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Executives

Deborah Stapleton - President, Stapleton Communications

Steven Cumming - VP of Finance and CFO

Steve Laub - President and CEO

Analysts

Anthony Stoss - Craig-Hallum Capital

James Schneider - Goldman Sachs

Steven Eliscu - UBS

Suji De Silva - Kaufman Bros.

Craig Berger - FBR Capital Markets

Raj Gill - Needham & Company

Hans Mosesmann - Raymond James

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

Operator

At this time, I would like to welcome everyone to the Atmel Q1 earnings conference call. (Operator Instructions) Mr. Deborah Stapleton.

Deborah Stapleton

Good afternoon. Thank you for joining us for Atmel's first quarter 2010 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 p.m. 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 President and CEO; and Steven Cumming, Vice President of Finance and Chief Financial Officer. Steven will begin the call with a review of our first quarter financial results, and Steve will then provide additional color on the business. At the conclusion of Steve's remarks, Steven will discuss our financial guidance for the first quarter of 2010 and then open the call for questions.

During the course of this conference call, we may make forward-looking statements about Atmel's business outlook, including statements regarding our expectations for revenues, target gross and operating margins, as well as cost savings for 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 Steven Cumming for a discussion of our first quarter results.

Steven Cumming

Let me provide some details of our statement of operations. Revenues for the first quarter increased 1% sequentially to $349 million, exceeding the top end of our guidance range of flat to down 4%; compared with revenues of $344 million in the prior quarter and $271 million in the first quarter a year ago. The strength in our revenues was broad-based with particular upside in consumer, automotive and industrial.

Gross profit as a percent of revenue was 38.4%, a 140 basis points improvement from 37% we reported last quarter, exceeding our guidance range of 38%. 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 $58 million in the first quarter compared with $56 million in the prior quarter and $53 million in the year-ago period. The sequential increase in spending reflects our continued focus on R&D investments in core high-growth microcontroller-based projects.

SG&A expense was $61 million for the first quarter compared with $59 million in the prior quarter and $55 million in the same period last year. The slight increase in SG&A spending this quarter is primarily a result of higher legal costs associated with the Rousset fab and asset divestitures and incremental payroll taxes for the start of the year.

Total operating expense in the first quarter was $120 million, within our guidance range. Included in operating expenses was $10 million of stock-based compensation expense, of which $2 million was related to manufacturing, $3 million to R&D and $5 million to SG&A.

Operating income was $50 million in the first quarter, including a net credit of $700,000 related to acquisition, restructuring and grant repayments. This compares with an operating loss of $72 million in the prior quarter, which included an asset impairment charge of $80 million relating to the Rousset wafer fabrication business.

The company's effective average exchange rate in the first quarter was approximately $1.42 to the euro. This compares to $1.48 to the euro in the fourth quarter and $1.32 to the euro in the first quarter a year ago.

Income tax provisions totaled approximately $3 million in the third quarter. This compares with an income tax provision of $10 million in the fourth quarter and a benefit of $28 million in the first quarter of last year.

GAAP net income in the first quarter totaled $17 million or $0.04 per diluted share. This compares with a net loss of $83 million or a loss of $0.18 per diluted share in the last quarter and net income of $4 million or $0.01 per diluted share in the same period last year.

On a non-GAAP basis, we had net income of $25 million or $0.05 per diluted share. This compares with a net income of $11 million or $0.02 per diluted share for the fourth quarter and $20 million or $0.04 per diluted share in the first quarter of 2009.

Turning to the balance sheet, cash from operations totaled approximately $70 million in the first quarter and combined cash balances, cash and cash equivalents plus short-term investments totaled $521 million, an increase of $45 million from the fourth quarter.

Net cash, combined cash balances, less current and long-term portion of debt, totaled $437 million in the first quarter and compared with $381 million in the fourth quarter.

Capital expenditures were approximately $17 million in the first quarter, consistent with last quarter's spending. Depreciation and amortization in the first quarter was $15 million compared with $19 million last quarter and $21 million in the first quarter a year ago.

Accounts receivable totaled $184 million at the end of the first quarter, down approximately $10 million from the prior quarter, due to increased collections. Days sales outstanding decreased to 48 days from 51 days.

