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Atmel Corporation (NASDAQ:ATML)

November 15, 2011 1:30 pm ET


Steve Laub - Chief Executive Officer, President and Executive Director


Unknown Analyst

Steven Eliscu - UBS Investment Bank, Research Division

Steven Eliscu - UBS Investment Bank, Research Division

Good afternoon, my name is Steve Eliscu, UBS Semiconductor Analyst and I would like to introduce Steve Laub, Atmel President and CEO. Steve has been with Atmel since August 2006, and had joined the Board shortly before that. Steve has led Atmel's turnaround moving to a fab light manufacturing model, and centering the business around microcontrollers, a core strength. Atmel has been successful with this strategy as it is focused on general-purpose microcontroller solutions with very low-power consumption for the broad market combined with targeted solutions into key growth areas, the most important right now being touchscreen controllers. With that, I'd like to welcome Steve.

Steve Laub

Thank you, Steve. It's a pleasure to be here today. Now before moving forward, I'd also like to introduce Mr. Peter Schuman. Peter is our Director of Investor Relations. If you have any questions at the end of this that I don't answer adequately, he's the guy to follow up with. For those of you not familiar with Atmel, we're a leading public semiconductor company located in Silicon Valley. Our trailing 12-month revenues were approximately $1.88 billion. We have product development and sales operations throughout the world. We are primarily focused in the microcontroller marketplace. It's a very attractive market within semiconductors and it's an area in which we've been the fastest-growing major supplier over the past several years. Today, I will discuss our strategy, some substantial changes we've made to the company, our position within the marketplace and the impact that's had on our financial performance.

Before moving forward, it's important that I just review real quickly a Safe Harbor statement which is noted here and I ask you just to quickly highlight it. But I think as many of you are familiar, during the course of this presentation, I may make some forward-looking statements and projections about Atmel's business including statements about expectations for revenues and operating margins as well as cost savings for 2011 and beyond. Since actual results may actually differ from those, we would like you to make sure you appreciate the risk factors involved in our business and all these are described from time to time in our SEC filings such as our Form 10-K and 10-Q reports. Now back to the business.

Atmel has gone through, and I think Steve highlighted that real quickly, some major changes over the past 5 years. Fundamentally what we've done is really change the product and strategy of the organization, the company throughout its operations. First and foremost, we decided to make microcontrollers our core business. So from that, what we did is we reallocated the company's R&D and our sales organizations and resources, predominantly around that particular business. At the same time, we exited 21 non-core businesses and product lines, and we also went on acquisitions to build that business, we did microcontroller-related acquisitions in the areas of capacitive touch, wireless ZigBee, LED and power line communications. While we were doing that with the businesses, we were also changing our manufacturing operations. We had 5 wafer fabs back in 2006, today we have one.

And we've also dramatically changed the organization. In my management team, I have 14 people in my management team. Of those that were there when I arrived in 2006, only one remains. The remaining group is made up of people from the outside, as well as internal promotions and that team has gone on to transform their organizations. In addition, due to a lot of changes in the company, we've actually grown the company, increased its profitability and reduced its headcount.

But you can't cut your way to prosperity, so we've made investments, but we certainly have profit from this turn. Going back to 2006, our gross margins were 33.6%, our pro forma off income was just over 4%. This year-to-date, our gross margins have been 51%, our pro forma off margins at 26%. So dramatic increases over the past 5 years. Specifically, why this has happen has been actually executing on the direction of the company that we set forth and that was building up the Microcontroller business. From approximately 24% of our total revenues back in 2006, microcontrollers today are approximately 63% of our total revenues while the company is larger than it was back in that timeframe. What we've done is we've done a lot of transformation in that business but also in the other businesses. Our Non-Volatile Memory business has declined as a percentage of the company from 22% to 14%. Our ASIC business has declined from 31% to 12%; our RF&A, from 23% to 11%. However, in each of those remaining businesses, those businesses now are growing businesses that are also far more profitable than have ever been historically.

In the third quarter earnings release that we just had a couple of weeks ago, our revenues increased for the 10th consecutive quarter, they're up 8% year-over-year and actually up 15% year-over-year when adjusting for a divestiture of a Smart Card business that we did last year at the end of Q3. And our quarterly revenue achieved its highest level since the first quarter of 2000. Now a lot of that success as I mentioned, is due to the change and the growth and success that we've had in the microcontroller space.

Since entering this market back in the mid-'90s, we've had steady growth except for a couple of brief periods through that entire time frame with particularly explosive growth over the last 5 to 6 years. From $277 million in revenues in 2005, we've actually climbed to $458 million in 2009 to $892 million in 2010, and approximately $1.18 billion for the last 4 quarters. A tremendous growth far faster than the marketplace and far faster than any other supplier. In fact our last 2 quarters, we achieved over $300 million each quarter in microcontroller revenues.

