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Executives

Robert Pursel – Director of Investor Relations

Stephen Cumming - VP of Finance and CFO

Steve Laub - President and CEO

Analysts

Suji De Silva - Kaufman Bros.

Doug Freedman – Broadpoint

Steve Eliscu - UBS

Anthony Staff – Craig Hallum

James Schneider – Goldman Sachs

Craig Berger - FBR Capital Markets

Atmel Corp. (ATML) Q4 2009 Earnings Call February 8, 2010 5:00 PM ET

Operator

Good afternoon. My name is Bonnie and I’ll be your conference operator today. At this time I would like to welcome everyone to the Atmel fourth quarter 2009 earnings conference call. (Operator Instructions). Mr. Pursel, you may begin your conference.

Robert Pursel

Good afternoon and thank you for joining us for Atmel’s fourth quarter and fiscal year 2009 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 press 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 fourth 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 first quarter of 2010, and then we’ll 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 2010 and beyond.

Our forward-looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today, and therefore are subject to risks and uncertainties as described in the Safe Harbor discussion 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 Stephen Cumming for a discussion of our fourth quarter financial results.

Stephen Cumming

Let me provide some details about our statement of operations. Revenues for the fourth quarter increased 8% sequentially to $344 million, exceeding the top end of our guidance range of up 3-7% and up 3% as compared to revenues of $335 million in Q4 2008. For the full year 2009, sales were $1.22 billion compared to $1.57 billion for 2008. Gross profit as a percent of revenue was 37%, a 590 basis point improvement from the 31.1% we reported last quarter, exceeding our guidance range of 33% to 35%. Driving the gross profit expansion this quarter was a more favorable mix of higher margin microcontroller products as well as improved factory utilization at our Colorado fab.

R&D expense was $56 million for the fourth quarter, compared to $51 million for the prior quarter and $62 million the year-ago period. The sequential increase in spending reflects a more normalized quarter compared to Q3 which had the seasonal effect of the European summer holidays and our continued focus on R&D investments in core high growth products.

SG&A expense was $59 million, compared to $57 million for the third quarter and $77 million for the same period last year. The slight increase in SG&A spending this quarter is primarily a result of higher selling expenses associated with the increased revenue this quarter. Total operating expense for the fourth quarter was $114 million, within our guidance range of $112 million, plus or minus $2 million.

Included in operating results was $11 million of stock-based compensation expense, of which $2 million was related to manufacturing, $4 million to R&D, and approximately $5 million to SG&A.

Operating loss was $72 million for the fourth quarter. Included in the operating loss was a non-cash impairment charge of $80 million related to the Rousset wafer fabrication business. Also included was $5 million of charges related to acquisition, restructuring and grant repayments.

The company’s effective average exchange rate in the fourth quarter was approximately $1.48 to the euro. This compares to $1.41 to the euro in the third quarter and $1.35 to the euro in the year-ago period.

Income tax provision totaled approximately $4.2 million for the quarter. The higher income tax was due to an out of period expense of $4.8 million for tax reserves related to withholding tax on deemed dividends associated with certain foreign intercompany loans. This compares to an income tax provision of $400,000 for the prior quarter and a provision of $4 million for the fourth quarter of 2008. Net loss on a GAAP basis for the fourth quarter totaled $77 million or a loss of $0.17 per diluted share. On a non-GAAP basis, we had net income of $18 million or $0.04 per diluted share.

Turning to the balance sheet, we entered 2010 with even stronger balance sheet. Cash provided from operations totaled approximately $55 million for the fourth quarter, and combined cash balances, cash and cash equivalents plus short-term investments, totaled $476 million, an increase of $30 million from the third quarter.

Net cash, combined cash balances less current and long-term portion of debt, totaled $381 million for the fourth quarter. Capital expenditures were approximately $17 million for the quarter and $32 million for 2009. The low level of capex compared to prior years was a result of the company’s strategic transition to a fab lite manufacturing model in addition to effective asset management.

Depreciation and amortization for the fourth quarter was $19 million and $71 million for the full year. This compares to $30 million in the year ago quarter and $135 million for 2008.

