Spreadtrum Communications, Inc. Announces Second Quarter 2013 Financial Results

SHANGHAI, Aug. 6, 2013 /PRNewswire-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, 2013.

SECOND QUARTER 2013 FINANCIAL SUMMARY:

• Total revenue was US$277.8 million, up 47.0% sequentially and 60.5% year-over-year (y-o-y), at the top end of the Company's previously guided range of US$270 - US$278 million.
• Gross profit was US$104.9 million, up 48.8% sequentially and 63.4% y-o-y. Gross margin was 37.8% compared to 37.3% in the prior quarter and 37.1% in 2Q12.
• Cash flow generated from operations was US$47.6 million, compared with US$17.4 million in the prior quarter and US$16.8 million in 2Q12.
• GAAP net income was US$34.8 million, up 71.9% sequentially and 66.2% y-o-y.
• GAAP net income per basic and diluted ADS was US$0.71 and US$0.64, respectively, an increase from US$0.42 and US$0.38, respectively, in the prior quarter and from US$0.45 and US$0.41, respectively, in 2Q12.
• Non-GAAP net income was US$51.8 million, up 95.6% sequentially and 74.8% y-o-y. Non-GAAP net income per diluted ADS was US$0.95, an increase from US$0.50 in the prior quarter and from US$0.58 in 2Q12.

SECOND QUARTER 2013 BUSINESS HIGHLIGHTS:

• Achieved record quarterly revenue as a result of strong demand for entry level smartphones in China and emerging markets;
• Achieved volume shipments of our dual-core TD-SCDMA/EDGE smartphone platform;
• Began commercial shipments of our first WCDMA baseband chipset, the SC7701B, now installed in Samsung handsets.

Commenting on the second quarter 2013 results, Chairman and CEO Dr. Leo Li said, "In the second quarter we saw very strong demand for entry-level smartphones based on our single-core smartphone chipsets. We expect this trend to continue well into 2014 as wireless subscribers replace feature phones with their first smartphone. In the second quarter, we increased our market share in midrange handsets as well, having achieved volume shipments of our dual-core smartphone chipsets to both China and global handset makers. Further, we are now shipping our first WCDMA chipset in volume, which expands our addressable market to include global 3G devices. The adoption of this chipset by the world's largest handset maker is a validation of the product quality and maturity we are now bringing to this market segment."

Further commenting on the financial results, Spreadtrum CFO Shannon Gao added, "In the second quarter, we achieved gross margin expansion due to improvement in our product mix. We also achieved improved operating leverage with our strong top-line growth, as reflected in our non-GAAP results. Our GAAP results, however, were affected in the second quarter by non-recurring share-based compensation charges."

SECOND QUARTER 2013 FINANCIAL REVIEW:

Revenue

Revenue in 2Q13 totaled US$277.8 million, up 47.0% from US$189.0 million in 1Q13 and up 60.5% from US$173.1 million in 2Q12. In 2Q13, smartphone products accounted for 75% of chipset revenue, and feature phone, modem and other products accounted for 25% of chipset revenue. In 1Q13, smartphone products accounted for 60% of chipset revenue, and feature phone, modem and other products accounted for 40% of chipset revenue.

Gross Profit and Margin

Gross profit for the quarter was US$104.9 million, up 48.8% from US$70.5 million in 1Q13 and up 63.4% from US$64.2 million in 2Q12. Gross margin for the quarter was 37.8%, up from 37.3% in 1Q13 and up from 37.1% in 2Q12. Non-GAAP gross margin, adjusted to exclude share-based compensation expenses, was 38.0%, up from 37.4% in 1Q13 and up from 37.2% in 2Q12.

Cost of revenue in 2Q13 totaled US$172.9 million, an increase of 45.9% from the previous quarter and 58.7% from 2Q12.

Operating Expense and Margin

The Company's operating margin for the quarter was 12.9%, up from 11.9% in the previous quarter and down from 13.5% in 2Q12. The sequential increase in operating margin was primarily due to the increased gross profit. The year-over-year decrease in operating margin was primarily due to higher research and development (R&D) expenses as a percentage of revenue. Non-GAAP operating margin, adjusted to exclude share-based compensation expenses was 19.0% in 2Q13, compared to 15.2% in 1Q13 and 18.5% in 2Q12.

Total operating expenses in 2Q13, including R&D expenses and selling, general and administrative (SG&A) expenses, were US$69.2 million, an increase from US$48.0 million in 1Q13 and US$40.8 million in 2Q12. The Company recorded certain non-recurring charges in the quarter which included share-based compensation charges, which were incurred due to immediate vesting of RSUs granted to employees who one year ago voluntarily elected to exchange a portion of their annual salary for RSUs. The vesting was triggered by the fact that certain pre-set revenue and shipment milestones had been met in 2Q13. Other non-recurring charges included severance benefits paid to an executive officer departed in April ("Executive Severance Benefits").

