Spreadtrum Communications, Inc. Announces Third Quarter 2011 Financial Results
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Spreadtrum Communications, Inc. Announces Third Quarter 2011 Financial Results

(PRNewswire) — Spreadtrum Communications, Inc. (Nasdaq: SPRD; "Spreadtrum" or the "Company"), a leading fabless semiconductor provider in China with advanced technology in both 2G and 3G wireless communications standards, today announced its unaudited financial results for the third quarter ended September 30, 2011.

THIRD QUARTER 2011 FINANCIAL SUMMARY:


BUSINESS HIGHLIGHTS:

Commenting on the results, Spreadtrum's Chairman and CEO, Dr. Leo Li said, "We exceeded revenue guidance in 3Q 2011 as quarterly revenue grew in both our 3G and 2.5G product lines. In the TD-SCDMA market, we continued to gain market share with global and domestic handset manufacturers as a result of our breakthrough standby and talk time and high level of integration. Our basebands are powering the TD-SCDMA version of the Samsung Galaxy S II, which launched in the third quarter and was well received by consumers. The overall TD-SCDMA market has continued to grow at a good pace given the combination of continuously improving network coverage and compelling portfolio of low-cost feature phones and smartphones that are now available to consumers. In the fourth quarter, we are on track to introduce our low-cost 40nm-based smartphone solutions for both TD-SCDMA and EDGE/WiFi, which we believe will drive further growth in both markets going into 2012. Through improvement in product mix, we have been able to mitigate ASP pressure in low-end feature phones. Looking ahead to 4Q 2011, with continuing growth vectors in both the TD-SCDMA and 2.5G markets, we expect revenue to be in the range of US$188 million - US$194 million with a gross margin of approximately 41%."

Key business highlights include:


Further commenting on the third quarter financial results, Shannon Gao, Spreadtrum's CFO, added, "In 3Q 2011 our inventory levels declined and we achieved both a stable gross margin and a stable operating margin. We declared our second quarterly cash dividend, distributing US$0.05 per ADS to shareholders on October 26, 2011, and have completed repurchase of approximately 5.4% of total outstanding shares before share repurchase, with 2.4% purchased in the third quarter. We expect to double our cash dividend distribution in the fourth quarter to US$0.10 per ADS.

"As of September 30, 2011, we consolidated the balance sheets of MobilePeak and Telegent. In the third quarter, non-recurring signing bonus and consulting fee expenses were offset by increased R&D subsidies. This resulted in a stable operating margin compared to the second quarter. Looking forward, we expect the operating margin to continue to be stable in 4Q11."

THIRD QUARTER 2011 FINANCIAL REVIEW:

Revenue

Revenue in 3Q11 totaled US$184.8 million, up from US$160.2 million in 2Q11 and US$96.2 million in 3Q10.

Sales volume of 2G/2.5G baseband and radio frequency bundle semiconductors realized in 3Q11 increased 19.1% sequentially and 121.7% year-over-year. Sales volume of 3G bundle semiconductors realized in 3Q11 increased 17.8% sequentially and 101.1% year-over-year.

The average selling price per unit of 2G/2.5G bundle semiconductors in 3Q11 decreased 3.7% sequentially and 15.9% year-over-year. The average selling price per unit of 3G bundle semiconductors in 3Q11 decreased 0.2% sequentially and 16.7% year-over-year.

Gross Profit and Margin

Gross profit for the quarter was US$77.2 million, up 14.8% from US$67.2 million in 2Q11 and up 81.7% from US$42.5 million in 3Q10. Gross margin for the quarter was 41.8%, down from 42.0% in 2Q11 and 44.1% in 3Q10. Non-GAAP gross margin, adjusted to exclude share-based compensation, was 41.9%, down from 42.1% in 2Q11 and 44.3% in 3Q10.

Cost of revenue in 3Q11 totaled US$107.6 million, representing an increase of 15.8% from the previous quarter and up 100.2% from 3Q10 levels, which is generally in line with the increase in sales.