Accounts receivables totaled $194 million at the end of the fourth quarter, up approximately $12 million from the prior quarter as a result of increased sales. Days of sales outstanding decreased to 51 days from 52 days. Fourth quarter total inventory as reported was $226 million. This excludes $16 million of inventory held for sale. Total inventory for the company decreased by $12 million. Days of inventory improved during the quarter to 102 from 105 days in the September quarter.

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

Steve Laub

As the results clearly show, the fourth quarter was a period of substantial operating improvement for Atmel. We experienced strong revenue growth, gross margin expansion, and further strengthened our balance sheet.

Moving to a more detailed review of the quarter, our revenue growth exceeded the high end of our guidance range with 8% sequential growth. We experienced solid growth in all business segments, driven primarily by improved demand from the industrial, communications, computing, and energy marketplaces.

In addition to our broad-based revenue growth during the December quarter, we also generated strong cash flows from operations of approximately $55 million, which has increased our net cash position to $381 million from $350 million in the September quarter. During 2009 despite the global industry downturn, Atmel increased its net cash position by approximately $86 million.

Now let me turn to a discussion of our business segments. For our microcontroller business unit, fourth quarter microcontroller revenues were $139 million, up 16% sequentially; 8- and 32-bit microcontrollers were both up 15% sequentially. Our 32-bit microcontrollers achieved another milestone, reaching record revenues again this quarter and growing over 30% on a full year basis as compared to 2008. In absolute dollars, the strong microcontroller growth came from the industrial, communications, energy, and consumer sectors this quarter.

Touch sensing revenues were up strongly this quarter, driven by our family of QTouch products. Volume shipments for Motorola’s next generation Android-based smartphones, the DROID, CLIQ, DEXT, and Milestone, increased again this quarter while volume shipments continue to Samsung for the Instinct, Galaxy, and Blue Earth.

With regard to a revolutionary maXTouch touch-screen products, customers confirm as compared to the latest alternative solutions available, maXTouch remains the industry’s highest performing, fastest response, and lowest power touch screen solution in the marketplace.

The number of new touch screen opportunities continues to grow substantially. In addition to generating increasing maXTouch design ends at top tier handset OEMs, we are seeing growing momentum for touch solutions in new products and form factors such as tablets, notebooks, gaming consoles, GPS, and multifunctional peripherals. We have began production shipments of maXTouch products to customers and are excited to say that we now expect maXTouch to meaningfully contribute to revenues beginning in the second quarter of this year, earlier than we had previously communicated. We have increased our expectations for maXTouch revenues for 2010 and beyond.

Our microcontroller and touch products continue to receive numerous awards and recently include the following. We are recognized in EDN’s hot products of 2009 for the maXTouch touch screen controller. Named CES Innovations’ 2010 design and engineering honoree for capacitive touchscreen controller, and selected in EE Times top 10 best products of 2009 for the SAM3U flash microcontroller. We released numerous new microcontroller and touch products during fourth quarter which include the following: A completed easy-to-use capacitive touch development suite for all AVR microcontrollers, three new picoPower AVR microcontrollers, a single wireless microcontroller which combines our AVR and Zigbee RF transceiver and we also introduced to the market the SAM3S series which is the 32-bit ARM Cortex family.

Turning to our ASIC business segment, revenue was $84 million for the fourth quarter, up 5% sequentially. Growth during the quarter came from our aerospace and Crypto products. Smart cards were seasonally down during the quarter; however, consistent with our previously articulated smart card strategy, our higher margin banking and identification business grew while our lower margin SIM business declined. As communicated in late January, Atmel has chosen to retain the customer specific products or CSP business and the aerospace business. Together, they represent nearly 70% of ASIC revenue and generate a gross margin profile higher than the company average.

For our non-volatile memory segment, total revenues were $79 million for the fourth quarter, up slightly in a seasonally weak quarter for memory. Our serial E-squared business grew 2% sequentially in the fourth quarter after growing 8% in the third quarter and 18% in Q2. Demand is being driven primarily by consumer and telecom applications such as LCD TVs, portable media players, handsets, and set-top boxes. Memory pricing continues to firm up, especially for flash due to the tight market supply situation. Demand for our flash products is being primarily driven by consumer electronics, networking, smart metering, and PC applications.