This growth has been comprised in 3 fundamentally different areas: Our 8-bit microcontrollers, our 32-bit microcontrollers and what we call touch microcontrollers. This translation of revenue growth has also translated into very strong market share growth. If you take a look at a ranking of the relative suppliers in the microcontroller area, and this is ranked by sales specifically within microcontrollers, what you would find is if you go back to the '90s, Atmel is a nonplayer. By 1998, we were the 14th largest supplier. By 2008, we were the eighth largest supplier. And this past year, we were the fourth largest supplier. So far this year, we're highly confident that the results were barred out, we've actually now evolved to be the third largest supplier in the industry behind Renaissance and Freescale.

However, also take into account that automotive is a big part of this marketplace and Renaissance and Freescale are larger suppliers to the automotive marketplace. Taking automotive out of it, which we're relatively small, we're actually the second largest supplier in the marketplace and we're second largest in the commercial -- therefore, in the commercial markets. So we're very proud of the success that we've had and the accomplishments we've had here. And our intention and our goals are to continue to increase our market share.

Now the way to do that is to grow in the areas that, simply, grow in the areas that are growing fastest. And within microcontrollers, the overall market if you go over the last 5 or 6 years has been growing only at single digits per year. Obviously, we've been growing a lot faster. And the way we do that is we pick out certain application areas that we believe are among the highest growth within that market, we invest heavily to be successful there. So when those markets take off, we'll ride their growth to our own success.

The areas that we're focused on, not surprisingly would be touch, battery management, smart energy, LED lighting, wireless and other connectivity technologies, sensor technologies and for us, automotive represents a big upside opportunity for us. Of these areas, what I'm going to focus on, because it’s the area that has had the biggest impact for us both today and in the near-term future and potentially long-term future is the growth within touch.

Touch represents if not -- it represents either the fastest or close to fastest growing market in the entire semiconductor space. According to Gartner, the smartphone market will probably top roughly 450 million phones this year, and projected to exceed a billion units by 2015. Tablets will do similar between 60 million to 70 million units this year and expected to do over 300 million units by 2015. And the beauty of this market is it's not just smartphones and tablets, what we're also saying is we're seeing now an uptick in the design and beginning of shipments for such things as gaming consoles, printers, GPS, cameras, portable media players, appliances, and we'll begin to also see in the future automotive with capacitive touch as an intregal part of their solutions.

In this market place, we've gone from a very distant third, we entered this market through acquisition. At the time of the acquisition, we became a distant third in the market and we've achieved the clear #1 position in this market during the last 2 to 3 years.

The way we did that is we took a company we acquired called Quantum Research Group, a group we acquired in the 2008 timeframe. It's primarily as software engineering team. These are very sophisticated algorithms that are used to create and facilitate and develop a touch solution and combined them with our microcontroller engineering team, and told them to go out and build the best touchscreen solution they could. From that, they built a product that we call maXTouch, and that product was released to the marketplace in 2009. During that year, all it did was garner design-ins, it actually generated virtually no revenue. At 2010, the revenue of that product line exceeded $140 million and this year, we expect it will exceed $375 million. We went from a very distant third to a clear #1 and today, we are the #1 market share leader in touch solutions for smartphones, for tablets and we've actually now seen that the other market, things outside those areas represent roughly 10% now of our total sales as well within our maXTouch revenues.

This is an area where we have invested very heavily, it’s an area we continue to invest very heavily because we're great believers in the long-term market opportunities that exist here. The other thing that we’ve done is also an area as you can imagine, is quite competitive. Since the introduction of our first-generation maXTouch products in 2009, we released a second-generation product almost a year ago. And we actually have a third-generation product that we're actually sampling this quarter with our customers in order to maintain and extend our leadership position in both our technology and with our customers.

To give you an example of some of the success that we're having, we're selling this product and are being used to the most -- with the largest and most -- among most important electronics companies in the world such as Samsung, HTC, Motorola, Nokia, Huawei, some customers in Japan such as Sharp and Fujitsu, and so forth. In the areas of tablets, in the areas of non-Apple tablets, we've also been the clear leader and our market share in that area is somewhere between 70% and 80%. So 3 out of 4 or 4 out of 5 of the non-Apple tablets are using maXTouch to power their touch solution.

And what we go for, we don't go for the commodity part of the marketplace, we go for the main part, sort of the high and midrange part of the markets where product technology and differentiation matter. This is an example where PCWorld does a valuation every quarter of what they view to be, based on their criteria, of the top 10 best smartphones. What you find is that Atmel's maXTouch product is powering 7 of them. And clearly, Apple, which uses their own solution, putting that aside, in fact had 7 really of 9 that we can go after. We're very pleased with that, we think we have a synergistic effect with our customers. They are trusting us with their most important flagship products. Our technology is powering those and they're having great success. We’d like to think that it's a mutual partnership that's worked very well with them and with us.

