Good afternoon. My name is [Bonnie], and I will be your conference operator today. At this time, I would like to welcome everyone to the Atmel 4th Quarter and Full Year 2010 Earnings Conference Call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).
Thank you. I would now like to turn the call over to Mr. Peter Schuman, Director of Investor Relations. Please go ahead, sir.
Thank you, [Bonnie]. Good afternoon, and thank you for joining us for Atmel's 4th Quarter and Full Year 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 pm Pacific today, and a webcast will be archived on the company's website for a period of 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 information on the business.
At the conclusion of Steve's remarks, Stephen will discuss our financial guidance for the first quarter of 2011 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, revenues, target gross and operating margins, product introductions and cost savings for the remainder of 2011 and beyond.
Our forward-looking statements and all other statements that are not historical facts reflect our expectations and beliefs as of today and, therefore, are subject to risks and uncertainties as described in the Safe Harbor discussion found in today's press release.
During the call, we will also discuss non-GAAP financial measures. The non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release.
I would now like to turn the call over to Stephen Cumming for a discussion of our fourth quarter financial results. Stephen?
Thank you, Peter. Let me provide some details of our statement of operations. Revenues for the fourth quarter increased 3% sequentially and 33% as compared to the same quarter in 2009 to $458 million.
Excluding the Smart Card business, which we sold at the end of the third quarter, revenues of $458 million increased 10% sequentially from $470 million, ahead of our guidance of up to 6% sequentially.
For the full year of 2010, sales were $1.64 billion compared to $1.22 billion for 2009, representing a 35% increase over the prior year. Excluding the Smart Card divestiture, full year revenues increased 42%.
Fourth quarter gross margin of 49.5% reached the highest level since the third quarter of 1996. The fourth quarter gross margin of 49.5% was a 270-basis point improvement from the 46.8% we reported last quarter and ahead of our guidance range of [up] 48% to 49%.
The sequential gross margin improvement was a result of increased volumes and improved mix of higher-margin products on the divestiture of the lower margins Smart Card business. For the full year of 2010, gross margins of 44.3% vastly improved from the 2009 gross margin of 33.9%.
Total operating expenses came in at $130 million in Q4 compared to $122 million in Q3 and $114 million in the fourth quarter of 2009. In Q4 2010, operating expenses increased sequentially as the third quarter benefitted from the seasonal impact of the European summer vacations and unfavorable fund exchange rate impact from our operations in Europe.
Our operating expenses were higher than guidance of $125 million, plus or minus $2 million, due primarily to increases in R&D investment, lower vacation than planned and higher costs on variable and stock-based compensation plans.
R&D expense of $60 million in the fourth quarter was approximately $4 million higher than in the prior quarter and $4 million higher than the $56 million reported in the year-ago period. The increase as compared to last quarter was primarily due to increasing investments in new products, primarily in our microcontroller business.
SG&A expense was $70 million for the fourth quarter of 2010 compared with $66 million in the prior quarter and $59 million in the same period last year due to higher costs on variable and stock-based compensation, increased sales across [inaudible] [segments].
Stock compensation for Q4 was $16 million and is broken out in the following areas; $2 million was related to manufacturing, $6 million to R&D and $8 million to SG&A. Stock compensation was $2 million higher than the third quarter.
For the full year, stock compensation of $61 million increased from $30 million in the prior year, [presumably] due to the performance stock-based compensation incentive program, which is based on our expectations of meeting certain long-term performance metrics sooner than was originally anticipated.
Income from operations was $94 million in the fourth quarter of 2010. This compares with income from operations of $78 million in the third quarter. Excluding acquisition-related charges, last summer sale of assets, restructuring charges and charges to grant repayments, fourth quarter income from operations would have totaled $97 million compared to $86 million in the third quarter of 2010.
The fourth quarter of 2009 operating loss of $72 million included an asset impairment charge of $18 million and $5 million of charges related to acquisition, restructuring and grant repayments.
For the full year 2010, income from operations totaled $107.5 million, or 6.5% of revenues. Excluding acquisition-related charges, charges for grant repayments, restructuring charges, asset impairment charges and loss and gain on sale of assets, income from operations totaled $227 million, or 13.8% of revenues.
This compares with an operating loss of $125 million in 2009. Excluding the same previously mentioned items, operating loss would have been $20 million for fiscal year 2009.
Income tax benefit totaled $133.1 million in the fourth quarter of 2010 compared to an income tax benefit of $136.6 million in the third quarter of 2010 and an income tax provision of $10.5 million for the fourth quarter of 2009.
The fourth quarter income tax benefit of $133.1 million included $118.1 million, or $0.25 per diluted share, primarily from releasing reserves of certain deferred tax assets.
During the third quarter of 2010, Atmel completed a settlement of an IRS tax audit resulting in a benefit of $150.4 million, or $0.32 per diluted share, which included a $48.4 million cash tax refund.
GAAP net income for the fourth quarter of 2010 was $223.1 million, or $0.47 per diluted share. This compares with the third quarter net income of $219.8 million, or $0.47 per diluted share, and a net loss of $83.3 million, or loss of $0.18 per diluted share, in the same period last year.
On a non-GAAP basis for the fourth quarter of 2010, we had ProForma net income of $119.5 million, or $0.25 per diluted share. This compares with non-GAAP ProForma net income of $88.6 million, or $0.18 per diluted share in the third quarter and ProForma net income of $11.3 million, or $0.02 per diluted share in the fourth quarter of 2009.
