Spreadtrum Communications, Inc. News
Spreadtrum Communications, Inc. Announces First Quarter 2008 Results
US GAAP net income for 1Q08 included
Commenting on the results, the Company's President and CEO, Dr.
''We are pleased that we were able to achieve our financial guidance in light of several factors that made this a challenging first quarter. Traditionally, Q1 is a seasonally slower quarter for the cellphone market. This year the market also had to work down a surplus of inventory from Q4 and cope with the impact of a snowstorm that disrupted travel and consumer spending. We were able to use this slower environment to streamline our internal operations, improve our product mix and enhance our product cost structure, which we believe will have a positive impact on profits in the 2nd half of this year.
On the business side, we completed our purchase of Quorum Systems in January and are far along in the integration of its R&D team and products into the combined Company. The joint team has already had some early successes in getting Quorum's RF transceivers designed into our customers' products and given this traction we are targeting a 30-40% attach rate for our basebands with Quorum's transceivers by the end of the year. Quorum's current products include low cost, low power single chip CMOS based multi-band transceivers for the GSM, GPRS, EDGE, TD-SCDMA, and WCDMA markets. With this acquisition we have more design options and more complete solutions for our customers—from 2G to 3G, physical layer software to protocol and applications.
On the 3G front, we are pleased that China Mobile began commercial trial in April and that two of our customers received a majority of the initial handset orders. We believe China Mobile will place two more rounds of handset orders in Q2 and Q3 respectively and that it has already begun to implement the 2nd phase of its TD-SCDMA network. We remain confident that we are well positioned for the ramp of this new technology in 2008 and beyond, as the market looks to ramp towards 100 million TD-based phones by 2011.
In addition to TD-SCDMA, we also have been working on additional growth drivers. We believe our recently announced mobile TV demodulator/decoder chip (the SC6600V) can work either as a stand-alone solution or with a host chip to address designers' needs and should become an important selling point for cellphones in the latter half of this year. The State Administration of Radio Film and Television (SARFT) already has commercial trials in 10 cities, including
Most of our revenue in 2008 should still come from our refreshed portfolio of 2G/2.5G products that we believe includes unique integrated features on a single chip that have normally been available only on Smartphones, but that Spreadtrum has brought into mainstream phones - such features as touchscreen, Java, dual-SIM, 5 mega-pixel sensors, and robust API capabilities, enabling such services as cell based A-GPS. Therefore, we believe we have the portfolio to allow handset designers to be successful now, but the roadmap to expand, not just within
First Quarter 2008 Financial Review
Revenue
Revenue in the first quarter totaled
Revenue from baseband semiconductors grew 73% from 1Q07 and decreased 21% from 4Q07 to
Revenue from turnkey solutions decreased during the quarter by 29% from 1Q07 and increased 11% from 4Q07 to
Gross Margin
The gross margin for the quarter was 44.9%, up from 42.9% in 1Q07 and down from 45.5% in 4Q07. The non-GAAP gross margin was 45.1%, up from 43.1% in 1Q07 and down from 45.6% in 4Q07. Gross margin for baseband semiconductors in 1Q08 decreased approximately 0.7% from 1Q07, primarily as a result of a decline in the weighted average selling price. Gross margin for baseband semiconductors in 1Q08 increased 1.6% from 4Q07, primarily as a result of better product mix.
The cost of revenue in 1Q08 totaled
Operating Margin
The Company's operating margin was 5.1% in 1Q08, compared to 5.0% in 1Q07 and 17.6% in 4Q07. The year-over-year improvement in operating margin was due to higher gross margin and lower SG&A expense as a percentage of revenue partially offset by an increase in R&D expenses as a percentage of revenue. The increase in R&D expenses was primarily due to the acquisition of Quorum Systems, whose primary activities are the research and development of radio frequency transceivers. The sequential decrease in operating margin was primarily attributed to higher R&D expenses as a result of the Quorum acquisition and higher SG&A expenses, as percentages of revenue. Excluding stock based compensation expense and the amortization of intangibles from the Quorum acquisition, the non-GAAP operating margin in 1Q08 was 10.8%, up from 9.7% in 1Q07 and down from 20.7% in 4Q07.