So to give a quick summary. Atmel Corporation has been transformed into the industry's highest growth microcontroller company. Our growth in 2010 was 95% in microcontrollers. Our growth in 2011 has also been quite dramatic in what has been a relatively soft year for the industry with our microcontrollers revenues expected to exceed $1.1 billion. And we've achieved a market leadership position in the area of capacitive touch. Our operating model or financial model has been substantially enhanced as we've increased our gross margins, our operating margins and our cash generation. Our automotive and memory businesses have been transformed as well, which you have seen and will continue to see, I believe, improvement in their financial performance and in their prospects as they move into more higher proprietary products and higher margin products as well. And the company, today, is positioned for continued high growth and we expect continued market share gains. So with that, I will turn the call over to questions.

Question-and-Answer Session

Steven Eliscu - UBS Investment Bank, Research Division

And let's -- I'll start it out with a couple of questions here. First one is around just more of a macro-related question. One of your key competitors called the December quarter a bottom for the industry and given that we're halfway through Q4, can you give us a sense of what you're seeing if you're seeing bottoming in any of your segments and just any update on your view that the tablet correction in this that's negatively impacting this quarter still, indeed, is a one-quarter event?

Steve Laub

So I'll probably answer your questions in opposite order here. So with respect to the facts, [ph] just to let everybody know, our guidance this quarter is for the company to be down sequentially. It's our first down quarter in 10 quarters, actually be the first 10 and 11 because we had 10 straight-up quarters. A large part of that, we are seeing softness across many different segments and particularly softness within the tablet segment. We do have confidence that the adjustment we're seeing in our tablet business is a one quarter and I have no reason to think that, that will be any different than what we gave guidance to in our earnings call. With respect to the trends in the business this quarter, I think at this point, there's no real change from our guidance in the kind of information we've provided during our earnings call. And with respect to people making comments about whether or not the industry is going to be bottomed this quarter, let me give you a sense for the industry which is that the semiconductor industry for most companies was a down quarter this year in Q3 and was also -- is anticipated to be a down quarter this year for Q4, which is a lot due to inventory adjustments, we believe, as we've talked to our customers, who’ve indicated that their actual consumption of semiconductors is below their actual usage as they rebalance their inventories. So that is happening. I do expect that next year, my anticipation would be that Q1 is seasonally a soft quarter for the industry. Typically, therefore, it's been typically, a down quarter on a single-digit basis. We're not planning for a different number at this point. We don't typically -- we haven't given any guidance for Q1. But that's typically with the industry's results. And then the expectation is that Q2, Q3, Q4 are likely to be a resumption of growth, I think, for the industry as the inventory adjustments should all be clarified by then. And I won't comment on the company that's calling Q4 to be the bottom because I think they actually had Q3 wrong at least twice.

Steven Eliscu - UBS Investment Bank, Research Division

If we could just talk about your -- you talked about your investments and clearly that's been reflected in growth of your operating expenses. But given that we've had a change of environment here and you've had to moderate the expense growth. At the same time, can you give us a sense of the same processes that led you to decide during your turnaround what businesses to keep, what businesses to invest in, what businesses to call? Can you give us a sense of how that process has been institutionalized and is working for you now or if you've evolved that process so you can continue to manage operating expenses appropriately and still generate the returns on all those new initiatives?

Steve Laub

Okay. I think those are actually 2 separate questions. First of all, from a managing of an operating expense standpoint and making the investments necessary to grow the business, actually, with the growth that we've had, we've said now to TheStreet that our model was to achieve by the fourth quarter of 2013 that we would have gross margins of approximately 54%. OpEx we thought would be closer to 29% and Op margins, therefore, 25%. And we have every expectation of maintaining that. We've actually been running our expenses at well below that 29% because our growth has continued to be so strong this year. We have been making investments in the company. Investments that we make are predominantly in the microcontroller area. They have been around those segments that we talked about. We continue to invest very heavily in our touch business believing in its long-term prospects, but continuing also to grow -- to invest in such areas as LED lighting. As I mentioned, we just recently did an acquisition of power line communications, which is important for our smart energy and smart metering business. We are going after those segments. The way to win in those segments is to invest now, get the technologies, get the engineering and talent so that we are well-positioned when those segments take off. From a standpoint of managing our expenses, I think that we've demonstrated our ability to do that very successfully and that we will continue to do that. What we have done is we've done what most companies had done, is become very selective on investments being made today and on hiring decisions being made today. But we will continue to invest where it's important for us especially in the engineering area. We did during 2009, during what was the sort of nuclear winter for the industry, we continue to make selective investments which we think paid back extremely well in 2010. And I think the investments we're making now will pay back very well when the industry recovers next year.

