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Atmel (NASDAQ:ATML)

Q3 2011 Earnings Call

November 01, 2011 5:00 pm ET

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., Research Division

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

Jeffrey A. Schreiner - Capstone Investments, Research Division

John Vinh - Collins Stewart LLC, Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Li-Wen Zhang - Pacific Crest Securities, Inc., Research Division

Steven Eliscu - UBS Investment Bank, Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Blayne Curtis - Barclays Capital, Research Division

Operator

Good afternoon. My name is Wesley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Atmel Corporation Third Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Peter Schuman, Director of Investor Relations, to begin. Please go ahead, sir.

Peter Schuman

Thank you, Wesley. Good afternoon, and thank you for joining us for Atmel's Third 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 1 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 third 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 fourth 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, litigation matters and 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, therefore, are subject to risks and uncertainties as described in the Safe Harbor's 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 third quarter financial results. Stephen?

Stephen Cumming

Thank you, Peter. Let me provide some details of our statement of operations. Revenues of $479.4 million for the third quarter 2011 were up slightly sequentially and increased 8% as compared to the same quarter in 2010 and at the low end of our guidance range are flat to up 4% sequentially. Our quarterly revenue reached the highest level in over 10 years and is Atmel's 10th consecutive quarter of sequential revenue growth. Excluding the Smart Card business sold at the end of the third quarter 2010, revenues increased 15% when compared to the third quarter 2010.

Third quarter 2011 gross margin was 50.1%. The third quarter gross margin was slightly below our guidance range of 51%, plus or minus 50 basis points. The sequential decrease in gross margin was due primarily to lower factory utilization and inventory adjustments.

Our operating expense of $133 million were below our guidance of $139 million, plus or minus $2 million. This compares to operating expenses of $136 million in Q2 2011 and $122 million in the third quarter of 2010. During the third quarter, we remained very focused on driving down operating expenses and took actions to reduce discretionary spending in light of the softer market conditions. Overall operating expenses represented 27.7% of revenues in the third quarter, down from 28.4% in the second quarter of 2011. R&D expense of $64 million in the third quarter was approximately $1 million lower than the prior quarter and approximately $8 million higher than the $56 million reported in the year ago period.

SG&A expense was $68 million in the third quarter of 2011 compared with $70 million in the prior quarter and $66 million in the same period last year. The sequential decrease in both R&D and SG&A was a direct result of strict controls over discretionary spending, as well as seasonal European vacation patents and adjustments to variable compensation expenses.

Stock compensation for Q3 was $16 million and is broken out in the following areas: $1 million was related to manufacturing, $5 million to R&D and $10 million to SG&A. Income from operations was $140 million in the third quarter of 2011. The GAAP operating margin of 29.2% was a record for the company.

Included within the third quarter of 2011 results was a gain of $33.4 million for the sale of our corporate headquarters. Excluding this amount, the operating margin would have been $107 million or 22.3% of sales. This compares with income from operations of $111 million in the prior quarter and income from operations of $78 million in the same period last year.

Income tax provision then totaled $23.2 million in the third 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 $0 during the third quarter 2011. As a reminder, the beginning of this year, we had implemented a global tax restructuring strategy, and we expect to have non-GAAP or cash tax effective rate in the low single-digit percentage for the foreseeable future. The third quarter 2011 tax provision compared to an income tax provision of $18.8 million in the second quarter of 2011 and a tax benefit of $136.6 million for the third quarter of 2010.

During the third quarter of 2010, Atmel completed a settlement of an IRS tax audit in the amount of $150.4 million or $0.32 per diluted share, which included a $48.4 million tax refund. GAAP net income for the third quarter of 2011 was $116.7 million or $0.25 per diluted share. This compares with second quarter 2011 net income of $90.9 million or $0.19 per diluted share and GAAP net income of $219.8 million or $0.47 per diluted share in the same period last year. On a non-GAAP basis, for the third quarter 2011, we had net income of $124 million or $0.26 per diluted share. This compares with non-GAAP net income of $124.3 million or $0.26 per diluted share in the second quarter of 2011, a non-GAAP net income of $88.4 million or $0.18 per diluted share in the third quarter of 2010.

As to our Stock Repurchase Program, during the third quarter, Atmel repurchased 6.1 million shares of our common stock in the open market at an average price of $9.23 per share.

Turning to the balance sheet. Combined cash balances, cash and cash equivalents plus short-term investments totaled $483 million for the third quarter, an increase of $29 million from the second quarter. Cash flow from operations totaled approximately $61 million in the third quarter, up approximately $18.5 million from $42.6 million in the second quarter of 2011. During the third quarter of 2011, we sold our corporate headquarter building for $48.5 million, resulting in a gain of $33.4 million, and we repurchased 56 million of common stock.

Capital expenditures were approximately $20 million in the third quarter, down from the second quarter's $24 million and below the guidance range of $30 million to $35 million. The decrease is due to our focus on capital asset management driven by the softer-than-expected semiconductor market. Depreciation and amortization in the third quarter of 2011 was approximately $19 million compared to $17 million last quarter and $17 million in the third quarter a year ago. Accounts receivables totaled $244 million at the end of the third quarter, up by less than $2 million from the second quarter. Our days sales outstanding from the third quarter was 46 days, flat from the prior quarter.

Third quarter's inventory, days of inventory, remained flat compared to the second quarter at 145 days. Inventories of $380 million increased by $30 million in the third quarter compared to the prior quarter. The increases in inventory was driven primarily by microcontroller products in the form of work inventory. We have taken considerable measures to reduce our internal inventories, including both foundry and internal fab loadings during the third quarter. Our long-term inventory model is approximately 120 to 130 days.

