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Atmel (NASDAQ:ATML)

Q1 2013 Earnings Call

May 01, 2013 5:00 pm ET

Executives

Peter Schuman - Director of Investor Relations

Stephen A. Skaggs - Interim Chief Financial Officer and Senior Vice President of Corporate Strategy & Development

Steven A. Laub - Chief Executive Officer, President and Executive Director

Analysts

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Steven Eliscu - UBS Investment Bank, Research Division

Blayne Curtis - Barclays Capital, Research Division

Ian Ing

John Vinh - Pacific Crest Securities, Inc., Research Division

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Cody G. Acree - Williams Financial Group, Inc., Research Division

Operator

Good afternoon. My name is, La Porsha and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2013 Earnings Conference Call. [Operator Instructions] Mr. Peter Schuman, Senior Director of Investor Relations, you may begin your conference.

Peter Schuman

Thank you, La Porsha, good afternoon, and thank you for joining us for Atmel's First Quarter 2013 Earnings Conference Call. A copy of the press release issued today is available on our Investor Relations website. A replay of this call will be available after 5 p.m. Pacific today, and will be archived for 24 hours. The webcast will be archived on the company's website for 1 year. Access information is provided in today's press release.

Joining us for the call today are Steve Laub, Atmel's President and CEO; and Steve Skaggs, Senior Vice President and interim Chief Financial Officer. Steve Skaggs will begin the call with a review of our first quarter financial results and Steve Laub will then provide additional information on the business. At the conclusion of Steve Laub's remarks, Steve Skaggs will discuss our financial guidance for the second quarter of 2013 and then open the call up for 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 market growth, litigation matters and the anticipated course of patent litigation, revenue, target gross and operating margins, product introductions and cost savings for 2013 and beyond.

Our forward-looking statements and all other statements that are not historical facts reflect our expectations and beliefs as of today, and therefore are subject to risks and uncertainties as described in the Safe Harbor discussion found in today's press release.

During the call, we will also discuss non-GAAP financial measures. The non-GAAP financial 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 Steve Skaggs for a discussion of our first quarter financial results. Steve?

Stephen A. Skaggs

Thank you, Peter. First quarter revenue of $329 million decreased $16 million or 5% from the prior quarter and due to stronger-than-expected quarter-ending distributor POS, exceeded the high-end of our updated guidance range of $318 million to $328 million. Excluding the revenue related to the Serial Flash business that we sold at the end of the third quarter of last year, revenue was down 4% sequentially and down 5% from the prior year's first quarter. The sequential revenue decline in Q1 was primarily due to seasonality and a slower-than-anticipated ramp for Windows 8 maXTouch business. First quarter 2013 GAAP gross margin was 39.9% and within our guidance range of 40%, plus or minus 100 basis points. Non-GAAP gross margin in the first quarter of 2013 was 40.5%, consistent with our guidance of 40.5%, plus or minus 100 basis points and compares to the 41.6% non-GAAP margin reported in Q4. The sequential non-GAAP gross margin decrease resulted primarily from the adverse manufacturing variances due to lower revenue and the impact of legacy take-or-pay wafer foundry agreements.

We initiated cost improvement measures in Q4 of last year to reduce overall capacity at our Colorado wafer fab in order to improve utilization, and we expect to begin to realize the benefits of those actions. In addition, we have and continue to take actions to lower our manufacturing cost throughout our entire supply chain. We expect to receive final wafer deliveries associated with our legacy European take-or-pay agreements during the third quarter. We expect additional margin improvements after the sell-through of those wafers.

Moving to operating expenses. We continue to carefully manage our operating expenses and are aggressively reducing our cost structure. Operating expenses came in at $132 million, within our original guidance range, excluding restructuring charges, recovery on foundry supplier receivables, gain-on-sale of assets, settlement charges and acquisition-related charges. This compares to operating expenses of $125 million, excluding special items in Q4 of 2012 and $136 million in the first quarter of 2012. Non-GAAP operating expenses for the quarter were $119 million. The sequentially higher OpEx was primarily the result of higher payroll taxes, a full quarter of expenses related to our fourth quarter acquisition of Ozmo, and the timing of government grants and tax credits.

R&D expense of $68 million in the first quarter was approximately $9 million higher compared to the $59 million reported in the prior quarter and up from $66 million in the same period last year. SG&A expense was $64 million for the first quarter of 2013, down $2 million compared with $66 million in the prior quarter and down from $70 million in the same period last year.

Stock compensation for Q1 was $15 million, allocated as follows: $2 million to manufacturing, $5 million to R&D and $8 million to SG&A. This compares to $16 million in the fourth quarter of 2012.

GAAP loss from operations of $62 million in the first quarter of 2013 resulted principally from restructuring and legal settlement charges. Restructuring charges during the first quarter were primarily related to actions initiated in Europe to better align our cost structure and improve operating models. We intend to continue our cost reduction efforts and to maintain strong discipline in managing our operating expenses to improve future operating performance. Settlement charges reflect accruals and connections with potential settlements of ongoing IP disputes, and are based on our current expectations and information.

On that note, I'd like to make a quick clarification concerning another legal matter. Last week, the EU Commission announced that it had sent several smartcard suppliers a statement of objections setting forth the commission's preliminary view that those suppliers may have engaged in cartel activities with a European economic carrier. As a reminder, Atmel sold our smartcard business in 2010. Although Atmel cooperated with the EU investigation, we want to note that neither Atmel nor any of our affiliates was charged with wrongdoing, nor did we participate in any settlement discussions. We are pleased with the result of this investigation and consider this matter closed.

Non-GAAP operating income for the first quarter of 2013 was $14.2 million or 4.3% of revenue, and excludes stock-based compensation, gain on sale of assets, the recovery of a European foundry supplier receivable, acquisition-related restructuring and legal settlement charges. This compares to fourth quarter 2012 non-GAAP operating income of $33 million or 9.7% of revenue and non-GAAP income from operations of $36 million in the same period last year.

