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Atmel Corp. (NASDAQ:ATML)

Q3 2009 Earnings Call

November 05, 2009 5:00 pm ET

Executives

Robert Pursel - Director of Investor Relations

Stephen Cumming - VP of Finance and CFO

Steve Laub - President and CEO

Analysts

Steve Eliscu - UBS

Craig Berger - FBR Capital Markets

Suji De Silva - Kaufman Bros.

Edwin Mok - Needham & Company

Ian - Goldman Sachs

Ian Ing - Broadpoint

Operator

Good afternoon. My name is Josh and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Atmel third 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. Pursel, you may begin your conference.

Robert Pursel

Thank you, Josh. Good afternoon and thank you for joining us for Atmel’s third quarter earnings conference call. A copy of the press release issued today is available on our investor relations website. A 48 hour telephone replay of this call will be available after 5:00 pm today, Pacific Time, and the webcast will be archived on the company website for one year. Access information is provided in today’s release.

Joining us for the call today are Steve Laub, Atmel’s President and CEO, and Stephen Cumming, Vice President of Finance and Chief Financial Officer. Stephen will begin the call with a review of our third quarter 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 fourth quarter of 2009 and then open the call 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 revenues, target gross and operating margins, as well as cost savings for 2009 and beyond.

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

During the call, we will also discuss non-GAAP financial measures. The non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principals. 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 third quarter financial results. Stephen?

Stephen Cumming

Thank you, Robert. Let me provide some details about statement of operations. Sales for the third quarter increased 12% sequentially to $318 million, exceeding the top end of our range by about 4% to 8%. Gross profit as a percent of revenue was 31.1%, slightly lower than our guidance range of 32% to 35%.

As we stated in our Q2 earnings call, we expected the gross profit would be adversely impacted by the decreased utilization at our two wafer fabs. The negative impact was greater than expected as our Rousset fab operated at lower utilization levels than planned. We expect that during Q4, gross margins will continue to be adversely impacted by reduced production levels at our Rousset fab.

R&D expense was $51 million for the third quarter, approximately $1 million less than the prior quarter and $12 million less than the $64 million reported for the year-ago period. The normal seasonal savings associated with the European summer vacation season were offset this quarter by adverse exchange rate movement. We continue to execute financial discipline to focus our R&D investments on core high growth products.

SG&A expense was $57 million, an increase of $6 million for the second quarter and $7 million less than the same period last year. The increase in SG&A spending is primarily as a result of higher legal expenses, adverse exchange rate movement and slightly higher selling expenses associated with the increased revenue this quarter. Total operating expenses for the third quarter were $108 million, consistent with the guidance we provided in August as we restored some of the temporary expense reductions during Q3.

While spending increased $5 million compared to the second quarter, it decreased $19 million when compared to the year-ago quarter, included in operating expenses was $8 million of stock based compensation expense, of which, $1 million was related to manufacturing, $3 million to R&D, and approximately $4 million to SG&A.

Operating loss was $50 million for the third quarter, included in the operating loss were $5 million of net charges related to acquisitions, restructuring and repayments. The company’s effective average exchange rate in the third quarter was approximately $1.41 to the euro. This compares to $1.33 to the euro in the second quarter and $1.54 to the euro in the year-ago period.

Income tax provision totaled approximately $400,000 for the third quarter. This compared to an income tax benefit of $10 million for the second quarter of 2009 and a benefit of $4 million for the third quarter of 2008. The income tax benefits in the prior quarters were the result of R&D tax credits as well as the reversal of tax liabilities no longer needed as a result of settlement of certain foreign tax audits. Net loss on a GAAP basis for the third quarter of 2009 totaled $17 million or a loss of $0.04 per diluted share. On a non-GAAP basis, net loss was $4 million or a loss of a penny per diluted share.

Turning to the balance sheet. Overall, our balance sheet remains very strong. Cash provided from operations totaled approximately $59 million for the third quarter. Combined cash balances, cash and cash equivalents plus short-term investments totaled $446 million at the end of the third quarter, an increase of $27 million from the prior quarter.