For the full year 2010, GAAP net income totaled $423.1 million, or $0.90 per diluted share. Excluding one-time items, non-GAAP net income from operations totaled $284 million, or $0.59 per diluted share. This compares with a GAAP net loss of $109 million, or a loss of $0.24 per diluted share, and a non-GAAP net income of $27 million, or $0.06 per share for the fiscal year 2009.
As to our stock repurchase program, during the fourth quarter, Atmel repurchased 4.7 million shares of our common stock in the open market at an average price of $10.31 per share. For the full year 2010, we spent approximately $89 million to repurchase 11.7 million shares of stock in the open market, an average price of $7.59 per share.
Now turning to the balance sheet, cash flow from operations totaled approximately $85 million in the fourth quarter and $299 million for the full year of 2010, up from $122 million in 2009, which is an increase of 146%.
Combined cash balances, cash and cash equivalents, plus short-term investments totaled $521 million for the fourth quarter, a decrease of $76 million from the third quarter. Net cash, combined cash balances less current and long-term portions of debt totaled $517 million in the fourth quarter, a record for the company compared with $513 million in the third quarter of 2010.
During the fourth quarter of 2010, the company repaid $18 million of its revolving credit facility and cancelled the facility. As previously mentioned, we used approximately $48 million to repurchase our shares during the fourth quarter.
Capital expenditures were approximately $44 million in the fourth quarter, up from the third quarter's $27 million and above guidance range of $35 million to $40 million. But we have continued to increase investment in backend [taxi cut] capacity for a rapidly expanding microcontroller business.
For the full year 2010, CapEx was $100 million.
Depreciation and amortization in the fourth quarter of 2010 was $18 million compared to $17 million last quarter and $19 million in the fourth quarter a year ago. For the full year 2010, depreciation and amortization was $66 million.
Accounts receivable totaled $232 million at the end of the fourth quarter, down by approximately $7 million from the third quarter due to improved collections and better linearity of shipments during the quarter.
We are particularly pleased with the sequential improvement in DSO, given the increase in revenues during the fourth quarter. Our days of sales outstanding of 46 in Q4 decreased from the prior quarter at 49 days.
Inventories of $277 million increased by $50 million in the fourth quarter compared to the prior quarter. The increase was primarily in our microcontroller business. As we have previously mentioned, we are increasing inventory to improve lead times. Days of total inventory increased in the fourth quarter to 109 days from 88 in the last quarter.
Now let me turn the call over to Steve for commentary on our business. Steve?
Thank you, Steven. The outstanding fourth quarter and full year financial results are the combination of our actions to transform Atmel, which began over four years ago.
Our transformation strategy [to] build a microcontroller-centered company [put us in a] high-growth, high-margin businesses, establish a fab-light manufacturing model and eliminate [non-strategic] and underperforming businesses has had an extraordinary impact on Atmel's performance.
For the full year of 2010, we increased company revenues to $1.64 billion. Gross margin climbed to 44% for the full year with Q4 ending the year at 49.5%, the highest level since the third quarter of 1996; fourth quarter 2010 operating profit of 20.5%, revenue at the highest since the fourth quarter of 2000.
Fundamental to our success has been the remarkable growth of our microcontroller business. Over the last several years, Atmel has been the fastest-growing major supplier of microcontrollers in the industry.
Four years ago, our microcontroller revenues represent 24% of total company revenues. For the fourth quarter of 2010, microcontrollers comprised 63% of company revenues. Clearly, we have built a very successful microcontroller franchise as we have transformed Atmel into a microcontroller-centric company.
Turning to a discussion of our business segments; for our microcontroller business unit, for the fourth quarter and full year 2010, our microcontroller business has performed spectacularly. Fourth quarter microcontroller revenues set another record at $288 million, up 13% sequentially and up 107% as compared to the fourth quarter of 2009.
For the year, revenues grew from $458 million in 2009 to $892 million in 2010, an annual growth rate of 95%. Microcontrollers at 63% of total company revenues in the fourth quarter of 2010 were up from 57% in the third quarter and up from 40% of total revenues in the fourth quarter of the prior year.
Both our 8-bit and 32-bit micros achieved record revenues. Our 8-bit microcontrollers were up 10% sequentially and 111% year over year while 32-bit micros were up 27% sequentially and over 93% year over year.
Industrial applications continue to be our largest end market, followed by smart phones, which have been growing very rapidly, and then the consumer market.
In the 32-bit space, we experienced strong growth in both our ARM and AVR 32-product families. Our 32-bit AVR products continue to receive special recognition.
Our recently introduced UC3L 32-bit AVR microcontroller won two prestigious product awards from top Asian trade publications; the [Electronics Design News] and the [Application and Electronic Technique Magazine].
This product offers the industry's lowest power 32-bit microcontroller for a broad range of applications and is the first 32-bit microcontroller to feature a built-in capacitive-touch interface, making it suitable for a wide range of low-power embedded applications.
Regarding our touch microcontroller products; we are pleased to announce that our industry-leading touch screen solution, maXTouch, which began production in the first quarter of 2010, easily surpassed our revenue guidance by $140 million for calendar 2010. Based on these results, we believe Atmel achieved the position as the world's largest supplier of capacitive touch screen solutions.
