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Executives

Robert Pursel - Director of IR

Steve Laub - President and CEO

Stephen Cumming - VP of Finance and CFO

Analysts

Craig Hettenbach - Goldman Sachs

Steve Eliscu – UBS

Kevin Rottinghaus - Cleveland Research

Hans Mosesmann - Raymond James

Edwin Mok - Needham

Suji De Silva - Kaufman Brothers

Pick Hover - FBR Capital Markets

Doug Freedman - BPSG

Atmel Corp. (ATML) Q4 2008 Earnings Call January 5, 2009 5:00 PM ET

Operator

At this time, I would like to welcome everyone to the Atmel Fourth Quarter and Fiscal Year 2008 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

Thank you. Good afternoon and thank you for joining us for Atmel's conference call. In addition to our fourth quarter earnings release, Atmel also had announced that it is pursuing strategic alternatives to the company’s ASIC business and related manufacturing assets. Copies of the press release issued today are available on our website. 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 US and 706-645-9291 for all other locations. The access code is 81448211. The webcast will be archived on the Atmel website for one year.

Joining us on the call today are Steve Laub, Atmel's President and CEO; and Stephen Cumming, Vice President of Finance and Chief Financial Officer. Stephen will begin the call with a review of our Q4 financial results and Steve will then provide a business update. At the conclusion of Steve’s remarks, Stephen will discuss our internal financial targets for the first quarter of 2009 and then open the call for your questions.

During the course of this conference call, we may make forward-looking statements about Atmel's business outlook, including statements regarding our expectation for revenues, target growth and operating margins, as well as cost savings for 2009 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, as 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.

I would now like to turn the call over to Steven Cumming for a discussion of our fourth quarter financial result. Stephen?

Stephen Cumming

Thank you, Robert. Let me provide some details of our statement of operations. Revenues for the fourth quarter of 2008 were $335 million, a 16% decrease compared to $400 million for the third quarter of 2008 and a 21% decrease compared to the $426 million for the fourth quarter ended December 31, 2007.

Revenues for 2008 were $1.57 billion compared to $1.64 billion for 2007 and were impacted by the slowdown in demand, particularly of non-volatile memory and automotive product shipments in the fourth quarter. Also during 2008, Atmel exited the RF-CDMA foundry business, which resulted in a revenue decline of approximately $50 million from 2007.

Gross profit, as a percent of revenue was 39.7% for the fourth quarter of 2008. This compares to gross profit of 39.5% in the third quarter of 2008 and 35.2% for the year-ago quarter. Included in the gross profit for the fourth quarter, was a one-time pension related benefit of approximately $4 million from the sale of our Heilbronn fab.

For the full-year 2008 gross profit was 37.7%, a 230 basis point improvement over the 35.4% reported for 2007. The improvements to gross profit have been primarily driven by our strategic restructuring initiatives, which included the closure of our North Tyneside fab, processing cost improvements in our Rousset fab and a stronger mix of higher margin microcontroller and other core products.

R&D expense was $62 million for the fourth quarter. This was $2 million less than $64 million for the third quarter and $10 million lower than the $72 million reported for the year ago period. The sequential decrease in R&D spending resulted primarily from stricter controls over our discretionary spending and a favorable dollar to Euro exchange rate.

SG&A expense was $77 million for the fourth quarter. This was an increase of $13 million compared to the $64 million for the third quarter and a $19 million increase compared to the $58 million for the year ago quarter.

SG&A expense was up in the fourth quarter to primarily to a bad debt provision of approximately $12 million that we took for an Asian distributor write-off, as well as unanticipated one time legal settlements and unsolicited M&A expenses. Excluding these one-time charges SG&A expenses would have been $61 million, $3 million less than the prior quarter.

Stock based compensation expense was $9 million for the fourth quarter of 2008 compared to $7 million for the third quarter and $5 million for the year ago quarter. For the full year 2008 stock based compensation was $29 million compared to $17 million for 2007.

Operating loss was $18.2 million for the fourth quarter of 2008 or 5% of revenue. This compares to an operating loss of $11.3 million for the third quarter of 2008 and an operating profit of $6.4 million for the fourth quarter of 2007.

Included in the fourth quarter 2008, operating loss was $12.2 million of net charges related to restructuring gain on loss of assets, acquisition and grant repayments. For the full year 2008, operating loss was $13.9 million compared to operating profit of $51.7 million reported for 2007.

Included in the full year operating results were net charges of $71 million for 2008 and $13.6 million for 2007, respectively, related to restructuring asset impairments acquisition gain on sale of assets and grant repayments.

The company's effective exchange in the fourth quarter of 2008 was approximately $1.35 for the euro, this compares to a $1.54 to the euro in the quarter and a $1.43 to the euro in the year ago period. A $0.01 decrease in the dollar-euro exchange rates increases operating income by approximately $0.5 million each quarter.

Other income and expense was a net expense of $3 million for the fourth quarter of 2008, this compares to net other income of $3 million for the third quarter and $1 million for the fourth quarter of 2007. For the full year, other income expense was an expense of $6 million for 2008 and income of $4 million for 2007.

Income tax provision was $4 million for the fourth quarter of 2008, this compares to income tax benefit of $4 million for the third quarter of 2008, an income tax provision of $6 million for the fourth quarter of 2007. For the full year 2008, income tax provision was $7 million compared to $8 million for 2007.

Non-GAAP net income for the fourth quarter of 2008 totaled $5 million or a $0.01 per diluted share compared to net income of $43 million or $0.09 per diluted share for the third quarter of 2008 and $20 million or $0.04 per diluted share for the year ago quarter. For the full year 2008, non-GAAP net income was $78 million or $0.17 per diluted share compared to $78 million or $0.16 per diluted share for 2007.

Net loss on a GAAP basis for the fourth quarter of 2008 totaled $24 million or $0.05 per diluted, this compares to a net loss of $5 million or $0.01 per diluted share for the third quarter of 2008, and net income of $2 million or breakeven per diluted share for the year ago quarter. Net loss for the full year 2008 was $27 million or breakeven per diluted share compared to $47.9 million or $0.10 per diluted share for 2007.