R&D expenses increased 49.9% sequentially and 77.6% year-over-year to US$59.2 million in 2Q13. The sequential increase in R&D expenses was primarily due to an increase in employee compensation expenses including share-based compensation and including non-recurring Executive Severance Benefits, and new product development engineering expenses, as well as a decrease in recognized R&D subsidies. The year-over-year increase in R&D expenses was primarily due to an increase in employee compensation expenses including share-based compensation and including non-recurring Executive Severance Benefits, depreciation and amortization expenses, and a decrease in recognized R&D subsidies, partially offset by a decrease in new product development engineering expenses.

SG&A expenses increased 18.1% sequentially and 34.6% year-over-year to US$10.0 million in 2Q13. The sequential increase in SG&A expenses was primarily due to increases in share-based compensation and marketing expenses. The year-over-year increase in SG&A expenses was primarily due to increases in employee compensation expenses including share-based compensation, legal expenses and marketing expenses.

Non-Operating Income

In 2Q13, the Company recorded interest income of US$1.4 million, up from US$1.2 million in the previous quarter and down from US$1.7 million in 2Q12. Interest expense in 2Q13 was US$1.0 million, up from US$0.9 million in the previous quarter and from US$0.8 million in 2Q12. Other income (net) in 2Q13 was a gain of US$1.5 million, compared to a loss of US$0.3 million in 1Q13 and a loss of US$0.7 million in 2Q12. Other income (net) mainly represented net foreign exchange gains and losses.

Net Income

The Company's net income totaled US$34.8 million in 2Q13, compared to US$20.3 million in 1Q13 and US$21.0 million in 2Q12. The sequential increase in net income was primarily due to the increase in gross profit. Net margin was 12.5%, up from 10.7% in 1Q13 and from 12.1% in 2Q12. Basic and diluted income per ADS were US$0.71 and US$0.64, respectively, in 2Q13, compared to US$0.42 and US$0.38, respectively, in 1Q13, and US$0.45 and US$0.41, respectively, in 2Q12.

Excluding share-based compensation expenses, the Company's non-GAAP net income for 2Q13 was US$51.8 million, up from a non-GAAP net income of US$26.5 million in 1Q13 and from US$29.6 million in 2Q12. Diluted non-GAAP net income per ADS in 2Q13 was US$0.95, compared with US$0.50 per ADS in the prior quarter and US$0.58 per diluted ADS in 2Q12.

Balance Sheet and Cash Flow

As of June 30, 2013, the total balance of cash and cash equivalents and term deposit with maturity dates over 90 days was US$201.7 million, compared to US$168.4 million as of March 31, 2013. The total balance of short-term and long-term restricted cash pledged to banks for short-term and long-term loans was US$139.8 million, compared with $91.9 million as of March 31, 2013. In 2Q13, the Company generated US$47.6 million in cash from operating activities and used US$5.8 million on property and equipment, US$4.9 million to pay a quarterly dividend and US$3.7 million on intangible assets.

Accounts receivable increased by US$21.2 million from US$52.4 million as of March 31, 2013 to US$73.6 million as of June 30, 2013. 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 25 days to 21 days. Inventory as of June 30, 2013 was US$235.0 million, an increase of US$85.9 million from March 31, 2013. 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 107 days in 1Q13 to 101 days in 2Q13. The increase in inventory is in line with our top line growth and to prepare for third quarter demand. 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$15.5 million as of March 31, 2013 to US$12.6 million as of June 30, 2013. Total assets as of June 30, 2013 were US$940.1 million, up US$199.7 million from US$740.4 million as of March 31, 2013. The increase in total assets was primarily attributable to increases of US$85.9 million in inventory, US$47.9 million in restricted cash, US$33.3 million in cash, US$21.2 in accounts receivable and US$18.3 in prepaid expenses.

Current liabilities increased from US$251.4 million as of March 31, 2013 to US$420.0 million as of June 30, 2013, primarily due to increase of US$66.9 million in short-term bank loans, US$63.7 million in accounts payable, US$23.7 million in advances from customers and US$11.8 million in accrued expenses. Long-term liabilities as of June 30, 2013 were US$60.8 million, compared to US$82.5 million as of March 31, 2013, primarily due to a US$20.0 million loan transferred from long-term loan to short-term loan.

WEBCAST OF CONFERENCE CALL:

The Company's senior management will host a conference call at 9:00 pm (U.S Eastern) / 6:00 pm (U.S Pacific) on Tuesday, August 6, 2013, which is 9:00 am on Wednesday, August 7, 2013 in Hong Kong to discuss the financial results and recent business activities. The conference call may be accessed by calling:

A telephone replay will be available shortly after the call until August 13, 2013 at (US Toll / International) +1 646 254 3697 or (Hong Kong) +852 3051 2780, passcode: 20767069.

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.

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 continuing strong demand for entry-level smartphones based on the Company's single-core smartphone chipsets in 2014. 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 Company's ability to sustain recent rates of growth and its dominant market share position in TD-SCDMA market; market acceptance of the Company's smartphone products and WCDMA 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 26, 2013 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.