First quarter inventory was $217 million, excluding $16 million of inventory held for sale. Total inventory, including held-for-sale inventory, decreased by $9 million. Days of total inventory, including held-for-sale inventory, improved from the first quarter to 99 days from 102 in the last quarter.

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

Steve Laub

Thank you, Steven. Our first quarter was a period of substantial operating improvements for the company. We experienced sequential revenue growth, expanded our gross and operating margins and further strengthened our balance sheet.

The sequential revenue improvement came primarily from increased demand in the consumer, industrial and automotive markets. During the first quarter, we generated strong cash flows from operations of approximately $70 million, increasing our first quarter net cash position to a company record of $437 million.

I'll now turn the discussion to our business segments.

For our microcontroller business unit, first quarter microcontroller revenues were a record $151 million, up 8% sequentially and up 56% as compared to the first quarter of 2009. Our 8-bit microcontrollers were also up 8% sequentially and 47% year-over-year, while our 32-bit microcontrollers were up 9% sequentially and 93% year-over-year.

Our 32-micros achieved record revenues again this quarter. The strong microcontroller growth came from the consumer, automotive, computing, industrial and smart energy segments.

Since our last conference call, industry analysts have published 2009 MCU market share and supplier growth information. We are pleased to report that Atmel continues to solidly increase our microcontroller market share. For 2009, our overall market share increased to 3.4%, and Atmel moved to position as the world's 11th largest microcontroller supplier, up from number 12 in 2008.

We are especially pleased with Atmel's performance as this was after Atmel's exceptionally strong performance in 2008, and our microcontroller business grew 14%, while the marked declined by 1%.

In the 8-bit segment, Atmel's market share remained steady at approximately 9%, as Atmel remained the fifth largest supplier. In the 32-bit segment, our market share increased to 1.5%, as we grew 26% and the market declined by 14%. This growth propelled Atmel to the number 13 position based on sales, up from number 17 in 2008.

We're also encouraged by the current and future growth of our microcontroller business based on the recently released TechInsights 2010 Embedded Market Study, which gauges design engineers product usage intentions. When asked which 8-bit chip they would consider for the next project, 39% of engineers chose Atmel's AVR, up from 35% from previous year. Overall, Atmel's AVRs rank as the second most preferred device family, just 1% behind the number one position.

In the 32-bit MCU area, when engineers were asked the same question, Atmel's ARM product offerings were ranked number three at 19%. Our proprietary AVR32 gained substantial ground and moved up to number five position, up from number seven last year. We're pleased to have two product families rank in the top five out of 29 product families in the 32-bit segment.

The first quarter was also a busy time for our maXTouch products. We experienced continued strong design wins in a variety of high-volume handset applications. As predicted, the proliferation of touchscreen solutions beyond handsets has begun, as we are engaging in new design opportunities for maXTouch products in such areas as netbooks, tablets, gaming consoles, GPS devices and other multifunctional peripherals. We expect our customers to introduce some of those products before the end of this year.

As stated in our last earnings call, the ramp of our maXTouch revenues is ahead of schedule, and we expect meaningful revenue growth beginning this quarter and to continue throughout the year. Recent products that are ramping with maXTouch include the Wave from Sumsung, the Crunch from Motorola and more recently HTC's newest phones called the EVO and the Incredible.

As further recognition of the advanced capabilities of our maXTouch products, in March we were pleased to see our maXTouch capacitive touchscreen controller win the 2010 Special Merits Award at the Embedded World Conference in Germany. We also released a number of new microcontroller and touch products during Q1, which position us well for future growth.

Turning to our ASIC business segment, revenue was $74 million in the first quarter, down 12% sequentially and down 5.5% as compared to the first quarter of 2009. Historically, the ASIC business experiences a seasonal decline in the first quarter.

Our smartcard business declined 4% sequentially as we continue to transition our business away from the commodity telecom SIM business to the higher-margin secured banking identification and system solution markets, which grew 3% sequentially.

As expected, our aerospace and military business declined 19% sequentially, but is actually up 38% as compared to the first quarter of 2009. This business is heavily influenced by government spending and is expected to rebound this quarter.

