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Atmel Corp. (NASDAQ:ATML)

Q3 FY08 Earnings Call

October 29, 2008, 5:00 PM ET

Executives

Robert Pursel - Director of IR

Steven Laub - President and CEO

Stephen Cumming - VP of Finance and CFO

Analysts

Craig Berger - FBR Capital Markets

Hans Mosesmann - Raymond James

Suji De Silva - Kaufman Brothers

Edwin Mok - Needham

Steven Eliscu - UBS

Kevin Rottinghaus - Cleveland Research

Operator

Good afternoon, my name is Tasha, and I will be your conference operator today. At this time I wanted to welcome every to the Atmel Third Quarter 2008 Earnings Release Conference Call. All lines have been place on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions].

Thank you. Mr. Pursel, you may begin your conference.

Robert Pursel - Director of Investor Relations

Thank you, Tasha. Good afternoon and thank you for joining us for Atmel's conference call. Copies of the press release issued today are available on our website.

During the earning's result discussion, we'll also be referring to the... webcast will also be found on our website www.atmel.com. A 48 hour telephone replay of this call will be after 5:00 PM today, Pacific Time.

The replay phone numbers are 800-642-1687 in the U.S. and 706-645-9291 for all other locations. The access code is 70428255. The webcast will be archived on the Atmel website for one year.

Joining us on the call today are Steven Laub, Atmel's President and CEO and Stephen Cumming, Atmel's Vice President of Finance and Chief Financial Officer. As you know, in addition to announcing our third quarter results. We also issued, a press release announcing that Atmel has ejected the unsolicited proposal from Microchip Technology and ON Semiconductor.

Steve, will begin the call with a review of this announcement and why their board believes this proposal is not in the shareholders best interest.

We'll then turn to our Q3 financial results and guidance for the fourth quarter. Finally, we'll open the call for the question.

During the course of this conference call, we may make forward-looking statement about Atmel's business outlook including statements regarding our expectation for revenues, target growth and operating margins as well as cost saving for 2008 and beyond. Our forward-looking statement and all other statements that are not historical facts reflect our belief and predictions as of today and therefore are subject to risks and uncertainties described in the Safe Harbor discussions found in today's press release. During the call we will also discuss non-GAAP financial measures. The non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on the company's Investor Relation's website at www.atmel.com.

I would now like to turn the call over to Steven Laub, Atmel's President and Chief Executive Officer. Steve?

Steven Laub - President and Chief Executive Officer

Thank you, Robert. Good afternoon everyone and thank you for joining us. As we announced earlier today after careful consideration including advice from our independent, financial and legal advisers.

Our Board of Directors unanimously determined that Microchip and ON's unsolicited proposal isn't adequate in multiple respects including value, conditionality and complexity and not in the best interest of Atmel's shareholders.

Our board has concluded that the $5 per share proposal price, significantly undervalues Atmel and has not reflected greater value that can be achieved with continued execution for the company's transformation plan.

As we will discuss in greater detail Microchip and ON's proposal is clearly an opportunistic attempt to acquire a leading technology and product portfolio at a time when there is value compression in the equity markets and the progress we are making is just starting to become more visible in our results and there is much more to come.

In contrast to this inadequate proposal, we're executing a plan to deliver superior value. As previously communicated, our plan includes a focus on the company's high growth, high margin product lines. Optimizing Atmel's manufacturing operations and the adoption of a fab like strategy.

We have been successfully executing on this plan, changing and enhancing nearly every aspect of Atmel's business. Atmel is driving substantial microcontroller revenue growth, market share gains and margin expansion.

Atmel has become the fastest growing major, 8-bit microcontroller supplier and the leading 32-bit provider with our industry AVR and ARM offerings. Even Microchip has stated that Atmel has strong momentum in proprietary AVR architecture.

Our strategic acquisition of Quantum Research Group earlier this year, puts Atmel at the fore front of the rapidly growing capacity sensing market.

Indeed, our microcontroller growth rate of 21% year-over-year to the September quarter, substantially exceeded that of Microchips 5.5% as well as the market as a whole. Further more, as we reported today in the third quarter gross margin were 39.5% up 300 basis points sequentially in the highest level obtained in over 7 years.

We expect that the combination of normalizing currency trends and the continued benefits from our on going structuring will result in further improvement in our operating and financial performance.

We have completed numerous actions to restructure the company. Non-core wafer manufacturing operations has been shut down and sold including those in Irvine, Texas UK and Heyburn Germany.

As a result, we expect to end 2008 with two fabs compared to the five that we place and get implementing this plan. We've also made substantial operational and process improvement, that has significantly reduced the cost of wafers and be continue the source internally.

Reflecting our focus on our most profitable products we have shut down or divested 14 non-core product lines. While consolidating a few numbers. We've also realized an 18% reduction in the companies' work force and strategy or $125 million cost of savings in 2008.

Well in excess of our target of $95 million. Even with this incredible results I want to emphasize that this just the beginning, more is yet to come. We are focused on fully working value in Atmel and ensuring that our shareholders are the beneficiaries of this value.

Given the progress that has been made our attractive results and the action is still on their way. We have confidence and our ability to bring and delivering on our commitments to ensure that Atmel's shareholders realize Atmel's full potential.

Microchip and ON's proposal was opportunistically timed to capture this value for themselves.