In our RF and automotive segment, revenues were $41 million for the fourth quarter, up 7% sequentially. Indications are that automobile production levels have continued to rebound even after government sponsored incentive program have expired. Automotive RF, high voltage, and RFID products were the primary contributors to business unit growth this past quarter. Our bookings from European based customers continue to climb, and we are seeing new interest from Asian automotive customers.

As we view the fourth quarter revenues by geography, Asia was our largest ship-to location, growing 6% sequentially and representing 50% of total revenues, down from 51% in the prior quarter. Europe had the greatest gain with a 20% sequential increase and represented 32% of revenues, up 29%, while the Americas declined 4% and represented 18% of total revenues, down from 20% last quarter.

In summary, I am pleased with the significant progress we are making in transforming Atmel into a higher growth, higher margin company with greater value to our shareholders. In the fourth quarter, microcontrollers reached 40% of Atmel’s total revenues, as we continue to capture market share from our major competitors. As we look to 2010, we are experiencing strong bookings for all of our core products. For our industry-leading microcontroller and touch business, we expect it to grow in Q1 and to be up strongly during 2010. Our expectations are that it will outperform the industry, and 2010 should be another year of market share gains.

For our memory and automotive products businesses, we are experiencing an improving business environment, and we expect these businesses to expand significantly during the year.

On the expense side, our Q4 operating expenses have been reduced by over 18% as compared to the fourth quarter of 2008, and we are well positioned to leverage greater earnings as revenue growth continues in 2010.

Regarding our ASIC business, in late January we announced that following a comprehensive review of strategic alternatives, we will continue to explore the potential sale of the smart card business located in Rousset, France, and East Kilbride, United Kingdom and that we are currently in discussions with interested parties concerning the potential sale of this business. We have discontinued sale discussions for the customer-specific products and aerospace businesses. As part of our review, we determined that shareholders’ interests are best served by Atmel retaining the customer-specific products and aerospace business segments.

As you may also recall, in December we announced that we entered into an exclusivity agreement with LFoundry GMBH for the potential sale of the Rousset wafer fab business. We are currently in the information and consultation process phase with the Rousset Workers’ Council concerning the proposed transaction, and we expect to have a decision during this quarter.

During our third quarter earnings call, we mentioned that we were experiencing reduced output at our Rousset wafer fab. During this quarter, the Rousset fab continues to operate at a reduced output level, and this is likely until there is greater certainty regarding the proposed sale to LFoundry. This reduced output has led to longer lead times for certain products, primarily in our ASIC and memory businesses and will continue to adversely impact gross margin due to the lower production levels.

Now let me turn the call back to Stephen for our Q1 financial guidance.

Stephen Cumming

The company expects first quarter 2010 revenues will be flat to down 4% on a sequential basis. As we continue to work through the proposed sale of our Rousset wafer fab business, we expect gross profit margins to be between 36-38% in the first quarter of 2010. Operating expenses are expected to be approximately $118 million, plus or minus $2 million for the first quarter based on a dollar-euro exchange rate we estimate will be approximately $1.43.

Depreciation is expected to be approximately $16 million for the first quarter, and capital expenditures are expected to be approximately $16-$18 million for Q1. Other income and expense is expected to be $1 to $2 million expense, and quantum acquisition related costs are expected to be approximately $3 million for the quarter. The provision for income taxes is expected to be in the range of $3 to $5 million expense, and for modeling purposes we assume share count will grow by 1 to 2 million shares in the first 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 Suji De Silva - Kaufman Bros.

Suji De Silva - Kaufman Brothers

Can you talk about the maXTouch business, you said it’s going to start showing revenue lower than you expected, how is the shape of that ramp going be? I know you have maybe design wins that are perhaps clumped up X quarters ago that might show up in a set of quarters. Can you just walk us through how that ramps up, Steve?