For our non-volatile memory segment, total revenue was $78 million for the first quarter, down 2% sequentially, but up 21% compared to the first quarter of last year. Our serial E-squared business declined 6% sequentially in the first quarter after growing 2% sequentially in the fourth quarter and growing 22% as compared to the first quarter of 2009.

We continue to see strong demand being driven primarily by consumer applications such as LCD TVs and portable media players. Given the tight market supply environment, our memory pricing continues to increase, especially for our Flash products where demand has been primarily driven by consumer electronics, networking, smart metering and PC applications.

Due to historical reduced output at our Rousset wafer fab and the prioritization of wafer supply to our microcontroller business unit, we have reduced the capacity available for the manufacturing of our memory products. This impacted Q1 memory revenues and will have an impact in our Q2 memory revenues as well.

In our RF and automotive segment, revenues were $46 million in the first quarter, up 12% sequentially and up 43% as compared to the first quarter of 2009. The automotive production continues to recover and this is combined with what we observe as a refill in inventory in the supply chain.

At the Embedded Show in Nuremberg this past March, we launched next-generation Remote Keyless Entry products, comprising a single-chip immobilizer and remote keyless entry MCU. These also include the first (inaudible) security standard to [mosfet] drive production. In addition, we introduced two new LIN transceiver families for automotive networking applications.

As we observe the first quarter revenues by geography, Asia continues to be our largest ship-to location, representing 49% of revenues as compared to 50% in the prior quarter. Europe represented 32% of revenues, the same as the prior quarter, while the Americas increased 13% and represented 19% of total revenues, up from 18% in the prior quarter. For the second quarter, we expect all regions to grow, with Asia growing the fastest.

In summary, Atmel continues to make significant progress in making the transition into a higher growth, higher-margin company with increasing value to our shareholders. We made a lot of progress in the first quarter. Here are some of the highlights.

From a strategic standpoint, we have taken several steps that better focus the company on its core microcontroller and touch businesses and facilitated a fab-light manufacturing model.

During the first quarter, we received approval from the employees and the Rousset Works Council regarding the proposed sale of Amtel's Rousset wafer fab business to LFoundry. This transaction is now expected to close in June.

In addition, we announced earlier today that we've received a binding offer from privately-held INSIDE Contactless to purchase Atmel Secure Microcontroller Solutions. This is known as our smartcard business, which is based in Rousset, France, and East Kilbride, the U.K.

In accordance with French law, Atmel today presented the purchase agreement signed by INSIDE to the employee representatives of the Works Council in Rousset. After completion of the information and consultation process with the Works Council, we will seek authorization from our Board of Directors to enter into the purchase agreement with the transaction expected to close in the second half of 2010.

We're also making excellent progress from an operation an operations standpoint. First quarter results exceeded our expectations from both revenue growth and gross margin improvement. Microcontrollers represented a record 43% of Atmel's total revenues compared with 40% in the prior quarter and up from 36% in the first quarter of last year.

On the expense side, our Q1 operating expenses were $120 million, within our guidance range, and we are well positioned to leverage greater earnings upside as we continue to maintain a tight control on expenditures.

As we look further into 2010, we are experiencing strong bookings for all of our products from all major geographies and from a wide variety of end markets. Particularly significant is our expectation that our industry-leading microcontroller and touch businesses will grow very significantly. And we believe we will continue to gain market share in both these areas as Atmel products outperform the industry.

These actions combined with others we are taking better position Atmel as a microcontroller-based company focus on high growth and high margin markets, which should allow us to achieve our near-term financial targets of 45% gross and 15% operating margins in the second half of 2011.

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

Steven Cumming

The company expects second quarter 2010 revenues will be up 5% to 9% on a sequential basis. We expect gross margins to be between 39% and 41% in the second quarter of 2010 as we continue to see improved utilization of our manufacturing assets and an increasing mix of microcontroller revenues.

Second quarter operating expenses are expected to be approximately $120 million plus or minus $2 million. Based on the dollar-euro exchange rate, we estimate it will be approximately $1.36 to the euro.

