Atmel Corporation Presents at Barclays Capital 2011 Global Technology Conference, Dec-07-2011 11:00 AM

 |  About: Atmel Corporation (ATML)
by: SA Transcripts

Blayne Curtis - Barclays Capital, Research Division

Welcome. We'll go ahead and get started. I'm very happy to have Steve Laub, who's the President and CEO of Atmel. Maybe a little bit shorter presentation to leave time. I'll lead some Q&A. And then as always, there's a breakout session right after this. So with that, I'll turn it over to Steve. Thanks.

Steven A. Laub

Good morning. Thank you, Blayne. A pleasure to be here for the Barclays Capital Global Technology Conference. Before moving forward, I'd like to introduce Peter Schuman, who's our Director of Investor Relations. If you have any questions, he is the man to approach and get information from.

For those of you not familiar with Atmel, we're a leading semiconductor company based here in Silicon Valley. We have trailing 12-month revenues of approximately $1.88 billion, product development, sales operations throughout the world, like many other companies or industry, and we are primarily what I call a microcontroller-based company. Microcontroller is a very attractive marketplace in our industry, and we're often also regarded now as a touch company, being that capacitive touch or the technology you see popularized today in a lot of smartphones, tablets, other products. We are the leader in that marketplace. I'm going to discuss our strategy. I'm going to discuss some changes we made in the company, the impact of those changes and also our future direction.

Before moving forward, take a look real quick just to talk about the Safe Harbor. As you know, during the course of the presentation, I am likely to talk about projections and other forward-looking statements about our performance, about our business outlook and so forth and that will impact expectations on revenue's profitability, which in fact, for 2011 and beyond. Actual results may materially differ. And for understanding of the risk factors, please look at our SEC filings.

Now moving to back to the company. I've been with the company a little over 5 years, and one of the key focuses that we've had at Atmel is really transform the company into a microcontroller-based company. We've got a number of changes. Our strategy was relatively simple. The actions are actually quite dramatic. The impact has been very strong. So first and foremost, a company that 5 years ago was less than 25% of its business, our revenues came from microcontrollers. Today, it's well over 60% of our business. To do that, we reallocated a lot of our R&D, our sales and a lot of investment of the company to really drive our leadership in this particular marketplace. We've gotten out over 21 different businesses that we regarded as noncore or nonstrategic and product lines, and we've also done 4 acquisitions, all microcontroller focused, capacitive, touch or touch sensing, ZigBee for wireless technologies, LED technologies and power line communication technologies. 5 years ago, 95% of our wafers came from our own fabs. Today, less than 50% generally come from one fab. We've gone from 5 fabs down to 1 fab in this timeframe.

We've also changed the company internally very dramatically with respect to the organization. I have a complete new management team. In fact, I have 14 members of our management team. Only one is still there from when I joined the company 5 years ago, and our headcount is roughly down about 35%. We've gone through a lot of restructuring transformation.

The impact of this has been quite dramatic. If you look at our financial performance back in 2006, roughly $1.67 billion of revenues but a gross margin of 33.6%, a pro forma op margin of just about 4%. And you can see steady improvement over the years was really dramatic improvement. In 2010 and year-to-date 2011, as our gross margins have climbed to over 50% for the first 3 quarters of this year and our pro forma op margins climbing to 26% in that same timeframe, really dramatic improvement, really driven by the changes that we made with respect to the company's strategy at really becoming a leader in the microcontroller marketplace and driving a cost and manufacturing operation of fablight, which has given us much closer to a really now competitive wafer prices yields and technology.

I'm going to turn to showing you the sort of composition of our company and revenues over this timeframe. As I mentioned, roughly 24% of our revenues were microcontroller back in 2006. In fact, back then, the biggest part of our marketplace was ASIC at 31%. Our RF and auto was roughly 22%, and memory was 22%. Micros are now 63%, RF and auto down to 11%, ASIC down to 12%, memory down to 14%. We've gone through all the business, not just micros, and made dramatic changes to them such that all the businesses through the first 3 quarters of this year are growing. All the businesses are increasing our profitability, and I expect you'll see continued increases in profitability in these businesses, assuming of course normal revenue growth, as we move forward in 2012, primarily driven by the fact that their products now are much higher margin, much more proprietary and their positions are growing and increasing within their marketplaces as well.