Finally, we've taken some significant actions over the past few years in terms of driving overall efficiency in taking out cost. Consistent with the strategy of shedding noncore assets, we took advantage of a favorable window in the commercial real estate market and sold our San Jose corporate office and land for $48.5 million, resulting in a gain of $33.4 million. This is a nonstrategic asset for Atmel, and selling it allows us to increase our cash position and find better ways of generating returns for our shareholders.

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

Steve Laub

Thank you, Stephen. Atmel continues to generate strong operating and financial results for our shareholders. We're pleased that we achieved our 10th consecutive quarter of revenue growth in the third quarter, as our sequential revenues were up slightly and up 8% year-over-year. Adjusting for the sale of our SMS business in the third quarter of last year, our sales grew 15%. These results demonstrate Atmel's out-performance relative to most of our peers. The strength of our financial results are the direct outcome of our strategy to reposition the company to lead in the high growth areas in the semiconductor space combined with our recently implemented fab-lite operating model.

Moving to a discussion of our business segments. For our Microcontroller business unit. Our Microcontroller business, after setting record revenues in the second quarter, again exceeded the $300 million revenue mark for the second time in the company's history. Revenues of $301 million were approximately flat sequentially and up 18% as compared to the third quarter of 2010. Based on these results, when compared with the results already announced or pre-announced by other marketing controller suppliers, we are confident that Atmel grew its Microcontroller market share substantially during Q3, both sequentially and year-over-year. By product family, our 8-bit microcontrollers were up 1% sequentially and up over 13% year-over-year, while 32-bit microcontrollers were down 4% sequentially but increased over 41% year-over-year. Smartphone and tablet applications continued to experience strong growth, while industrial applications experienced slowing in demand consistent with what has been reported by other semiconductor companies.

As to new products, during the quarter, we expanded our industry-leading AVR XMEGA family with 7 new microcontroller products. These products integrate leading edge functions, such as high throughput low-power, USB interfaces and LCD controllers. They offer designers reduced design complexity and lower overall system cost while providing ultra low-power consumption for applications, including smart meters, home automation, power tools and other applications that require a user interface.

In 32-bit ARM microcontrollers, Atmel recently announced our first ARM Cortex-M4 processor family as part of the continued expansion of our ARM product portfolio. This is the latest embedded architecture processor by ARM specifically developed to address digital signal control markets that demand an efficient easy-to-use blend of control and single-processing capabilities, targeting motor control, smart metering, automotive, power management, embedded audio and industrial automation markets.

During Q3, we also announced a significant new product enhancement to drive the adoption of wireless devices in consumer and industrial applications using many of Atmel's AVR and ARM-based microcontrollers. System designers now have the ability to easily implement 802.11n Wi-Fi with Atmel's AVR and ARM-based products along with Redpine Signals Wi-Fi modules. Wi-Fi connectivity is fast making its way into embedded applications, including building automation, metering, digital audio and medical applications.

Moving to our touch products. maXTouch set a revenue record for Q3 with particularly high shipments for smartphones. We are experiencing excellent acceptance of our industry-leading maXTouch E Series family. Since its introduction in February 2011, our maXTouch E Series has surpassed 15 million units shipped as of the end of the third quarter. This is the fastest new microcontroller product launch in the company's history and far exceeds that of our very successful prior-generation maXTouch family.

Recent customer design wins include Samsung's Galaxy Note, a revolutionary device that features a 5.3-inch display powered by our maXTouch 540E touch controllers. The high-node density and 32-bit processing power of the 540E product enable high-resolution touch sensing and advanced signal processing. The Samsung Galaxy S II, which features our maXTouch 224E product with an advanced on-sell touchscreen implementation, continues to set sales records worldwide, even surpassing Apple's iPhone shipments during Q3.

Other notable wins include 2 new HTC smartphones, the Windows Mango Titan and Android-based Rhyme as well as Motorola's Electrify, Droid Razr and Atrix 2. Nokia has released a number of new smartphones featuring maXTouch, and Kyocera recently released the Milano smartphone.

We continue to expand our customer base with a growing number of new Chinese-based design wins, including the Vision smartphone and Slim 7 Android tablet from Huawei as well as a new tablet from Lenovo. This adds to our already strong base of global customers.

Regarding tablets, Atmel continues its market share dominance as the world's leading provider of capacitive touch solutions for non-Apple tablets. New tablets incorporating maXTouch include Asus' EeePad Slider SL101, which features a built-in QWERTY keyboard and integrated USB port; and the Asus Padfone, which allows you to dock your Asus phone inside a tablet. This provides for Internet access from the 3G network connection to be shared between the phone and the pad.

Samsung launched a new tablet coin, the GALAXY Tab 7.7, an ultrathin form factor with a Super AMOLED Plus display, which is powered by Atmel's 768E controller in an on-sell touchscreen implementation. Dell launched their Streak 10 Pro, which is now available in China. And as previously stated, Lenovo, another new tablet customer, launched their IdeaPad K1 tablet, which is available worldwide.

As to other major developments, a significant milestone was announced in September with Microsoft's selection of Atmel as a co-engineering partner for industry-leading maXTouch controllers in support of the new Windows 8 operating system. The touch-centric operating system is expected to expand the market for not only tablets but hundreds of millions of notebook PCs. At the Microsoft BUILD Conference in September, the maXTouch 1386 controller was used in a Samsung Windows Developer Preview PC that was given away to conference participants. In the future, a full array of maXTouch products are planned to support Windows 8.

Yesterday, Atmel announced a revolutionary new product named maXStylus, the highest performing active stylus solution for both tablets and smartphones. maXStylus is the only active stylus solution with a capability to simultaneously detect and respond to touch commands from fingers and stylus. Referred to as multisense functionality, this feature enables advanced gesturing, such as zooming in and out while writing and scrolling, page flipping while scrolling and selecting a tool or content. maXStylus has the most precise highest-resolution writing experience available with a narrow with 1 millimeter tip.