GAAP income tax benefit totaled $14.4 million in the first quarter of 2013 as a result of the GAAP net loss. During the first quarter of 2013, our non-GAAP income tax provision was approximately $1 million, which compares to $2.6 million in the prior quarter. As a reminder, our non-GAAP income tax provision approximates our cash taxes incurred. We expect to have a non-GAAP or the cash tax effective provision of $1 million to $2 million per quarter for the remainder of 2013.

GAAP net loss for the first quarter of 2013 was $47.7 million, or a loss of $0.11 per diluted share. This compares with a GAAP net loss for the fourth quarter of 2012 of $12.3 million or a loss of $0.03 per diluted share, and GAAP net income of $20.4 million or $0.05 per diluted share in the same period last year.

On a non-GAAP basis for the first quarter of 2013, we had net income of $13.6 million or $0.03 per diluted share. The Q1 2013 results compare with non-GAAP net income of $29.4 million or $0.07 per diluted share in the fourth quarter of 2012, and non-GAAP net income of $35.3 million or $0.08 per diluted share in the first quarter of 2012.

Turning now to the balance sheet. Combined cash balances, including cash equivalents and short-term investments, totaled $245 million for the first quarter, representing a decrease of approximately $51 million from the fourth quarter. The decrease in cash balances of approximately $51 million is primarily related to cash payments of approximately $25 million to complete the Ozmo Wi-Fi and IDT smart energy acquisitions and the prepayment of $10 million for our product to our XSense commercial partner, combined with a $29 million decrease in trade payables and an $8 million higher accounts receivable balance due to the timing of shipments in Q1. The Q1 decrease in trade payables relates to a normalization of payable days, following abnormally high balances at the end of Q4 due to our year end shutdown.

Cash flow use from operations totaled approximately $12 million in the first quarter, down from a positive $79 million in the fourth quarter of 2012. We expect to return to positive operating cash flow during the second quarter. However, as a result of one-time outflows for previously announced restructuring charges and legal settlements, we expect overall cash balances to be down in Q2. Our current expectation for Q2 ending cash balances, excluding the impact of stock repurchases, is $230 million to $240 million.

Capital expenditures were approximately $4 million in the first quarter, down from the fourth quarter's $6.5 million and below the guidance range of $5 million to $10 million.

Finally, during the first quarter, we repurchased 2.4 million shares of common stock in the open market at an average price of $6.52 per share. Depreciation and amortization in the first quarter was approximately $20 million, flat compared to the $20 million in the fourth quarter of 2012, and up from the $19 million in the first quarter a year ago.

Accounts receivable totaled $196 million at the end of the first quarter, an increase of approximately $8 million from the fourth quarter. Day sales outstanding for the first quarter stood at approximately 54 days, up 4 days from the prior quarter as a result of shipments being more back-end loaded as our business continued to strengthen throughout the first quarter.

Inventory decreased by $12 million to $336 million compared to the prior quarter's $348 million, due to lower quarterly revenue levels. Days of inventory increased slightly and now stands at 154 days. We expect inventory to decrease throughout the year as we work towards our target model of 120 to 130 days.

With that, now let me turn the call over to Steve Laub for a commentary on our business. Steve?

Steven A. Laub

Thank you, Steve. As I stated on last quarter's earnings call, the March quarter would be the bottom of the current semiconductor cycle. And based on current business trends, we are confident this will be accurate. Over the past few quarters, Atmel's considerably strengthened our product portfolio by delivering innovative new solutions for our customers that fit into the fast-moving and increasingly connected world. We have made acquisitions to strengthen our strategic technology offerings, partnered with industry leaders to enhance our solutions, and we've introduced a record number of new 32-bit microcontroller devices, including a considerable number of new Atmel ARM Cortex-M4 and Cortex-A5 products to expand our presence in existing markets and target exciting, new applications.

Consistent with this, in early March, we announced the acquisition of Integrated Device Technology's smart energy, IT product lines and technologies. This acquisition included the transfer of certain IP and all assets, customers and the design team of IDT's smart energy IC product launch to Atmel. Acquiring an award winning metering product line enables us to round out our smart energy portfolio and the analog front end to the processor and communication stack. This acquisition is already accretive for Atmel.

Moving to a discussion of Q1 results. We are pleased to exceed the upper end of our revised revenue guidance as our core microcontroller business expanded in Q1, growing both sequentially and year-over-year. We also saw growth in our automotive business. Our other business segments declined on a sequential basis. From an end market perspective, our largest end market, industrial, grew as compared to last quarter. As we anticipated, after fourth quarter launch of Windows 8, shipments of large screen Windows 8 touch devices were weaker during the first quarter. On a positive note, the consumer market, our third largest, grew during the first quarter and automotive had both sequential and year-over-year growth due in part to last time buys of certain legacy products. Sales to mobile, computing, communications and networking, as well as military aerospace, were lower during the quarter.

Moving to a discussion of our business segments. For our microcontroller business unit, microcontroller revenue of $215 million decreased 6% sequentially and was down 1% as compared to the first quarter of 2012.

By product family, during the first quarter, our 32-bit microcontroller decreased 8% sequentially, but increased 37% year-over-year, while our 8-bit microcontrollers were down 5% sequentially and were down 16% year-over-year. For our 32-bit microcontroller business, we had a significant product win as Samsung selected Atmel's 32-bit AVR microcontroller base sensor hub solution for its latest flagship smartphone, the Galaxy S4. The new Galaxy S4 has an increased number of sensors, including an accelerometer, digital compass, proximity, gyro, humidity, barometer and gestures. The Atmel sensor microcontroller gathers and processes data from all the connected sensors in realtime, providing a better user experience for a range of applications, including gaming, navigation and virtual reality. Atmel's sensor hub solutions lowers the overall system power consumption to enable longer battery life. We are excited about this product family as we see more and more mobile devices requiring sensor hub capabilities to match increasing number of sensors being used in smartphones, Windows 8 tablets, notebooks, Ultrabooks and gaming devices.