In addition to inadequate value, Microchip and ON's opportunistic and complex proposal is highly conditional and subject to significant execution risk. For example, the proposal has cross conditional signing risk that requires Microchip and ON to reach a definitive agreement on price. As well as the complex separation of Atmel's businesses which today share a number of significant functions as a condition to any agreement with Atmel.

In addition, the proposal has cross conditional closing risk that requires Microchip and ON to each receive necessary regulatory clearance for their acquisitions of competing businesses obtain hundreds of millions of dollars of financing and meet all other closing conditions before any transaction with Atmel can close.

To sum up I want iterate that our board and management are focused on enhancing shareholder value.

We are confident that our transformation plan will create value superior to Microchip and ON's proposal. While we appreciate Microchip and ON's recondition of Atmel's superior product and technology portfolio.

We believe their proposal is opportunistic and not consistent with our board's objective of maximizing shareholder value.

The third quarter results we announced today also our confidence in our plan and the value it unlocking.

I can turn the call to Steven to review these results in greater detail.

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Thank you Steve. Let me provide some details of our statement of operations. Revenues for the third quarter of 2008 were $400 million which included a one time reduction of approximately $19.9 million from the conversion of European distributors to a sell through revenue model.

As a result, third quarter revenue decreased 5% compared to $420.9 million for the second quarter of 2008 and decreased 4.3% compared to $418.1 million to the third quarter of 2007.

Excluding the one time account adjustment, we estimate third quarter revenues would have decreased 0.2% sequentially and grown 4.4% compared for the year ago quarter.

Gross profit as a percent of revenue with 39.5% for the third quarter of 2008, this compared to gross profit of 36.5% for the second quarter of 2008 and 35.6% for the year ago quarter.

The 300 basis point sequential improvement to gross profit was driven primarily by improved manufacturing utilization as a results of our strategic restructuring initiatives. And by a stronger mix of higher margin microcontroller and other product.

R&D expense was $63.9 million for the third quarter. This was $4.4 million less than the $68.2 million for the second quarter of 2008 and nearly even with the $63.6 million reported for the year ago quarter.

This sequential decrease in R&D spending resulted primarily from product line and project reductions, reduced payroll related expenses in Europe as employees to their traditional summer vacation and an increase in R&D grant payment.

SG&A expense was $63.9 million for the third quarter. This was a $4.7 million dollars decrease compared to the $68.6 million for the second quarter of 2008. And a $5.4 million increase compared to the $58.5 million a year ago quarter.

SG&A expense was down sequentially due to reduced payroll expense, due to European employee vacation as well as legal fees following the settlement of various litigation matters and completing agreement for the Heilbronn fab sale.

For the third quarter, stock based compensation expense was $7.4 million dollars of which $1.1 million dollars was included in cost of sales, $3.1 million dollars was included in R&D, and $3.2 million dollars in SG&A.

Stock based compensation expense was $6.4 million in the second quarter of 2008 and 4.9 million in a year ago quarter.

Operating loss was $11.3 million for the third quarter of 2008. This compares to operating profit of $0.2 million for the second quarter of 2008 and $25.4 million for the third quarter of 2007.

Included in the third quarter 2008 operating loss was $41.6 million of charges related to restructuring, asset impairments, acquisition and grant repayment.

The company's effective average exchange rate in the third quarter of 2008 was approximately $1.54 to the Euro compared to $1.56 to the Euro in the second quarter of 2008 and $1.36 to the Euro in the year ago period.

We continue to estimate that a penny decrease in the dollar Euro exchange rate will increase operating income by about $0.5 million per quarter.

Other income net was $2.5 million for the third quarter of 2008. This compares to $0.9 million expense for the second quarter of 2008, and $1.3 million of income for the third quarter of 2007.

Income tax benefit was $4.1 million for the third quarter of 2008 as a result of a one time discrete item relating to R&D tax credits in Europe. This compares to income tax provision of $4.3 million for the second quarter of 2008, and $10.1 million for the third quarter of 2007.

Net loss for the third quarter of 2008 totaled $4.7 million or a penny per diluted share. This compares to net income of $4.9 million or a penny per diluted share for the second quarter of 2008 and net income of $16.6 million or $0.03 per diluted share for the year ago quarter.

The one time revenue adjustment and associated margin impact have the effect of reducing net income by $10 million or $0.02 per diluted share for the third quarter of 2008.

Non-GAAP net income including the one time conversion of European distributors to a sell through model for the third quarter of 2008 totaled $42.6 million or $0.09 per diluted share compared to $17.3 million or $0.04 per diluted share for the second quarter of 2008, and $22.8 million or $0.05 per diluted share for the year ago quarter.

Non-GAAP net income excludes charges related to restructuring activities, acquisition grant repayment, asset impairment charges or recovery and stock based compensation as well as the loss of gain on the sale of assets, and income tax effect for these excluded items.

A reconciliation of GAAP results to non-GAAP results is included following the financial statements in our press release. Management estimates non-GAAP net income excluding the one-time conversion of the European distributors to a sell through model for the third quarter of 2008 would have totaled $52.7 million or $0.11 per diluted share.

Turning to the balance sheet. Combined cash balances, cash and cash equivalents plus short tern investments totaled $420.9 million at the end of the third quarter of 2008, an increase of $45.1 million for the end of the prior quarter and a decrease of $9 million for the year-end balance at December 31st 2007.

