@Analysts
Surprise surprise, as the stock went down, analysts now
decrease their targets - well expected:
Two, the Street is not all that excited about the prospects for Spansion, but neither have they completely given up on the stock.
Credit Suisse’s John Pitzer, who has an Outperform rating on the stock, chopped his target on the stock in half to $5 from $10. He thinks the company can reach break even in Q3.
Citigroup’s Glen Yeung concedes that his Buy rating on the stock “has been wrong,” and he cut his target to $7 from $13. But he sticking with his bullish stance, given a relatively low valuation.
Cowen’s Betsy Van Hees maintains her Neutral rating on the stock, and cautions that, given the difficult economic environment, management’s revenue outlook for the first quarter “may prove to optimistic.”
Spansion today is down 9 cents, or 3%, at $2.85.
blogs.barrons.com
More here:
CITI:
Spansion Inc (SPSN)
GM% Improvement And Valuation Still Interesting Though Risks
Are Evident
Gross Margin Improvement Better Than Expected — Spansion post GM% of
19.8%, outpacing the consensus of 17.9% despite revenue falling short of
expectations ($653M vs. $660M consensus and $670M mid-point of
guidance). GM% improvement came from a 4% ASP improvement and lower
costs that were a result of efficiencies at Fab 25.
? 1Q08 GM% Down Though Improving Through 2008 — Spansion’s management
expects 1Q08 gross margin to be down sequentially as depreciation expense
increases $25M due to SP1 and ASPs decline 10% q/q. We model GM% to
bottom in 1Q08 at 15.8% and improve from there into the mid-20’s as
production at the SP1 facility ramps.
? Risks Can’t Be Ignored… — Spansion’s 2008 story is 1H08 investments (80%
of capex in 1H08) for 2H08 payoffs (GM% improvement to mid-20’s from midto
high-teens). The risks associated with the story include our assumption of
~$100M of cash generated by a burn off of inventory, macro risks, and at least
a $150M increase in Debt.
? …But Are Considered In Our Valuation — We have lowered our target price to
$7 from $13 on lowered estimates, a shift to using Spansion’s median historical
EV/EBITDA multiple of 4.5x from our S&P model and incorporating the risk of
an additional ~$315M of equity or debt (to reach the level of cash at IPO) to be
raised in addition to what we have modeled to fund operations in 2008.
? Lowering Estimates — We have lowered our 2008 revenue and EPS estimates
to $2,589M/($1.43) from $2,712M/($0.60) and 2009 to $2,720M/$0.16 from
$2,840/$0.49. Our 2008 EBITDA estimate is $540M down from $601.
? Conclusion — Our Buy rating on Spansion's shares has been wrong but we are
not compelled to downgrade the stock given its valuation. While predicated on
a solid value proposition, managements' missteps, negative estimate revisions,
a loss of investor confidence and a tough competitive environment worked
against our Buy rating in 2007. However, we are encouraged by the improving
NOR pricing environment (part of our longer-term thesis), Spansion's share
gain, and manufacturing cost reduction opportunities in 2008.
Details
Revenues Fall Short But Gross Margins Better. Spansion Inc reported
4Q07 revenues of $653M, below consensus of $660M and $670M mid-point of
guidance (range $640M-$700M). Gross margin was up sequentially to 19.8%,
above consensus gross margin 17.9% and our estimate of 18.1%. Gross
margins improved as ASPs were up 4% sequentially while Spansion got
improved efficiency out of Fab 25 in Austin, Texas. The resulting EPS was
$(0.37), above consensus of $(0.54).
1Q08 Revenue Guided Down Seasonally As Gross Margins Trough.
Management guided 1Q08 revenue to $580M-$640M, mid-point $610M
(versus consensus of $617M). ASPs are expected to decline 10% in 1Q08
while CSID units should decline below seasonality (down 10-20% q/q) which is
partially offset by an increase in wireless units due to share gains at tier-one
customers and a return of sales into Japan with the new 65nm products. Gross
margin is expected to decline due to a $25M increase in depreciation expense
related to SP1 as well as a 10% ASP decline which is expected to be offset by a
similar decrease in unit costs. 1Q08 is expect to mark a trough in Spansion’s
gross margins as cost benefits from the ramp of SP1 begin to come through in
2Q08 and 3Q08. Spansion guided 1Q08 R&D to $105M and SG&A to be flat as
a percent of revenue. Net interest expense is expected to be $20M-$23M and
tax expense is expected to be $3M-$5M in 1Q08.