Continuing the momentum we built in our 32-bit microcontroller business in 2012, during the first quarter of 2013, we introduced 35 new ARM and AVR products. This brings the total number of new 32-bit products to over 150 in the past 5 quarters. The record number of new 32-bit Atmel product introductions include ARM-based Cortex-M3, M4 and A5 devices, along with our ADR 32 products. We are well-positioned to capitalize on the continued growth of the 32-bit marketplace. In addition, we expect to hear more details, or you can expect to hear more details, about new ARM products planned for introduction later this quarter.

In the area of wireless, with Atmel's ultra-low power Wi-Fi technology, peripherals such as remote controls and smart connected devices, comprising the Internet of Things, can now utilize the existing Wi-Fi infrastructure without compromising cost or power. During the quarter, our ultra-low power Wi-Fi solution was selected for a gaming remote with Roku, based on the technology acquired from our Ozmo acquisition in Q4. The remote features a built-in headphone jack for private listening that accompanies the highly acclaimed Roku 3 set-top box. The Wi-Fi technology brings uncompressed stereo audio to the remotes, while allowing a user to enjoy streaming content or gaming simultaneously.

During the first quarter, Atmel also signed an agreement with Exegin Technologies Limited, a leading supplier of ZigBee's network stacks to jointly offer integrated wireless communication solutions for smart grid applications. The joint collaboration will enable smart metering customers to enjoy a full range of integrated smart metering solutions for smart grid applications in wireless mesh networks.

Turning the discussion to our touch products. Market adoption of Windows 8 devices has started out at a slower pace than the market anticipated. However, Microsoft and Intel have both reaffirmed the importance of touch in Windows 8 and are taking aggressive steps to drive its growth. Intel's fourth-generation Haswell chips for Ultrabook designs must be touch-enabled as a standard feature. And is expected to lead to acceleration in touch for large screens during the second half of the year. Atmel has enhanced its leadership position in large screen solutions with Monday's announcement of our maXTouch T Series, our next generation family of maXTouch controllers. The first device sampling in the T Series is the maXTouch 2952T, the world's first single-chip, capacitive controller supporting touchscreens up to 23 inches and Windows 8 Ultrabooks and notebooks up to 15.6 inches. The 2952T boasts industry-leading performance and ultra-low power, while supporting all critical user interface technologies. One of the most significant differentiators in the T Series is it offers hybrid sensing technology, combining both mutual and self-capaciting architectures. The hybrid technology not only enables true multitouch tracking, but also provides a better user experience by offering improved glove support, thinner passive stylus, improved moisture capabilities, along with thinner cover glass and cutting-edge performance, creating a best in breed platform for the mobile market. The T Series also supports hover capability, which detects a finger or an object not in contact with the screen.

Further distinguishing the 2952T from all other touch controllers is it's successful integration of active stylus and sensor hub technologies, which are becoming mandatory for mi-d and large-screen devices. Until now, these technologies were only available as separate discrete solutions.

Another key benefit of the T Series is it includes specific circuitry designed to take advantage of metal mesh sensor technology, such as Atmel's XSense product. Leveraging the extremely low sheet resistance of XSense, the T Series can support significantly lower charge times, improves signal noise ratio and reduced power consumption. Given the large number of customer product launches in Q4, there were fewer customer product launches during Q1. However, several notable products featuring maXTouch were released, including the Dell Latitude 10-inch tablet and GTE V98. We have a lot of designs in the pipeline and expect to see a steady ramp of new launches each quarter for the rest of this year.

Atmel is currently Windows 8 certified for approximately 70 different tablets and Ultrabooks, and is actively engaged in well over 100 different Windows 8 programs. In the Android community for large screens, maXTouch is now powering the touch capabilities in the new Google Chromebook Pixel, which features a 12.85-inch screen, and has the highest resolution screen that has ever been shipped in a laptop. In addition, maXTouch is used in the touch pad for the Chromebook. MaXTouch is also powering the touch in the ZTE V72 7-inch tablet and the ASUS MeMO Pad 7-inch tablet, which also features XSense in some versions. We also recently received a 2012 Best Partner Award from ASUS, for helping them to get to market faster with no delays and no product shortages. Atmel was the only touch supplier to receive this prestigious award.

In the market for handsets, we added BlackBerry as a new customer for maXTouch, with the launch of the new BlackBerry Q10, which was introduced early this week in Canada and this past weekend in the U.K. Other recent smartphones introduced since our previous earnings call, utilizing maXTouch, include multiple new design wins from Samsung, phones from Motorola and handsets from ZTE and Xiaomi.

In new markets for touch, our technology continues to be adopted in new applications as touch becomes more ubiquitous. Samsung shipped a smart remote control for televisions featuring touch capability. A large manufacturer of global positioning system devices selected maXTouch for a recently launched GPS product. This new product includes a 5-inch high-resolution touch screen display with pinch and zoom capability, including dual orientation, so users can use the device either horizontally or vertically. MaXTouch allows for the most precise touches, improved battery life and a brighter touch screen, which allows for the best GPS experience.

As we have previously stated, touch will continue to proliferate into other segments of the market, beyond just mobile devices. As touch has become the preferred method for humans to interface with electronic devices, we believe our addressable market and opportunities will continue to grow.