Cash provided from operations totaled approximately $67.2 million for the third quarter of 2008 compared to $50 million for the second quarter of 2008 and $45 million for the third quarter of 2007.

Capital expenditures were approximately $8 million for the third quarter and $34.4 million on the year-to-date basis. We expect the capital expenditures for the full year will now be in the range of $45 million to $55 million significant lower than our original estimate of $80 million to $90 million due to improved cost control.

Depreciation and amortization for third quarter of 2008 combined with $34.5 million, this compares to $36.3 million for the second quarter and $30.9 million for the third quarter of 2007.

Accounts receivables were $221 million dollars at the end of the third quarter. This was flat with the prior quarter. Days of sales outstanding increased slightly to 50 at the end of the third quarter compared to 48 at the end of the prior quarter, primarily driven by the one time conversion of our European distributors to a sell through model.

Inventory was $315.4 million at the end of the third quarter, this was a decrease of $21 million dollars from the $336.4 million dollars in the prior quarter.

$10 million dollars of this reduction was due to the re classification of our Heilbronn inventory as an asset held for sales as the result of the recently announced sales of the Corporation.

Days of inventory at the end of the third quarter increased to 119 from a 115 at the end of the prior quarter due also to the one time conversion.

Now let me turn the call over to Steve for commentary of our business.

Steven Laub - President and Chief Executive Officer

Thank you, Stephen. Atmel's stellar results reflect the solid progress we are making as we transform Atmel into a higher growth, a more profitable company. We are particularly pleased that previous restructuring activities and efficiency initiatives are having material benefits to profitability of the company as evidenced by the 300 basis points improvement to gross margins. The highest levels since the first quarter of 2001.

In fact, excluding the reduction in revenues associated with the one-time conversion of our European distributors to a sell through model, our pro-forma gross margins would have been 40.4% and our operating margins would have climbed to 11.5%.

During the third quarter of 2008, we announced to sell the Heilbronn wafer fabrication operation to TSH Limited. This is expected to close during the fourth quarter of 2008. We also commenced the first stage of our redundancy procedure in France, which identified approximately 210 positions to be potentially eliminated in [indiscernible] and not.

Also, our focus on Atmel's microcontroller and related businesses is driving revenue growth, mortgage share gains, and margin expansion.

Now let me turn to discussion of our business units.

Revenues will be discussed excluding the one-time reduction from the previously announced conversion of our European distributors to a sell-through model from a selling model.

For our microcontroller business unit, revenues set another record this quarter reaching $144 million, up 1% sequentially and up 21% from the same period last year.

AVR products continued to be the major driver as they exceeded $100 million for the first time to over $102 million growing nearly 3% sequentially, and 23% compared to the same quarter last year. The industrial sector continues to be healthy although we are seeing some softness in the appliance and consumer markets.

New major microcontroller design wins include a touch screen solution one of the leading handset OEMs and peripheral device controllers for two of the three largest game console manufacturers.

In addition our new XMEGA family is rapidly gaining broad acceptance as samples have been shipped to over 700 customers. For our microcontroller business is leading the industry in revenue growth, its profitability has also dramatically improved.

Growth profit margins have climbed from the 39% in 2007 to 43% in the first quarter of 2008 to 46% in the second quarter of 2008 to 49% this past quarter.

Furthermore operating margins are rapidly increasing as well from 6% in 2007 to 7% in the first quarter of 2008, 9% in the second quarter of 2008 to 14% in the quarter we just ended. We expect the microcontroller revenues and gross and operating margins to continue to increase significantly during 2009.

Turning to our ASIC business segment. Revenues for the ASIC segment were $116 million for the third quarter, down 4% sequentially and down 10% as we enter the last year.

During the quarter we reduced our exposure to the commodity, telecom SIM card marketplace while ARM based Cap 7 and Cap Customizable ASIC. Continue to gain interaction as it our preferred alternative to traditional ASIC.

For our non-volatile memory segment, revenues were $94 million for the third quarter, up 7% sequentially and down 3% in the same period last year.

Q3 is typically a seasonal stronger quarter and this past quarter was consistent with that. We experienced growth in both Serial EEPROM and Serial Flash product. As we head into Q4, we are seeing softness in the global memory marketplace, driven primarily by general sums in the consumer market and lower than expected activity in China.

This is impartially offset by increase activities by new design winds, for set-up boxes, software storage devices and portable media players in other geographies.

Turn to our RF and Automotive segment, revenues were $66 million for the third quarter down 6% sequentially and down 11% from year ago quarter. However, this business segment also includes a RF CDMA foundry which has been declining excluding the CDMA foundry business, our RFA business segment achieved $65 million down 2% sequentially but up 6% from third quarter of 2007.

On a global automotive business, it's experiencing generalized softness, we continue to see some litigant success achieve design wins and qualifications for our LIN or Local Interconnect Network products at most major Atmel manufacturers, and we here with new AVR based designs for innocuous entry, high voltage and high temperature applications.

In viewing Atmel's revenues by geography for the third quarter, Asia continues to be our largest shipping location representing approximately 50% of revenues, up to 40% last quarter, while Europe represented approximately 36% as compared to 37% in Q2 and the Americas represented over 14% total revenues which was consistent with last quarter.

Let's now turn for discussion to Atmel's operational efficiencies.