Depreciation and amortization is expected to be approximately $60 million in the second quarter, and capital expenditures are expected to be approximately $25 million to $35 million in Q2, as we continue to support the growth of our microcontroller and touch product lines. We expect 2010 capital expenditures will now be in the range of $70 million to $80 million.

Other income and expense is expected to be $2 million expense, and Quantum acquisition related costs are expected to be approximately $1 million for the quarter.

The benefit from income taxes is expected to be in the range of $0 million to $3 million, resulting from additional tax basis deductions relating to be expected fab sale in Q2. For modeling purposes, we assume share count will go up by 3 million to 4 million shares in the second quarter.

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

Question-and Answer session

Operator

(Operator Instructions) Your first audio question comes from the line of Anthony Stoss.

Anthony Stoss - Craig-Hallum Capital

Can you talk about how much visibility you have or what you've booked to that guide for June?

Steven Cumming

With respect to our backlog coverage, our guidance is actually very good. For Q2, basically we are booked for June quarter to our guidance from the standpoint of backlog coverage. So the bookings are very strong for Q2. We're also seeing now obviously a backlog being laid in for Q3. So at this point, we feel very comfortable with respect to the guidance that was provided.

Anthony Stoss - Craig-Hallum Capital

Steve, would you mind commenting about more on the design side of things on the handsets? You say design activity is very strong. Can you quantify that? Can you share with us how many models you think might be coming out June quarter and throughout the remainder of the year?

Steve Laub

We don't like to, in a sense, pre-announce what our customers are doing with respect to that. What I can tell you is that we now have, with respect to several handset manufacturers, I'll say these are probably the top five guys. I'd say with at least three of them, we have a double-digit number of models in design, our design wins that we have already established of products that will be coming out this year. At least with one of the other two, we have numerous designs wins, but not yet the double-digit level.

Anthony Stoss - Craig-Hallum Capital

Any additional constraints on materials that might limit kind of June and forward? Thanks.

Steve Laub

The only limitations we're having is indicated in the prepared remarks, which is that because we are expecting to see strong growth in the maXTouch business, we have redirected capacity to two of those businesses and away from the memory businesses. So we otherwise would be able to do a higher memory higher in Q2 that we otherwise will be doing due to supply considerations.

Operator

Your next audio question comes from the line of James Schneider.

James Schneider - Goldman Sachs

I was wondering if you could give us some visibility when you have finally divested the smartcard business at the end of the year. And then if there is any effect on the Fabco, what would be the rough cost savings you would get from those two actions and how will that be broken out between cost of goods sold and OpEx?

Steve Laub

I think we have shared with respect to some of the information on the gross margin impacts of those two. And, Steve, I'll turn it over to you perhaps to share with him what we expect from the standpoint of the impact on gross margin.

On the operating expense side, we have not yet disclosed that. I think it's too early for us to share those on the smartcard, because we're presuming an answer. It's been signed by the buyer. We got to wait for Works Council opinion a week inside. Until that's done, it's too early for us to talk about the impacts. But the gross margin impact, I think, is probably fair.

Steven Cumming

The gross margin relating to the Rousset fab, we'll see about 300 basis points improvement. Now that's once we've actually burned through the high cost inventory. So we do expect that transaction to happen during Q2. There'll be a period of time, which I think up to that six months for us to burn through the high cost inventory. So we'll see the full impact of the 300 basis improvement coming out in the early part of 2011.

With regards to the SMS divestiture, that gives us about another 150 basis points improvement. And that will come out towards the end of this year.

James Schneider - Goldman Sachs

Can you just comment on the lead time environment at this point? Our lead times on average for your products is stretching out further or coming in a little bit, and can you quantify them for us please?

Steve Laub

With respect to the microcontroller business, we're actually seeing lead times has begun to come down, for example, for 8-bit micros. We're probably holding pretty steady for 32-bit micros. And now (inaudible) because we're redirecting the capacity towards those businesses.

We're seeing lead times also go out in the memory business. And so we actually have specifics called on-allocation for particular direction and with two specific customers in that business. Basically what we're doing in the memory business is reducing our participation in the spot market and just focus on taking care of our specific customers that have been historical customers with Atmel.

With respect to the automotive business and so forth, I would say pretty typical lead times that we've had historically. Customers there tend to book way in advance because of the nature of that business. And so there is no real big change in lead times there.