The key reason for the growth in micros has been really threefold. One is to drive what we call our general microcontrollers. And particularly there, it's been an AVR architecture in the 8-bit space, which has been extraordinarily successful. This is a proprietary architecture that was invented. It's owned by Atmel, which is driven to a very strong position in the 8-bit. It's also been introduced and also growing nicely in the 32-bit space. We're also an early licensee of ARM in 32-bit. That's given us a very strong position with the 32-bit space, where we've grown very fast as well. And then it's also the acquisitions and predominantly that of touch in a marketplace that I think you will recognize as perhaps one of the fastest growing marketplaces in the industry.

To give you a sense for the growth in micros. Back in 2005, the revenues were roughly $270 million. That's grown tremendously in the last few years. In 2009, it was at $458 million; 2010, $892 million. In the last 4 quarters, it's been $1.18 billion. This is a marketplace that has been growing single digit. So the success, the market share gains we've had have been, I think, nothing short of extraordinary, and obviously our intention is to continue to gain market share in the space.

To give you a sense for how we rank relative to the others. This is a marketplace with a lot of players. It's a very fragmented market. It's a marketplace that's comprised of products that go to many, many different end markets as well. If you go back and think about the history, back in the mid '90s, Atmel was really nowhere or really not known in this marketplace. We grew the 14th position by 1998. We grew the eighth position in 2008. And last year, we were the fourth largest supplier, and we expect a little of the numbers roll up this year. It will be recognized as the third largest supplier.

Now automotive is a very big end market for microcontrollers. That's roughly perhaps a little over 30% of the entire market for micros. It's a market that we are actually very, very small and we're actually very strong in the commercial markets outside of automotive. If you take a look at the market outside of automotive, we're probably going to end up being the #2 supplier in the marketplace ahead of free scale in that market.

So obviously, our goal is to keep growing. And one of the beauties of micros is this is not -- despite the success we've had, our market share is still well less than 10%. So there's tremendous opportunities for future growth, and what we've done is identify some areas that we think will propel us to having that success. And one of the reasons we've grown so well is we identified key application areas that we believe are going to go through a very rapid growth. We invest heavily into those areas, come out with products in those areas and solutions, and then when it goes through its gold phase, we'll be one of the key guys who'll be providing those solutions.

As we move forward over the next few years, our intention is to continue to grow very rapidly in touch. We're investing heavily in smart energy, but also battery management solutions, LED lighting solutions, wireless or connectivity solutions, sensor solutions, and we're also investing into the automotive area, which for us is all upside. The TAM of these areas over the next 3 to 4 years, we expect, will grow from about $8 billion to about $12 billion despite the fact that the market itself is only growing roughly single digit. So succeeding and getting market share means succeeding in getting market share in these areas.

We'll talk a little bit more about touch. This is an area that has impacted the company tremendously over the last few years, and we expect it will be a source of continued, very rapid growth in the years ahead. It's a marketplace that 5 years ago probably didn't exist in any material fashion, and then we that expect that this year will probably exceed $900 million in sales. It's growing extremely rapidly. It's being adopted in the largest marketplaces in our industry. The single largest market for semiconductors is cellphones. The second largest market is PC. And these products are going into smartphones, which is the high-growth area of cellphone, and tablets, which is the high-growth area with data processing. So it's being adopted into the largest and highest growth marketplaces in the world. And on top of that, it's being adopted well throughout new marketplaces as well, whether it be gaming consoles, printers, appliances, automobiles, cameras and so forth. Touch has become the preferred way for human beings to interface with electronic products.

In this marketplace, we have become the market share leader. Our products offer the best performance, whether it be a limited touch, whether it be fastest response, whether it be precision, which is when you touch something, does it actually recognize that that's what you meant to touch? It's very accurate in that way, and lowest power. In addition, a very important parameter is noise immunity. Does it do a great job of making the product immune from noise, for example, from LCDs or from chargers. The revenues we've had in this have been nothing short of explosive. We went from roughly 0 sales in 2009, when this product was introduced in the second quarter of 2009, [indiscernible] during that year. We went from 0 to over $140 million in 2010 to what we expect is over $375 million this year with our maXTouch product line, and we're coming out now with a new generation of those products, which we're sampling this quarter for both smartphones and tablets.

