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Atmel (NASDAQ:ATML)

Q3 2013 Earnings Call

October 30, 2013 5:00 pm ET

Executives

Peter Schuman - Director of Investor Relations

Stephen A. Skaggs - Chief Financial Officer and Senior Vice President

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

Analysts

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

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

Craig Hettenbach - Morgan Stanley, Research Division

Christopher Hemmelgarn - Barclays Capital, Research Division

Rajvindra S. Gill - Needham & Company, LLC, Research Division

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

Gabriela Borges - Goldman Sachs Group Inc., Research Division

Brian C. Peterson - Raymond James & Associates, Inc., Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Operator

Good afternoon, my name is Ginger, and I'll be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2013 earnings conference call. [Operator Instructions] Mr. Peter Schuman, Senior Director of Investor Relations, you begin your conference.

Peter Schuman

Thank you, Ginger. Good afternoon, and thank you for joining us for Atmel's Third 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 5:00 p.m. Pacific today and will be archived for 48 hours. The webcast will be archived on the company's website for 1 year. Access to 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 Chief Financial Officer.

Steve Skaggs will begin the call with a review of our third 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 fourth quarter 2013 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 market growth, revenue, target gross and operating margins, product introductions and cost savings for 2013 and beyond, as well as litigation matters. Our forward-looking statements and all other statements that are not historical facts reflect our expectations and beliefs as of today and are therefore 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 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 discussion of our third quarter financial results. Steve?

Stephen A. Skaggs

Thanks, Peter. Third quarter revenue of $356 million increased $8 million or 2% from the prior quarter and was at the midpoint of our guidance. Revenue growth was driven by our non-microcontroller business segments, which collectively grew 10% on a sequential basis. Microcontroller revenue declined 2% sequentially due to a previously forecasted decrease in shipments of sensor hub products. Excluding sensor hub products, microcontroller revenue grew in the high-single digits on a sequential basis.

Third quarter 2013 non-GAAP gross margin was 43.1% within our guidance range and was 50 basis points higher than the 42.6% reported in Q2. We are pleased to have increased gross margin while also driving a significant reduction in our inventory balances. The sequential gross margin increase reflects continued progress on our cost improvement plans, partially offset by efforts in product mix. We expect further gross margin expansion next quarter and throughout 2014, as we continue to execute on our margin improvement activities.

On a GAAP basis, third quarter gross margin was 40.3% below our guidance of 43.0%, plus or minus 100 basis points. The lower GAAP gross margin was primarily due to a $8.9 million loss related to our foundry take-or-pay arrangements.

Moving to operating expenses. During the third quarter, we realized savings from our previous restructuring and cost-reduction initiatives and, as a result, drove down quarterly operating expenses. Third quarter non-GAAP operating expenses were $115.6 million, within our guidance range and down significantly from the $120 million reported in the second quarter.

On a GAAP basis, total R&D and SG&A expense for the third quarter were $123 million, significantly lower than our guidance, primarily due to a $7 million credit associated with our long-term, performance-based stock compensation plan. Stock compensation for Q3 was $8 million, allocated as follows: approximately $1 million to cost of sales, $3 million to R&D and $4 million to SG&A.

Non-GAAP operating income for the third quarter of 2013 was $37.9 million or 10.6% of revenue and excludes loss on foundry arrangements, restructuring, stock-based compensation and acquisition-related charges. This compares to second quarter 2013 non-GAAP operating income of $27.6 million or 7.9% of revenue and non-GAAP income from operations of $45.8 million or 12.7% in the same period last year.

Our non-GAAP income tax provision was approximately $1.6 million, unchanged compared to the prior quarter. As a reminder, our non-GAAP income tax provision approximates our cash tax incurred. On a non-GAAP basis for the third quarter of 2013, we have net income of $37.7 million or $0.09 per diluted share. This result compares with second quarter 2013 non-GAAP net income of $25.3 million or $0.06 per diluted share and non-GAAP net income of $43.0 million or $0.10 in the third quarter of 2012.

Turning to the balance sheet. We had an outstanding quarter with respect to improvements in our balance sheet and cash generation. Accounts receivables totaled $198 million in the third quarter, a decrease of approximately $8 million from the second quarter. Days sales outstanding for the third quarter were approximately 51 days, a decrease of 3 days from the prior quarter.

Inventory decreased by $36 million to $288 million compared to the prior quarter's $324 million. Days of inventory improved by 24 days and now stand at 123 days. This represents our lowest inventory level in terms of both dollars and days of inventory since 2010. And we are pleased to have now achieved our target model of 120 to 130 days of inventory.

We had excellent operating cash flow, driven by improved profitability and the reductions in inventory and accounts receivable I just reviewed. Cash flow from operations totaled approximately $82 million in the third quarter, up by over $73 million from the $9 million in the second quarter of 2013. Combined cash balances, including cash equivalents and short-term investments, totaled $271 million for the third quarter, representing an increase of approximately $44 million from the second quarter. This increase was after the return of $34 million to shareholders through stock repurchase.

Looking forward, we expect to generate -- to continue to generate significant cash flow from operations and are pleased to also announced today that our Board of Directors has added an additional $300 million to our outstanding stock repurchase authorization, raising the total authorized amount to $1 billion. Since the inception of the program in the second half of 2010, we have now repurchased $636 million of our stock.

Capital expenditures were approximately $14.5 million in the third quarter, up from $9 million in the second quarter and consistent with our guidance. The sequential increase was primarily due to equipment purchases to support capacity additions for XSense metal mesh sensor production facility.

Depreciation and amortization in the third quarter of 2013 was approximately $18 million, down $1 million compared to $19 million in the second quarter of 2013 and $19 million in the third quarter a year ago.

Finally, during the third quarter, we repurchased 4.6 million shares of common stock in the open market at an average price of $7.52 per share.

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

Steven A. Laub

Thank you, Steve. Moving to discussion of Q3 results. We continue our path of improved operating performance, as revenue continue to expand and non-GAAP gross and operating margins continue to measurably increase.

We experienced revenue growth in all business segments after adjusting for the anticipated decline in sensor hub sales. From an end-market perspective, industrial, our largest end market, grew sequentially and year-over-year while consumer had a robust growth in the seasonally strong third quarter. Exhibiting its highest quarterly revenue in 2 years, it emerged as our second largest end market.

