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Executives

Robert Pursel – Director of IR

Stephen Cumming – VP of Finance and CFO

Steven Laub – President and CEO

Analysts

Steve Eliscu – UBS

Suji De Silva – Kaufman Brothers

James Schneider – Goldman Sachs

Hans Mosesmann – Raymond James

Edwin Mok – Needham Capital

Craig Berger – FBR Capital Markets

Doug Freedman – BPSG

Atmel Corporation (ATML) Q1 2009 Earnings Call Transcript May 5, 2009 5:00 PM ET

Operator

Good afternoon. My name is Robert and I will be your conference operator today. At this time, I would like to welcome everyone to the Atmel First Quarter 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Robert Pursel, Director of Investor Relations, you may begin your conference call.

Robert Pursel

Thank you, Robert. Good afternoon and thank you for joining us for Atmel's First Quarter Earnings Conference Call. A copy of the press release issued today is available on our Investor Relations Web site. A 48 hour telephone replay of this call will be available after 5:00 p.m. today Pacific time and the web cast will be archived on the company Web site for one year. Access information is provided in today's press release.

Joining us for the call today are Steve Laub, Atmel President and CEO and Stephen Cumming, Vice President of Finance and Chief Financial Officer. Stephen will begin the call with a review of our Q1 financial results and Steve will then provide additional color on the business. At the conclusion of Steve's remarks, Stephen will discuss our financial guidance for the second 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 expectations for revenue, target growth and operating margins, as well as cost savings for 2009 and beyond. Our forward-looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today, and therefore, are subject to risks and uncertainties as described in the Safe Harbor discussion sign 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 Stephen Cumming for a discussion of our first quarter financial results. Stephen?

Stephen Cumming

Thank you, Robert. Let me provide some details of our statement of operations. Revenue for the first quarter of 2009 was $271 million, less than the $290 million we previously estimated for internal planning purposes. This represented a 19% sequential decrease compared to the $335 million for the fourth quarter of 2008 and the 34% decrease compared to the $411 million for the first quarter of 2008. The decrease was primarily driven by the decline of our automotive and ASIC businesses as a result of the global macroeconomic slowdown.

Gross profit as a percent of revenue was 35.1% for the first quarter of 2009 within our internal target range of 35% to 38%. This compared to gross profit of 39.7% for the fourth quarter of 2008 and 35.5% for the year-ago quarter. Gross profit was at the lower end of our guidance as we took steps to decrease fab utilization and inventory in the quarter to align to the lower shipment levels.

R&D expense was $53 million for the first quarter. This was $9 million less than the $62 million for the fourth quarter and $13 million less in the $66 million reported for the year ago period. We continued to maintain our focus on core R&D projects but have taken actions to size our R&D investments, given the current business and economic outlook.

SG&A expense was $55 million for the first quarter. This was a $7 million decrease compared to the $62 million for the fourth quarter, after excluding one-time charges for legal settlements and distributed bad debt in Q4 and $9 million less than the year-ago quarter. The sequential decrease in SG&A spending is a direct result of stricter controls over discretionary spending in addition to the headcount redundancy programs we announced in the third and fourth quarters of last year.

Total operating expenses for the first quarter of $107 million, was down 23% when compared to Q4 at $139 million, and down 17% when compared to the year-ago quarter of $130 million. This is the lowest level since the fourth quarter of 2005. Stock-based compensation expense was $5 million for the first quarter compared to $9 million for the December quarter and $6 million for the year-ago quarter. The lower expense was as a result of reassessment of our equity-based management performance programs resulting in a one-time expense reduction of $2 million.

Operating loss was $20.5 million for the third quarter of 2009. This compares to an operating loss of $18.2 million for the fourth quarter of 2008 and operating profit of $15.4 million for the first quarter of 2008. Included in the first quarter, 2009 operating loss was $8.5 million of net charges related to restructuring, gain on sale of asset, acquisition, and grant repayments.

The company's effective average rate in the first quarter of 2009 was approximately $1.32 to the Euro, this compares to $1.35 to the Euro in the fourth quarter and $1.47 to the Euro in the year-ago period.

A one cent decrease in the dollar-Euro exchange rate increases operating income by approximately 300K each quarter. Other income and expense with a net expense of $4 million for the first quarter of 2009 as interest rates remain depressed. This compares to $3 million expense for the fourth quarter and $5 million of expense for the third quarter of 2008.

Income tax benefit totaled $28 million for the first quarter of 2009. This compares to an income tax provision of $4 million for the fourth quarter of 2008 and $3 million for the first quarter of 2008. The income tax benefit for the first quarter of 2009 was a result of the release of reserves related to certain foreign R&D tax credits the company realized in the quarter.

Net income on a GAAP basis for the first quarter of 2009 totaled 3.6 million or $0.01 per diluted share. This compares to a net loss of 24.4 million or $0.05 per diluted share for the fourth quarter of 2008 and a net income of $6.8 million or $0.02 per diluted share for the year-ago quarter.