Operating Expense and Margin

The Company's operating margin for the quarter was 21.4%, compared to 21.2% in the previous quarter and 21.5% in 3Q10. Non-GAAP operating margin, adjusted to exclude share-based compensation expense was 23.7% in 3Q11, compared to 23.0% in 2Q11 and 25.1% in 3Q10.

Total operating expenses in 3Q11, including selling, general and administrative (SG&A) expenses and R&D expenses, were US$37.6 million, representing an increase from US$33.3 million in 2Q11 and an increase from US$21.7 million in 3Q10.

R&D expenses increased 7.8% sequentially and 73.5% year-over-year to US$28.9 million in 3Q11. The sequential increase in R&D expenses was primarily due to a non-recurring signing bonus to a newly appointed officer and a milestone achievement bonus related to new technology, partially offset by an increase in subsidies recognized in3Q11 and a decrease in engineering expense related to development of new product. The year-over-year increase in R&D expense was primarily attributable to a non-recurring signing bonus to a newly appointed officer, a milestone achievement bonus related to new technology, an increase in employee compensation including share-based compensation, engineering expense related to development of new product and depreciation and amortization expense, partially offset by an increase in recognized subsidies from the government and other parties.

SG&A expenses increased 34.5% sequentially and increased 72.0% year-over-year to US$8.8 million in 3Q11. The sequential increase in SG&A expense was primarily due to a non-recurring consulting fee to a resigned officer from MobilePeak, partially offset by a decrease in professional service fees. The year-over-year increase in SG&A expense was primarily due to a non-recurring consulting fee to a resigned officer from MobilePeak and an increase in depreciation and amortization expense of office equipment and new office layouts.

Non-Operating Income

In 3Q11, the Company recorded interest income of US$1.6 million, up from US$1.4 million from previous quarter and up from US$1.0 million in 3Q10. The sequential and year-over-year increase was primarily due to investment of a higher balance of cash combined with an increase in deposit saving rate. Interest expense in 3Q11 was US$1.2 million, up from $0.7 million in previous quarter and up from $0.6 million in 3Q10. The sequential and year-over-year increase in interest expenses was due to an increase in short-term loans. Other income in 3Q11 was US$5.2 million, compared to US$2.6 million in 2Q11 and US$1.3 million in 3Q10. Other income (net) mainly represented net foreign exchange gains and losses and, in 3Q11, gains arising from re-measurement of interests previously held in MobilePeak as a result of step acquisition accounting.

Net Income

The Company's net income totaled US$39.3 million in 3Q11, compared to US$32.5 million in 2Q11 and US$19.5 million in 3Q10. The sequential increase in net income was primarily due to an increase in sales and gross profit, partially offset by higher operating expenses. Net profit margin was 21.3%, up from 20.3% in 2Q11 and 20.3% in 3Q10. Basic and diluted income per ADS were US$0.84 and US$0.75, respectively, in 3Q11, compared to US$0.67 and US$0.60, respectively, in 2Q11 and US$0.41 and US$0.37, respectively, in 3Q10.

Excluding share-based compensation expenses, the Company's non-GAAP net income for 3Q11 was US$43.5 million, up from a non-GAAP net income of US$35.5 million in 2Q11 and up from US$22.9 million in 3Q10. Diluted non-GAAP net income per ADS in 3Q11 was US$0.83, compared with US$0.65 per ADS in the prior quarter and US$0.43 per diluted ADS in 3Q10.

Balance Sheet and Cash Flow

In 3Q11 the Company completed the acquisition of majority shareholding (85.6%) of MobilePeak and 100% shareholdings of Telegent and started to consolidate the financial statements of MobilePeak and Telegent from respective acquisition closing dates. Based on the preliminary purchase price allocations for both acquisitions, the Company recognized identifiable intangible assets (including completed technologies and in-process research and development projects), of US$23.1 million and goodwill of US$34.2 million. The Company expects to finalize the purchase price allocations by December 31, 2011.