And in the ASIC business, lead times actually are going to be coming in, and this is where we're also redirecting some capacity out in the ASIC business. They were impacted by the slowdown of the Rousset wafer fab. The wafer fab has begun normal operation as of beginning of March. And so we expect that the ASIC business supply situation, the 32-bit micro spot situation will be getting better because of that.

And then as we had mentioned, the 8-bit, the situation is actually getting better as well.

Operator

Your next audio question comes from the line of Steven Eliscu.

Steven Eliscu - UBS

On the gross margin guidance, if I take a look at that, you're basically guiding 450 basis point improvement from the Rousset sale and smartcard sale. And if I look at the midpoint of your 2Q guidance, that basically gets to pretty much to 45%. Are you suggesting there are no additional improvements from mix and cost reductions, or you're just being conservative here?

Steven Cummings

Steve, just to clarify, when I was talking about the 300 basis point improvement and the 150 basis point improvement, that was actually from our Q4 '09 base. That's what being communicated consistently all along. So when you do the math, certainly you get beyond that 40% level as you go into 2011. But it's not significantly up on the numbers you're describing.

Steven Eliscu - UBS

I have a couple of more questions here. On 32-bit, since that grew, I guess the market research people said 26% and assuming with economic recovery that you talked about in various business segment, we should continue to get growth. So would you expect even faster growth in 2010 or there are some factors that allow you to grow much faster than the market in 2009?

Steve Laub

Can you hit the first part of the question, Steven?

Steven Eliscu - UBS

You said in your prepared remarks you grew 26%, is that correct?

Steve Laub

With respect to company?

Steven Eliscu - UBS

No, in 32-bit microcontrollers.

Steven Cummings

That is correct.

Steven Eliscu - UBS

So in 2010, given the economic recovery, should we expect even faster growth in that segment or were there special factors that allowed that business to grow so quickly in 2009?

Steve Laub

We haven't put on a forecast for what 8-bit is going to do in 2010 and 32-bit is going to do in 2010. And we spoke to the microcontrollers overall. And I think what I can tell you is that we have high confidence that the microcontroller business will generate very significant growth overall this year. We just finished the first quarter. The 32-bit, at this point, I'm not going to put a number down for its growth, given the strong growth last year.

We did have a lot of growth in the smart energy last year. It's an area which I think continued to grow despite the downturn and which will also generate growth for this year as well. It's just too early to say what will happen specifically on segment. We do expect strong growth. I'm just not going to put a number down. But overall, microcontrollers this year, combined with the touch business, as I mentioned for February and March, very strong growth we expect.

Steven Eliscu - UBS

And just one last question here about the dollar of net cash. Are you thinking about using that cash for perhaps some acquisitions or return of that cash to shareholders?

Steven Cummings

There is a lot of active discussion internally about the best use of that cash. I think we've indicated before to our investors that once we got past a number of the strategic divestitures that we're currently actively doing in France that we would be able to provide a lot more clarity with respect to the cash.

While we've made a lot of progress and we're almost complete certainly with the first one being the fab sale, we may not make any decisions prior to that's all being complete.

Operator

Your next audio question comes from the line of Suji De Silva.

Suji De Silva - Kaufman Bros.

Just a quick housekeeping question. First, on the guidance there, Steven, was that GAAP? And if so, what's the stock expense expectations last quarter-over-quarter?

Steven Cumming

It's basically flat quarter-over-quarter.

Suji De Silva - Kaufman Bros.

And the guidance is GAAP, just so I understood?

Steven Cumming

Yes.

Suji De Silva - Kaufman Bros.

And then on the restructuring, just a couple of questions, what was the rationale behind making an equity investment in INSIDE? Do you guys have other equity investments already on the balance sheet that you could talk about?

Steve Laub

We don't have other equity investments on the balance sheet. And this particular one, we actually feel that the combined company between INSIDE Contactless, it's been our estimates that it will be a very attractive company. We've gotten some calls already regarding the announcement done earlier today with respect to the transaction.