Non-GAAP net income for the first quarter of 2009 totaled $20.1 million or $0.04 per diluted share compared to the net income of $4.8 million or $0.01 per diluted share for the fourth quarter of 2008 and $13.3 million or $0.03 per diluted share for the year ago quarter.

We are pleased that despite the sequential decline in revenues, we were able to aggressively reduce costs and capital spending and generate positive cash from operations for the quarter.

Turning to the balance sheet, our combined cash balances, cash and cash equivalents plus short-term investments totaled $416.9 million at the end of the first quarter of 2009, a decrease of $23.7 million from the end of the prior quarter, an increase of $80.1 million for the first quarter of 2008. Not included in this balance is $17.2 million of restricted cash.

During the quarter, lower revenue levels resulted in a drop in receivable balances which serve as collateral for line of credit. We elected to pledge cash balances instead of repaying the credit line and remain in full compliance with all borrowing agreements and covenants. Our net cash of $295 million was essentially unchanged from the last quarter.

Cash provided from operations totaled approximately $5.6 million for the first quarter of 2009 compared to $33.7 million for the fourth quarter of 2008 and cash used in operations of $40.2 million for the first quarter of 2008.

Capital expenditures were approximately $4 million for the first quarter and expected to be in the range of 25 million to 35 million for 2009. The lower CapEx is a result of reduced manufacturing capital requirements and effective asset management.

Depreciation and amortization for the first quarter of 2009 combined were $21 million. This compares to $30 million for the fourth quarter of 2008 and $34 million for the year-ago quarter. The sequential decline of $9 million in depreciation and amortization was a result of suspending depreciation of our ASIC business and associated assets which were classified as assets held for sale at the end of the first quarter.

Accounts receivable totaled $173 million at the end of the first quarter; this was down approximately $12 million from the prior quarter primarily as a result of lower revenue during the quarter. Days of sales outstanding were 58 at the end of the first quarter, up eight days from the prior quarter, primarily due to higher shipment levels towards the end of the quarter.

With the exception of the provision taken in the fourth quarter for bad debt related to an Asian 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 $245 million at the end of the first quarter. This was down $79 million from the prior quarter primarily as a result of the reclassification of $77 million of ASIC inventory to assets held for sale. We continue to manage inventory exposure by reducing our fab loading in order to match wafer production to full cost of demand. Excluding the impact of the ASIC reclassification, we reduced inventory by $2 million compared to the prior quarter, where days of inventory increased to 167.

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

Steven Laub

Thank you, Stephen. According to SIA estimates, semiconductor revenues have declined approximately 35% to 40% since Q3 of last year, across the entire range of semiconductor products and end markets due to global economic slowdown. Although Atmel is not immune to the impact of the macroeconomic recession our business continued to perform better than most semiconductor companies during this period as our business declined 32%.

While the SAA has briefly stated that it may be too early to conclude that the global semiconductor decline has hit bottom, we believe our business levels stabilized during the first quarter and our second quarter revenues are expected to be up on a sequential basis. We will continue to carefully manage our business in response to the dynamic business conditions.

Now, let me turn to a discussion of our business segments. For our micro controller business unit, since our last conference call, industry analysts have published 2008 market controller market share and competitive growth information.

We are pleased to report that Atmel continues to be the fastest growing major market controller supplier. As a total market controller industry declined 1% in 2008, Atmel grew 14%. In addition, our 8-bit business grew 12% and our 8-bit market share increased from 8.1% to approximately 9%.

Excluding our one time conversion of European distributors to a sell-through revenue model last year, our total micro controller business grew by 18% and as confirmed today by Gartner and his 2009 semiconductor industry report, our 8-bit business actually grew 16% in 2008.

According to the recent tech insights 2009 embedded market study, which gauges design engineers product intentions, among the questions asked is which 8 bit chip microcontroller did we consider for the next project. 35% of the engineers chose Atmel's AVR, up from 29% the previous year.

Overall, Atmel's AVR is the second most preferred device family and demonstrates the largest increase compared to all other suppliers. In the 32-bit micro controller area, when asked the same question, Atmel's 32-bit 1891 micro controller family outpaced all of the consolidated arm family in this category. Furthermore, Atmel's proprietary AVR32 made its first appearance on the survey, coming in at number seven at a 34 solutions mentioned.

Looking at the first quarter from a business standpoint, micro controller revenues were $97 million, down 19% sequentially, and down 26% from the same period last year. AVR revenues were 63 million in Q1, down 25% sequentially and down 33% from Q1 2008. This decline was primarily due to weakness in Asia as we experienced significant reductions in shipments to handsets and consumer customers during the quarter

While disappointing and below our expectations our overall micro controller business continued to perform better than our micro controller peers. Our micro controller business has declined 25% over the last two quarters, this is far better than the rest of the micro controller industry, which is estimated to have declined by at least 40%.

We continue to deliver new devices around our popular X mega product platform, which has received many awards and numerous design wins and is quickly becoming a major market success.