Risks To The Story Remain. Spansion guided 2008 capex to ~$550M, down
50% Y/Y but said $450M will be spent in 1H08 for the ramp of the SP1 facility.
This is a front end loaded investment which the company expects to pay off in
the form of higher gross margins in 2H08 (mid-20s up from mid- to highteens).
We have modeled the company tapping the remaining $100M of it GE
credit line in 1Q08 and $50M of its $175M Senior Secured Credit Line in order
to maintain >$400M cash balance through 1H08. This leaves $125M of the
credit line available as a buffer to downside. We have also modeled a
reduction of days of inventory from 102 day in 4Q07 to 88 days in 4Q08 which
generates ~$90M of cash flow from operations in 2008. Naturally, there is risk
that the macro slowdown would not allow Spansion to sell off inventory to
produce needed cash in 2008.
Changes to Our Estimates. We have lowered our 2008 revenue estimate to
$2,589M from $2,712M to reflect our more conservative view of semiconductor
demand given CIR’s view of a slowing economy and U.S. recession. Our 2008
gross margin estimate is lowered to 21.9% from 22.1% as the ramp of SP1 is
slower than we had expected but efficiencies at Fab 25 in Austin are better
than we had expected. Our 2008 EPS estimate falls to ($1.43) from ($0.60)
and 2009 to $0.16 from $0.49. Our 2008 EBITDA estimate is $540M down
from $601. We are now modeling in the use of $150M of additional credit lines
including $100M from GE in 1Q08 and $50M of the $175M Sr. Secured in
2Q08.
S&P:
S&P REITERATES HOLD OPINION
ON SHARES OF SPANSION INC
Q4 loss of $0.37 vs. $0.19 loss, is $0.01 wider than we expected. Sales rose 7% from Q3, with healthy results
for most end-markets and improving average selling prices. Gross margins widened on better sourcing,
more efficient testing, higher yield improvements, and better sales mix. As a result, operating margins also
expanded.We see marketshare gains aiding near-term results. But even so, we remain cautious on
competition and long-term sales growth.We now see an '08 loss of $1.75, widened from our previous
forecast of $0.38 loss, and we cut our 12-mo target price by $2 to $5.
Argus
ARGUS RATING: HOLD
• HOLD-rated Spansion Inc. posted fourth-quarter revenue of $652.8 million and a loss of $0.37 per
share; in the year-ago quarter, the company posted a loss of $0.19 per share.
• For all of 2007, Spansion posted revenue of $2.5 billion and a loss of $1.95 per share. This compares
with revenue of $2.58 billion and a loss of $1.15 per share in 2006.
• Our financial strength rating is Medium-Low and our long-term growth rate estimate is 15%,
assuming a return to profitability in 2009.
• For 2008, we are narrowing our loss estimate by a penny to $1.25 per share. For 2009, our
preliminary estimate is a loss of $0.06 per share, although our model projects profits in the second
half of 2009.
INVESTMENT THESIS
H OLD-rated Spansion Inc. (NGS: SPSN) had a decent 4Q07, but the outlook for the
coming year suggests continued volatility. Indeed, we expect Spansion to continue to burn
cash, particularly in the first half of 2008, with a possible return to operational
profitability in the second half. Since we do not expect this rebound to take place until the
fourth quarter, we are maintaining our HOLD rating.
RECENT DEVELOPMENTS
S p a nsion's 4Q07 results had both positive and negative elements. As we had
anticipated, the pricing environment for NOR chips was tough, with average selling prices
falling dramatically. At the same time, Spansion managed to gain some traction,
particularly in its consumer, set-top box and industrial business (CSID), where revenues
rose 10% sequentially. This growth brought total revenues to $652.8 million, a
year-over-year decline of 5.0%, but a sequential improvement of 6.8%.