During the third quarter, the company repaid $22 million of its revolving credit facility. In the previous quarter, the company repaid $20 million of its revolver. Capital expenditures were approximately $7 million for the quarter and we expect them to be at the lower end of our range of $25 million to $35 million for 2009. The low level of CapEx is a result of reduced output and continued effective asset management.

Depreciation and amortization for the third quarter was $15 million, this compares to $15 million for the second quarter and $34 million in the year-ago quarter. Accounts receivable totaled $182 million at the end of the third quarter, up approximately $12 million from the prior quarter as a result of increased sales. Days sales outstanding decreased from 54 days to 52 days.

We continued our strong management of inventory which declined $27 million to $191 million. Days of inventory saw a significant improvement during the quarter to 102 from 138 days in the June quarter. This brings our inventory days to the lowest levels since September of 2006.

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

Steve Laub

Thank you, Stephen. As our result show, the third quarter was a period of substantial improvement for Atmel. Revenue grew significantly, our net cash position strengthened, inventories shrank dramatically, and we are seeing strong traction from our new maXTouch products.

Moving to a review of the quarter, we had very solid revenue performance, exceeding the high end of our guidance range with 4% sequential growth. We experienced solid growth in all business segments and geographies, driven primarily by improved demand from the consumer, industrial, automotive and PC markets.

In addition to our broad-based revenue growth during the September quarter, we also generated strong cash flows from operations of nearly $60 million, which has increased our net cash position to nearly $350 million from $301 million in the June quarter and $274 million in the third quarter of 2008. I am pleased that during this severe global industry downturn, Atmel increased its net cash position by over $75 million.

Let me turn to a discussion of our business segments. For our microcontroller business unit, third quarter microcontroller revenues were $120 million, up 18% sequentially. 8-bit revenues were up 14%, while our 32-bit microcontrollers achieved record revenue levels this quarter as revenues grew a very impressive 36% sequentially. When comparing last quarter with the third quarter a year-ago, 32-bit revenues are up over 50%.

In absolute dollars, growth came primarily from the industrial and consumer markets, while handsets and automotives had the highest percentage growth. The strong 32-bit microcontroller growth this quarter came from smart energy-based applications, including electric meters along with continued strength in the industrial market for such applications as point-of-sale terminals, security and alarm devices and factory automation systems.

Touch related revenues generated strong growth in Q3, driven primarily by our touch screen products. Particularly noteworthy during the third quarter, we began volume shipments to Motorola for their next generation Android-based smartphones, the CLIQ and the DROID.

At Samsung, we had previously been selected as a touch screen supplier for their Instinct, Galaxy and solar powered Blue Earth handsets, and volume shipments began toward the end of the third quarter and we expect them to continue to increase throughout Q4.

In the area of new products, in September, we released to production, a revolutionary a capacitive touch screen controller product family called maXTouch, which has been extremely well received. Our customers have told us that maXTouch represents the industry’s highest performing; fastest response and lowest power touch screen solution in the marketplace.

We are being designed into multiple programs at four of the top five handset manufacturers in the world. In addition, our maXTouch products are being designed into and evaluated for other high volume applications as well, including netbooks based on Windows 7 operating system, printers and portable electronic devices such as handheld gaming, GPS and others. We are also expanding our touch button and slider product offerings with the latest release of our QTouch Library, which extends touch capabilities to all of our 8-bit and 32-bit AVR microcontrollers.

Turning to our ASIC business segment. Revenue was $80 million through third quarter, up 3% sequentially. Growth during the quarter came from our smart card, cell-based and crypto products. We continue to successfully migrate our smart card revenues and customer design activity from the low end SIM market to higher end banking and identification applications, and have recently won several designs in conditional accesses set top boxes.

While aerospace bookings remained strong, shipments were down slightly this quarter due to supply issues at one of our backend testing partners. Our ASIC momentum continues to be driven by design wins, coming primarily from custom logic, smart cards and space and defense products.

For our non-volatile memory segment, total revenues were $39million for the third quarter, up 14% sequentially. Our serial E-squared memory business grew 8% this quarter and 3.0 flash was up nearly 35%. During the quarter, strengths from LCD TVs, portable media players, handsets and automotive end markets were the primary growth drivers.

