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Executives

Steve Laub - Chief Executive Officer, President and Executive Director

Stephen Cumming - Chief Financial Officer and Vice President of Finance

Peter Schuman - Director of IR

Analysts

Craig Berger - FBR Capital Markets & Co.

Rajvindra Gill - Needham & Company, LLC

Jeffrey Schreiner - Capstone Investments

Ian Ing - Gleacher & Company, Inc.

Blayne Curtis - Barclays Capital

James Schneider - Goldman Sachs Group Inc.

Steven Eliscu - UBS Investment Bank

Sujeeva De Silva - ThinkEquity LLC

Hans Mosesmann - Raymond James & Associates, Inc.

Anthony Stoss - Craig-Hallum Capital Group LLC

Betsy Van Hees - Wedbush Securities Inc.

John Vinh - Collins Stewart LLC

Atmel (ATML) Q2 2011 Earnings Call August 3, 2011 5:00 PM ET

Operator

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 Corporation Second Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Peter Schuman, Director of Investor Relations.

Peter Schuman

Thank you, Bonnie. Good afternoon, and thank you for joining us for Atmel's Second Quarter 2011 Earnings Conference Call. A copy of the press release issued today is available on our Investor Relations website. A replay of this call will be available after 5 p.m. Pacific today, and will be archived for 48 hours. The webcast will be archived on the company's website for one year. Access information is provided in today's press release.

Joining us for the call today are Steve Laub, Atmel's President and CEO; and Stephen Cumming, Vice President of Finance and Chief Financial Officer. Stephen will begin the call with a review of our second 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 third quarter 2011 and then open the call up 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, litigation matters and the anticipated course of patent litigation, 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 are therefore, subject to risks and uncertainties as discussed in the Safe Harbor discussion found in today's press release.

During the call, we will also discuss non-GAAP financial measures. Non-GAAP measures are not prepared in accordance with the 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 second quarter financial results. Stephen?

Stephen Cumming

Thank you, Peter. Let me provide some details of our statement of operations. Revenues for the second quarter increased 4% sequentially and 22% as compared to the same quarter in 2010 to $478.6 million, at the high end of our guidance about 1%, 4% sequentially. Our quarterly revenue reached the highest level in over 10 years and is Atmel's ninth consecutive quarter of sequential revenue growth. Excluding the Smart Card sold at the end of the third quarter in 2010, revenues increased 31% when compared to the second quarter of 2010.

We set another record for gross margin. Second quarter 2011 gross margin was 51.8%. The second quarter gross margin was an 80 basis-point improvement from the 51% we reported last quarter and ahead of our guidance of 51%. The sequential gross profit improvement was primarily the result of a favorable onetime invoicing adjustment from a sub con.

Our operating expenses of $136 million were within our guidance of $137 million, plus or minus $2 million. This compared to operating expenses of $133 million in Q1 of 2011 and $130 million in the second quarter of 2010. In the second quarter of 2011, operating expenses increased sequentially, primarily as a result of planned higher R&D expenditures. Overall, operating expenses represented 28.4% of revenues in the second quarter, down from 28.9% in the first quarter of 2011.

R&D expense of $65 million in the second quarter was approximately $3 million higher than the prior quarter and approximately $3 million higher than the $63 million reported in the year-ago period. The increase in R&D expense as compared to last quarter was primarily due to increasing headcount to support our Microcontroller business, the higher mask and wafer costs.

SG&A expense was $70 million for the second quarter of 2011 compared with $71 million in the prior quarter and $67 million in the same period last year. The lower sequential spend was primarily due to decreased stock-based compensation expense, lower sales-related spending and more vacations in Q2, offset by higher variable compensation and merit increases during the second quarter.

Stock compensation for Q2 was $14 million. It is broken out in the following areas: $2 million was related to manufacturing, $5 million to R&D and $7 million to SG&A. Stock compensation was $5 million lower than the first quarter of 2011 due to the successful completion of our long-term performance-based compensation plan.

Income from operations was $111 million in the second quarter of 2011. The GAAP operating margins of 23.2% was the highest level achieved since the first quarter of 1997. This compares to income from operations of $82 million in the prior quarter and a loss from operations of $79 million in the same period last year. First quarter 2011 income from operations included $21 million of restructuring charges and a $2 million gain on the sale of assets. For the second quarter of 2010, loss from operations included charges related to the sale of the company's manufacturing operations in Rousset, France, $108 million.

Income tax provision totaled $19 million in the second quarter of 2011, resulting in an effective GAAP tax rate of 17%, which is slightly lower than our guidance of 18%. Our non-GAAP tax expense was approximately $700,000 or approximately 1% during the second quarter of 2011. On Jan 1, 2011, we implemented a global tax restructuring

[Audio Gap]

our global tax position. This tax-focused restructuring included changes to our transactional flows, inventory ownership, IP ownership, legal entity structure and sales structure.

With the successful implementation of our strategic restructuring project, we now expect our long-term effective tax rate to be 18% on a GAAP basis and should be approximately 2% to 3% on a non-GAAP or cash tax basis for the foreseeable future. The second quarter tax provision compared to an income tax provision of $9.8 million in the first quarter of 2011 and a tax benefit of $39.7 million for the second quarter of 2010.