Total operating expenses in 1Q08, which include selling, general and administrative (SG&A) expenses and research and development (R&D) expenses, were
SG&A expenses increased by 22% in 1Q08 from 1Q07 and 15% from 4Q07 and represented 12.1% of revenue. These expenses as a percentage of revenue in 1Q08 improved from 15.0% of revenue in 1Q07 primarily due to lower fees for professional services and higher revenue level in 1Q08. These expenses as a percentage of revenue in 1Q08 increased from 8.6% of revenue in 4Q07 primarily due to lower revenue level in 1Q08. The year-over-year dollar increase was driven primarily by higher salary and benefits as a result of headcount addition, share-based compensation expense, marketing and business travel expense, partially offset by lower fees for professional services. The sequential dollar increase was driven primarily by higher salary and benefits as a result of headcount additions, higher stock-based compensation, marketing and professional service expenses.
R&D expenses in 1Q08 increased 83% year-over-year and 17% sequentially and represented 27.8% of revenue in 1Q08, compared to 22.9% in 1Q07 and 19.3% in 4Q07. The R&D expenses associated with Quorum Systems, which acquisition was completed in
Non-Operating Income
In 1Q08, the Company recorded net interest income of
Earnings
Diluted earnings per ADS was
The Company's net income totaled
Balance Sheet and Cash Flow
As of
Accounts receivable (A/R) decreased from
Current liabilities decreased from
Promotion
The Company promoted Dr.
Business Outlook:
The Company currently expects revenue in the second quarter to be approximately
The Company estimates its operating margin in 2Q08 should be in the range of 4%-5%, approximately flat from the Q1 level. The Company estimates its stock-based compensation expense will be approximately
Webcast of Conference Call:
The Company's management team will conduct a conference call at
USA (Toll Free): 1-866-679-8035 USA (Toll): 1-617-213-4848 Hong Kong (Toll Free): 800-962-844 China (Toll Free): 10-800-130-0399 Participant Passcode: 97671951 Pre-registration (optional): https://www.theconferencingservice.com/prereg/key.process?key=PWAALGPHF
A replay of the conference call will be available for seven days via the following telephone numbers:
USA (Toll Free): 1-888-286-8010 USA (Toll): 1-617-801-6888 Participant Passcode: 1897 2285
Discussion of Non-GAAP Financial Measures
In addition to disclosing financial results prepared in accordance with US GAAP, the Company's earnings release contains non-GAAP financial measures that exclude the effects of share-based compensation and amortization of intangibles from the Quorum acquisition. The non-GAAP financial measures used by management and disclosed by the Company exclude the income statement effects of all forms of share-based compensation and amortization of intangibles from the Quorum acquisition.
The non-GAAP financial measures disclosed by the Company should not be considered a substitute for financial measures prepared in accordance with US GAAP. The financial results reported in accordance with US GAAP and reconciliation of GAAP to non-GAAP results should be carefully evaluated. The non-GAAP financial measures used by the Company may be prepared differently from and, therefore, may not be comparable to similarly titled measures used by other companies.
The Company believes that the presentation of non-GAAP gross margin, non- GAAP operating margin, non-GAAP net income, and non-GAAP diluted earnings per ADS provides important supplemental information to management and investors regarding financial and business trends relating to the Company's financial condition and results of operations. The non-GAAP diluted earnings per ADS is calculated by dividing non-GAAP net income by the US GAAP weighted average diluted shares outstanding.
Listed below are the share-based compensation amounts included in net income that management excludes in computing the non-GAAP financial measures referred to in the text of this press release. A reconciliation of GAAP to non-GAAP results is presented after the consolidated balance sheets.