Turning to the balance sheet, we remain focused on managing our cash effectively. Our cash and cash balances which are cash, cash equivalents for short-term investments totaled $441 million at the end of the fourth quarter of 2008, an increase of $20 million from the end of the prior quarter, and an $11 million increase from the fourth quarter of 2007. Cash provided from operations totaled $30 million for the fourth quarter of 2008 and $165 million for the full year of 2008 excluding the impact of North Tyneside fab closure.

Capital expenditures were approximately $10 million for the fourth quarter and $44 million for the full year of 2008. This was at the low end of our revised estimate of $45 to $55 million for 2008. The lower CapEx can be attributed to effective cost controls and reduce manufacturing capital requirements.

Depreciation and amortization for the fourth quarter of 2008 combined were $30 million. This compares to $34 million for both the third quarter of 2008 and the fourth quarter of 2007. For the full year, depreciation and amortization was $135 million for 2008 and a $129 million for 2007.

Accounts receivable were a $185 million at the end of the fourth quarter. This was down approximately $36 million from the prior quarter primarily as a result of lower revenue during the quarter.

Days and sales outstanding were 50 at the end of the fourth quarter, flat from the prior quarter, with the exception of the provision taken in Q4 for bad debt related to an Asian distributor, whose business was extraordinarily impacted following their addition to the US government’s entity list, which prohibits the company from shipping products to the distributor.

We have not seen any decline in the payment performance of our customer base and we continue to provide tight control and oversight of our credit levels and AR balances.

Inventory was $324 million at the end of the fourth quarter. This was up $9 million from the prior quarter a result of the lower Q4 revenue levels. We are taking action to reduce inventory exposure by reducing our fab loadings in order to match rate of production before cost to demand.

Days of inventory at the end of the fourth quarter increased to $148 from $119 at the end of the prior quarter. Now, let me turn the call over to Steve for a commentary of our business.

Steven Laub

Thank you, Stephen. As you know, today Atmel announced that it is pursuing strategic alternatives for the company's ASIC business and related manufacturing assets, including a potential sale. This is a significant step-forward in building a new Atmel, which is to transform Atmel into a microcontroller based company, enhance its cost structure and unlock value.

Over the last two years, we have taken decisive actions to improve and restructure nearly every aspects of Atmel's operation. The evaluation and implementation of strategic alternatives for ASIC business is a major step in Atmel transformation plan. Atmel's ASIC business is a leading provider of high-performance, customer-specific integrated circuits and security solutions to the industrial, military, aerospace and consumer markets, operating in three distinct segments; customer-specific products, smartcards and aerospace.

Our ASIC business is a market leader in multiple segments, it is no longer consistent with our long-term strategy of building a micro-controller base company. As we proceed with this process, we will remain focused on continuing to drive technological leadership, provide innovated products and services for our ASIC customers and create value.

Now let me move to a discussion of our business. During the fourth quarter of 2008, as we all aware, the global economy continued to weaken and the semiconductor industry suffered one of the worst declines on record. Virtually every semiconductor company revised revenue guidance downward, as the global economic weakness, translated to customers pushing out or cancelling orders as a result of their own reduced demand.

Although Atmel is not immune to the consequences of the weakening economic environment, we are encouraged by our strong relative performance, as our fourth quarter revenues declined only 16% sequentially, while most companies in our industry experienced sequential revenue declines of 18%, 25% and 35%.

In addition, Atmel generated the highest gross margins for both the fourth quarter and full year 2008 in over seven years. This is the result of the actions we have previously taken, to focus the company on a high-growth, high-margin products, as well as reduce our cost structure. These actions included divesting or closing over 14 product lines, reducing our wafer fab facilities from five to two, and reducing our total headcount from appropriately 8000 to approximately 6000 or over 25%.

Despite the current environment and focus on reducing expenses, as we announced yesterday with MeshNetics ZigBee acquisition, we will continue to pursue strategic investments in the microcontroller space to enhance our leading technology position.

Now, let me turn to discussion of our business segments. First, our microcontroller business unit: Revenues were $120 million for the fourth quarter, down 8% sequentially and down 1% from the same period last year. For the full year, microcontrollers grew 14% reaching a record $523 million for 2008, compared to $458 million for 2007. AVR revenues declined 8% sequentially in Q4 but grew 15% in 2008, and our expanding 32-bit microcontroller business grew 14% sequentially in Q4 and 30% for the full year 2008, as compared to 2007.

We want to be clear about the ongoing market share gains we are achieving in the microcontroller marketplace. I think no one would dispute that we are taking market share in the 8-bit MCU space with our advanced AVR microcontrollers which are being used in both 8-bit and 16-bit applications due to their unmatched performance and low power efficiency.

In addition, our 32-bit microcontroller business, which grew 30% year-over-year is gaining substantial market share as well in the 32-bit space. If we evaluate our overall microcontroller revenues, as compared to others in the industry, our microcontroller business substantially outperformed them in Q4 and for the full-year 2008 as well.

Although, our Q4 microcontroller revenues declined sequentially by 8%, we note that Freescale’s microcontroller revenues declined sequentially by 26% and Microchip’s by as much as 28%. For the full-year 2008, we made substantial progress in closing the gap between ourselves and Microchip. As our microcontroller revenues, rose by 14%, Microchip’s appear to have declined by approximately 3%. If we exclude the impact of the one-time conversion of European distributors to a sell-through model from a sell-in model. Microcontroller revenues for the fourth quarter were $123 million and $540 million for the full-year 2008.

As we enter 2009, we are aggressively pursuing new MCU designs in such high growth areas, like single and multiple touch screen, buttons, slider and wheel applications, as well as ZigBee low power and energy efficient applications, and also power management areas.

We continue to deliver new devices and on the XMEGA platform, which has been a major market success and is expected to be a significant growth driver beginning in 2009 for designs, by both existing as well as new customers, for the full year 2009, despite the very difficult macroeconomic environment. We expect that our micro controller revenues will grow year-on-year significantly out pacing the market.

In addition to driving outstanding revenue growth, we are taking significant steps to drive gross margin improvement. For the full year 2008, micro controller gross margins were 46% up from 39% in 2007 and we expect gross margins to increase substantially in 2009.