Communications and networking had a double-digit percentage uptick in sales and automotive recorded another quarter of steady growth.

As anticipated, revenue from handsets and tablets was down sequentially due to the previously forecasted decline in sensor hub shipments. Sales in computing was soft as anticipated ramp of new PC form factors remains sluggish. The military aerospace market softened and after a strong second quarter.

Looking at our results by business segment. Our microcontroller business generated revenue of $227 million, down 2% sequentially and up slightly as compared to third quarter of 2012. Excluding sensor hub revenue, microcontrollers grew at a high-single-digit percentage sequentially during the third quarter.

By product family, during the third quarter, our 8-bit microcontrollers were up 10% sequentially and flat year-over-year. 32-bit microcontrollers decreased 20% sequentially and are up 2% year-over-year. Excluding the sensor hub business, our 32-bit revenue grew mid-single digit sequentially during the quarter.

Focusing on our core microcontroller business, as anticipated, this business declined approximately 3% on a sequential basis primarily due to a sharp reduction in sensor hub revenue. Excluding sensor hub, the business increased high-single-digit percentage sequentially with strong growth in AVR and ARM microcontrollers.

In 8-bit microcontrollers, leveraging our 2 decades of microcontroller leadership, we announced a further expansion of a low-power, tinyAVR family with the addition of 2 new products, the ATtiny441 and ATtiny84. These products feature increased efficiency; enhanced analogue performance; better communication capabilities for low-power, cost-effective industrial and consumer applications, such as home and building automation, personal health accessories, computer peripherals and much more.

In 32-bit microcontrollers, we continue our new product momentum with over 90 new 32-bit products introduced so far this year. This brings to well over 200 the number of new 32-bit core microcontroller devices introduced in the past 7 quarters. The products introduced include ARM-based Cortex-M0+, M3, M4 and A5 devices, along with new 32-bit AVR products. We are now shipping in production quantities the new Atmel SAM D20, the first series of new family of ultra-low-power embedded flash microcontrollers based on the ARM Cortex-M0+ processor.

The new series combines innovative improving technologies, including intelligent peripherals, with Atmel's event system and capacitive touch support for button, slider and wheel capability and proximity sensing. The SAM D20 is ideal for Internet-connected devices, using building automation, consumer electronics, smart metering and industrial controls, which are becoming more intelligent and connected.

We also recently introduced a new sensor hub solution based on our SAM D20 core. The new solution offers lower power, smaller package and even better performance than our prior sensor hub solutions, making it ideal for battery-powered consumer electronics devices, such as tablets and smartphones, as well as for applications related to the Internet of Things.

Bosch Sensortec is among the first adopters. The next generation of self-contained, 9-axis absolute orientation sensor benefits from the high performance and lower power consumption of our SAM D20.

As to other design wins in our core microcontrollers, TomTom's new running and multi-sport watches are powered by Atmel SAM4S Cortex-M4 and tinyAVR microcontrollers. In the market for smart energy products at recent European and Chinese utility conferences, Atmel showcased its new and comprehensive smart energy platform designed specifically for smart grid communications, electricity, gas and water metering systems and energy management applications.

We are first to market with a flexible and scalable smart energy solution based on the Atmel SAM4Cx platform, which includes several system-on-chip devices built around a dual-core ARM Cortex-M4 architecture with advanced security, metrology, wireless and power line communications options.

In the area of wireless, we had a significant ramp in revenue for our ultra-low-power WiFi solutions, as some of the previously mentioned design win activity converted to volume production, while new design activity continues to remain strong. For example, during the third quarter, we were selected for Sony's BRAVIA Smart Stick next-generation Google TV advanced remote control. However, the biggest opportunity for our wireless business is the Internet of Things, which is rapidly becoming one of our largest growth opportunities in the semiconductor industry.

Atmel has the most complete portfolio of IoT technologies: ultra-low-power microcontrollers, sensor hub, security and, of course, wireless connectivity. Combined with Atmel's development environment and global sales and support network, we offer the broadest, most comprehensive IoT solutions in the industry. Atmel is targeting high-growth IoT applications for home and building automation, industrial machine to machine, consumer personal area networks and wearable markets.

In a sign that the Internet of Things is rapidly becoming a reality, Amazon has recently set up a section of its website for home automation. The section offers items in 3 categories: The first category is energy management with items like programmable wireless thermostats and wireless sliding and controls. Next there is entertainment category, which includes such items as wireless audio and media services. And the third category is a monitoring section with items, including intelligent door hardware and locks that replace keys with your phone as well as web cams and security systems. The site also allows for setting up a network to enable centralized control of your entire home and providing remote access when you're away. Nearly all of these applications are served today by Atmel microcontroller customers. Atmel has and will continue to invest substantially to ensure we provide the most compelling solutions to the IoT marketplace.

Turning the discussion to our touch products. Consistent with our expectations, our maXTouch products grew sequentially during the third quarter. In the market for large-screen Windows devices, while the adoption of touch in Windows 8-based systems has been below forecast, 3 critical factors are expected to drive increased demand for touch: lower system prices, longer battery life and a new Windows 8.1 operating system.

Intel recently mentioned that currently over 50% of fourth-generation Intel core designs are touch-based systems and Ultrabooks are up more than 70% touch on the way to 100% touch. These new cost-effective designs, combined with Microsoft's new 8.1 operating system, launched on October 17 and are expected to exert demand for new touch-enabled systems this holiday season.

Our leadership position in large screens was enhanced in the second quarter of this year, with the launch of our maXTouch 2952T, the world's first ultra-low-power, single-chip touch screen controller, supporting Windows 8-certified touch screens up to 15.6 inches and our 1664T touch controller for touch screens up to 12.5 inches. These new devices build on our previous success and as a result, Atmel has enabled more Microsoft-certified touch products in the marketplace than any other touch controller manufacturer. Atmel is currently Win 8 and 8.1 certified in over 115 different tablets, notebooks and Ultrabooks and is actively engaged in well over 190 different Windows 8 and Windows 8.1 programs.

MaXTouch is once again powering the touch for Microsoft's flagship product, the new Surface Pro 2 and Surface RT devices. We have also won numerous other new designs, including being selected by ASUS for their T100, UX300, X450, X550 and VivoTab TF810 devices. We are in Dell's XPS12 convertible and Lattitude 7240, Lenovo's Miix2 and Samsung's ATIV Tab 3.

