Spreadtrum Communications, Inc. Announces Second Quarter 2012 Financial Results

SHANGHAI, Aug. 9, 2012 /PRNewswire-Asia-FirstCall/ -- Spreadtrum Communications, Inc. (Nasdaq: SPRD; "Spreadtrum" or the "Company"), a leading fabless semiconductor provider in China with advanced technology in 2G, 3G and 4G wireless communications standards, today announced its unaudited financial results for the second quarter ended June 30, 2012.

SECOND QUARTER 2012 FINANCIAL SUMMARY:

  • Total revenue increased 7.5% quarter-over-quarter and 8.1% year-over-year to US$173.1 million, in line with the Company's previously guided range of US$170 - US$175 million.
  • Gross profit was US$64.2 million compared to US$61.3 million in the previous quarter and US$67.2 million in 2Q11. Gross margin was 37.1% compared to 38.0% in the previous quarter and 42.0% in 2Q11.
  • Cash flows from operations were US$16.8 million, compared with US$21.0 million in the previous quarter and US$34.5 million in 2Q11.
  • GAAP net income was US$21.0 million, compared with US$24.3 million in the previous quarter and US$32.5 million in 2Q11.
  • GAAP net income per basic and diluted ADS was US$0.45 and US$0.41, respectively, a decrease from US$0.53 and US$0.47 per basic and diluted ADS, respectively, in 1Q12 and US$0.67 and US$0.60 per basic and diluted ADS, respectively, in 2Q11.
  • Non-GAAP net income was US$29.6 million, compared to US$29.3 million in 1Q12 and US$35.5 million in 2Q11. Non-GAAP net income per diluted ADS was US$0.58, an increase from US$0.57 per diluted ADS in 1Q12 and a decrease from US$0.65 per diluted ADS in 2Q11.

BUSINESS HIGHLIGHTS:

  • Shipped more than 1 million units of 1GHz TD-SCDMA and EDGE Android smartphone chipsets;
  • Expanded global first tier customers with HTC's launch of two premium smartphones with Spreadtrum's TD-SCDMA baseband modem;
  • Spreadtrum's baseband shipping in multiple flagship TD-SCDMA smartphones including the Samsung GALAXY S III, HTC One XT and devices from major China OEMs;
  • Achieved volume ramp of the SC6530, the industry's first 2.5G baseband designed with 40 nanometer CMOS silicon.

Commenting on the results, Spreadtrum's Chairman and CEO, Dr. Leo Li said, "This quarter, we achieved a strong ramp of our 1GHz Android smartphone products, with customers launching handsets through both China Mobile and open market distribution channels. Many are targeting a newly created 500-700RMB retail segment, making 1GHz smartphone performance more affordable and attractive to the mass market consumer. The demand for our smartphone products is very strong, and we now expect to ship more than 10 million smartphone chipsets in the third quarter.

"Looking ahead to 3Q12, we expect revenue to be in the range of US$178 million to US$186 million, which is a sequential increase of 2.8% to 7.5%, with a flat gross margin relative to Q2. In the short term, our 2.5G outlook is constrained by a shortage of some handset components. For TD-SCDMA business, we expect strong shipment growth in smartphones to be partly tempered by a drop in market demand for TD-SCDMA feature phones, reflecting shifting consumer preferences towards low-cost smartphones as they become more affordable. In the coming quarters, we expect our smartphone products, which carry a higher gross margin and ASP than our feature phone products, to continue to grow rapidly and more than offset this shift in the TD-SCDMA market."

Further commenting on the 2Q12 financial results, Shannon Gao, Spreadtrum's CFO added, "With the ramp in smartphone product shipments we have now stabilized our gross margins. Our operating expenses increased slightly this quarter as expected, with much of the increase in non-recurring cash bonus and share-based compensation recorded on the achievement of a final milestone in our WCDMA program related to the MobilePeak acquisition last year. We are continuing to invest in research and development in dual-core and quad-core smartphone platforms, as well as WCDMA, LTE and connectivity technologies, which will expand our addressable market in both China and overseas regions. In Q3, we expect our operating margins to be similar to the second quarter."

SECOND QUARTER 2012 FINANCIAL REVIEW:

Revenue

Revenue in 2Q12 totaled US$173.1 million, up from US$161.1 million in 1Q12 and from US$160.2 million in 2Q11. 

Sales volume of 2G/2.5G baseband and radio frequency bundle semiconductors recognized as revenue in 2Q12 increased 32.4% sequentially and 52.1% year-over-year. Sales volume of 3G bundle semiconductors recognized as revenue in 2Q12 decreased 28.1% sequentially and increased 22.5% year-over-year.