Turning our discussion to XSense. The market for IT alternatives and metal mesh technology, in particular, is moving into the mainstream. During the first quarter, ASUS shipped their 7-inch tablet known as the MeMO Pad, featuring XSense. In addition, XSense was recently selected for multiple new designs with several Tier 1 OEMs. Furthermore, we are engaged in active discussions with major ecosystem partners to develop reference designs and to ensure that substantial capacity is available to support the forecasted rollout of large-screen systems. Based on these engagements and increasingly strong customer feedback, we believe that the adoption of metal mesh technology as a replacement for traditional ITO sensors is accelerating. Today, our manufacturing requirements are being supplied by our partner, CIT, as we qualify our Colorado facility for large-scale production. We currently expect our facility to be qualified this month, which is a delay from Q1, which had been our prior schedule. Due primarily to this delay, we expect XSense revenue to be between $15 million to $25 million for 2013. Despite this near-term reduction in revenue, we anticipate a substantial ramp in volume and are planning to expand capacity to support product revenue exceeding $100 million in 2014. As a leader in this technology, with strong IP and manufacturing know-how, we expect the market for metal mesh solutions, which has an addressable market of over $5 billion today, to grow rapidly over the next few years, with XSense as the leading product.

Turning to our Non-Volatile Memory segment, total revenue for the Non-Volatile Memory segment was $27 million in the first quarter of 2013, down 15% sequentially and down 43% as compared to the first quarter of last year. The sequential and year-over-year decreases were primarily the result of the sale of the Serial Flash memory business at the end of the third quarter of 2012, as well as the weaker PC market. The fourth quarter of 2012 included approximately $2 million in Serial Flash revenue, which was sold in the channel. Adjusting for the Serial Flash divestiture, non-volatile memory was down 10% sequentially and 24% from the first quarter of 2012.

Turning to the RF and Automotive segment. Revenue was $47 million in the first quarter of 2013, up 17% sequentially and up 7% as compared to the first quarter of 2012, due in part from the end of life shipments of some legacy products. Our high-voltage products did particularly well, as we had a record quarter revenue for those products.

In the ASIC business segments, first quarter revenue of $40 million was down 10% sequentially, and decreased 18% as compared to the first quarter of 2012. The Aerospace business declined due to the timing of orders and is still being adversely impacted by changes concerning export controls for products shipped from Europe to Asia. We do expect to see recovery in the ASIC business beginning in the second quarter of this year.

Looking at the first quarter revenue by geography, our largest ship to location was Asia, representing 60% of revenue. EMEA was 25% of revenue while the Americas were 15% during the first quarter. EMEA and the Americas strengthened during the first quarter, while Asia decreased sequentially from the prior quarter due to seasonality and softness of Windows 8 product shipments.

In regards to our leadership team, given the size, complexity and different characteristics of our core market controller and touch businesses, we have assigned management to each business in order to maximize our success. In our growing core microcontroller business, we recently added Dr. Reza Kazerounian to our management ranks. Many of you may be familiar with Reza as he has a long track record of success in the semiconductor industry, and most recently served as Senior Vice President and General Manager for the automotive industrial multimarket solutions group for Freescale Semiconductor, where he oversaw annual revenue of more than $2 billion. We are pleased to have Reza joined Atmel as Senior Vice President and General Manager of our core microcontroller business unit. With Reza's joining, Vegard Wollan and Peter Jones, are now serving as vice presidents and co-general managers of our Touch business, focusing on the numerous growth opportunities in the Touch end markets. As you know, Steve Skaggs, who currently serves as Atmel's Senior Vice President of Corporate Strategy and Development, was also recently appointed Interim Chief Financial Officer of Atmel. As our April's second press release noted, Steve Skaggs has more than 20 years of experience in the semiconductor industry, including over 7 years of prior public company CFO experience.

In summary, given the improved order activity and a stronger backlog, it appears we are at the start of a recovery in our business, amid an improving industry environment, and expect strong revenue growth this quarter in our core microcontroller and ASIC business segments. Driven by our new 32-bit product introductions during the past 5 quarters, customer design activity for the company and the microcontroller business, in particular, are at multiyear highs. In Touch, we are enthusiastic by the release of the first product in our new T Series family of maXTouch controllers. This new family combines industry-leading performance with ultra-low power. The T Series is game changing for the mobile markets by being the first touch controller to integrate sensor hub and active stylus technologies, while supporting all critical user interface technologies, including enhanced hover capability. Furthermore, the T Series extends our leadership position in large-screen solutions by being the first fully integrated signature solution for Windows 8 notebooks and Ultrabooks.

As the largest touch supplier for Windows 8 products, we look forward to increased penetration of Windows 8 during the second half of the year, especially the arrival of Intel's Haswell chips. We are also excited with the progress we have made with XSense. Despite the push out in near-term revenue, customer enthusiasm for metal mesh solutions, and XSense in particular, is strong and we are confident of the rapid growth of this market in our leading position with XSense.

As we move forward in 2013 and a new period of expansion for the industry and Atmel, we expect meaningful revenue growth, combined with increasing gross margin and significant reductions in the quarterly operating expenses in the back half of this year. This will provide Atmel positive operating leverage throughout the remainder of 2013 and into 2014.

Now let me turn the call back to Steve Skaggs for our Q2 financial guidance. Steve?

Stephen A. Skaggs

Thanks, Steve. We ended the quarter with an improved backlog, and are expecting revenue growth during the second quarter driven primarily by a continuing recovery in the core microcontroller business. The company expects second quarter revenue of between $339 million to $355 million, up 3% to 8% sequentially. Gross margin should improve for the second quarter as we expect a GAAP gross margin of 41.5%, plus or minus 100 basis points, and on a non-GAAP basis, model 42%, plus or minus 100 basis points.

Second quarter GAAP operating expenses are expected to be approximately $132 million, plus or minus $2 million or essentially flat on a sequential basis. As a reminder, our guidance includes a full quarter of expenses associated with our IDT smart energy acquisition. Non-GAAP operating expenses are expected to be approximately $118 million, plus or minus $2 million due to restructuring and other actions we have recently taken. We expect Q3 and Q4 operating expenses to be down $3 million to $5 million each quarter sequentially.