Our Zigby products are experiencing rapid growth, particularly in the North American industrial sector as well as in high volume consumer applications. We are gaining significant design momentum with our touch products across several high volume end markets, including handsets, printers, navigation devices and appliances.

During the quarter, major new touch design wins included handset wins with Samsung and Motorola, design wins with the two largest North American printer OEMs, and numerous others in the industrial appliance, consumer, and automotive marketplaces.

Looking ahead, based on recent bookings momentum and new product rollouts, we are optimistic about sequential micro controller growth, and in particular, growth in our touch business.

Turning to our ASIC business segment, revenues were $78 million for the first quarter, down 25% sequentially, and down 32% from the same period last year. Historically, the ASIC business experiences a seasonal decline in the first quarter.

Our Smart Card business declined 23%. But this was primarily due to the diversification OA from the commodity telecom SIM business to the higher margin secure banking identification and system solution markets, which declined only 12%. Our cell-based and cap customizable ASIC products are generating strong interest and significant new designs.

For our nonvolatile memory segment, while total revenues were $64 million for the first quarter, down 1% compared to the prior quarter, and down 33% from the same period last year. Serial E-square proms grew 12% sequentially as major customers began to ramp production of portable media players, handsets and notebook peripherals. Our Serial E-square proms continue to be the market leader as recognized by Web-Feet Research for 2008. Our flash memory products were down again this quarter as a result of continued declines in the PC and storage markets.

While the consumer markets have generally been weak, we are starting to see recovery in the PC and specific consumer segments which have new demand, are primarily portable media player and high-definition LCD displays.

Turning now to our RF and automotive segment, revenues were $33 million for the first quarter, down 29% sequentially, and down 54% from the year ago quarter. As you are all aware, there has been extraordinary weakness in the automobile end markets as well as an ongoing inventory correction within the automotive supply chain. Current indications are that automobile production levels will start to increase during the third quarter.

Despite the sector weakness, we are continuing to invest in innovative new products for car entry, security and safety systems as well as hybrid and electrical technologies, as automobiles evolve to a greener platform and incorporate increasingly more advanced electronics.

If we view first quarter revenues by geography, Asia continues to be our largest ship to location, representing approximately 48% of revenues. This is down from 50% last quarter. While Europe represented approximately 33%, even with last quarter, and the Americas represented over 19% of total revenues, up from 17%. For this quarter, we currently expect Asia to return to growth, North America to be flat to slightly up and potentially down in Europe.

I would like to provide an update on our ASIC announcement and other recent events. In February, we announced we were pursuing strategic alternatives with respect to our ASIC business and related manufacturing assets. As previously stated, we engage Morgan Stanley to assist us. While we are in the early stages of this process, we have begun preliminary discussions with several interested parties.

With respect to our business operations, Atmel recently implemented an additional headcount reduction of approximately 300 personnel involved in our manufacturing activities. Decisions regarding staffing levels are never easy. We valued the dedication and hard work of all of our employees and recognize how difficult this is for those affected.

In addition, due to the ongoing severe macroeconomic conditions, we continue to take actions to minimize our expenses. As in Q1, we will continue in Q2 the following major actions. Continued scrutiny over discretionary spending, selected hiring for critical positions only, a two-week wafer manufacturing shutdown worldwide, a one-week mandatory leave for non-manufacturing employees and pay reductions for the executive staff.

Now, despite the weak level economy, we believe that the ongoing actions we have taken to transform the company positions us to continue our market share gains during this downturn and to demonstrate substantially improved profitability as business recovers.

Now, let me turn the call back to Stephen for our Q2 financial guidance.

Stephen Cumming

Thank you, Steve. Despite the current macroeconomic environment and limited visibility, the company expects second quarter 2009 revenues will be up 1% to 4% on a sequential basis.

Looking at our expectations for gross profit, based on revenue and plans to maintain reduced factory loadings, we expect our gross profit margins to be between 32% to 34% in the second quarter of 2009.

Based on the structural cost reductions we took in Q4 and Q1 from our previously-announced headcount reduction, and other actions, operating expenses are expected to be approximately $109 million, plus or minus $2 million for the second quarter of 2009.

We anticipate a dollar-Euro exchange rate of approximately $1.32 in Q2. Q2 capital expenditures are expected to be $6 million to $8 million and between $25 million to $35 million for 2009.

In Q2, we have already incurred restructuring charges of approximately $3 million for the previously announced headcount reductions in our San Jose and Colorado facilities. This action is expected to provide annualized savings of $13 million on a go-forward basis.

Quantum acquisition-related costs are expected to be approximately $4 million for Q2. In addition, the provision of income taxes is expected to be in the range of flat to $1 million.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Steve Eliscu from UBS.

Steve Eliscu – UBS

Yes, good afternoon, guys. Given where gross margin is going in Q2 and thinking about it before going, exiting the year, at about 40%, given any upturn in the second half, is that now something that's possible or do you think gross margin being a little less aggressive?