As of September 30, 2011, the total balance of cash and cash equivalents and term deposit with maturity dates over 90 days was US$253.8 million, flat compared to June 30, 2011. The total balance of restricted cash pledged to banks for short-term loans was US$70.9 million, compared with $14.7 million as of June 30, 2011. To capture the benefit of the appreciation of the RMB against the US dollar and to quickly access US denominated capital without incurring material borrowing costs, the Company obtained one-year bank loans in the amount of US$64.0 million of which US$50.7 million and US$13.3 million was drawn down in 3Q11 and 2Q11, respectively. These short term loans are denominated in US dollars and secured by RMB term deposits which are recorded as restricted cash. The average borrowing rate of the short term bank loans is lower than the deposit savings rate on the restricted cash. In 3Q11, the Company generated US$30.5 million in cash from operating activities and used $8.9 million in cash on property and equipment as well as US$3.6 million relating to intangible asset acquisitions. In 3Q11, the Company used US$17.3 million in cash to repurchase its outstanding shares.

Accounts receivable increased by US$12.4 million from US$2.2 million as of June 30, 2011 to US$14.6 million as of September 30, 2011 as a result of increased credit line to selected customers. A/R days was calculated based on quarterly average accounts receivable divided by quarterly revenue. Average A/R days increased sequentially from 1 day to 4 days. Inventory as of September 30, 2011 was US$100.2 million, a decrease of US$24.0 million from June 30, 2011. Deferred cost 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. Deferred cost increased from US$78.5 million as of June 30, 2011 to US$93.5 million as of September 30, 2011. Inventory days was calculated based on quarterly average inventory (excluding deferred cost) divided by quarterly cost of goods sold. Inventory days decreased from 117 days in 2Q11 to 96 days in 3Q11. Total assets as of September 30, 2011 were US$705.1 million, up US$79.0 million from US$626.1 million as of June 30, 2011. The increase in total assets was primarily attributable to increase of US$56.1 million in restricted cash, US$34.2 million in goodwill, US$22.9 million in acquired intangible assets, US$15.0 million in deferred cost, US$12.4 million in accounts receivables and indemnification asset of US$5.6 million, partially offset by decrease in equity investment of US$25.0 million, inventory of US$24.0 million, prepaid expenses and other current assets of US$11.0 million and elimination of $11.8 short-term and long-term loans to MobilePeak upon consolidation.

Current liabilities increased from US$373.2 million as of June 30, 2011 to US$414.0 million as of September 30, 2011, primarily due to the addition of US$51.6 million in short-term loan and increases of US$11.5 million in accrued expense and US$2.7 million in income tax payable, partially offset by decrease of US$20.7 million in accounts payable and US$4.3 million in advance from customers. Long-term liabilities as of September 30, 2011 were US$12.5 million, compared to US$5.3 million as of June 30, 2011.

BUSINESS OUTLOOK:

Looking ahead, Spreadtrum expects revenue for the fourth quarter of 2011 to be in the range of US$188 million – US$194 million with a gross margin of approximately 41%.

WEBCAST OF CONFERENCE CALL:

The Company's senior management will host a conference call at 8:00 pm (Eastern) / 5:00 pm (Pacific) on Wednesday, November 9, 2011, which is 9:00 am (Hong Kong) on Thursday, November 10, 2011 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 (0)808 234 6646

Participant Passcode

"SPRD" or "Spreadtrum"




A telephone replay will be available shortly after the call until November 16, 2011 at (US Toll / International) +1 718 354 1232, passcode: 21737703.