For the second quarter, depreciation and amortization is expected to be approximately $19 million, and stock compensation to be approximately $16 million. We expect capital expenditures to be approximately $5 million to $10 million for the quarter. Other expenses expected to be approximately $1 million to $2 million and acquisition-related costs are expected to be approximately $2 million for the quarter. We expect our Q2 GAAP tax expense to be approximately $1 million to $2 million. For those doing non-GAAP models, we expect non-GAAP tax on all of our [ph] operations to be approximately $1 million to $2 million per quarter in 2013. For modeling purposes, assume a GAAP fully diluted share count of approximately 433 million shares and a non-GAAP share count of around 440 million. This concludes our prepared remarks. We'd now like to open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Chris Caso with Susquehanna Financial.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Just wondering, if you could talk a little bit about the sort of pace of bookings in the backlog as you went through the quarter, as you look in the second quarter, just in general, as we're going through earning season here, we're getting some different tone from different suppliers, just what your take is from the customers that you're talking to now?

Steven A. Laub

I'd say, first of all, we track obviously, both bookings and what we call backlog coverage. Obviously, the bookings, what we're saying, is the bookings for, as we look out here in April. They're up as compared to March and so we'd say that the bookings' tone of business has actually been good, has been solid. The other thing we look at is what we call our backlog coverage and right now, our backlog coverage for this quarter as compared to say, to prior quarters is actually up and so we don't need to turn as much business this quarter to achieve the guidance that we've given you.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Okay, great. As a follow-up to that, perhaps you could talk about -- I think you had said the distributor point-of-sale was stronger toward the end of the last quarter, that was part of the source of the upside for the calendar first quarter. If you could talk about the distributors, are doing now, particularly with regard to inventories. I know your distributors have been taking down inventory. I guess many of the customers have been last year, where do you see that changing as you go into the new year?

Steven A. Laub

So from a standpoint, I know obviously, one thing that in Q2 is an advantage over Q1 is we don't have a Chinese New Year recur again in Q2. So in that regard, we actually, you do expect a sort of a more solid business trend so seasonally, Q2 is typically up as compared to Q1. From a standpoint of inventory in the channel, inventories actually came down last quarter very nicely. We're roughly at about 8.5 weeks of inventory in the channel, which is the lowest that we've been in approximately 2 years. So I'd say inventory positions are actually very good.

Operator

Your next question is from the line of Jim Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

Steve, I was wondering if you could talk a little bit about the Touch business expectations for 2013. Understanding you reduced the XSense forecast a little bit, relative to prior, but can you maybe talk about the maXTouch forecast, and kind of give your visibility on design wins in large screens throughout the year? If you can give us any color on the yearly review forecast for that, that'd be appreciated.

Steven A. Laub

Sure. With respect to our forecast for this year, today, the majority of our maXTouch business is in the large screen, what I call the sort of notebooks, Ultrabooks and tablets part of the business. To a great extent, the numbers we're going to have in maXTouch this year are quite dependent on the adoption of Windows 8 and the success of Windows 8. I think it's been a little slower than we and others had anticipated currently this year. Although there is an expectation, a very strong upside in the second half of the year. It's actually quite typical right now for us to forecast how that's going to come out, because I think a lot of people just don't know how those numbers are going to turn and we have such a significant amount of our business is really dependent upon that. So at this point I don't want to give out a prediction on that, because again there's just so much uncertainty. We feel very good about the design wins and our position with respect to those programs. So it's really just a function of those programs going to production to kind of, long that they're going to -- and success they're going to achieve.

James Schneider - Goldman Sachs Group Inc., Research Division

That's helpful. And then maybe, can you give us a little bit color on the different business segments, particularly for Q2, particularly in automotive, which is up so strongly, partly on the legacy product sales. Do you expect that to continue to go up as we head throughout the year, and maybe if you can comment on memory and ASIC as well?

Steven A. Laub

Sure. So for Q2, our expectation is that the -- our MCU business is probably in the up to mid-single digits, and that's -- there's a real distinction. The core MCUs will be up double digits sequentially, we expect in Q2. While maXTouch, we expect again because of the slowness of the Windows 8 will actually down double digits in Q2. Our ASIC business, we expect to be up double digits. The automotive business is probably going to be down sequentially, sort of mid-single-digits, and again after a very strong Q1, and memory probably down also, low to mid-single-digits.

Operator

Your next question is from the line of Steven Eliscu with UBS.

Steven Eliscu - UBS Investment Bank, Research Division

On gross margin, during the past quarter at an Investor Conference, you highlighted towards reaching your goal of 54% by Q4 of next year that you expect a gross margin improvement of 500 to 600 basis points from increased capacity utilization, and 300 from getting out from under your take-or-pay arrangements. Can you give us any update on that and any new initiatives? And to help better calibrate our models, can you give us an idea next year, when you think you can at least get to 50%?

Steven A. Laub

So as an update for that, first of all, we are on track, Steve, with respect to what we highlighted, as with the different programs that we have. Your numbers are correct, by the way, roughly 200 to 300 basis point improvement in getting past the impacts of the take-or-pay agreements. So it's not just the take-or-pay agreements coming to an end, which we expect to happen the mid part of this year, the wafer, all the wafers associated with those take-or-pay agreements we expect will be received during Q3. They'll be the final shipments in Q3. Obviously, those have to sell-through to really enjoy the impacts of the better wafer pricing, and therefore the higher margins associated with those products. You're also correct, roughly 500 basis point improvement due to utilization. The utilization on our manufacturing assets, specifically our plant in Colorado as well as our backend manufacturing. And then there are roughly, another 500 basis points improvement in operational initiatives. So those things are in place. We do actually monitor those on a very regular basis, because it is so important to both our profitability and to the value of this company. It's actually a very -- it's a #1 priority, frankly, for our Senior Vice President of Operations, and it is the #1 priority for our interim CFO, Mr. Skaggs, as well. With that -- with respect to say, what quarter we're going to have, say, a 50% gross margin and so forth, I'm actually, a lot of it is dependent on some of the timing of these things. I don't know exactly the sell-through of those wafers is going to occur. A large portion of it is also dependent upon revenue growth, clearly to enjoy increasing margins, you do need to have the revenue growth as well. And while we're seeing now the beginnings of a recovery and expansion of both of our business and the industries, I am reluctant to give you out a specific number as to which quarter were going to hit a given number. We've already given you guys the guidance as to 54% by Q4 of next year, and our expectation and our plans are such that we are committed to maintaining that, and we have a full -- every expectation of achieving that.