Three months ended March 31, December 31, March 31, 2007 2007 2008 (in thousands of US dollars) Share-based compensation: Cost of revenue $ 49 $ 47 $ 75 Research and development 457 535 790 Selling, general, and administrative 711 913 991 Spreadtrum Communications, Inc. Condensed Consolidated Income Statements (in thousands of US dollars, except per share data and percentages) (unaudited) Three months ended Change from March 31, December March 31, 2007 31, 2007 2008 1Q07 4Q07 Revenue $26,167 $48,542 $39,498 51 % (19)% Cost of revenue 14,954 26,476 21,746 45 % (18)% Gross profit 11,213 22,066 17,752 58 % (20)% Operating expenses Research & development 5,996 9,352 10,967 83 % 17 % Selling, general & administrative 3,920 4,154 4,774 22 % 15 % Total operating expenses 9,916 13,506 15,741 59 % 17 % Operating income 1,297 8,560 2,011 55 % (77)% Non-operating income (expense) Interest income 439 1,452 795 81 % (45)% Interest expense (6) (27) (35) 483 % 30 % Other income, net 331 563 637 92 % 13 % Total non-operating income 764 1,988 1,397 83 % (30)% Income before tax 2,061 10,548 3,408 65 % (68)% Income tax expense 29 352 630 2,072 % 79 % Net income $2,032 $10,196 $2,778 37 % (73)% Basic earnings per ADS $0.36 $0.24 $0.06 (83)% (75)% Diluted earnings per ADS $0.05 $0.22 $0.06 20 % (73)% Margin analysis: Gross margin 42.9 % 45.5 % 44.9 % Operating margin 5.0 % 17.6 % 5.1 % Net margin 7.8 % 21.0 % 7.0 % Weighted average ADS equivalent: (1) Basic 5,659,595 42,263,233 43,164,186 Diluted 38,156,489 47,032,432 46,789,892 (1) Assumes all outstanding ordinary shares are represented by ADSs. Each ADS represents three ordinary shares. Spreadtrum Communications, Inc. Condensed Consolidated Balance Sheets (in thousands of US dollars) (unaudited) March 31, December 31, March 31, 2007 2007 2008 (Note) Cash and cash equivalents $44,801 $157,038 $97,232 Accounts receivable, net 10,713 2,198 1,410 Inventories 9,870 25,054 20,301 Deferred tax assets 202 392 392 Prepaid expenses and other current assets 1,063 5,650 5,625 Total current assets 66,649 190,332 124,960 Property and equipment, net 19,503 23,046 25,236 Acquired intangible assets, net 7,551 14,220 49,321 Goodwill — — 46,895 Deferred tax assets 1,060 1,222 1,225 Other long term assets 3,939 8,102 9,876 Total assets 98,702 236,922 257,513 Current portion of long term loan 1,099 685 — Accounts payable 10,218 24,857 10,165 Advances from customers 2,028 1,210 1,532 Obligation on acquisition of building 5,447 — — Income tax payable 1,858 3,088 3,703 Accrued expenses and other current liabilities 12,596 13,773 12,594 Total current liabilities 33,246 43,613 27,994 Long term loan 3,232 3,423 3,562 Deferred tax liabilities 17 37 14,365 Other long-term obligations — 1,954 1,905 Total long term liabilities 3,249 5,414 19,832 Total liabilities 36,495 49,027 47,826 Shareholders' equity 62,207 187,895 209,687 Total liabilities & $98,702 $236,922 $257,513 shareholders' equity Note: The financial information at March 31, 2008 includes preliminary valuation of Quorum, which is subject to further adjustments. Spreadtrum Communications, Inc. Supplemental Information (in thousands of US dollars, except percentages) Revenue (US$000) 2Q06 3Q06 4Q06 Baseband Semiconductor $11,760 $15,684 $22,645 Turnkey Solutions 17,961 11,017 8,317 Total $29,721 $26,701 $30,962 As % of Total Revenue Baseband Semiconductor 40 % 59 % 73 % Turnkey Solutions 60 % 41 % 27 % Gross Margin 38.8 % 43.2 % 46.4 % Revenue (US$000) 1Q07 2Q07 3Q07 4Q07 1Q08 Baseband $20,589 $27,357 $34,161 $44,971 $35,532 Semiconductor Turnkey Solutions 5,578 4,830 4,409 3,571 3,966 Total $26,167 $32,187 $38,570 48,542 39,498 As % of Total Revenue Baseband 79 % 85 % 89 % 93 % 90 % Semiconductor Turnkey Solutions 21 % 15 % 11 % 7 % 10 % Gross Margin 42.9 % 45.5 % 45.6 % 45.5 % 44.9 % Spreadtrum Communications, Inc. Reconciliation of GAAP to Non-GAAP Results (in thousands of US dollars, except per share data and percentages) (unaudited) Three months ended March 31, December 31, March 31, 2007 2007 2008 Cost of revenue $14,954 $26,475 $21,746 Adjustment for share-based compensation (49) (47) (75) Cost of revenue (non-GAAP) $14,905 $26,428 $21,671 Operating income $1,297 $8,560 $2,011 Adjustment for share-based compensation within: Cost of revenue 49 47 75 Research and development 457 535 790 Selling, general, and administrative 711 913 991 Adjustment for amortization of intangibles from Quorum acquisition within research and development — — 400 Operating