Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Atmel (NASDAQ:ATML)

Q1 2012 Earnings Call

May 02, 2012 5:00 pm ET

Executives

Peter Schuman -

Stephen Cumming - Chief Financial Officer and Vice President of Finance

Steven A. Laub - Chief Executive Officer, President and Executive Director

Robert Pursel - Director of Investor Relations

Analysts

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

Sujeeva De Silva - ThinkEquity LLC, Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

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

Blayne Curtis - Barclays Capital, Research Division

Steven Eliscu - UBS Investment Bank, Research Division

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

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

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Brian C. Peterson - Raymond James & Associates, Inc., Research Division

Operator

Good afternoon. My name is Misti, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2012 earnings conference call. [Operator Instructions] Thank you. Mr. Peter Schuman, Director of Investor Relations, you may begin your conference.

Peter Schuman

Thank you, Misti. Good afternoon, and thank you for joining us for Atmel's first quarter 2012 earnings conference call. A copy of the press release issued today is available on our Investor Relations website. A replay of this call will be available after 5:00 p.m. Pacific today and will be archived for 48 hours. The webcast will be archived on the company's website for 1 year. Access information is provided in today's press release.

Joining us for the call today are Steve Laub, Atmel's President and CEO; and Stephen Cumming, Vice President of Finance and Chief Financial Officer. Steven will begin the call with a review of our first quarter financial results, and Steve will then provide additional information on the business. At the conclusion of Steve's remarks, Stephen will discuss our financial guidance for the second quarter of 2012 and then open the call for questions.

During the course of this conference call, we may make forward-looking statements about Atmel's business outlook, including statements regarding our expectations for market growth, litigation matters and the anticipated course of patent litigation, revenue, target gross and operating margins, product introductions and cost savings for 2012 and beyond. Our forward-looking statements and all other statements that are not historical facts reflect our expectations and beliefs as of today and, therefore, are subject to risks and uncertainties as described in the Safe Harbor discussion found in today's press release.

During the call, we will also discuss non-GAAP financial measures. The non-GAAP measures are not prepared in accordance with the Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release.

I would now like to turn the call over to Stephen Cumming for discussion of our first quarter financial results. Stephen?

Stephen Cumming

Thank you, Peter. Let me provide some details of our statement of operations. The first quarter revenue declined 6.7% as compared to our guidance of down 6% to 11% due to stronger turns and the collection of the Asia distributor deferred revenue, although gross margin was lower than our original expectations.

As expected, first quarter revenue was impacted by the ongoing customer rebalancing of their inventory and lower revenue, primarily within the aerospace business, which is part of our ASIC segment.

In respect to the rescheduling of payments by an Asian distributor mentioned last quarter, during the first quarter, we have received payments totaling approximately $8 million and we expect to receive the remaining portion by the end of the second quarter.

Excluding the deferred revenue collected from the Asian distributor in Q1 of 2012 of approximately $8 million, revenue would have been $350 million. First quarter 2012 gross margin was 42.6%. The first quarter gross margin was below the low end of our guidance of 44% but well above the trough of 31.1% we experienced in the last downturn in 2009.

The non-GAAP gross margin was 43.2%. The majority of the sequential decrease in gross margin was due primarily to the following factors: Lower factory utilization as a result of decreased business levels, lower revenue from the Aerospace business, which carries a higher than corporate average gross margin, pricing pressure in some of our commodity product lines and higher excess inventory reserves when anticipated as a result of our take or pay agreement with our foundry.

In addition, we renegotiated our wafer supply agreements with both of our European foundry partners, our foundry in France and TSG in Germany. This adversely impacted our wafer cost for Q1 and for the remainder of 2012, but the reduced the length of the take or pay agreement by approximately one year.

Our operating expenses are $136 million or at the midpoint of our guidance of $136 million plus or minus $2 million. This compares to operating expenses of $134 million in Q4 of 2011 and $133 million in the first quarter 2011. We continue to maintain strong discipline in managing our operating expenses during the quarter.

R&D expense of $66 million in the first quarter was up approximately $3 million compared to the prior quarter and compared to the $62 million reported in the same period last year. We had higher seasonal payroll rate expenses and made selective investments in our Microcontroller business.

SG&A expense was $70 million for the first quarter of 2012 compared with $71 million in the prior quarter and in the same period last year. Stock compensation for Q1 was $19 million and is broken out in the following areas: $2 million was related to manufacturing, $7 million to R&D and $10 million to SG&A. Stock compensation was flat compared to the fourth quarter of 2011.

Income from operations was $25 million in the first quarter of 2012, including the first quarter we release of reserves related to a previously established foreign government grant, which resulted in a benefit of approximately $11 million.

The GAAP operating margin was 7%. This compares with income from operations of $49 million in the prior quarter and income from operations of $82 million in the same period last year. Non-GAAP income from operations for the first quarter of 2012 of $36 million or 9.9% of revenue excludes the credit from reserve grant income, acquisition-related charges, restructuring charges and stock-based compensation. This compares to non-GAAP income from operations of $69 million in the prior quarter and $121 million from the same period last year.