Memory pricing has generally stabilized with flash pricing beginning to rise due to a tight market supply situation. In our RF and automotive segment, revenues were $39 million for the third quarter, up 9% sequentially. Indications are that automobile production levels have rebounded, contributing to our positive bookings activity during the quarter.

High voltage and mixed-signal automotive products were the primary contributors to the business unit’s growth this past quarter. We believe the automotive market will continue to be an attractive long-term business for Atmel and we continue to invest in innovative new products. Recently we launched the industries safest battery management battery solution for high-cell-count Li-Ion batteries, the type used in electric and hybrid vehicles and e-bikes.

Looking at third quarter revenues by geography, all of our geographies grew their sales during the third quarter. Asia is our largest ship-to location, and during Q3 grew 13% sequentially, rising to 51% of revenues, up from 50% in the prior quarter.

Europe increased 6% and represented 29% of total revenues, down from 31%, while the Americas grew 16% sequentially, representing 20% of total revenues, up from 19% last quarter.

In summary, as we and our industry recover, I am pleased with the progress we are making to transform Atmel into a microcontroller-based company which would generate higher growth, higher margins and higher value to our shareholders.

During Q3, microcontrollers generated 38% of Atmel’s total revenues, a record for the company. As we look into Q4 and 2010, we are currently experiencing very strong bookings for our microcontroller products and given our industry leading microcontroller product offerings and continued customer design win momentum, we expect the microcontroller business to demonstrate robust growth and significantly outpace the marketplace.

In the area of touch, the introduction of our maXTouch products is likely to be the most important product introduction in the company in recent memory. Given the enormous growth opportunities for capacitive touch screen solutions, the performance of our maXTouch products and the very strong design momentum that we are experiencing, we are optimistic that maXTouch products will begin to generate substantial revenue growth in the second half of 2010 and throughout 2011.

On the expense side, we are better positioned to leverage greater earnings as revenue growth continues. As the adverse impact of the decreased utilization of our manufacturing facilities subsides, our gross margins should show meaningful improvement.

Our Q3 operating expenses have been reduced by over 15% as compared to the third quarter of 2008, and we expect revenue growth to outpace operating expense growth as we move forward. Regarding our ASIC business based in France, as you may recall, we announced in February that we were pursuing strategic alternatives with respect to our ASIC business and related manufacturing assets, including a potential sale.

We are far along in the sales process and while there is always a great deal of uncertainty regarding M&A transactions particularly in this economic climate, we do expect to present a proposed transaction to the appropriate workers council representatives this quarter. Based on this timeline, we are hopeful to complete a transaction in the early part of 2010.

Now, let me turn the call back to Stephen for our Q3 financial guidance. Stephen?

Stephen Cumming

Thank you, Steve. Given the improving economic climate and better visibility, the company expects fourth quarter 2009 revenues will be up 3% to 7% on a sequential basis. Looking at our expectations for gross profit based on slightly improved factory loadings we expect gross profit margins to be between 33% to 35% in the fourth quarter of 2009. Operating expenses are expected to be approximately $112 million plus or minus $2 million for the fourth quarter, and based on a dollar-euro exchange rate we estimate it will be approximately $1.48 for Q4.

Depreciation is expected to be approximately $15 million for the fourth quarter and capital expenditures are expected to be approximately $8 million to $10 million, allowing us to achieve the low end of our range of our $25 million to $35 million for the full year. Other income and expense is expected to be $1 million to $2 million expense and Quantum acquisition related costs are expected to be approximately $4 million for Q4.

The provision for income taxes is expected to be in the range of $1 million to $2 million expense, and for modeling purposes, assumed share count will grow from 1 to 2 million shares in the fourth quarter. 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 with UBS.

Steve Eliscu - UBS

On the gross margin, trying to understand where that’s going to go. I mean if we look at the first three quarters of the year COGs has increased pretty much in line with revenues which runs counter to the potential for some leverage in your model. Help us understand as your utilization goes up, sort of the reverse of these effects, and kind of how we should of the gross margin beyond Q4?

