Executives
Robert Pursel - Director of IR
Steven Laub - President and CEO
Bob Avery - VP of Finance and CFO
Analysts
Edwin Mok - Needham & Company
Doug Freedman - AmTech Research
Jingo - Wedbush Security
Robert Burleson - ThinkEquity Partners
Dennis Reed - Cleveland Research
Kevin Cassidy - Thomas Weisel & Partners
Atmel Corp. (ATML) Q3 2007 Earnings Call October 30, 2007 5:00 PM ET
Operator
Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Atmel Third Quarter 2007 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)
Thank you. Mr. Pursel, you may begin your conference.
Robert Pursel
Thank you, Stephanie. Good afternoon, and thank you for joining us for Atmel's third quarter 2007 earnings release conference call. Our release crossed the wires today after market close and is available on the company's Investor Relations website at www.atmel.com. A 48-hour telephone replay of this call will be available after 5:00 PM today Pacific Time. The replay phone numbers are 800-642-1687 in the U.S. and 706-645-9291 for all other locations. The access code is 19444605. The webcast will be archived on the Atmel website for one year.
Joining us for the call today are Steven Laub, Atmel President and CEO and Bob Avery, Vice President of Finance and Chief Financial Officer. Bob Avery will begin the call with a review of our Q3 financial results and Steve Laub will provide a business update. At the conclusion of Steve's remarks, we will 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 cost savings for 2007 and 2008, target gross and operating margins and revenues. Our forward-looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today and, therefore, are subject to risks and uncertainties as described in the Safe Harbor discussion found in today's press release.
Now, I would like to turn the call over to Bob Avery for a discussion of our third quarter financial results.
Bob Avery
Well, thank you, Robert. As most of you may already be aware, today I announced my planned retirement to be effective sometime in the first quarter of 2008, after a successor has been named. My decision to retire comes at a point when the company has successfully executed on many of the strategic initiatives announced last December, and I am confident that Steve and the management team will lead the company to continuing successes. I look forward to devoting more time to my family and my many other personal interests.
Let me provide some details of our statement of operations. Revenues for the third quarter ended September 30, 2007 were $418.1 million, a 3.4% increase compared to the $404.2 million for the second quarter of 2007, and a 3.2% decrease compared to the $431.7 million for the third quarter ended September 30, 2006. Excluding our RF CDMA foundry, revenues in the third quarter grew 4.5% sequentially and 4.2% year-over-year.
Gross profit was $149 million for the third quarter or 35.6% of revenue, an increase of 60 basis points from the prior quarter, and a 50 basis points improvement from the same period last year. This was up $7.4 million from the second quarter due to higher revenue and enhanced product mix and improvements in manufacturing efficiencies. It was down $2.5 million from the year ago quarter due to lower revenue.
Research and development expense was $63.6 million for the third quarter. This was $5.7 million lower than our prior quarter due to the efforts to focus R&D on core technologies as well as the recent sale of our Network Storage Products Group in the third quarter. R&D expense decreased $11.6 million from the year ago quarter, mostly due to the restructuring initiatives that have been implemented.
Selling, General and Administrative expense was $58.5 million for the third quarter. This was a decrease of $9.4 million from the prior quarter, primarily due to the reduction of one-time expenses associated with a special meeting of stockholders in May 2007 and various independent investigations which has been partially offset by higher ongoing legal fees and stock-based compensation expenses.
SG&A expense was up $8.3 million compared to the year ago quarter, due primarily to increased stock-based compensation cost, resources added to increase investments and sales and administrative organizations, as well as the weaker dollar in the third quarter of 2007.
For the third quarter, stock-based compensation expense was $4.9 million, of which $500,000 was included in cost of sales, $600,000 was included in R&D, and $3.8 million in SG&A. Stock-based compensation expense totaled $3.3 million in the prior quarter and $1.5 million in the year ago quarter.
Operating profit was $25.4 million for the third quarter or a 6.1% of revenue, and included net non-recurring charges of $1.5 million. This was increase of $18.3 million from the prior quarter due to higher gross profit and lower operating expenses. Operating profit declined $800,000 from the year ago quarter, primarily due to current quarter restructuring charges. Excluding net non-recurring charges, third quarter 2007 operating profit would have increased $700,000 from the same period last year.
Other income and expense net was $1.3 million in income for the third quarter. This was an improvement of $700,000 from the prior quarter, and a decline of $400,000 from the same period last year, primarily due to translation adjustments.
The income tax provision was $10.1 million for the third quarter, primarily due to statutory income at our foreign subsidiaries. This was an increase of $3.1 million from the prior quarter and $4.5 million from the third quarter of 2006. Net income for the third quarter of 2007 totaled $16.6 million or $0.03 per diluted share. This compares to net income of $700,000 or zero pennies per diluted share for the second quarter of 2007, and net income of $124.3 million or $0.25 per diluted share for the year ago quarter, which included income and gain from disposition of discontinued operations of $102 million or $0.21 per diluted share. Excluding the income and gain from the sale of our former Grenoble subsidiary, net income for the third quarter of 2006 would have been $0.04 per diluted share.
