Spansion (CODE)

Q2 2011 Earnings Call

July 27, 2011 4:30 pm ET


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

Shubham Maheshwari - Investor Relations

John Kispert - Chief Executive Officer, President and Director


Rajvindra Gill - Needham & Company, LLC

Atif Malik - Morgan Stanley

Krishna Shankar - ThinkEquity LLC

Delos Elder

Daniel Berenbaum - MKM Partners LLC

Unknown Analyst -



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Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Spansion Inc. Earnings Conference Call. My name is Francine, and I am your operator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Shubham Maheshwari. Please proceed, sir.

Shubham Maheshwari

Thank you, very much, and welcome to Spansion's second quarter 2011 earnings conference call. On the call with me are John Kispert, CEO; and Randy Furr, CFO of Spansion. We will be referencing a slide deck during the portion of today's call. You can download a copy of these slides from Investor Relations section of our website at, under Events and Presentation. There will be an audio replay of this call available by dialing 1 (888) 286-8010, and passcode 36022600. A webcast replay will be available on the company's website for the next 30 days.

Before we begin, please note the following Safe Harbor Statement. During the course of this meeting, we may make forward-looking statements regarding future events or the financial performance of the company. Such statements are based on assumptions as of the current date and may differ materially from our current expectation. We encourage you to review risk factors in our various SEC filings. The company disclaims any duty to update forward-looking statements.

With that, I will now turn the call over to John.

John Kispert

Thank you, Shubham. Good afternoon to everybody, and welcome to our fiscal year 2011 Q2 earnings conference call. I'll begin by highlighting our results and update you on the -- then I'll update you on the market and then finally, our strategy. Then Randy will give you the financial details for the quarter and the outlook for the third quarter, which ends in September. And then finally, we'll field your questions.

To begin, we continue to execute against our strategic priorities and maintain our leadership in embedded markets. At a high level, we achieved GAAP earnings of $0.40 per share and non-GAAP diluted earnings of $0.54 per share. We expect positive GAAP earnings per share -- we expect a positive GAAP earnings per share and for it to continue to improve the next couple of quarters.

Revenues of $299 million represented an increase of approximately 2% sequentially, and year-over-year with our core embedded business increasing about 12% over last year. We also achieved improved gross margins. And our cash from operations at the end of the quarter was approximately $48 million.

To date, we have spent $156 million of cash for approximately 11 million shares, at an average price of approximately $15. We also continue to have strong design win momentum, which I will cover shortly.

However, in Q2, we begin to see some demand weakness due a few factors. First, in our consumer segment, we saw demand slowing and we attribute that to the macro-global issues surrounding consumer confidence. And thus, spending in our consumer segments. These are segment such as digital TVs, digital cameras, home gateways, all these were impacted particularly in China for us, which is where most of the manufacturing for our customers takes place.

Second, in wireless, we saw a supply surplus developed throughout the second quarter, which impacted our margins. And finally, with the Japan earthquake, there was a lower automobile production due to shortages of electronic parts across the industry and an inventory correction happened towards the latter part of the quarter.

Currently, we are forecasting that these trends do not abate in the September quarter. I would add that although we anticipate the supply demand issues in the auto supply chain correcting soon, we don't anticipate seeing that business picking up till the end of September or maybe early October.

Overall, we have a clear strategy and are focused on continuously developing a track record for executing. We will leverage our strength as the leading memory provider for embedded and will be aggressive in our new product introductions.

Our market share continues to grow in embedded, gaining over 1 point from last quarter at approximately 38%, an increase of 8% market share from a year ago. We have a broad base of about 6,500 customers worldwide. I will now touch on some of the strategic announcements we made in the quarter in both our core specialty memory and in our licensing businesses.

In core specialty memory, we extended our foundry relationship with SMIC to expand our 65-nanometer capacity and to include the manufacturing of Spansion's 45-nanometer flash memory. This supports our strategy to meet customer demand for all of our flash products and our expanding roadmap.

And in licensing, as you know, we have put the Samsung litigation behind us. This was a significant milestone. Now that we have demonstrated the value of our IP, we intend to aggressively pursue additional opportunities to grow our licensing revenue by offering licensing to our patents, as well as to certain technologies.

For example, foundries are using various embedded flash technologies, which have limited scalability. We have a competitive and scalable technology that meets their needs.

Moving to new product development, which has been a big focus this year for defining our future product lines, we are starting to gain momentum with our new product platform. The GL-S flash memory. We entered production last quarter with the 1-gigabit and the 512-megabit products.

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