I can tell you that the minority investment is not material. So it's something that we think is a good thing for us to do, also because they're going to be a customer with respect to the LFoundry fab and which we are interested in making sure that they put the other obligations there. So overall, we think it's a good thing to do.

Suji De Silva - Kaufman Bros.

And then on the timing of he Rousset sale, is June the timeframe you're expecting or is there something in the process taking a little look longer than you expected? Some color there would help.

Steve Laub

Since we received the Works Council opinion in March, we have been expecting June as the close. And so we only need to get the Works Council's opinion before we would be able to have an accurate clarity on the close date. So June is the date. And it's been the date since March.

Suji De Silva - Kaufman Bros.

And then last question on touch. Do you expect the progress through the rest of 2010 to be linear or do you expect some ramp as you build up some of the models and present in the second half of the year?

Steve Laub

It will be linear. I think it'll be increasing throughout the year is our expectation with respect to the touch business. So it will start, we believe, in a much more significant fashion this quarter and then increasing in Q3 and in Q4.

Operator

Your next audio question comes from the line Craig Berger.

Craig Berger - FBR Capital Markets

Can you help us understand the split between touchscreen or Quantum and your traditional microcontroller business?

Steve Laub

Yes, Craig, we haven't broken that out historically. And hence it's still early for us to be doing that. Probably for competitive purposes, we haven't broken that out. You can say the touch business grew very significantly year-over-year, grew also sequentially and that we expect very strong growth.

From the standpoint of the overall 6% relative to the overall micro business, the microcontrollers are the vast majority of the numbers we include. We talk about microcontrollers with respect to that number.

Craig Berger - FBR Capital Markets

Thank you. And then I guess the next question would with so much strength here in the first half of the year better than seasonal, do you still look for overall business to grow in the second half of the year?

Steven Cummings

The answer to that question is yes, we do. And part of that is we expect the microcontroller and touch business to grow very nicely throughout the year.

Craig Berger - FBR Capital Markets

And then as you've allocated more resources to microcontrollers and touchscreen and lead times have come down, have you seen any unusual order cancellations, de-booking or customers still want the product even though the lead times are shorter?

Steve Laub

We continue to see strong demand for the product.

Craig Berger - FBR Capital Markets

And then just lastly, is there any reason why you guys don't include stock comp expense in you pro forma net income when so many broad-based competitors do and it's also included in your Thomson First Call estimates?

Steve Laub

Well, some guys break it out, some guys don't, Craig. We think it's good to our visibility in breaking it out for non-tech services.

Operator

Your next audio question comes from the line of Raj Gill.

Raj Gill - Needham & Company

Just on the maXTouch business, are there any market share assumptions that you're factoring in, maybe any clarity in terms of what's the pricing dynamic that you saw in the last quarter?

Steve Laub

With respect to the market share assumptions, we certainly have internal targets for market shares that we focus on that we've not yet shared with The Street. The other reason we haven't shared that also is that the maXTouch product line is just beginning to ramp now. And so we think it's getting somewhat early to be talking about market shares and growth in market shares and what those numbers are. And the product launch is just beginning to ramp.

I think as the ramp becomes stronger and as it becomes a much more substantial part of the company, I think at that point it's probably for us top re-look at providing more clarity to The Street on that.

With respect to the pricing environment on touch, we are saying it's competitive as all markets are. We are able to command a premium for our product, because we are able to provide a superior product to the marketplace. And so a lot of the products, and now the pricing of that we had a year ago when we began the designs of these products is still in place today.

Raj Gill - Needham & Company

So as you move from Quantum and then moving to maXTouch, you are seeing a premium on your pricing?

Steve Laub

Yes, the maXTouch product is a significant enhancement in functionality and capability relative to the earlier touchscreen devices that we had. So we're providing a significantly higher performance, and we're also commanding a significantly higher price for that as well.

Raj Gill - Needham & Company

Okay. And just one on capacitive touch, if I can, any sense of your strategy about moving into the tablet PC market? Are you sampling any products? Any color there will be helpful?

Steve Laub

With respect to the tablet PC market, the answer to it is yes, we do have customers that have begun designs in those areas, and our maXTouch product is ideally suited for doing a tablet PC as well.