Turning to the balance sheet, total cash, which is cash and cash equivalents for the short-term investments, was $251 million at the end of the third quarter, a decrease of $225 million from the end of the prior quarter. During the third quarter of 2007, the company used $250 million to repurchase shares of its common stock, under an accelerated stock repurchase program, and reduced its debt, current and long-term, $20 million from the prior quarter.
Cash flow from operations totaled approximately $46 million in the third quarter. Capital expenditures were approximately $9 million for the third quarter and $54 million year-to-date. Capital spending decreased approximately $10 million from the prior quarter and $19 million from the year ago quarter due to lower expenditures for semiconductor manufacturing equipment.
Depreciation and amortization was $30.9 million for the third quarter. This was a decrease of $800,000 from the prior quarter, and a decrease of $25.6 million from the year ago quarter, approximately $15 million of which relates to the sale of our North Tyneside, United Kingdom manufacturing operation.
Accounts receivable were $226.3 million at the end of the third quarter. This was an increase of $1.7 million from the prior quarter due to the higher comparative revenue, and a decrease of $19 million from the year ago quarter due to a lower comparative revenue. Days of sales outstanding were 49 at the end of the third quarter compared to 50 at the end of the prior quarter, and 50 at the end of the year ago quarter.
Inventory was $348.8 million at the end of the third quarter. This was a decrease of $12.9 million from the prior quarter due to higher shipments and lower inventory bills. Compared with a year ago, inventory increased $45.3 million, primarily due to replenishment of MCU and buffer stock inventory from less than optimal levels. Days of inventory at the end of the third quarter were 117 compared to 124 at the end of the prior quarter and 96 a year ago.
The company's effective average exchange rate in the third quarter of 2007, was approximately $1.36 to the Euro, compared to $1.35 to the Euro in the second quarter of 2007, and $1.28 to the Euro in the year ago period, a $0.01 increase in the dollar/euro exchange rate reduces operating income by nearly $1 million each quarter.
On August 27, 2007, Atmel announced that its Board of Directors approved a stock repurchase program, under which the company has repurchased $250 million of its common stock. As of this day, an initial 43.4 million shares have been delivered to Atmel, and under this program, the company may receive additional shares during the period of up to four months from September 20, 2007.
The purchases under this program and actual number of shares remaining to be purchased depend on a variety of factors, including the market price of the company's common stock, regulatory and contractual requirements, and other market factors during the period of up to four months from September 20, 2007.
Now, let me turn the call over to Steve for a discussion of our business this quarter.
Steven Laub
Thank you, Bob, and good afternoon. First, let me say that it's been a pleasure to have the opportunity to work with Bob during the past 15 months. He has made innumerable contributions to Atmel during the past 18 years and has been an invaluable partner to me, as we transform Atmel into a higher growth, more profitable and valuable company. On behalf of the Board and other members of the management team, we thank him for his many years of support and wish him the best in his well-deserved retirement.
Let me now turn to discussing the results for the third quarter. I am pleased to say that we have exceeded the upper end of our revenue guidance for the third quarter, as our overall revenues grew 3.4% sequentially. I am also particularly gratified by the increase of our operating profitability this past quarter, excluding non-recurring charges of one-time events. We generated operating profit of $26.8 million, our highest quarterly operating profit since the first quarter of 2001.
Now, let me provide you an update on the operating segments. Revenues for the Microcontroller segment, which set a record this quarter, were $119 million, up 7% sequentially, and up 11% from the same period last year. 8-bit AVR products continue to be the major driver, achieving record revenues, and delivering 7% sequential and 17% year-over-year growth. 32-bit ARM revenue also set an all-time high, growing 33% sequentially and 29% year-over-year. MCU design kit shipments remain strong, as the company shipped more than 22,000 in Q3 and over 60,000 since January.
We are particularly pleased to see that our decision to focus on microcontrollers and related products as our core product area is being to positively impact our results, as we experienced strong sequential and year-over-year growth. We continue to be the fastest growing major 8-bit microcontroller supplier and expect to continue to gain market share in Q4 and 2008.
For the ASIC segment, our revenues were $128 million for the third quarter, up 3% sequentially and up 1% from the same period last year. Smart card IC sales were robust, with 11% sequential and 3% year-over-year growth. Advanced products also showed significant strength during the quarter, up 24% sequentially and 68% year-over-year. I am also pleased to mention that Atmel's CAP customizable ARM-based system-on-a-chip product was voted one of China's top five MCUs in a recent survey.
Turning to the Nonvolatile Memory segment, revenues for this segment were $97 million for the third quarter, up 9% sequentially and up 3% from the same period last year. Serial EEPROMs and serial DataFlash products continue to penetrate new accounts and markets, as new customers convert applications from parallel to serial interface. And applications, such as DVD drives, LCD monitors, disk drives and PC BIOS. Serial EEPROM delivered 8% sequential and 10% year-over-year growth, while serial Flash was up 32% and 28% respectively.