Stylus is becoming increasingly important to consumers, especially for the Asian markets, as the stylus can be used to recognize the numerous characters in the various Asian languages. Atmel's active stylus technology allows for handwriting and characters to be accurately recognized and converted to text. Our technology breakthrough is a significant product differentiator for our OEM tablet customers when combined with Atmel's industry-leading maXTouch solutions. Atmel's maXStylus product supports Google's Android operating system and Microsoft Windows 8.

In the market for buttons, wheels and slider solutions, we continue to experience strong order activity and we generate significant design wins for major home appliance makers this past quarter. In addition, we announced a new family of solutions for the home appliance market designed to assure safe operation of these appliances, which makes it faster for our OEM customers to obtain domestic and international certifications. These new home appliance devices, combined with Atmel's superior noise immunity, make Atmel the leading capacity of touch choice for all home user appliance interfaces.

Moving to our Non-Volatile Memory segment. Total revenues were $66 million in the third quarter, down 7% sequentially and down 1% as compared to the third quarter of last year. The sequential decline in our Memory business was primarily the result of slowing market conditions reported by many of our customers in the PC and consumer markets combined with a weaker pricing environment. Our Serial E-Squared Memory business was flat sequentially and was down 10% as compared to the third quarter of 2010. Our Serial Flash business decreased 25% sequentially and 13% from the third quarter of the prior year.

We had a good quarter with multiple design wins for our temperature sensor product family, which is targeted toward a wide range of consumer and industrial applications. This product family allows OEMs to replace 2 components by integrating an e-squared memory and a temperature sensor into one component, thereby reducing both system cost and space on the circuit board.

Turning to the RF and Automotive segment. Revenues declined slightly to $52 million in the third quarter of 2011, down 1% sequentially and up 15% as compared to the third quarter of 2010. These results are stronger than typical seasonality due to strength in our high-voltage automotive products.

Our Automotive Microcontroller business generated sequential revenue growth during Q3. Also in the quarter, Atmel launched a new secure ultra-low power AVR microcontroller for passive entry and passive start key fob applications. The microcontrollers can be combined with a companion RF transmitter device to have the lowest power consumption in the industry, enabling extended battery life for car key fobs while providing maximum security protection.

In September, we announced the availability of 2 standalone LIN transceiver ICs in DFM packages to save 75% of a designer's overall PCB area. Since space and cost savings are critical for LIN applications, these new Atmel LIN transceiver ICs are ideal for automotive body electronic systems, including door modules, seat control, intelligence sensors or power train applications.

We continue to increase our design share with European-based OEMs and have expanded our design wins to include new OEM customers in both North America and Japan. We are confident about our long-term prospects of increasing our share in the automotive market.

Looking at the ASIC business segment. Revenues were $60 million in the third quarter, up 14% sequentially and down 22% compared to the third 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 in revenues in the third quarter of last year. Excluding Q3 2010 Smart Card revenues, the ASIC business segment's revenues were up 20% year-over-year. We had an exceptionally strong quarter in the Space business as we have been catching up on customer order delinquencies.

Moving to third quarter revenues by geography. Asia was once again our largest ship-to location, representing 63% of revenues compared to a 60% in the prior quarter, as China continued to grow as an end market and Japan rebounded from the effects of the tragedy during Q2. Europe decreased by 1 percentage point sequentially to 24% of revenues, while the Americas were down to 13% as compared to 15% total revenues in the prior quarter.

I'll now provide an update as to our strategic initiatives. During Q3, Atmel acquired Advanced Digital Design, also known as ADD Semiconductor, a privately held company based in Spain that develops power line communication solutions. PLC modems are used to transfer data of existing electric power lines. With ADD Semiconductor, Atmel acquired a portfolio of innovative products and an established team of technical experts focusing on single processing and power line communications.

ADD Semiconductor provides us with 3 important strategic benefits: first, a market-proven power line communications technology; second, a team of seasoned technical experts; and third, a portfolio of synergistic products that complement our existing marketing-only based products and solutions target at the Smart Grid lighting and infrastructure automation markets.

PLC is an enabling technology for Smart Grid particularly outside the United States. Until now, only 15% of the 1.6 billion meters installed worldwide are enabled to support a Smart Grid. The IC channel within this segment can reach several hundred million dollars and is forecasted to grow past 2020. In addition to Smart Grid, PLC has significant market potential in other infrastructure automation markets, such as street lighting, where wireless solutions are less practical.

In summary, we are continuing to invest in the key areas of growth for our business. The return from these investments has clearly paid off in terms of innovation and a significantly faster growth rate in our industry. Atmel has now achieved our 10th consecutive quarter of sequential growth, and our Microcontroller business surpassed $300 million in revenues for the second quarter in a row. As we have transformed the company, we have established a substantially improved operating model with our focus on microcontrollers and other proprietary products along with the adoption of fab-lite manufacturing.

Last quarter, we stated that we expect maXTouch revenues to easily surpass $350 million for calendar year 2011 from over $140 million generated in 2010. As you are aware, the marketplace has been very dynamic with a softening macro environment and continued uncertainty. However, the superiority of our maXTouch solutions and premier customer profile has allowed us to achieve market share gains beyond our previous expectations. We are pleased to increase our guidance for maXTouch revenues in 2011 to over $375 million.

Due to the enormous growth and opportunities in the touchscreen marketplace, there's a lot of supplier posturing with Wall Street as to the capability and quality of their touchscreen solutions. There is no doubt that Atmel's release of maXTouch set a new and a higher standard as the premier capacity of touchscreen solution. With the release of our second-generation maXTouch E Series, we set the bar higher and extended our leadership position.