GAAP income tax provision totaled $4.3 million in the first quarter of 2012, which is within our guidance of approximately $4 million to $5 million. The first quarter 2012 GAAP tax provision of $4.3 million compares to a tax provision of $14.4 million in the fourth quarter of 2011 and an income tax provision of $9.8 million to the first quarter of 2011.

During the first quarter of 2012, a non-GAAP income tax provision was approximately $71,000. As we have previously mentioned, we expect to have non-GAAP or cash tax effective rate in the low single-digit percentages for 2012. GAAP net income for the first quarter of 2012 was $20.4 million or $0.05 per diluted share. This compares with fourth quarter 2011 net income of $32.9 million or $0.07 per diluted share and GAAP net income of $74.6 million or $0.16 per diluted share in the same period last year.

On a non-GAAP basis for the first quarter 2012, we had we had net income of $35.3 million or $0.08 per diluted share. This compares with non-GAAP net income of $67.5 million or $0.14 per diluted share in the fourth quarter of 2011, a non-GAAP net income of $122.2 million or $0.26 per diluted share in the first quarter of 2011.

As to our Stock Repurchase Program, during the first quarter, Atmel repurchased 9.5 million shares of common stock in the open market at an average price of $10.18 per share. Our plan totals to date for Atmel's $500 million buyback program instituted since the third quarter 2010 of 49.9 million shares repurchased at an average price of $9.80, amounting to approximately $489.4 million.

Now turning to the balance sheet. Combined cash balances, cash and cash equivalents plus short-term investments totaled $299 million for the first quarter, representing a decrease of $33 million from the fourth quarter. The decrease is related to the repurchase of common stock utilizing approximately $96 million in cash during the first quarter 2012.

Cash flow from operations totaled approximately $61 million in the first quarter, up approximately $18 million from $43 million in the fourth quarter of 2011. Capital expenditures were approximately $7 million in the first quarter, down from the fourth quarter's $10 million and at the midpoint of the guidance range of $5 million to $10 million.

Depreciation and amortization in the first quarter of 2012 was approximately $19 million compared to $21 million last quarter and $20 million in the first quarter a year ago.

Accounts receivable totaled $205 million at the end of the first quarter, down by approximately $8 million from the fourth quarter. Our days sales outstanding for the first quarter stood at approximately 52 days, up 2 days from the prior quarter.

Our first quarter inventory declined by $20 million to $357 million compared to the prior quarter's $377 million. Due to the actions we have taken to manage our inventory both internally and with our channel partners, our days of inventory decreased by 14 days and stood at 158 days compared to the fourth quarter. We are pleased that despite the low revenue level during the first quarter, both the inventory days and absolute inventory dollars decreased. We have and will continue to take actions to work inventory levels down to our target model of approximately 120 to 130 days.

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

Steven A. Laub

Thank you, Stephen. The energy slowdown that began during the second half of 2011 now appears to be behind us. Like most others in our industry, we believe Q1 will mark the bottom of this cycle, and we expect to grow sequentially each quarter throughout the remainder of the year. We have continued to invest heavily on Microcontroller business during the downturn and released a substantial number of new products in the past few quarters, which will benefit our business during the industry recovery.

From an end market perspective, our industrial business, our largest end market, stabilized during the first quarter after several soft quarters. We generated growth in the consumer and automotive markets, while we incurred weakness in the communications and computational markets. Our military and aerospace markets experienced a larger than normal decline after a very strong fourth quarter, which we caught up with customer delinquencies.

Moving to a discussion of our business segments. In our Microcontroller business unit. Last week, Gartner, a leading information technology research and advisory company, published their analysis of the largest microcontroller companies. I am proud to say that Atmel, once again, was one of fastest-growing major semiconductor suppliers. For the first time, according to Gartner, Atmel passed Microchip in microcontroller revenue and we are now recognized as the fourth largest microcontroller supplier in 2011. Excluding smartcards, Atmel is the third largest microcontroller company in the industry.

Moving back to a discussion of Q1 2012 results, Microcontroller revenue of $218 million increased 1% sequentially and was down 26% as compared to the first quarter of 2011. By product family, during the first quarter, our 8-bit microcontrollers declined 2% sequentially and we're down 30% year-over-year, while 32-bit microcontrollers increased 9% sequentially while decreasing 12% year-over-year.

As to new products, Atmel announced an aggressive expansion of its Atmel ARM Cortex-M3 and M4 processor-based MCU family with 40 new devices released to production, delivering more scalability, cost efficiency and connectivity for a broad array of applications, including industrial automation, Smart Grid and building a home automation.

Throughout this year, Atmel plans to quadruple its to Cortex-M3 and M4 Series processor portfolio to nearly 200 ARM processor-based MCUs and include devices with higher on-chip memory densities and extensive peripherals.

In our AVR microcontroller family, we further expanded our product portfolio of 8 and 32-bit products with the announcement of 14 new devices. These new products feature higher memory densities, more communication interfaces and improved system integration. These devices support a broader array of markets and applications, including consumer electronics, capacitive touch, utility metering, home automation and medical.