Steven Eliscu - UBS Investment Bank, Research Division

Great. I'm just going to ask one last quick question here that's related on managing OpEx. Have you, just way of having 2 32-bit architectures and the AVR32 being key to your touchscreen controller capabilities, have you considered just scaling that effort back to just being more of a special-purpose controller leveraging the ARM ecosystem for your general-purpose controllers?

Steve Laub

So with respect to our 32-bit product development, we actually do a lot of sharing there that may not be real apparent to our investor base. So we have our own proprietary architecture which we call the AVR32, and then we also are a licensee of ARM products. With respect to both product lines, they both are being quite successful in the marketplace. But there is no doubt that there is significant investment to support 2 different architectures. What we've done is part of that is that we share a lot of the engineering development whether it be design libraries, analog peripherals and so forth as between the 2. And then use the architecture of the AVR32 specifically to go after areas where there are specialized segments or technology requirements that are not well served by the ARM products. So in that respect, I think we're actually optimizing quite well our developments and investments that we do within 32-bit space which we -- which for us, is succeeding and our success there is very important.

Steven Eliscu - UBS Investment Bank, Research Division

Can we take some questions from the audience please?

Steve Laub

Yes, in the back.

Unknown Analyst

One of your competitor is showing a technology roadmap as in-cell, on-cell or discreet solutions. So I was wondering where your position is with the new products you're bringing to market on this kind of architectures that are getting -- likely to get adopted in 2012 and 2013?

Steve Laub

I think the question you're asking, let me restate that was, says that one of our competitors or more of our competitors are talking about in-cell and on-cell technologies and the question is, where are we with respect to that? So we, today, are actually shipping millions of units with on-cell technologies. For those of you who are not familiar, these are technologies that have to do with touch controllers and the use of how they're used within the stackup of a customer solution, primarily today that would be in the smartphones. And so within that, as I mentioned, we're shipping actually on-cell solutions, we have been all year in millions of units. And in-cells, we don't talk about things that we’re in the development of, because this isn't the place to be announcing those, it's with our customers. But you can rest assure that we're very well aware of the technologies and the need for different technologies especially as it relates to the stack. Because what we do with the chip can influence the cost of the stackup for customers. And so we believe that we will leave that marketplace as well when it becomes one -- the in-cell market place when it becomes important for our customers. Yes?

Unknown Analyst

Just a little bit of clarification as to what you think might have happened with the tablet market. I was at CES and personally counted 84 tablets. And all the buzz in January was this was the market that was going to grow at astronomical rates and it was basically going to take over the PC business overnight. Then all of a sudden we have a third quarter that you reported. What happened? All of a sudden we go from not being able to get product to massive excess inventory.

Steve Laub

I'm sorry, can you repeat the question?

Unknown Analyst

Yes. We went from having a shortage of product to a big excess inventory problem almost overnight. It almost reminds of the memory business in 1984.

Steve Laub

1984 was a long time ago. The tablet market. The tablet market has actually been a market that came from -- it was 0 2 years ago. Then it was Apple only last year. And it's been Apple and everybody trying to go after Apple this year. The market, as we understand, is roughly 60-some-odd million units this year. I think the -- if you talked to a lot of the third-party people who follow this. Apple's market share is somewhere in the mid-60s, I believe, mid to upper 60s. Which actually means that almost 1 out of every 3 tablets shipped is actually a non-Apple tablet. A market that was 0 last year. So the market as any new market is going to go through a lot of uncertainty and fits and starts, and we actually at Atmel have a lot of confidence in the long-term growth in this marketplace. There's a lot of innovation being done, there's a lot of new products will be coming out next year with respect to the constant improvements in the Android operating system and in the products that will come out as part of that. We expect a lot of new products to be coming out early next year with that. And clearly, Microsoft has announced their Windows 8 which will also support tablets as well. So it's early in this marketplace, but there's no doubt that it's been one that has caused a lot of hand wringing not just with the investment community but a little bit for us because it's also one that's been less predictable because of its newness in that regard. Our market share as we can see within the tablet market space is somewhere between 70% and 80%. So 3 out of 4, or 4 out of 5 of every tablet shipped outside of Apple is being powered by Atmel's maXTouch which is a tremendous market share if you think about it. It's actually higher than Apple's market share in tablets. So that's something that we intend to maintain a very high market share as we go into next year and beyond. But it's something that I think the market will be a little bit lumpy, some great periods of great growth and some periods of slower growth which is unfortunate but that's what we expect.

Steven Eliscu - UBS Investment Bank, Research Division

With that, we're out of time, Steve. Thank you very much.

Steve Laub

Steve, thank you. And thank you all of you for being here.

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Source: Atmel Corporation Presents at UBS Global Technology and Services Conference 2011, Nov-15-2011 01:30 PM

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