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Spreadtrum Communications, Inc. Announces Second Quarter 2010 Fiscal Results

posted on Aug 12, 10 04:15PM

SHANGHAI, Aug. 12 /PRNewswire-Asia-FirstCall/ -- Spreadtrum Communications, Inc. (Nasdaq: SPRD; "Spreadtrum" or the "Company"), one of China's leading wireless baseband chipset providers, today announced its unaudited financial results for the second quarter ended June 30, 2010.


SECOND QUARTER 2010 FINANCIAL SUMMARY:
-- Total revenue increased 37% quarter-over-quarter and 341%
year-over-year to US$71.4 million, exceeding the Company's previously
guided range of US$65-68 million.
-- Gross profit was US$31.9 million compared to US$23.7 million in the
previous quarter and US$3.8 million in 2Q09. Gross margin was 44.6%
compared to 45.5% in the previous quarter and 23.6% in 2Q09.
-- Cash flows from operations were US$35.2 million, compared with
US$28.7 million in the previous quarter, and compared with
US$-0.8 million in 2Q09.
-- GAAP net income was US$11.1 million, compared with US$6.6 million in
the previous quarter and a net loss of US$13.1 million in 2Q09.
-- GAAP net income per basic and diluted ADS was US$0.24 and US$0.21,
respectively, an improvement from US$0.14 and $0.13 per basic and
diluted ADS, respectively, in 1Q10 and a loss of US$0.29 per basic and
diluted ADS in 2Q09.
-- Non-GAAP net income was US$17.7 million, compared to US$8.7 million in
1Q10 and a net loss of US$7.5 million in 2Q09. Non-GAAP net income per
diluted ADS was US$0.34, an improvement from US$0.17 per diluted ADS in
1Q10 and a loss of US$0.16 per diluted ADS in 2Q09.

BUSINESS HIGHLIGHTS:

Commenting on the results, Spreadtrum's President and CEO, Dr. Leo Li said, "We maintained our positive momentum in the second quarter of 2010 and achieved our best quarterly results in the history of our company in terms of revenue and profitability. Revenues for the quarter rose 341% year-over-year to $71.4 million and net income grew 69% from the prior quarter to $11.1 million as new and existing customers continued to recognize the value and quality of our products. Our low cost solutions with high quality and attractive features are enabling us to gain market share in both the GSM and TD markets. At the same time, we further expanded our operating and net margins during the second quarter.

"Looking ahead to the second half of 2010, we are confident that our solid and growing base of loyal customers, the expected increase in revenue contribution from both domestic and international sales, coupled with favorable trends in the TD market, and our plans to deepen our product portfolio, will support continued growth in the second half of the year. For the third quarter 2010, we expect revenue to be in the range of $88-96 million with flat or slightly lower gross margins on a sequential basis. Although we are facing toughening competition as we gain market shares in both GSM and TD business, we believe that our value proposition and ability to execute on our key initiatives will support healthy and sustainable margin levels that are in line with our long-term targets."

Further commenting on the Q2 financial results, Shannon Gao, Spreadtrum CFO, said, "As we further develop and expand our business, we anticipate an increase in R&D expenses in the second half of the year while continuing to maintain effective controls over our operating expenses to better align our bottom-line."

SECOND QUARTER FISCAL YEAR 2010 FINANCIAL REVIEW:

Revenue

Revenue in 2Q10 totaled US$71.4 million, up from US$52.1 million in 1Q10 and US$16.2 million in 2Q09.

Unit shipments of 2G/2.5G semiconductors realized in 2Q10 increased 29.6% sequentially and 250.6% year-over-year. Unit shipments of 3G semiconductors realized in 2Q10 increased 95.3% sequentially and 1,664.9% year-over-year.

Gross Profit and Margin

Gross profit for the quarter was US$31.9 million, up 34% from US$23.7 million in 1Q10 and up from US$3.8 million in 2Q09. Gross margin for the quarter was 44.6%, down from 45.5% in 1Q10 and up from 23.6% in 2Q09. Non-GAAP gross margin, adjusted to exclude share-based compensation, was 44.7%, a sequential decrease from 45.7% in 1Q10 and a year-over-year increase from 24.0% in 2Q09.