As you may remember, we target $80 million to $95 million cost savings for 2008 as a result of our previously announced restructuring initiatives. For the first three quarters of this year, we are on track to achieve in excess over $125 million of cost savings.

As previously stated, these saving are due to decisive actions we took in shutting down our selling non-core wafer fabrication operation, consolidating or eliminating numerous product lines and reducing the company's workforce by nearly 20%.

Going forward, due to continued reactions underway as part of the company's transformation plan, Atmel expects to see continued improvement in the company's gross profit margins. As we enter Q4, Atmel is well positioned to complete it's transformation into a high growth, high margin company focused by microcontroller and related products.

We will continue to take all appropriate steps including selling or shutting down those remaining businesses that do not need our financial or strategic objectives to ensure that we unlock the value inherent in Atmel for Atmel shareholders.

Given the current challenging macro environment, we are taking prudent steps to minimize operating expense this quarter. These steps include a mandatory quality shutdown, and shut down of our wafer fabrication facilities as well as generalized reduction in our discretionary spending.

Not withstanding the current environment, given the ongoing actions to transform the company we believe we are well positioned to continue to increase our profitability in 2009.

I would like to thank our employees, who stayed focused on providing Atmel's customers the superior products and service and they can give us any results as possible.

I am confident that we will build on this positive momentum and as the best is yet to come.

Now let me turn the call back to Stephen, for discussion of our financial guidance for the fourth quarter.

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Thank you Steven. We anticipate the global macroeconomic environment will be very challenging. As a result we expect fourth quarter 2008 revenue will be down 3% to up 3% from the $400 million in the third quarter of 2008.

Looking in our expectations to gross profits going forward, due primarily to the improved efficiencies, cost reduction initiative and favorable product mix, we expect our gross profit margin to be up 75 basis points in the fourth quarter of 2008, plus or minus 50 basis points. As evidenced by our Q3 operating expense reduction, we continue to be very disciplined in our spending levels. Based on the dollar-euro exchange rate, we anticipate will average approximately $1.38 in Q4, operating expenses are expected to be approximately $127 million, plus or minus $2 million for the fourth quarter of 2008.

On to next acquisition related expenses, are expected to be approximately $7 million for Q4.

In addition, the provision for income taxes is expected to be in the range of $4 million to $6 million for the fourth quarter.

This concludes our remarks. We will now open the call for your questions.

Question And Answer

Operator

[Operator Instructions] Our first question comes from the line of Craig Berger with FBR.

Craig Berger - FBR Capital Markets

Hi guys, thanks for taking my question, and congrats on the strong gross margins. As we looked to the Q4 gross margins, I'm surprised the guidance is better. I do not want to be greedy here, but you said Q4 Euro is being guided to $1.38, that's about a $0.20 sequential improvement. So should you see a $5 million benefit right off the bat just from the Euro on a gross margin?

Steven Laub - President and Chief Executive Officer

Craig, this is Steve. I'll start off and have Stephen perhaps chip in here, but the... first of all what's going on. Which I think you're aware it takes sometime before your manufacturing, what you manufacture in one quarter through has to sold. So, you're correct that the impact of the Euro will be very positive for the company, beginning in Q4. But the real impact on a manufacturing side will probably takes place in Q1.

We will definitely see reduction at our manufacturing costs in Q4, but most of the inventory that will be sold in Q4 was manufactured prior to Q4. So, the real impact of that is going to be showing up in Q1.

Craig Berger - FBR Capital Markets

I see, can you.

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Let me clarify that Craig, also the different on the exchange rates. I think we had a blended average in Q3 of $1.54 and will be as we said we guided $1.38. So I think its about $0.16. Its not quite as high as you outlined.

Craig Berger - FBR Capital Markets

Okay, thank you. Can you help us to understand just what visibilities you're saying are, how confident you are in your guidance and given that we are falling roughly 5% sequential here maybe what the implications are for first quarter sequential?

Steven Laub - President and Chief Executive Officer

Well I think, what we're seeing I think is consistent with what the rest of the industry is seeing, which is pretty limited visibility frankly with respect to bookings and so forth. There's a lot of caution out there as you've seen the guidance from other companies. Generally most are guiding not just down, but down significantly for Q4.

We believe we're being prudent with respect to our guidance not based on the backlog we have that was at the beginning of the quarter and the backlog that we have today. But overall I think that we're probably seeing things that are better than most, but nevertheless we're seeing a decline of roughly just add kind of a midpoint of about 5% for those quarter.

With respect to Q1 I think it's early. Just what happens, we seasonally are actually down in Q1 apart from Q4. And so I would have the expectation that Q1 for us is like all presumably down independent of what's occurring in the business from the standpoint of it in the macro condition that are occurring in the current marketplace today.

Craig Berger - FBR Capital Markets

Last question and I'll jump in the queue. On the attempted acquisition, I know you guys rejected, is there any ongoing dialogue. Are you open to a higher bid or you are not open to a higher bid?

Steven Laub - President and Chief Executive Officer

Yes, we did reject it. There has not been a conversation between the two companies, since the public bid that was given to us. I'm not going to speculate on how our board will respond to any response from either side.

Craig Berger - FBR Capital Markets

Thank you.

Operator

Your next question comes from the line of Hans Mosesmann with Raymond James.

Hans Mosesmann - Raymond James

Thank. You comment on what Quantum may have represented in Q3 and what kind of ramp did you see there for the next couple of quarters? Thanks.