The average selling price per unit of 2G/2.5G bundle semiconductors in 2Q12 decreased 9.5% sequentially and 23.4% year-over-year. The average selling price per unit of 3G bundle semiconductors in 2Q12 decreased 2.8% sequentially and 21.0% year-over-year.

Gross Profit and Margin

Gross profit for the quarter was US$64.2 million, up 4.7% from US$61.3 million in 1Q12 and down 4.5% from US$67.2 million in 2Q11. Gross margin for the quarter was 37.1%, down from 38.0% in 1Q12 and 42.0% in 2Q11. Non-GAAP gross margin, adjusted to exclude share-based compensation, was 37.2%, down from 38.1% in 1Q12 and 42.1% in 2Q11.

Cost of revenue in 2Q12 totaled US$108.9 million, an increase of 9.1% from the previous quarter and up 17.2% from 2Q11.

Operating Expense and Margin

The Company's operating margin for the quarter was 13.5%, compared to 16.1% in the previous quarter and 21.2% in 2Q11. The sequential and year-over-year decrease in operating margin was primarily due to a lower gross margin and higher research and development (R&D) expenses as a percentage of revenue. Non-GAAP operating margin, adjusted to exclude share-based compensation expense was 18.5% in 2Q12, compared to 19.2% in 1Q12 and 23.0% in 2Q11.

Total operating expenses in 2Q12, including selling, general and administrative (SG&A) expenses and R&D expenses, were US$40.8 million, representing an increase from US$35.4 million in 1Q12 and from US$33.3 million in 2Q11.

R&D expenses increased 17.3% sequentially and increased 24.6% year-over-year to US$33.3 million in 2Q12. The sequential increase in R&D expenses was primarily due to an increase in engineering expenses related to the development of new products and non-recurring cash bonus and share-based compensation that was recorded in 2Q12 as a result of achievement of WCDMA development milestones related to the MobilePeak acquisition, offset in part by an increase in recognized R&D subsidies. The year-over-year increase in R&D expenses was primarily due to the aforementioned reasons, as well as an increase in depreciation and amortization expenses and employee compensation expenses including share-based compensation.

SG&A expenses increased 6.4% sequentially and 13.5% year-over-year to US$7.4 million in 2Q12. The year-over-year increase in SG&A expenses were primarily due to an increase in employee compensation expenses including share-based compensation.

Non-Operating Income

In 2Q12, the Company recorded interest income of US$1.7 million, down from US$2.2 million in the previous quarter and up from US$1.4 million in 2Q11. The sequential decrease was due to the decrease of cash balance while the year-over-year increase was due to investment of a higher balance of cash. Interest expense in 2Q12 was US$0.8 million, down from US$1.4 million in the previous quarter and up slightly from US$0.7 million in 2Q11. The sequential decrease was due to the repayment of bank loans in 2Q12. Other income (net) in 2Q12 was a loss of US$0.7 million, compared to a gain of US$0.6 million in 1Q12 and a gain of US$2.6 million in 2Q11. Other income (net) mainly represented net foreign exchange gains and losses.   

Net Income

The Company's net income totaled US$21.0 million in 2Q12, compared to US$24.3 million in 1Q12 and US$32.5 million in 2Q11. The sequential decrease in net income was primarily due to the increase in R&D expenses as well as the decrease in non-operating income. Net margin was 12.1%, down from 15.1% in 1Q12 and 20.3% in 2Q11. Basic and diluted income per ADS were US$0.45 and US$0.41, respectively, in 2Q12, compared to US$0.53 and US$0.47, respectively, in 1Q12, and US$0.67 and US$0.60, respectively, in 2Q11.

Excluding share-based compensation expenses, the Company's non-GAAP net income for 2Q12 was US$29.6 million, up from a non-GAAP net income of US$29.3 million in 1Q12 and down from US$35.5 million in 2Q11. Diluted non-GAAP net income per ADS in 2Q12 was US$0.58, compared with US$0.57 per ADS in the prior quarter and US$0.65 per diluted ADS in 2Q11.

Balance Sheet and Cash Flow

As of June 30, 2012, the total balance of cash and cash equivalents and term deposit with maturity dates over 90 days was US$161.8 million, compared to US$233.1 million as of March 31, 2012. The total balance of restricted cash pledged to banks for short-term loans was US$67.2 million, compared with $70.0 million as of March 31, 2012. In 2Q12, the Company generated US$16.8 million in cash from operating activities and used $5.3 million in cash on property and equipment, US$11.4 million on intangible assets, US$15.7 million on equity investments and US$4.6 million to pay a quarterly dividend. We repaid bank loans of US$60.9 million that were due in 2Q12 and borrowed new long-term loans of US$20 million.  