The average selling price per unit of 2G/2.5G baseband and Radio Frequency ("RF") bundle semiconductors in 2Q10 decreased 7.8% sequentially and was down 0.7% year-over-year. The average selling price per unit of 3G baseband and RF bundle semiconductors in 2Q10 decreased 22.1% sequentially and 39.0% year-over-year. Overall gross margin maintained fairly stable sequentially due to increased volume in sales of higher margin products.

Cost of revenue in 2Q10 totaled US$39.6 million, representing an increase of 39% from the previous quarter and up 219% from 2Q09 levels, attributable to an increase in sales across all major product lines.

Operating Expense and Margin

The Company's operating margin for the quarter was 17.7%, compared to 14.3% in the previous quarter and negative 85.7% in 2Q09. The sequential and year-over-year improvements in operating margin were primarily driven by an increase in sales and gross profit, also by an increase in government subsidies, which were recorded as a reduction of R&D expenses, partially offset by an impairment loss of intangible assets due to technological obsolescence and change in business strategy. Non-GAAP operating margin, adjusted to exclude share-based compensation expense and impairment loss of intangible assets was 26.9% in 2Q10, up from 18.3% in 1Q10 and negative 51.2% in 2Q09.

Total operating expenses in 2Q10, including selling, general and administrative (SG&A) expenses and research and development (R&D) expenses, were US$19.2 million, representing an increase from US$16.2 million in 1Q10 and an increase from US$17.7 million in 2Q09. The sequential and year-over-year rises in operating expenses were primarily due to an impairment loss of intangible assets, partially offset by a decrease in share-based compensation and an increase in government subsidies, which were recorded as a reduction of R&D expenses.

R&D expenses increased 24.7% sequentially and increased 84.6% year-over-year to US$14.96 million in 2Q10. The sequential increase was primarily attributable to an impairment loss of intangible assets, partially offset by an increase in earned government subsidies, which were recorded as a reduction of R&D expenses. The year-over-year increase was mainly due to the aforementioned reasons, as well as increases in employee compensation expense.

SG&A expenses were flat on a sequential basis and decreased 55.7% year-over-year to US$4.26 million in 2Q10. The year-over-year decrease was driven primarily by a decline in share-based compensation attributable to SG&A expenses.

Non-Operating Income

In 2Q10, the Company recorded interest income of US$0.8 million, up from both the previous quarter and 2Q09 as a result of investing a higher balance of cash. Other income (net) in 2Q10 was a gain of US$0.4 million, compared to a loss of US$0.1 million in 1Q10 and a gain of US$0.2 million in 2Q09. The sequential and year-over-year increases were primarily due to foreign exchange gain.

Net Income/Loss

The Company's net income totaled US$11.1 million in 2Q10, compared to US$6.6 million in 1Q10 and a net loss of US$13.1 million in 2Q09. The sustained profitability in the first half of 2010 was primarily due to increased sales of product lines and net profit margins coupled by stable gross profit margin. Net profit margin was 15.6%, up from 12.6% in 1Q10 and up from negative 80.7% in 2Q09. Basic and diluted income per ADS was US$0.24 and US$0.21, respectively, in 2Q10, compared to US$0.14 and US$0.13, respectively, in 1Q10 and a loss of US$0.29 per basic and diluted ADS in 2Q09.

Excluding share-based compensation expenses and impairment loss of intangible assets, the Company's non-GAAP net income for 2Q10 was US$17.7 million, up from a non-GAAP net income of US$8.7 million in 1Q10 and up from a non-GAAP net loss of US$7.5 million in 2Q09. Diluted non-GAAP income per ADS in 2Q10 was US$0.34, compared with US$0.17 per ADS in the prior quarter and a non-GAAP loss of US$0.16 per diluted ADS in 2Q09.

Balance Sheet and Cash Flow

As of June 30, 2010, the total balance of cash and cash equivalents and term deposit with maturity dates over 90 days was 147.1 million, an increase of 31.9 million from 115.2 million as of March 31, 2010. The increase primarily resulted from a rise in advances from customers, an increase of 2Q2010 net profit, and an increase of government subsidies, partially offset by an increase in inventory. The total balance of restricted cash which is available to use when the related expenses occurred and appropriate obligations are satisfied was 18.9 million, compared with 18.7 million as of March 31, 2010. In 2Q10, the Company generated US$35.2 million in cash from operating activities and used $1.7 million cash on property and equipment as well as US$2.5 million toward intangible asset acquisitions.