Stephen Cumming

Yes, Steve, this is Stephen here. I think certainly 40% gross margin would be in sight if we could get sort of to return to pre-recession order rates. I think given our outlook, obviously, we have taken a lot of actions to take out costs operationally, we are well prepared for our gross margins to come out of this up down and much stronger and certainly north of the 40%, but it is tough to call whether we can attain 40% within 2009.

Steve Eliscu – UBS

And on OpEx, I think on the last call indicated that given that you're taking extraordinary cost reduction measures at this time, model in increases as we go into the back half of the year. Is that still a reasonable assumption or are you thinking now that costs will be more tightly managed on OpEx?

Stephen Cumming

Yes, so you can see from our results in Q1, we were very good at managing our overall OpEx, with very tight spending around discretionary levels. With the ongoing executive pay cuts, management time off, ongoing focus on travel and obviously the benefits from the restructuring activities that we did in the end of last year starting to ripple through. I think realistically with some of the temporary measures we've taken, they will continue into Q2 and Q3 and from an overall OpEx level, we can expect some uptick into Q4.

Steve Eliscu – UBS

Also just from switching gears to a macro point of view, are you finding that your exposure to the European market is weighing more heavily on your results given that at least what we're hearing on macroeconomic comments that Europe is still seeing greater weakness relative to Asia and America?

Steven Laub

Steve, this is Steve. I think to the extent, what you're hearing is accurate. I think Asia, as I articulate in my earlier comments, Asia is probably going to be the strongest geographical area this particular quarter for us, followed by North America and Europe, and I think that's probably more consistent with the rest of the industry as well. So I think exposure to Europe is going to be somewhat weaker at least for Q2. I think anybody who goes out and begins to predict Q3 and Q4 in this environment is being surprised that they're often not accurate. But I tend to think that Europe tends to follow the other economies. So I tend to think that it is later to become weak and of all of the markets, probably the last one to recover as well.

Steve Eliscu – UBS

Got it. I got one last question here. Just in terms of the debt that you have outstanding, are you looking at potential opportunities to pay some of that down considering that you're managing cash flow pretty well here?

Stephen Cumming

I think given what we have ahead of us with regards to ongoing restructuring and continuing to transform the company, I think to be realistic, Steve, we want to have that cushion, so we're going to keep sitting on that for the time being. I think once we get out of this pre-recession levels and return to more normal revenue levels, we will certainly have another look at that and see if we want to make any changes to our overall capital structure.

Steve Eliscu – UBS

Thank you.

Steven Laub

Thanks, Steve.

Operator

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

Suji De Silva – Kaufman Brothers

Hi, Steve. Hi, Stephen. How are you guys doing?

Stephen Cumming

Good.

Suji De Silva – Kaufman Brothers

So real quick on the ASIC business since you announced the sale, I'm wondering if there was any impact on the normal business level. It was down a little bit more than the overall company. Was there any sense of an impact there, Steve, from the announcement?

Steven Laub

Yes, we don't think so. The ASIC business seasonally is down in the first quarter and its down typically more than the company is because a number of those products go through the consumer marketplaces, so no, we don't think there is any impact due to the announcement. Sometimes in fact with announcements cause people to book product because they want to make sure they get some. So no, we don't anticipate that.

Suji De Silva – Kaufman Brothers

Okay. Great. And can you talk about your own inventories; can you talk about where distributor inventory levels are relative to target typical levels and how much that's been worked down thus far?

Steven Laub

Our sense is that the inventories in our distribution channel, what we're experiencing is that North America inventories haven't worked down by, we're finding that the inventories in Asia, I would say, relatively flat, in fact even last quarter, and that our inventories in Europe are also probably relatively flat. As you know, the way our sell-through model works, we're sell-through in North America and Europe and Asia.

Suji De Silva – Kaufman Brothers

And then visibility, what's your terms in the guidance versus typical? Are you being more conservative here?

Steven Laub

Respect to backlog coverage and so forth?

Suji De Silva – Kaufman Brothers

Yes.

Steven Laub

Yes, we're actually probably being little more conservative based on the experience we had now in the last two quarters with respect to how much business is actually done in the quarter. So I believe that our backlog coverage last quarter we announced the earnings was roughly around mid-70s, which historically would be a good number for hitting the number that we're anticipating. Right now, we're using a number much closer to mid-80s respect to backlog coverage; we want to give ourselves some cushion on the turn.

Suji De Silva – Kaufman Brothers

And last question for me. On micro controllers, sounds like Quantum is doing well here. Is there going to be an inflection in the ramp in the second half as some of these programs come and is micro controllers brewing outside of ex-Quantum I guess?

Stephen Cumming

To answer your last question first, this last quarter, obviously down and they were down pretty much across end markets, and again, over the six month period I think one thing important to measure, I think we were impacted a little bit more because of our existing model in Asia because we are sell-in and not sell-through, I think we saw some of the impact in Asia a little later than some other people. But nevertheless, we do expect as mentioned the micros continue to resume this quarter sequentially. The Touchmans will also be expected to grow in both touch and outside of touch. So I expect pretty much most of the end markets to grow for us, for micros, in that regard.