As the largest touch supplier for Windows 8 and 8.1 products, we are well positioned to garner a substantial benefit as PC-based systems accelerate to a transition to touch-based technology.

In the Android market for large screens, maXTouch is now providing the touch capabilities of Samsung's new Galaxy Note 10.1-inch 2014 edition tablet, which complements their announcement last quarter on the Galaxy Tab 3, 10.1-inch. In addition, LG Electronics unveiled a new G Pad 8.3, an 8-inch tablet, equipped with a sharp 920 x 1200 resolution display, with 273 pixels per inch, that outperform the iPad's Retina technology.

In the market for smartphones, Xiaomi, a leading provider of smartphone's apps and consumer electronics that has taken the China market by storm, has selected our maXTouch 540S controller to power the 5-inch touchscreen for the recently launched full high-definition Mi3 smartphone. Other smartphone introductions featuring maXTouch, include Pantech's recently launched full high-definition VEGA smartphone, which is a 5.6-inch touchscreen. The VEGA takes advantage of maXTouch's superior touch performance for passive stylus.

We had numerous design activities in the smartphone pipeline and expect a significant number of new designs in the market in the first half of next year. Leveraging the leading technology of our maXTouch T series family, last week, Atmel announced our new 224T, 336T and 640T series of touch controllers for smartphones and phablets from 3.2-inch up to 6.2-inch and midsized tablets up to 8.3-inch. These devices integrate a number of exceptional features that add performance and value to mobile devices, including supporting our second-generation maXStylus, the improved hover and superior multi-finger performance when wearing gloves. Our T series now supports both active and passive stylus with tips as narrow as 1 millimeter for a more precise selection and handwriting.

The new maXTouch T devices incorporate Atmel's adaptive sensing technology and utilize both self- and mutual-capacitance sensing capabilities to provide users with seamless, unconstrained touch interactions. These new T series products raised the bar in product performance and positioned Atmel to regain significant market share in smartphones and small to midsized tablets.

In additional markets for touch, as we previously stated, touch is expanding beyond smartphones and tablets into traditional industrial, consumer and automotive markets. We are pleased that during Q3, our sales and markets outside of smartphones and tablets hit an all-time high as a percentage of our touch revenue. In the consumer market, maXTouch is powering the touch for the new Sony PlayStation Vita handheld gaming device, which launched on October 10. The new Vita features a thinner and lighter frame with increased battery life. Also, Kyocera selected maXTouch for a medical device application.

Within the automotive marketplace, touch solutions are being implementing in center stacks, touch pads, navigation systems, audio/video controls and rear-seat entertainment systems. MaXTouch is the preferred solution for new automotive designs as evidenced by its selection in over 100 car models being introduced now and in the foreseeable future.

During the third quarter, 2 new European auto manufacturers, Jaguar Land Rover and GM Opel Insignia and one new Japanese customer, Mazda, introduced new vehicles, which incorporate our maXTouch technology. In addition, we have multiple designs in new car models with the 3 largest automotive makers in North America and Europe. Touch is moving beyond just luxury cars and to mainstream vehicles. And we expect increased momentum in car manufacturers park [ph] introductions during 2014. Atmel's maXTouch is positioned as the market-leading touch solution for consumer, industrial and automotive applications.

Turning our discussion to XSense. During the third quarter, we commenced volume production and achieved our first shipments for revenue from our Colorado Springs manufacturing facility. In regard to 2013 XSense revenue, while we are successfully ramping production in Colorado Springs and shipping to multiple customers, a significant reduction in forecast by a major customer has adversely impacted our ability to achieve our prior XSense revenue range. Although near-term revenue will be lower than expectations, customer interest and design activity continues to be very strong, and we are on track to bring our new capacity that will support over $100 million of XSense revenue in 2014. We are very optimistic in these strong growth prospects for XSense.

We continue to expand or extend the technical advantage of XSense or simultaneously expanding the market opportunity. Recently, we introduced sensors capable of supporting screen sizes up to 15.6 inches from 13.3 inches previously. Further increasing our competitive advantage, XSense can enable our customers to achieve touch panel stacks that are thinner, lighter, and cheaper as compared to other sensor technologies. We now enable customers to utilize low-cost, plastic-equivalent solutions with only 0.2-millimeter thickness or use glass-covered lens at only 0.4-millimeter thickness. XSense also enables the narrowest border area designs available in the market today, which allows for thin vessels on our OEM's products.

As a leader in metal mesh technology, the strong IP and manufacturing know-how, Atmel stands to significantly benefit from the adoption of metal mesh technology and the overall growth of the touch sensor market.

Turning to our Non-Volatile Memory segment. Total revenue for Non-Volatile Memory segment was $31 million in the third quarter of 2013, up 14% sequentially and down 29%, as compared to the third quarter of last year. Adjusting for the serial flash divestiture at the end of the third quarter of 2012, Non-Volatile Memory was down 4% year-over-year. Recently, we have continued to see increased demand for serial EEPROM products in new and emerging applications requiring high-density solutions, in such high-growth market as metering, medical, smart watches and other consumer accessories.

Turning to the RF and Automotive segment. Revenue of $45 million in the third quarter of 2013 was up 10% sequentially and up 5% as compared to third quarter of 2012. We had strong sales across most product lines with notable strength in our high-voltage products during the third quarter. We also announced the availability of a new family of high-performance, low-power RF receivers designed specifically for the automotive and Smart RF markets. Featuring the industry's lowest power consumption and robust communication link, these new devices are ideal for remote keyless entry, passive entry go and remote start.

In the ASIC business segment, third quarter revenue of $53 million was up 9% sequentially and increased 11% as compared to the third quarter of 2012. Our security products were particularly strong during the third quarter due to ramp in a new application area and offset previously forecasted weakness in aerospace business.

Looking at the third quarter revenue by geography. Our largest ship-to-location was Asia, representing 60% of revenue. EMEA was 24% of revenue, while the Americas was 16% of revenue during the third quarter. Asia increased sequentially while EMEA weakened after a strong second quarter, and the Americas strengthened significantly from the prior quarter.