Accounts receivable and notes receivable (collectively, "A/R") decreased by US$2.0 million from US$3.8 million as of March 31, 2010 to US$1.8 million as of June 30, 2010. Average A/R days decreased sequentially from 11 days to 4 days as a result of an increase of advances from customers and shorter cash collection period upon customer acceptance. Inventory as of June 30, 2010 was US$49.6 million, an increase of US$12.5 million from March 31, 2010. This increase resulted from a rise in deferred costs included within inventories, which consisted of products shipped to customers where the rights and obligations of ownership had passed to the customers, but revenue had not yet been recognized due to pending customer acceptance. Inventory days were 100 days based on the average inventory amount of this quarter as a result of the higher inventory balance, partially offset by higher sales. Total assets as of June 30, 2010 were US$286.3 million, up US$38.7 million from US$247.6 million as of March 31, 2010. The increase in total assets was primarily attributable to increases of US$32.1 million in cash and US$12.5 million in inventory, partially offset by a decrease of US$2 million in accounts receivable and notes receivable, and a decrease of $4.5 million of intangible assets.

Current liabilities increased from US$73.1 million as of March 31, 2010 to US$97.7 million as of June 30, 2010, primarily due to the increases of US$15.3 million in advance from customers, accrued expenses and other current liabilities (mainly comprise increase of US$3.0 million in government subsidies, US$2.4 million in accrued rebate to customers, US$2.3 million accrued employee compensation) and US$2.0 million in income tax payable, partially offset by a decrease of US$1.9 million in accounts payable. Long-term liabilities as of June 30, 2010 were US$49.6 million, compared to US$49.3 million as of March 31, 2010.

BUSINESS OUTLOOK:

Spreadtrum currently expects revenue for the third quarter of 2010 to be in the range of US$88-96 million with flat or slightly lower gross margin on a sequential basis.

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 12, 2010, which is 9:00 am (Hong Kong) on Friday, August 13, 2010 to discuss the financial results and recent business activities. The conference call may be accessed by calling:


Toll Free Toll
United States +1-866-700-0161 +1-617-213-8832
China 10-800-130-0399
South China China Telecom
10-800-130-0399
China Netcom
10-800-852-1490
North China China Telecom
10-800-152-1490
Hong Kong 800-96-3844
United Kingdom 00-800-280-02002
Participant Passcode "SPRD" or "Spreadtrum"

A telephone replay will be available shortly after the call until August 19, 2010 at (US Toll Free) +1-888-286-8010 or (US Toll) +1-617-801-6888. Passcode: 27065058.

A live webcast of the conference call and replay 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 impairment loss of intangible assets. 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 impairment loss of intangible assets.

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 (loss), and non-GAAP diluted earnings per ADS, all excluding share-based compensation expenses and impairment loss of intangible assets. 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 (loss) 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
2009 2010 2010 2Q09 1Q10

Revenue 16,218 52,113 71,448 341% 37%
Cost of revenue 12,396 28,410 39,585 219% 39%
Gross profit 3,822 23,703 31,863 734% 34%

Operating expenses
Research & development 8,100 11,990 14,955 85% 25%
Selling, general &
administrative 9,618 4,251 4,263 (56%) 0%
Total operating expenses 17,718 16,241 19,218 8% 18%
Operating income (loss) (13,896) 7,462 12,645 (191%) 69%

Non-operating income
(expense)
Interest income 334 609 754 125% 24%
Interest expense (66) (696) (633) 852% (9%)
Other income (expense),
net 232 (124) 378 63% (405%)
Total non-operating
income (expense) 500 (211) 499 0% (337%)
Income (loss) before tax
and equity in loss of
affiliates (13,396) 7,251 13,144 (198%) 81%
Income tax
expense(benefit) (306) 583 1,988 (750%) 241%
Equity in loss of
affiliates, net of
taxes -- (82) (29) -- (65%)
Net income (loss) (13,090) 6,586 11,127 (185%) 69%

Income (loss) per ADS,
basic (0.29) 0.14 0.24 (183%) 71%
Income (loss) per ADS,
diluted (0.29) 0.13 0.21 (172%) 62%