Steve Laub

We began product shipments really during this quarter. We have already begun that process and will be ramping up through the quarter, and our expectation is that we’ll see a continuous ramp throughout 2010. The reason we brought that in is that we expected to have really insignificant volume levels in the first half of the year earlier with a strong ramp in the second half of the year, and I think the expectation now is that we’ll be seeing the ramp begin in a significant way during Q2 and it will continue to increase throughout Q3 and Q4.

Suji De Silva - Kaufman Brothers

Stephen, can you walk us through the gross margin expansion and what some of the driver were—maybe utilization to understand that and how that progress is going forward?

Stephen Cumming

As we said in the call, we benefited from the higher utilization levels which were out of our Colorado facility. Remember we started to improve the overall production levels in Colorado in Q3, but went into inventory and came in Q4, as lower cost inventory improving our gross margin. As we go forward, we do expect Colorado to continue to improve, but as Steve mentioned earlier Rousset will continue to operate at a lower production level until there is certainty around the proposed transaction. Other gross margin drivers for the outlook is we continue to see an enhanced mix of our newer products at higher margins, and ongoing improvement in our overall wafer cost.

Suji De Silva - Kaufman Brothers

What was the utilization this past quarter?

Stephen Cumming

The utilization for this quarter was around 70%.

Suji De Silva - Kaufman Brothers

How’s it going into the first quarter in terms of turns expected and what’s happening to lead times? You said it is stretching out a little bit, but can you give us a sense of what your visibility is right now?

Steve Laub

From a standpoint of visibility, our backlog coverage is over 90% at this time for Q1, so demand really isn’t an issue for us. What we expect in Q2 is primarily due to the impact from different businesses is that you’ll see a sequential growth in both the micro business, the automotive businesses, and we expect that the memory business will be relatively flat, and that the ASIC business will be down, and the whole thing balances down to the overall guidance that Steve gave you.

Suji De Silva - Kaufman Brothers

Is any of that guidance a supply constraint to you?

Steve Laub

There is a little bit of supply constraint, specifically I would say on the ASIC and memory.

Operator

The next question comes from the line of Steve Eliscu with UBS.

Steve Eliscu – UBS

On the Rousset fab, if that had been running at reasonable utilization, what kind of gross margin do you think you would have come out at?

Stephen Cumming

Steve, I think the best way to answer that is what we said previously where we have a model outlook assuming we can get to revenues of around $350 million, and we have the fabs operating at normal consumption levels which is higher obviously than Rousset has been operating at the moment that we can get our gross margins up to 40%.

Steve Eliscu – UBS

Maybe you can talk a little about the end markets. You talked about this energy market, also if you can give an idea what you see in the automotive market as well.

Steve Laub

Specially in the energy markets, the markets we are serving a lot there have to do with the metering marketplace due to the big change occurring in the electric meters and so forth to use energy much more efficiently, and so part of the federal stimulus and support into that area will be filtering down into our products primarily supporting into our microcontroller business, and in the automotive business we are saying that business also resumed sort of a recovery and expansion. We saw 7% growth as you mentioned in Q4 sequentially, and we expect that business to be up nicely in Q1 as well.

Steve Eliscu – UBS

On Opex, the maXTouch products obviously require more handholding for the customers. As you ramp the number of designs, how should we expect Opex to ramp as well, maybe give us some idea what kind of scalability you have with that business?

Steve Laub

With respect to the support for maXTouch, you’re correct. I would say that the customer support with respect the maXTouch or touch screen control products is significantly higher than it would be for a simple touch button or touch lighter product, but we’ve already added a lot of the headcount over the past 12 to 18 months in both the factory and the field to support this business, so we will be adding some incremental headcount, but I would say that the majority of what we needed to add has already been done.

Operator

The next question comes from the line of Anthony Staff – Craig Hallum.

Anthony Staff – Craig Hallum

If you can give a little bit more color on timing of your capacitive wins or expected revenue, presumably Q2 was for handsets, any views on netbooks, notebooks, and other segments on when that might start to impact revenues?

