Prospectus Summary
PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and related notes, and our risk factors beginning on page 10, before deciding whether to purchase our ADSs.SPREADTRUM COMMUNICATIONS, INC.
Overview
We are a fabless semiconductor company that designs, develops and markets baseband processor solutions for the wireless communications market. We combine our semiconductor design expertise with our software development capabilities to deliver highly-integrated baseband processors with multimedia functionality and power management. We have developed our solutions based on an open development platform, enabling our customers to develop customized wireless products that are feature-rich and meet their cost and time-to-market requirements.
We offer a comprehensive portfolio of highly-integrated baseband processor solutions that support a broad range of wireless communications standards, including GSM, GPRS and TD-SCDMA, an international 3G standard for wireless communications promoted by China. A baseband processor is the most critical semiconductor component of a wireless handset, responsible for encoding and decoding wireless communications transmissions, serving as a platform for the handset’s operating system and multimedia applications, managing storage and directing short range connectivity such as Bluetooth traffic. Our solutions also offer a wide array of multimedia capabilities such as TV-out, MP3 digital audio playback, Motion JPEG, MPEG4 and H.264 digital video playback and 64-channel polyphonic ringtone playback.
Our business model has enabled the rapid development of advanced products. Within the first 15 months of our inception, we fully developed our first series of integrated baseband semiconductors for the GSM/GPRS market. In June 2005, we commercially introduced what we believe to be the world’s first fully integrated analog and digital baseband semiconductor with power management and multimedia functionality. In the 3G area, we have been instrumental in the development, trialing and planned commercial rollout of the TD-SCDMA standard. In April 2004, we developed what we believe to be the world’s first dual-mode TD-SCDMA/GSM baseband processor. In addition, we are an active member of the TD-SCDMA Industry Alliance, which is responsible for developing and enhancing the standard globally. In February 2007, we announced our development of a TD-SCDMA baseband semiconductor that supports HSDPA. We intend to offer samples of a baseband processor that supports EDGE in the second half of 2007, and are developing solutions that will support other 3G wireless standards, such as WCDMA/UMTS. In addition, we are working to develop advanced products to further expand our current portfolio, including solutions that incorporate smart phone functionality, advanced multimedia applications and other applications such as mobile digital TV, which allows subscribers to receive television transmissions through their wireless handsets.
We derive significant advantages by conducting most of our operations in China, including access to a highly educated technical workforce and a competitive cost structure. In addition, our geographic proximity to a significant portion of the wireless handset supply chain enables us to maintain close relationships with industry players, provide effective service and support to our customers, and strategically position ourselves in the high-growth wireless market in China. We are a recognized leader in the emerging China semiconductor industry as indicated by various third-party awards we have received that are based, in part, on the technological innovation of our baseband semiconductors. These include the award by the China Semiconductor Industry Association as one of the integrated circuit design companies in China with the highest growth potential for 2005, the People’s Republic of China National Science and Technology Advancement First Class Award awarded by the State Council in 2006 and the award by the Management Case Center of Peking University and Communications Weekly as one of the top telecommunications equipment suppliers for 2006.
We have grown significantly since our inception. Our revenue increased from $2.4 million in 2003 to $12.9 million in 2004, $38.3 million in 2005 and $107.1 million in 2006 and from $19.7 million for the three months ended March 31, 2006 to $26.2 million for the same period in 2007. We derive our revenue from the sale of baseband semiconductors and turnkey solutions, such as handset boards and modules that combine our baseband semiconductors with other third-party wireless handset components. Our baseband semiconductor revenue has increased from $4.1 million in 2005 to $54.9 million in 2006. As a percentage of revenue, sales of baseband semiconductors were 0.0%, 0.6%, 10.7%, 51.3% and 78.7% in 2003, 2004, 2005, 2006 and for the three months ended March 31, 2007, respectively. Turnkey solutions have been used to help promote and enable the rapid adoption of our baseband processor solutions. In 2006, these strategic objectives for turnkey solutions had been achieved. We phased out our handset board business in 2006, and we intend to phase out our module business within the next 12 months. We expect turnkey solutions to represent a smaller percentage of our revenue in 2007 as we focus on our higher margin baseband semiconductors. We expect that sales of our baseband semiconductors in the future will offset any decline in revenue from turnkey solutions. We first became profitable in the first quarter of 2006, and we recorded net income of $14.4 million and $2.0 million in 2006 and for the three months ended March 31, 2007, respectively.
Industry Overview
The wireless communications market is highly dynamic and represents one of the most important communications markets in the world. According to iSuppli Corporation, or iSuppli, a leading market research firm focused on the electronics industry, global wireless (mobile handset) subscribers reached 2.2 billion in 2005, and are expected to grow to 3.7 billion in 2010. In particular, China represents the world’s largest wireless market, with 487.4 million wireless subscribers as of April 2007 according to the Ministry of Information Industry. Wireless technologies have evolved through successive generations of wireless communications standards, or protocols, driven by the need for more efficient networks with the increased bandwidth capacity to enable increased usage of wireless data services by subscribers. In particular, 3G technologies are currently seeing rapid deployment and adoption throughout the world. 3G networks enable significantly higher data transmission speeds, up to a maximum of 2.0 to 2.5 Mbps compared to a maximum of 144 to 384 Kbps for 2.5G networks, which facilitate an enhanced user experience through advanced applications such as music downloads, interactive mobile gaming and video calls. According to International Data Corporation, or IDC, a leading market research firm, 66.0 million 3G handsets were shipped worldwide in 2005 and this is expected to reach 475.8 million units by 2010, representing 34.9% of total handset shipments. Multimedia capabilities are becoming standard features on today’s handsets, transforming them from pure communication tools to personal computing and entertainment devices.