GAAP net income for the second quarter of 2011 was $90.9 million or$0.19 per diluted share. This compares with first quarter 2011 net income of $74.6 million or $0.16 per diluted share and a net loss on a GAAP basis of $36.4 million or a loss of $0.08 per diluted share in the same period last year. On a non-GAAP basis, in the second quarter 2011, we had non-GAAP net income of $124.3 million or $0.26 per diluted share. This compares with non-GAAP net income of $122.2 million or $0.26 per diluted share in the first quarter of 2011, a non-GAAP net income of $50.6 million or $0.11 per diluted share in the second quarter of 2010.

As to our stock repurchase program, during the second quarter, Atmel repurchased 2 million shares of our common stock in the open market at an average price of $13.64 per share. Since the plan's inception, we have spent approximately $202 million to repurchase 19.5 million shares of stock in the open market at an average price of $10.37 per share.

Turning to the balance sheet. Combined cash balances, cash and cash equivalents plus short-term investments totaled $453 million for the second quarter, a decrease of $43 million from the first quarter. Cash flow from operations totaled approximately $42.6 million in the second quarter, down approximately $31.5 million from the $74.1 million in the first quarter of 2011.

During the second quarter of 2011, the company incurred higher payable taxes due to the successful achievement of a long-term performance-based equity plan and the repurchase of $28 million of common stock. Capital expenditures were approximately $24 million in the second quarter, down from the first quarter's $31 million and below the guidance range of $30 million to $35 million. The decrease is primarily due to the timing of payments versus received equipment during the quarter as we continue to make investments in back-end test capacity for our Microcontroller business.

Depreciation and amortization in the second quarter of 2011 was $17 million compared to $20 million last quarter and $16 million in the second quarter a year ago. Accounts receivable totaled $243 million at the end of the second quarter, up by approximately $17 million from the first quarter. Our days sales outstanding for the second quarter increased to 46 days, up from the prior quarter's 44 days.

Inventories of $367 million increased by $48 million in the second quarter compared to the prior quarter. The increase was primarily from our microcontroller and maXTouch product lines as we continue to reduce lead times to improve customer service and support the growth of our Microcontroller business. Days of inventory increased in the second quarter to 145 days as compared to 128 days in the last quarter. The second quarter's inventory increase was predominantly in WIP as we reduced our finished goods. Given the current macroeconomic environment, our inventory is at a level higher than our target range. However, the risks of onetime write-offs are minimal as our products have a long shelf life and staging the inventory in WIP gives us greater flexibility to support our customers. With the continued growth of our Microcontroller business, we expect to bring our inventory down over the coming quarters.

And now, an update on the litigation with Infineon. On July 5, in our first substantive response to the lawsuit Infineon filed on April 11, 2011, Atmel sued Infineon Technologies AG and Infineon Technologies North America Corporation for patent infringement in the United States District Court for the District of Delaware. In our court filing, we alleged that Infineon's 8-bit, 16-bit and 32-bit microcontrollers infringe 6 Atmel patents. The allegedly infringing Infineon products are used in various industrial commercial and automotive applications. We also denied Infineon's allegations and have sought a judicial declaration that each of the patents Infineon asserted against us are invalid and do not infringe.

As for the timing of a resolution on this matter, we currently do not expect significant activity to occur until the end of 2011 or early 2012. In the near term, we do not see any material increase in our expenses in connection with this litigation, and it is already included in our financial guidance.

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

Steve Laub

Thank you, Stephen. I'm very pleased that we've been able to deliver our ninth consecutive quarter of revenue growth and our highest quarterly revenue in over 10 years. Our overall business grew 4% sequentially and 22% as compared to the second quarter of last year. Adjusting for the sale of our SMS business in the third quarter of last year, our sales grew over 30% on a year-over-year basis. Furthermore, this past quarter, our overall gross margin of 51.8% was the highest level achieved in the company's history, and marked our seventh consecutive quarter of increasing gross margin.

Our operating margins of over 23% were the highest level achieved since the first quarter of 1997, reflecting the vastly improved earnings power of our new business model.

With the substantial strategic business changes we have made in the past 4-plus years, we have built a microcontroller-centric company with a much more attractive business mix and operating model than ever before. The changes we implemented have enabled us to build the industry's most rapidly growing and successful microcontroller business, as well as substantially enhancing competitiveness and financial performance of other businesses. In addition, with the implementation of our fab-lite manufacturing model, we have access to advanced process technologies, wafer capacity and low-cost manufacturing to leading agent foundries on minimizing any adverse impact due to changing market conditions.

Turning to a discussion of our business segments. For our Microcontroller business unit, Atmel continues to gain market share in the overall microcontroller market, seen by our most recent quarterly results. In the second quarter of 2011, our Microcontroller business set another record, surpassing the $300 million mark for the first time in the company's history. Revenues of $302 million were up 3% sequentially and up 53% as compared to the second quarter of 2010. Our 8-bit microcontrollers were up 3% sequentially and up over 45% year-over-year. Our 32-bit microcontrollers were also up 3% sequentially and increased over 85% year-over-year.