Suji De Silva – Kaufman Brothers

Great. Thanks, guys.

Operator

Your next question comes from the line of James Schneider with Goldman Sachs.

James Schneider – Goldman Sachs

Hey, good afternoon. Could you provide some kind of color on where you think you guys are shipping relative to end consumption across your various end markets? And are there any areas where you still believe that you're undershipping end demand?

Steven Laub

What you're asking basically is who has inventory and who doesn't across our end markets?

James Schneider – Goldman Sachs

Well, I guess really, what I'm asking is are inventory reductions still taking place in any of your end markets, or has supply chain overcompensated in pretty much all of the end markets. What's your take on that part?

Steven Laub

My sense is automotive. People are still burning off inventories, from what we can tell. They're still not purchasing consistent with their own production levels. I believe that most other end markets are pretty close to hitting an inventory level they want to achieve. The handset market generally was soft in Q1. There was a lot of inventory being bled off. I believe that orders for resuming building and stocks and inventories is resuming this quarter. For most other markets, there is probably some bleeding still going on, but most people are beginning to order. We are seeing expedites, quick turn orders and so forth, especially surprisingly more in the commodity products than in the other products where we're seeing that for example, the memory and so forth. That's primarily what we're seeing.

James Schneider – Goldman Sachs

Okay. Fair enough. And then on the OpEx, does your guidance reflect the full impact of the additional 300 headcount reduction that you made in this past quarter?

Stephen Cumming

Yes, it does.

Steven Laub

That impact is really being on is manufacturing. It's not going to be in the R&D or SG&A area.

James Schneider – Goldman Sachs

I understand. And then do you expect that there could be any additional OpEx benefits as we move throughout thee year if things don't get any worse or is this pretty much bottom?

Steven Laub

There is other actions we are taking internally to reduce our operating expenses in that regard, but as Steve mentioned earlier, our expectation from a planning standpoint, we expect Q3 OpEx to be pretty similar to Q2. We would expect Q4 to be perhaps slightly up from that level.

James Schneider – Goldman Sachs

Fair enough. And just last one, housekeeping question, you classify the ASIC inventory remaining as an asset held for sale. Did you do that because you're getting close to selling the business? Or is there some other reason why you had to do that?

Stephen Cumming

There are certain conditions that we have to meet in order to allow us to classify those assets held for sale and some accounting rules, so it wasn't just the inventory. It was all related assets, fixed assets, and payables and liabilities around as well.

Steven Laub

But there is no single being sent that says there is an imminent deal, let's say in the next 30 days or so.

James Schneider – Goldman Sachs

I understand. Thanks very much.

Operator

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

Hans Mosesmann – Raymond James

Thanks. Steve, couple of questions. Last quarter, you said that you expected for Atmel, to grow your micro controller business in 2009, do you still believe that's the case?

Steven Laub

No, I do not. Unfortunately, based on obviously how Q1 turned out and really the disappointment we had with respect to our shipments in Asia and so forth, we think that that's not going to be possible in 2009 unless there is an extraordinary come back in the second half. We nevertheless remain very confident about our ability to continue to gain market share in microcontroller marketplace this year.

Hans Mosesmann – Raymond James

Okay. And can you give us a sense of what size of the touch screen part of the business is as part of your microcontrollers or if you can give us just more granularity in terms of how that business is coming along on a relative basis?

Steven Laub

We've never actually broken out the touch business from a micro business, because from a competitive standpoint, it's not helpful for us because everyone wants to know, how big is it, where are you selling into, who the customers are and so forth, so we're not breaking that out. I can tell you that, that business for us was our highest growing end market in 2008 and we expect it will continue to grow very substantially in 2009 on a full-year basis.

Hans Mosesmann – Raymond James

Fair enough. And two more questions if I may. What is driving the growth in E-squared serial memory? Are you gaining share? Or what's exactly going on there which is kind of odd?

Steven Laub

I think what's going on, I think commodity markets tended to get hit very hard in Q4 because people can shut down commodities because it is very easy to source them. So from a customer standpoint they drove down the inventories aggressively. You don't do that with proprietary products nearly as aggressively because you may have a problem getting that back. Don't worry about that with commodities. So I think that was the first thing that customers took down. So I think that's what happened. And secondly I think we're seeing now a combination of customers recovering and memory products actually I think benefiting earlier from that general recovery and I think other suppliers have mentioned the same thing, and I think also we are the market leader in this marketplace, I wouldn't be surprised if we are getting share, but not enough information is being released by others for us to conclusively reach that conclusion.

Hans Mosesmann – Raymond James

And then last question if you can give us a sense of the utilization rates in Colorado and France in Q1 and what you expect in Q2, if you can?

Stephen Cumming

Yes, so Q1 overall blended utilization rates were in the mid-60s and with that, I would say, we drained a little bit of inventory, once we back out the assets held for sale on the ASIC side. Going into Q2, we are going to be running around the 50% level of utilization.