As an indication of the popularity of our maXTouch products, of the top ten best smart phones, as ranked by PCWorld, Atmel is providing the capacitive touch solution for eight of them.
During the past quarter, maXTouch began shipping new products with new high-profile touch customers. This includes Nokia, which introduced our C7 smart phone; Sharp with their SH8128U smart phone; and Toshiba's Regza T-01 C. Other new phones from established customers include Motorola's DROID Pro and DEFY and HTC's Desire and [Trophy 7].
Our maXTouch design activity continues to be very strong. Many of our larger customers are anticipating substantial increases in [inaudible] volumes for smart phones during 2011. To satisfy this expected demand, during Q4, we began shipments of maXTouch products from TSMC and substantially increased [MCUA] for shipments from UMC. For 2011, we have secured commitments for substantial expansion of both wafer and test capacity.
Turning the discussion to tablets, with approximately 85 to 90 different tablets displayed at the Consumer Electronics Show last month in Las Vegas, the tablet market appears headed for a large ramp of non-Apple-based products during the first half of 2011 with the arrival of the Android-based Honeycomb operating system.
According to market research companies, the tablet computer market in 2010 was nearly 17 million units. This was expected to grow to 45 million in 2011. In 2012, worldwide shipments are projected to reach 71 million units.
On December 6, we announced we began shipping production quantities of the Atmel maXTouch mXT1386 and mXT616 chip sets for large touch screens up to 15 inches.
These products offer the industry's best multi-touch with unlimited touch capability, the lowest power consumption, fastest response time and the highest consumer-to-noise ratio to detect the most sensitive touches from a fingernail, stylus or even a user wearing gloves.
We expect these chip sets will power a number of upcoming touch devices, including tablets, mobile internet devices and a range of industrial applications.
With double-digit design wins for tablets, we feel very good about our competitive position in the marketplace. We look forward to providing further updates once our customers' products are formally released and widely available in the market.
In addition to the touch screen [inaudible] market served by maXTouch, Atmel continues to enjoy strong growth in the traditional button sliders and [wheel] segment of the touch market.
We believe that Atmel is the market leader in the home appliance market for refrigerators, stovetops, dishwashers, washer dryers with customers such as Electrolux, GE, [Higher], LG, Samsung and [Real Pool].
MaXTouch has become the gold standard for touch screen controllers by any measure, whether it is technical performance or market success. To extend our leadership, yesterday we announced a new generation of maXTouch solutions, the maXTouch E Series.
The E series offers enhanced analog sensing to dramatically improve performance, reduce system power and lower system cost. The E series includes the first single chip 32 bit solutions for smartphones, e-readers and tablets for screen sizes up to 12 inches.
These products utilize Atmel's AVR architecture optimized for capacity sensing and offer from 224 to 768 nodes to provide the industry's most advanced single-chip solution for any touchscreen size and application.
The benefits of the maXTouch E series extend beyond system designers to the direct users of the end products. With substantially improved noised immunity, these devices further enhance the capabilities offered by our industry-leading maXTouch family. This includes even faster response times, higher accuracy, lower power and superior sensitivity to enable detections of fingernail and users [wearing] gloves.
In addition, the E series is the industry's first to allow consumers to simultaneously use a 2 millimeter passive conductive stylus while continuing to support multitouch. Stylus is an especially important feature for aging customers. We are thrilled by the level of customer enthusiasm already shown for this new family.
Turning our discussion now to the ASIC business segment, revenues were $59 million in the fourth quarter, down 24% sequentially and down 30% as compared to the fourth quarter of 2009. However, as a reminder, Atmel sold its Smart Card business at the end of Q3, which was part of the ASIC business.
That business generated revenues of $27 million during the third quarter. Excluding Smart Card revenues, the ASIC business segment's revenues were actually up 16% sequentially, compared to $51 million in Q3 and up 1% compared to the fourth quarter of 2009.
Atmel has retained remaining businesses in the ASIC segment, which are primarily made up of custom products which leverage our proprietary AVR and ARM microcrontroller technologies as well as our Aerospace business.
The Custom Products business experienced solid growth in point of sales terminals, paid TV applications and the medical end markets. Our Aerospace business had a very good quarter as we were able to resolve some of the supply issues which has hampered the prior quarter's results.
For our non-volatile memory segment, total revenues were $60 million in the fourth quarter, down 10% sequentially and down 84% as compared to the fourth quarter of last year. As we have stated throughout 2010, we have allocated wafer supply to support the growth of our Microcontroller business, which would otherwise have been used to support the non-volatile memory business.
For Q4, our serial E-squared memory business declined 30% sequentially and was down 48% as compared to fourth quarter 2009. Our serial Flash business increased by 14% sequentially while increasing 24% from the fourth quarter of the prior year.
Currently, the revenues of the memory business are still impacted by last year's wafer allocations. We expect to increase supply for memory products during the second half of 2011 as we expand production with existing foundry partners and qualify new ones.
For the RF and Automotive segment revenues were $51 million in the fourth quarter of 2010, up 13% compared to Q3 and up 24% as compared to the fourth quarter of 2009. We are experiencing good demand worldwide, particularly in China.