Turning to our ASIC business segment, revenues for the ASIC segment were $104 million for the fourth quarter down 9% sequentially and down 21% for the same period last year. For the full year, ASIC revenues were $455 million, declining 8% compared to $496 million for 2007.

For the fourth quarter our bright spot was our aerospace business, which grew 48% sequentially and 21% compared to the same quarter last year. The ASIC business decline was primarily due to reduced smart card shipments as we reduced our exposure to a lower margin telecom market segment.

For our Non-Volatile Memory segment, revenues were $65 million for the fourth quarter down 29% sequentially and down 38% from the same period last year. For the full year, 2008 Non-Volatile Memory revenues were $339 million, declining 10% compared to $377 million for 2007.

As we commented in our last call, we experienced softness in the global memory business driven primarily by general weakness in the consumer markets and lower than expected booking activity in China. This indeed was the situation as consumer and PC vendors continue to lower their forecast and as a result ordering activity.

Turning to our RF and Automotive segment, revenues were $46 million for the fourth quarter, down 28% sequentially and down 32% from the year ago quarter. Full year 2008 revenues were $250 million, a decline of 19% from $309 million in 2007. However, excluding the CDMA foundry business, our RFA business segment in 2008 was down 5% from the previous year.

In December, we completed the sale of our Heilbronn manufacturing operation to TSH Limited reducing the number of our wafer manufacturing facilities from four at the beginning of 2008 to two. Approximately 260 Atmel employees directly associated with fab operations and other support functions are now part of TSH. Also to ensure a seamless transition for our customers, Atmel and TSH entered into a three year supply agreement.

Turning to our revenues by geography for the fourth quarter; Asia, continued to be our largest ship to location, representing approximately 43% of revenues down from 50% of revenues last quarter, while Europe represented approximately 41% as compared to 36% in Q2, and the Americas represented over 16% of total revenues pretty consistent with the last quarter.

I am now going to turn to Atmel's operational efficiencies. As you may remember, we targeted $80 million to $95 million of cost savings for 2008, as a result of our previously announced restructuring initiatives and we actually achieved savings in excess of $125 million.

During the fourth quarter, we completed the previously announced headcount reduction activities in France and implemented additional cost reduction actions in North America for a combined $32 million of annualized savings.

In response to the severe macroeconomic conditions, we are taking numerous actions to reduce our expenses and our cash breakeven point. We are proposing to accelerate activities to consolidate some of our backend test operations during 2009 to further reduce our manufacturing cost i.e. we have instituted tighter control over discretionary spending, and selective hiring for critical positions only.

Furthermore, we have taken the following major actions: We have imposed a two week wafer manufacturing shutdown at both our Rousset, France and Colorado Springs, Colorado fabs during Q1. We also had a one week leave for all non-manufacturing employees during Q1, a 10% salary cut for myself and 7% for the remaining members of the executive team. A salary freeze for the rest of the company’s workforce and a suspension of the company’s (inaudible).

Notwithstanding the current environment, given the ongoing actions to transform the company, we believe we are well positioned to continue to enhance the company’s competitiveness and to outperform our peer group.

I would like to thank our employees who have stayed focused in providing Atmel’s customers with superior products and service, which allowed us, in Q4, to outperform our industry in revenue and to achieve the highest gross margin in over seven years.

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

Stephen Cumming

Thank you, Steve. In light of the uncertainty and limited visibility in the current macroeconomic environment, the company is not providing revenue guidance this time. For internal purposes, we are planning first quarter 2009 revenues to be approximately $290 million.

Looking at our internal expectations to gross margin, based on our lower revenues and reduced factory loadings, we expect our gross profit margins to be between 35% and 38% in the first quarter of 2009.

We continue to be very disciplined in our spending levels. Based on the dollar-euro exchange rate, we anticipate we will average approximately $1.35 in Q1. Operating expenses are expected to be approximately $114 million, plus or minus $2 million for the first quarter of 2009. First quarter capital expenditures are expected to be $5 million and between $25 million to $35 million for 2009.

Quantum acquisition related costs are expected to be approximately $4 million for Q1. In addition, the provision for income taxes is expected to be in the range of $2 to $4 million for the first quarter.

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

Question-and-Answer Session

Operator

(Operator Instructions).

Our first question is from the line of Craig Hettenbach with Goldman Sachs.

Craig Hettenbach - Goldman Sachs

Steve, you mentioned Touch as an area that you are pursuing aggressively for 2009. Can you just talk about Atmel's positioning with Quantum and ABR, and how that stands up to from other competitive offerings in the market place?

Steve Laub

Sure, so the areas that, these are sort of three major different areas of touch, there is, lets consider, a touch screen, which is primarily, today, the large application area, is sort of a handset or smart phone, and there is also buttons and then sliders. Its really these kind of areas of touch that we will focus on. We have products across all three areas. I would say that from a standpoint of competitiveness of the company there is probably one other significant competitor, I would say, in the touch-screen area. And then, there is probably one recent competitor in the buttons and sliders area. From our standpoint, we are competing very effectively in all three areas. It's a very dynamic place, but there is only three people I'd say that are competing very effectively in the touch area today, including ourselves.

But today we're also wary about the way of high growth. We have design wins in the handset area with two of the top three cell phone manufacturers or handset suppliers. We also have design wins in areas that are also adopting touchscreen; such as printers and GPS, those types of applications, a lot of consumer handheld applications where touchscreen is becoming a major area as well and then expanding very considerably also in the buttons and sliders area.

The business for us grew very substantially in 2008 as compared to 2007. We expect this to be an area of very substantial growth, and despite the economic environment it will be an area of substantial growth in 2009 as well.

Craig Hettenbach - Goldman Sachs

Great. And if I can ask a follow-up related to the automotive market. Traditionally you haven’t had a big presence in microcontrollers. Can you just discuss the potential opportunity to leverage existing relationships within your RF and automotive business as it relates to penetrating deeper with microcontrollers?

