An accelerated fall in consumer spending, manufacturing adjustments and higher rates of unemployment resulting from the intensified financial crisis worsened global economy drastically in the third quarter (October 1 – December 31, 2008).

In the DRAM industry, unable to withstand the global recession, spending on PCs, digital consumer electronics and mobile phones fell, causing a steep drop-off in DRAM demand. Although production cuts by DRAM manufactures begun in September started to bring about reductions in the DRAM supply, with less demand, the average spot price for a 1-gigabit DDR2 SDRAM, a leading PC DRAM product, fell about 50% QoQ.

Given this extremely difficult business environment, Elpida continued to improve its cost base by reducing legacy 90nm manufacturing and has been increasing production of highly cost-competitive 65nm products.

Elpida’s bit shipment growth was 5% QoQ in the third quarter of 2008. The average selling price was down 44% QoQ due to the impact of the aforementioned price declines and lower shipments of Premier DRAMs (used in digital consumer electronics and mobile equipment).

As a result, third quarter of 2008 net sales fell 46% QoQ to 61.8 billion yen. Since selling prices continued to run well below manufacturing costs and the yen grew stronger, the company had gross losses of 42.9 billion yen (compared with an 8 billion yen loss in the previous quarter) and operating losses of 57.9 billion yen (a 24.5 billion yen loss in the previous quarter). Ordinary losses came to 66.1 billion yen (a 30.3 billion yen loss in the previous quarter) partly due to equity method investment losses of 7.4 billion yen that mainly concerned Rexchip Electronics Corporation (Rexchip). An extraordinary loss of 5.4 billion yen in connection with an accrued provision to cover litigation settlement costs was a factor in a net loss of 72.3 billion yen (a 31.9 billion yen loss in the previous quarter).

Premier DRAMs

Against the background of the global economic recession, the sales of digital consumer electronics and mobile phones dropped sharply in the third quarter of 2008. In response, there was a steep decline in Premier DRAM demand. As a result, Premier DRAM net sales fell 47% QoQ to 27.1 billion yen.

To cut costs and improve earnings, Elpida is strengthening customer support for qualification testing of its products in order to encourage customers to switch to products using more advanced processes. Also, the company is seeking to enlarge the size of its customer base by expanding its line-up of high performance products, such as Mobile RAM-based MCP (Multi Chip Package) products, high density-high bandwidth one-chip solution products and enhanced power-saving products.

Computing DRAMs

The Computing DRAM business in the third quarter of 2008 saw net sales fall 45% QoQ to 34.7 billion yen, as prices for PC DRAM products suffered a sharp decline.

Although DDR3 ramp up was slower than the company had originally expected due to the delay of the chipsets, DDR3 shipments grew QoQ and accounted for slightly more than 10% of total Computing DRAM net sales.

Also in the third quarter of 2008, Elpida achieved high yields on the shrink version of its 65nm chips and moved forward plans to transition to production of these products. In addition, mass production of 50nm products is scheduled to begin in the Jan-Mar quarter following completion of the development phase in November 2008. Both moves are expected to make the company cost competitive.

Cash Flows

The balance of cash and cash equivalents at the end of the third quarter of 2008 rose 129.9 billion yen versus the end of previous quarter to 207.5 billion yen. Free cash flow (a combination of net cash used in operating activities and net cash used in investing activities) saw a net outflow of 21.1 billion yen. Cash flow and related conditions in the third quarter of 2008 are discussed next.

Net cash used in operating activities

Operating activities saw a net outflow of 6.9 billion yen. Losses before income taxes were partially offset by depreciation and amortization and changes in assets and liabilities related to operating activities.

Net cash used in investing activities

Investing activities used net cash of 14.3 billion yen, mainly because of payments made on some manufacturing equipment purchases.

Net cash provided by financing activities

Financing activities in the third quarter of 2008 provided net cash of 153.1 billion yen. Whereas long-term borrowings and lease obligations were repaid under an agreed schedule, the full exercise of a 110.0 billion yen long-term commitment line and the issuance of 50.0 billion yen in convertible bonds generated a cash inflow.