Steven Laub

Just to let you guys it's more of sort of a bigger positioning, we're bringing down the fabs from Q2 more aggressively based on the results for Q1 and where we are with respect to our expectations for this quarter and moving forward. And so in light of that, we want to get our inventories reduced more substantially faster, so that we can again bring up the fab utilization, let's say in Q3 and Q4.

Hans Mosesmann – Raymond James

Fair enough. Thank you.

Operator

(Operator instructions) Your next question comes from the line of Edwin Mok with Needham Capital.

Edwin Mok – Needham Capital

Hey, thanks for taking my question. So, Steve, I have a question regarding just the four business groups, if you can rank them, or give some color in terms of your guidance, you're guiding for up sequentially in the second quarter. Can you rank or say which group you see stronger growth versus the other groups?

Steven Laub

Yes, I would say in Q2, my expectation is you're going to see the strongest growth coming from the micro controllers and from the memory groups. And I think the other groups are probably relatively flat, as our expectations flatten, maybe slightly down, expecting how they come out at this point.

Edwin Mok – Needham Capital

Would you say automotive is probably the weakest right now just because of the end market?

Steven Laub

Yes, automotive continues to be weak. That's probably the weakest of our four business groups.

Edwin Mok – Needham Capital

Great. And then on the OpEx guidance, I'm just trying to get clarity. The $109 million number, does that include restructuring and amortization? Because it looks like that number is actually up sequentially from the first quarter number. Can I ask why, considering you haven't done all of the headcount reduction and all the special temporary measures that you're taking?

Stephen Cumming

It's up slightly, so Q1 was 107.4, and we're guiding 109 plus or minus two. The main reason for the slight increase is additional expenses; we had a one-time credit in Q1 that comes back in Q2 so that was about $2 million.

Edwin Mok – Needham Capital

I see. I would imagine with the headcount reduction you have cost savings and with the temporary measures as well, right?

Steven Laub

Well, all the temporary measures we had in place in Q1 as well. Clearly, we had guided I think a 110 in Q1 and came in at 107. And so I think based on what we see, what we believe right now, it's 109, plus or minus two. Clearly, in this environment, we endeavor to be a number below that.

Edwin Mok – Needham Capital

I see. Great. And then on the margins, you mentioned that utilization rates go down which impact margin. Is it possible for you to quantify how much of that impact has come from the, I guess roughly around 10% decrease in utilization rate?

Stephen Cumming

Edwin, the majority of the downside in gross margin is going to be coming from that low utilization, to be honest.

Edwin Mok – Needham Capital

Great.

Stephen Cumming

But I would say our sense is that we expect gross margins to be the bottom in Q2.

Edwin Mok – Needham Capital

I see. So basically, you expect utilization to pick up in the second half, that's why margin will come back, is that correct?

Stephen Cumming

Yes.

Edwin Mok – Needham Capital

I see. And one last question on micro controller looks like you guys are gaining share and based on the data that was out there, I'm just curious, a two part question. First is on the Quantum stuff, are those mostly AVR or do you guys have Quantum on auto micro control as well? That's my first question. And second question relates to the market share gain that you have mentioned, kind of looking forward, where are you thinking you have the best opportunity to gain more share? Is it going to be remained at 8 bit or is it more likely the 32 bit? Thank you.

Steven Laub

On the first question, the vast majority of the Quantum shipments that involve hardware are AVR. So when we bought Quantum, lot of it was reselling of not just AVR, but other vendors’ products, lot of that all has been converted and transitioned over to almost completely AVR products. That's the second question. On the first question, we're going to continue gain share, 8 bit versus 32 bit and so forth, I do expect the 32 bit marketplace will be growing faster. It grew faster for us last year. I expect it will grow faster for us this year. But we have every intention of gaining share in both 8 bit and 32 bit this year.

Edwin Mok – Needham Capital

Great, that's all I have. Thanks.

Stephen Cumming

Alright. Thanks, Edwin.

Operator

The next question comes from the line of Craig Berger with FBR Capital Markets.

Craig Berger – FBR Capital Markets

Hi, guys. Thanks for taking my questions.

I guess with all the cost reductions you got going on, can you help me understand what revenue level you might need on a quarterly basis to achieve a 40% gross margin?

Steven Laub

It is a good question, Craig. It's something we have for internal planning purpose here; we've actually not shared that because we've done a lot of cost reductions. Lot of cost reductions are actually short-term, from the standpoint of making sure continue to drive our numbers to improve our performance, this quarter, next quarter, and so forth. I think that achieving a 40% gross margin clearly is well below the revenue level that we had to achieve even in Q4, and so forth, and obviously mix is also important too as part of that. But I'm not going to conjecture right now what that number would be because it will also be impacted by how much product we're going to build in a normalized environment. For example, we have excess inventory today. We want to bring those inventories down and so we will bring them down obviously the utilization of the fabs to do so. I think what you're talking about is what revenue, assuming a normalized inventory, you run your fabs at the right utilization, what would that be, and I think what we should do perhaps is we will consider, we're not to share that number, I can tell you it is below the number that obviously existed three months ago, but I don't want to share that at this point into the marketplace.