Margin analysis:
Gross margin 23.6% 45.5% 44.6%
Operating margin (85.7%) 14.3% 17.7%
Net margin (80.7%) 12.6% 15.6%

Weighted average ADS
equivalent: (1)
Basic 44,606,747 46,539,706 46,990,866
Diluted 44,606,747 50,424,925 51,825,499
ADS equivalent
outstanding at end of
period 44,836,196 46,722,120 47,233,651

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



Spreadtrum Communications, Inc.
Consolidated Income Statements
(in thousands of US dollars, except per share data and percentages)
(unaudited)

Six months ended
June 30, June 30,
2009 2010 Change
Revenue $24,434 $123,562 406%
Cost of revenue 19,018 67,996 258%
Gross profit 5,416 55,566 926%

Operating expenses
Research & development 15,884 26,945 70%
Selling, general & administrative 12,991 8,514 (34%)
Total operating expenses 28,875 35,459 23%
Operating income (loss) (23,459) 20,107 (186%)

Non-operating income (expense)
Interest income 578 1,363 136%
Interest expense (109) (1,329) 1,119%
Other income, net 648 254 (61%)
Total non-operating income 1,117 288 (74%)
Income (loss) before tax and equity in
loss of affiliates (22,342) 20,395 (191%)
Income tax expense (benefit) (947) 2,571 (371%)
Equity in loss of affiliates, net of
taxes -- (111)
Net income (loss) $(21,395) $17,713 (183%)

Income (loss) per ADS, basic $(0.48) $0.38 (179%)
Income (loss) per ADS, diluted $(0.48) $0.35 (173%)

Margin analysis:
Gross margin 22.2% 45.0%
Operating margin (96.0%) 16.3%
Net margin (87.6%) 14.3%

Weighted average ADS equivalent: (3)
Basic 44,359,240 46,766,532
Diluted 44,359,240 51,236,488

(3) 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
December March June
31, 2009 31, 2010 30, 2010

Cash and cash equivalents $37,809 $33,908 $29,995
Restricted cash $11,496 $18,677 $18,889
Short term deposits $20,504 $37,384 $72,921
Notes receivable $1,383 $266 --
Accounts receivable, net $7,008 $3,569 $1,836
Inventories $25,541 $37,038 $49,557
Deferred tax assets $1,347 $1,347 $1,354
Prepaid expenses and other current
assets $5,561 $8,869 $9,154
Total current assets $110,650 $141,058 $183,706

Property and equipment, net $27,090 $26,568 $27,049
Acquired intangible assets, net $26,621 $25,208 $20,543
Equity Investment $1,001 $7,428 $7,398
Deferred tax assets $570 $570 $571
Goodwill $2,000 $2,000 $2,000
Long term deposits $43,935 $43,948 $44,177
Other long term assets $7,227 $819 $838
Total assets $219,094 $247,600 $286,282

Accounts payable $19,498 $20,727 $18,785
Advances from customers $14,667 $29,929 $45,180
Income tax payable $3,071 $3,655 $5,632
Accrued expenses and other current
liabilities $17,888 $18,779 $28,136
Total current liabilities $55,124 $73,090 $97,733

Long term loan $43,935 $43,948 $44,177
Other long-term obligations $5,464 $5,380 $5,383
Total long term liabilities $49,399 $49,328 $49,560
Total liabilities $104,523 $122,418 $147,293

Shareholders' equity $114,571 $125,182 $138,989
Total liabilities & shareholders'
equity $219,094 $247,600 $286,282



Spreadtrum Communications, Inc.
Supplemental Information
(in thousands of US dollars, except percentages)

Revenue 3Q08 4Q08 1Q09 2Q09
Baseband and RF Semiconductor $18,765 $9,298 $8,007 $16,071
Turnkey Solutions $1,212 $937 $209 $147
Total $19,977 $10,235 $8,216 $16,218
As % of Total Revenue
Baseband Semiconductor 93.9% 90.8% 97.5% 99.1%
Turnkey Solutions 6.1% 9.2% 2.5% 0.9%
Gross Margin 43.7% -26.8% 19.4% 23.6%