For the RF and Automotive segment, revenues were $74 million for the third quarter, down 7% sequentially and down 28% from the year ago quarter. Excluding the RF CDMA foundry business, the segment is down 3% compared to the second quarter of 2007 and up 1% from the same period last year.
Atmel's recently launched LIN transceiver product, which is designed in combination with the AVR MCU, is being enthusiastically received by several major automobile OEMs. Our RF CDMA foundry business declined 22% sequentially and nearly 70% year-over-year and currently represents 3% of third quarter sales.
Dealing our business from a geographic perspective for the third quarter, Atmel experienced growth in all regions worldwide. For the quarter, Asia was up 5% sequentially and represented 50% of total revenues. Europe was up 1%, representing 34% of revenues and the Americas was up 7%, representing 16% of total revenues.
I now want to highlight two major events that occurred during the third quarter that add significantly to shareholder value. First was the announcement in August of a $250 million stock buyback to return capital to shareholders. The second event is with the initiatives we announced last December. Earlier this month, the company announced that it has entered into separate agreements with TSMC and Highbridge Business Park Limited for the sale of its North Tyneside, U.K. property and wafer fabrication equipment for $125 million, which has to be substantially completed during the first quarter of 2008.
The sale of this facility was part of a strategic restructuring initiative announced last December to increase Atmel's competitive position and enhance shareholder value by optimizing manufacturing and refocusing the company for profitable growth. We have many hardworking and dedicated employees at North Tyneside. We serve our customers and our company admirably, and we are committed to helping easy transition as production is concluded.
To ensure a seamless transition for customers, Atmel will continue to manufacture products at the North Tyneside facility into the first quarter of 2008, and then redeploy production to our other fabs located at Colorado Springs, Colorado and Rousset, France, as well as to external foundries.
These restructuring initiatives were announced last December in addition to the sale of our North Tyneside fab. We have sold our Irving, Texas manufacturing facility. We have divested or curtailed further investment in over eight product lines, consolidated this Serial EEPROM and flash memory businesses into one streamline business unit, and are currently transferring test operations from North America to Asia.
In total, the steps taken since December have enabled us to exceed our headcount reduction targets of only 300 non-manufacturing personnel by the end of 2007, and stay ahead of schedule to achieve previously announced cost savings for 2007 of $70 million to $80 million, and $80 million to $95 million for 2008.
Despite the progress we have made in refocusing Atmel, in its core businesses and in reducing its manufacturing cost as we transition to a fab light model. Atmel continues to remain heavily exposed to adverse changes in the dollar/euro exchange rate. As we enter the fourth quarter, we anticipate that Atmel expenses are likely to be significantly impacted by recent changes in the dollar/euro exchange rate. To mitigate this impact in 2008, we intend to take additional strategic and tactical actions to reduce our exposure to euro-based expenses.
Now I’d like to turn the call back over to Bob to discuss the expected financial impact of the sale of the North Tyneside fab, and the outlook for Q4.
Bob Avery
Thank you, Steve. In looking at our expectations for gross profit going forward, we expect that the sale of our North Tyneside fab will have negligible impact for the fourth quarter. However, assuming the current level of revenues and no changes in the dollar/euro exchange rates, we expect the fab sale to contribute 150 basis points in the first quarter, and an additional 100 basis points in the second quarter of 2008.
However, we anticipate that the weak dollar in the fourth quarter will have a negative impact on our gross profit, which will only be partially offset by increased manufacturing efficiencies, and therefore, we expect the fourth quarter gross profit will decline between 25 to 50 basis points. We base our assumptions for the fourth quarter on an average exchange rate of a $1.42 per euro.
Separately, operating expenses are expected to be approximately $128 million in total, plus or minus $2 million for the fourth quarter. Restructuring charges related to the sale of the North Tyneside facility for the fourth quarter will be in the range of $15 million to $25 million, with additional charges and related gains from the sale recorded in 2008.
Looking at the current business environment, we expect revenues for the fourth quarter will be unchanged to up 2% on a sequential basis.
I would now like to open the call for questions.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions) Your first question comes from Edwin Mok of Needham & Company.
Edwin Mok - Needham & Company
Hi, congratulations for a good quarter. Let me start with the product group. It sounds like every product group has shown good growth this last quarter, while on your guidance you guys are looking for a kind of a flattish guidance for the December quarter. Can you Steve, maybe going to move in part to tell me which group you expect to show growth versus which one you expect to decline?
Steven Laub
Yeah, I'll be happy to, and thank you, Edwin. For the fourth quarter, our expectation is the market controller group will continue to grow on a sequential and year-over-year basis. We also expect that we would have probably a little bit of growth or pretty much flat, flat to little bit growth in the Serial EEPROM business, and memory's business overall. Our ASICs business will be up also sequentially in the fourth quarter, and we expect the advance products group will be down in the fourth quarter more significantly than just slight, probably a roughly, I would say about a 20% down, it’s a relatively small group, but had a very big jump in the Q3 and it will not be repeated. Some of those bookings will be, those will not repeat in Q4. And the automotive business, we think will be slightly down in the fourth quarter.