Steve Laub

Yeah, though you're correct. Historically, the company hasn't had much of a presence in automotive with respect to the market controllers. For those people who are familiar with it, micros represent roughly full microcontrollers. Automotive customers represent roughly one third of the total market opportunity, and for us, it's really a complete renewal for us.

We have in the last two to three years invested quite a bit from an R&D side and we are now shipping a lot of automotive grade microcontroller products, so there is a lot of design activity that is occurring. In fact, in the automotive area, that area actually grew for us this past year, 2008 as compared to 2007, approximately a 60% growth for us. And as a percent of our total, it's right now at about; just under 5% of our total sales of micros goes into the automotive area, whereas again for the industry it is 33%. So it's a huge upside for us, and despite the fact that automotive right now is a very soft marketplace, but we look at this as one of the many areas where we can have a significant growth in the future.

Craig Hettenbach - Goldman Sachs

Okay. And last one if I could, as it relates to the $290 million you are planning internally. Any diversions between business segments in terms of, from what we've seen last quarter, or do you expect to see kind of similar trends in terms of relative performance between segments?

Steve Laub

I do expect, probably, somewhat similar to last quarter, I do expect the automotive business to be quite soft this quarter and so I expect that it will actually decline by more than the percentage reduction that the $290 million represents as compared to $334 million. I would also anticipate that the, ASIC business will actually probably decline more this quarter, than it did last quarter as well. Not surprisingly, I expect that the micro business will do better than the company will do overall and probably the micro business will decline this quarter probably something closer to the mid single-digits.

Craig Hettenbach - Goldman Sachs

Okay. Thanks so much.

Operator

Our next question is from the line of Steve Eliscu with UBS.

Steve Eliscu – UBS

Thank you. First question regarding OpEx; It sounds like you have a step-down this quarter, in part because of the cost reductions that you are doing. Can you talk about how we should think about OpEx through the rest of the year?

Stephen Cumming

Yes, Steve. Yeah, so for Q4, our overall OpEx is $139 million but that did include a one-time charge for a bad debt provision of $11.7 million and a one-time legal settlement and cost of the $3.3 million. So, you back them out, we reduced our spending by about $4 million over Q3 and then going into Q1 we expect another step down as we have guided $114 million due largely to some of the actions that Steve mentioned earlier with regards to vacations, pension programs, and salary cuts, et cetera. Obviously we will see going into next year the full impact also our French restructuring and our US restructuring which already gives us the full impact at the beginning of the year.

Steve Eliscu - UBS

So, should we kind of think about that, having room to go down further, or are you suggesting there is something things taking it down and perhaps some other things that might bring it up later in the year.

Stephen Cumming

I think so, I think certainly for the additional measures that Steve mentioned we can see that prolonging into the rest of the first half and then there is other opportunities to pull it down, from additional operational activities into the second half.

Steve Laub

And thinking about it going a yard further there is additional steps the company could take along, similarly to what to we see other companies have done, clearly not the majority of other companies and we are very much paying attention to what's happening in the industry today. I think some companies that saw declines of 30%, for example, typically saw salary cuts for the entire workforce two weeks vacation or two weeks forced time off.

Those are the things, clearly, that we will be evaluating, and have evaluated, given that we have actually outperformed on a relative basis, the industry and we're generating quite possibly cash at this point, but we haven’t taken those steps which clearly are something that we are contemplating and could do based on what happens with general and street conditions.

Steve Eliscu - UBS

Some other questions. How are you seeing business so far in January? Or through since you have concluded January how have you seen it?

Steve Laub

Business so far, for the month of January; clearly an improvement from what we were experiencing in the latter half of November and through December; which is that we are back to environment. Now people are actually placing orders and taking product and actually expecting to take product in relatively short timeframes.

So, turns business has resumed and people placing orders has resumed. So that’s a very positive thing. We are not seeing the reschedules and push outs that we did experience in the latter half or the latter part of Q4 and so the overall tone of business has clearly improved, but its not I wouldn’t say its at the levels by any scratch what we’re experiencing in the first three quarters of the year, but clearly an improvement relatively to what we are experiencing in the latter half of Q4.

Steve Eliscu - UBS

One last question here on 32-bit AVR, what were your revenues in 2008 and what ballpark are you thinking about in 2009?

Steve Laub

So, we don’t breakout our 32-bit business between the ARM and AVR products from a competitive standpoint. We just feel it is better just not to do that. We can tell you that the AVR products grew from a percentage standpoint quite substantially. I’ll share that with you, they grew about 50% sequentially. So the business is going very rapidly in that respect, but it's smaller than ARM business is, it hasn’t been around as long really as the ARM business has. But overall they are both going very nicely for us.

Steve Eliscu - UBS

Thank you.

Operator

Our next question is from the line of Kevin Rottinghaus with Cleveland Research.

Kevin Rottinghaus - Cleveland Research

Can you hear me okay.

Steve Laub

Yeah. We can hear you, thanks, Kevin.

Kevin Rottinghaus - Cleveland Research

Okay. Great, thanks. Did you talk about where channel inventories are first half, I guess?

Steve Laub

So, from a channel inventory standpoint, what we experienced is in our OEM channel what we found is that a lot of OEM customers have taken their inventories down pretty substantially. And so in that regard one of the things that we firmly do believe and one thing that we confirmed in discussions with our sales people, who confirmed that with our customers. Is that they are actual taking your product certainly in Q4 relative to what their builds were, they were taking less than they are actually consuming, so they did bring down inventories generally across the OEM channel.

With respect to our distribution customers I know that in North America and Europe generally I believe the inventories came down a bit, the days of inventories actually probably went up but the actual absolute level of inventories came down. Asia; Stephen will just speak to that.

Stephen Cumming

Yes, Asia was roughly flat, again, days of inventory going up.

Kevin Rottinghaus - Cleveland Research

Okay. And then, the inventory in your books, could you talk about the mix of what it is at all, I mean, is it controllers, or, what products are you building at this point?

Steve Laub

I would say that, we don’t typically breakout too much of that detail, but from a standpoint of what we are building, I would say that the majority of our inventory build in Q4 was in controllers. That's based on the fact that from the standpoint of, you know, you think if you are building those things upon which you have the greatest growth potential as well as greatest growth expectations, which for us is the microcontroller business. And also, the microcontrollers, as they tend to have a very long shelf life, so that you can resell these products for a very extended period of time well after you have built them.