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




September 30

June 30

September 30

Change from


2010

2011

2011

3Q10

2Q11




Revenue

96,230

160,177

184,783

92.0%

15.4%

Cost of revenue

53,760

92,976

107,625

100.2%

15.8%




Gross profit

42,470

67,201

77,158

81.7%

14.8%




Operating expenses




Research & development

16,631

26,754

28,852

73.5%

7.8%

Selling, general and administrative

5,102

6,525

8,776

72.0%

34.5%

Total operating expenses

21,733

33,279

37,628

73.1%

13.1%




Operating income

20,737

33,922

39,530

90.6%

16.5%




Non-operating income (expense)




Interest income

976

1,374

1,597

63.6%

16.2%

Interest expense

(621)

(740)

(1,239)

99.5%

67.4%

Other income, net

1,263

2,597

5,195

311.3%

100.0%

Total non-operating income

1,618

3,231

5,553

243.2%

71.9%

Income before income tax and equity in loss of affiliates

22,355

37,153

45,083

101.7%

21.3%




Income tax expense

(2,798)

(4,185)

(5,172)

84.8%

23.6%

Equity in loss of affiliates, net of taxes

(30)

(475)

(639)

2,030.0%

34.5%




Net income

19,527

32,493

39,272

101.1%

20.9%




Income per ADS, basic

0.41

0.67

0.84

104.9%

25.4%

Income per ADS, diluted

0.37

0.60

0.75

102.7%

25.0%




Margin analysis:




Gross margin

44.1%

42.0%

41.8%

Operating margin

21.5%

21.2%

21.4%

Net margin

20.3%

20.3%

21.3%







Weighted average ADS equivalent(1):




Basic

47,457,465

48,686,506

47,007,964

Diluted

52,729,515

54,257,201

52,643,649

ADS equivalent outstanding at end of period

47,706,621

47,447,391

46,677,518







(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)



Nine Months ended



September30,

September30,

2010

2011

Change


Revenue

219,792

482,031

119.3%

Cost of revenue

121,756

279,771

129.8%



Gross profit

98,036

202,260

106.3%



Operating expenses


Research &development

43,573

79,555

82.6%

Selling, general and administrative

13,620

20,559

50.9%

Total operating expenses

57,193

100,114

75.0%



Operating income

40,843

102,146

150.1%



Non-operating income(expense)


Interest income

2,338

4,250

81.8%

Interest expense

(1,950)

(2,678)

37.3%

Other income, net

1,518

9,505

526.2%

Total non-operating income

1,906

11,077

481.2%

Income before income tax and equity in loss of affiliates

42,749

113,223

164.9%

Income tax expense

(5,369)

(12,794)

138.3%

Equity in loss of affiliates, net of taxes

(141)

(1,129)

700.7%



Net income

37,239

99,300

166.7%



Income per ADS, basic

0.79

2.07

162.0%

Income per ADS, diluted

0.72

1.83

154.2%



Margin analysis:


Gross margin

44.6%

42.0%

Operating margin

18.6%

21.2%

Net margin

16.9%

20.6%




Weighted average ADS equivalent(1):


Basic

46,999,374

48,049,601

Diluted

51,827,975

54,155,019




(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  


September 30,

June 30,

September 30,


2010

2011

2011

ASSETS


Current assets


Cash and cash equivalents

36,339

167,510

183,250

Restricted cash

19,142

14,735

70,852

Short-term deposit

132,068

87,367

70,594

Short-term loan to an associate

-

9,763

-

Accounts receivable, net

4,317

2,225

14,611

Inventories(2)

20,293

124,230

100,185

Deferred cost(2)