Edwin Mok - Needham & Company
Maybe a clarification, you said that the advance product group was one that's down a lot, because you see a strong growth in the third quarter, is that..?
Bob Avery
Well, that's correct. Just to give you a sense, that group grew, it's a relatively small group, that group grew roughly, they grew about...
Steven Laub
Yeah. It's a 20% up in the third quarter and will be back down about 20% we expect or more in the fourth quarter.
Edwin Mok - Needham and Company
I see, great. Yes, sorry to cut you off.
Steven Laub
No, go ahead.
Edwin Mok - Needham and Company
Yeah. So my second question is on wafer fab sale, thanks for giving us some color in terms of the margin expansion going forward. But I imagine that those numbers that you guys provide is only related to fab sale, I mean that you guys are still continuing to improve your efficiency on the other part of your operation as well, right?
Steven Laub
That's correct. These are specifically related to the impact of the North Tyneside fab sale and does not take into account other efficiencies we're doing in another fabs, as well as other things we're doing on tested other operational changes we are making.
Edwin Mok - Needham and Company
So, historically, you guys have had this, I guess, 50 to 80 basis point improvement per quarter, assuming that Forex is stable obviously. Are you guys still looking for similar level of improvement excluding the fab sale or maybe lowering that or how shall I look it on?
Steven Laub
I think that once you get past the fab, so assume that for the time being that the impacts are as Bob described, so Q4 will have, for example here is what's going on, Q4 the currency impact based on going from the $1.36 to the Euro to $1.42 to the Euro. The expectation is that the currency impact on that, nothing else changing, would be probably somewhere around 100 basis point impact on our gross margins because of manufacturing efficiencies and enhanced mix of products and so forth. That's one of the reason we are only actually anticipating a decline of 25 to 50 basis points in Q4. So, we're making that up as because we are driving efficiencies in our manufacturing operation.
The other way to look at it, it would have been up 50 to 75 basis points in Q4, but for the fact that we're having a currency impact against us. So I would assume that what you should find is that for Q4, it is what Bob described. For Q1, the 150 basis point improvement, as compared to, in a sense where we are now is something that you should expect to where it will be at the end of Q4. We'll see a 150 basis point improvement, again assuming no additional currency change and no, nothing disruptive with respect to the business levels and so forth.
I was expecting Q1 and Q2, expect the current numbers on gross margin we just talked about. After Q2, well, you should continue to expect increases in our gross margin. We've highlighted to our investment community that we expect to achieve a 40% gross margin in the second half of 2008, that was based on, and by the way a fact that of a 1.36 exchange rate at the time that we've made that and we fully anticipate that we would make that at that exchange rate, given the exchange rates moving against us and given that we like meeting our commitments. We're looking, we are endeavoring to do what we can to continue to drive that even higher.
Edwin Mok - Needham and Company
That sounds okay.
Steven Laub
A long-winded answer, but I think I given you, well, what you are looking for.
Edwin Mok - Needham and Company
Yes, that was a very helpful color. One question on, just maybe a housekeeping question regarding the stock repurchase. Are we expecting that based on the full year or I guess three months from the September date. Are we expecting that to just partially kicked in, in the fourth quarter and more likely kicked in by the first quarter in terms of the share count and how we model that?
Bob Avery
So, Edwin, this is Bob. In the third quarter, we didn't see much of the effect because of this, we got the 43 million shares back towards the end of the quarter.
Edwin Mok - Needham and Company
Right.
Bob Avery
But, we'll see a 100% of the effect in the fourth quarter.
Edwin Mok - Needham and Company
Great, thanks a lot for clarifying that.
Bob Avery
Right out of account.
Edwin Mok - Needham and Company
Thanks. That's what I asked.
Bob Avery
Thank you.
Operator
You next question comes from the Doug Freedman from AmTech Research.
Doug Freedman - AmTech Research
Great, thanks guys. Can you talk a little bit about what you are seeing as far as channel inventories and a little bit of a read on basically what you are feeling, your customers are feeling, given the uncertain macro times as the media likes to report?
Steven Laub
With respect to the inventories that we are seeing in our channels, I would say, actually inventories are pretty consistent with where they have been, probably or approximately two months of inventory in most of our distribution channels, while actually for some AVR products, they are actually less than that. And so we are expecting some inventory build to replenish those inventories for the AVR products. But overall, I'd say inventories are by no means, are they too large or too abundant, in fact they are where it historically have been or even a little bit light right now.
With respect to sort of our customers and what's going on with that, I would say that we are a little cautious as you can tell by our guidance. We just did our guidance in Q3 based on what we are seeing and base that the macro environment does appear little bit more uncertain. We ourselves are being a little bit more, I'd say prudent with respect to our guidance for Q4, but we are not saying, we are saying it's still, I'd say considered environment out there, I wouldn't say it's particularly soft, I wouldn't say it's particularly strong, it's still sort of a very much of business as you look type of environment, is what I would say is what we are seeing right now.