Recently introduced products for the Automotive segment, including new system and package solution for LIN automotive networking applications, the ATA6614 single package solution combines a LIN system basis chip, a LIN transceiver, a five volt voltage regulator and a low-power microcontroller. With this highly innovative solutions, customers can complete LIN nodes using just one IC.
The LIN system and package solution is also compatible with Atmel's QTouch library for button slider and wheel touch applications. We also introduced the next generation of SmartRF devices for the automotive and consumer markets to enable high performance RF system.
These multiband devices are ideal for remote keyless entry, remote start, passive entry go and tire pressure monitoring systems. Looking at the fourth quarter revenues by geography, Asia once again was our largest ship-to location representing 59% of revenues compared with 58% in the prior quarter.
Europe remained at 24% of revenues while the Americas were down slightly at 17% as compared to 18% of total revenues in Q3.
As we have mentioned in the past, Asia should continue to be the fastest growing region for Atmel driven by the growth of local electronics companies in Asia and continued outsourcing production by large North American and European OEMs, particularly by microcontroller customers.
Let me give you an update on lead times. During 2010 the semiconductor industry, including Atmel were impacted by strong demand, which led to tight supply and extended lead times to customers.
Throughout the past year and particularly in the fourth quarter, Atmel has brought on substantial additional capacity in both wafers and back-end test to ramp our business and support our customers.
In the fourth quarter supply and demand have come in greater balance and has enabled us to reduce our industry lead times in general to approximately six to 10 weeks.
For 2011, in anticipation of significant growth in our microcrontroller business, we have taken action to procure substantial additional wafer and back-end capacity to support our customers' requirements.
I'll now provide an update on our strategic activities. In November, Atmel acquired substantially all the assets of mSilica Incorporated. mSilica was an early stage, privately funded company based in Silicon Valley and is an independent provider of intelligent LED driver devices and currently offers a family of power efficient [inaudible] solutions targeted towards the emerging LCD backlighting and intelligent illumination markets.
As a part of this acquisition, the majority of mSilica employees joined Atmel. The terms of the acquisition were not disclosed and are not [part of the material to direct] natural results. We are supporting the current customers of mSilica while maximizing the potential of the acquired product portfolio.
Longer term, we plan to use the acquired technology in combination with our industry-leading microcontroller products to develop system level solutions targeted towards the rapidly growing LED, intelligent lighting and other power management applications.
In summary, the fourth quarter was a strong finish to what was a remarkable year for Atmel. We accomplished numerous strategic and restructuring activities. Most noteworthy were the sales of our wafer manufacturing business based in Rousset, France, this past June and our Smart Card business with primary operations in Rousset, France, and [Easterbar], UK, this past September.
In addition, we expanded our foundry relationships and have substantially completed our transition to a fab-lite manufacturing model as nearly 50% of our wafers now come from foundries.
For 2010, our maXTouch product line easily surpassed $140 million in revenues in its first year of production, among the fastest first-year growth of any semiconductor product in a new market in the history of the semiconductor industry.
We believe this catapulted Atmel into the market leadership position for touchscreen controllers. Touch is already an enormous market. While we are now entering a growth phase, we are only in the infancy stage in terms of touch's option. We're just beginning to see capacitive touch sensing rapidly expand beyond smartphones into new applications such as tablets, net books, gaming, cameras, printers, automotive and other areas.
We have a multiyear secular growth opportunity in front of us and Atmel is in the leadership position. We have no intention of slowing down our pace of innovation and are keenly determined to win in the marketplace.
While touch gets the visibility, particularly impressive this past year has been our Microcontroller business, excluding maXTouch, which grew over 60%. This is far faster than any other major microcontroller supplier and demonstrates the superiority of Atmel's AVR and ARM products.
In viewing our Microcontroller business in total, it grew to $892 million in 2010, an incredibly growth rate of 95%. Our Q4 microcontroller revenues of $288 million puts our micro business at an annual run rate of over $1.15 billion.
At this scale, Atmel has achieved a status as a top tier microcontroller supplier. We continue to take substantial market share and believe we will continue to grow faster than the overall microcontroller market in 2011.
For the first quarter of 2011, we expect our Microcontroller business will generate higher growth than normal seasonality. The year 2010 marked the transformation to a new Atmel. As we enter 2011 we are better positioned than ever before in our products and technologies, sales momentum and in the markets we serve.
It is particularly gratifying that our shareholders enjoyed a return of 167% for calendar year 2010 under investments in Atmel. I would like to thank our dedicated employees for their passion to satisfy our customers and their commitment and execution on delivering such outstanding results.
Now, let me turn the call back to Steven for our Q1 financial guidance. Steven?
Thank you, Steve. For the first quarter of 2011 the company expects revenues to be between up 1% to down 4% on a sequential basis. This is better than expected given the typical first quarter seasonality.
We expect gross margin to be between 48.5% and 49.5% in the first quarter of 2011 as we adjust to first quarter expected revenues and increased labor costs. The first quarter operating expenses are expected to be approximately $133 million plus or minus $2 million. Depreciation and amortization is expected to be approximately $20 million in the first quarter.
We expect that first quarter capital additions to be in the range of $25 million to $30 million and for the full year 2011 we expect capital spending to be similar to 2010 in the range of $80 million to $100 million.
Other income and expense is expected to be approximately $1 million to $3 million expense and quantum acquisition rate costs are expected to be approximately $1 million for the quarter. We expect our forward-looking effective tax rate to be approximately 18% and for modeling purposes assume fully diluted share count will remain essentially flat.