Industrial applications continue to be our largest end market, followed by smartphones and tablets, which have been growing very rapidly, and then the consumer market. From a demand perspective, consistent with the experience of many others in our industry, the industrial markets began to slow during the end of the second quarter.

In the 8-bit space, we recently launched an ultra-low power version of our already very successful AVR XMEGA product family. This new product family offers USB connectivity and high-precision analog, along with a unique combination of large flash memory and the market's lowest power consumption. The AVR XMEGA microcontrollers are designed for applications in the industrial, consumer, metering and medical segments.

In the 32-bit space. In July, we announced sampling of our 32-bit ARM Cortex-M3 based microcontrollers, with 1 megabit embedded flash and 128 kilobit SRAM. This is a new addition to Atmel's ARM-based family of MCUs, which is a portfolio of over 100 products shipping in volume.

The new Atmel Cortex-M3 MCU offers high performance, low power and large memory density for applications including medical equipment, building and home control, industrial automation, machine to machine, test and measurement, smart grid connectivity and data input/output peripherals for consumer and computing devices.

Our automotive micros continue to gain traction in the market. We have good designing momentum with a number of major automotive tier 1s for our low power, MEGA32 M1 posting high-temperature applications. We are pleased with the customer acceptance of Atmel automotive-qualified solutions.

At our Analyst Day in June, we announced some additional growth drivers for the company, including LED lighting. The migration of industrial and commercial lighting from lightbulbs to LED requires a microcontroller that drives, powers and supports the LED lighting infrastructure. Atmel recently introduced a new family of intelligent multiscreen LED drivers, the backlighting and solid-state lighting markets. The comprehensive portfolio of Atmel LED drivers support the rapidly growing LED applications.

Regarding our touch products. MaXTouch continues to extend its leadership in the market. MaXTouch revenues generate strong sequential growth during the second quarter, the sales of smartphones and new tablets based on the Android operating system increased rapidly. In the smartphone area, new design wins included Samsung's flagship LTS2, which features our new MaXTouch 224E product. And last week, Samsung announced that sales of the Samsung Galaxy S II smartphone had surpassed 5 million units in 85 days. The device has only been launched in Europe and Asia and is soon to be launched in the U.S. Other wins include Samsung's Infuse 4G, Nokia's recently introduced E6, X7 and N9 smartphones and Motorola's Photon, Bionic and Droid 3 smartphones.

In June, we announced we would have our new maXTouch 112E touch controller available for the fast growing consumer markets, including feature phones, digital still cameras, global positioning systems, gaming consoles and other high-volume devices. We had previously not participated in the high-end feature phone and low-end smartphone segment of the market. Due to overwhelming customer interest, we developed this part, optimized for touchscreens of 2.8 to 3.5 inch. The key benefit of the product is the ability to use single layer touchscreen constructions, including on-sale designs.

We expect air production shipments of the 112E to begin during the third quarter. Smartphones continue to experience very rapid growth, according to a recent report by IDC, which forecasts 55% growth in 2011 on smartphones or 472 million units, and to approach shipments of 1 billion units by 2015.

In mid-July, Google stated the company is activating 550,000 Android smartphones and tablets per day, a market increase in the rate at which Google said it was activating Android devices just a few weeks ago.

Moving on to tablets. In addition to previously announced NVIDIA tablet reference design powering touchscreens up to 15 inches, Atmel is now included in a number of new tablet reference designs. We are now part of Qualcomm's 11.6-inch reference design, as well as Texas Instruments 10.1-inch reference design for Android-based tablets.

MaXTouch continues to be the clear market and technology leader for tablet-based solutions that has superior multichip and single-chip solutions.

During the second quarter, we added the new Samsung GALAXY Tab 10.1 in the list of tablets powered by Atmel. The recent review of the Galaxy Tab 10.1 by Engadget states that the capacitive touchpanel was "abundantly responsive in both swiping and pinch-to-zoom actions and recognized immediately and accurately. As far as tablet touch experiences go, Tab 10.1 delivers one that's world class."

Customer design activity continues to be very strong. In addition to smartphones and tablets, we are pursuing multiple opportunities across many different applications, including e-readers, multifunction printers, digital still cameras, gaming consoles and appliances.

As an example of capacitive touchscreen adoption in the area of appliances, maXTouch has recently been designed into an oven module by a European manufacturer, which is a large-cover display that allows selecting the functions simply by sliding your finger across the screen.

In the automotive area, we have good design activity with leading automotive suppliers in all major regions of the world in our maXTouch 540E and 768E parts for automotive infotainment touchscreens.

We are particularly pleased with our penetration in the North American market. We expect to see first revenues begin during the second half of next year from these designs.

Moving to our new maXTouch E series products. During the second quarter, we commenced volume shipments of the maXTouch 224E, 540E and 768E. In addition, we began sampling the 1386E and 1716E products to support larger capacitive touchscreens. The E Series extends our leadership position by offering world-class performance when compared to the latest offerings by any competitor. The family offers the industry's only 32-bit touchscreen controller, which we combined with enhanced analog sensing to deliver faster response times, higher accuracy, improved noise immunity, reduced system power and lower system cost. All of our E Series products are capable of serial bus designs to help our customers create thinner products and reduce their costs.