Doug Freedman - AmTech Research
Alright. Can you comment, and clearly you saw some roll offs in the RF foundry business. Can you let us know what the actual revenue was in the third quarter? How much further of a roll-off is there, that we need to plan on?
Steven Laub
I think we commented on 3% of our sales, the RF foundry business in the third quarter. We don’t even give the exact dollar amount, but that will get you very, very close.
Doug Freedman - AmTech Research
Okay.
Steven Laub
That’s what the number was. And we do expect to see some more roll-offs, sequentially, each quarter through next year. But it is really, from a year-over-year basis, it's down approximately $30 million.
Doug Freedman - AmTech Research
Alright. You've been very helpful on the gross margin impact from the closure. Can you talk about what the utilizations are, that's going to help make that happen? So, where was utilization now and where do you think that will go with the closure at the fab?
Steven Laub
Utilization of which fabs?
Doug Freedman - AmTech Research
In total for the company.
Steven Laub
Okay. So, the impact what we have right now is, give me one moment. So, the fab in North Tyneside has probably been running roughly at about 50% to 60% utilization. Okay. And I would say that it will be running a bit higher in Q4, but still well below its overall capacity. With respect to the other fabs, they are running closer to between 85% and 90% of utilization. That being both Colorado, I will talk to you specifically about the Colorado Springs fab and the Rousset, France fab.
My expectation is that, since we are building it, what we're doing right now is, we're building inventory with respect to the products that are in the North Tyneside fab. So, that will be sufficient inventories to carry those products depending on which, for example, the microcontroller products are building sufficient inventories to carry those products until, really the fall of the next year to give us more than enough time to convert those products and transport them over to the ones that are to be built in Colorado Springs.
So, there are certain products to be built in both fabs, and those ones we're not building excess, extra inventory, and the ones built only in that Fab9, we are building the extra inventory, and we will not be building really manufacturing of those products, until the second half of next year in Colorado.
With respect to the smart card products that are built in Fab9, we're also building quite a bit of inventory of those parts for our customers as well, depending on the customer, anywhere between 6 and 12 months. Other inventory of those products for the customers, and we will not be, in the sense -- really, we're not going to tell you the exact data basis necessarily and bring them up in Rousset, France. What we'll do is, as those customers are migrating to our next generation products, those with migrations will be to parts in Rousset.
So again, you really want to see the impact in utilization of that fab until the second half of 2008. And so that's why we expect a big uptick in those fabs than what we run in those, from the movement out of Fab9. There will be an uptake in those fabs in the first half based on just normal business growth for those products that are currently run there.
Doug Freedman - AmTech Research
Alright, terrific answer. On the smart card business that you mentioned there, can you comment on what you've seen there, as far as pricing and how you are holding, where you believe your share is in that market?
Steven Laub
With respect to the smart card business, we've made a decision to one to diversify from participating almost wholly, and what has been historically telecom SIM card market to other more attractive parts of the market, which are banking, ID and system applications, which typically have high level of security and higher margin. So, that's the area we've been focusing a lot of our attention for the future growth or for future part of that business. We have also made a decision to not participate as aggressively in what I call the low-end or small SIM card business, which is the most aggressively priced in the lowest price part of the marketplace. We are participating there, but we've reduced our participation in that part of the marketplace.
Doug Freedman - AmTech Research
Alright, two last ones. Just the MCU, the microcontroller opportunity in automotive, you talked in the past about having an opportunity there to try to get into some of your automotive accounts. Where are you at on that in any progress that you can report?
Steven Laub
The answer to that is that it's actually growing rapidly for us in a very small number. So, I mean our automotive revenues, I'd say overall for us and less than 5% than of our total microcontroller revenues. So either the market is roughly probably 35% of microcontroller sales go into automotive for us is less entire. It's growing very rapidly a year ago, it was probably about a 1% - 2%, and today it's probably closer to 3% to 4% sale. Our number is growing as our company micros, and that percentage is growing faster, so that gives you a sense for that.
We think the opportunity is enormous for several reasons. We have customers on track through our automotive business unit. So, a lot of customers that uses automotive products, and actually use our micro today, for example, in the remote keyless entry products uses our micro, for example, are already used in some of our micros. I don’t count that by the day as part of our automotive micros, but we are using our microcontroller architectures in automotive products today, that are used by automotive business units.
So, we have customers on track, we have the high voltage technologies and high temperature technologies, and we do have a big focus, we have all the quality controls and so forth to support it. And we do have a lot of new products that are coming out. I talked about one in the call, about our LIN Transceiver product that’s recently been introduced, that’s actually sold with and coupled with our AVR product to send to automotive. So we look at this as a terrific opportunity for us that we are investing pretty substantially, both from a development standpoint and from a applications and sales and marketing standpoint.
Doug Freedman - AmTech Research
Terrific, one last detail, it sounds like inventory, should we be planning on inventory increase given the closure of the fab and how should we think of that over the next, say, two quarters?
Steven Laub
You should expect that there will be some increase in inventory because of the fab closure. Bob, why don’t you talk about what kind of levels increases.