Steven Eliscu - UBS Investment Bank, Research Division

Great, that's helpful. And as a follow-up question, I'd like to -- you've talked about XSense being what you expect to be the leader in metal mesh technologies. Help us understand the sustainability of that business? I mean, when we look at XSense, really looking at something that's really an exercise in material science, and it just seems like when somebody else figures out how to reliably adhere fine wires to film less expensively than you, then you lose your advantage. So can you help us understand why that's an overly simplistic view of the technology? And some of the reasons that it is defensible?

Steven A. Laub

I'm sure that the same things are often said about semiconductor products when somebody can make a processor as same as you, why does it matter, and why can't they just drive the prices down associated with that. It is related to material sciences, but what you find out though, there is a tremendous amount of learning and capability and innovation in actually being able to develop a product for example, that has clarity, with a right type of clarity, with respect to satisfying a customer's requirement. One of the things that held us back over the past year, which I think we highlighted, was we weren't able to achieve a kind of optical clarity that's consistent with that of ITO. And one of the key things that we've learned over the past year with our partner is you'll deliver products where that's no longer a barrier to our success. However, in noting other people's technologies, it's a real barrier for them to be able to do so. Another thing about the technology, first example, that's really critical for that is being able to drive the process, you can actually make a lot of things that, and I'm not going to say what they are, because I don't want to highlight to other people who are pursuing this marketplace, but there's a lot of things you can do with the plastic to reduce the cost of actually the stack-up. And the way you provide the complete touch module solution. And so there's a number of things we can do which dramatically reduce the entire cost of a touch solution that we're actually working on with our partner for next-generation. So we believe this is actually very early innings, with respect to this technology from a standpoint of what it can accomplish. It's like any -- it's not creating -- like a base silicon. This is something where the fundamental product and its characteristics can actually deliver a better product to the customer, and a lower cost product to the customer, depending on your ability to drive, for example, more advanced lithography, and things like that. So I'm actually very comfortable with that. This is a very good differentiable and very sustainable advantage that we have, and that we can sustain for many, many years.

Operator

Your next question is from the line of Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

I just want to clarify, in the March quarter where core MCU is up, and then it looks like you're bucking the sensor hub into core MCUs for June. I just wanted to clarify that, and if so, do you expect, outside of that, when do you see a recovery in the overall, just general, MCU business?

Steven A. Laub

Well, the answer is, in the March quarter, general MCU was up and the answer is yes, we do include within the general MCU, we do include sensor hub as part of that product because it is a 32-bit MCU as part of that solution, is that your question, Blayne?

Blayne Curtis - Barclays Capital, Research Division

Yes, I guess the second part is, I assume so. So the second part is outside of that win, I mean, do you expect the general MCUs to be up again in the...

Steven A. Laub

Yes, we do.

Blayne Curtis - Barclays Capital, Research Division

Okay. And then I -- maybe I misheard you, but I thought you guided the cash balance in June down, and obviously, you've made an acquisition, but I -- assuming that closed in Q1, so if you just give us some clarity, I thought you said also that inventory was going down, so I trying to understand why the cash balance would be down in June?

Stephen A. Skaggs

That's right, Blayne. This is Steve Skaggs, we guided to $230 million to $240 million of cash without the impact of stock repurchases. You saw that we took a legal and a restructuring charge, so those are accounting charges, cash will flow against those charges in the incoming period. So that's the reason, primarily for cash being down, we expect operating cash to be positive in the next quarter.

Blayne Curtis - Barclays Capital, Research Division

Okay, helpful. And then Steve, just to follow up on the questions on XSense. I mean, there's been a lot of chatter about, issues with visibility and reliability, and I just want to understand better your comment about how you're targeting markets where that may not be an issue, is that a -- are some of the issues that you've occurred not fixable? And you're just there's certain applications where they're okay with that lack of clarity? Or did I mistake you, in -- maybe you just -- are all the issues behind you at this point, I guess, would be helpful?

Steven A. Laub

So with respect to clarity specifically, that was big issue last year, because customers could distinguish the differences between ITO clarity and the clarity of our technology. Today, they can no longer distinguish those differences. So we have substantial improvements on optical clarity, so that is now resolved, with respect to our [ph] structure across [ph] , which is why we're having now being selected by Tier 1 customers for their products. So that's actually something we resolved, but we have actually noted that other people are having major challenges with respect to that. With respect to resolving all issues on XSense, I think one thing we highlighted during the prepared remarks, we're currently in the process of qualifying our facility and expanding capacity at our facility in Colorado, and so that was something that we had expected to be qualified during the first quarter. It did not complete during the first quarter, and we have every expectation to be qualified this month. So that is probably 1 remaining risk factor, although we think a very minor one. But that is something clearly that does need to be completed, because that is where we're counting on for a lot of production that we're planning on shipping in Q3 and Q4.

Operator

Your next question is from the line of Ian Ing with Lazard Capital Markets.

