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:


Toll

-   United States/International

+1 845 675 0437

-   United Kingdom

+44 20 3059 8139

-   Hong Kong

+852 2475 0994

-   Singapore

+65 672 39381

-   China

+86 4006208038 or +86 8008190121

Participant Passcode

"SPRD" or "Spreadtrum"

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.

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,

Change from


2012

2013

2013

1Q13

2Q12







Revenue from third parties

171,072

189,019

277,810

47.0%

62.4%

Revenue from a related party

2,058

-

-

-

-100%

Total revenue

173,130

189,019

277,810

47.0%

60.5%

Cost of revenue

108,934

118,515

172,885

45.9%

58.7%







Gross profit

64,196

70,504

104,925

48.8%

63.4%







Operating expenses






Research & development

33,344

39,508

59,205

49.9%

77.6%

Selling, general and administrative

7,408

8,446

9,972

18.1%

34.6%

Total operating expenses

40,752

47,954

69,177

44.3%

69.8%







Operating income

23,444

22,550

35,748

58.5%

52.5%







Non-operating income (expense)






Interest income

1,650

1,154

1,379

19.5%

-16.4%

Interest expense

(849)

(930)

(976)

4.9%

15.0%

Other income(expense), net

(742)

(286)

1,510

-628.0%

-303.5%

Total non-operating income (loss)

59

(62)

1,913

-3,185.5%

3,142.4%

Income before income tax and equity in loss of affiliates

23,503

22,488

37,661

67.5%

60.2%







Income tax expense

(2,706)

(1,799)

(2,585)

43.7%

-4.5%

Equity in loss of affiliates, net of taxes

(55)

(434)

(251)

-42.2%

356.4%







Net income

20,742

20,255

34,825

71.9%

67.9%







Net loss attributable to non-controlling interest

209

-

-

-

-100.0%

Net income attributable to Spreadtrum Communications, Inc.

20,951

20,255

34,825

71.9%

66.2%

Income per ADS, basic

0.45

0.42

0.71



Income per ADS, diluted

0.41

0.38

0.64









Margin analysis:






Gross margin

37.1%

37.3%

37.8%



Operating margin

13.5%

11.9%

12.9%



Net margin

12.1%

10.7%

12.5%









Weighted average ADS equivalent: [1]






Basic

46,253,967

48,446,586

49,251,777



Diluted

51,625,730

52,948,094

54,075,395



ADS equivalent outstanding at end of period

46,457,352

48,753,586

49,841,210




[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,



2012

2013

Change





Revenue from third parties

332,186

466,829

40.5%

Revenue from a related party

2,058

-

-100%

Total revenue

334,244

466,829

39.7%

Cost of revenue

208,755

291,400

39.6%





Gross profit

125,489

175,429

39.8%





Operating expenses




Research & development

61,766

98,713

59.8%

Selling, general and administrative

14,368

18,418

28.2%

Total operating expenses

76,134

117,131

53.8%





Operating income

49,355

58,298

18.1%





Non-operating income(expense)




Interest income

3,880

2,533

-34.7%

Interest expense

(2,253)

(1,906)

-15.4%

Other income(expense), net

(106)

1,224

-1,254.7%

Total non-operating income

1,521

1,851

21.6%

Income before income tax and equity in loss of affiliates

50,876

60,149

18.2%

Income tax expense

(6,073)

(4,384)

-27.8%

Equity in loss of affiliates, net of taxes

(110)

(685)

522.7%





Net income

44,693

55,080

23.2%





Net loss attributable to non-controlling interest

514

-

-100%

Net income attributable to Spreadtrum Communications, Inc.