Today, others are announcing new products, which they claim to be superior. We appreciate your acknowledgment that maXTouch is a technical and market-leading touchscreen solution and the product to beat. We have evaluated the latest products announced by others, and we are confident that our E Series product is superior across multiple parameters. However, we intend to raise the bar higher and to further extend our market in technology-leading position.

This quarter, we plan to begin sampling our third generation of maXTouch products. This third-generation maXTouch family is clearly superior to anything else announced by others, and we are confident that it will allow us to further extend our leadership position in both smartphones and tablets. We continue to have confidence that our business strategy, operational focus, product mix and market penetration have positioned us to continue to outpace our industry.

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

Stephen Cumming

Thank you, Steve. For the fourth quarter of 2011, the company expects revenues to be down 12% to 16% on a sequential basis. We expect gross margin percentage to be approximately 48%, plus or minus 50 basis points, in the fourth quarter of 2011. Fourth quarter operating expenses are expected to be approximately $135 million, plus or minus $2 million.

Depreciation and amortization is expected to be approximately $19 million in the fourth quarter. We expect that fourth quarter capital expenditures to be in the range of $10 million to $15 million. We expect stock compensation to be approximately $19 million for Q4.

Other income and expense is expected to be approximately $2 million to $3 million expense. And quantum and our recent ADD Semiconductor acquisition-related costs are expected to be approximately $1.4 million in the quarter. This includes approximately $400,000 incremental expense per quarter for the ADD acquisition.

We expect our Q4 GAAP tax expense to be approximately $16 million to $18 million. For those doing non-GAAP tax models, we expect the non-GAAP or cash tax rate to be approximately 1% in Q4 and low to mid- single-digit percentage for the next several years. For modeling purposes, assume a slight reduction in fully diluted share count as we see the full weighted average impact from the repurchases made in Q3.

This concludes our prepared remarks. We'll now open your call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Steven Eliscu with UBS.

Steven Eliscu - UBS Investment Bank, Research Division

Revenue guidance and -- was down 12% to 16% and maXTouch guidance range, clearly the nontouch area, is impacting, the macro is impacting. Can you give a sense as to how in some of your segments, either by end markets or the particular divisions, where you're seeing shipments that you think are below end market demand and where, what, where, in particular, you're seeing the macro negatively impact you?

Steve Laub

Steve, this is Steve. From our standpoint, the end markets, the biggest end market reduction that we saw in Q3 and continue to see would be the industrial end markets. We had a very significant decline in that market during Q3. Again, we expect that it will decline significantly further in Q4. It is difficult to discern exactly their actual shipment rate versus -- or their overall consumption rate versus their income rate from us. One thing that does appear to be very true is that customers are continuing to adjust their inventory levels consistent with the new outlook for their businesses as well as consistent with the fact that lead times now from our sales and, I think, from others are basically around the 4- to 5-week timeframe. And things are basically available from -- are very readily available with our -- from distribution or from us directly. So I think what you're saying is you're seeing the behavior that is consistent across the general market, which is customers are bringing down their inventories to minimal levels. It's something that we typically see during this tough environment where lead times are very short. But industrial is the biggest swing factor. And you're correct, we are seeing throughout the general part of our business, when you excluded touch, we're seeing basically what the rest of our industry is seeing.

Steven Eliscu - UBS Investment Bank, Research Division

And, okay, just with respect to each of the divisions of each of the business segments, how do you -- what kind of decline do you expect relative to that midpoint guidance?

Steve Laub

So I think with respect to the businesses, I think what you'll find is the Memory business is pretty -- probably pretty consistent with the midpoint guidance. I mean, we're seeing all the businesses decline. We're seeing, we believe, frankly virtually all end markets will be declining. The MCU business, what we're seeing is kind of a bifurcation. We're actually seeing a onetime adjustment in the MCU market, in the touch area with respect to tablets. And so one of the things that we're saying is tablets were very strong for us, actually even through Q3 have been quite strong for us. We're seeing a very significant adjustment during Q4. We think that's been driven by several factors that are all contributing to reduction, one being that the end market demand for non-Apple tablets had softened. There's a lot of inventory in the channel both provided [ph] by our customers, their end product, as well as inventory of our components that they are holding is also occurred. And the other thing that's happening also is there's a transition occurring from multi-chip solutions for touch within the tablets to a single chip, which is bringing down the content or touch content per tablet as well. [indiscernible] events occur in Q4 were just having a very significant impact specifically on that part of the Touch business. The Touch business and our Smartphone business continues to actually be quite good and quite solid. So the micro number overall is probably really pretty consistent with our overall guidance, midpoint of our guidance. However, what's really impacting that is the touch specifically from the tablets. We're quite confident that from a design activity, design win standpoint and a market share standpoint, we continue to be very, very strong.

Operator

The next question comes from Craig Berger with FBR Capital Markets.

Craig Berger - FBR Capital Markets & Co., Research Division

I guess one of the main investor questions I get is how sustainable your competitive advantage is in touch, what are the barriers to entry in that business, what are some of the next-generation features that will differentiate Atmel from other competitors. So maybe you can help us understand some of those dynamics. And you also mentioned the industrial light goods -- or the light goods market, the whole like goods market. Could you help us size that opportunity and timeframe?