income (non-GAAP) $2,514 $10,055 $4,267 Net income $2,032 $10,196 $2,778 Adjustment for share-based compensation within: Cost of revenue 49 47 75 Research and development 457 535 790 Selling, general, and administrative 711 913 991 Adjustment for amortization of intangibles from Quorum acquisition within research and development 400 Net income (non-GAAP) * $3,249 $11,691 $5,034 Diluted earnings per ADS $0.05 $0.22 $0.06 Adjustment for share-based compensation 0.03 0.03 0.04 Adjustment for amortization of intangibles from Quorum acquisition — — 0.01 Diluted earnings per ADS (non- GAAP)* $0.08 $0.25 $0.11 Gross margin 42.9 % 45.5 % 44.9 % Adjustment for share-based compensation 0.2 % 0.1 % 0.2 % Gross margin (non-GAAP) 43.1 % 45.6 % 45.1 % Operating margin 5.0 % 17.6 % 5.1 % Adjustment for share-based compensation 4.7 % 3.1 % 4.7 % Adjustment for amortization of intangibles from Quorum acquisition — — 1.0 % Operating margin (non-GAAP) 9.7 % 20.7 % 10.8 % Net margin 7.8 % 21.0 % 7.0 % Adjustment for share-based compensation 4.7 % 3.1 % 4.7 % Adjustment for amortization of intangibles from Quorum acquisition — — 1.0 % Net margin (non-GAAP)* 12.5 % 24.1 % 12.7 % * The non-GAAP adjustment does not take into consideration the impact of taxes.
About Spreadtrum Communications, Inc.:
Spreadtrum Communications, Inc. (Nasdaq: SPRD; the ''Company'') is a fabless semiconductor company that designs, develops, and markets baseband processor solutions for the mobile wireless communications market. The Company combines its semiconductor design expertise with its software development capabilities to deliver highly-integrated baseband processors with multimedia functionality and power management. The Company has developed its solutions based on an open development platform, enabling its customers to develop customized wireless products that are feature-rich and meet their cost and time-to-market requirements.
Safe Harbor Statements:
This press release contains "forward-looking statements" within the meaning of the ''safe harbor'' provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements regarding the impact that the streamlining of the Company's internal operations, improvement of product mix and product and cost structure will have on the Company's operations in the second half of the year, the Company's target attach rate by year-end for the Company's baseband chips with Quorum's transceivers, China Mobile's placement of second and third rounds of TD-SCDMA handset orders before the Olympics, the TD-SCDMA industry's ramp up of TD-SCDMA technology towards a 100 million user target by 2011, China Mobile's implementation of the second phase of its TD-SCDMA network, our positioning for the ramp up in the manufacture of cellphones incorporating TD- SCDMA technology, that cellphones incorporating our mobile TV demodulator/decoder chip will become an important selling point, the availability of CMMB network in 37 cities by August and CMMB network installation plans for 2009, the revenue in 2008 coming mostly from the Company's refreshed portfolio of 2G/2.5G products, ramp up in sales to new customers during the third and fourth quarters, the improvement in our business during the second half of the year and the Company's expectations with respect to the revenue, operating margin, and stock-based compensation for the second quarter of 2008. These statements are forward-looking in nature and involve risks and uncertainties that may cause actual market trends and the Company's actual results to differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, continuing competitive pressure in the semiconductor industry and the effect of such pressure on prices; unpredictable changes in technology and consumer demand for mobile phones; the Company's ability to integrate Quorum's operations into its own; the Company's ability to successfully produce and market Quorum's RF transceivers in volume; the rate at which the commercial deployment of TD- SCDMA technology will grow; market acceptance of products utilizing TD-SCDMA technology; the Company's ability to sustain recent rates of growth; the state of and any change in the Company's relationship with its major customers; and changes in political, economic, legal and social conditions in
For investor information, please contact: Investor Relations Tel: +86-21-5080-2727 x2268 Email: ir@spreadtrum.com
SOURCE Spreadtrum Communications, Inc.
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