Stephen Cumming

For gross margin, what we saw in Q3, we would likely be impacted negatively by the high cost inventory that we built in the first half of 2009 when the overall factory utilizations were down. Also in Q3, there was additional manufacturing period expense that was incurred in the quarter as we operated our Rousset fab at lower utilization levels than we planned in our original guidance.

We burned a lot of that inventory off. As you saw, we drained inventory by $27 million, and we are starting to continue to increase our overall production levels, certainly at our Colorado fab. So, that’s going to be an improvement to our gross margins as we go into Q4, hence the guidance of up to sort of 33% to 35% gross margins.

Looking further than that, I wouldn’t want to give too much guidance, but we do expect production continuing to improve as we go out into subsequent quarters.

Steve Laub

Let me add to that a couple of things. I think first of all, one thing that was mentioned here is that we are currently experiencing a temporary reduction in output at our wafer fabrication facility in Rousset, France. We anticipate it will continue to operate at this reduced output level until there is greater clarity regarding a potential transaction there. So that did impact our gross margin last quarter and it will impact our gross margin in this quarter. That is in the guidance number.

Once that situation there is resolved which we expect it will be, get clarity on transaction there, we expect it will have a positive impact on gross margin. I think we’ve also mentioned to the Street previously that we felt we got back to a revenue level of think; it was around 340 to 350?

Stephen Cumming

It was at 350. Yes.

Steve Laub

About $350 million of revenues and production facility is consistent with that revenue level and so forth, and our gross margin should be approaching the 40% range at that point. So there is no change from that, Steven

Steve Eliscu - UBS

Just one other way of looking at it. You did drawdown from inventory. If you had manufactured that product at Q3 costs, would gross margin have been appreciably higher?

Stephen Cumming

Yes, it certainly would have been in our guidance range.

Steve Eliscu - UBS

Also, just regarding the ASIC segment transaction. You’ve been pretty public about wanting to have something concluded by the end of the year. At least according to my calendar we are getting really close to that. How are you preventing a potential buyer to that? As you try to negotiate here that they don’t try to leverage the fact you want to get a deal done and hold off till the last second and force you into a less than favorable transaction?

Steve Laub

Our communication has been to have a transaction completed by the end of the year. I think our shareholders would appreciate that transaction slips into the very early part of next year and gets a favorable terms for it; I think our shareholders would fully appreciate and support that. I don’t feel compelled to accept a deal by someone trying to leverage that timeframe and I would never act under that.

As I said in our prepared remarks, we do expect to show a proposed transaction and have a proposed transaction to demonstrate to the appropriate workers council representatives. The way the process for us works is that, we do need to present a proposed transaction to the workers councils in France prior to actually closing on a transaction.

Steve Eliscu - UBS

Great. Just one last one. Going back to gross margin here. Microcontrollers, you’ve talked about in the past being above corporate average, of course. I guess the thing here is; we’ve all these handset opportunities which is a very competitive business. How should we think about specifically microcontroller gross margins trending as you start shipping more of maXTouch controllers?

Steve Laub

As we ship more of maXTouch controllers, my expectation is that will have a positive impact on the overall gross margins of our microcontroller business.

Steve Eliscu - UBS

In terms of where microcontroller gross margins are relative to where you are for the company, can you give us a sense? You did in the past prior to the downturn?

Steve Laub

Yes, we did it prior to the downturn because it was much more meaningful from the standpoint that of you are operating at a normal level and so forth. Right now, obviously, the company is being impacted by a lot of the adverse or the very low utilization we’ve had in our manufacturing facilities. The microcontroller gross margin continues to be well above the company average, but it has also been impacted this previous quarter as well by the very low utilization because the fabs that we run it at have been running that way. Nevertheless, it is well above the company average.

Operator

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

Craig Berger - FBR Capital Markets

On just the overall business environment, are you getting pretty good visibility from your customers and into their inventory positions as well? Then kind of with respect to your guidance, what’s your assumption on kind of Christmas and/or turns orders that you need to achieve the high or low end of the range? Thank you.

Steve Laub

With respect to inventories of our customers, let me speak first about just our channel inventories, channel inventories are on the lower end of where they have been over the last couple of years. So, not only were the obviously reduced here, they reduced in the channel as well. So the expectation and the belief is that the inventories in our customers are relatively lower than they have been.