Steve Laub

Craig, with respect to the sustainability of differentiation in touch, the perspective I have is, I think, let's look at the evidence and what's occurred in the marketplace. There has been -- certainly, since we've been in the market, even before we knew the market, there were probably 2 very -- I've seen the 2 primary suppliers since the marketplace. We became -- we started off as a distant third in 2008 and 2009 and emerged as the leader in 2010. It's been a market that's really comprised. If you look at really where the market share is, who's winning the major programs and who has the kind of component that people are evaluating and using, it's really the 3 of us. And to a greater extent, it's really us first in that regard because we do have a very significant market share advantage today vis-à-vis the other 2. I do think that it's quite sustainable because, I think, people are finding that the type of solution or requirements to support this business are actually a little bit [indiscernible] and is typical in a semiconductor industry. It's a very solution-oriented product, a balance of a complex and sophisticated semiconductor component along with very advanced software algorithms and technology that really have to work together in a very fundamental way to provide the proper solution for customers. Literally[ph] what happens is that these solutions are continuing to be innovative and demanding with respect to our customers' applications. There are certain characteristics that have to do, for example, with the speed and the quality of the touch response, that have to do with their ability to be immunity to noise, their ability to be inserted and utilized within the stack up as it were within the sort of whole display and touch construction. These are all parameters that require a lot of support and a lot of knowledge and capability. We're fortunate that we got into this business through acquisition with the leading independent provider. Other people having to get through this organically, I think, are finding it quite challenging. And the other thing that's happening, too, is that you're saying there's a lot of innovation occurring by people in this marketplace with new products, new product families because of the fact that their demand's requirements are constantly changing. And whenever you see a market where the requirements are constantly changing, it's a market with sustainable barriers because the customer requirements are, therefore, changing and new people have a very tough time catching up. With respect to the next-generation products and what kind of features are people going to have and what's important to them, I think we've talked about those with respect to this last generation, such things as a very low-power, such things as noise immunity, such things as being able to support, what we call, touch-on-lens or in-cell and on-cell type of applications. These are things that are very important to the customers, and these are things that continuing, providing high-quality in that, and they continue to be very important and then also being able to provide integrated solutions like single-chip versus multichip in a tablet-type environment and be able to provide the kind of performance that a very large screen like a tablet would want. So plenty of innovation required, plenty of requirements for our customers and very sustainable, I think, barriers for this business again for the reasons just discussed.

Craig Berger - FBR Capital Markets & Co., Research Division

And then just as a follow-up, can you help us understand how long you think the tablet-related weakness is going to last? Are you seeing inventory impacts from your larger -- largest handset customer in the fourth quarter like others and then give them the cyclical shifts? How are you thinking about the first quarter? How should we be thinking about modeling that given some of these cyclical headwinds we're at right now?

Steve Laub

So our sense is that this is a one quarter adjustment with respect to the Tablet business. And so we do expect that the first quarter will be in a more -- will be a normal environment for that business. We think most of the inventory issues and a lot of the transition issues from multi-chip to single-chip, where it's going to occur, will have occurred by then. What we're saying right now is the market's bifurcating into very high-end tablets, which we use multi-chip today and to more of mid-range tablets, which use more of a single-chip today. Longer term, we expect the entire market to transition to a powerful single chips, but that will be longer term.

Operator

The next question comes from Betsy Van Hees with Wedbush Securities.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Steve, I was wondering if you could help us in terms of the maXTouch revenue. So you've up the guidance to $375 million, congratulations. So how much of that do you expect to be tablets versus smartphones now?

Steve Laub

Okay. So with respect to it, I think I have mentioned last quarter that we thought smartphones would be in the range of 60% to 75%, tabs in the range of 20% to 30%. I would say that within those broad ranges, that's still an accurate number to use. I think what you can find is that the tablet number will be lower than we'd anticipated, and the smart phone number, therefore, to be -- it'll be at lower in a range than we had thought last quarter. The smartphone number will be higher in that range than we had thought last quarter. Those will be within that range is our expectation. And the other business, we said, these are things outside the smartphones and tablets, will be roughly 5% to 10%. Our expectation is that will actually be closer to 10% for the year.

Betsy Van Hees - Wedbush Securities Inc., Research Division

And then in terms of the quarter you guys just completed, when we look at the quarter-over-quarter in microcontrollers, you said it was roughly flat $201 million. Can you help us a little bit in terms of when we look at maXTouch versus your core microcontrollers? Can you help us in terms of what percent quarter-over-quarter or year-over-year maXTouch grew? And kind of give us a range to sort of help us as we model this.

Steve Laub

Yes, we don't typically provide that kind of granularity. What we do is provide the kind of numbers I just gave you, which is a guidance from maXTouch specifically. We gave you the guidance we have during the year as well as the guidance at the end of the year as to pretty much when we finished that business. But with respect to within the quarter and those kind of numbers, we haven't been providing those.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Fair enough. And then just one question is on gross margin. As we're looking at gross margin moving forward, can we expect to be into the kind of a range that you gave for the quarter? Or will you see a rebound back up in gross margins to the over 50% level?

Stephen Cumming

Betsy, this is Stephen, yes. So our gross margin guidance that you heard was 48%, plus or minus 50 bps. And we're already seeing what's been driving that down, as you saw from the prepared remarks, is the lower factory utilization, some of the mix changes, et cetera. Going forward, assuming we get to a more normal environment when we start to see from growth, we do expect gross margins to pop back up, be on the 50% level as we go into next year assuming that there's growth projections there.

Operator

The next question comes from Jeff Schreiner with Capstone Investments.

Jeffrey A. Schreiner - Capstone Investments, Research Division

Stephen, I wish -- well, you could just maybe follow-up with that as to maybe what the overall negative impact on your gross margin guidance is from positive utilization. And if you could give us some directional as to where utilization levels were in third quarter versus what they were in the June quarter.