Kevin Rottinghaus - Cleveland Research

Okay, and what, could you tell us, what you have been, what you are, manufacturing in France currently, which product lines?

Steve Laub

Sure. In France, the majority of the products that are built there are actually for the ASICs business. So those would include the ASIC products, our Smart Card products, and so forth. There is also space products built in France. Most of those are actually built through a fabrication partner of ours. Then, also in the fab, we are building memory products as well as 32-bit microcontroller products. There is some other miscellaneous products, but those are the major ones that are being built there.

Kevin Rottinghaus - Cleveland Research

Okay.. Was there any -- I guess the question is on inventory. Is there any intentional inventory built there, as you now, I guess before the release today kind of put that asset, at least you're weighing your options with that asset?

Steve Laub

That's correct. With the way the process works, and I think we; if I had discussions with them, but the way process works with respect to anytime you are working with foreign countries, especially those in Europe, you have to make sure you follow a proper protocol, so, what we announced today is that we are pursuing or evaluating strategic alternatives in respect to that business, which is the proper of way to think about moving forward with respect to making changes there.

With respect to inventory builds there, there was no special action taken to build inventory there in that regard, in pursuit or in anticipation of this.

Kevin Rottinghaus - Cleveland Research

Great, I will jump back in queue. Thanks.

Operator

A next question is from the line of Hans Mosesmann for Raymond James.

Hans Mosesmann - Raymond James

Thank you. Good showing guys. If we look at the Atmel model, once the ASIC business goes away at some point in time, I would like to know how: do we assume gross margins and OpEx to trend longer term?

Steve Laub

So, one other thing that is unfortunate is that, I think you guys may recall from the discussions that we had in the mid part of 2008 when we announced a proposal to do a social play with respect to some of our labor force in France, we weren't able to talk at that time about any specifics regarding: will it happen if this versus that, and so, today we are in the same position. We can't talk about the implications of what may or may not happen without first getting there, a few steps need to be taken with the appropriate, with the proper, authorities in France.

Hans Mosesmann - Raymond James

Fair enough.

Steve Laub

It's a good question, but we really can’t provide any clarity with respect to that question today.

Hans Mosesmann - Raymond James

Okay, and then assuming that business is not there, is it reasonable to assume that about half of the ex-ASIC business would be microcontrollers and the half is going to be assortment of nonvolatile memory?

Steve Laub

We respect to the business composition, I think that you guys can easily discern that from the information we provide. I would say that what you have is, the remaining businesses that are not part of the ASIC business will be the microcontrollers, would be the automotive business and the nonvolatile memory.

Hans Mosesmann - Raymond James

Fair enough. Thank you very much.

Steve Laub

Thank you.

Operator

Our next question is from the line of Edwin Mok with Needham.

Edwin Mok - Needham

I think my question is for Steve or Stephen. The first question regarding the announcement. I would just want to get a clarification. Are you referring to just the French fab or you including the Colorado fab as well?

Steve Laub

No, what we are referring to, with respect to this, is the ASIC business units or the product lines that make up the business unit, which are the, in respect to their products, which are ASICs, which are also smartcard products, and also an aerospace business that reside there. In addition to that, we're also including related manufacturing assets of that business, which would consist of the fabrication facility in Rousset, France, as well as. There is a test or probing facility in East Kilbride in the UK and other miscellaneous facilities, but we are not including within that, the Colorado Spring facility.

Edwin Mok - Needham

Great. Just thank you for that clarification. And then, I guess, I have a two part question related to this announcement. First thing is, in that French fab will also been some auto product, you mentioned memory and maybe some other ARM MCU product. Are you guys taking step to start transferring those manufacturing to your Colorado Spring fab? That’s the first question?

And then, my second question is: can you give us some color in terms of gross margin? If you had exited that business parts also, including the sale, at what level gross margin do you think you're company can become; a rough range will be helpful? Thank you.

Steve Laub

So, very good questions. With respect to the first question, there had been some steps taken just from a standpoint of making sure that we're second sourcing high volume products. There is some steps already been taken with respect to that, with respect to parts are being built in that path and I was just back to that, we will continue to do that, because it's a right business decision ought for us to do that. But its other way too far ahead, we are doing that because, we are doing that anyway, and just because we feel that these products should be multiple source.

With respect to what has fab again, I can't get into too much today, with respect to, what if this, what if that, what we do, clearly we are considering if this alternative, what should we do with respect to that and I’m hopeful to get some clarity on that, in the relatively near-term once we move forward along a few steps that, that are necessary that we do with respect to the authorities in France and so forth.

Edwin Mok - Needham

Okay. And then maybe I should ask it differently. Their ASIC business is it above corporate average, below coverage average or corporate average gross margin?

Stephen Cumming

It is below the corporate average gross margin, actually significantly.

Edwin Mok - Needham

Yeah, great. That's the call I'm looking for and then you typically gave a lot of backlog coverage at this point of the quarter. Can you give that number some color on that?

Stephen Cumming

So, the backlog coverage right now, for the quarter, is actually consistent with where it was last quarter, which was actually relatively consistent with where it is, it’s about in the mid-70s, is our backlog coverage, and our sense is that it's also moved from the mid-60s in the second quarter to mid-70s now, which is consistent of our experience. So, right now so far, it's moved consistent with our historical experience, if we ignore our last quarter.

And so, we are anticipating and we are hopeful that, that will continue to be that way this quarter and this is in light of the fact also that we just gone through Chinese New Year and so obviously, there is a lot more, there is less booking of product and so forth, during the timeframe up to Chinese New Year. So a key part of what happens this quarter I think as you probably heard from other people is, will there be a resumption of normal behavior, quote, 'normal behavior' anyway with respect to bookings activity now that Chinese New Year is over.

Edwin Mok - Needham

Great. I just have two more quick ones; on microcontroller you mentioned that your target is to grow that business this calendar year. Does that growth all come from Touch or are you expecting other piece of your microcontroller business to grow as well?

