Spansion Spanked by Falling Chip Prices

SAN FRANCISCO -- Spansion ( SPSN) suffered a much larger-than-expected loss in the third quarter, as plummeting prices for its flash chips ravaged the company's bottom line.

The company said it killed off its least profitable business in the third quarter and vowed to aggressively cut costs even as it warned that sales in the current quarter will fall short of Wall Street expectations.

The Sunnyvale, Calif., chipmaker posted a net loss of $118.7 million, or 74 cents a share, vs. a net loss of $71.6 million, or 53 cents a share, at this time last year.

Analysts expected Spansion to lose 52 cents a share.

Spansion's stock was up 9 cents to $1.21 in extended trading Wednesday.

Although prices for the NOR flash memory chips Spansion makes have been in freefall for more than a year, the company said the 10% sequential price decline in the third quarter proved greater than expected.

As a result of the price drop, Spansion said it decided to exit its least profitable business, providing chips for "content delivery" manufactured with older-generation equipment.

Spansion said it monetized the business' inventory and wrote down related assets, resulting in a roughly $13 million hit to its gross profit margin.

The news is the latest evidence of the pain being felt in the flash memory business. On Tuesday, Intel ( INTC) incurred a $265 million charge to account for its joint-venture producing NOR flash chips with ST Micro ( STM).

Last week, Micron ( MU) announced it was shutting down an entire production line for NAND flash chips, and laying off 15% of its workforce, on account of the abysmal market conditions.

Spansion's revenue in the three months ended Sept. 28 totaled $630.8 million, up 3% year over year, which CEO Bertrand Cambou described as a great achievement in the current business environment.

The chipmaker said its business selling flash chips for cell phones increased 8% sequentially to $320 million, as strong sales in North America, Korea, China and Europe offset an industry slowdown in Japan's handset market.

Cambou said the company was taking "aggressive action" to reduce its cost structure and enhance Spansion's cash position. During the third quarter, Spansion cut salaries and capital spending, as well as research and development projects.

Spansion said its operating expenses will decline by approximately $10 million in the current quarter.

The company projected that net sales in the fourth quarter will decline slightly from the third quarter. The average analyst expectation called for sales to increase about 3% to $650 million.

"While we remain optimistic about Spansion's long-term opportunity, our expectations for the fourth quarter are tempered due to the uncertain economic environment," Cambou said in a statement.

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