Money-losing flash-memory manufacturer Spansion (NASDAQ:SPSN) put out a press release the other day titled "Samsung Names Spansion Best Supplier 2006." It is certainly better to receive that recognition than not to get it, I suppose, but the release I would really like to see is one that declares "Spansion Expects to Deliver a Profit to Its Shareholders." Oh, and it would be nice to see such a release on a day other than April 1!

Spansion manufactures a type of memory called NOR flash, which Intel (NASDAQ:INTC) and STMicroelectronics (NYSE:STM) also are making. Unfortunately, making NOR flash memory isn't a great business, so Spansion has tried to juice things up by introducing a new flash-memory variant called ORNAND and by manufacturing its memory using a different architecture, called MirrorBit.

The market is clearly skeptical about Spansion's prospects. Its stock has taken a big dip recently and fallen below its IPO price. Further, the Motley Fool CAPS community gives Spansion the lowest possible rating of one star.

Despite the negative vibes, the company has shown improvement in revenues, net income, and gross margin. This table summarizes the results over the past three years.









Gross margin




Net income




Numbers in millions.

The revenue decline during 2005 was due to the decline in average selling prices for memory chips. The situation improved during 2006 because the average selling prices for MirrorBit products rose. I have to wonder, though, how long Spansion will benefit from rising prices.

There are two points worth mentioning about 2006. First, Spansion had trouble meeting demand for MirrorBit products. It's not hard to believe that pricing held up in this kind of environment. Second, the firm still managed to lose money despite the strong demand.

Another problem with Spansion is that its ORNAND memory puts it in direct competition with the big NAND flash manufacturers such as Samsung, SanDisk (NASDAQ:SNDK), and Toshiba, as well as the IM Flash Technologies (IMFT) joint venture between Intel and Micron (NYSE:MU). These companies have deep pockets and are always striving to reduce manufacturing costs and increase their capacity to manufacture flash memory.

While Spansion has $886 million in cash, it also has nearly $950 million in debt. And while it is generating cash from operations ($444 million during 2006), I have to wonder whether it will find more lint than cash in its pocket in a couple of years. Its cash-generation abilities are currently dwarfed by its needs to invest in the business.

Memory companies are not like retailers that can reduce their capital expenditures when they make a misstep. Spansion has to constantly invest in expanding the number of bits on each chip to reduce the per bit-costs and remain competitive. As a result, management expects to fund $1 billion in capital expenditures this year. My worry with Spansion is that at some point, the investment requirements will overwhelm it.

The company is currently trading below book value, so if it manages to drive forward to profitability, the potential gains here are large. Unfortunately, that looks like a pretty big "if" to me.

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Fool contributor Dan Bloom owns shares of Intel, which is a Motley Fool Inside Value recommendation. He welcomes your comments, and you can check out Inside Value free for 30 days. The Fool has a disclosure policy.