To give you a sense for the kind of success we've had, we are the market leader in both smart phones and tablets. In the smartphone area, a lot of success with the leading products with such suppliers, for such customers as Samsung, HTC, Motorola, Nokia and many others. In the tablet space, we believe that our market share in the non-Apple tablets is probably somewhere between 70% and 80%. We are the guys selling to the primary tablets from such people as Motorola, Samsung, Acer, LG, ASUSTeK, DEL and others. We provide them their leading solutions to compete in the marketplace.

To give you a sense also of the success our customers are having with respect to the phones that we are in, PCWorld does an assessment, I think, about every quarter where they determine what they believe to be the world's top 10 best smartphones in what you'll find is that Atmel's maXTouch is powering 8 of those, based on the latest survey from PCWorld. The only 2 that were not in is Apple's. Apple does their own technology for touch. The other one being HTC Sensation, which is ranked #10 on this list.

We like to think that our success with our customers is they're trusting us with their best products and we're helping make their best products truly outstanding in the marketplace and giving them the best performance to compete and be successful in that marketplace. This does translate into great market share gains for us from virtually roughly 5% market share in 2009, with a product line we had prior to maXTouch. We've grown to where we believe this year. We'll probably end the market at roughly around 40% market share in the touch marketplace. This is the market excluding Apple, which has their own solution, as I mentioned earlier. So tremendous success. We are investing very heavily in this marketplace as our intention is to continue to be the market leader as the market continues to grow rapidly for the next few years.

In summary, we transformed Atmel into the industry's highest growth microcontroller company. We had 95% growth in microcontroller business in 2010. We're forecasting over $1.1 billion of microcontroller revenues for this year, and as I showed you, we have become the market leader in capacitive touch, probably the highest growth marketplace in the entire industry. Our operating model has been very substantially enhanced both at the gross margin level and at that the operating margin levels, hitting records for the company in many respects. We've also transitioned our businesses outside of micros, hardware and memory businesses into high-growth, high-margin businesses as well and -- or higher-margin. You'll see that. Certainly, you're starting to see that now and you'll see that, I think, through 2012 and we expect to continue our growth in market share gains.

So with that presentation, and I will open it up Blayne to questions from both you and the audience.

Question-and-Answer Session

Blayne Curtis - Barclays Capital, Research Division

Thanks, Steve. Maybe the first question, just starting off on a high level. Obviously, you as with everyone else is seeing a down December. I'm not going to ask you to call the bottom here, but maybe you could talk about your visibility lead times, how refills are trending, kind of just how you feel about your end market.

Steven A. Laub

So I think we're actually -- you're right. The industry is actually -- generally, almost everybody is down in December quarter. We are actually up in the third quarter, one of the few companies actually growing in the third quarter. We actually had grown for the last 10 quarters, last 2.5 years. Our expectation is we've seen the business kind of stabilize but albeit at a lower level. Whether or not this is the bottom or Q1 is the bottom, I'm not going to make that call right now. Q1 is typically a seasonally soft quarter for the industry, which means we're typically down roughly around mid single digits. I'm planning for that right now. The good news is I'm not planning for anything more than that from the standpoint of what I see out there, and there are some indications. As I said, things are stabilizing. There are some indications that perhaps things will get better in that respect in Q1. But I'm planning for Q1 to being the bottom right now instead of Q4.

Blayne Curtis - Barclays Capital, Research Division

Maybe -- you're obviously saying a correction in the tablet market, not Apple tablet, sell-through hasn't been what was expected. But maybe when you look out to 2012, maybe talk about the opportunities on when, a, where your positioning is there, how you see the competitive landscape and how much you see touch playing in these types of devices as the form factor may change but it's [indiscernible].