Now, let me provide an update regarding our long-term business model. As mentioned during our investor conference last quarter, we are revisiting our longer-term gross margin forecast given our previous 50% gross margin target at the end of 2012.
As we achieved 49.5% in our fourth quarter results, we are now setting a new longer-term gross margin target of 52%. This concludes our prepared remarks and we will now open the call for your questions.
[Bonnie], can we take the first the first question?
(Operator Instructions). Your first question comes from the line of Doug Freedman - Gleacher & Company.
Doug Freedman - Gleacher & Company
If I can dig into a little bit on the lead time side of things, Steve, I believe you said lead times were coming in and were six to 10 weeks. Can you tell us, is that across the product line or do you still have products that are in high demand that you're having trouble meeting the market demand?
The lead times -- we spoke really about microcontroller, which has come in pretty substantially down to the six to 10 weeks. That's in general. There's a few packages that are still longer than that but the vast majority of that business has come into the six to 10-week timeframe.
We're still constraining the memory business to particular parts of the marketplace. But the lead times have also come down because what it is is that we're focused on supporting specific customers in that marketplace.
The automotive business has also come down to a stable lead time environment, more consistent with what existed back in the 2008 timeframe. So, overall as a company, we really have come in on the lead times pretty substantially between Q3 and Q4 as we look out now in Q1.
Doug Freedman - Gleacher & Company
The follow-up to that -- are you seeing an impact of shorter lead times to your book to bill? Can you discuss your book to bill and what you're seeing from your customer base and their willingness to give you visibility whether at your lead times or beyond your lead times?
So with respect to the impact, currently as lead times come in, customers tend to obviously not look out as far with respect to the business in that manner. We don't publish a book to bill because we tend to think it's somewhat misleading. We do share backlog coverage numbers. I can share with you now that our backlog coverage -- for example, for this quarter to the mid point of the guidance that Steven provided -- is at 91% for our billing of backlog, which is quite healthy.
Your next question comes from the line of Rajvindra Gill - Needham & Company.
Rajvindra Gill - Needham & Company
One question on the single chip 32 bit for tablets; what do you think the impact is to pricing in the tablet market? I know in the past you had mentioned that you could be selling a system of chips, two or three, that could range in ASB for the total solution between $10 to $15.
So I just wanted to get an understanding of what the pricing impact is of a single chip for tablets. Also your current pipeline of tablets design wins, do you see more moving to the maXTouch E series or is it a healthy balance with the multichip?
With respect to the tablets and the pricing and so forth -- so the current solutions are either three or four chips that we offer depending on the level of capability -- and so what the customer wants generally -- and the size of the touch screen that they're utilizing on their tablet. There are even customers using a seven inch tablet where they're using a single-chip solution today.
With respect to the new single-chip solution, it will clearly have a lower price than what the multichip solutions provide. But at the same time it brings a lot of advantages to the customers from the standpoint of less real estate, lower power, it'll reduce their system costs substantially independent of the pricing because of other characteristics of the single-chip solution.
So we think that the pricing will be below that $10 to $15 range but at the same time we do expect that we'll actually, as a company, enjoy a better margin on that because of the value that's being provided by that solution.
With respect to the tablets that we see being ramped in the first part of this year, those will be using the chip set solution. You can expect that you'll see some tablets emerge in the second half of 2011. They'll be using the single-chip solution.
Rajvindra Gill - Needham & Company
On my follow-up, with respect to the revised long-term gross margin target, Steven, what's the timeframe for you guys hitting that? What are the assumptions behind that long-term gross margin target of 52%?
Yes, so we are obviously really pleased that being able to get near our initial longer-term target sooner than we thought, towards that 50%. We closed the year out at 49.5%. I think going forward we do expect, as we work through 2011 to see some gross margin progression and we expect as we exit 2011 to get to that 50% threshold.
Then we're going to see more gradual progression in gross margins when we look out over the next few years and I think that's really going to come down to ongoing improvement in mix from the continued growth of Microcontroller business and also ongoing improvement in manufacturing and overall cost reductions.
So I think roughly you can assume a point a year after we get through that 50% threshold toward the end of 2011.
Your next question comes from the line Suji De Silva - ThinkEquity.
Suji De Silva - ThinkEquity
First of all, you're building up a fairly big cash balance here. Can you remind us your thoughts on use of cash received, buybacks, acquisitions, so forth?
So it's interesting. So we initiated a share repurchase program at the end of Q2 last year. We've been executing on that. It was an opportunistic program. We haven't put any timeframes around it.
We've been executing on that in the second half of 2010 and we bought back roughly $89 million or somewhere around 11 million shares, I think it was, 11.7 maybe, over those two quarters and we'll continue to do that, move in and out of the market and repurchase as we see fit.
Obviously, we continue to invest in our Microcontroller business and so that's going to be one of the uses of cash. As Steve mentioned in the prepared remarks, we acquired a smaller company called mSilica in Q4 so we continue to look at those smaller types of acquisitions as well.
Suji De Silva - ThinkEquity
Then on the [MTO] touch business, just trying to understand the growth rate for the year for microcontrollers and perhaps touch and also how touch paces out quarter by quarter, if customers ramp in steady fashion there.