Raj Gill - Needham & Company

And following up the question on the second half, you've experienced kind of above seasonal patterns for Q1 and Q2. Do you expect the seasonality to continue in the third quarter, any color in terms of how you look at kind of order trends, backlog in the third quarter?

Steve Laub

It's a little early to get a lot of that. I think a lot of people obviously are beginning to book into Q3 for a lot of companies, because a lot of people are pretty substantially booked for Q2 and their lead times have got out, which is similar to what's happening in our situation as well. So with respect to Q3, we are seeing more booking, but I think it's also related to the fact as I just indicated. It's too early to know that if Q3 will be a seasonally slower quarter and typically is for our industry. I just don't really know the answer to that.

Raj Gill - Needham & Company

What were the utilization rates this quarter and what's your assumption going forward?

Steven Cumming

The overall blend in utilization was in the low 80s. We saw the uptick in Colorado. And as Steve mentioned earlier, we were still working through the low production levels in Rousset, but that is improving. As we go into the Q2, we'll see overall rates jump in to the 90s.

Raj Gill - Needham & Company

On the transaction to INSIDE, any sense of what potential cash you would get from that product from that sale of that business? In the past, you had mentioned that the smartcard was around $20 million, $25 million a quarter revenue run rate, but had a very low margin and a negative operating margin. You'd provided an exercise in the past. Just wondering if you could provide any details around what you would get for that?

Steve Laub

So with respect to that, you're correct that the revenues for business were approximately $25 million a quarter. The financial performance of the business for us has been more challenging within the structure of Atmel and so forth, because it's a more unique business relative to rest of our businesses.

With respect of the terms of the deal, they're not disclosed at this time. Once we've had a Works Council opinion and if we move forward, we sign an agreement then in closing the deal, we will be disclosing information at that time.

Operator

(Operator Instructions) Your next audio question comes from the line of Hans Mosesmann.

Hans Mosesmann - Raymond James

A couple of questions. Can you give us a little more detail on the touch side of your business from a design win dynamic? Who are your competitors and how has that changed over the past year?

Steve Laub

Are you talking about touchscreen, Hans?

Hans Mosesmann - Raymond James

That's right.

Steve Laub

Okay. So on touchscreen controllers, the competitive environment from the standpoint of who we interact with hasn't really changed. In our mind, there's obviously some new people that have entered, but the people that we see the most often are people that I think that you guys are well aware, and I think some of the people you probably cover, which is Synaptics and Cypress. We do see them in the marketplace in the touchscreen control area.

Hans Mosesmann - Raymond James

What about Asian players that may inflate the lower end of the market and what's the dynamic there? Is there an opportunity for those guys to come from beneath and make it more complex for you over time?

Steve Laub

There are some people. There are a few people in Asia who have also participated in this marketplace. And you're correct on the lower end of the market. But I think we don't see them as much big as our product is a more premium product. I think that there are other sort of domestic competitors, probably you see them a lot more, because their product line probably overlaps with them a lot more fewer than ours does.

Hans Mosesmann - Raymond James

And then one last question in the non-microcontroller areas that are associated with smart phones. Where are you gaining share specifically? Is it automotive? Is it consumer? Is it across the board? Or there is one area that's driving it?

Steve Laub

In the micros or in the touch?

Hans Mosesmann - Raymond James

In the micro.

Steve Laub

Are you saying the areas for us in micros where we're seeing the most growth in?

Hans Mosesmann - Raymond James

Where do you think you're gaining share?

Steve Laub

The areas that we feel that we're gaining the most share in, certainly we're gaining share in things in the smart energy area. We think we're gaining share in a lot of the areas of point-of-sale terminals, some of the industrial type of application areas. And we continue to garner lots of design wins and a lot of affordable applications for battery life and low power is very important. So the traditional areas where we've gained share, we continue to see we're having outperformance for our products.

Operator

Your next audio question comes from the line of (Mark Hu).

Unidentified Analyst

Steve and Steven, just on ASPs, do you think they will generally be higher for tablets and notebooks, because a lot of that will be going to existing customers, although some will be different customers, and whether it's too early to kind of quantify some unit expectations for tablets and notebooks this year?