Ian Ing

First of all, for sensor hubs, could you talk about some share expectations in discrete sensor hubs? I think MCU vendors aren't talking too much about it, but there's a small PL vendor talking about it. And then, as you move to maXFusion, how do you think some of the share dynamics play out? I mean, are some smartphones going to keep discrete and some will integrate?

Steven A. Laub

So with respect to sensor hub, from our standpoint, I don't usually talk about other people, but there are several other MCU suppliers that we are competing against in sensor hub. We do not see any programmable logic supplier in that particular marketplace, so that may be a different type of product that they're doing, or perhaps a different customer base that they are pursuing. But other major 32-bit suppliers, we are competing with in the sensor hub marketplace. With respect to maXFusion, we think what that does, is we think some customers will adopt maXFusion as part of, and that can be integrated with our touch controller [ph as part of their sensor hub solution, and we think others will maintain a discrete solution, depending upon, first of all, what they're trying to accomplish, and how they're trying to accomplish that. And initially, for example, our maXFusion product will be on large screens, not on, I would say, smartphones, although we have the ability to take that down into the smartphone marketplace with our T Series. So we think that there will be some distinctions that way.

Ian Ing

Great. And my follow-up, the push out of the XSense qualification. I think there was talk of $50 million at some point this year at one point. But how -- talk about how you're able to keep in touch with customers in play, are they still able to get product samples, can they still take products to market with enough volume sort of gauge the customer experience?

Steven A. Laub

So it's a couple of things. First of all, we are qualified with our partner for production shipments. So our partner here on this material is producing and is shipping. Production's going for us today, and in fact, the ASUS product came from our partner, okay? So just -- this is clarification. We are -- we have no problems being able to ship production. The other thing is, we can ship samples, they ship samples, obviously, from their facility. We can also ship samples from our Colorado facility today. So we can do that while awaiting the qualification. What we're saying is, to make sure that we can expand the capacity consistent with the business that we want, we need to qualify the Colorado facility. That is what was delayed from Q1 and now it's again, expectation that'll qualified this month. It's because of that delay, what we did is we obviously, with any new technology, you don't want to go too wide initially. You're working with a few customers on key programs, and you're being very closely involved with them to make sure you're taking care of the requirements, which is what we're doing. So we delayed going wide as it were, with this product line, until we get our own facility fully qualified. Then we'll go much broader into the customer base, and that's really what's caused the delay on the near-term revenue ramp.

Operator

Your next question is from the line of John Vinh with Pacific Crest Securities.

John Vinh - Pacific Crest Securities, Inc., Research Division

My first question is just a follow-up on XSense, what is your level of confidence on the $15 million to $25 million? Do you have all the design wins, currently, to support this level of revenues? And then is there further risk that further delays in getting qualified, could kind of put risk to that $15 million to $25 million at this point?

Steven A. Laub

So the answer is, we have design wins today that get us most of that way. Again, its May, we can still get designs over the next, I'd say, 60 to 90 days, which will impact revenues by the end of this year. So I would say most of that revenue to at least at the minimum part of that range is already won. Clearly, we need to make sure we get our facility fully qualified, so that we can expand the capacity in a timely way. We think right now, that is not going to be an issue, but it is a risk factor. Just to let you know for customers, from a customer standpoint, we obviously have their schedules. We have those programs and our expectations will be to deliver consistent with those programs. Our initial production, as I'll repeat, our production, all rushing from last quarter, and for this quarter, is planned coming from our manufacturing partner. So that actually is already taken cared for, for this quarter as well. But for Q3 and Q4, to hit the kind of numbers we expect to ramp, we do need to bring up our own facility. So I hope that gives you clarification on that.

John Vinh - Pacific Crest Securities, Inc., Research Division

Got it. And then my follow-up is on the Touch business, you talked about Touch being double-digits in Q2. If you look at your biggest competitor in Windows 8, they continue to see growth in Q1, and sequential growth into Q2, albeit off of a smaller base. I would imagine, I know this, the ramp of Windows 8 touchscreen is going to be heavily second half loaded, but why aren't you seeing any sort of modest growth right now, given that you, we are still seeing some adoption of Windows touchscreens in the marketplace?

Steven A. Laub

We had a very strong ramp, I would say, with respect to the Windows 8 products in Q4, far greater than anybody else. And we also had some of that actually continuing to Q1. So some of the customers that we've had are still shipping through I think, on their shipments, but had some inventory that was left over from Q4 on something that did not ship. I'm highly confident with respect to the products that we have, the design wins that we have, that we will be enjoying some very strong ramp in the second half of this year. The other thing is that, our customer base tends to be the Tier 1 customer base, and I think to some extent the sort of other guy is shipping are at least winning some of these Windows 8 designs are doing more Tier 2, which may be seeing more, wasn't a strong earlier but may be ramping throughout this year.

Operator

Your next question is from the line of Anthony Stoss with Craig-Hallum.

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Steve, on the sensor hub side, love to hear more detail on other wins outside of the Galaxy 4, other customers and also how you see it playing out on the tablet side, and kind of what you expect on ramps there?

Steven A. Laub

Well, we have this, so for example, an earlier design that we had shared was we were also with Samsung on the Galaxy Note II sensor hub. So it is something that we have enjoyed with Samsung, primarily we do have other designs that are currently now in place, but Samsung has been our early customer. We also have a sensor hub solution with Microsoft on their Surface tablet. So those are the sort of, I'd say, the most well-known and highlighted sensor hub wins that we've accomplished. We, right now, are also working with several other people on sensor hub designs, but until they're shipping their product, we obviously can't share who they are.

Operator

Your next question is from the line of Jeff Schreiner with Feltl and Company.

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

Steve, I was just hoping to get your comments about the industrial end markets. You've talked about an overall bottom pod, potentially here, occurring in the March quarter for the semiconductor cycle. Just trying to understand, what risks still lie in the Industrial segment, and when does that become a real driver of growth again for Atmel in the future?