So with respect to the microcontroller business excluding touch, I think the expectation you should have is that we'll continue to outpace the industry and we expect to gain substantial share in the market generally as you go through 2011.
With respect to the touch business, we believe that for 2011 our touch business should more than double from what it was in 2010. The progression would be -- I think you'll see just increasing revenues throughout the year. I'm not going to get more granular than that at this point.
Suji De Silva - ThinkEquity
Was microcontroller excluding [touch], can you tell us what that did sequentially in the fourth quarter and if you expect it up in the first quarter?
Unfortunately, because of some of the relative -- as you know, the marketplace has become extremely competitive and everybody's wanting to gauge everybody else's position specifically in the touch area. We're not providing a lot more granularity right now with respect to the touch and the non-touch areas of the microcontrollers than what's provided in the prepared remarks.
Suji De Silva - ThinkEquity
Can you say if they were up at all?
You're asking the same question I just answered.
Your next question comes from the line of John Vann - Collins Stewart.
John Vann - Collins Stewart
I was wondering if you could just give us a little bit more color to help us size up the tablet opportunity for you. Can you talk about maybe anticipated number of design wins you expect to ramp at the first half or maybe talk about what percentage of your revenues in 2011 you think will be driven by tablets versus smartphones?
I think you talk to anybody right now it's really hard to gauge exactly what happens with tablets because it's completely new marketplace. Clearly the Apple portion of marketplace is much better understood and so forth but the non-Apple and the Android operating system and that adoption right now is depending on many variables. It's dependent on people actually introducing the products, when the operating systems are available and so forth and the success and acceptance of those products.
We do anticipate that there'll be -- there's introductions occurring this quarter. We expect that there will be ramps for us beginning in Q2 in some more -- actually, starting this quarter, but I think there's a substantial ramp in Q2 for us on the tablet selling side. But how much it actually ends up being throughout the year is very difficult to gauge at this point.
John Vann - Collins Stewart
My follow-up is if you look at your market share in tablets, can you qualitatively just talk about or quantitatively talk about what do you think your market share in tablets -- or how does that compare to your market share in smartphones? Is it about the same more or less? Also, if you look at a competitive landscape is it the same set of players you're seeing in tablets versus smartphones or are there different players there in tablets?
So with respect to the market share in tablets, I don't think anybody really knows their market share in tablets today. They know the designs that they've won and who they've won them with but until people begin to ship and see how well their customers do it's extremely difficult to gauge the overall market shares.
I feel very good about the acceptance and the design wins that we already have realized in the tablet space. We are in a lot of high-profile tablets that we believe are going to be very successful in the marketplace. But until they actually begin to ship and so forth in a meaningful fashion, we're not going to know if the market share is [ours].
With respect to the competitive landscape in that market today, it's a very small competitor group. We and one and maybe another would be the competitive dynamic that we see today.
Your next question comes from the line of Anthony Stoss - Craig-Hallum.
Anthony Stoss - Craig-Hallum
If you wouldn't mind taking us through, Steve, from your list of customers that you don't call customers, any sense on 2011, any progress you can make? Also, I'd love to hear about your design activity with existing guys.
Also, if there was a market of digital cameras or printers, what do you think would be the biggest surprise revenue-wise for 2011 to you guys?
So with respect to customers I think we should talk primarily about smartphone customers. There are a few people that we are not designing with or didn't have design wins begin to ramp with them in 2010.
We have already one design win in a couple more people of that so I anticipate, if you use a top five or a top 10, let's say a top 10 number, I would assume we're probably going to be at at least eight of the top 10 by at some point in 2011. One of those top 10 would be Apple, which we do not supply into their iPhone and one may be one other customer, but I feel very good that we're basically penetrating to nearly all if not all the other non-Apple smartphone customers that we didn't have in 2010.
With respect to other applications, digital still cameras and so forth, I think that that's going to be a really good market. We are making progress there. We believe we'll be able to nail some design wins for you guys shortly on that.
We are also -- obviously tablets I think will be the biggest market in 2011 after smartphones and I also think one other application would be gaming. I think you'll find there's going to be some multiperipheral hand devices but I think gaming will be one of those that you'll see as potentially a big market for these products as well.
Your next question comes from the line of Hans Mosesmann - Raymond James.
Hans Mosesmann - Raymond James
The dynamic, as it relates to 32 bits and tablets, was that -- a year ago, was that part of the strategy that addressed the market with 32 bit solution or were your customers coming to you and saying we'd really like you to take the AVR and use your 32 bit version?
Well, you've got to remember the tablet market didn't start until -- Apple started it in 2010. But we had a plan to evolve our solutions into a 32 bit solution because at the time the talk really was net books.
So we had identified net books as a real big opportunity and a lot of the people in the PC space were thinking about adding touch to net books and so moving to the larger screen to be able to support that was something that was adopted first out initially and then as tablets -- we became aware of that last year and our customers began to ask for it. Clearly we optimized it more for the tablet marketplace.
It can support both but that's how that evolved to go from the eight to 32 bit recognizing that clearly being able to move to larger and larger screens is something that's been very important for our customers.
Hans Mosesmann - Raymond James
As a follow-up, from an industry perspective, the industry answer, over time will tablets go to 32 bit touch solutions regardless if they are maXTouch or somebody else's?
