Spreadtrum Communications, Inc. Announces Third Quarter 2013 Financial Results

Revenue in 3Q13 totaled US$293.3 million, up 5.6% from US$277.8 million in 2Q13 and up 56.1% from US$187.9 million in 3Q12. In 3Q13, smartphone products accounted for 73% of chipset revenue, and feature phone, modem and other products accounted for 27% of chipset revenue. In 2Q13, smartphone products accounted for 75% of chipset revenue, and feature phone, modem and other products accounted for 25% of chipset revenue.

Gross Profit and Margin

Gross profit for the quarter was US$109.8 million, up 4.7% from US$104.9 million in 2Q13 and up 56.8% from US$70.1 million in 3Q12. Gross margin for the quarter was 37.5%, down from 37.8% in 2Q13 and up from 37.3% in 3Q12. Non-GAAP gross margin, adjusted to exclude share-based compensation expenses, was 37.6%, down from 38.0% in 2Q13 and up from 37.4% in 3Q12.

Cost of revenue in 3Q13 totaled US$183.5 million, an increase of 6.1% from the previous quarter and 55.7% from 3Q12.

Operating Expense and Margin

The Company's operating margin for the quarter was 13.4%, up from 12.9% in the previous quarter and remaining the same as 3Q12. The sequential increase in operating margin was primarily due to lower research and development (R&D) expenses as a percentage of revenue. Non-GAAP operating margin, adjusted to exclude share-based compensation expenses was 15.3% in 3Q13, compared to 19.0% in 2Q13 and 16.6% in 3Q12.

Total operating expenses in 3Q13, including R&D expenses and selling, general and administrative (SG&A) expenses, were US$70.5 million, an increase from US$69.2 million in 2Q13 and US$44.9 million in 3Q12.

R&D expenses decreased 2.6% sequentially and increased 58.1% year-over-year to US$57.6 million in 3Q13. The sequential decrease in R&D expenses was primarily due to a decrease in employee compensation expenses including share-based compensation and an increase in recognized R&D subsidies, partially offset by increases in new product development engineering expenses and depreciation and amortization expenses. The year-over-year increase in R&D expenses was primarily due to increases in employee compensation expenses, new product development engineering expenses and depreciation and amortization expenses, and a decrease in recognized R&D subsidies.

SG&A expenses increased 28.5% sequentially and 51.2% year-over-year to US$12.8 million in 3Q13. The sequential increase in SG&A expenses was primarily due to an increase in professional expenses and legal fees related to the buy-out deal, partially offset by a decrease in share-based compensation. The year-over-year increase in SG&A expenses was primarily due to an increase in employee compensation expenses including share-based compensation and professional expenses and legal fees related to the buy-out deal.   

Non-Operating Income

In 3Q13, the Company recorded interest income of US$0.8 million, down from US$1.4 million in the previous quarter and from US$1.5 million in 3Q12. Interest expense in 3Q13 was US$1.2 million, up from US$1.0 million in the previous quarter and from US$1.1 million in 3Q12. Other income (net) in 3Q13 was a loss of US$0.1 million, compared to a gain of US$1.5 million in 2Q13 and a loss of US$0.2 million in 3Q12. Other income (net) mainly represented net foreign exchange gains and losses.

Net Income

The Company's net income totaled US$35.7 million in 3Q13, compared to US$34.8 million in 2Q13 and US$23.2 million in 3Q12. The sequential increase in net income was primarily due to the increase in gross profit. Net margin was 12.2%, down from 12.5% in 2Q13 and from 12.4% in 3Q12. Basic and diluted income per ADS were US$0.71 and US$0.64, respectively, in 3Q13, compared to US$0.71 and US$0.64, respectively, in 2Q13, and US$0.50 and US$0.44, respectively, in 3Q12.

Excluding share-based compensation expenses, the Company's non-GAAP net income for 3Q13 was US$41.2 million, down from a non-GAAP net income of US$51.8 million in 2Q13 and up from US$29.3 million in 3Q12. Diluted non-GAAP net income per ADS in 3Q13 was US$0.74, compared with US$0.95 per ADS in the prior quarter and US$0.56 per diluted ADS in 3Q12.

Balance Sheet and Cash Flow

As of September 30, 2013, the total balance of cash and cash equivalents and term deposit with maturity dates over 90 days was US$139.7 million, compared to US$201.7 million as of June 30, 2013. Restricted cash as of September 30, 2013 was US$188.7 million including US$113.9 million pledged for bank loans and US$74.8 million as security deposit for the buy-out deal. In 3Q13, the Company generated US$50.7 million in cash from operating activities and used US$33.3 million on intangible assets, US$5.2 million on property and equipment and US$1.0 million on equity investments.

Accounts receivable decreased by US$13.5 million from US$73.6 million as of June 30, 2013 to US$60.1 million as of September 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, remained stable at 21 days. Inventory as of September 30, 2013 was US$321.4 million, an increase of US$86.4 million from June 30, 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, increased from 101 days in 2Q13 to 140 days in 3Q13. The increase in inventory is to support the expansion of our product portfolio expansion to new 2.5G feature phone chipsets, dual-core and quad-core smartphone chipsets, WCDMA chipsets and connectivity chipsets, and to prepare for fourth quarter demand for these and other products. 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, increased from US$12.6 million as of June 30, 2013 to US$13.6 million as of September 30, 2013. We plan to completely step down the use of customer acceptance program in 4Q13. Total assets as of September 30, 2013 were US$1,048.2 million, up US$108.1 million from US$940.1 million as of June 30, 2013. The increase in total assets was primarily attributable to increases of US$86.4 million in inventory, US$48.8 million in restricted cash and US$27.8 million in intangible assets, offset by decreases of US$62.0 million in cash and US$13.5 million in accounts receivable.

Current liabilities increased from US$420.0 million as of June 30, 2013 to US$531.0 million as of September 30, 2013, primarily due to increases of US$91.3 million in accounts payable, US$23.2 million in short-term bank loans and US$15.0 million in accrued expenses, offset by a decrease of US$17.5 million in advances from customers. Long-term liabilities as of September 30, 2013 were US$13.8 million, compared to US$60.8 million as of June 30, 2013, primarily due to a US$50.0 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 8:00 pm (U.S Eastern) / 5:00 pm (U.S Pacific) on Monday, November 11, 2013, which is 9:00 am on Tuesday, November 12, 2013 in Hong Kong to discuss the financial results and recent business activities. The conference call may be accessed by calling:

A telephone replay will be available shortly after the call until November 18, 2013 at (US Toll / International) +1 646 254 3697 or (Hong Kong) +852 3051 2780, passcode: 87818369.

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
		2012		2013	2013	2Q13	3Q12
Revenue from third parties		185,505		277,810	293,320	5.6%	58.1%
Revenue from a related party		2,367		-	-	-	-100.0%
Total revenue		187,872		277,810	293,320	5.6%	56.1%
Cost of revenue		117,810		172,885	183,472	6.1%	55.7%
Gross profit		70,062		104,925	109,848	4.7%	56.8%
Operating expenses
Research & development		36,461		59,205	57,649	-2.6%	58.1%
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