SAN JOSE, Calif. What's wrong with Spansion Inc.?
Spansion (Sunnyvale, Calif.) on Friday (Jan. 5) issued a sales and profit warning for the fourth quarter of 2006, meaning that the world's largest supplier of NOR flash-memory devices is in danger of reporting its tenth consecutive quarterly loss.
In fact, Spansion has failed to make a profit since the second quarter of 2004. Since that time, the company's total aggregate loss is a staggering $455.8 million, according to its financial reports.
In addition, the chip maker has not produced a yearly profit since 2003 and 2006 will most likely be in the red as well. And Spansion is not projected to turn a yearly profit until 2008, said Alex Gauna, an analyst with UBS Securities LLC.
What's the future for the company? Observers believe that Spansion could become a takeover target or a private-equity buyout candidate if its losses continue at the present rate.
For now, Spansion's warning for the fourth quarter is a major concern. ''Spansion announced that it now expects 4Q06 sales to range between $680-690 million, which is below the prior range of $710-740 million,'' Gauna said in a report.
''4Q06 sales were impacted significantly by late December delays in customer demand for certain high-density custom NOR flash devices. Spansion also expects these delayed orders to be sold in 1Q07,'' he said. ''Spansion also noted that the lower sales of high-density devices such as MirrorBit products will adversely impact EPS and the company no longer expects to be EPS break even in 4Q06.''
The analyst also lowered his Q4 sales estimates to $690 million, from $700 million. He expects a new pro forma EPS loss of minus $0.03-to-$0.06, from the original forecast of minus $0.01-to-$0.03.
There is an even bigger problem for Spansion, which only sells NOR-based devices. For some time, it has become apparent that the NOR flash-memory market is nothing more than a lousy commodity business.
The volumes for NOR are high in products like handsets, but the profit margins are dwindling and the competition is fierce in the arena. What's more, NAND devices are invading the handset market, possibly at the expense of NOR.
Spansion's ability to scale its core NOR product, MirrorBit, has been questionable. On the technology curve, NOR devices like MirrorBit have fallen behind NAND, at a time when the market needs smaller and cheaper chips.
Even Intel Corp., which has never made a dime in NOR, is reportedly looking at getting out of the business. Recently, Doug Freedman, an analyst with American Technology Research, said that an unnamed private equity institution is preparing to acquire the NOR flash memory businesses of STMicroelectronics Inc. and Intel.
For years, Intel's rival, Advanced Micro Devices Inc. (AMD), also struggled in NOR. As a result, AMD and its NOR partner, Fujitsu Ltd., in 2005 spun-off the product group into a new and independent operation called Spansion.
But since the spin-off, it's been an uphill battle for Spansion. In 2005, the company filed for an IPO amid a capacity glut and falling product prices.
The chip maker continued to spill red ink in 2005, causing it to revamp its manufacturing strategy. Despite a push to build new wafer fabs, flash-memory maker Spansion last year expanded its foundry agreement with Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC). The move was intended by Spansion to cut costs, according to analysts.
Spansion also has a 200-mm fab in Austin, Texas. The fab is making 90-nm MirrorBit parts, but the plant will transition to 65-nm technology in 2007. The company is also producing 110-nm parts at its JV3 facility in Aizu-Wakamatsu, Japan.
As reported, Spansion will invest about $1.2 billion in a 300-mm fab at its Aizu plant in Japan. The new SP1 wafer fab is designed to help Spansion take aim at the embedded flash memory market for data storage and program code storage. The fab is scheduled to begin operations next year, and will manufacture Spansion's MirrorBit flash memories using 65-nm process technology. The company's 45-nm parts are planned on 300-mm wafers in mid-2008.
Despite weak pricing and an inventory glut, Spansion expanded its share and solidified its lead in the global NOR flash memory market in the third quarter of 2006, according to a preliminary ranking from iSuppli Corp