Steve Laub

There are other pieces I think that will grow as well. I think the biggest growth will come from Touch, so that’s my anticipation, but I think some pieces will grow for us as well. Some of which I am not going to describe. We don’t talk about a couple of application areas because, strategically and competitively, we don’t see as much competition there so we are exploring those areas right now. But we expect those areas to grow for us as well.

Edwin Mok - Needham

Okay. A last one regarding the acquisition. It looks like you guys are trying to be a little more proactive on ZigBee. I understand, historically, you guys also manufacture ZigBee radio as well. So, just curious: are you still manufacturing that or have you guys just moved out the whole business and are just on the microcontroller side?

Steve Laub

The ZigBee radio and the ZigBee products are part of the microcontroller business unit.

Edwin Mok - Needham

I see. Great. That’s what I was looking for. Thank you.

Steve Laub

Okay.

Operator

Thank you. Our next question is from the line of Suji De Silva with Kaufman Brothers.

Suji De Silva - Kaufman Brothers

So, on the announcements Steve, can you give me a sense of what drove the timing of the ASIC announcement? And if the factor that drove the timing here would also drive further potential actions?

Steve Laub

The timing of the announcement was multivariate, I would say. There is always a preference to disclose to the extend that you can or you should, and one of the things here is, given the complexity sometimes, in working issues, with respect to Europe, specifically France, there are a lot of requirements that you need to make sure you are satisfying, and disclosing a lot of the activity is one. There is a preference, or a lot easier to do work in France with respect, to that if you do disclose.

So, there was a sense that; one, there was a preference from a legal standpoint to disclose. There was also something you can move much faster with the disclosure with respect to that, and obviously, a lot greater focus in urgency because now it’s a public event. It also expands the universe of options and alternative that is disclosed.

Now, that the kinds of disclosing which I've described in the past has the adverse, or potential adverse, impact to both employees and to customers. And one of the things that happened here is that due to uncertainty that was created with the unsolicited M&A activity from Microchip and ON that occurred, I think beginning in September of last year; sort of the anxiety of that team, actually, and uncertainty of that team was raised to that time.

So, they themselves have never completely taken a position of saying everything is back to normal. There has been more of “what’s going to be happening to us”. And so, the impact to the employee base in that context was actually already impacted and so the additional impact have actually disclosing is actually much lower. And from a customer standpoint, we’ve actually taken number of actions to minimize an impact adversely with customers.

And I think in this economic environment with respect to what’s going on, it actually reduces any potential adverse impact as well because a lot more things people are worrying about then what may or may not be happen with respect to that. So there was a lot of reasons why we thought this was the right time, and we’ve previously discussed the fact that this was the year in which we wanted to make sure we completed the major actions, or certainly all the substantive actions, with respect to the transformation of the company that we had pushed on or began approximately two years ago. And so, this is a natural step in that completion.

Suji De Silva - Kaufman Brothers

Now, Steve, if I hear you correctly, it sounds like there were factors unique to this, i.e. the European exposure that made it appropriate to announce it ahead of time versus other ones which don’t have that similar characteristic. Is that correct?

Steve Laub

I would say that certainly was one of the major characteristics that influenced our decision.

Suji De Silva - Kaufman Brothers

Great. Can you talk about the prospects of the sale and your current thought as to your ability to sell the ASIC business in this environment?

Steve Laub

Yes. So as you have highlighted at the start of this call, I am, as I said, limited in how I can discuss, but right now what we have announced is that the company is pursuing alternatives for this business, including a potential sale. Clearly we have not made the decision with respect to that. No final decision has been made. And we are working with our partners and the authorities in France, properly as we discern what is the right alternative for this business.

Suji De Silva - Kaufman Brothers

Understood. Switching over to the 32-bit microcontroller business; can you talk about what end market you’re perhaps seeing relative strength in the areas you are growing here because it’s fairly impressive growth in this environment?

Steve Laub

So the growth market will be, for example point-of-sales terminals, we are also seeing it in a number of handheld application areas, (inaudible) for example would be as simple as calculators and things like that. So, the growth is widespread, but primarily, I would say, in those two areas we saw particular growth in this last quarter.

Suji De Silva - Kaufman Brothers

Okay, lastly on pricing in the commodity areas of memory, how much is the decline versus sort of typical decline this quarter.

Steve Laub

Q4 prices decline was quite substantial relative to historical behavior which are always, you know, this is a business where pricing decline is the norm, and it was more substantial in Q4 than before.

Right now, the sense is that, we will not be experiencing the same type of price declines in Q1 as we experienced in Q4, and so, in that respect we are a little bit more optimistic that while the business will be under pressure this quarter just because of the general economic environment, we don’t expect pricing to be quite on the same pressure it was in Q4.

Suji De Silva - Kaufman Brothers

Right, thanks guys.

Operator

Our next question is from the line of Craig Berger with FBR Capital Markets.

Pick Hover - FBR Capital Markets

Okay, [Pick Hover] in for Craig, thanks for taking my question. First, just in terms of the announcement, if that does close, will that eliminate the pension liabilities in France?

Steve Laub

Again, I am not going to presuppose what a transaction would look like. I understand your questions and I completely appreciate the questions and in no way am I attempting not to answer them, but I could only tell you what I am allowed to discuss at this point and so I don't want to even begin to say what it would look like, because right now we are still in process. We are proposing different alternatives; we are working with our partners and the authorities in France to make sure that we do this in an appropriate fashion.

Pick Hover - FBR Capital Markets

Okay.

Steve Laub

We will however share with you, answers to all these questions as soon as we are allowed to do so.

Pick Hover - FBR Capital Markets

Understood, and just for my follow-up, can you talk about fab utilization in the December quarter and where you expect it to trend in the March quarter, thank you?

Steve Laub

Yeah, our overall blended fab utilizations were in the 80% area. And we benefited, as you remember, from a North Tyneside side closures. So, we may be able to put a lot of demand into the remaining fabs within Rousset and Colorado. So, that certainly helps us out when the overall demand levels have been shrinking. And going forward we do expect that to, with a low demand outlook, we do expect that to step down a little bit further into Q1.

Pick Hover - FBR Capital Markets

Thank you.