Turning next to our nonvolatile memory segment. Total revenues were $71 million in the second quarter, up 12% sequentially and down 3% as compared to the second quarter of last year. The sequential improvement in our memory business was primarily the result of increased wafer supply allocation. Our serial E-Squared memory business grew 7% sequentially and was down 22% as compared to the second quarter of 2010. E-Squared memory is particularly strong in the industrial and automotive markets. Our serial flash business increased by 5% sequentially while increasing 21% in the second quarter of the prior year.

We continue to transition our overall memory business from commodity to more specialty and analog-based memory products, such as our new temperature sensor solutions, which will support the overall margin profile for this business set.

For the RF and automotive segment, revenues grew to $53 million in the second quarter of 2011, up 3% sequentially and up 16% as compared to second quarter of 2010. As the majority of our customers in the automotive market are based primarily in Europe and North America, the tragedy in Japan had minimal impact on our automotive business. The second quarter was our fourth consecutive quarter of revenue growth of the high-voltage product lines. Furthermore, we are pleased to have won a large car access platform design at a leading OEM during the quarter. In addition, we began volume shipments of lithium ion battery management ICs, supporting 6 cells per IC.

Turning to the ASIC business segment. Revenues were $53 million in the second quarter, down 1% sequentially and down 32% as compared to the second quarter of 2010. As a reminder, Atmel sold the Smart Card business at the end of Q3 2010, which was included in the ASIC business and contributed approximately $27 million revenues in the second quarter of last year. Excluding Q2 2010 Smart Card revenues, the ASIC business severance revenues were up 5% year-over-year. Noteworthy was the growth of our Crypto products during the second quarter. These products leverage our microcontroller and ASIC solutions that are designed to authenticate objects to prevent piracy of software or other intellectual property and protect sensitive data.

Looking at the second quarter revenues by our geography, Asia continues to be our largest ship-to location, representing 60% of revenues compared with 58% in the prior quarter. Europe decreased by 1 percentage point sequentially to 25% of revenues, while the Americas were down slightly at 15% as compared to 16% of total revenues in Q1.

As to lead times, as we continue to grow our company, we are pleased to have reduced our overall lead times for approximately 4 to 6 weeks for most products in order to better service our customers. We now have sufficient capacity in place to support the growth of our ongoing business.

In summary, we have successfully built a microcontroller-centric company. We are focused on winning in the high-growth market segments. As discussed at our recent Analyst Day, the increase in our top line revenues from Microcontrollers, which are among our higher gross margin businesses and the continued improvements that have occurred in our other business segments have allowed us to continue improving our long-term financial model.

The second quarter was Atmel's ninth consecutive quarter of sequential revenue growth, a significant accomplishment. We had record Microcontroller revenues surpassing the $300 million milestone for the first time, which puts us an annual run rate of over $1.2 billion for Microcontrollers. For the second quarter in a row, Atmel has truly achieved the position as the industry's third-largest microcontroller supplier, behind only Renesas and Freescale. Furthermore, we expect our Microcontroller business will continue to gain further market share during the third quarter.

Last quarter, we stated that we expect maXTouch revenues to easily surpass $300 million for calendar-year 2011 and over $140 million generated in 2010 due to the continued rapid growth of smartphones, the rise of Android tablets and the penetration into new high-volume applications, we now expect maXTouch revenues to surpass $350 million during 2011. As the clear leader in smartphones and tablets, we intend to extend our leadership into new touchscreen applications, which will continue the proliferation and success of maXTouch.

As we enter a more uncertain macroeconomic environment, we are not completely immune to an overall economic slowdown. However, the recent introduction of our industry-leading maXTouch E Series products in a rapidly growing touch market, along with our industry-leading 8- and 32-bit microcontrollers, provides Atmel enormous long-term growth opportunities and a buffer against short-term economic weakness and global uncertainties.

I would like to thank our employees for their dedication to our customers in delivering yet another quarter of outstanding results. Let me turn the call back to Stephen for our Q3 financial guidance. Stephen?

Stephen Cumming

Thank you, Steve. For the third quarter of 2011, the company expects revenues to be flat to up 4% on a sequential basis. We expect gross margin [Audio Gap]

percent plus or minus 50 basis points in the third quarter of 2011. Third quarter operating expenses are expected to be approximately $139 million, plus or minus $2 million and depreciation and amortization is expected to be approximately $20 million in the third quarter. We expect the third quarter capital additions to be in the range of $30 million to $35 million. Other income and expense is expected to be approximately $2 million to $3 million expense and Quantum acquisition-related 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 those doing non-GAAP models, we expect non-GAAP or cash tax rate to be approximately 2% to 3% going forward. For modeling purposes assumed, fully diluted share count will remain essentially flat.

This concludes our prepared remarks. We'll now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Sujee De Silva of ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC

In the utilization rates here, where are they now as you're taking gross margins up here as you brought lead times in?

Stephen Cumming

Yes. Sujee, the utilization rates for our only remaining fab is pretty much unchanged. In Q2, it was pretty much fully utilized for the quarter.

Sujeeva De Silva - ThinkEquity LLC

And then on taking the touch guidance up here, what percent of that do you think is tablet, maybe for the full year or exiting the year to have a sense of how that's ramping?

