Atmel Corporation: Is a Recovery in Sight?

Atmel Corporation (ATML) reported selected financial results for Q1'07 on 1st May. Considering that the current management's goal is to focus on the company's core microcontroller products, the results must be regarded as pretty good. First quarter 2007 revenues totaled $391.3 million, a 2% decrease compared to the $400.8 million reported in the first quarter of 2006, excluding Grenoble (subsidiary sold in Jul'06), and a decrease of 4% compared to the $408.9 million reported in the fourth quarter of 2006. Sales of microcontroller products grew by 9% sequentially and approximately 19% compared to Q1'06, while proprietary AVR microcontroller products grew at remarkable 17% sequentially. The company guided to 1%-4% sequential growth in revenue for Q2'07, the mid point of which still falls higher than consensus estimates. The company's net cash position improved by $35 million to $275 million (gross cash $420 million). On the restructuring, Atmel has put up its UK fab facility on the block and recently sold its Irving Texas facility to Maxim for $38 million.

All of these do reflect the good work by the new management that took over last August when the founder and then Chairman and CEO was terminated from office for misuse of corporate travel funds. But is this really the beginning of a fundamental recovery? Probably. If the current management continued with its efforts on improving efficiency and margins by focusing on core product, and realizing the estimated savings $70-80million annually over the next two years, the company would turn around. But I do believe the stock is likely to witness a spurt much ahead of this recovery in fundamentals.

The company continues to build up cash on the balance sheet. There is an indirect pressure from former CEO Perlegos, who is now making a bid to nominate directors to the board, to implement a buy back ($1bn as proposed by him).

Also, the company remains attractive for the free cash flow from operations that it generates. The company is on the process of becoming a clean (all the issues from the past, including stock options adjustments, are being settled) and focused (though smaller) business. The current management, with stated mission of unlocking shareholder value, would be more than amenable to a take over. The company had received a take over offer from RDG Capital valuing it at USD 2.7 billion last May. But with the recent developments a new bid would probably come in at a substantial premium. The market would start reflecting these expectations much sooner.

ATML 1-yr chart

Disclosure: none