In summary, the substantial investments we have made in the past 18 months has significantly enhanced the competitiveness of our product portfolio and positioned us for enhanced operating performance. For our core microcontroller business, we're well positioned to continue the market share gains. Our new product introductions continue to accelerate with over 90 new 32-bit products introduced so far this year. This brings to well over 200 the number of new 32-bit core microcontroller devices introduced in the past 7 quarters. This has translated into very high levels of customer design activity for our 32-bit products. Atmel is also positioned to take advantage of the growth of the Internet of Things, as we provide industry-leading, ultra-low-power microcontroller, connectivity solutions, software stacks and development tools, the fundamental building blocks for success in this attractive growth market.

In Touch, our recently announced next-generation maXTouch T series for smartphones and midsized tablets is expected to reinvigorate our competitive position and allow us to recapture market share during the next year.

In the large screen market, we are positioned to benefit disproportionately as the market for new Windows 8.1 devices accelerates. Furthermore, we're now realizing the benefit of the expansion of touch into new markets beyond smartphones and tablets, such as automotive, consumer and industrial.

Our XSense products is in volume production and customer design activity is high. The touch sensor market represents enormous opportunity for Atmel, and we expect substantial growth in our XSense business in 2014 and beyond.

From an operational perspective, the steps we have taken in the past year have substantially enhanced our operating model. Our gross margin increased during the third quarter while the same time, we significantly reduced internal inventory and channel inventories remain lean. We have the initiatives in place to continue our gross margin expansion for the fourth quarter and throughout 2014. We achieved double-digit op margins during Q3, as we reduced our expenses and realized the benefit of recent restructuring actions. We remain committed to achieving our long-term operating model targets.

Now let me turn the call back to Steve Skaggs for our Q4 financial guidance. Steve?

Stephen A. Skaggs

Thank you, Steve. For the fourth quarter, which traditionally is a seasonally slow quarter, we expect revenue to be between $350 million and $364 million.

Turning to the rest of the P&L. Effective this quarter and moving forward, we will only provide non-GAAP guidance. During the fourth quarter, we expect further expansion of our gross margin, as we continue to execute on our improvement plans. Non-GAAP gross margin is expected to be 44%, plus or minus 100 basis points. Non-GAAP operating expenses are expected to be approximately $110 million, plus or minus $2 million. This represents a sequential decrease of $6 million and reflects the full realization of the benefit of our previously discussed restructuring and cost-reduction activities implemented earlier in the year.

For the fourth quarter, depreciation and amortization is expected to be approximately $19 million and stock compensation approximately $15 million. We expect the capital expenditures to be approximately $10 million to $15 million. Other expense is expected to be approximately $1 million and acquisition-related charges are expected to be approximately $2 million for the quarter. We expect our non-GAAP tax provision to be approximately $1 million to $2 million. And for modeling purposes, please assume a non-GAAP share count of around 434 million shares.

This concludes our prepared remarks. We'd now like to open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] You do have a question from William Stein from SunTrust.

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

First, I'd like you to please remind us of what the gross margin target is and what the deltas are from here to get us there and also how the significant reduction in inventory should affect the pace of achieving the target.

Stephen A. Skaggs

Sure, this is Steve Skaggs. Our long-term goal remains unchanged to drive our semiconductor gross margin to 54%, which, as we said in the past, will require a quarterly semiconductor revenue of approximately $450 million. At current revenue levels, we believe we can drive the gross margin to approximately 50%. As we've said in the past, there are a number of operational initiatives in place to improve gross margin and we're focused on achieving our goals. So I'll review once again the primary contributors to achieving a higher gross margin and potential impact on the gross margin as measured from the starting point of Q1 of this year of 40%. I should note that these plans and the numbers I'm going to review haven't change from the last 2 times I reviewed them on the conference calls.

So first, there is a 200- to 300-basis-point improvement opportunity from eliminating the impact of the high-priced legacy, take-or-pay contracts, which will be realized after receipt of all ordered wafers and completion of the sell-through of the associated inventory, which will occur and extend through the first half of 2014. There is another 500 to 600 basis points of improvement from a substantial list of identified resource and time frame, operational cost-reduction initiatives that are planned and will be implemented and realized through the end of 2014.

And finally, there is a 500 basis points opportunity from the improved utilization of our manufacturing assets, including the elimination of underutilization of our Colorado fab, increased utilization of back-end manufacturing assets and achieving full absorption of our remaining manufacturing fixed cost overhead. That improvement is dependent upon achievement of higher revenue and as we said, the full impact will be realized at $450 million of quarterly semiconductor revenue. So we continue to march forward on this plan to realize improvements. We realized improvements last quarter. We're forecasting improvement this quarter. The reduction of inventory, I would say, is a necessary part of getting to our goals but doesn't really change the pace and the progress which we've forecasted on achieving those goals.

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

And if I can have one follow-up on XSense, sounds like you're taking down the goals, owing to a change in plans from one of your customers. Can you elaborate? Are you using losing -- essentially losing the design slot to another metal mesh manufacturer? Or is -- has this manufacturer decided to go back to ITO or is it a share issue? Any elaboration would be very helpful.

Steven A. Laub

Sure. No, this -- this is Steve Laub. No, this customer is neither moving to another metal mesh or to ITO. They're just merely rescheduling the ramp of new product introduction. And that's really all it is, both the ramp and magnitude of that.

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

And do we have a new target for XSense revenue?

Steven A. Laub

No. We've given a target for 2013. We're not going to give new targets because it's -- with a complete new business, that has been very hard to predict. I think what we can share with you is we said in the comments, we began shipping XSense products for revenue from our Colorado facility this past quarter. That will be ramping this quarter and beyond, and that lots of design activities are occurring, lots of programs, [indiscernible] with customers. But we're not putting out revenue targets at this time.

Operator

Your next question comes from John Vinh from Pacific Crest Securities.

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

Just a follow-up on XSense, I was wondering if you could just clarify, I think you said during the prepared remarks that you are adding CapEx to expand your XSense facility and now you're tracking north of $100 million in capacity for 2014. I was wondering if you could talk about whether this is the case and what's driving kind of the uptick there in the increased outlook for 2014 there.

Stephen A. Skaggs

John, actually, this is not an increase. This is more an affirmation of what we previously stated. We have previously stated that 2000 -- for 2014, we are putting in place, by the end of this quarter, that we had -- we would have ordered -- we received delivery of sufficient equipment in capital, so that we could support revenues of over a $100 million next year for this business. We're not making a specific revenue projection for next year. We're letting you know that we're making the kind of investment from a capital equipment standpoint so you have a sense of the magnitude of what we're putting in place. But it's really too early for us to put or get a projection for next year on the business that's ramping obviously from a low -- to a number today. But this is really an affirmation of we've earlier stated in previous calls.