Steve Laub

So, Sujee, our expectation is that tablets will probably end up being -- so first of all, just to let you know, the growth that we're saying is both in smartphones and tablets. Tablets are probably 20% or 30% of that total. We're also expecting that applications outside of smartphones and tablets will be 5% to 10% of the total.

Sujeeva De Silva - ThinkEquity LLC

Great. And then last question, on the 112E product, when do you expect the volume ramp for that to be material [ph] ?

Steve Laub

We expect volume shipments to begin during this quarter, but the real ramp will occur some time, probably some time in the first part of next year.

Operator

Our next question comes from Rajvi Gill of Needham and Company.

Rajvindra Gill - Needham & Company, LLC

On the kind of softness you're seeing in the industrial end markets, maybe if you could elaborate that a little bit further? And kind of what are you seeing in the non-maXTouch business, the 8-bit and the 32-bit in the third quarter kind of relative to some of the other competitors in the marketplace?

Steve Laub

So from a standpoint of what we're seeing, so as we noted during the prepared remarks, that the industrial markets for us have been the area where we're seeing some softness. Specifically in that, the expectation is you're seeing softness in both these sort of industrial automation markets. Some of these are energy markets and security markets. We're still seeing the lighting and medical markets are holding up reasonably okay. But the other ones are where the impact is more significant. With respect to the 8-bit and 32-bit marketplaces for the third quarter, we really don't break those out from a forecast standpoint. What we can tell you is that what we expect is that all of our micros, both touch and non-touch in Q3, we expect to go up.

Rajvindra Gill - Needham & Company, LLC

On the margin expansion, what do you think are some of the drivers for a margin expansion going forward? Is it just the increasing mix of maXTouch? Now that maybe microcontroller non-maXTouch might be perhaps slowing down, or maybe if you can elaborate some of the drivers of some of the margin expansion going up?

Stephen Cumming

Rajvi, it's Stephen. It hasn't changed, really, on what you've seen as sort of the continued margin expansion of the company over the last few quarters. And certainly, mix is a component of that over the longer term. We do expect our Microcontroller business to continue to grow faster than market and faster rate than some of the other businesses, and that is the richer gross margin business within the company. And obviously, within that, touch as well. So that's a big component. Cost reductions that we've spoken about in the past in terms of die shrinks, yield improvements, overall manufacturing improvements are another contributor to that. But it's really those 2 main areas that are the ongoing expansion for our gross margin over the longer term.

Rajvindra Gill - Needham & Company, LLC

Just a follow-up on the microcontroller side, given kind of your increased forecast for maXTouch, I'm kind of making some assumptions for third and fourth quarter, it would imply that the 8-bit and 32-bit would be down. Is that a fair assumption?

Steve Laub

For those quarters, that would not necessarily be a fair assumption on that, because we haven't put a forecast out for Q4, so I think you're getting ahead of that. I do think, or as I say, we're seeing some positive industrial marketplaces, and I think that's consistent with what other people are seeing as well. That's not something that's likely to last over the long term. It's likely to be, I think, a short-term adjustment, and then I think things resume their normal growth. So I think it's a little too early to be anticipating a down for Q4 on those particular product lines.

Operator

Our next question comes from Blayne Curtis of Barclays Capital.

Blayne Curtis - Barclays Capital

Guys, can you just talk about maybe the strength you saw in June in touch? I don't know if you can give any sort of metrics as to how big that was, but maybe just the components that drove the growth. And then the 20% or 30% of tablets, is that run rate today or is that something that you grow into, that run rate?

Steve Laub

So with respect -- I wouldn't jay with June, specifically. It was really a Q2 growth that we experienced with respect to the touch business. Regarding the tablets, we did experience that type of number in Q2 with respect to the mix of 20% to 30% of our total. Actually, we're particularly surprised with respect to the tablet number in Q2. We actually exceeded that number for the quarter, which gives us the confidence for 20% to 30% for the total year.

Blayne Curtis - Barclays Capital

I see. And in a non-volatile memory business, obviously that's a function of the capacity coming back. I mean, are you fully caught up at this point or do you still have some ability to catch back up there?

Steve Laub

Q2 is really a catch-up quarter for that business. There was a lot of customers that had really wanted to continue to source from us that we were not able to provide as much sourcing over 2010 that we would have liked. And we did a lot more catch-up in Q2. We think Q3, for the memory business, will probably be relatively flat as compared to Q2.

Blayne Curtis - Barclays Capital

I got you. And I see I missed the gross margin guidance, Stephen. What was that?

Stephen Cumming

The gross margin was 51%, plus or minus 50 basis points.

Operator

Our next question comes from John Vinh of Collins Stewart.

John Vinh - Collins Stewart LLC

First question is I was wondering if you could give us an update on where you stand on the single-chip tablet solution at this point.

Steve Laub

What we offer today is as much a tablet solution as with our 760AD. It is being used, for example, on 7-inch tablets, a number there in the marketplace. So we do offer that today. With respect to offering a chip that supports very high performance, let's say a 10-inch and above type of screen resolution, we don't preannounce products as part of our earnings calls. So I think it's a little early for us to be indicating that. But we're very comfortable with the timeframe of what we're developing and delivering our next set of products for the tablet marketplace, vis-a-vis our competitive schedules as well.