Steve Laub

The handset, you’re right. That’s primarily the Q2, ramp will be in that part of the marketplace. With respect to the others, we’re currently competing for design wins and design ends in other parts of the market, and I expect both the timing of the that and actually the initial volumes of that will be lower because touch hasn’t been adapted in those marketplaces like it’s been adopted into the handset space, so from a standpoint of looking out, I would say this year will be significant, and I think my sense is that it will be beginning the first half of next year before it adds I would say in a significant way or a tangible way to our financials.

Anthony Staff – Craig Hallum

On your MCU business for the March quarter guidance, would you say that is inline with the industry; it’s just the ASIC decline that’s really pulling you down?

Steve Laub

Whatever the industry is likely to do in the March quarter, I would tend to say that I think we like to think of ourselves as outperforming the industry. We’ve outperformed the industry consistently now for several years. Based on what we have seen what our peers show for their fourth quarters and their 2009 full year, we also outpaced the industry with market share gains, so our sense is whatever the industry does in the March quarter, we should be consistent or better.

Operator

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

James Schneider – Goldman Sachs

Clearly visibility has improved quite a bit and your backlog coverage is pretty high as you said. Can you give us a sense of how do you think about your business in terms of normal seasonality for Q2, and any initial guess about directionally which way that may be going at this point?

Steve Laub

Seasonality-wise, I think business for Q2 typically is up over Q1 because Q1 is typically your seasonally down quarter in a normal environment, so I am comfortable in saying that Q2 should be sequentially higher than Q1 if that’s the question that you’re asking, but I’m comfortable with that at this point. We do have that visibility.

James Schneider – Goldman Sachs

As a followup, Steve or Stephen, maybe you can give us a sense of Opex and whether we have kind of come back to normalized Opex level here, guiding up a little bit? Have all the temporary measures for reductions come off at this point or do we still expect some incremental increases in the future?

Stephen Cumming

I think for Q1, we guided $118 million. There are a few things that got reset as we entered 2010. The FICA contributions come back. We’re not expecting to take any unforced vacations in Q1, and all of the temporary cost reductions are pretty much back in place, so I think $118 million in a good number. We do expect it to increase a little bit as we go into the subsequent quarters, but not significantly and obviously anywhere near to the levels of 2008.

Operator

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

Craig Berger - FBR Capital Markets

One of my questions relates to the sustainability of current shipment levels before we get into the maXTouch share gains. Are you guys comfortable that there’s no meaningful inventory building downstream? How much visibility do you have in your OEM customers, and what are your processes or controls to continue to monitor that?

Stephen Cumming

With respect to inventories in the channel, we do monitor those, and we also do talk to our major customers to check on theirs. So our inventory in the channel currently is approximately 8 weeks, I’d say, through our channel partners, which is pretty consistent with where it was a quarter ago. So we’re not seeing a big buildup. At the same time, we’re providing a sufficient inventory to satisfy customer requirements, so I feel good about where that inventory level is, and I feel good about the sustainability of the business right now. I think whenever where are lead times beginning to move out a bit and so forth, you do get some people who are booking further out to ensuring themselves of supplies. So I think that has happened, which I think leads to obviously better visibility for us, but I feel good that the overall business levels we’re seeing and the demand we’re seeing is consistent with customer’s requirements.

Craig Berger - FBR Capital Markets

You guys filled your internal inventories fairly meaningfully here in the fourth quarter. What was the driver behind that to put a little extra oomph into the gross margin in the quarter?

Stephen Cumming

Craig, it’s a little bit misleading. As we have gone through the clarity of the transactions with our ASIC business and the pieces that are held for sale and the pieces that we’re no longer selling, we had to reclassify certain balance sheet items, some of which were inventory held for sale. So that actually goes back into the pot and distorts the numbers a little. I think from a days basis, we actually dropped 105 to 102, and if you compare it on an apples to apples comparison including all the held for sale inventory, overall the company dropped by $11.5 million.

Craig Berger - FBR Capital Markets

You guys are starting to build up your cash balances a bit. Any color you have on uses or paying down some of your debt, because you only have short term debt left at this point, right? And also can you address what’s in your other liabilities as well?