With respect to this quarter, our backlog at the beginning of the quarter actually was quite good. We are sitting in a very nice backlog position. We don’t need a lot of turns to hit our guidance numbers and our expectation is that the business will soften as it typically does on a seasonal basis in the December timeframe in both the Americas and Europe. So, we feel comfortable with respect to the guidance and the backlog position we have to achieve that.

Craig Berger - FBR Capital Markets

Can you talk about where lead times are now? Where were they last quarter and do you think that that’s driving any of the shipment strength that we may then have to pay for down the road? Or do you think those concerns are somewhat overblown? Thank you.

Steve Laub

So lead times last quarter we believe are probably somewhere between six and eight weeks typically. There are always a few parts that are significantly longer but the general business was six to eight weeks. This quarter it’s closer to eight to ten weeks right now with respect to the business. The question you are asking is, to what extent are people booking extra because of the lead time issue? There may be a little bit of that going on in the industry generally, because the industry is generally tight, but what we are saying is, given that the inventories throughout the channels and our customers is relatively light right now my sense is there is not too much of that activity going on.

Craig Berger - FBR Capital Markets

Any insight into Q1 just anecdotally? Thank you so much and good job.

Steve Laub

I think Q1 may be seasonally a little bit better than typically for the industry and for us as Q1 is a down quarter, down a few points. As we are seeing more visibility now because of the stronger booking situation, I’m not going to say that it is going to be an up quarter but I think it may be a little bit better than it’s typical from seasonal action.

Operator

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

Suji De Silva - Kaufman Bros.

A question on the gross margins first. Just understanding you guided last quarter and then came in below range slightly. Trying to understand your visibility and sort of range you’ve guided to here, and how much of the effects of last quarter are truly behind in the fourth quarter?

Stephen Cumming

Clearly, our Rousset facility didn’t operate at the production levels that we were expecting. So that does create a little bit of a headwind going into Q4 for us. However, we have factored that into our guidance. Colorado is ramping significantly and overall utilizations are improving there, and that also improved in Q3 and we’ll pick up the benefit of lower cost of inventory that will come out in Q4. So, all of that’s being accommodated into our guidance at this point in time.

Suji De Silva - Kaufman Bros.

Then as you look at the end markets here over your different segments, how do you see them tracking versus your guidance?

Steve Laub

We don’t usually give too much end market guidance, Suji.

Suji De Silva - Kaufman Bros.

Strengths in segments then Steve?

Steve Laub

Which ones we are seeing strengthening?

Suji De Silva - Kaufman Bros.

Microcontrollers versus ASIC, where you expect the growth to come from next quarter or if it’s evenly based?

Steve Laub

I think the strength this past quarter primarily, for example, in the microcontrollers came primarily from the industrial markets that grew very nicely for us. The consumer markets grew very nicely for us. The expectation is it’s going to be broad-based. It will be broad based into this quarter and what we are seeing is industrial recovering nicely from I think the drop that they had. The handset market is also recovering very nicely and we expect that to continue.

Suji De Silva - Kaufman Bros.

With the maXTouch product and handset customers, what are really the competitive factors that are helping you win the designs versus the competition here as you start to gain some of the design wins?

Steve Laub

Things that are probably causing the greatest differential vis-à-vis the competitors and we don’t want to give away too much, because clearly that’s information from them. However, one of the things or a couple of things that we fully provide is, when we say highest performance, we are talking touch response time. So, when the device is touched, recognizing that touch and react to that touch, what you’ll find is this has got by far the fastest response time in the industry.

Another thing it provides is provides stylus support much better than it’s provided by any other device in the market. For the Asian market that’s very important, and to be able to do that with the standard stylus which we can do is a real differentiator for people who sell to the Asian market, which today is en enormous marketplace.

Another key indicator is power. Much lower power, both active and standby than any other competitive solution that’s offered. So these are the kind of things, and it’s a fully integrated solution as well. You need to add-on a lot of external components to develop your capacitive sensing touch screen solution.