John Vinh - Collins Stewart LLC

Okay. And then Steve, just a follow-up question. Encouraging to see that your tablet mix is increasing from 20% to 30%. Can you talk about what your assumptions for tablet rjvenues are in the second half? Obviously, there's still a lot of concerns about there about non-Apple tablets able to compete effectively in the marketplace. If you could just give us your perspective on that, that'll be great.

Steve Laub

No, we understand. And we see the same type of press releases and interesting information on that as well. So as I mentioned to the -- on the prior question, our tablet revenue or our maXTouch revenues based on tablet actually exceeded 30% in Q2. And so given where it's at and given the growth of the business, that's why we raised our total overall guidance as about the rate as the percentage we've expect to come from tablets.

Operator

Our next question comes from Steven Eliscu of UBS.

Steven Eliscu - UBS Investment Bank

First of all, just want to get a sense if any of the weakness you're seeing in the industrial market in Q3 is related to inventory depletion from any buildup that there was -- there may have been in Q2 from the Japan disaster.

Steve Laub

That's a good question, Steve. Our anticipation is that there probably was a little bit of buildup in the business that occurred early on in Q2. We did see some softness beginning in the aftermarkets towards the very end of Q2, which could be impacting Q3. We also think there may be some just general adjustments to one, business levels for our customers, as well as the fact that now, lead times approaching down 4 to 6 weeks. It's much lower than where they were simply 3 to 6 months ago. So perhaps, it's also the customers adjusting to that. Particularly, however, in the industrial marketplaces, we think it's a combination of some inventory adjustments and a little bit of weakness, we think, in the industrial marketplace as well, which we expect will be pretty much caught up or hopefully caught up by the end of this quarter.

Steven Eliscu - UBS Investment Bank

That's helpful. Also, just going back to the prior call, you suggested that you would see strength in the back half of the year in maXTouch with some 4G handset launches. Just wondering, given you're talking more about tablets, is that dynamic changed specifically? Has it diminished? Or is it that it's more or less as you expected. We have tablets as a big upside surprise. If you can help separate that?

Steve Laub

I think the answer is we're seeing both. We're seeing a lot of 4G release and a lot of 4G demand on us. And so that's actually going better than we anticipated. So what's happened is we'll be able to raise the overall number because of both growth in the smartphone, growth in the tablet, as well as growth outside in such new application areas as well. We did just raise the number to $50 million. So the anticipation is we are seeing strong growth in maXTouch across the board.

Steven Eliscu - UBS Investment Bank

And just one last question, Stephen, on the tax rate. You said that the non-GAAP tax rate of 2% to 3% would be for the foreseeable future. In terms of us thinking about valuation and thinking out let's say a 10-year time period, I mean, does it extend essentially as long as that, or are we talking just 2, 3 years? So if you could give us a sense of how long you get this big delta.

Stephen Cumming

Yes. That's a tough one to go out that far, Steve. But yes, certainly, over the next few years, it's going to be certainly in the single-digit range. As we go out a few more years, it may increase a little bit. It's tough to give you what it looks like 10 years from now, but I think best that I can tell, it's going to be in the single-digit range.

Operator

Our next question comes from Ian Ing of Gleacher & Company.

Ian Ing - Gleacher & Company, Inc.

Could you talk a little bit about these new non-handset touch opportunities in the op margin versus tablets and handset? It seems like it could be some richer gross margins due to lower volume, so more resources on the engagements.

Steve Laub

Yes, sure. So, your question was the OpEx impact of...

Ian Ing - Gleacher & Company, Inc.

Just the op margin to handsets and tablets.

Steve Laub

Okay. Yes, with respect to the new application areas, and we talked about some of those are, those can be printers, gaming consoles, appliances and so forth. The profile of that for the company from a standpoint of profitability is actually superior to that, which we expect for smartphone and tablet from both a gross margin perspective, and the way it ripples down to the op margin. So that's a very nice piece of business. It also has the longer product life cycles of -- multiyear product life cycles. It gives you more sustainable and assurance of long-term revenue associated with that. So it's very positive for us. We're very happy to see that. We expect that to continue to grow through the end of this year and into next year.

Ian Ing - Gleacher & Company, Inc.

My second question, this MaXTouch revision about $50 million more. When I look at the tablet contribution, the percent of sales and the non-smartphone contribution percent of sales and taking midpoints, I get about $50 million there. So am I misreading that handsets are not really contributing or is it these number's conservative in a sense already that handsets are also contributing?

Steve Laub

Handsets are also contributing. It depends if you want to take the high or low end to what those ranges are on that. But we're feeling very comfortable about the handset contribution to those numbers.

Operator

Our next question comes from Jim Schneider of Goldman Sachs.

James Schneider - Goldman Sachs Group Inc.

I was wondering if you could maybe talk about the automotive market a little bit more, what kind of trends you're seeing there? I think there's been a pretty wide divergence from your competitors in terms of what they're expecting in Q3. Can you maybe talk about what you're expecting in Q3 until the end of the year?