Stephen Cumming

From the cash side, you’re right, we’ve got about $80 million of short term debt which is pretty cheap. I think what we said previously and we’re not changing our position at this point in time is that we want to continue to work through our restructuring initiatives in 2010, and then once we’re through that, we’re going to look at a more formalized revised capital structure, and we’ll communicate that. Obviously, we’re working closely with our board and what that will look like. With regard to other liabilities on the balance sheet, most of it consists of pensions, which is probably about a quarter of it, taxes are the lion’s share of the other liabilities.

Operator

Your next question comes from the line of Doug Freedman – Broadpoint.

Doug Freedman – Broadpoint

If you could talk a little bit about the market share gain that you’re alluded to in the MCU space, where do you think they’re coming from, and are you guys seeing benefits from the Renesas-Hitachi merger, and what’s going on out in the landscape in the MCU market?

Steve Laub

With respect to what’s happening in the market, the one you measure yourself ultimately is on the revenue side. So we know from just the revenue numbers that people are posting that we’re gaining market share, and we feel particularly good about it because in 2008, we’re the only major guy who actually had a positive growth number. We grew 14%, while our major competitors actually shrunk. In 2009, we all shrank, but we shrank less than they did. With respect to where it’s coming from, one of the things that I think helped us considerably is that because our products tend to offer greater value especially from a performance standpoint and a very lower power standpoint, we tend to get design into a lot of the newer applications, and so a lot of new areas in the consumer area, a lot of new areas in the energy area, anything that is sort of battery backup powered and hand-powered tend to defer to our AVR products as a preferred choice. So we’re seeing a lot of growth in a lot of the newer consumer and handheld areas, and industrial areas that use batteries as well. Tehse are things like smoke detectors and so forth which one wouldn’t necessarily think of as a major market, but it really is on a worldwide basis, and so I think that’s happening for a lot of our wins. With respect to what’s happening with the Renesas merger and to what extent that has actually given us opportunities, clearly if I ask my sales guys, they’ll say that they’re doing a great job of creating confusion and winning because of that because clearly they’re trying to do what they can to gain advantage from it, but I tend to think it’s really from new application areas. We do compete with several people for most of the designs that we do, and we win more than we lose. That’s the message.

Doug Freedman – Broadpoint

Do you guys have a specific target for revenue in the touch segment in 2010?

Steve Laub

Yes. We have a number. It’s internal. It’s not a number that we share.

Doug Freedman – Broadpoint

Stephen, can you talk a little bit about the tax rate going forward? You mentioned what went on in the inventory in the trailing period, but what do you expect your inventory plan could be for the next couple of quarters?

Stephen Cumming

We’ve guided $3 to $5 million for Q1. It’s tough given the restructuring efforts we’re going through in France to give an overall percentage for modeling purposes, so I think on a go-forward basis, if you want to use that as a number for 2010 on a quarterly basis, it should be fairly representative. With regard to inventory, we do expect inventory to be slightly down in Q1.

Doug Freedman – Broadpoint

On the business that you plan to sell in the ASIC revenues, it’s going to be now 30% of the ASIC business that looks like is going to be held for sale, so approximately $25 million. Am I looking at that the right way?

Steve Laub

Let’s say between 30-35%?

Doug Freedman – Broadpoint

And those are at gross margins well below company average?

Steve Laub

Below company average, yes.

Operator

At this time, there are no further questions. Mr. Pursel, do you have any closing remarks?

Robert Pursel

During the first quarter, Atmel will be presenting at the Thomas Weisel Technology and Telecom Conference on February 10, 2010, at the Goldman Sachs Technology and Internet Conference on February 24, 2010; at the Morgan Stanley Technology, Media, and Telecom Conference on March 1, 2010, and at the Jefferies Fourth Annual Global Technology Conference on March 9, 2010. Webcast information for these events will be available on the company’s Investor Relations website. Thank you for joining us today.

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Source: Atmel Corp. Q4 2009 Earnings Call Transcript
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