So, on all those levels, we are finding that the product is extremely attractive and we’ve been told by several different parties who’ve us and competitors that it is the best touch screen device in the marketplace.

Suji De Silva - Kaufman Bros.

A last quick question for Stephen. On the balance sheet I saw a liability held for sale. Can you explain what that is, Stephen?

Steve Laub

That’s the suspension of the ASIC business and its associated assets.

Operator

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

Edwin Mok - Needham & Company

I just want to clarify. You did say that your target is $350 million to get to around 40% gross margins. Is that correct?

Stephen Cumming

Yeah. That’s correct.

Edwin Mok - Needham & Company

Is that on a normalized or kind of high utilization baseline, because if I use your midpoint of guidance, your revenue for next quarter will be already $333 million?

Stephen Cumming

Absolutely, but that’s assuming that we are going to be operating our factories to end demand. So, obviously, overall utilization is going to be up significantly from where we are today.

Edwin Mok - Needham & Company

So, it’s fair to assume that next quarter your realization maybe still a little bit below normalized level?

Stephen Cumming

That’s exactly how to see it, how to view it.

Edwin Mok - Needham & Company

Great. Thanks for clarifying that. Then the second thing is regarding the microcontroller group. Can you tell us how you are progressing on the AVR? Previously you talked about the growth rate you have on that group and can you help us a little out on that? Also, you’ve talked about maybe designing or targeting more automotive applications for your microcontroller business. Can you give us some progress on that?

Steve Laub

The AVR growth was pretty consistent with the overall microcontroller growth, so I think those numbers are pretty much the same. With respect to automotive, the best way to put it is, the automotive product it appears is double-digit growth. With respect to that, we are selling a couple different lines into the automotive segment. At a minimum, it was double digit and upwards potentially of over 30% growth sequentially this past quarter.

Edwin Mok - Needham & Company

Then on non-volatile memory, typically it declined seasonally in the fourth quarter, at least, if I look at the last few years, your business has declined seasonally. How do you like at that in the fourth quarter? If it’s better than seasonal, can you explain why?

Steve Laub

It will be better than seasonal in the fourth quarter because of what I think is happening in the market generally. You’re seeing the rapid growth. I don’t think our customers are growing as fast as our industry is. The combination of both end market demand picking up and obviously inventories being restored is driving overall numbers up and is driving the strong demand in Q3 and I think the continued growth in Q4 for the industry.

Edwin Mok - Needham & Company

Then finally on this French fab ASIC action that you have here, it sounds like you’re pretty close. Just to clarify, you said that you’ll submit a proposal before the end of the year. Can you kind of explain a little bit about the process there? After you submit a proposal, I guess, what should we look out for? Should we expect a decision to come out? If so, what kind of timeframe and how do we look at that progressing?

Steve Laub

Let me share with you what my understanding is. You almost have to get an attorney to help on this process. We’ve got plenty of activity on that from a legal standpoint, but the way the process is as we understand, is that before you complete a transaction that the workers, the workers councils have a right to review the transaction and give their own decision to see whether are in favor of it or whether or not they reject it or disapprove of the transaction.

Regardless of whether they approve or not approve, you can still go forward. It is not for them to make the decision, but it’s up for them to be able to be aware of it before it’s completed, before all the terms of it are completed, so they have the ability potentially to sort of influence and say, can we do it this way or do it that way or at least understand it and how they should recommend it to their workers in the workers council and unions.

That timeframe for them to do that is a little ambiguous. It’s a timeframe range for them to make that decision. So, that’s why we put the wording down here that getting a proposed transaction to them is something we have a little more control over given the time that we have to complete this transaction or at least complete preliminary transaction.

The timeframe that they have can take just a very short timeframe, say as short as a couple of weeks or it could take significantly longer than that. So, our expectation is that we would hear back from them if we give them something say in the December timeframe, that we would hear back from them sometime early in Q1.

Now, based on that, we would expect that that, and obviously we are hopeful to have their support. We prefer to have their support. We don’t have to have it, but prefer to have their support. We’d expect to move forward with the final signature of the transaction and to begin the process of closing the transaction at that time. So that is the timeline process and the activity steps that need to take place.