Steve Laub

Sure. So as you may know, our automotive business is primarily European, also supported by North American manufacturers as well. Our business was up nicely in Q2. Our expectation for Q3 is it would be back to slightly down during the quarter. We don't typically forecast out beyond the quarter so I can't give indication of Q4 at this point because the marketplace is somewhat dynamic. But we're still seeing a nice business in there. We're still seeing it reasonably assured. Q3 is typically seasonally a softer quarter for automotive and flat to slightly down is something that we feel our performance is doing quite well.

James Schneider - Goldman Sachs Group Inc.

Fair enough. And then maybe looking into Q3, can you maybe give us some more color on, outside of the touch opportunity, within microcontrollers, which are the submarkets you expect to be stronger or weaker?

Steve Laub

For automotive?

James Schneider - Goldman Sachs Group Inc.

No in micro -- sorry, XTouch.

Steve Laub

XTouch? With respect to Q3, what we expect is that the communications, networking marketplaces for us are growing nicely. The medical marketplaces, lighting marketplaces within industrial. The consumer markets, we expect some growth in Q3 as well, but we feel the General Industrial will be the area that we think will be soft in Q3 as we saw some softness begin during the end of Q2.

Operator

Our next question comes from Anthony Stoss of Craig-Hallum.

Anthony Stoss - Craig-Hallum Capital Group LLC

A follow-up on that also. So if memory's flat our file is [ph] flat to slightly down, custom ASIC, I think you've neglected so far. And also just to round up that MCU commentary. MCU is, in general, you're saying kind of flat to down a little overall. And then also if you wouldn't mind chatting on kind of pricing or ASPs in the touch side. Do you see any deviation there?

Steve Laub

Yes, Anthony, just to correct you, MCUs, we're seeing those up. We're seeing those up for both touch and non-touch micros in Q3. With respect to the ASIC business, we also expect to see some growth in the ASIC business in the Q3 quarter as well. From an ASP standpoint, ASPs were relatively flat in Q2 as compared to Q1. And we're not seeing any unusual behavior with respect to the pricing environment today.

Operator

Our next question comes from Craig Berger of FBR.

Craig Berger - FBR Capital Markets & Co.

Can you just remind us where channel weeks of inventory were exiting Q1 and then were they were exiting Q2 and what expectations are for third quarter?

Stephen Cumming

Yes, Craig, this is Stephen. So we reported back in our Q1 earnings call that channel inventory for us was around 8 weeks. We are now in -- for Q2, we're about 9 weeks. So just a refresher, we like to operate generally between 8% to 10%. So we're right in the mid-point of our overall ranges. Tough to give you any sort of indication with regards to Q3, but I don't see that dramatically changing in the third quarter.

Craig Berger - FBR Capital Markets & Co.

Just as a follow-up, can you -- I'm sorry if I missed it, but can you provide any color on how the E series, maXTouch product design wins are tracking? And then as you look forward and you look at tablets where today you might be shipping 4 or 5 chips and next year, you might be shipping one megachip, what does that do to the content for you in that tablet?

Steve Laub

With respect to the E Series family, design wins are very strong. Actually, overall design wins in our maXTouch business continue to be very strong and they've really transitioned from the original 224 product family to the E product family. So virtually all the new design wins or design win activity is occurring with the E products. As we think about the tablet business, you're correct that this year, it's been primarily a multichip business. There has been some single-chip business with the 768E as well. We do expect that next year, there will be a pretty strong transition down to a 2 or a single or one-chip tablet solution, and as that happens, you could expect that the ASPs, while we don't want to communicate those too openly to the marketplace and to our competitors, but you can expect that the content will probably drop, probably about 1/3, that's probably just roughly speaking, let's say as you move into the solutions for next year. At the same time, we expect that the tablet market is going to grow rapidly, especially for the non-Apple tablets.

Craig Berger - FBR Capital Markets & Co.

Can I just squeeze one more in on your maXTouch products, because there is a lot of competition coming into this and you guys clearly seem to be the leader. What are the key features or functions that you'll be able to integrate that'll allow you to keep a technological edge over this mass of competitors coming in.

Steve Laub

Craig, it's a great question. There is, as part of our roadmap, we are integrating a lot of functionality, because we do recognize the entire sort of ecosystem environment that surrounds those solutions. We've not announced what those functionalities are, because we don't want to let that be known to our competition. Some people have announced what they're doing, other people have not. We've not done that but, rest assured we're not just going for a longer touchscreen shift. We do recognize the need to integrate what I call neighboring functionality, important functionality for both the smartphone tablets and other solutions as well.

Operator

Our next question comes from Jeff Schreiner of Capstone Investments.

Jeffrey Schreiner - Capstone Investments

My first question was, just wondering we've heard a lot of talk about some of the weakness in the non-Apple tablets. And wondering if any of your customers perhaps pushed out some tablet design wins you had? Maybe pushing out the ship dates and just adding on to that, wondering kind of the visibility you have in maXTouch beyond September?