Stephen Cumming

Just a clarification, I think the level was actually close to 85% in Q4 for the fab utilization. And as Steve mentioned, the closing of the North Tyneside fab really put us in a very good position relative to capacity and capacity utilization. I think we are probably in better shape than most other companies frankly in our industry. We are in a position where we expected that we are doing that very aggressively under the normal environment to be bringing our foundry capacity, in fact we were actually quite worried. We would not be able to satisfy all of our requirements if business had kept up the way it was moving. So, in some respects as I said, we are in good position, surely less than a position than Atmel historically has been, in respect to that.

Pick Hover - FBR Capital Markets

Thank you.

Operator

(Operator Instructions).

Our next question is from the line of Doug Freedman with BPSG.

Doug Freedman - BPSG

Can we dig into some of the numbers that you reported in December? If I look at the SG&A line looks like almost a 21% increase on a like-for-like September to December? Can you help me to understand what's going on there?

Stephen Cumming

Yes, Doug. Within the SG&A line, with some one time items, as I mentioned earlier on in the script, we had a one time bad debt provision of $11.7 million and also some legal settlement expenses of $3.3 million. There were the main items. We did have charges associated with unsolicited M&A expenses as well, which increased our overall SG&A in Q4.

Steve Laub

Doug, just to give you a perspective on the distributor issue that we faced. What happened was that the US government; one of our distributors, a very limited distributor of ours at that time on discounted parts lists; which basically says you can not shift to that distributor. So effectively, in a constructive way, almost terminated from doing business, so that they shouldn't be able to do business with us. So we obviously replaced the distributors, but it obviously impacted it adversely, impacted their motivation, and their ability, frankly, to be able to pay the money that they ordered. It's an unusual situation that is, frankly, the exception.

Doug Freedman - BPSG

Do you have any insurance recourse there? Is that something that we could see back in future quarters?

Steve Laub

No. We don't have an insurance recourse for that. It's something that, to the extent that, clearly when that happens, these distributors work for the government and try to get released from that list. If that was to happen, we'll be, optimistically, able to recapture that money. But for time being, we think, we're being prudent and taken the action that we did.

Doug Freedman - BPSG

Okay. And if we go back and hopefully I'll ask you a question that you can answer in regard to the ASIC business. The revenue that you've recorded year-to-date or for the full year 455 I believe it is you're selling off business at 416. Can you help us understand the $40 million or so there that you're keeping?

Steve Laub

Yeah. There was another business that we include within the business segment. It's an Advanced Products Group, it's staying with company. It's actually based here in the state. And so that business is staying as part of the Atmel. But the business segment or the business unit as defined as the three different products here as I descried earlier are the ones that make up the 416.

Doug Freedman - BPSG

Okay. Is that -- would that otherwise be non-offset I think you prefer to it in the past as your security is that the security stuff?

Steve Laub

Well it is some security stuff and for example Crypto. So our Crypto products are in there, for example yes. There is also security obviously smart cards are security cards in the ASIC's Group. It's one of the reasons we've all together, frankly, because there is some relationship there. But the customer base and the actual solution itself are different. They share some technology, but they are different. And so it was something that we felt we were going to retain as part of Atmel.

Doug Freedman - BPSG

All right. And then operationally moving on, if I was to look at sort of your inventory clearly a big jump, hard to keep it from not going up, given what we've seen in the demand picture. Can you give us some idea when you think it will come back to what would consider normal? And how quickly do you think you can get it back to that target level?

Steve Laub

Well normal is probably close to the days of inventory that we had prior to the jump. Well, Steven what was that number?

Steve Cumming

119 days.

Steve Laub

Yeah. I think 115 days, 100 to 115 days ; 110 to 115 days, I think, is what we attempt to run the business at. We are target to get below that. But given the complexity of the business, it's been about the right note for the business as configured today. So that would be , say 110 to 115 is what we want target down to. With respect to how can we get down there, it obviously depends on both the combination of breaking down the bills and getting revenue growth.

And right now, we are not making any predictions with respect to long-term revenue growth for the year. Although, we have put in plans internally to bring that rest -- to bring the inventories down. So we have got our bills down consistent with that. We are bringing that down simply because of the needs of, it is everything to raise the money building product that you're not going sell for sometime. And obviously, there is nothing really the advantageous from our cash standpoint, not from an inventory standpoint or from our gross margin standpoint, but we'll do that.

Doug Freedman - BPSG

Terrific. Can you talk a little bit about the sort of the way in which you think this cycle is going to play out? And how you believe that your revenues might recover to what you might believe your real demand is? If you can give us some idea how you are envisioning the next several quarters to unfold, any sort of color you can offer would be helpful?

Steve Laub

Well if I know that answer, I think I will become stock ticker. As I think no one anticipated the downturn quite likely to hit and everyone has their different estimate to what's going on. I will tell you our view here. But I don't want to get into specific numbers, because I think anybody is going to be looked, it's just too difficult at this point to anticipate that. Our expectation and not surprising I felt this was going to be true even back in sort of the November timeframe. Q1 would be a down quarter. It's seasonally a down quarter for us, as we anticipated it would be.

My sense for the industry obviously as its turning out, it's going to be down across the industry, which is also anticipated and a significant one as well. I also anticipate that it takes about three to six months for customers to adjust their inventories, consistent with their lower run-rates. And so I expect that for most customers, they will be pretty much adjusted to their own inventories by the end of this quarter. I do believe that the run-rates or consumption rates, excuse me, that the bill rates of our customers are exceeding their consumption rates, such that they are burning inventory right now. Even though we've been learning from our OEM customers that they actually have reduced inventory during Q4.

I think there is more reductions occurring right now and that will continue through this quarter. I do think we end Q1 with most of these cuts. We're therefore having reduced our inventories and adjust to simply build to their lower factory rates they will have to buy more in Q2, than they bought in Q1. So unless, of course this turns out to be a far most severe recession that anybody anticipated. So I expect Q2 to be a flat to up quarter for the industry and for Q3 and Q4 to be up more substantially than that. The magnitude of that recovery in Q3 and Q4 completely depends on what happens in the sort of worldwide economy situation. But I don't expect that the industry will be down in Q2. I said it'll be flat to slightly up.