Bob Avery
There is a variety of factors going to inventories and I have learned over the years, a solid prediction of absolute number on inventory is a dangerous thing to do. But generally, Steve is right. The inventories will increase somewhat. I don’t expect that will increase dramatically, though.
Doug Freedman - AmTech Research
Alright. Terrific and congratulations, Bob, on your retirement and thanks Steve and guys, nice job on the quarter.
Bob Avery
Great. Thank you very much.
Operator
Your next question comes from Steve Park of Wedbush Security.
Steve Park - Wedbush Security
Hello. Steve.
Operator
Mr. Park, your line is open.
Jingo - Wedbush Security
Hello. Yeah. This is [Jingo] for Steve. Steve is on the other line. Just a quick question, you mentioned gross margin improvement in Q4 and Q1 What’s the particular impact on the MCU and the smart cards?
Steven Laub
The MCUs and smart cards, we'll actually see effectively the vast majority of that gross margin improvement. Those are the two product lines that are built in the North Tyneside fab. If you think about taking the gross margin improvement that we've articulate, which is 150 basis points in Q1, another 100 basis points in Q2, those would be pretty much equally shared between those two business units. I don't have the calculations, so I can't exactly tell you exactly what happens to them, but it's a pretty substantial increase, I would say for microcontrollers, it probably takes the gross margin up about 5%, and for the smart cards it probably takes them up about even more than that I think. Bob, do you the number there?
Bob Avery
No. I don't. But it's going to be a substantial difference because they were observing considerable amount.
Jingo - Wedbush Security
Yeah. Okay that's fair enough. And then the, can you comment on about lead times. You mentioned the inventories levels, the cargo sale, how about the lead times?
Steven Laub
Lead times are typically 4 to 6 weeks for most of our products for which we provide. We sell through distribution and so forth, some automotive products typically have much longer lead times because they are more build to order, but the, our lead times are fine.
Jingo - Wedbush Security
Okay. How about the ASPs? Can you comment any ASP declines across your product lines?
Steven Laub
There has been no substantial decline in the ASPs across our product lines. I'd say it's the normal orderly declines of the industry and there has been no unusual pricing behavior that we experienced this past quarter.
Jingo - Wedbush Security
How about Q4 ?
Steven Laub
We don't anticipate, the usual pricing, even Q4 either.
Jingo - Wedbush Security
Okay. Thanks. Any plan for the another fab sale in Europe.
Steven Laub
I am sorry.
Jingo - Wedbush Security
Do you plan for, do you plan to sell another fab in Europe?
Bob Avery
We haven't made any announcements of any intentions with respect to, but besides our fab in Germany, which we do plan on selling, so I just spoke there. We do plan on selling that fab we had articulated previously that we would be putting our energy into selling the North Tyneside fab first, because that had greater impact on our operational performance, but we do anticipate selling the Heilbronn in Germany fab is well. We have no plans at this current time to sell any other fabs in Europe.
Jingo - Wedbush Security
So you don't have a timeframe for the sale?
Bob Avery
We don't a specific timeframe for the sale. Our anticipation is that it would probably, so it would sell probably over the next 12 months or so.
Jingo - Wedbush Security
Okay. Fair enough. Thanks.
Operator
Your next question comes from Robert Burleson of ThinkEquity Partners.
Robert Burleson - ThinkEquity Partners
Hey. Good afternoon. Thanks for taking my question.
Steven Laub
Sure.
Robert Burleson - ThinkEquity Partners
I wanted to just get a sense when just stepping back from the current environment that everybody is worried about. It seems like one of the stories here is that you guys are doing a really good job taking market share in microcontrollers. I want to get a sense in the automotive market, what you guys see that's kind of the key differentiator, that's allowing you to do that, let's say over the next 12 months?
Bob Avery
Specifically, one of the key differentiators are Atmel's microcontrollers is that our products besides having a sort of a higher performance in that product than any other on the market, from the standpoint of architectural efficiency, at the same time combining the higher performance with very low power is a combination that has been very successful for us. Our plans that can succeed in automotive are to utilize the advantages of our, in a sense, more advanced architecture and that's offered by our other competitors. So again the lower power, the higher performance, now combined that with the high voltage, our technology capabilities that we have and also combining it and the high temperature ones. And then adding to that, the quality capabilities that we have through automotive business unit that they offer, as well as some, we'll do more product will be in combination with them as well, so that we sell our AVR product to our microcontroller products in con service of our automotive products. We think it will be very successful because, we continue to make a lot of progress and continue to penetrate in the commercial markets, because we have this slightly superior architecture, and we also have outstanding design tools. And so, we will combine that, that will be also be very relevant for the automotive segment as well.
Robert Burleson - ThinkEquity Partners
In terms of competition, do you guys look at the competitive landscape being more competitive or competitors being more in Europe or more in North America at this point, in terms of where you see most of the competition going forward?
Steven Laub
I'd say the competition is everywhere.
Robert Burleson - ThinkEquity Partners
Okay.
Steven Laub
This is a worldwide marketplace.