Edwin Mok - Needham & Company

Just quickly clarify, so if you don’t get their support, you mentioned that you can still progress with the deal but would it be fair to assume that you might restructure the deal a little bit to try and gain that support if that happens?

Steve Laub

I don’t want to speculate because the answer is we can move forward and there could be all kinds of different answers to these things. We have been working very closely with the workers councils throughout the entire process. There’s been a lot of updates and information. The way you do that type of activity, you keep people informed so that it is not a surprise when you come to the end of the process.

Operator

Your next question comes from James Schneider with Goldman Sachs.

Ian - Goldman Sachs

It’s Ian in for Jim. Thanks for taking my questions. Just a point of clarification first. Can you tell us on the inventory work down what type of products if they were any difference in sort of the overall blend of products that were bled off in the quarter?

Stephen Cumming

It was pretty much a drain across the board. There’s no specific business unit that was drained unusually lower than the rest.

Ian - Goldman Sachs

Then on RF and automotive, it seems to be recovering a bit but not nearly as much as maybe your MCU auto business and some other auto businesses around in some of your peers. Can you just give us a little more detail on kind of what your outlook is for that business going into that next year and sort of what your strategy is there?

Steve Laub

So the outlook of the business, just to give you some sense for that. First of all, you can tell us what’s going to happen in the automotive industry that would be really, really helpful, because I think everyone has had a difficult time with that. Just to share with you, the business actually has actually grown nicely. It grew double digit Q1 to Q2. It grew this quarter also high single digits.

The perspective for that business is, sorry it hasn’t grown, the micros has, but the expectation is, we participate primarily in a lot of the sort of the sort of high voltage engine control as well as car abscess areas, and our sense is that we should have some nice growth in that business consistent with the growth of those segments.

Right now we’ve not yet pooled together what our forecast is for 2010 for each of our different segments, so I’m not going to speculate what that will be, but we expect to grow consistent with what the marketplace would be in the segment that we participate in.

Ian - Goldman Sachs

Just a last one. Obviously you had a nice result on microcontrollers and some of your peers didn’t do well. Can you just sort of help us maybe contextualize your, their results, the industry results that are also pretty strong this quarter, and kind of where you are really seeing the outperformance of your MCU business?

Steve Laub

I think the best information on other people, how they are doing and what they are saying is through conversations with them. I don’t usually like to speculate on what our competitors are saying and what they are not saying. I think we commented that, we are seeing strong growth across the board in virtually all the different end market areas for microcontrollers, strong growth in both 8-bit, particularly strong growth in 32-bit.

We also covered in the prepared remarks that a lot of it’s in the smart energy area, a lot of it’s also in the sort of industrial, factory automation, point-of-sale terminal, those type of applications as well as very strong growth in touch. So, I think there is not much to add beyond what we have already shared. We are glad to see the overall industry rebounding and our sense is that you’ll find that we’ll be growing faster than the industry will generally.

Ian - Goldman Sachs

So still growing ahead of the industry in all segments? 8-bit, 32-bit, maybe more so in touch, maybe even the most?

Steve Laub

Yes. We half expect that.

Operator

(Operator Instructions). Your next question comes from the line of [Michael Servinsky] with Raymond James.

Unidentified Analyst

Thanks for taking my call. Just a quick question on handsets and touch screen technology. How much dollar content are you getting per handset?

Steve Laub

We don’t break that out because that will give too much information about what our ASPs are like and so forth, because your next question is going to be, well, how much of that is the touch screen controller and how of that is your memory or micros? So, I’m sorry, we don’t break that out.

Unidentified Analyst

Fair enough. Just a follow-up. I don’t know if you can answer it or not on the microcontrollers. Could you comment on whether or not you gained share with respect to microchip, and if so, if it was an 8-bit or 32 bit?

Steve Laub

Again, I don’t really like to comment about what happened with us vis-à-vis any of our competitors. We have a lot of respect for our competitors. I think really market share is just a numbers game at the end of the day. So, I really just leave it to you guys to do that. I’m pleased with our growth and I’m pleased with our perspective and our growth going forward based on the very strong bookings we are seeing in our micros, but that’s where I’ll leave that.