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

Great. And then my follow-up question is on maXTouch. Can you talk about how we should be thinking about maXTouch into Q4? And then as we kind of roll into 2014, you'd talked about kind of resurgence and a refocus on smartphones. When you look at your opportunities in smartphones, tablets and PC touch, where do you see the biggest growth opportunities for your maXTouch business into '14?

Steven A. Laub

Well, with respect to Q4 our expectation for maXTouch products is it'll probably be down to low-single digits. So just as a repeat, they were actually up in Q3 and then we expect a little bit down in Q4. As you look into 2014, we feel that on, for example, on the large screen, which is a position that we have strong leadership of, we kind of define that as tablets and PCs, notebooks, Ultrabooks, those types of applications, sort of 10 inches and above, we have the leadership position there. We have a new product family we introduced several months ago in our 2152T [ph] and 1664T [ph] products, which are being extremely well received by customers. These are both single-chip solutions that are very high performing, very low-power and that are being very substantially designed today. So depending on the attach rates, for example in Windows 8 programs, and that -- those who adopt -- the adoption of touch into that are along with I'd say a lot of the growth in sort of 11-inch -- 10, 11-inch tablets really dictates the success of that business. We expect that business to grow nicely next year. But I think attach rates have been below people's forecast. They're going up at a slower rate than people expected. But nevertheless, we expect nice growth in that business next year. With respect to the other parts of the business for the smartphones, and I'd say mid-sized tablets, we have, as I think we've communicated to the street, but we've made an effort to really focus on larger screens, expecting that the adoption of the touch in Windows 8 platforms would be much stronger than has occurred. That's something that Intel, Microsoft and frankly, I think virtually everybody else expected as well. Because it has been slower, we did adopt and developed this new family, we call our T family. So that it would be extremely high performing, not just on large screens, but satisfies requirements of customers very well across smartphones and midsized tablets as well. It's a very cost-optimized solution as well. So we've decided to engage in more active way in that part of the marketplace. You could expect that we should see significant growth in that part of the marketplace as well. I'm not putting out a forecast at this time. But we feel very good about the reception of the products and about the activity that's undergoing right now with customers.

Operator

Your next question is from Craig Hettenbach from Morgan Stanley.

Craig Hettenbach - Morgan Stanley, Research Division

For Steven Laub, just -- can you talk about the Ozmo acquisition, just what the customer reception has been so far, and just ways you're looking to kind of leverage that maybe more broadly into Internet of Things and what type of applications you're seeing early success there?

Steven A. Laub

Sure. Additionally, the product line, just to give people a sort of more general understanding of it. It's a extremely low-power WiFi solution. And so one of the beauties of that is that traditional WiFi solution that you find, for example, in a smartphone or tablet or typically both, not just type of performance, but they're actually high-powered. And so as you think about the Internet of Things, one of the things that a lot of -- for example, a lot of the items that would be in a home for home automation, whether it be your lighting system, securities system, your thermostat. I think, for example, you could even say, a smoke alarm. If you're going to connect these things to connect to the Internet, so that people can receive messages from them or control them that way, you want to have an extremely low-power WiFi to do so. And that's something that's really not properly satisfied by the traditional WiFi solutions. So one of the things that we have is WiFi direct technology, which is what the Ozmo product does. It is the lowest power solution. And this past quarter, we were delighted to see a really substantial ramp-up in the revenues associated with that product line. The initial applications that we're seeing ramp-up is mostly in what you're seeing point-to-point communications, for example, remote controls. There's is a number of, for example, people who are coming out with I'd call it intelligent or Smart TVs or set-top box, where they want to have the wireless or communication between their remote control and that TV is through WiFi. Because oftentimes, you already have the WiFi inside the TV or inside the set-top box. So it's a very cost-effective way to sort of add that to the -- use that as your control point on a remote control. So a lot of the initial revenues are associated with that. We're also gonna see a lot of other revenues associated with other point-to-point consumer products, some of which we can't announce right now because we kind of give away who they are. But we're also very actively involved in new designs with some very large OEMs, specifically on the Internet of Things. Because we do have, as part of our roadmap, the ability to have the products connect directly to the Internet. So a very exciting product line for us and actually, extremely, very active -- activities undergoing on that as well. It's an area we're putting a lot of R&D investment into like today and throughout next year.

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

And as my follow-up for Steve Skaggs, just on the gross margin, the operational efficiencies, can you give any more granularity in terms of how you see those playing out through 2014 and when they kind of layer into the model?

Stephen A. Skaggs

It's difficult to give out a granularity at that level. The operational initiatives, as we said in the past, are literally up to 20 or so specific items of span the spectrum of our supply chain. And so we're driving those and those will accrue into the P&L over the time frame we described. We don't want to get into a mode of where we're reporting on each of those 20 items. But we do see the past for improved margins as we forecasted for the next quarter and as we delivered this quarter, and we'll be continuing that path through 2014 as we drive towards our business goal.

Operator

Your next question is from Blayne Curtis from Barclays.

Christopher Hemmelgarn - Barclays Capital, Research Division

This is Chris Hemmelgarn on for Blayne Curtis. First, I just hope that you could kind of walk through the puts and takes of your expectations for the rest of your business segments into Q4.

Steven A. Laub

Sure. So with respect to our MCU business, specifically, the core microcontroller business, we actually expect that business to be up in Q4 on a sequential basis, probably low-single digits. As previously mentioned, we expect the touch business to be down in the low-single digits. We would expect that our RFA or Automotive business to be up in the low-double digits. Our ASIC business down in low-double digits and memory probably down mid- to low -- excuse me, mid- to high-single digits.

Christopher Hemmelgarn - Barclays Capital, Research Division

Just nearing in on XSense a little bit, 2 quick questions there. One, I was hoping you could quantify a little bit more your new expectations for '13. I think the last number I had for you guys was in the $10 million to $15 million range for this year. Does that still hold?

Steven A. Laub

That's correct. No, in the prior call, it's -- what I said was we were not likely to hit that due to a customer reducing their forecast and so forth.