Stephen Cumming

Yes, sure. So on previous calls, we'd said that we were operating our internal facility in Colorado pretty much for utilization. We started to take some actions during Q3, so we were operating Colorado in Q3 are in the low 90 utilization levels, and that's going to come down further in Q4. The break out for the sort of gross margin headwinds that we saw in Q3, I haven't got the specific break out, but it's a combination of that lower factory utilization, mix and some slight ASP erosion, particularly in memory, coupled with some of the inventory adjustments. So they are the main criteria, but I didn't break them out specifically.

Jeffrey A. Schreiner - Capstone Investments, Research Division

Okay. And could you just talk generally about kind of end markets here and what the visibilities are now versus historical norms? Obviously, it sounds like touch is really strong, but could you also give us a little bit of granularity as to why you feel so comfortable in raising those numbers other than share gains? Is it the number of shipments you're going to have? Or any visibility granularity you could give us versus maybe historical norms.

Steve Laub

Yes, this is Steve. With respect to the Touch business, the reason that we feel comfortable in raising our guidance number for that is that our number in Q3 was actually somewhat better than we expected in that, and particularly in the smartphone area, which is what we're saying, I would say, outside strength relative to the expectations that we had as well as some new customers begin to ship really particularly in the other markets outside the smartphones and tablets. So that, based on what backlog we have for Q4, is really what gives us the confidence to really raise that number to what we did because, again, the Q3 number was so much stronger. With respect to the other marketplace, as what we're saying is we're seeing generalized weakness. I mean, we got the industrial because industrial is our largest end market. And so that's [indiscernible] most relevant for us. But in that respect, we're seeing generalized weakness across that. It's really hard to identify. There are some areas within that that are stronger than others. But today, what we're saying is we're seeing a lot of adjustment by our customers in really getting their inventories in line. And that's what's causing the generalized weakness [indiscernible].

Operator

The next question comes from James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

I was wondering if you could address the differences you saw between 8-bit and 32-bit MCUs in the quarter. And was that all due to the relative differences in touch? And what you expect in terms of that trend in Q4.

Steve Laub

Just a second here. Actually, so for the quarter, we saw that 8-bit was a little bit stronger than in the 32-bit, but primarily the biggest difference is 32-bit is a little bit more impacted by industrial. [indiscernible] industrial markets, then I would say the 8-bit market [indiscernible]. And so that's the primary reason why the difference is between the 8-bit and 32-bit within the quarter.

James Schneider - Goldman Sachs Group Inc., Research Division

Okay, fair enough. And then just as a follow-up, in terms of the Q4 guidance, can you just confirm that you expect the Touch Control business to decline sequentially as with the rest of the business?

Steve Laub

We do. But I wouldn't say -- we said the decline, [indiscernible] the decline, but then those -- it may have declined by quite as much. So I just -- so I'm not giving you a sense for the amount of its decline, but I am letting you know that we do expect there's a sequential decline in Q4.

James Schneider - Goldman Sachs Group Inc., Research Division

Fine. And just one more clarification. Do you also expect the industrial end market to be down than most of your end markets in Q4?

Steve Laub

That's really hard for us to know right now because a lot of things also depend on POS from our sort of distribution. We don't have a good sense. We don't know the answer today exactly at a few months of roll up by the end of the quarter and which particular customer [indiscernible] distribution. So we just can't answer that right now.

Operator

The next question comes from Blayne Curtis with Barclays Capital.

Blayne Curtis - Barclays Capital, Research Division

Maybe just following up on the commentary for Q4, if you x out the tablet impact with the handsets, are you still planning growth in Q4? I think that's my first question.

Steve Laub

Give me a second here. So I would say with respect -- let's take a look at this in a broader way. So in the Touch business, the biggest impact to that business in Q4, as you said, is in the tablets. But taking it exclude tablets, we still expect to probably be some decline in that business during Q4 as well, primarily we think due to inventory adjustments with those customers.

Blayne Curtis - Barclays Capital, Research Division

I guess what it means is that Q3 was a really, really strong quarter, and I'm trying to get -- just want to figure out where that strength came from. Obviously, your make [ph] your handset customer was quite strong, but could you give any color as to how big that tablet number was in Q3?

Steve Laub

I'll give you some sense for that, hold on. The tablet number was in the sort of between 25% and 30% of our number. And so that's -- so that was in Q3. Then the other thing to tell you is that the other part of our marketplace, if you remember, some -- a lot of the things that I'm going to touch are things that are used in some of the consumer markets where there are Christmas bills and things like that. And so we saw that impacting Q3 as well, and we think there's some seasonality to the Q4 number as well, independent of the inventory adjustments. There's some general seasonality with respect to those products. There are a number of customers who built for Christmas bills and have indicated to us they're not going to build by much during Q4, but they're planning in resuming their consumption during Q1.

Blayne Curtis - Barclays Capital, Research Division

Got you. And then maybe just broadly on the Q4 guidance, and then obviously, the touch, you said, was probably down the least. Maybe you could rank some of the other segments as to who would be -- which ones will be down the most.

Steve Laub

No, I didn't say touch was down the least. I said it was -- put that, distinguish that from the others because I wasn't putting that in a context of these businesses generally. With respect to the business, we expect memory to be down quite significantly during Q4 both based on the general weakness within the end markets and some impact also generally on ASPs as well. With respect to the MCU market, we said it would be declining pretty consistent with the midpoint of the guidance that we gave you. A significant portion of the impact of that is because of tablets. And so that's what I do think it’s worth to understand or appreciate. As you take out the tablets, then you're talking about a number that's much less than that.

Operator

The next question comes from John Vinh with Collins Stewart.

John Vinh - Collins Stewart LLC, Research Division

On the Industrial MCU business, do you have any sort of visibility or sense of is Q4 the bottom? And how much further do you think we'll have a correction there in the Inventory segment and in the Industrial segment here?