Robert Burleson - ThinkEquity Partners
And then just lastly, looking at this distribution, what's happening with distributors recently? Are your distributors more cautious with regards to their end customers and did you see change at some point within Q3 or early Q4 that with regards to distributors that prompted you to be cautious in your outlook?
Steven Laub
I would say, I am not so much basing it on what's happening today with our distributors. Our outlook is based on many different variables. It's based on impact from our sales force, it's based on our backlog that we've generated, it's based on the specific shipments and resource inputs we have on specific individual customers that are business units where business units are interfacing with, and also inputs from our distributors. So, it's really many different things that go into formulating our perspective, as well as what other people in the marketplace are seeing as well, that obviously is going to influence our decisions.
Robert Burleson - ThinkEquity Partners
Okay. Great, thank you very much.
Robert Pursel
Thank you.
Operator
Your next question comes from Kevin Rottinghaus of Cleveland Research.
Dennis Reed - Cleveland Research
Hi, this is actually Dennis Reed for Kevin. A couple of questions. First, just a clarification on the OpEx. I think you had mentioned OpEx would $128 million roughly in the out quarter. Is that including the currency that you had baked in or out the actual currency?
Bob Avery
That has the currency baked into it.
Dennis Reed - Cleveland Research
Okay, thank you. Secondly, if you look at the competitive landscape, worldwide in microcontrollers, based on the success you guys have seen over the last 12 to 18 months, have you seen any changes from any of your competitors and how they have reacted?
Steven Laub
In how they reacted to what?
Dennis Reed - Cleveland Research
To your success in the marketplace.
Steven Laub
I don’t know if they're reacting specifically to us. I kind of think that the market -- it’s a very competitive marketplace, with a lot of very substantial large company competitors. My sense is everybody is focused on winning and succeeding in their marketplace. It’s a very attractive marketplace and the reason we were focused on it, is that has tens of thousands of different customers in different application areas, different segments. And so, you don’t compete against the same people all the time. You're competing with many different people in many different areas, different markets and different applications, and I think in that respect is, one of the reason it’s attractive, it also allows you, I think to compete more effectively because of that as well. I don’t see any unusual or different, a different behavior that I saw a year ago.
Dennis Reed - Cleveland Research
Okay. Yeah, if you look at the microcontroller, your microcontroller business, how you see AVR 32 being received?
Steven Laub
AVR 32 is actually received quite well. Currently, the revenues for that product line are very small, so we don’t break it out and really talk about it. But we do track are designed total shipments and our design wins, and from that measure it’s ramping up nicely for us.
Dennis Reed - Cleveland Research
Okay. And I guess just lastly, if you look at over the last nine months, so, is there any end markets in particular with your microcontroller business that you had success in, whether it's competitive or just market growth?
Steven Laub
I think one of the areas that are, this is the largest end market for us in microcontrollers is industrial. We continue to have a lot of success in the industrial marketplaces, which does include by the way housing and things like that. We are also having success in consumer electronics as well. So some of the portable consumer electronic products are also used microcontrollers, and we are having success in that marketplace as well.
Dennis Reed - Cleveland Research
Okay.
Steven Laub
The kinds of applications are, for example, the touch sensing is an area of growth for any good microcontrollers.
Dennis Reed - Cleveland Research
Okay. And I guess lastly, I know in the past year you've provided the backlog coverage for the quarter. Could you provide that again?
Steven Laub
Yeah. Currently our backlog coverage, lets say, as of where we are in a sense, going into say this week, our backlog coverage is roughly 75% for Q4 to our guidance.
Dennis Reed - Cleveland Research
And what was the last quarter, I mean I can go back and check.
Steven Laub
Last quarter was a little bit higher. It was about 80%, and then last Q4, it was about the same as it is this Q4.
Dennis Reed - Cleveland Research
Okay. Alright, well, thank you very much and congratulations.
Steven Laub
Thank you.
Bob Avery
Thank you.
Operator
Your next question comes from Kevin Cassidy of Thomas Weisel & Partners.
Kevin Cassidy - Thomas Weisel & Partners
Thank you for taking my question. A few more questions about the microcontroller business. Has there been, is the growth coming from distribution if the strength is in industrial or has it, are you doing that direct?
Steven Laub
We are growing in both distributions and direct.
Kevin Cassidy - Thomas Weisel & Partners
But is it percentage phases up about the same quarter-over-quarter?
Steven Laub
I don’t actually have that in front of me. I would have to go check that. I just know that both channels are growing for us in the micros.
Kevin Cassidy - Thomas Weisel & Partners
Okay.
Steven Laub
We don’t often have clean breakouts, because we still recognize what our revenue on a ship to not a sell through.
Kevin Cassidy - Thomas Weisel & Partners
Right.
Steven Laub
And so, we don't have all the sell through information of our distributors that could tell us this sell through from this distributor for this product. It's not tracked cleanly here yet.
Kevin Cassidy - Thomas Weisel & Partners
Okay. And just from your comments, that you are expecting distribution inventory, say, constant in fourth quarter?