Steve Laub

Well, the answer is the ASPs will be higher, but part of that's because there will be multiple chip solutions off them. So you're going to have a situation whereby the ASP is higher, because: one, the volume on a given (part) is lower than a handset; hence such a very-high volume, as you know; and secondly, because there are multifunctional devices in a given solution.

Unidentified Analyst

And then maybe just on the sequential ramp in touch for the balance of this year, is there a particularly operating system which you are focusing on, or is it more wins that existing handset vendors, are you trying to get into new OEM, just kind of like your strategy of market share gains in touch?

Steve Laub

From an operating standpoint in handset, it's really operating system independent. So whether it be a proprietary operating system of the vendor, whether it be for example the Google operating system or some another operating system, a Microsoft operating system, it doesn't really matter in that regard. So we're focused more on providing the best sort of touch experience for the customer and for their customer, and what that does is driving them to use our product.

Unidentified Analyst

Lastly, the handset vendor seems to be driving touchdown market this year, and most of the growth will be at low-end touch devices. Is that kind of the market you would also focus on, or is it just trying to be opportunistic at the high end what a premium product?

Steve Laub

The QTouch product we had initially before the maxTouch was more a product that participated on a more simple functionality, more single and dual-touch instead of multiple-touch functionality. And as such, we're looking at with a very high performance, multi-touch type of product, which is really an ideal solution, for example, for smart phones.

And so I agree with you; we are seeing some growth in the area below smart phones as touch, because I think it's a preferred interface for virtually all the phones. I think what we're seeing is as people use touch, they never go back to the traditional way of using a cell phone.

But I disagree with the fact that most of the growth will be below end. I think from the standpoint of where the revenue and margin is that the smart phone is really where there's an enormous adoption of touch and enormous growth in that area.

Operator

Your next audio question comes from the line of (inaudible).

Unidentified Analyst

A few questions. The revenue growth that you got it for, does that include ASIC business? And if we just want to look at what the microcontroller business growth would be for the second quarter?

Steve Laub

So the growth does include the ASIC business, including the entire company. And to give you some sense for growth across the businesses, our expectation is that the microcontroller business will grow sequentially between 15% and 20% in Q2.

ASIC business should be up single digit, (inaudible) up single digit. And memory will be down, probably double-digit, because we're getting pretty redirected. We prioritized the capacity from memory to microcontrollers.

Unidentified Analyst

Great. And did you tell what the legal expense was in the quarter?

Steven Cummings

No, we didn't disclose that.

Unidentified Analyst

Okay. Is it safe to assume that by the end of the second quarter that SG&A will go down to (inaudible)?

Steven Cummins

Some of those costs will start to roll off. I mean there is always going to be some of the ongoing sort of transitionary type legal spending associated with working through the final part of those transactions. But we should start to see G&A get more in line a little bit.

Unidentified Analyst

Okay. And if the deal closes at the end of the second quarter, is there a (inaudible) would be the absence of that $25 million basic business on revenue?

Steve Laub

No, the deal that closed in the second quarter is a fab deal. What happens now for the SMS or smartcard business is that we've not submitted a proposed agreement and proposed transaction to our Works Council in Rousset. We now await their opinion with respect to the transaction, which we're hopeful we'll get that before the end of this quarter. And then if we do, we would have the transaction closed sometime at the end of Q3. If we don't get that opinion by then, the transaction could fall into a Q4 date when it actually closes.

Unidentified Analyst

Are there any implications by keeping it for quarter three and quarter four to the P&L positive or negative?

Steve Laub

It would be whatever the P&L is going to be.

Unidentified Analyst

Okay. And when that closes, will you give us some pro forma numbers at that point?

Steven Cummings

Yes, certainly we'll have to break that in a lot more detail.

Operator

At this time, there are no further audio questions. I'll turn the call back over to the presenters.

Deborah Stapleton

During the second quarter, Atmel will be participating in several bus tours and presenting at the Craig-Hallum Conference in Minneapolis on June 2 and at UBS Conference in New York on June 9. Webcast information for these events will be available on the company's Investor Relations website. Thanks you very much for joining us today.

Operator

We thank you for joining today's conference call. You may now disconnect.

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Source: Atmel Corp. Q4 2009 Earnings Call Transcript
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