Steven Laub - President and Chief Executive Officer

We, I think, we mention to the marketplace without the acquisition that we went out and breaking out Quantum specifically as part of our micro business that we've rolled up into the micro business part of that is because a number of the sales of our products that go into capacity sensing or microcontroller sales. And so Quantum historically had a mixture of both IP and microcontroller sales we're now having our own microcontroller sales is part of... application space which are not rolled into the Quantum number. So it would actually be somewhat misleading, as I talk about, what I can tell you is that the capacitive sensing business for us and they sales into that application are increasing substantially.

Hans Mosesmann - Raymond James

And as a follow-up just commentary about inventories that you could see out there in the channel are they loaded, are they low or they what can you tell us?

Steven Laub - President and Chief Executive Officer

For what we've looked at, as we rolled up the numbers for this quarter because of the transition actually for example in Europe of our distribution... distributors to the sell through as compared to sell in. They've actually have been bring down their inventories, but consistent with that on a unit basis.

So our sense is that inventories today are actually pretty reasonable with respect to our distribution network. I'd say probably roughly that it is around eight to 10 weeks on average.

Hans Mosesmann - Raymond James

Thank you.

Operator

Our next question comes from the line of Suji De Silva with Kaufman Brothers.

Suji De Silva - Kaufman Brothers

Hi guys, how're you doing? Nice job on the quarter. Can you talk about, Steve, in the flat guidance what you expect by the segments?

Steven Laub - President and Chief Executive Officer

It's going to be more challenging this quarter as you can imagine. With respect to that. But, I'll give you some generalized perspective that we do expect. So on a basis on, I am looking at revenues from a standpoint of ship in because that's very comparable the way to look out for us. So give me just extra moment while I just do that.

Suji De Silva - Kaufman Brothers

Okay.

Steven Laub - President and Chief Executive Officer

So, micros we expect will be relatively sort of flat, actually slightly down probably... on a shipping basis, that would be just low single-digits. Memories we expect are actually going to be down this quarter. Probably more of a... sort of a double-digit decline, potentially, high single to double-digit decline.

And is again off the higher number that's roughly 419, 420 number for the company overall. Automotive for us this quarter is probably going to be down somewhere between high single-digits as well. Pricing digits in that business at our ASIC business we expect this quarter frankly will probably be flat, to maybe slightly up. Okay.

Suji De Silva - Kaufman Brothers

Okay. Thanks a lot. Yes. And then on the French fab and what you're doing there. Can you talk about what your next steps are from this point forward?

Steven Laub - President and Chief Executive Officer

What I can communicate is I've been thinking about to people in the past which is... this company is going to complete its transformation into a microcontroller focused company and that we are going to take steps to... as we said before to either fix or to move away from businesses that don't provide the right return for us.

I'm not going to announce those in advance because doing so definitely has damaged to both our employee base and to our customer base. It's not the business of our shareholders to have an asset that you may or may not do something with, but it damage of that asset with a lot of speculation and rumor.

Clearly, the activities in the public nature of with Microchip and ON have done here has been, I would say, it creates an environment within our employee base, which is not the best interest to our shareholders and so forth.

So it's best not to talk about those thing specifically, but the company is committed to fulfilling and taking actions, to make sure that we're competitive to derive the maximum return we can, upholds microcontroller business.

Suji De Silva - Kaufman Brothers

Okay. I was asking more specifically if there are any near term milestones or next step that you could point out with what's going on there. With talking to the French relations, labor word?

Steven Laub - President and Chief Executive Officer

Sorry, I jumped... I misunderstand your question. With respect to that, we're actually moving along the process. There's a return to procedure, we're moving along that process I think we had communicated last time that in the November timeframe we will be able to give you that information on that. Our expectation is that we should be pretty much completed with the process sometime next month.

Suji De Silva - Kaufman Brothers

Okay. And I think this was kind of question you're answering but let me ask you anyway. In the given current environment and in the weaker macro environment demand does that have any impact on the timeframe of the strategic actions you talked about in the call, in terms of that accelerating them or taking a lot of risks and, can you just comment on your thoughts there generally, thanks Steve.

Steven Laub - President and Chief Executive Officer

I assume, I do not think they're too risky. I think as we're seeing in the environment generally there is always companies out there that want to do deals. Financing of course with more challenging that it has been generally but nevertheless, I think that the environment today and with respect to some of things going on with this company I think acceleration of any of our activities is more or likely they're not.

Suji De Silva - Kaufman Brothers

Thank you, Steve.

Operator

Your next question comes from the line of Edwin Mok with Needham & Company.

Edwin Mok - Needham

Yes, Steve. Just to follow-up on your question, I'm just curious on the ASIC area what would be driving the potential increase?

Steven Laub - President and Chief Executive Officer

Well, with respect to that business we have some parts of this for example, aerospace and military which tend to have a seasonally strong quarter in Q4 for example. So there are some pieces of that that actually are Q4 driven. They also at the near part of business clearly have different seasonality to them, which are different parts, but that one in particular tends to have a very strong Q4.

Edwin Mok - Needham

And then you have some given the strong goal your exchange rate guidance, will that half some of close to $10 million impact on your revenue anyway if you go installers very recently?

Steven Laub - President and Chief Executive Officer

It tends to have an adverse impact on our revenue in Europe is that what you are saying?