Gross margins were also favorable at 19.8%, up from both last year and last quarter. In
addition, the company's operating loss of $46.1 million was narrower than last quarter's $59 million, but wider than the loss of $15.7 million in 4Q06. The
quarterly results also benefited from capitalized interest
adjustments and a tax benefit. This put Spansion's net loss for the
quarter at $49.5 million or $0.37 per share, less than we had
expected. In the year-ago quarter, Spansion had a net loss of $25
million or $0.19 per share.
For all of 2007, Spansion posted revenues of $2.5 billion and a
loss of $1.95 per share. This compares with revenues of $2.58
billion and a loss of $1.15 per share in 2006.
M eanwhile, Spansion and Saifun have amended their merger
agreement, and will increase the cash distribution portion of the
deal to $6.05 from $5.05 per share. This will be funded from
Saifun's cash on hand when the deal closes. The exchange ratio for
Saifun shareholders will remain 0.7429 shares of SPSN for each
SFUN share. The transaction was approved by shareholders in late
December and is expected to close in 1Q08.
EARNINGS & GROWTH ANALYSIS
Further review of the fourth-quarter results shows that Spansion
had a relatively strong backlog in its Wireless business, with a
book-to-bill ratio of about 1.3. We note, however, that this healthy
book-to-bill was essentially the same as in the prior quarter, though
it did not immediately convert to revenue strength due to the
decline in ASPs.
F o r 1Q08, Spansion projects revenues of $580-$640 million.
Management expects Wireless sales to remain strong, while the
CSID business experiences a seasonal decline. At the same time,
management expects deteriorating gross margins due in part to
increased depreciation expense from the ramp-up of the company's
SP1 facility, as well as higher interest expense and a tax provision
of about $4 million. In all, we project revenues of $611 million and
a loss of $0.74 per share. Added costs from SP1 should be offset in
the second half as Spansion expands sales of new semiconductor
offerings with higher yields and an improved cost structure. These
offerings will include the company's Eclipse architecture, which will
reformat NOR and NAND chips into a single die.
In 2008, we expect the completion of the Saifun deal by the end
of the first quarter. In addition, we assume an improved cost
structure by the second half of the year, with profitability likely by
the fourth quarter. This puts our loss estimate for all of 2008 at
$1.25, versus our prior loss estimate of $1.26. For 2009, we again
anticipate a slow start, with a more favorable environment in the
second half, and project a full-year loss of $0.06 per share. Our
long-term growth rate estimate is 15%.
FINANCIAL STRENGTH
Our financial strength rating is Medium-Low. Total debt/cap at
the end of 2007 was 46.2% compared with 37.7% a year earlier.
The company holds a net cash position of negative $986 million.
Cash flow from operations was $195 million for the year, but
Spansion's capital expenditures of $1.1 billion resulted in a cash
burn for all of 2007. For 2008, Spansion plans to cut capex in half, with most of this spending coming in 1H as the company ramps up
the SP1 facility. Accordingly, we anticipate a continued cash burn
in the first half of the year, with a return to positive free cash flow
in the second half.
VALUATION
Spansion's lack of profitability has led us to focus on price/sales
and price/cash flow metrics for valuation purposes. SPSN is
currently trading at 0.16-times our sales per share forecast for
FY08. In addition, the stock is trading at a projected FY08
price/operating cash flow multiple of just over 1. While both of
these multiples are very low relative to peers, we note that other
issues must also be considered. One is Spansion's plan to acquire
Saifun, which will alter the company's focus. A second factor is the
company's substantial use of cash and the likelihood that this will
continue. We note that SPSN currently trades well below its tangible book value per share of $12.07 as well as its cash per
share of $3.07. But as Spansion's equity position likely deteriorates
over the next several quarters and the company continues to burn
cash, we believe that the shares will appear more fairly valued. Our
fundamental model now points to a trading range for SPSN of
$2.50-$8 per share, while our discounted cash flow model indicates
a value of about $7, which assumes a return to sustainable
profitability in late 2009. Blending these approaches, we arrive at a
value of $6, above current prices. But we also note that the current
market volatility may alter Spansion's customer purchasing
patterns. We are therefore maintaining our HOLD rating.
O n January 23, HOLD-rated SPSN closed at $2.85, down
$0.09.
BUGGI |