Craig Berger – FBR Capital Markets

Okay. Thanks for the insight. Let's see. Moving on to I mean just when I look at the revs, I mean you guys are down 33%, 34%, year-on-year, for Q1, Q2, and still worse than 20 in the Q4 that just passed and the Q3 likely coming up. I mean are you seeing anything in your end markets, PC's down 5% or 10% units this year, handsets down 10% units this year, it seems like automotive might be a little bit worse, but it seems like you guys are being a little conservative unless there is something you're seeing out there in the end markets that would cause you to continue to be well below what seems like ongoing demand levels. What are you seeing in industrial and housing?

Stephen Cumming

The industrial markets are also have been declining. They haven't been as soft as probably the two markets which were impacted the most which was the handset and the consumer marketplaces. We think those obviously showing the micro controller business more significantly than any other end market did for us in this time frame. But overall, I don't know if we're being conservative or not conservative. We declined 32%. I think on a year-over-year basis. And that's better than most other companies did. We believe, as I said, that we're going to be growing this quarter. We were disappointed that in Q1 we didn't achieve the numbers that we had internally planned for. And so to that extent we obviously want to calibrate properly with respect to our backlog numbers, our revenue numbers, to make sure that we can achieve the kind of targets that we're putting up to Wall Street.

Craig Berger – FBR Capital Markets

Can you talk about what you're seeing in consumer and can you also talk about lead times, whether they're still contracting, stable or potentially starting to expand? And one last one, just pricing, pricing environment. Thanks.

Stephen Cumming

The consumer markets were very weak in Q1. It's a seasonally weak quarter four and secondly what we saw in Asia was a lot of people burning off inventories. We are beginning to see some recovery in that marketplace. But it's still early to say to gauge the magnitude of that recovery. Now, with respect to pricing, there is some pricing pressure in some of the marketplaces. It's not as aggressive as one would expect in a market downturn like we're experiencing right now, but it is more aggressive than where things were prior to the downturn.

Craig Berger – FBR Capital Markets

Lead times?

Stephen Cumming

Lead times for us are actually continuing to be reduced. There are some products obviously that are in quick expedite demand from our consumers and so in those particular product areas, there are some longer lead times, but overall lead times are still very good for us.

Craig Berger – FBR Capital Markets

Thanks so much.

Operator

Your final question comes from the line of Doug Freedman with BPSG.

Doug Freedman – BPSG

Great, guys. Thanks for taking my question. Clearly, Steve, you guys have refocused a few of the businesses as far as target markets. Are there any key markets that you think we, as investors, should be paying attention to, to really measure and start to see Atmel get into? I noticed you moved the Smart Card market a little bit recently. Are there other things that you're doing to sort of retarget some of the end markets?

Steven Laub

I think the retargeting that we're doing, the most significant one is probably touch related, those markets where we feel touch is going to have the greatest opportunities, so handsets is a marketplace where I would say 18 months ago, we actually almost ignored. It was very small for us. Micro controllers were not found in handsets until about that time frame. So that was a market that was really not broken out for us. It's a market now that is very visible to us. So that would be a market for us, especially moving forward, I think would be important for you guys to identify and (inaudible) for us to measure and identify as well. I think you are also going to see some opportunities in some markets where micro controllers haven't been used before but touch will help drive them into, these would be things such as printers, potentially the net PCs, with Windows 7, going to be some new markets that emerge from micros that will become important for us. GPS is another one. So there is a lot of these new markets that have not been markets for us in the past that will become very big for us we believe going forward.

Doug Freedman – BPSG

Great. That's very helpful. Can you talk a little bit about maybe your exposure in the handset space? Is there a certain segment of that market that you're going to be more exposed to than others, whether it is high end, mid tier or low end over in Asia, any sort of color you can offer there would be helpful?

Steven Laub

I think moving forward you are going to find that primarily our participation is going to be at a high end, potentially high versus mid tier, but high end predominantly and then the mid tier level. I think low end you're not only going to see our participation.

Doug Freedman – BPSG

Alright. Great. If I could focus a little bit on sort of the irregularity that you did see in the serial E square business, you offered some color already, but is there sort of a relationship that you guys have seen with serial E square and your micro business? I know they're quite often sold next to each other. Is there a leading or lagging indicator there that you guys have traditionally seen?

Stephen Cumming

We have traditionally seen, I would say a partnership between the two, so your question is a very accurate one in that regard. We typically do sell them together; the customer base is typically very similar. With respect to what's going on though we're seeing a distinction I think between commodity and proprietary products, which is that as I mentioned earlier in the call, the downturn I think was more strongly felt initially in our industry by commodity, and the commodity product areas and I think they're the ones that are actually covering the fastest as well because you can bring down those inventories much lower than you can for proprietary products as a buyer. So I think that's what you're seeing there. I think it's an indication of continued growth and so forth. We will know that. For example, in the serial E square, we will have that answer probably sometime during this quarter, if this is a sustainable growth or this is something that's just merely inventory replenishment that's going on and some merely end market demand growth, but not nearly as much as what we're seeing from a growth standpoint.

