Spansion Gains From Fujitsu Buy, Makes Chips For Cars


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 fruit.

In the first quarter,Spansion ( CODE ) -- 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 while.

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 IBD.

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. 1.

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 automation.

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 telecommunications markets."

In the first quarter Spansion saw higher demand for the microcontroller and analog products it acquired, said Kispert in a statement.

"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 ( ADI ),Intel Corp. ( INTC ) Toshiba Semiconductor and Micron Technology ( MU ).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: CODE , ADI , INTC , MU

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