Christopher Hemmelgarn - Barclays Capital, Research Division

Okay. So you don’t want to quantify beyond that.

Steven A. Laub

It's something that -- to some extent, I think, virtually anybody who is quantifying on a new business and so forth, which has a lot of dynamism to it. New orders come in. Others are going to get moved out, rescheduled and so forth. It makes it very difficult to predict. And so I think at this time, we're -- all I can tell you is that we'll be ramping it a -- very substantially up as compared to Q3. And we expect that to continue throughout next year.

Operator

Your next question is from Rajiv Gill from Needham & Company.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Just a question, again, on the guidance on the revenue side. If you take the midpoint of your guidance, you basically are looking at flat sequential growth, which, in the broader context of the earnings cycle so far, is very good relative to other semiconductor companies who are guiding down for Q4. I was just wondering if you could kind of elaborate what are you seeing in the core microcontroller business, which is allowing you to kind of growth low-single digits. Is it -- can you maybe elaborate on specific vertical? Or any more information why you're kind of deviating better than the rest of the industry?

Steven A. Laub

We are placed to see actually that, at least on a relative basis, that our performance is actually doing quite well, particularly the core microcontroller business. I think as we've said before, I think a lot of it has to do with end markets. We had a lot of strength in the end markets, both industrial was up. Consumer was up very strongly in Q3. And while we don't expect the same kind of performance in consumer in Q4, I think that our position in a lot of the sort of industrial areas and so forth is helping us. It's a more steady, more stable end market than others. But because, we aren't privy to some of the things that are going on with our competitors, we merely can see that their numbers and like what we've seen is everybody is guiding down for Q4, as we are guiding up. And I don't think there's any typical reason besides the fact that we do have our channel inventories are in good shape. I think over the past year, we had probably higher inventories than we want. That's now been taken care of, particularly in Asia. And so what you're seeing now is true sell-through. What we shipped into them is truly selling through in a more accurate way. And I think this just indicates the strength of our business fundamentally.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

And a question, Steve Skaggs, on the margin. You talked about at the current revenue levels, you could achieve 50% gross margin -- is around $357-odd million.

Stephen A. Skaggs

That's correct.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

So I would expect that revenue to start to improve off that base, excluding Q1, which is probably seasonally down. I was just wondering, that 50% -- how are you getting to the 50% just on the $357 million level of the revenue? You would imply it could be much higher pretty quickly.

Steven A. Laub

Again, I think the gross margin improvement plan and supporting pillars are no different than we have discussed, again, the last 2 conference calls. So it is correct to say that the current revenue would support of 50% gross margin given our plans, the other 4% requires giving the revenue up to $450 million of semiconductor revenue on a quarterly basis. But in aggregate, that equates to the 500 basis points of improvement due to increased utilization. The other 2 programs are the 500 to 600 basis points of improvements of cost-reduction initiatives, which are numerous. And we're progressing on those, and those have afforded us a margin improvement above what has been delivered by utilization increases from our trough of 40% thus far this year. In addition, the ending of our take-or-pay arrangement and the conversion of procurement to lower-cost foundry suppliers. We look forward to 200 to 300 basis points improvement. That will extend through the first half of 2014. Next quarter, we do have an outlook for margin. The reason that we do have enough outlook on flat revenue is because we have some cost-reduction activities and some initial benefits from the conversion of our take-or-pay contract. So again, I'll communicate hopefully consistently. The story is not changing our gross margin improvement and we were marching forward on our plans.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Yes, that's really clear. And just last question, Steve Laub, on the XSense. The revenue being taken down. There's been kind of a series of issues. I think the last quarter was qualification issues. One of the 7 didn't happen. And now, there's a rescheduling of this product by a particular customer. And I can understand that this is a new technology. But what, I guess, makes you confident that this product or this technology is being -- will be adopted? If you can provide any feedback from that perspective, and as it relates to your 2014 goals, capacity to support $100 million of revenue. Again, what gives you -- kick confidence on that $100 million level? What's -- what are the drivers of that?

Steven A. Laub

Yes, sure. So from the standpoint of -- from a customer standpoint, what gives us confidence about the acceptance of the products and its eventual ramp, the best understanding of it is really the customer feedback. The customers do their testing. They do their evaluations. They do their selections. And so on that measure, the feedback we've gotten from that and the programs that we're engaged with do give us confidence of the sort of competitiveness of the product and its adoption in the marketplace. So we're not questioning, from our standpoint. That's actually not a question for us about the customer adoption. This -- the pace of that production, of course, is the one thing that's really hard to understand, because it's a new product and new marketplace for us and so forth, in this kind of product, in this kind of technology. So I think on the first point of your question, that actually, we don't consider as a big risk for us. We did have an issue, as you mentioned, before that we have to lay in the qualification of our facility in Colorado, that actually impacted things generally. Because it slowed down a lot of our sales and marketing activities. We had to put those on hold until the qualification was completed. And so there's been a lot of running after things, chasing after things, to try to bring that -- the business back up and so forth. So there are some programs that were missed just because of that. There are new programs that we are engaged in. But it did affect the timing of things, which we had talked about last time. And I think, to some extent, it probably affected the timing of things a little bit this time as well. With respect to next year, I think it's really important to appreciate this. We're putting in the capital, because we need to get -- and I'm very careful to say, we're not saying the business will do $100 million. We're saying we're putting the capital to do so. And the reason for that is, you're going to be ramping this business each quarter. And we expect pretty aggressive ramp each quarter on the business. Obviously, it depends on customer adoption and so forth. But that's the expectation. Because it takes 4 to 6 months to put in new capital, you've got to put in capital well above what your run rate is. Or you're going to end up leaving customers in a very bad position with respect to their needs. And so you have to put capital in place. It doesn't mean that you're actually going to hit that number. But your run rate by the end of the year, maybe at that number or your run -- or depending -- or at some point, you have to increase your capacity during the year as well. So we have to make constant decisions about how much capital fund to deploy that, whether or not to expand that and so forth. But I want to make it clear, we're putting in the capital because we see the opportunities there. We'll get to where we're going to need that capital at some point during the year whether it be Q2 or Q3 or Q4. We could control the deployment. We can control the deployment of the equipment as well. But the key thing is it doesn't mean that we're going to be running, say, $25 million flat every quarter next year. Because that won't be the way it will look. There'll be more running -- rolling each quarter during the year. Go ahead.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Yes, I understand that. I'm just trying to figure out what's the basis -- the mathematical basis of the $100 million capacity number.