Steven A. Laub

Give me just a moment. So just to give you a sense, the industrial markets for us, it is our largest end market. And this past quarter, it grew and it's one of the -- it grew one quarter last year, and then actually declined back again. Besides that, it's been declining for approximately 2 years. So I think that's something consistent you've seen generally from other people as well, the industrial markets have been very soft for some time. Our expectation is that, this is a market that needs and should turn. It's the primary market, we believe, from our Controller business generally, and we continue to win a majority of our design wins are in that market as well. I think the -- so I think generally, there's been a lot of inventory that have been built up in that customer base involving Industrial. We think that's now played itself out, and so their inventories are much better in bounds than they were over the past year. I think the only major risk would probably balance sheet, be Europe. Europe has been and continues to be a very soft economy. And while we think a lot of this business now is shipping into Asia, I'd say the only real risk to it is whether or not Europe takes another step down. If that happens, then I think it would obviously impact this business as well. Otherwise, I would tend to think that this business should continue to expand throughout this year. I think one thing that unfortunately that we've all seen is, its very hard to have visibility beyond, shouldn't be down 1 or 2 quarters, just because of the dynamics in the marketplace, as well as the fact that lead times are very short. And therefore, customer visibility as to their booking patterns is pretty much for just this lever in the quarter. But that's what were seeing today in industrial.

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

And a quick follow-up. I was just wondering if you could talk about -- you spoke earlier about the expansion of maXTouch outside of the typical tablets and smartphones. Could you talk about the automotive touch IC opportunity, and maybe the size of that opportunity? And if that's a focus for Atmel, going forward?

Steven A. Laub

Yes, specifically you're talking about maXTouch within the automotive marketplace is, the answer is yes, that is a focus for us. We actually have won numerous designs in the automotive sector. What's occurred there is, is there's a lot of automobile models today that have introduced touch and they did that initially with resistive technology, which if you have an automobile that uses that technology, you've probably been somewhat disappointed with the user experience, primarily because resistive tends to be a very slow technology, and it's much less forgiving with respect to where you place your finger and so forth and having it react. And so what's happened is, there's a been both a customer desire for touch, but they also want a touch experience that's more consistent with what they usually find on their smartphones, and so there is now an adoption, really a wholesale adoption from resistive to capacitive, while at the same time, there is a much greater, I'd say, penetration of touch capability into automobiles, generally. So we are pursuing it, we are winning many, many designs in that area, it obviously, takes a bit longer than it does in other markets before these models come out. We do expect to be shipping revenue, we have shipped some revenue already in automotive. We expect that to expand throughout this year, however. And obviously into next year.

Operator

And we have time for one more caller. And our final question will come from the line of William Stein with SunTrust.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

First, I'd just like to ask about XSense one more time. You say that in order now to hit the 15 to 25, I think, was the target for that for the year now, that you'd need to ramp the Colorado production, and also it sounds like you need to ramp on the design win front. When you're not winning on the design win side, is it that you're missing out on traditional ITO opportunities or where ITO is retaining the business? Or are you losing to another competitor?

Steven A. Laub

Oh, it's where ITO is retaining the business, is what's happening. And frankly, we're not really losing opportunities that were going after. What we're doing is we're controlling the opportunities that we're taking. So this isn't something, whereby, you go after 10 or 20 opportunities and you win a few. This is something whereby where we have, where we decide to engage, we're winning the opportunities and where we are not engaging, ITO is being selected.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

So it's really the production capacity, and once you're comfortable with that, with your ability to produce out of Colorado, then the design wins come, is that fair?

Steven A. Laub

That is our expectation, that is correct.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then, regarding your own internal planning or your own thinking about this topic, can you talk about your expectation for Touch attach rates in Windows 8 notebooks in this year?

Steven A. Laub

I think the best answer for that really, is going to be what Intel is commenting, because they're the one who's demanding and driving, for example in Ultrabooks, that if you're going to use their Haswell processor, you're going to be having touch to call it an Ultrabook. So I think the best information, frankly, is going to come from Intel on that. We obviously, see from our side with customers on those programs where they're adding touch into their notebooks and Ultrabooks, so what we're not seeing is, we don't know to what extent they have programs, where they're not adding touch, for example, into a notebook. One thing we have seen, however, is there are some OEMs, some Tier 1 OEMs, who are making the decision that they want to add touch into all of them, and be the leader, whether it be an Ultrabook or touch-enabled notebooks.

Cody G. Acree - Williams Financial Group, Inc., Research Division

One more if I can, regarding the take-or-pay contract that ends in Q2, you say you get last shipments in Q3. Can you remind us of the magnitude and the timing of the cost savings, relative to that event?

Stephen A. Skaggs

Yes. I think this is, as Steve mentioned, this is Steve Skaggs, we'll be taking deliveries in Q3. Those wafers will need to flow through delivery and so forth. But the range that we've said was a 200 to 300 basis points improvement in gross margin, when we'll fully exhausted those contracts in the wafers of throughout -- through inventory, throughout the period after Q4 of this year.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

So it -- the ramp of gross margin owing to this factor, this exiting the take-or-pay starts after Q4? The benefit is [indiscernible] .

Steven A. Laub

Beginning in Q4 -- it begins in Q4, and extends into 2014.

Operator

We have reached the allotted time for Q&A. I will now turn the call back over to Mr. Peter Schuman.

Peter Schuman

Thank you, La Portia. During the second quarter, Atmel will be -- we will be presenting at the Barclays Global Technology Media Telecommunications Conference on Thursday, May 23 in New York City. Webcast information for this event will be available on the company's Investor Relations website. In the meantime, you are always welcome to contact our Investor Relations Department at (408) 437-2026 with any questions that may arise. Thank you for joining us, and this concludes today's call.

Operator

Ladies and gentlemen, that concludes today's quarterly all hands meeting. Thank you for your participation. You may now log off.

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