the quarter we have to physically change the stuff from one line to the other one, and that’s happening in the second quarter. Between the beginning of the second quarter and the end of quarter, we are going to essentially change the mix of Fab 25 quite significantly. Then, we’re going to keep doing that in the third quarter at a lesser extent and then in fourth quarter we’re going to be more on the plateau regime.

Sean Webster, JP Morgan

Also, so, assuming stable pricing and mix, then we should begin to see more margin uplift in the third quarter because that spending will disappear, is that correct?

Dr. Bertrand Cambou, President and CEO

Exactly.

Sean Webster, JP Morgan

Can you talk about your book to bill and lead times?

Dr. Bertrand Cambou, President and CEO

What we elected to do this quarter is as you know in the previous quarter we did not give you the guidance on revenue and you saw that this time we elected to give you more transparency, to give you more help in terms of guidance in revenue, and obviously we are predicting quite a good significant growth to the second quarter, which is a result of a strong backlog and strong book to bill. The market is strong across the board and all solutions seem to be well accepted right now. We have a good pricing environment. We think that the cost structure in line to the market, which will actually take the business to pretty favorable terms. Altogether, on the progress chart then point, we had a strong first quarter.

Sean Webster, JP Morgan

Okay, and then on your utilization rates, do you expect those to go up in the second quarter.

Dr. Bertrand Cambou, President and CEO

On the utilization rate what we have right now is we’re more or less using what we have, and what we need to do is to make the asset more productive, which means essentially converting to MirrorBit and converting to 90-nanometer, because right now if you take Fab 25 is running floating gate 110-nanometer, which is kind of an old technology and it’s essentially making the asset not productive as much as we have built to build, which means there are opportunities to keep the same asset to make them more productive. The utilization is fine right now, we have essentially a running capacity here.

Sean Webster, JP Morgan

Are they’re fully utilized?

Dr. Bertrand Cambou, President and CEO

They’re fully utilized, but like I said, the technology like in Fab 25 that we’re using here, the floating gate die that we have is too big and that’s why we have to convert it to MirrorBit and to 90-nanometer here.

Sean Webster, JP Morgan

Okay, and what do you expect your mix of MirrorBit to be exiting 2006?

Dr. Bertrand Cambou, President and CEO

A hundred and fifty percent.

Sean Webster, JP Morgan

Okay, thank you very much.

Operator

We do have time for one last question and that is from Ben Lynch with Deutsche Bank.

Ben Lynch, Deutsche Bank

Yeah, hi guys thanks for taking the question. First one, maybe this is for Dario, in my opinion the cash balance is quite low, obviously you don’t agree if you think $100 million buffer is sufficient. Could you give some color on where you expect it to be at the end of the second quarter. There are definitely like for the first quarter some elements which are predictable and there are other elements which are unpredictable, can you give us a little bit more color on that, and I do have a couple other questions?

Dario Sacomani, Executive Vice President and CFO

Sure Ben. Like I mentioned in my commentary, I quoted it as a net deck and I mentioned that we do have about $230 million of unused credit facility, so whether it comes out of cash or whether it’s used from the credit facilities we expect that the net deck will increase by about $110 million in the second quarter.

Ben Lynch, Deutsche Bank

Okay. Bertrand, you mentioned based on your volumes you think you gained cellphone share in the first quarter, how can you be confident that it’s that and not in a tight environment you’re actually shipping into inventory?

Dr. Bertrand Cambou, President and CEO

First of all I never said the first quarter result is not available yet and I was kind of thinking that we had a solid result. I’m going to analyze that in detail. I know that year on year we gained a lot of market share and that has been the comment I did. Now, as we’re looking at the customer inventory, the customer-to-customer end usage here, quite frankly we’re constraining them right now. They want us to produce more, the demand is very, very strong, we know that their inventory in many phones is pretty minimum here, which are thing that we don’t have, anything else but the strong end cellular phone market here.