45,207

55,080

21.8%

Income per ADS, basic

0.98

1.13

15.0%

Income per ADS, diluted

0.88

1.02

16.2%





Margin analysis:




Gross margin

37.5%

37.6%


Operating margin

14.8%

12.5%


Net margin

13.5%

11.8%






Weighted average ADS equivalent: [1]




Basic

46,099,951

48,851,406


Diluted

51,331,322

53,826,640




[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,


2012

2013

2013

ASSETS                                                                                                    




Current assets




Cash and cash equivalents

129,385

134,834

167,487

Restricted cash

67,236

28,019

85,121

Short-term deposit

32,430

33,596

34,211

Accounts receivable, net

7,926

52,427

73,551

Inventories

98,292

149,081

235,015

Deferred cost

18,862

15,545

12,597

Deferred tax assets

3,154

2,456

2,492

Prepaid expenses and other current assets

18,650

30,234

48,570

Total current assets

375,935

446,192

659,044






Property and equipment, net

41,280

49,468

52,012

Acquired intangible assets, net

69,736

74,619

72,740

Equity investment

39,322

55,645

55,683

Deferred tax assets

818

771

775

Goodwill

38,908

38,908

38,908

Long-term restricted cash

10,000

63,882

54,704

Indemnification assets

5,567

5,567

3,412

Other long-term assets

4,471

5,346

2,817

Total assets

586,037

740,398

940,095






LIABILITIES AND SHAREHOLDERS' EQUITY




Current liabilities




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

50,798

24,078

90,930

Accounts payable

92,026

109,724

173,391

Advances from customers

12,694

49,425

73,149

Income tax payable

13,933

12,738

15,281

Accrued expenses and other current liabilities

52,409

55,478

67,238

Total current liabilities

221,860

251,443

419,989

Long-term loan

20,000

70,000

50,000

Other long-term obligations

5,113

5,280

5,765

Long-term tax liabilities

5,567

5,567

3,412

Deferred tax liabilities

1,612

1,612

1,612

Total long term liabilities

32,292

82,459

60,789

Total liabilities

254,152

333,902

480,778






Non-controlling shareholder interest

2,450

396

396

Shareholders' equity

329,435

406,100

458,921

Total liabilities and shareholders' equity

586,037

740,398

940,095

 

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,


2012

2013

2013





 Cost of revenue

108,934

118,515

172,885

 Adjustment for share-based compensation

(163)

(174)

(560)

 Cost of revenue (non-GAAP)

108,771

118,341

172,325

 Operating income

23,444

22,550

35,748

 Adjustment for share-based compensation within: Cost of revenue

163

174

560

 Research and development

6,785

4,243

13,188

 Selling, general, and administrative

1,720

1,808

3,214

 Operating income  (non-GAAP)

32,112

28,775

52,710

 Net income

20,951

20,255

34,825

 Adjustment for share-based compensation within: Cost of revenue

163

174

560

 Research and development

6,785

4,243

13,188

 Selling, general, and administrative

1,720

1,808

3,214

 Net income (non-GAAP)*

29,619

26,480

51,787

 Net income per ADS, diluted

0.41

0.38

0.64

 Adjustment for share-based compensation

0.17

0.12

0.31

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

0.58

0.50

0.95

 Gross margin

37.1%

37.3%

37.8%

 Adjustment for share-based compensation

0.1%

0.1%

0.2%

 Gross margin (non-GAAP) 

37.2%

37.4%

38.0%

 Operating margin

13.5%

11.9%

12.9%

        Adjustment for share-based compensation

5.0%

3.3%

6.1%

 Operating margin (non-GAAP)*

18.5%

15.2%

19.0%

 Net margin 

12.1%

10.7%

12.5%

        Adjustment for share-based compensation

5.0%

3.3%

6.1%

 Net margin (non-GAAP)*

17.1%

14.0%

18.6%

 Operating expenses

40,752

47,954

69,177

        Adjustment for share-based compensation:




 Research and development

(6,785)

(4,243)

(13,188)

 Selling, general and administrative

(1,720)

(1,808)

(3,214)

 Operating expenses (non-GAAP)

32,247

41,903

52,775


* 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 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.



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