Yes, I think to get the type of performance in a large screen as provided by the tablet solutions, 32 bit is clearly the way to go. It provides -- to be able to match the performance you're getting at three inch screen today, a three or four inch screen today, to do that at seven to 10 inches I think we'll eventually move to a single 32 bit solution.
Your next question comes from the line of Steven Eliscu - UBS.
Steven Eliscu - UBS
The first question is on operating expenses. You clearly stepped that up and you stated previously that OpEx as a percentage of sales was that we should be modeling 30%. Even with your guidance it still looks like you'll be just at or below that. How should we think about OpEx progressing through the year?
Yes, so we did increase our Q4 OpEx as we planned. Some of the things that -- given the top line growth that we saw in Q4 and we expect as we go into 2011, it's tough for us to spend that much to get to that 30% threshold. You've already seen that we've made a strategic acquisition and bringing new employees into the organization.
So I think for our Q1 guidance we guided $133 million plus or minus $2 million. I think you'll start to see that continue to grow primarily in the R&D and the sales and marketing areas as we go throughout the year. But it's tough depending on the top line growth can we come back to that 30% threshold. That is the plan but we'll see how it goes for the rest of the year but it will gradually increase in stage throughout the rest of the year.
Steven Eliscu - UBS
Next question is on inventory; clearly you've had to step that up to support the ramp of these customers. The concern is now you're proliferating products. You're going from the 224 to 224 E and with tablets I think you've raised the issue of how well they're actually going to sell through. What are you doing to make sure that products you build now will actually have a home three months from now when it actually comes out of the back end?
Actually, really not concerned about that issue. Let me share some things. First of all the 224 to 224E will be a transition, will work with our customers. So that's something that I’m not concerned about. With respect to the tablets, today the mutlichip solution actually utilizes the 224s. So the same hardware that you use for the tablets is also the same hardware you use for the smartphones.
Then we have a master controller in there, which is one of our 32 bit controllers, today which we can also use for a whole host of other customers as well. So there are really dedicated products that if this market doesn't grow quite as quickly as we expect that that product isn't going to have a home. So I'm actually not concerned about these products and so forth. They all have plenty of different places to go to.
But that being said, we're putting a lot of capacity in place, both wafer and [test], because we do expect that this will be a year -- I think, again, more of the issue is going to be making sure we have the supply to support the business rather than the other concern that the business doesn't materially.
Steven Eliscu - UBS
That actually presents a good segue to my next question. In terms of the capacity additions, can you quantify it in terms of the percentage revenue increase would support or in terms of total revenue that the increased capacity could support in 2011?
I think the way to think about that is that we are going to have revenue in place, which, again, I think that from what we've -- the steps that we've taken and the actions that we have, we could do revenue -- and I'm not saying this will be our revenue; and far be it from me to put that into your model -- but we will be able to support revenue because we also have to present ourselves of that capacity rate in advance but upwards $600 million a quarter by the end of this year.
So I don’t think capacity should be an issue for us. There's always some mix issues but we think we've got capacity in place to support growth.
Steven Eliscu - UBS
Just with regards to proliferation of your products, you've been pushing up the market. Your primary competitor has done a good job in the smaller screen smartphones and other devices that have smaller displays. Is that an opportunity you see as something you want to pursue as everything you've talked about to date is the 224 and up?
So our products and technologies, there's no reason why we couldn't pursue that marketplace if we chose to. This is a market where the opportunities -- there are very abundant ones. As you've seen the success that we've had this past year, I think we made the right decision in going for the higher end of the market or higher and mid ranges is what I'd say we've done. We consider that to be the more important segments and winning in those is something that we have a keen focus on.
However, it is not an issue for us to go and participate in the low-end area of the touch and controller, too, if we chose to do so.
Your next question comes from the line of Betsy Van Heees - Wedbush Securities.
Betsy Van Hees - Wedbush Securities
You talked, Steve, about the fact that if we were to exclude the touch business in 2010 that the microcontrollers grew about 60% year over year and then you talked about the touch business next year in 2011 more than doubling.
Can you give us a sense how we should be looking at the microcontroller business in 2011 excluding touch and what are going to be the key drivers behind the business in 2011?
Our sense is that the microcontroller business, again, I think in 2010 excluding touch, it grew at over 60%. The sense is that for 2011, we don't know yet what the market growth rate will be. Our anticipation is whatever that is, we should grow significantly faster than that for both our eight bit and 32 bit products. But we're not putting out a forecast at this time as to what that number's going to be. We'll have to wait a little bit longer, I think, to be able to give you some indication of that.
Betsy Van Hees - Wedbush Securities
I was wondering you talked about lead times contracting and are seeing ASPs in both the touch and then the eight bit and 32 bit?
ASPs for 2010 as a company actually rose during the year because our mix of business has continued to get richer. We are, again, much more of a microcontroller-centric company today. Micros tend to be higher ASP for us than other product families and so that has had a very positive effect for us with respect to the overall company ASP.
My expectation is that our ASPS in touch, they've also been climbing during the year and we anticipate as the maXTouch e-family ramps that will continue to support or raise the ASP even further because it will go from, again, a richer mix of customers and applications.
Your next question comes from the line of James Schneider - Goldman Sachs.
James Schneider - Goldman Sachs
I was wondering if we could just talk a little bit more about the non-smartphone applications, meaning tablets and everything else in the industrial automotive space as well. If we fast forward a year, do you think those combined applications could constitute a pretty meaningful portion of your touch revenues, say 30% or so exiting next year, exiting 2011?