Accounts receivable increased by US$0.6 million from US$7.3 million as of March 31, 2012 to US$7.9 million as of June 30, 2012. Average accounts receivable days, calculated based on quarterly average accounts receivable divided by quarterly revenue and multiplied by number of days in the quarter, decreased sequentially from 5 days to 4 days. Inventory as of June 30, 2012 was US$98.3 million, an increase of US$35.4 million from March 31, 2012. Inventory days, calculated based on quarterly average inventory (excluding deferred cost) divided by quarterly cost of goods sold and multiplied by number of days in the quarter, decreased from 71 days in 1Q12 to 67 days in 2Q12. Deferred cost, which consists of products that have shipped to customer where the rights and obligations of ownership have passed to customers but revenue has not yet been recognized due to pending customer acceptance, decreased from US$55.8 million as of March 31, 2012 to US$18.9 million as of June 30, 2012. The decrease is due to the gradual phase-out of the customer acceptance program as the high quality of the Company's products over the last couple of years has helped firmly establish customer confidence. Total assets as of June 30, 2012 were US$586.0 million, down US$42.2 million from US$628.2 million as of March 31, 2012. The decrease in total assets was primarily attributable to a US$74.1 million decrease in cash and US$37.0 million decrease in deferred costs, partially offset by a US$35.4 million increase in inventories, US$15.4 million increase in equity investment, US$10.0 million increase in long-term restricted cash and US$9.8 million increase in acquired intangible assets.

Current liabilities decreased from US$309.3 million as of March 31, 2012 to US$221.9 million as of June 30, 2012, primarily due to a decrease of US$60.9 million in short-term loans, US$50.4 million in advance from customers and US$7.7 million in income tax payable, partially offset by a US$34.2 million increase in accounts payable. Long-term liabilities as of June 30, 2012 were US$32.3 million, compared to US$12.2 million as of March 31, 2012, primarily due to an increase of US$20.0 million in long-term loan.

BUSINESS OUTLOOK:

Looking ahead, Spreadtrum expects revenue for the third quarter of 2012 to be in the range of US$178 millionUS$186 million with a flat gross margin relative to Q2.

WEBCAST OF CONFERENCE CALL:

The Company's senior management will host a conference call at 9:00 pm (Eastern) / 6:00 pm (Pacific) on Thursday, August 9, 2012, which is 9:00 am (Hong Kong) on Friday, August 10, 2012 to discuss the financial results and recent business activities. The conference call may be accessed by calling:


Toll

- United States/International

+1 718 354 1231

- Hong Kong

+852 2475 0994

- Singapore

+65 672 39381

- United Kingdom

+44 20 3059 8139

Participant Passcode

"SPRD" or "Spreadtrum"

A telephone replay will be available shortly after the call until August 17, 2012 at (US Toll / International) +1 718 354 1232, passcode: 11970452.

A live webcast of the conference call and replay, along with an accompanying quarterly results presentation, will be available in the investor relations section of the Company's website.

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 other non-recurring items. 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.

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 provides the presentation of non-GAAP gross margin, non- GAAP operating margin, non-GAAP net income, and non-GAAP diluted earnings per ADS, all excluding share-based compensation expenses. The Company believes that these non-GAAP financial measures provide 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 are calculated by dividing non-GAAP net income by the US GAAP weighted average diluted shares outstanding.


Spreadtrum Communications, Inc.

Condensed Consolidated Income Statements

(in thousands of US dollars, except per share data and percentages)

(unaudited)

 


Three months ended




 June 30

March 31

 June 30

2Q12 change from


2011

2012

2012

1Q12

2Q11







Revenue from third parties

160,177

161,114

171,072

6.2%

6.8%

Revenue from a related party

-

-

2,058



Total revenue

160,177

161,114

173,130

7.5%

8.1%

Cost of revenue

92,976

99,821

108,934

9.1%

17.2%

Gross profit

67,201

61,293

64,196

4.7%

-4.5%

Operating expenses






Research & development

26,754

28,422

33,344

17.3%

24.6%

Selling, general and administrative

6,525

6,960

7,408

6.4%

13.5%

Total operating expenses

33,279

35,382

40,752

15.2%

22.5%







Operating income

33,922

25,911

23,444

-9.5%

-30.9%







Non-operating income (expense)






Interest income

1,374

2,230

1,650

-26.0%

20.1%

Interest expense

(740)

(1,404)

(849)

-39.5%

14.7%

Other income(expense), net

2,597

636

(742)

-216.7%

-128.6%

Total non-operating income

3,231

1,462

59

-96.0%

-98.2%

Income before income tax and equity in loss of affiliates

37,153

27,373

23,503

-14.1%

-36.7%







Income tax expense

(4,185)

(3,367)

(2,706)

-19.6%

-35.3%

Equity in loss of affiliates, net of taxes

(475)

(55)

(55)

-

-88.4%







Net income

32,493

23,951

20,742

-13.4%

-36.2%







Net loss attributable to non-controlling interest

-

305

209

-31.5%

-

Net income attributable to Spreadtrum Communications, Inc.