Steven A. Laub

Well, the mathematical basis is we look at the programs that we -- the programs that you need to engage with; how much those programs are likely to be; how much capital is required to support those programs; the different mix of programs between large-screen tablets, mid-sized tablets, Ultrabooks, those types of things that we would do; and how much -- how many sensors that's going to be, the HP's [ph] of those sensors and therefore, what kind of capital. We know how large these programs typically are. We know how long they typically take to get into production. We have a sense for how many -- how much we think we can garner and wins over what period of time. And so, that's the one way it's built from that standpoint. Raj, I want to go back at your earlier question. You asked the question about, in a sense, why also are we anticipating growth in our core market business in Q4 when others aren't? If you go back and look at both Q2 and Q3, if you put the sensor hub aside, we actually grew probably higher than our competition did when you put both those quarters together. And even with sensor, we grew approximately 20% in those 2 quarters. So I think it's important to maybe look. I think we're actually gaining share. And so to the extent that they're down a bit in Q4, but for our other line of business is a bit stronger, we're not going to see quite as -- quite the same impact that they may made.

Operator

Your next question is from Jeff Schreiner from Feltl and Company.

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

I guess, one question I would like to ask Steve is just, what was the decision amongst the board to choose to do such as significant add-on to the buyback versus maybe starting to go down the road of a dividend than some of your competitors currently do?

Steven A. Laub

I obviously -- discussions with the board are generally are private discussions. We've been doing significant amount of buyback as a company over the past several years, particularly since 2010. It is something that, as you know, we've -- we chose to do that because felt it was a very good way to return cash to our shareholders. And also during a time when I think business has been more dynamic for us, as we've gone through changes in our business model and so forth. It was a little bit better way to think about -- to be returning -- returning cash to shareholders. Obviously, we evaluate the different ways of doing so. We do look at buyback. We do look, obviously, at dividends. Currently, the decision we've made is to go -- is continue with buyback, which we've been very good about doing. But we do evaluate from time to time whether or not we should distribute a dividend or not. And I can't give you any more detail on that.

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

And then, what portion of the maXTouch business is currently automotive? And what's the ASP for automotive relative to other maXTouch businesses?

Steven A. Laub

So today, the automotive business is actually relatively small. Because it takes a long time from a -- in the automotive area and any product to go from a new product introduction from us to winning a design with them to actually have in that model -- that car model ship in the marketplace. So it's relatively small today, but it's something that we do anticipate we'll have pretty significant growth, particularly beginning next year and throughout the next several years.

Operator

Your next question is from James Schneider from Goldman Sachs.

Gabriela Borges - Goldman Sachs Group Inc., Research Division

This is Gabriela Borges on behalf of Jim. I want to follow up on your commentary on share gain from the core MC business. Could you give us an update on competitive dynamics in 8-bit versus 32-bit? And what's segments or applications do you think you're gaining share?

Steven A. Laub

From the standpoint of dynamics, the 8-bit business is a marketplace that fundamentally there's ourselves and one other supplier that I'd say are both investing and growing substantially in that business. And so it's really mostly between the 2 of us, I would say, from a competitive standpoint. The 32-bit marketplace, I would say, is different from the standpoint of that it's much more an ARM-based marketplace with multiple suppliers but also much more diversified, I would say, types of solutions that you provide into that marketplace. So the competitive dynamics that we compete against is different. The type of solution is also a bit different in that regard. With respect to applications, we're seeing growth across a really -- a multitude of different applications across many areas of industrial, medical, lighting and so forth and also in the consumer areas as well. Beyond that, I don't really share much more detail because it really highlights from a competitive standpoint how well we're winning and so forth.

Gabriela Borges - Goldman Sachs Group Inc., Research Division

And then just as a follow-up, if I may. Could you give us an update on how you're thinking about the sensor hub opportunity for next year? And specifically, any call that you might have on the design pipeline from 1H '14?

Steven A. Laub

I'm sorry, you broke up. Could you repeat that, please?

Gabriela Borges - Goldman Sachs Group Inc., Research Division

The sensor hub opportunity for next year and any color you might have on the design win pipeline for the first half of 2014?

Steven A. Laub

Yes. Our sensor hub products, what we're seeing actually an extension to new applications. I think one thing we commented on in the prepared remarks was we're seeing sensor hub going to lots of products, not just in this handset and tablet space, but also into other areas where sensors are important. And the highlighting of that with the Bosch Sensortec design win with our SAM D20. We also -- with the other new programs in this sort of handset and tablet space as well, but -- as the market continues to expand and there's many programs, some of which we win, some of which we don't win. It is consistent, I think, with the digital marketplace.

Operator

Your next question comes from Hans Mosesmann from Raymond James.

Brian C. Peterson - Raymond James & Associates, Inc., Research Division

This is Brian Peterson in for Hans. With inventory at targeted levels now, could you address the pace of improvement in gross margins in the first quarter and then in the second quarter? I guess the targeted levels, I thought that the impact would have rolled off in the first quarter.

Steven A. Laub

You're correct. Inventory is at our target level of 120 to 130 days, and we'll continue to manage inventory in that type band and I look for further reductions in inventory to the extent that's possible. As I mentioned, we haven't given guidance for gross margin for Q1 and Q2. As part of our plan, we need to drive inventory down to those levels in any regard. So it doesn't really have an impact on the timing of the plan that we've discussed on the targets. It's part of the avenue in the path to get to where we need to get to from a business model standpoint.

Operator

Your next question is from Chris Caso from SIG.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

I wonder if you could just talk a bit about the Windows market. I think your comments talked about that being a bit weaker than expectations. What's the outlook into 2014? And then as a follow-on to that, are the levels of revenue into that segment now fairly minimal? And I guess, just trying to gauge a potential downside risk from that, given the concerns on the PC space, in general, now.