I think it will be meaningful. It's hard to put a number on that right now. Clearly, it will be a double-digit number, my expectation. Smartphones were certainly a very bit part of the touch screen marketplace for us. But for overall touch revenues, probably somewhere between 10%, 20% and 30%. I couldn't say 30% today. It's just too early to know in the rise in tablets but 20% to 30% is probably the right number.
James Schneider - Goldman Sachs
Just a housekeeping question, Steven, can you share for us -- the interest in other expense line, given your substantial cash, can you talk about what is driving the go-forward expenses on that line and why you're not getting a benefit from that and if you expect that to continue for the rest of the year?
Yes, I think, Jim, I do probably expect -- that's probably a reasonable number to assume for the rest of the year. Apart from interest expense, obviously we don't get much on our money at this point in time, but there's other things that go into that other I&E line associated with FX gains on losses on settlements of intercompany loans, etc cetera. So that creates a little bit of volatility.
These loans denominated in currencies other than USD. So that does create some signs of a little bit of volatility in that area, so that's why we're giving that range of $1 million to $3 million. Obviously we are benefitting from the lower interest expense as we've repaid our debt facility but that's the reason for that guidance.
Your next question comes from the line of Craig Berger - FBR.
Craig Berger - FBR
I wanted to ask you about inventory. It went up a lot. I know customers are still tight in some areas but what's the plan there and the drivers and is there good news in the margins that may not repeat from that?
With respect to inventory, it did go up a lot. It's actually something -- .
Craig, are you referring to internal inventory or in the channel?
Craig Berger - FBR
Yes, internal, but if you want to comment on channel inventory, that would be great, too.
Why don't I give you the channel inventory first, then. From a channel standpoint, our inventory in our channel is a little over seven weeks in general and it's actually probably a little bit lighter in Asia and probably closer, about eight to nine weeks in Europe and North America, so a key thing for us was getting our distribution partners to a more reasonable level of inventory, which we have.
The other thing we did was we built inventory primarily to build from the micro area because that's been an area that we've been cut shortest this year as the business has ramped so much more strongly than we had anticipated.
We also are brining a lot of inventory because we want to make sure we can support the growth in the touch business for 2011 and so we actually put ourselves in a very good position. But now we can support the business that we have and the growth of that business without having the extended lead times that I think others are actually now starting to see.
So we think we've done a good job of putting ourselves in that position and getting ahead of it because we're actually a little bit surprised last year with the growth.
Craig Berger - FBR
As a follow-up, I get lot of questions from investors about the tablet ramp in the first half of the year. Obviously a lot of tablets are being built. Is there any way to frame that, how many of these non-Apple tablets are getting built. Just the context is that some people are concerned that everybody is forecasting a 20% market share or that they may not sell out of the channel as well as they're being [felt].
Yes, I think to everyone -- you have better information, frankly, than we would on that because we're not the best in understanding what's happening at the consumer level. What we can tell you is we as a company focus on those customers that we believe are going to be the winners.
So just as we did in the smartphones, where, as you see, our customers did particularly well in the success this past year on their smartphones. We've done the same thing strategically on the tablet side, to work with those customers we think will be most likely winners in there.
So there will be winners that are non-Apple. The key issue is to make sure you're riding the right one. So what we're doing and that's what our focus is and so we think, regardless of how the market does, as long as there's a reasonable non-Apple market, we think we're very well positioned to have a very good market share in that.
Your next question comes from the line of Mark Sue - RBC Capital Market.
Mark Sue - RBC Capital Market
Within the non-Apple tablet market, one of the inhibitors of the unit growth may be the high-end retail price and also the lack of carrier subsidies. With that being said, are you starting to see some requests for more price concessions or do you think it's way too early for that?
Then, secondly, just touch on notebooks, is that a returning opportunity or is that and either/or proposition at this point, tablets and notebooks?
So with respect to the tablet marketplace and what type of pricing that were getting impacted by our customers, so I can tell you customers, you are dealing with the customers who are in many respects the same as your smartphone customers and other people who are in the PC marketplace.
So it's reasonably already a very competitive environment. But that being said, they also appreciate that there's all these tablets coming out and the only way to win is to have a product that really differentiates in the marketplace. The touch experience for what they can offer to their customers is a pretty important part of that value solution.
So what we have found is since we have the best touch solution for tablets, we can command a premium for our product and the customers will pay that premium just as they did on the smartphone side to deliver the best product in marketplace and win.
So I think it's a little early. We're not getting really squeezed hard on that. They care more about making sure they have the best solution.
With respect to touch into notebooks, what we're seeing is a lot of the energy that was being put into notebooks is really being put into tablets. It's the same type of people who are building them and that's where the energy is going today.
There are no further questions at this time. Iw ill now turn the call back over to Mr. Schuman.
Thank you, [Bonnie]. During the first quarter, Atmel will be presenting at the Goldman Sachs Technology Conference on Wednesday, February 16 and the Morgan Stanley Conference on Wednesday, March 2. Both conferences will be held in San Francisco. Webcast information for these events will be available on the company's Investor Relations website.
In the meantime, you are always welcome to contact our Investor Relations department at 408-518-8426 with any questions that arise. Thank you for joining us today and this concludes the call.
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