Operator

Your next question comes from the line of Ian Ing with Broadpoint.

Ian Ing - Broadpoint

Could you talk more about the smart metering opportunity? I’m assuming that’s part of this domestic Smart Grid stimulus. How do you see seasonality or linearity throughout calendar year 2010? Is it a multi-year stimulus and maybe some cross selling opportunities regarding like ZigBee wireless and things like that?

Steve Laub

The answer to your last question is yes. Very often when we are selling the smart energy micro, we are also selling a ZigBee product as well. So, there is cross selling going on there. With respect to its linearity, it’s early to tell because a lot of this has to do with deployment from government and utility related projects and contracts. So, it is very hard, it’s very early on because there is a lot of activity happening right now. It is being something that is part of the stimulus packages or investments that the federal government is making from an energy conservation standpoint, but we expect it will be multi-year and it will be substantial.

Ian Ing - Broadpoint

Could you talk more about the non-handset capacity of touch opportunities and would these also materialize second half in 2010 and 2011? Or is that further out?

Steve Laub

With respect to non-handsets, the types of areas we are seeing, for example, netbooks, that to me would be beyond 2010 from any type of meaningful ramp up, because when we came out of the with the maXTouch, the first place we took it to is the marketplaces that we recognized as both the fastest growing and largest which is the handset. So, that’s where the energy was placed and so forth.

Now, it’s really been just more recently that we’ve been deploying it across multiple different segments, netbooks being one of them, another one being hand held devices, gaming, for example. I do expect that by the second half of 2010, maybe towards the fourth quarter we will begin to see production revenues from some of the other areas as well. However, the real ramp is going to be with the handset guys first. Not only because of the reason I just gave you; they tend to also move pretty quick.

Ian Ing - Broadpoint

A question on your gross margin guidance. Can you give me a sense of the segments that are contributing the most to the improvement and others that are not? I am parsing your statements that, when you say fab is still underutilized, but you are ramping Colorado Springs, so it fair to say that perhaps ASIC and Arm processors are not contributing as much?

Stephen Cumming

To be honest, as utilizations go up, pretty much all [BUs] will see some favorable impact, so it is pretty much across the board.

Steve Laub

I think the only difference might be for example is that the ASIC group may not get quite the impact.

Stephen Cumming

Not the same impact.

Steve Laub

As they get most of their wafers from the fab in France.

Ian Ing - Broadpoint

That’s helpful, but a lot of transition is underway at Colorado Springs already it sounds like?

Steve Laub

That’s correct.

Operator

You have a follow-up question from the line of Edwin Mok from Needham & Company.

Edwin Mok - Needham & Company

Just quickly on the offering expense. The $112 million, does that include a $4 million of Quantum charge?

Stephen Cumming

No, it doesn’t, Edwin.

Edwin Mok - Needham & Company

Why it didn’t increase sequentially?

Stephen Cumming

Yeah. First of all we had some currency headwind going into Q4. Our euro-dollar exchange rate was $1.41 in Q3 and we forecast that to be $1.48 in Q4. So, that’s a big component. Then a little bit of not taking the full impact of the vacation period that we benefited from in Q3 in Europe. So, that creates a little bit more of a headwind going into Q4. The other two main drivers are driving the increases.

Edwin Mok - Needham & Company

Stephen, do you have kind of a view about your normalized offering expense level, that $350 million you guys talked about before?

Stephen Cumming

It is going to go up a little bit from where we are now but not dramatically. So, it’s going to go a little bit up from 1.12. Obviously, as we roll into next year, you’ve got the fighter contributions and a few other things adding on, but it’s not going to be too much above this run rate.

Operator

There are no more questions at this time. I will now like to turn the call back over to Mr. Pursel for closing remarks.

Robert Pursel

Thank you, Josh. During the fourth quarter Atmel will be presenting at the SBR Capital Markets Fall Investor Conference in New York on December 1st and the Credit Suisse Annual Technology Conference in Scottsdale on December 2nd. Webcast information for these events will be available in the company’s Investor Relations website. Thank you for joining us today.

Operator

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

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Source: Atmel Corp. Q3 2009 Earnings Call Transcript
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