Revenue 3Q09 4Q09 1Q10 2Q10
Baseband and RF Semiconductor $38,349 $42,118 $52,107 $71,298
Turnkey Solutions $30 $139 $6 $150
Total $38,379 $42,257 $52,113 $71,448
As % of Total Revenue
Baseband and RF Semiconductor 99.9% 99.7% 100.0% 99.8%
Turnkey Solutions 0.1% 0.3% 0.0% 0.2%
Gross Margin 39.0% 42.2% 45.5% 44.6%



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,
2009 2010 2010
Cost of revenue $12,396 $28,410 $39,585
Adjustment for share-based
compensation (60) (102) (91)
Cost of revenue (non-GAAP) $12,336 $28,308 $39,494
Operating income (loss) $(13,896) $7,462 $12,645
Adjustment for share-based
compensation within: Cost of
revenue 60 102 91
Research and development 632 1,200 1,176
Selling, general, and administrative 4,898 776 799
Adjustment for impairment loss of
long-lived assets 4,486
Operating income (loss) (non-GAAP) (8,306) 9,540 19,197
Net income (loss) (13,090) 6,586 11,127
Adjustment for share-based
compensation within: Cost of
revenue 60 102 91
Research and development 632 1,200 1,176

Selling, general, and administrative 4,898 776 799
Adjustment for impairment loss of
long-lived assets 4,486
Net income (loss) (non-GAAP)* (7,500) 8,664 17,679
Income (loss) per ADS, diluted (0.29) 0.13 0.21
Adjustment for share-based
compensation 0.13 0.04 0.04
Adjustment for impairment loss of
long-lived assets 0.09
Income (loss) per ADS, diluted (non-
GAAP)* (0.16) 0.17 0.34
Gross margin 23.6% 45.5% 44.6%
Adjustment for share-based
compensation 0.4% 0.2% 0.1%
Gross margin (non-GAAP) 24.0% 45.7% 44.7%
Operating margin(loss) (85.7%) 14.3% 17.7%
Adjustment for share-based
compensation 34.5% 4.0% 2.9%
Adjustment for impairment loss of
long-lived assets 6.3%
Operating margin(loss) (non-GAAP) (51.2%) 18.3% 26.9%
Net margin(loss) (80.7% 12.6% 15.6%
Adjustment for share-based
compensation 34.5% 4.0% 2.9%
Adjustment for impairment loss of
long-lived assets 6.3%
Net margin(loss) (non-GAAP)* (46.2%) 16.6% 24.8%
Operating expenses $17,718 $16,241 $19,218
Adjustment for share-based
compensation:
Research and development 632 1,200 1,176
Selling, general, and administrative 4,898 776 799
Adjustment for impairment loss of
long-lived assets 4,486
Operating expenses (non-GAAP) $12,188 $14,265 $12,757

* The non-GAAP adjustment does not take into consideration the impact of
taxes.


ABOUT SPREADTRUM COMMUNICATIONS, INC.

Spreadtrum Communications, Inc. (Nasdaq: SPRD; "Spreadtrum") is a fabless semiconductor company that develops baseband and RF processor solutions for the wireless communications market. Spreadtrum combines its semiconductor design expertise with its software development capabilities to deliver highly-integrated baseband processors with multimedia functionality and power management. Spreadtrum has developed its solutions based on an open development platform, enabling its customers to develop customized wireless products that are feature-rich to meet their cost and time-to-market requirements.

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 ability to gain market share in both GSM and TD markets, the Company's belief that its growing customers, the expected domestic and international sales growth, the favorable trends in TD market and the plans to deepen its product portfolio will support its continued growth in the second half of the year, the Company's ability to maintain healthy and sustainable margin levels that are in line with long-term targets under increasingly tough competition, the Company's ability to maintain effective controls over its operating expenses when facing an increase in R&D expense in the second half of the year, the Company's expectations with respect to revenue being in the range of US$88-96 million in the third quarter of 2010 with flat or slightly lower gross margins on a sequential basis. 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 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 domestic and international customers and Chinese government agencies; the Company's ability to successfully complete the projects of the Chinese TD-SCDMA operator; 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 May 7, 2010, 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.


For further information, please contact:

Investor Relations
Tel: +86-21-5080-2727
Email: ir@spreadtrum.com
Web: http://www.spreadtrum.com
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