45,008

78,470

93,454

Deferred tax assets

1,373

1,709

1,740

Prepaid expenses and other current assets

10,599

29,291

18,264

Total current assets

269,139

515,300

552,950




Property and equipment, net

28,219

33,828

39,545

Acquired intangible assets, net

23,269

36,517

59,405

Equity investment

7,366

35,018

10,065

Long-term loan to an associate

-

2,045

-

Deferred tax assets

573

803

811

Goodwill

2,000

2,000

36,208

Long-term deposits

44,769

-

-

Indemnification assets

-

-

5,567

Other long-term assets

734

540

580

Total assets

376,069

626,051

705,131




LIABILITIES AND SHAREHOLDERS' EQUITY


Current liabilities


Short-term loan, including current portion of long-term loan

-

59,656

111,222

Accounts payable

42,269

108,393

87,687

Advances from customers

73,803

140,156

135,836

Income tax payable

8,431

15,642

18,362

Accrued expenses and other current liabilities

37,026

49,397

60,887

Total current liabilities

161,529

373,244

413,994

Long-term loan

44,769

-

-

Other long-term obligations

6,209

5,277

5,323

Long-term tax liabilities

-

-

5,567

Deferred tax liabilities

-

-

1,612

Total long term liabilities

50,978

5,277

12,502

Total liabilities

212,507

378,521

426,496




Non-controlling shareholder interest

-

-

2,692

Shareholders' equity

163,562

247,530

275,943

Total liabilities and shareholders' equity

376,069

626,051

705,131


(2)Certain reclassifications have been made to all periods presented in the condensed consolidated balance sheets to conform to the current period presentation. Such reclassifications had no effect on previously reported results of operations or stockholder's equity.



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  


September 30,

June 30,

September 30,


2010

2011

2011


Cost of revenue

53,760

92,976

107,625

Adjustment for share-based compensation

(137)

(120)

(149)

Cost of revenue (non-GAAP)

53,623

92,856

107,476

Operating income

20,737

33,922

39,530

Adjustment for share-based compensation within: Cost of revenue

137

120

149

Research and development

1,877

2,085

2,857

Selling, general, and administrative

1,373

759

1,255

Operating income  (non-GAAP)

24,124

36,886

43,791

Net income

19,527

32,493

39,272

Adjustment for share-based compensation within: Cost of revenue

137

120

149

Research and development

1,877

2,085

2,857

Selling, general, and administrative

1,373

759

1,255

Net income (non-GAAP)*

22,914

35,457

43,533

Net income per ADS, diluted

0.37

0.60

0.75

Adjustment for share-based compensation

0.06

0.05

0.08

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

0.43

0.65

0.83

Gross margin

44.1%

42.0%

41.8%

Adjustment for share-based compensation

0.2%

0.1%

0.1%

Gross margin (non-GAAP)  

44.3%

42.1%

41.9%

Operating margin

21.5%

21.2%

21.4%

 Adjustment for share-based compensation

3.6%

1.8%

2.3%

Operating margin (non-GAAP)*

25.1%

23.0%

23.7%

Net margin  

20.3%

20.3%

21.3%

Adjustment for share-based compensation

3.6%

1.8%

2.3%

Net margin (non-GAAP)*

23.9%

22.1%

23.6%

Operating expenses

21,733

33,279

37,628

Adjustment for share-based compensation:




Research and development

(1,877)

(2,085)

(2,857)

Selling, general and administrative

(1,373)

(759)

(1,255)

Operating expenses (non-GAAP)

18,483

30,435

33,516


* 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 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 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. 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 continuing growth of the overall TD-SCDMA market at a good pace, the Company's belief that the introduction of its low-cost 40nm-based smartphone solutions will drive further growth in both TD-SCDMA and EDGE/WiFi markets going into 2012, the Company's ability to mitigate ASP pressure in low-end feature phones, the continuing growth of 2.5G and TD-SCDMA markets, the Company's expectations with respect to revenue for the fourth quarter of 2011 being in the range of US$188 million - US$194 million with a gross margin of approximately 41%, the Company's ability to engage with other global tier-1 manufactures, the Company's ability to maintain revenue growth and margin stability, and the Company's expectation with respect to the operating margin continuing to be stable in 4Q11, the Company's delivery of WCDMA/HSPA+ solutions by mid-2012, and the Company's expectation with respect to doubling its cash dividend distribution in the fourth quarter to US$0.10 per ADS. 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; the Company's continuous expansion of its footprint with global and domestic TD-CDMA handset manufacturers, including both global and domestic tier-1 handset manufacturer; the Company's ability to sustain recent rates of growth and its dominant market share position in both the feature phone and fixed wireless handset markets; 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 6, 2011, as amended, 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:

+1-650-308-8148

Email:

Email Contact

Web:

http://www.spreadtrum.com



SOURCE Spreadtrum Communications, Inc.

Contact:
Spreadtrum Communications, Inc.
MobilePeak
Telegent
Web: http://www.spreadtrum.com