Now, if allow me to also make another comment, because there’s another purse of the market that we have is with the general market. And in the case of the general market, one of the opportunities that we have is the high density so far as being a space that we’re being under-represented. and last year the focus we had was to essentially come back into the wireless space. In 2006, we are going to have a very, very strong push into gaining market share into the high density general market, and that’s what we saw because in the first quarter in the embedded market the absolute ___went up, and we had a heck of a quarter in the first quarter in the general market and we think that going on in 2006 this is pivotal to our strategy where we are going to not only keep walking on gaining market share on the handset but we’re also going to have an opportunity to diversify into a high-density general market where we have a very, very strong portfolio right now and strong customer support. I just talked about the customer award that we had in the general market and they are big names, and they definitively represent for us a great opportunity for 2006.

Ben Lynch, Deutsche Bank

Okay thank you and then the last question I have, you guys reiterated in the press release I guess the expectation or plan to be break even in or during the second half, second quarter specifically you’re guiding up revenues a lot, unfortunately gross margin is flat, OpEx percentage seems to be sort of flattish as well. So, it doesn’t sound like the loss will be much better than in the first quarter, could you get a little bit more concrete on what you think is going to flip around specifically in the second half to get you to that break even. I know you sort of referred to some of the spending disappearing, but what’s the assumption on how much revenue growth you’d need to do that, how much you can cut absolute expenses. It doesn’t seem like you’re on track to do that and OpEx may be in the cog’s line, if you can be just a little more concrete, there’s a long way to go from where you are in the first quarter and guiding to second quarter to break even?

Dr. Bertrand Cambou, President and CEO

Clearly right now, we have made the investment for 90-nanometer, we have made the investment of ORNANDD, we have made the investment of all those new technologies and products and you see the expense of it. The second half of the year is where that stuff is going to turn into an upside opportunity for the company, and we think that we’re exactly on time, in fact we are proceeding in many cases ahead of schedule to be able to get a large customer acceptance in the second half. We also have an opportunity to switch from floating gate to MirrorBit then giving us more capacity and as we transition from one technology to the other, let me give some coloring here, because you need to appreciate it. Every time you have new products, you have to go and qualify your product, you have to qualify that to your customer, in many cases you have to give some pilot for free. There is a cost of switching customer to a new technology and we are in the midst of it. If you look at first and second quarters this is clearly what we’re currently doing here and we think that we are going to end the second quarter with customers populated with our solutions, essentially allowing us to turn that investment into the profit that we’re guiding you.

Now I want to highlight the comment of what Dario said. I don’t want to drive a misunderstanding about our cash management here. It’s not because Dario said that $100 million is enough that is our objective, but we are going to have very, very prudent cash management, we are taking actions, and we definitively understand or have the ability to curb those curves down. I want to give the last example of what we think that has been an achievement that perhaps we never had an equation on that one today so far, but I want to come back on that, it’s the SAP environment. For the one who is familiar with what that means, switching from an AMD IT SAP environment to our own Spansion environment is a massive overtaking, and we did one, we swallowed that one, and that is a huge, huge transition, because what we were doing is we were paying service level agreement to AMD to get access to their IT environment while we were investing in our at the same time. Again, in the second half of the year, that is going to go away. We’re going to have our own IT environment, and I can go down the list as far as the prudent cash management here, but we are making these type of transitions, there is obviously the cost associated with it, but we are committed to deliver financial success, we see it’s an environment that is exciting, the market is strong, our technology is very aggressive, is very competitive, and we’re convinced that we are fundamentally gaining market share, which means that’s why we have such an exciting guidance for the last part of the year.

Ben Lynch, Deutsche Bank

Thank you very much.

Operator

And with that, we will close out the Q&A session, I’d like to turn the conference back to Bertrand Cambou for any additional or closing remarks.

Dr. Bertrand Cambou, President and CEO

I appreciate everybody’s time. Thank you very much.

Dario Sacomani, Executive Vice President and CFO

Thank you.

Operator

Thank you and this does conclude today’s conference call.

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