China’s evolution into 3G is expected to be in large part based on the TD-SCDMA standard, and mobile operators in China are expected to commence commercial deployment of TD-SCDMA in 2007. In January 2006, the Ministry of Information Industry approved TD-SCDMA as one of the national 3G technology standards for the wireless communications industry in China. The Chinese government has already initiated and subsidized several rounds of testing of the TD-SCDMA network. In May 2007, the Ministry of Information Industry further expanded the list of approved national 3G technology standards to include WCDMA and CDMA2000 in addition to TD-SCDMA.
The baseband semiconductor is the most critical semiconductor component in the wireless handset. It is commonly referred to as the engine of a wireless handset, equivalent to the central processing unit of a computer. According to iSuppli, revenue from worldwide GSM, GPRS, EDGE and WCDMA baseband semiconductor shipments reached $8.5 billion in 2005 and is expected to grow to $13.1 billion by 2010. According to iSuppli, the baseband semiconductor market in China is expected to grow from $3.5 billion in 2005, representing 30.6% of the worldwide market, to $6.8 billion in 2010, representing 41.3% of the worldwide market.
As the wireless technology landscape continues to evolve, baseband semiconductor suppliers are required to adopt a new operating model to succeed. Key features of this new operating model include adopting a total systems solution approach, possessing a strong multimedia platform, providing a customizable solution, having rapid time-to-market for product development, increasing integrated functionality and offering comprehensive customer support.
Our Competitive Strengths
Our open platform enables us to develop solutions to address the changing requirements of the wireless handset market. Our approach enables us to substantially improve the development time and cost of our baseband semiconductors, which in turn allows our customers to reduce their time-to-market and costs and improve the customization of their handsets. The success of our approach is a result of our research capabilities and strong development team. We believe we have the following competitive strengths:
Our Strategy
We intend to build upon our leadership in the China wireless baseband semiconductor industry and become a global leader in the wireless baseband market. We plan to achieve this objective by pursuing the following strategies:
Our Risks and Challenges
Despite our competitive strengths, we believe the following are some of the major risks and uncertainties that may materially affect us:
Corporate Information
We were incorporated in the Cayman Islands in April 2001. Since our inception, we have conducted our operations principally through our wholly-owned subsidiaries in China and the United States. Our principal executive offices are located at Spreadtrum Center, Building No. 1, Lane 2288, Zuchongzhi Road, Zhangjiang, Shanghai 201203, People’s Republic of China. Our telephone number at this address is +86 (21) 5080-2727. Our registered office in the Cayman Islands is located at M&C Corporate Services Limited, P.O. Box 309 GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Our telephone number at this address is +1 (345) 949-8066. We also have offices in Beijing and Shenzhen, People’s Republic of China, and in Sunnyvale, California, and Austin, Texas, United States of America.
Investors should submit any inquiries to the address and telephone number of our principal executive offices set forth above. Our website is www.spreadtrum.com and the information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is National Corporate Research, Ltd., located at 225 W. 34th Street, Suite 910, New York, New York 10122.
Corporate Structure
We are a holding company and conduct our operations primarily through our wholly-owned PRC subsidiary, Spreadtrum Communications (Shanghai) Co. Ltd., or Spreadtrum Shanghai. Spreadtrum Shanghai is the entity that employs the majority of our employees in China and through which we sell our products to our customers located in the PRC. We have a wholly-owned PRC subsidiary, Spreadtrum International Trading (Shanghai) Co. Ltd., or Spreadtrum Trading, through which we sell our products to our customers located outside of China. We also have a wholly-owned subsidiary in the United States, Spreadtrum Communications Corp., or Spreadtrum California, a California corporation, which employs our personnel in the United States in administration and research and development. We have entered into a development agreement and an administrative and managerial services agreement with Spreadtrum California. We do not conduct any sales through Spreadtrum California. In addition, as a result of our contractual arrangements with Beijing Spreadtrum Hi-Tech Communications Technology Co. Ltd., or Beijing Spreadtrum, a company established under the laws of the PRC, and its three shareholders, who are PRC nationals, we consolidate Beijing Spreadtrum’s operating results, assets and liabilities into our consolidated financial statements. Beijing Spreadtrum performs research and development for Spreadtrum Shanghai. As a PRC domestic company, Beijing Spreadtrum may be eligible to participate in PRC government research projects that are restricted to PRC domestic companies that are not foreign invested enterprises. All three shareholders of Beijing Spreadtrum are family members of our executive officers or employees. For a further description of the family relationships between the shareholders of Beijing Spreadtrum and our executive officers or employees and our contractual arrangements with Beijing Spreadtrum, see “Related Party Transactions—Relationship with Beijing Spreadtrum.”
The following diagram illustrates our current corporate structure and the place of formation, ownership interest and affiliation of each of our subsidiaries and Beijing Spreadtrum as of the date of this prospectus.
Equity Interest Loan Agreement by and among Spreadtrum Communications, Inc. and Shujun Zhang, Dichen Li and Yuer Zhang. See “Related Party Transactions—Relationship with Beijing Spreadtrum.” Research and Development Agreement between Spreadtrum Shanghai and Beijing Spreadtrum. See “Related Party Transactions—Relationship with Beijing Spreadtrum.”For a more detailed description of our corporate structure, see “Business—Corporate Structure.”