Steve Laub

We don't really comment on whether or not our customers are pulling out or pushing unless it's already happened. As I mentioned earlier, our maXTouch tablet, our business was actually stronger in Q2 than we had expected, which I think indicates customers actually are bringing in or at least being consistent with the timelines that they had provided us. But with respect to Q4, we don't typically forecast but right now, the indications are that we expect a quite a solid Q4 with respect to our touch business, whether it be smartphones, tablets and other new applications as well.

Operator

Our next question comes from Hans Mosesmann of Raymond James.

Hans Mosesmann - Raymond James & Associates, Inc.

Steve, can you frame the touch positioning qualitatively for us in terms of you guys tend to get the high end of the various SKUs. Are you getting all of them? And as it relates to smartphone migration to tablets, are you seeing that OEMs are sticking with your solution or do they want to split the business? That would be very helpful.

Steve Laub

So yes, we have primarily, through 2010 and today, we've been the guy on the high end, that's just sort of midrange and high-end smartphones, which is why we've often made aware to the marketplace that, for example, PCWorld when they do their publication of the top 10 best smartphones in the marketplace, if you take a look at Apple, which has been part of that top 10, we've been in 8 of the other 9, traditionally. So we really have captured and have delivered with our customers the most important smartphones in the marketplace. What we've not participated in is that space where the low-end smartphones or the high-end feature phone, which is now adopting touch. The 112E product line is something that will allow us now to participate in that market with a much more -- with a product that's much more optimized for the requirements of ours [ph] , which tend to be a luxury requirement clearly in the mid- or high-end smartphone marketplace as well. With respect to the tablet solutions, that's a more demanding solution than it is for the smartphone because of the larger screen size and so forth, and because of the fact you really do take advantage of at least 10 touches multi -- simultaneously because you can use both hands on the tablet. Much more easier than on a smartphone. So our technology is much more obviously and evident as being superior in that particular environment and that's why with respect to the tablets, we've been also the very clear leader in helping the non-Apple guys deliver their tablets into the marketplace. There has been some movement just over these last several months, I'd say the last 6 months. We've begun to get into some new accounts that were part of our accounts before and we're seeing some of the other guys move into some sort of more low-end phones with some of the accounts that we pretty much or maybe the sole guy in 2010. Should be a little bit of movement that way. On the high end, we've continued to be the guy on the high end, both smartphones and tablets.

Hans Mosesmann - Raymond James & Associates, Inc.

Okay, and if I can, a quick follow-up, on the next generation of touch solutions, analog, integration analog, sensing, is going to become more important that some of your competitors or want to become competitors believe that they have some kind of an angle there in terms of -- on the analog front-end side of things. What are your advantages or your solutions relative to some of these proposed solutions in the market from your potential competitors?

Steve Laub

Well, one of the things that's very important to know is that competing in microcontrollers generally requires excellent analog peripherals. And so, one thing that Atmel has historically had is outstanding analog design, analog peripheral, analog performance, which is one of the reasons we've been so successful in both our 8- and 32-bit microcontrollers. So we've extended and taken that capability into this marketplace. And so we have -- we're very comfortable with the capability. We're very comfortable with our competitiveness in competing on analog, because of what we've been doing historically against the large microcontroller suppliers in the world for the last several years as well. So analog performance is important as is the microcontroller compute performance. And on that level, I think we've demonstrated that we offer superior solutions in both.

Operator

Our last question comes from Betsy Van Hees of Wedbush Securities.

Betsy Van Hees - Wedbush Securities Inc.

Stephen, I was wondering if you could help me in terms of the guidance. So microcontrollers is going to be up, maXTouch is going to be up, non-volatile is going to be flat, ASICS flat, and then what was radio frequency and automotive?

Steve Laub

That would be flat to slightly down.

Betsy Van Hees - Wedbush Securities Inc.

Flat to slightly down, okay. And then you increased the maXTouch guidance from $300 million to $350 million, and MCUs grew in Q1 over Q4 and again in Q2, excluding maXTouch. So if you look at the guidance of what microcontrollers are going to do this quarter, then Q4 is going to be a huge number or am I just not doing the math correctly?

Steve Laub

We're giving the sense for what the full year will be by giving you obviously maXTouch for the full year. To get to those numbers that we've talked about, we do not need Q4 to be a significantly strong quarter as compared to Q3. We do expect Q4 to be a solid quarter, which we indicated. But it does not require anything sort of heroic to get the kind of numbers we described.

Betsy Van Hees - Wedbush Securities Inc.

Okay, great. And then last question is on the non-volatile memory. Is typical seasonality in Q4 for that business to be flat or down?

Steve Laub

Q4 is typically to be probably flat to slightly down. Q1 is the seasonally down quarter for that business.

Peter Schuman

I have some closing remarks. During the third quarter, Atmel will be presenting at the Canaccord Genuity Conference, Tuesday, August 9 in Boston. We will be in New York for both the Rodman & Renshaw Conference on Monday, September 12, and ThinkEquity Conference on Tuesday, the 13th of September, also in New York. Additionally, we will be at the Deutsche Bank Conference on Thursday, September 15 in Las Vegas. Webcast information for these events will be available on the company's Investor Relations website. In the meantime, you're always welcome to contact our Investor Relations department at (408) 518-8426 with any questions that arise. Thank you for joining us, and this concludes today's call.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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