Embedded systems maker Spansion has wasted no time making use
of key technology it snapped up in 2013.
A little less than a year after acquiring Fujitsu's
microcontroller and analog business, that move is bearing
In the first quarter,Spansion (
) -- whose products power everything from Internet routers to
consumer and automotive electronics -- saw its biggest sales and
earnings growth in years.
The company reported significant progress with acquired
product lines and said it expects the microcontroller business to
serve as a "significant engine of growth" for its expanding
portfolio in mass markets, industrial, consumer and auto segments
around the world.
The strategy leading up to the buy was percolating a
Once Spansion emerged from bankruptcy in 2010 and
recapitalized a year later, a management team headed by CEO John
Kispert shifted the company's position. Spansion went from a
flash-memory chip maker targeting the wireless and embedded
systems markets to one focused just on the embedded systems
space, not wireless.
Embedded systems are dedicated to specific tasks and found in
everything from routers and thermostats to television set-top
boxes and auto electronics.
Spansion had been looking to buy companies with the additional
technology it needed to execute effectively on its embedded
systems strategy, Chief Financial Officer Randy Furr told
Behind The Buy
So when Fujitsu Semiconductor, a subsidiary of Fujitsu Ltd.
and a long-time strategic partner of Spansion announced it was
divesting its microcontroller and analog business in the spring
of 2013, Spansion offered to buy it for about $110 million plus
about $65 million in inventory.
Spansion announced the deal on May 1 and closed it on Aug.
Fast forward to the first quarter of 2014 and the acquisition
has already given Spansion's business a jolt. After seeing profit
growth declines on and off the past few years, Spansion's
earnings soared 500% year over year to 18 cents a share in the
first quarter. And its sales climbed 64% to $311.8 million.
The growth spurt is expected to continue. Analysts polled by
Thomson Reuters see full-year earnings rising 66% to $1.26 a
share after three straight years of declining earnings growth.
They see a 51% lift in 2015 and a 26% rise in 2016.
"The main thing that's driving the increase in revenue are the
design wins in our microcontroller and analog businesses," Furr
told IBD. "That's been fueled by the acquisition."
Total design wins in the first quarter were around 775
compared with 470 a year earlier, when it had yet to close the
acquisition, according to spokeswoman Michele Landry.
Typical applications for the design wins include security
surveillance, energy, robotics, automotive and factory
Why was the deal so attractive? "At the time, Spansion had
only flash memory and some logic capabilities," said Furr. "We
saw where combining flash memory with the microcontroller,
analog, logic and graphics was where there would be a lot of
opportunity for growth."
In order to execute on its strategy to expand its
flash-memory-based solutions into the embedded systems space it
needed to acquire additional technology, including both the
microcontroller and analog technology, says Furr.
A microcontroller is a small computer on a single integrated
circuit designed for embedded applications. Analog semiconductors
condition and regulate functions such as temperature in a
thermostat. Flash memory is used to store the programs that run
devices like set-top boxes and automotive electronics. It's a
reprogrammable memory that retains information even with the
power turned off.
"It seemed to make almost the perfect fit for us in what was
our strategy to grow the business," said Furr.
An Eye On Autos
What made the deal "very compelling," was one-half of
Fujitsu's microcontroller sales were into the automotive
business, a market where Spansion is "very strong," said Furr.
"What drove the acquisition was our strategy to combine these
technologies of flash memory, microcontroller and analog along
with graphics and logic onto one system on a chip."
A system-on-chip is a combination of different circuit modules
on a single chip/die. This reduces the number of
components/packages that you need to mount onto the board, which
makes the board more reliable, says Landry. It allows Spansion
customers to have greater security at faster speed and to do it
at a lower cost, says Furr.
"We're down a path now on combining our technology to come up
with a system-on-chip solution for our embedded systems
customers," he said.
Spansion expects its first embedded system-on-a-chip product
to come out toward the end of the year.
"The acquisition of Fujitsu's microcontroller and analog
business took Spansion into more stable markets than Nor flash
memory, which prior to the acquisition accounted for 90% of
Spansion's business," said Sterne Agee analyst Vijay Rakesh, who
reiterated a buy rating on the company on May 27.
A lot of microcontroller and analog products go into the
automotive, industrial, communications and gaming markets, which
are "very stable" markets and represent a 38% to 45% gross margin
business, adds Rakesh.
"The acquisition gave them more diversification away from Nor
flash memory," he said. "Now they are able to cross-sell a more
complete solution with the microcontroller, analog and flash
memory. They're better able to upsell into the automotive and
In the first quarter Spansion saw higher demand for the
microcontroller and analog products it acquired, said Kispert in
"Looking ahead, we see continued demand increasing for our
stand-alone flash memory, microcontroller and analog products, as
well as system-on-chip solutions," he said.
So far the acquisition has exceeded expectations by some
measures. When Spansion announced the transaction it gave a
revenue range contribution of $450 million to $550 million on an
annual basis and an operating profit margin estimate of 8% to
10%. The annualized run rate in the first quarter was a little
over $560 million in revenue and operating profit was "slightly
better than the top end" of the guidance it gave, says Furr.
Is another acquisition possible? "There's a chance there will
be another acquisition given the success we've had with this
transaction," said Furr. "There are areas like the analog space
where we would like to grow our business in the future. And doing
it through an acquisition might make sense."
Spansion is "working on a number of opportunities," he says,
and a deal could be "sooner rather than later, but timing is
always difficult to predict."
Spansion serves customers worldwide directly or through
distributors, who buy the products and resell them to original
equipment makers and original design manufacturers. Competitors
includeAnalog Devices (
),Intel Corp. (
) Toshiba Semiconductor and Micron Technology (