Steven A. Laub

So one thing that has happened is, in fact, at our business, for example in Q4, is that we along with others are forecasting that the touch business will actually be sequentially down. We had an extraordinarily strong Q3, and the primary reason for the down Q4 is in the tablet area we have gone from what was a 4-chip solution in tablets to a more a single-chip solution. So that has reduced the dollar content for Atmel in a tablet quite substantially, probably cut into less than half. And a lot of that transition is occurring during Q4. So even if we were shipping the exact same number of units, you'd see a substantial reduction in those revenues. And in fact in Q4, we're expecting some transition down in the number of units as well due to the inventory levels that people have. Now with respect to next year, we expect that the majority of the product that will be shipped within tablets will be the single chip, although there will be some multiple-chip solutions as well. Our anticipation is that the Windows 8 will be quite positive for the tablet market, and will be quite positive for Atmel. As I mentioned earlier, our market share in tablets is somewhere between 70% and 80%, which is a tremendously strong market share in the non-Apple tablets. The expectation that we have for next year is that we're very well positioned to win the majority of the tablets out there. It's obviously our job to do, but we have every indication that that's going to happen. With respect to Android, we expect some very good Android improvements in the operating system. Well, the tablets are very, very competitive there. But Windows 8, we believe especially introduction to the second half of the year, will have a real positive impact for us for 2 reasons: One, we're an engineering partner with Microsoft for touch in Windows 8, so we are the designated suppliers to be used for their -- the touch solutions for Windows 8 tablets. The other thing is that I believe that to a great extent as Windows 8, everything I read says it's going to be supporting a lot of the business office applications and so forth. It becomes a true alternative to a laptop or notebook, which I think to a great extent today, tablets are not. Often, people have both. And I think with those applications in there, you'll see a real adoption for a lot of businesses to have tablet as alternative to the laptop network. I think that will drive a lot of the adoption of Windows 8. And I think that will be very good for both, obviously, Windows 8 and also for Atmel.

Blayne Curtis - Barclays Capital, Research Division

You showed in the slide, you clearly own the high-end of touch. Maybe you're seeing a lot of new entrants at the low-end. Obviously, it will take time for them to move upstream. But maybe the battleground is more of the mid-tier for you. As you're looking next year's designs, has it gotten any more competitive? Or kind of maybe some thoughts on just the overall competitive environment, has the new entrants changed any of the markets or so?

Steven A. Laub

So this is a -- it's a competitive market. It's been a competitive market ever since we entered this marketplace. We have been very strong in the mid and high end of the market. I expect our strength and our share there to continue to be very high. The lower end of the market is a mark that is adopted by other people. You could expect that you will see us penetrating into the low end market in 2012 as well. It's not that hard to go from the high end down. It's a lot harder to go from the low end up. We have a whole new family of products that we're introducing right now. And we came out with our initial family in 2009, which was completely -- took the market by surprise, I think, from the standpoint of how good it was. It jumped us into the #1 position. We came out with a new family, we call it E family, early this year, which has been also put us in position of being the technology leader. The new family we introduced, we're actually sampling with customers now and demo-ing to customers now. And the feedback we've got is that it is the best product they have out there that they've seen, including any new product from any of the other suppliers. So I feel very good about our position and our market share continuing to be leading as we go into -- and throughout 2012.

Blayne Curtis - Barclays Capital, Research Division

The last question on touch, I promise. There's a lot of talk about on-cell, in-cell how it will change the environment. Some players think they're better positioned than others. Kind of just quickly, what's your positioning with particularly Intel?

Steven A. Laub

So on-cell means on the LCD, in-cell means within the LCD. We are shipping tens of millions of units today in on-cell. So that's a marketplace that's already being adopted. And in fact, I think we're probably the market share leader today in those technologies from the standpoint of what we're shipping with the customers. In-cell is a technology -- we don't talk about what we're developing, but it's a technology that we think will have some adoption in the marketplace. We tend to work on things that we believe will be adopted in the marketplace. So we are working on technology as well. I don't think it's going to be a game changer unless you are not in it from that standpoint, because at the end of the day, people think your solution based on the performance of your touch controller. What in-cell primarily gives you is the cost-saving and not a huge cost-saving, but a cost-saving, but it's a technology that will have adoption as well and it's something that I think that you'll see in the market probably more substantially. You'll see some solutions potentially begin next year based on what we hear competitors are saying, and I think there will be more adoption for Atmel in 2013 timeframe.