Steve Laub

It's really hard -- I think a lot of people right now are hesitant to give predictions about Q1, which is what you're asking me to do. I think our experience, what we're saying is consistent with what everybody else is saying. If you look at the earnings calls from other people, they're reporting weakness, particularly in Industrial segments, so that's a large part of their end market. They've been experiencing that for both Q3, and they anticipate that for Q4 as well. So I think our experience is very consistent with what the others are seeing there. I'd like to think that the adjustments will be completed in Q4. Because at some point, I think the customers, their overall run rate for what their shipping, I believe based on what I see, I believe, is greater than what they're taking. So I think there is an active programs by our customers to work down their inventories. I believe that most of that will be done by the end of Q4, but [indiscernible]. But they have told us that they are working at inventories and they expect to resume a more stronger consumption of buying product in Q1.

John Vinh - Collins Stewart LLC, Research Division

Great, okay. My follow-up is a question on the tablets. In the Q4 adjustment that you talked about on tablets, how much of that is driven by an end demand question by your customers? And how much of that is driven by kind of the transition from multi-chip to a single-chip?

Steve Laub

It's actually being driven by 3 things. It's been driven by end demand by -- one is their end demand, which is being influenced by the fact that they have a fair amount of inventory already of their built systems that they're still waiting for those to ship out; then they have inventory of components; and then, of course, as they transition from multi-chip to single-chip. Breaking out their -- all of them are having a significant impact on the number for Q4. My sense is that all of those are pretty much -- pretty much all that impact will be done by the end of Q4.

John Vinh - Collins Stewart LLC, Research Division

Great. And on the pricing, where were you in the transition from multi- to single-chip? How do we think about pricing as we go from our content from multi chips to single chips into next year?

Steve Laub

I think next year what you'll see is that the vast majority of tablets units will be shipping in single-chip.

John Vinh - Collins Stewart LLC, Research Division

Okay. And then pricing?

Steve Laub

The pricing within the marketplace -- what you're doing with the pricing is actually reasonably, I'd say, stable or declines at its normal orderly rate. So most of the pricing transition should occur through this quarter. Some began last quarter. I will expect a much more significant impact in a transitional curve this quarter. I think we'll be through most of that by the end of this year, by the end of this quarter.

Operator

The next question comes from Hans Mosesmann with Raymond James & Associates.

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Going back to the multi-chip, single-chip dynamic that you're getting lots of questions on, is Atmel better positioned competitively in the dynamic when you transitioned or when the industry transitions to single-chip?

Steve Laub

Yes, I mean, for 2 reasons. One, well, I mean, going backward, we are the guy in the multi-chip, so your question is will we maintain our share in the single-chip. We surely expect to. We have the best single-chip products out today with the 768E product that we are shipping in volume. That is being used in a lot of the new tablets I just announced earlier on our prepared remarks. So we are chipping that in volume today when customers are doing their evaluation of that vis-à-vis the alternative solutions. We are winning at the same or even higher rate than we're winning before. So we feel very good about that. We also expect that there'll be -- as I mentioned earlier, there's -- we have new products that we'll be sampling, new-generation methods we'll be sampling this quarter, and we think those products will put us in even better position to compete in both the smartphone and tablet markets.

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Okay. And as a follow-up, I don't know if this is applicable or relevant to the -- what was the ASP for maXTouch more or less? Was it kind of stable? Or is it up, down?

Steve Laub

So we don't break that out. I can tell you, it came down and it really -- we need to break out sort of the smartphones and tablets, so ASPs generally are influenced a lot by mix, how much new shipping versus smartphone and tablet, so if you're shipping a lot of tablets, obviously, ASPs are going to go up. It should be more smartphones. Since last quarter, we had a bigger mix toward smartphones, so the overall ASP for maXTouch came down relative to the quarter before when we had a higher shipment of tablet. So to give you that sense from a proportional standpoint. But these products are always coming down just as any significant product does in an orderly way. And that's in kind of these particular products as well. Right now because the transition between multi-chip and single-chip, that mix is driving an ASP erosion. But within a particular product, the ASP erosion is quite orderly.

Operator

The next question comes from Sujee De Silva with ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC, Research Division

Can you talk about what the distributor inventories are, what level they're at now and your ability to reduce your own inventories next quarter where you think you can return back to target levels next quarter?

Stephen Cumming

Yes, Sujee, this is Stephen. Our distributor inventory is approximately around 11 weeks. The overall weeks of inventory is sort of adjusted [indiscernible] between the [indiscernible] overall POS. From our internal inventories, you saw that we actually had inventory days flat to Q3. We are working that down aggressively, I would say, over the next few quarters. We have dialed back build rates both for internally in our Colorado fab and with all of our foundries, so we work that down over the coming quarters. I think you'll see a significant reduction in Q1.

Sujeeva De Silva - ThinkEquity LLC, Research Division

And what are the turns and the guidance, Stephen?

Stephen Cumming

The coverage that we have at the moment is roughly around 70%.

Sujeeva De Silva - ThinkEquity LLC, Research Division

I'm sorry, in the 4Q guidance? The turn [indiscernible].

Stephen Cumming

Yes, we've got about 70% of our backlog covered.

Sujeeva De Silva - ThinkEquity LLC, Research Division

So 30% turns, okay. And last question, you talked about gross margin being impacted by utilization as well as mix. Can you just clarify what you mean by the mix having impacted gross margin and whether that element can recover and snap back in the next quarters?

Stephen Cumming

The mix is just -- ongoing product mix in some of the areas that Steve mentioned in terms of single-chip, multi chips, memory products, it's really across the board. They were slightly impacting the overall gross margin, nothing really specific in one area across the board.