Doug Freedman - BPSG

Terrific. And by the way, I feel to applaud you for being one of those few management teams willing to say what you are actually think might play out, whether it does or not.

Steve Laub

As always you don't hold it against me.

Doug Freedman - BPSG

Yeah. I definitely in this environment, we will not. Moving on to something that you can control, you moved in some of your distribution channel to a sellout model, but yet, you still have a fair amount of settling accounting in Asia. Any thoughts on moving to a global sellout, and when and if, and what are a sort of deciding factors there?

Steve Laub

With the preference to do that, but it will not happen in this year. We have to do that and number of our distributor's in Asia today don't have the type of systems in place that we can feel comfortable, Stephen and I that when they tell us that they have this POS number that we recognized revenue for. And we want to certify those financials, frankly. So, until that all those systems are in place we have that taking care of, we won't make any change. I don't think this is the year that it'll happen.

Doug Freedman - BPSG

And my last question and I’ll leave it there. Stock comp it's the last line on your income statement. Can you help us with trends going forward, it's been picking up lately and wanted to make sure that I'm calibrated to what's happening on that line?

Stephen Cumming

Yeah, that stock comp increase was largely due to the ground equity refreshment. That level is going to be pretty consistent going forward.

Doug Freedman - BPSG

Great. Thanks guys.

Steve Laub

Thank you.

Operator

Our next question is a follow-up from the line of Kevin Rottinghaus with Cleveland Research.

Kevin Rottinghaus - Cleveland Research

Thanks. I think you answered this already, but for controllers to be up in 2009, is that kind of consistent with the industry forecast you just gave as far as how the industry goes or is it not dependent upon 2Q kind of stabilizing and growing from there?

Stephen Cumming

So, I'm already being be held responsible for what I just said.

Kevin Rottinghaus - Cleveland Research

I don’t want…

Stephen Cumming

No, no. So our anticipation is a relatively, its going to be down year for the industry, is our expectation. So, I think the expectation must be pullout. However, even in that kind of environment depending unless the negative (inaudible) down, far below what people are anticipating today. We expect the micros to grow year-over-year.

So that's the best way I can put it. It does assume that at least it's stabilizing in future. But the micros we expect to outperform, as they have been and micros have been outperforming consistently for years and we expect that to continue.

Kevin Rottinghaus - Cleveland Research

Do you think that APAC will grow in 2009?

Steve Laub

We think it will, I mean all I will anticipate right now is I'm just telling the total microcontrollers are going to grow for us in 2009. Whether the industry, the segments is going to grow is too early to anticipate I would guess that.

Kevin Rottinghaus - Cleveland Research

Okay, are you in volumes with XMEGA now?

Steve Laub

We are shipping XMEGA now, but there is no significant volume for that. But there is a very substantial amount of design activity occurring on that, very, very substantial.

Kevin Rottinghaus - Cleveland Research

When should that start layer in, do you think?

Steve Laub

We think its going to start generating production revenues for us in a meaningful fashion towards the second half of this year.

Kevin Rottinghaus - Cleveland Research

Okay.

Stephen Cumming

But really probably, we really take our ops in 2010. It will begin now and have an impact in the second half of this year.

Kevin Rottinghaus - Cleveland Research

Did you say which segment was impacted by the distributor bad debt expense?

Steve Laub

We did not.

Stephen Cumming

I don't think, it's across all of our products, shipping into that distributor. So, it's not specific to any given segment.

Kevin Rottinghaus - Cleveland Research

Okay, and that charge is, we won't see any recurring impact from that?

Stephen Cumming

No, no that's the expectation is no further charges.

Kevin Rottinghaus - Cleveland Research

Okay, did they have to return products to you or what exactly happened?

Stephen Cumming

Well, the US government added to the [right products] list and in a situation where we were unable to ship them any further products. And we were a significant supplier to them which already has a limit business to operate going forward and caused significant cash flows for the company. So, that's basically what the situation is.

Kevin Rottinghaus - Cleveland Research

Okay. Thank you very much.

Steve Laub

Thank you.

Operator

Our final question is from the line of Edwin Mok with Needham.

Edwin Mok - Needham

It's a quick follow-up on the gross margin guidance. You guys have pretty strong margin in the last quarter and but you're telling about backed out of $4 million the one-time item that you talk about, is still higher than you outlook for the first quarter. Is it or just from fixed cost assumption in the coming quarter or are you guys expecting some inventory write-down. How do we look at that?

Stephen Cumming

The revised number yet, we passed out the one-time pension number, Edwin. We were about 120 basis points lower. Part of that was due to the fact that we shutdown our North Tyneside facility and leveraged that vastly into our Rousset and Colorado fabs. And obviously, we saw the continual growth of our micros or the change in mix of our micros in relations with the rest of our business and that also contributed to the overall improvement.

Edwin Mok - Needham

Right. But what about for the first quarter guidance, I mean, the guidance range is lowered or not, what do you guys have recorded in the fourth quarter range. Is that one, fixed cost assumption or is that higher costs…

Stephen Cumming

As we deal back our capacity a little bit more, we’re moving outside of our normal ranges and unfortunately carried expense, some of those charges and that's causing us to take a bit of a dropdown.

Edwin Mok - Needham

I see. So, it sounds like is more relative fab production utilization or--

Stephen Cumming

Exactly, yeah.

Edwin Mok - Needham

I see. Great, that's all I have. Thanks.

Operator

I would now like to turn the call back over to Mr. Pursel for any closing remarks.

Robert Pursel

Thank you, Julia. During the first quarter Atmel, we'll be participating in several investor conferences. On February 9th, Atmel will be presenting at the Thomas Weisel Partners Technology & Telecom Conference in San Francisco and on February 25th at the Goldman Sachs Technology and Internet Conference in Las Vegas. And finally on March 2nd, Atmel will be in San Francisco for the Morgan Stanley Technology Conference. Webcast information for these events will be published in the company’s Investor Relations website.

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

Operator

This concludes our conference call. You may now disconnect.

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Source: Atmel Corp. Q4 2008 Earnings Call Transcript
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