Blayne Curtis - Barclays Capital, Research Division

The focus has been on touch. Even it's within your MCU business, but even excluding touch, you've outgrown the market for the last 3 years. Obviously, this is a pause in the market that we’re seeing, but maybe talk about why you have been outgrowing the market at MCUs and kind of what are you doing to keep that going.

Steven A. Laub

So in the general MCU market, which by the way I regard as critical. I mean, that to me is the core of our products because we build everything from that. That market for us by the way grew 60% to over 60% in 2010, and it's continuing to grow this year. Even though some other people haven't grown this year in that marketplace. Our success has been primarily that within our AVR products, we have really 3 characteristics which are very critical. One is we have the -- we have very low power. So what we've seen is that a lot of the newer products that are being introduced in the marketplace, whether it be in the industrial markets or the consumer markets are battery powered. And so the need for lower power has become much more important than it used to be, which has allowed us to have a lot more market share gain. The second characteristic of our product is that with our architecture, we have much better what's called code compaction. So that a customer of ours can use a product with a smaller memory than our competitors, therefore reducing their cost because we compact their code much more efficiently than our competitors do. So those 2 characteristics, and we also have outstanding design tools with respect to our products that we support that gives us a real advantage vis-à-vis our competitors. And its design tools support both the 8-bit and 32-bit products as well. The other that has really helped us is that we were an early licensee of ARM. ARM is having a lot of success in the marketplace and driving and being successful and driving share gains within that, and growing with them has been a big part of our success as well. So those are the primary reasons. We continue to invest pretty heavily in that marketplace. I consider that marketplace very important for our long-term success. We should expect to continue we'll outpace the market there.

Blayne Curtis - Barclays Capital, Research Division

There may be time for a question or 2 from the audience, if there are?

Unknown Attendee

Can you talk about your margins for the touch business? It looks like you guys have the high-end and mid-end and then you have -- you're moving to the low-end. Competition is eventually going to move to the mid to high end. So how do you forecast -- what is your view on the margins going forward?

Steven A. Laub

So the margins for us are touch business are higher than the company's overall margins. My expectation is that our margins will remain that way. The key thing for us to command higher margins is to make sure we're coming out with products that give customers a reason to use us. We don't go after where price is the sole consideration. We go after those applications where we give our customers the ability to differentiate their products and win in the marketplace. Touch is a parameter that users see, users feel, and so the quality of the touch solution is something that is part and partial of making our customers' product successful. So long as that continues, and every indication is that will continue for some time, I think several years, because you as a user want to have the fastest, most efficient, most precise touch performance than a competitor and you'll make a decision as to what you'll use with respect to that. So that is why we can command more for our products. Therefore, I continue to expect that our margins for our touch business will continue to be higher than the company average as we go through 2012 and beyond.

Blayne Curtis - Barclays Capital, Research Division

Maybe I'll take the last one. Following up on the margin discussion, you did put some targets out at your Analyst Day. Obviously, we have a reset in the middle here, but maybe talk about -- beyond mix, what other opportunities do you have in improving your margins?

Steven A. Laub

Obviously, there's a mix. We expect to ship more microcontrollers as a percentage of the company each year, but I think part of that is not just shipping microcontrollers. But within microcontrollers, it's shipping those kinds of products which command higher margin. Whether they be in smart energy, whether they be in battery management, they're varied solution-oriented products which command higher margin than selling a simple micro that goes into an appliance, for example. So it's really a composition of mix to micros and to higher-end microcontrollers. The other thing that's going on is we're doing a number of things that we still have opportunities. We've done the big pieces with respect to getting rid of fabs and those type of things. However, there's a lot of opportunity for us with respect to yield enhancements, dye shrinks and so forth, which will allow us to do the drive, I think, just proportionately lower cost to our products.

Blayne Curtis - Barclays Capital, Research Division

Okay. We'll wrap it up there. Thank you very much, Steve, and we do have the breakout following this.

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