32,493

24,256

20,951

-13.6%

-35.5%

Income per ADS, basic

0.67

0.53

0.45



Income per ADS, diluted

0.60

0.47

0.41









Margin analysis:






Gross margin

42.0%

38.0%

37.1%



Operating margin

21.2%

16.1%

13.5%



Net margin

20.3%

15.1%

12.1%









Weighted average ADS equivalent:(1)






Basic

48,686,506

45,945,184

46,253,967



Diluted

54,257,201

51,108,873

51,625,730



ADS equivalent outstanding at end of period

47,447,391

46,028,101

46,457,352



 

(1) Assumes all outstanding ordinary shares are represented by ADSs.  Each ADS represents three ordinary shares.

 

Spreadtrum Communications, Inc.

Condensed Consolidated Income Statements

(in thousands of US dollars, except per share data and percentages)

(unaudited)

 


Six Months ended



June 30,

June 30,



2011

2012

Change





Revenue from third parties

297,249

332,186

11.8%

Revenue from a related party

-

2,058


Total revenue

297,249

334,244

12.4%

Cost of revenue

172,146

208,755

21.3%


Gross profit

125,103

125,489

0.3%


Operating expenses




Research &development

50,703

61,766

21.8%

Selling, general and administrative

11,783

14,368

21.9%

Total operating expenses

62,486

76,134

21.8%


Operating income

62,617

49,355

-21.2%


Non-operating income(expense)




Interest income

2,653

3,880

46.2%

Interest expense

(1,439)

(2,253)

56.6%

Other income(expense), net

4,310

(106)

-102.5%

Total non-operating income

5,524

1,521

-72.5%

Income before income tax and equity in loss of affiliates

68,141

50,876

-25.3%

Income tax expense

(7,622)

(6,073)

-20.3%

Equity in loss of affiliates, net of taxes

(490)

(110)

-77.6%


Net income

60,029

44,693

-25.5%


Net loss attributable to non-controlling interest

-

514

-

Net income attributable to Spreadtrum Communications, Inc.

60,029

45,207

-24.7%

Income per ADS, basic

1.24

0.98

-20.6%

Income per ADS, diluted

1.10

0.88

-19.6%


Margin analysis:




Gross margin

42.1%

37.5%


Operating margin

21.1%

14.8%


Net margin

20.2%

13.5%






Weighted average ADS equivalent:(1)




Basic

48,579,052

46,099,951


Diluted

54,806,954

51,331,322


 

(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)

 


 As of 


June 30,

 March 31,

 June 30,


2011

2012

2012

ASSETS




Current assets




Cash and cash equivalents

167,510

192,308

129,385

Restricted cash

14,735

70,047

67,236

Short-term deposit

87,367

40,825

32,430

Short-term loan to an associate

9,763

-

-

Accounts receivable, net

2,225

7,270

7,926

Inventories

124,230

62,907

98,292

Deferred cost

78,470

55,830

18,862

Deferred tax assets

1,709

2,917

3,154

Prepaid expenses and other current assets

29,291

19,114

18,650

Total current assets

515,300

451,218

375,935






Property and equipment, net

33,828

46,009

41,280

Acquired intangible assets, net

36,517

59,929

69,736

Equity investment

35,018

23,934

39,322

Long-term loan to an associate

2,045

-

-

Deferred tax assets

803

820

818

Goodwill

2,000

36,208

38,908

Long-term restricted cash

-

-

10,000

Indemnification assets

-

5,567

5,567

Other long-term assets

540

4,560

4,471

Total assets

626,051

628,245

586,037






LIABILITIES AND SHAREHOLDERS' EQUITY




Current liabilities




Short-term loans and current portion of a long-term loan

59,656

111,740

50,798

Accounts payable

108,393

57,817

92,026

Advances from customers

140,156

63,047

12,694

Income tax payable

15,642

21,610

13,933

Accrued expenses and other current liabilities

49,397

55,073

52,409

Total current liabilities

373,244

309,287

221,860

Long-term loan

-

-

20,000

Other long-term obligations

5,277

5,048

5,113

Long-term tax liabilities

-

5,567

5,567

Deferred tax liabilities

-

1,612

1,612

Total long term liabilities

5,277

12,227

32,292

Total liabilities

378,521

321,514

254,152






Non-controlling shareholder interest

-

1,760

2,450

Shareholders' equity

247,530

304,971

329,435

Total liabilities and shareholders' equity

626,051

628,245

586,037


 