Edwin Mok - Needham

Yes.

Steven Laub - President and Chief Executive Officer

Yes it does. We did our guidance based on adjusting for that.

Edwin Mok - Needham

I though your guidance more impacted on that.

Steven Laub - President and Chief Executive Officer

It does factored that in.

Edwin Mok - Needham

And then, I guess I'm going to ask this question related with you. So, given that you guys have rejected the [indiscernible] here how does the Board wish you to follow on Atmel here?

Steven Laub - President and Chief Executive Officer

I'm sorry--

Edwin Mok - Needham

I'm say that $5 is still lower that. So I don't know if you can put a number down or if not at least come, maybe talk around and explain how you develop the company?

Steven Laub - President and Chief Executive Officer

I think the best way I can see is the Board is looking to proposal in it's totality and rejected at on for multiple factors. I'd include value as one of them, the conditionality of the deal was another reason why it was rejected, the complexity and so forth. So, it wasn't just a value question. Value is just one of several factors that actually influenced the Board's decision.

Edwin Mok - Needham

I see. And then recurring end demand we heard some several companies saying that demand will fall off in the month of September continued to decline in this quarter. Have you guys seeing something similar and if you have since you're not changing the demand, can you can talk about which area you think strong decline and which areas you feel that you're stronger?

Steven Laub - President and Chief Executive Officer

I think what you're hearing is consisting for virtually all companies. Demand has definitely softened probably beginning of September timeframe and it is continued to be soft through the sub period. It's a little early to be saying for example, is it happening this versus that, we're seeing some softness obviously in the consumer area, but I think people are saying that as well.

But actually sort of target specific applications at this point, beside consumer, I think it might be... what happens in the middle of the quarter when you do that. If you are getting some strong bookings in this following week, it'd been wrong. And so, I think that you can mislead, or misrepresent or mischaracterize what's happening in the marketplace. Consumer is definitely softer. The other parts of the marketplace, we have some general tendencies and beliefs out of this softening as well and but I don't want to communicate that in this quarter.

Edwin Mok - Needham

Okay. That's all.

Steven Laub - President and Chief Executive Officer

Overall things as you can tell are soft.

Edwin Mok - Needham

Yes. Obviously. One last question and I'll go away. Regarding the backlog coverage usually you guys give some color on, can you provide us?

Steven Laub - President and Chief Executive Officer

Yes. Our backlog coverage at the beginning of the quarter was just under 70% which was among the highest backlog coverage we had, quite frankly over the last two years actually was higher for the last two years. And our backlog coverage in the first part of the quarter is just under 80% and that was too much consistent with the backlog we have at this point.

So, can you give me a sense for, you're slightly ahead at the beginning of the quarter we right now were kind of in the, I'd say in the middle of where we've been historically.

Edwin Mok - Needham

Great. That was helpful. Thank you.

Operator

Your next question comes form the line of Steven Eliscu with UBS.

Steven Eliscu - UBS

Yes, thank you. I have a question on the trajectory of margin. Given the 300 increase we had last quarter continued momentum this quarter, and we haven't really even seen the benefits of the dollar and assume it somewhere around your Q4 guidance for next year. Can you give us a sense of what kind of trajectory we should get in 2009, assuming the micros inline with your current view?

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Yes, Steven, this is Steven. I... we've been normally get out by far from a guidance perspective but certainly, I consider about speculate some of the drivers. We continue to see overall improvements in our manufacturing facilities both in Russet and Colorado. We continue to rationalize our best our back-end test assembly sides and fees and cost savings there. Coupled with the ongoing favorable mix as we see a growth very solid growth of our microcontroller business into 2009.

So they are the main drivers as we go into 2009 and setting from our guidance, we're breaking the 40% barrier as we exit the year and we would just continue to be grows from that quarter-on-quarter into next year, and we had anymore clarity.

Steven Eliscu - UBS

Let me ask you just a different way, essentially if you look year-on-year you've had about you will had about 500 increase, is that durable in 2009?

Steven Laub - President and Chief Executive Officer

Probably something closure to about half of that number is probably durable in 2009.

Steven Eliscu - UBS

Very helpful. Let me ask you on the different note, if of course, exclude in your RF and automotive, we understand the foundry business is going wayward, if we look, going forward here with your exposure to automotive and what is globally a automotive recession. How do you see that business? How do you see being able to sustain that business at a reasonable level over the next few quarters or should we expect to a step down in line with the global auto economy?

Steven Laub - President and Chief Executive Officer

With respect to the business what we do expect that there'll be probably some decline in that business showing first half of next year because of the general global recession in the automotive industry. We do also expect that whatever recession occurs that would acquire first through the semiconductor manufacturers, serving other industry, so we will see less, or will have less could impact the most.

Most of the step that were designed into a higher growth application to the automobile, and then others are also our customer base tend to be doing relatively better in a generalizes sort of industry as overall.

So, there are things for us which is, since our automobile business is based in Europe and most of our customer base is based in Europe that actually change in the currency, which has a very positive affect on the profitability of that business everything else being equal. Even adjusting for the revenue impact of the currency change the overall expenses associated with that will acquired by far greater than any revenue effect.

Steven Eliscu - UBS

Very helpful. One last question on, you on your prepared remarks you talked about the handset area being an important, you have an important design opportunity in the touch area. Can you talk about how about that looks going forward in terms of the growth area for your microcontroller business not just touch, but specifically the handset in portable media player market?