Doug Freedman – BPSG

Alright. Great. And my last one really is the way in which you guys are managing through this challenging downturn, and that is on the OpEx side, clearly you've made some headcount reductions turning temporary savings into permanent ones. How long can you continue to run with the shutdown environment before it becomes disruptive to the future growth opportunities of the business? Is there a time frame or a revenue number at which some of those temporary shutdowns sort of go away? How are you thinking about it?

Stephen Cumming

Well, it's a break down the shutdowns between manufacturing and nonmanufacturing shutdowns. So with respect to the manufacturing shutdowns, one of the things, by doing the reductions we did with respect to our San Jose and Colorado operations, what that does is better align our, in a sense effective capacity with what we're going to be requiring. So those workers that remain will not have to endure continual shutdowns every quarter. And so that was one of the intentions we had with respect to making that change. Because we think it is very hard on the workers who are among the lower paid workers in the company, then have to endure the unpaid time, and so our sense is we will obviously continue to do that through this quarter, we will do it so long as we need to do it, in both Colorado and in Rousset, France, with respect to manufacturing operations. But we are hopeful with the actions we've taken; we have better aligned the capacity, certainly in Colorado with our requirements. And so hopefully we won't have to continue that certainly next quarter or certainly beyond Q3.

With respect to nonmanufacturing these are the one week mandatory time off for our employees, obviously for a lot of people they have already used up all of their vacation and so this becomes an unpaid time for them. It is difficult for people. But at the same time, I do believe that our people appreciate two things, which is it's a very tough environment generally out in the economy, that this is a small, in a sense a small cost to bear on a personal level to maintain, moving forward for the company, at a time in which most of our industry is not just not making money, but is burning cash. And while we're not making money, we are generating cash, and we feel very good about that, we continue to expect and continue to generate cash this year. But I think our employees fully appreciate that it's a pretty small sacrifice in the grand contest of being able to maintain their employment and move the company forward. And I think people also do appreciate the progress that is being made here to better position us for the eventual upturn.

Doug Freedman – BPSG

Alright. Great. Thank you.

Operator

Your final question comes from the line of Craig Berger of FBR Capital Markets.

Craig Berger – FBR Capital Markets

Thanks for the follow-up guys. How should we be thinking about taxes on a go forward basis beyond just the next quarter?

Stephen Cumming

I think operationally wise, Craig, we can achieve roughly moving back to the levels we had previously guided, which is around the $2 million mark for the rest of this year.

Craig Berger – FBR Capital Markets

2 million per quarter?

Stephen Cumming

Yes, that's excluding any one-time discrete items but that's what we will be guiding for.

Craig Berger – FBR Capital Markets

And then as profit ability comes back into the picture for 2010, is it still 2 million or is it a percentage?

Stephen Cumming

We like to, as we get out to that time period, we'd like to start guiding to more of a percentage. I can't give that at this point in time, but that's what we're shooting for.

Craig Berger – FBR Capital Markets

Okay. Can you talk about what you view as your levels of sustainable CapEx given that you're kind of rescaling your manufacturing network and potentially getting rid of one of your two fabs?

Steven Laub

Craig, you're talking about what 2010 CapEx looks like?

Craig Berger – FBR Capital Markets

Yes, 2010 or what you view as a sustainable kind of investment level going forward as a percentage of revenue or is a dollar revenue, just so I can understand what depreciation versus CapEx will look like, if there is any difference there at all.

Steven Laub

Assuming there is a recovery in this industry, let's say, for example, the industry that we believe things have bottomed out in Q1 and there is going to be slow growth through the remainder of the year. Let's assume that in 2010, that there is a more rapid growth as there is a real recovery, generally in the worldwide economy industry as well. And our CapEx at that time is probably somewhere between $50 million to $60 million.

Craig Berger – FBR Capital Markets

$50 million to $60 million.

Steven Laub

Yes.

Craig Berger – FBR Capital Markets

And then on Rousset, I understand there is no real visibility in the transaction at this point, but what do you guys envision the impact of not being in that facility, if we flash forward 12 months or 18 months? What is the cost structure of the company look like?

Steven Laub

We are not discussing that today. Appreciate how important that is for our shareholders to understand. But we think it's little premature to disclose that right now.

Craig Berger – FBR Capital Markets

Okay. Thanks, guys.

Steven Laub

Thank you.

Operator

There are no further questions. Do you have any closing remarks?

Stephen Cumming

I do. Thank you, Robert. During the second quarter, Atmel will be presenting at the UBS Global Technology Conference on June 8th in New York City. The webcast information will be provided for this event on the Company's Investor Relations Web site. Thank you for joining us today. This concludes our conference call.

Operator

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

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Source: Atmel Corporation Q1 2009 Earnings Call Transcript
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