Steven A. Laub

Well, from the standpoint of the marketplace, I think the attach rates for adding touch into some of those different systems has been below what people have forecasted. I think there's an expectation over that. It isn't as if the attach rates are going negative, it's just that they're not going as fast from a positive standpoint as anticipated. So our expectation is attach rate will continue to rise next year. That is, I think, virtually everyone in the market's expectations. Not just Intel and Microsoft, but also the PC manufacturers are doing lots of designs right now, whether adding touch to their systems, whether it be a tablet system, Ultrabook system or other type of system. So my expectation is we'll continue see growth in that area and since the products now are pretty much single-chip solutions from the standpoint of revenue and margin, that should be a positive for us in that regard. You're not going to see this moving from multiple-chip down to single-chip, which has occurred in previous years. From the standpoint of how it is for us, I would say it's material revenue for us. But it wouldn't -- but it's not a enormous amount of revenue for us. I don't want to give too much color on that because, again, for competitive reasons. But nevertheless, we don't anticipate shortfalls or [indiscernible] any sort of adverse impacts from what may happen next in this business. I actually look at this being an upside for us next year.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Understood, okay. And just a quick follow-up to that, with respect to the handset market in general, it's obviously a competitive space. And in the past, you guys have talked about integration opportunities, specifically within touch. But I think that's more -- that can apply more broadly. Can you talk about, as you look forward, maybe not even just next year or even up -- over a multiyear period kind of where you can bring the product line to kind of differentiate yourself a little more in the handset space and create some of opportunities for yourselves?

Steven A. Laub

Yes. So I think the -- there are -- I think no one's going to talk to heavily about what the roadmaps are and how they distinguish themselves. I think 2 areas that we talked about where we're bringing technology for the tablet space, but we're actually seeing it now moving down into the handset space would be sensor hub products and potential integration of that, as well as stylus more and more people adding active stylus into their phones, actually passive stylus and probably the move towards active stylus is also likely to increase. And the ability to do that with a capacitive solution is something that we now do offer with our maXStylus solution. And I think that gives us the unique position in that marketplace. There are others who are also attempting to do that. But leading with that technology provides a true upside for it. There are other things we are working on in that space but it just wouldn't be appropriate for me to be sharing that generally this way.

Operator

Your next question is from Betsy Van Hees from Wedbush Securities.

Betsy Van Hees - Wedbush Securities Inc., Research Division

I was wondering, Steve, if we could go back to the commentary on the channel inventory. Last quarter, you guys said that distribution inventory was around 7 weeks. And it was one of the lowest levels of distribution inventory you've seen since 2010. So how is distribution inventory looking on a week-by-week basis quarter-over-quarter? That's my first question.

Stephen A. Skaggs

Sure Betsy, this is Steve Skaggs. As we've stated in the past, our target for channel inventory is between 8 and 10 weeks, which is the level, we believe, is appropriate for our business. This quarter, just ended inventory was slightly over 8 weeks so well within our target or slightly within our target. And we've actually liked it to increase a bit to the midpoint of our target this quarter.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Okay, great. That's very helpful. And then just going back to XSense, given the designs that you guys are working on and have likely won, as we look at next year and we look at the ramp and you've talked a lot about that, would it be linear maybe in the first half as you're starting to ramp the design and then we would see more of a hockey stick effect in the second half of the year? Or how should we be looking at that as we're trying to incorporate our estimates into our models?

Steven A. Laub

Well, I think, any new business is not linear by definition just because it's dependent on the initial programs that began to ship. I do -- but I do agree with you. It's not going to be where each quarter is going to be roughly the same. It is going to be something probably ramping each quarter to -- our expectation is pretty substantial each quarter. So that is the expectation we do have from a standpoint of the ramp of the business.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Okay. But would it be -- given the designs that you guys are in and the seasonality, is it fair to say that we would see a much greater ramp in the second half of the year, in the Q3 and the Q4 quarters?

Steven A. Laub

Yes.

Operator

We do have time for one final question. Your final question comes from Sidney Ho from Nomura.

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Just on the guidance one more time, the -- I know you talked about the MC business is going to be up low-single digit. I wasn't sure if you mentioned about sensor hub, which was obviously the pain in Q3. Is that going to be increasing in Q4? That's my first question.

Steven A. Laub

We don't forecast with -- in a product line like that. So I just -- we just don't do that, I'm sorry. We break out 8-bit, 32-bit or there's something unique. But that's how it's done.

Sidney Ho - Nomura Securities Co. Ltd., Research Division

That's fine. My follow-up to that is, if you look at outside your touch business or sensor hub business, I was hoping you'd give us a sense of what the linearity of the quarter was and how has orders been trending in the first month of the this quarter. And typically, what's the seasonality for Q4 for the core business?

Steven A. Laub

So to answer your last question first, the seasonality of the business is actually be a little bit down, typically 2% or 4% down in Q4. And so what we're seeing is -- obviously, we're seeing better than seasonality for us this quarter and, I guess, substantially better than the industry, relative to what we've seen other people report. With respect to what we're seeing in October, let me just give you a sense for the business. We're entering the quarter with a backlog coverage, actually, slightly up from where it was last quarter and actually, also up to where it was year-over-year. And so actually, the quarter right now is progressing pretty consistent, very consistent actually, with what we've expected.

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Great, and just my last question on the -- you guys have a couple of quarters of restructuring expenses. And I think, Steve, you mentioned that the $110 million is kind of the bottom, reflecting all the restructuring charges. Should we expect that number to start going up for next year, as we progress throughout the year?

Steven A. Laub

I mentioned that the $110 million reflected the benefit of the restructuring charges [indiscernible] within the year and marks a full realization of the benefit. From an operating standpoint, the first quarter tends to be seasonally high because we have a lack of vacations. We have the re-initiation of U.S. FICA payments. We also have some credits that typically flow through our P&L in the second half of the year and in Europe. So for all those reasons, we do expect operating expenses to increase in the first quarter for seasonal reasons.

Operator

That concludes our Q&A session. Mr. Schuman, do you have any closing remarks?

Peter Schuman

Yes. Thank you, Ginger. During the fourth quarter, Atmel will be presenting at the Raymond James Fall Investor Conference on November 12 in Boston, the Barclays Capital Select Growth Conference November 19 in New York and the NASDAQ OMX International Investor Program on December 4 in London. We will also be with investors at the Consumer Electronics Show in Las Vegas on January 8 and January 9. Webcast and other information for these events will be available on the company's Investor Relations website. In the mean time, you're always welcome to contact our Investor Relations Department at (408) 437-2026 with any questions that arise. Thank you for joining us, and this concludes today's call.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.

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