Steven Laub - President and Chief Executive Officer

We believe that the handset market, portable media player market for touch as a general application will be very high growth and very large. We do have a very important design win that we just achieved. We can't share with you who that is without the permission of the OEM.

But, this is the area that we are investing very heavily into. We have very strong relationships with two of the top four OEMs in the space. And our goal is to work with them and the others, as they transition from their traditional type of technology to the capacitive sensing touch screen technology. But, as you see most of the... manufacturers or all the handset manufactures over do.

Steven Eliscu - UBS

And just as the last follow-up. How are you differentiating from other players in that market such as Cypress and Synaptics?

Steven Laub - President and Chief Executive Officer

Well I think during a technology comparison during the conference call is not appropriate, but I think you can talk to another of the different people in the marketplace that will tell you the capabilities and strength of our technology and our solution with respect to that. People who truly have a touch screen solution that is really just ourselves and one of the other players today.

Steven Eliscu - UBS

Thank you.

Operator

[Operator Instructions]. Your next question comes from the line of Kevin Rottinghaus with Cleveland Research.

Kevin Rottinghaus - Cleveland Research

Can you hear me okay?

Steven Laub - President and Chief Executive Officer

Yes.

Kevin Rottinghaus - Cleveland Research

Okay, was in the restructuring charges this quarter?

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Hi Kevin this is Steven. The restructuring charges consisted primarily of approximation of the amounts associated with the we made on the French social plan. In fact I think it was with $28 million and that was pretty much all of it.

Kevin Rottinghaus - Cleveland Research

Okay those are the charges related to it. There is nothing for the German fab in there.

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Yes in terms of other impairment items, we had $8 million of impairments related to the Heilbronn manufacturing operation as we expect to close that in Q4.

Kevin Rottinghaus - Cleveland Research

Okay and is the target of prices is still in 2010. Is it still kind of your talking right now?

Stephen Cumming - Vice President of Finance and Chief Financial Officer

That was potential yes

Kevin Rottinghaus - Cleveland Research

Okay and when do you think will start to see any benefits, can you talk about any benefits you'll see from those two actions the sale of the German fab and then the early restructuring you may doing now in France with your current target

Stephen Cumming - Vice President of Finance and Chief Financial Officer

On the social plan and the French situation we can't really presume the benefit from that until we completely close out on the program. With regards to the Heilbronn facility, we have an ongoing supply agreement. Its primarily supporting our automotive business, so we don't envisage really any upside at least in 2009 as we start to re-qualify our path in '10 and '11, we'll start to reap the reward going forward after that.

Kevin Rottinghaus - Cleveland Research

Okay, then on the gross margins in the microcontroller business could you maybe dig in a little bit as to kind of what the drivers were there. I mean is it the 8051 rolling off and just more AVRs at a better margin or what exactly kind of drove the real strong improvements you're seeing in gross margins there?

Steven Laub - President and Chief Executive Officer

This is Steve. So the factors that impact the gross margin were one that we were sourcing and every microcontroller our products out of the Heilbronn fab, which was high cost and so the business was being adversely impacted by the high cost wafers coming from there.

That effect is almost nearly complete now as far as being eliminated. So that will go away. The other thing that's happened is we're just now introducing shrinks for a number of our hard volume devices. The impact of that is just starting actually and will be taking effect throughout 2009 as we introduce those parts to convert our customers to the lower cost dye and so we're so. Those two factors as well as the fact that we've actually also implemented productivity, improvement programs in our existing two... remaining 2 high volume wafer fabs both in colors as we say. Which are driving down the cost of wafers there quite significantly.

So probably all those factors are influencing that. In addition a few other things we're doing for yield enhancement, things changes to back in and so forth. That's the reason why we stated that we do expect. We see significant increases in gross margin as well as our margins in our microcontroller business next year.

Kevin Rottinghaus - Cleveland Research

Okay, and the strength you're doing in that segment. Are those being done in Colorado or are they elsewhere?

Steven Laub - President and Chief Executive Officer

They're being done primarily, being manufactured in Colorado, but also a little bit outside foundry.

Kevin Rottinghaus - Cleveland Research

Is it still around 5% of wafers or less than 5% of wafers in the foundry or is it creeping up now?

Steven Laub - President and Chief Executive Officer

No it still is our goal as actually increase the number, but we're not going increase that number while we have full capacity in our existing plant.

Kevin Rottinghaus - Cleveland Research

Okay. And then, just last question from me, could you give us any kind ballpark or any kind of idea on how much of this smart card business, what kind of impact that may have had in ASIC segments this quarter and then, what we should think on that going forward or you're going to de-emphasize that business and how much impact could it have going forward?

Steven Laub - President and Chief Executive Officer

We don't give out specific numbers with respect to product lines like that.

Kevin Rottinghaus - Cleveland Research

Right.

Steven Laub - President and Chief Executive Officer

I can tell you that these smart card business did decline in Q3 as compared to Q2 and it did decline sedately from a Q3 of '07 as compared to Q3 of '08 as well. And really what's going on there is that we are growing the banking and ID portion of the business or tracking down the telecom SIM Card business. So, we are growing the higher margin parts and while bringing down the commodity parts of it and that's the transitions we occur in, but overall, the number is coming down a little bit.