 

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 


 June 30,

 March 31,

 June 30,


2011

2012

2012





 Cost of revenue

92,976

99,821

108,934

 Adjustment for share-based compensation

(120)

(158)

(163)

 Cost of revenue (non-GAAP)

92,856

99,663

108,771

 Operating income

33,922

25,911

23,444

 Adjustment for share-based compensation within: Cost of revenue

120

158

163

 Research and development

2,085

3,519

6,785

 Selling, general, and administrative

759

1,345

1,720

 Operating income  (non-GAAP)

36,886

30,933

32,112

 Net income

32,493

24,256

20,951

 Adjustment for share-based compensation within: Cost of revenue

120

158

163

 Research and development

2,085

3,519

6,785

 Selling, general, and administrative

759

1,345

1,720

 Net income (non-GAAP)*

35,457

29,278

29,619

 Net income per ADS, diluted

0.60

0.47

0.41

 Adjustment for share-based compensation

0.05

0.10

0.17

 Net income per ADS, diluted (non-GAAP)*

0.65

0.57

0.58

 Gross margin

42.0%

38.0%

37.1%

 Adjustment for share-based compensation

0.1%

0.1%

0.1%

 Gross margin (non-GAAP) 

42.1%

38.1%

37.2%

 Operating margin

21.2%

16.1%

13.5%

  Adjustment for share-based compensation

1.8%

3.1%

5.0%

 Operating margin (non-GAAP)*

23.0%

19.2%

18.5%

 Net margin 

20.3%

15.1%

12.1%

Adjustment for share-based compensation

1.8%

3.1%

5.0%

 Net margin (non-GAAP)*

22.1%

18.2%

17.1%

 Operating expenses

33,279

35,382

40,752

Adjustment for share-based compensation:




 Research and development

(2,085)

(3,519)

(6,785)

 Selling, general and administrative

(759)

(1,345)

(1,720)

 Operating expenses (non-GAAP)

30,435

30,518

32,247

 

* There is no tax effect resulting from these adjustment items.

 

ABOUT SPREADTRUM COMMUNICATIONS, INC.

Spreadtrum Communications, Inc. (NASDAQ: SPRD; "Spreadtrum") is a fabless semiconductor company that develops mobile chipset platforms for smartphones, feature phones and other consumer electronics products, supporting 2G, 3G and 4G wireless communications standards. Spreadtrum's solutions combine its highly integrated, power-efficient chipsets with customizable software and reference designs in a complete turnkey platform, enabling customers to achieve faster design cycles with a lower development cost. Spreadtrum's customers include global and China-based manufacturers developing mobile products for consumers in China and emerging markets around the world. For more information, visit www.spreadtrum.com.

SAFE HARBOR STATEMENT:

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 Company's expectations with respect to shipping more than 10 million smartphone chipsets in the third quarter; the Company's expectations with respect to revenue of 3Q12 being in the range of US$178 million to US$186 million with a flat gross margin relative to Q2; the Company's expectations with respect to strong shipment growth in TD-SCDMA smartphones being partly tempered by a drop in market demand for TD-SCDMA feature phones; the Company's expectations with respect to its smartphone products continuing to grow rapidly and more than offsetting this shift in the TD-SCDMA market in the coming quarters; the effectiveness of the Company's continuous investment in research and development in smartphone platforms, WCDMA, LTE and connectivity technologies in expanding its addressable market in both China and overseas regions; and the Company's expectations with respect to its operating margins in 3Q12 being similar to the second quarter. The Company uses words like "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these words. 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 rate at which the market adoption of TD-SCDMA technology will grow; the demand for the Company's smartphone products; the state of and any change in the Company's relationship with its major domestic and international customers and Chinese government agencies; and changes in political, economic, legal and social conditions in China. For additional discussion of these risks and uncertainties and other factors, please consider the information contained in the Company's filings with the U.S. Securities and Exchange Commission (the "SEC") and the annual report on Form 20-F filed on April 10, 2012 especially the section under "Risk Factors" and such other documents that the Company may file with the SEC from time to time, including on Form 6-K. The Company assumes no obligation to update any forward-looking statements, which apply only as of the date of this press release, and does not intend to update any forward-looking statement whether as a result of new information, future events or otherwise except as required by law.

 

SOURCE Spreadtrum Communications, Inc.



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