Operator

The next question comes from Li-Wen Zhang with Pacific Crest.

Li-Wen Zhang - Pacific Crest Securities, Inc., Research Division

Actually most of my questions have been answered, but if you can and given some other on hands in momentum on the maXTouch, are you ready to provide us some outlook for next year?

Steve Laub

Well, it's a little early to provide our outlooks for next year, I think, at any of our particular products. I mean, I can tell you, we have a complete comment that maXTouch will be up next year, but right now, the absent magnitude of that is too difficult to discern right now.

Li-Wen Zhang - Pacific Crest Securities, Inc., Research Division

Okay. And you mentioned the others for the maXTouch application is to the high end of the previous outlook of 5% to 10% and also given that on touch-on-lens, the on-cell, in-cell technology evolutions, do you see your revenue generate from these 3 technologies right now?

Steve Laub

Yes, we do. We're seeing revenue from touch-on-lens on-cell, not from in-cell. In-cell is a technology that really isn't anybody generating or providing production products for. But for on-cell touch-on-lens, the answer is yes, and we are generating revenues from that with our customers today.

Li-Wen Zhang - Pacific Crest Securities, Inc., Research Division

And also, given the industry is the largest end market for Atmel and that the -- from what you hear from your customers, when should we expect the industry to rebound?

Steve Laub

I think that was asked by somebody else. It's hard for us to predict exactly when our customers will have their inventories and adjustment. We do know that based on the feedback that we perceive from our customers, they are working down their own inventories at this point. And so we do know that their actual shipment rate exceeds their consumption rate of semiconductors, and we're hopeful that they'll have an imbalance by the end of this year, end of this quarter. The expectation is there will be a resumption closer to their actual shipment rate in Q1. I just don't know if it will be at or still below that shipment rate, okay?

Operator

The next question comes from Anthony Stoss with Craig-Hallum.

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Two part of it. First part, can you talk about whether or not you're seeing any stabilization, thus far, in this quarter in your booking patterns? And also, Steve, if you won't mind talking about the TAM, one of your competitors talked about 2012 units being up by an excess of 50%, factoring in the Windows 8 opportunity that's growing. Care to share and of your thoughts on kind of unit growth for 2012 for the overall market in touch?

Steve Laub

With respect to unit growth of the overall market, I think 50%, and I'm not going to argue with that. I think the market for touch will be very strong next year. We actually are -- internally, we're actually quite bullish about the opportunity that Windows 8 will provide for touch and for the marketplace. And as a partner, co-engineering partner with Microsoft, we think that will be particularly advantageous for Atmel with our solutions. So I think that combined with the very rapid growth in smartphones and the continued adoption of touch now outside of those smartphones and tablets, I think next year will be a very, very strong year. You could look to us to provide you some forecast on that in our next earnings call and perhaps some outlook also with respect from what 2012 will be like for us. But I think it can be a very strong year for touch next year.

Operator

The final question comes from Raji Gill with Needham & Company.

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

I'm just trying to stay on the maXTouch forecast again. I know it's been beaten down, but it doesn't make sense why you had raised the maXTouch up $25 million when it's going to be down pretty significantly on a quarter-over-quarter basis. Just doing the math, it would seem like the maXTouch will be down something in the order of 20%, 25% sequentially. So I guess are you saying that you -- I mean, you must be able to offset that pretty entirely with smartphone wins. But I'm just wondering why -- what the rationale was to raise the forecast for maXTouch $25 million when there's a massive inventory build on the non-Apple tablet side and you haven't worked that through yet.

Steve Laub

It's actually -- a couple of things. First of all, I think our forecast of last quarter was to easily be 350, so we weren't at exactly a 350. We thought we would actually be pretty comfortably based on how strong we were seeing Q2 come in. With respect to what happened in Q3, it was even stronger than our expectation in the touch portion of our business. So I think in light of being completely transparent with The Street and letting them know where our business is, we felt it was important to provide you guys an update in that, because we appreciate how important and how much that is followed by our investors and how important it is to our investors. So that's the reason why we provided that. And we've gone through the numbers ourselves internally and reviewed our backlogs and so forth. And as I said, we felt comfortable that it was proper to give, and we feel comfortable within achieving the new guidance target that we gave you.

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

And the ability to get above 50% sometime next year, what do you think is the -- I mean, you talked about getting utilization rates up, but does that bake in kind of a much -- a significantly lower ASP for tablets or significantly lower pricing for the overall touch controller market, is that baking in? That when you're thinking about getting above 50% maybe down the road in 2012?

Steve Laub

Yes, the biggest impact that was just going to get back to a normal business operations, which will be once inventories are proper in adjustment and you're running your fab much closer to full utilization, getting the absorption and so forth will actually get us the efficiencies that will allow us to bring the manufacturing costs and to bring up the gross margin consistent with that. Even though we're seeing this transition from multi-chip to single-chip with respect to the tablets, it actually does not mean that your gross margins will decline, your gross profit dollars. If you're shipping the exact number of units, unit tablets, you'll see a gross profit dollars decline, which may, in fact, may actually see an increase in your gross margin percentage because of the fact that we expect that a superior single-chip solution will garner terrific value from our customers in that regard, okay?

Operator

And Mr. Schuman, there are no further questions. Do you have any closing comments?

Peter Schuman

I do. Thank you, Wesley. During the fourth quarter, Atmel will be presenting at the UBS Global Technology and Services Conference on Tuesday, November 15, in New York as well as the Needham Conference in early January. We will participate in the Credit Suisse Annual Technology Conference in Scottsdale on December 1 as well as the Barclays Capital Conference in San Francisco on December 7. 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 again for joining today's conference. You may now disconnect.

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