Steven Laub
No, I didn't say, we'll stay constant. Distribution inventories, right now for us overall, are relatively, I look at it from a standpoint of, are they stable on a weeks. How many weeks of inventory they are holding relative to sales.
Kevin Cassidy - Thomas Weisel & Partners
Right.
Steven Laub
Okay. So, overall, since our business is flat to up 2%, we are expecting the Q4, and assuming distribution maintains its percentage of your business, it would be probably slightly up, the distribution inventories in Q4 as well. The AVR business, we expect to grow more than that in Q4. AVR inventories are actually, or micro inventories are actually a little bit down relative to the normal inventories they hold. I expect they're going to be boosting our inventories back up in Q4.
Kevin Cassidy - Thomas Weisel & Partners
Okay. Thank you.
Steven Laub
Sure.
Operator
(Operator Instructions) We have a follow-up question from Edwin Mok of Needham & Company.
Edwin Mok - Needham & Company
Hi. I actually have three questions. First one is on, just going back to the memory group. Do you guys see that as just, is it that you guys are gaining share against your competitor or are you guys actually just seeing general positive longer term in that group?
Steven Laub
Are you specifically about Serial EEPROMs or the Flash memories?
Edwin Mok - Needham & Company
Actually, both of them, if you don't mind going through the details.
Steven Laub
Okay. So Serial EEPROMs, I think other people have noted, was relatively strong last quarter, not just for us, but for other people in this marketplace. I believe that one or two other suppliers who are significant suppliers had relatively robust sales. So I think we all kind of experienced that this past quarter. We don't expect that, that can continue as strong essentially going forward. I'd have to, I am not positive, we gained share, I think we did. We at least maintained, if not gained share, I would think of Serial EEPROMs last quarter.
With respect to Flash memories, when we consolidated the Flash group from the serial EEPROM group, at the very end I believe of Q2. And as part of that, the operations, was transferred over to the people who run the operations of serial EEPROM. There were a number of delinquencies and other things with respect to the shipments of Flash. A lot of that was newly rated during Q3, and some of that is still being taken care of in Q4. And so, I think to some extent you saw a bit of the growth there was because of that.
Edwin Mok - Needham & Company
Great. The second question is on seasonality. Historically, you guys don't have to see a lot of seasonality in the first quarter. Now that you guys have more of these [seats] seems like you have more opportunity on microcontroller and relate to the consumer end market. Do you expect to see a bigger seasonality in the first quarter going forward?
Steven Laub
Probably, yes. I think we will be seeing more seasonality. I think the industry is becoming more seasonal, frankly, overall. But for us, the micros, we expect to see some seasonality through our business. I would also think certainly, the memories are that way, some of the ASIC product, the smart card products are that way. So that is my expectation.
Edwin Mok - Needham & Company
Great. And one last question, just CapEx and maintenance, so, it is right now that you guys sold the U.K. Fab. Do you, what are you guys expecting for your CapEx that you need to maintain on your existing profit that you have, going forward?
Steven Laub
Well, you know, the nature of our CapEx changes overtime, just to put a little color on it. So our Fab and Fab 7 and we will say, is pretty mature, and we don't expect to make huge capital investments in that. So, it'll be primarily replacement and technology upgrades. Same as, it is even more true of our 6 inch fab in Colorado Springs. They'll both remain productive of course. And then, it looks like a large part of our CapEx in the next year or two will probably be directed at items like probers and backend testers, final testers. So, as we look at the landscape for the upcoming year, I’d say that we could expect our CapEx to be similar or maybe a little bit higher next year than this year, probably in the $80 million to $90 million range.
Edwin Mok - Needham and Company
So basically, this pass quarter you guys just have lower than normal CapEx this quarter, is that right?
Bob Avery
Yeah. We’ve been very careful about acquiring what we need, and just haven’t had the real need for it.
Edwin Mok - Needham and Company
Great. Thanks for answering my question.
Bob Avery
Thanks, Edwin.
Operator
He is still online, sir.
Steven Laub
Edwin, are you still there?
Edwin Mok - Needham and Company
Yes. I am done. Thank you.
Bob Avery
Well, Steve had another comment.
Steven Laub
First, I have to punch you. Well, I think the company is becoming, well, it is become a little more seasonal, so, I think the industry is becoming that way with respect to Q1. I'd like to think that in the micro business, that given our fast growth in our business and the opportunities we see and the fact that we are gaining market share, my expectation is that we’ll continue to grow, not just in Q4, but sequentially again in Q1 in the micro business.
Edwin Mok - Needham and Company
Great. Thanks.
Operator
At this time, there are no further questions. Do you have any closing remarks?
Robert Pursel
Thank you, Stephanie. During the month of November, Atmel will be participating and Steven Laub will be presiding at the UBS Global Technology Conference in New York City on November 13 and the Credit Suisse Annual Technology Conference in Scottsdale on November 28. In January, Atmel will also be presenting at the Needham & Company Tenth Annual Growth Conference in New York City. Webcast information for these events will be published in the Company’s investor relations website. This concludes our third quarter financial conference call. Thank you for joining us today.
Operator
This concludes today's conference. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!