Kevin Rottinghaus - Cleveland Research

I guess, I just follow-up excluding the reduction in the commodity piece that you are walking from was that business up, sequentially?

Steven Laub - President and Chief Executive Officer

I don't have, we don't have up to the breakout here. I've, we'll have to recheck that.

Kevin Rottinghaus - Cleveland Research

Okay. Great. Thank you very much.

Operator

Your next question is a follow-up from the line of Craig Berger with FBR.

Craig Berger - FBR Capital Markets

Just a follow-up. Can you comment on share buybacks, if you have anything active and outstanding and so how much?

Steven Laub - President and Chief Executive Officer

Right now Craig the Board, we do not have a share buyback program in place.

Craig Berger - FBR Capital Markets

Okay. Can you comment more, is that something that you might be looking out down here, in a pretty nice increase in cash balances?

Steven Laub - President and Chief Executive Officer

We do have some increase in cash balance which is something clearly that the company has been supportive of in the past. So this management team and the board have supported that as we did last year. And we do expect also the cash balance to continue increase in a significant way. I think one thing we're just concerned about is most companies are, is how deep that kind of climate is going to take the general economy.

And so I think that's one of the biggest considerations right now that the board has. But it is something that we do talk about and our... as we said we demonstrated support for that in the past. I think to that speaking, I don't want speaking in terms side of the Board towards a negative decision on this year. It is something that we only support of that.

Craig Berger - FBR Capital Markets

Can you comment on what your view of sustainable CapEx over time is, it's obviously pretty low this year, is this year normal, or how should we view that?

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Yes, I think it's going to be off a little bit going into 2009 and we've taken significant efforts to reduce that especially in light of the overall macro economic conditions that during 2008. But I think going forward through '09 we're probably shooting for around $80 million.

Steven Laub - President and Chief Executive Officer

And the only clarification that's assuming that the business does return to more normal levels.

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Yes.

Craig Berger - FBR Capital Markets

Got it. Can you comment on CapEx guidance for Q4? You're doing vacation shutdowns and you are benefiting some from the euro? Why is that guidance not better than flattish?

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Right, I think Craig this is Steven again. To get your attention to the actions that we already took in Q3. We've got ahead of the game here and you can see from Q2 to Q3, we already reduced our OpEx by almost $9 million and we did benefit as I mentioned in the call from some European vacation days that benefited our overall spending reduction to Q3. So that's come little bit into Q4. We do have a slight increase in the legal expenses and there's a slight increase with regards to our refresh of our... program that's offsetting some of those currency benefit that we've spoke about.

Steven Laub - President and Chief Executive Officer

But it's also for the context, we do get probably more a reduction in Q3, because of Europe vacations and the most comes our industry, because of where our population of our employees are. Last year between Q3 and Q4 our OpEx actually rose about $8 million and so the fact that this year we're saying hey, it's going be down slightly gives you bigger indications after already been down, that were actually putting other things in place to reduce those expenses.

Craig Berger - FBR Capital Markets

With respect to cash balance, are there any outstanding inflows or outflows expected?

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Yes, we've got restructuring that we expect is going to go through during Q4.

Steven Laub - President and Chief Executive Officer

So that's one of the bigger items.

Craig Berger - FBR Capital Markets

What the cash impact there?

Stephen Cumming - Vice President of Finance and Chief Financial Officer

It's around $20 plus million.

Craig Berger - FBR Capital Markets

Okay. Can you comment on chip pricing trends in the quarter, seeing any unusual pressure?

Steven Laub - President and Chief Executive Officer

For the standpoint of our pricing trends, I think the only area that were seeing any particular changes in the environment would be in the memory business, where the pricing has become, I would say a little a bit more aggressive than normal. We do participate... as you guys know, we don't participate in a broad way in a market. We go after particular applications where we're more protected than most.

Craig Berger - FBR Capital Markets

And last question on the short term debt, what's the plans there?

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Well we have two credit revolvers, I think that's about a $125 million. We have just actually extended one to take us through the September 2009 and as we go into 2009, we are going to look in a more complete fashion of our overall capital structure and see what we need to do.

Craig Berger - FBR Capital Markets

Sorry, the last final question. Expense or income this quarter, you guys had income? So we'd be modeling income going forward and is $5 million a quarter on taxes still the right number going forward?

Stephen Cumming - Vice President of Finance and Chief Financial Officer

Yes, I think from other earnings, we did have a one time benefit in Q3 from settlements of some litigation items that generate a little bit more income. I think to Q4, you can assume there would be an expense of roughly around $1 million and from the tax perspective, I think we'll just follow on with around $5 million.

Craig Berger - FBR Capital Markets

Great. Thanks guys.

Operator

We have wasted a lot of time for questions. Mr. Pursel, please proceed with your closing remarks.

Robert Pursel - Director of Investor Relations

Thank you, Tasha. During the fourth quarter Atmel, we'll be participating in several industry conferences. On November 19, Atmel will be presenting at the UBS Global Technology and Services Conference in New York City and on December 11 at the Raymond James 2008 Boston for Investor's Conference. Webcast information for these events will be published on our company's Investor Relations website.

This concludes our conference call. Thank you for joining us today.

Operator

This concludes today's conference call. You may now disconnect. .

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Source: Atmel Corp. Q3 2008 Earnings Conference Call Transcript
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