During the past quarter, we announced a significant milestone for both Atmel's ARM and AVR customers, with the introduction of Atmel Studio 6, our integrated design tools, which supports both Atmel 32-bit ARM Cortex M Series processors and Atmel's 8 and 32-bit AVR-based microcontrollers. For the first time in our cost company's history, the extensive AVR customer base have more than 100,000 engineers and designers, combined with ARM Cortex M Series customers have all the tools required to develop and debug Atmel MCU applications in a single seamless environment. We are experiencing very enthusiastic acceptance of this tool as customers have already downloaded over 50,000 copies of the product since its introduction approximately 2 months ago.

Moving to our touch products. We grew our maXTouch revenue sequentially during the first quarter as we continue to increase the breadth of our customer base and gain market share from the competition. Some recent major smartphones released to the market using maXTouch include Nokia's new Windows smartphones, the Lumia 610, 800C for the Chinese market and 900, which features both our maXTouch controller and touch buttons. Other new smartphones include Samsung's Galaxy Note for AT&T and Galaxy S Advanced. Motorola Mobility released 3 new phones with maXTouch: the DROID 4, MOTOLUXE and DEFY MINI. Other smartphones include Huawei's Vision and Ascend P1, BBK's Vivo V1 and ZTE's Blade II and Tania.

Following the announcement of our new maXTouch S Series products at the Consumer Electronics Show in January, we began shipping to Tier 1 and other customers during Q1. And we expect volume shipments of the S Series to commence this quarter. These new products with the industry's highest performance touchscreen controllers had raised the bar by enabling a new breed of mobile products with groundbreaking performance, ultra slim profile and superior noise immunity. The S Series products released for smartphones include the maXTouch 224S for screen sizers from 3.5-inch to 4.3-inch, and the maXTouch 336S, the highest performance controller for the next generation of super phones with screen sizes from 4.3 to 5.5-inch.

Two smaller competitors in touch for handsets made comments during the recent earnings conference calls as the difficulty in penetrating the touch market and one of them is evaluating exiting the market. This highlights the significant barriers to entry to successfully compete in this market and the R&D and skill required to produce a competitive and successful product offering.

In the tablet marketplace, we are sampling the maXTouch 1664S, an important new 32-bit, single-chip touch platform for tablets and PCs, the industry's highest node count available, which supports screen sizes up to 17-inch. As a co-engineering partner with Microsoft for Windows 8, the 1664S is designed to meet the stringent requirements of Windows 8 for products with screen sizes up to 12.5 inches. We are also working to develop Win 8 certified solutions for larger screen sizes up to 7.3 inches to support the market for ultrabooks and convertible PCs.

Larger screen designs offer Atmel a significantly higher average selling price then handsets. Some recent major tablet introductions that utilize maXTouch include Samsung's Galaxy Tab 7.7, an Android Honeycomb Tablet, which features a similar Android plus display technology, Motorola Solutions ET1 and the ZTE's Light Tab 2.

While the growth of these non-Apple tablet market has been below expectations from a year ago, there are at least 2 major catalysts that are poised to drive dramatic growth in this marketplace during 2012 and beyond. The first is a rapid growth of the new media-based e-reader, e-book tablets, which now accounts for well over half of the Android tablets shipping today. Atmel is establishing a significant presence in this market and expects to meaningfully participate this year.

In the second half of this year, Microsoft's launch of the new Windows 8 operating system. It is expected to usher in a new era of touch-enabled tablets, ultrabooks, convertible PCs and all-in-one PCs. Customer design activity is strong for Win 8 devices. Atmel's leading technology and market position combined with our Win 8 co-engineering partnership with Microsoft positions us to be the favored touch supplier as Win 8 products launch this fall.

In the automotive space, we announced the availability of our fully automotive-qualified maXTouch 540E and 768E products for automotive touchscreens and touchpads using center stack displays, navigation systems, radio-human machine interfaces and rear seat entertainment systems. These new automotive-qualified maXTouch devices support displays from 5-inch to 10-inch, and extend our market leading touch supplier status beyond consumer industrial applications into automotive.

First volume shipments of automotive maXTouch devices are expected in the second half of this year. For touch button sliders and wheel solutions, capacitive touch is being enthusiastically adopted to many new markets and applications. For example, recent products implementing discreet touch solutions include internet-enabled headphones and medical equipment for patient monitoring. Design activity continues be strong for major appliance makers, but touch-enabled products showing up in the market during later this year. In addition, many of these discreet capacitor touch customers also utilize maXTouch, such as Nokia in their Lumia 900 smartphone. This is synergistic and complementary to our existing customer base for our core microcontroller products, thus leveraging our existing customer relationships.

This brings me to our next topic, XSense. As many of you are aware, about a month ago, Atmel unveiled its revolutionary new and unique film-based touch sensor product called XSense. XSense is based on proprietary fine-line metal mesh technology, is a high-performance alternative to traditional touch sensors most commonly used today. XSense touch sensors are highly flexible and will enable new generation of smartphones, tablets and an array of new innovative consumer industrial touch-based products. OEMs will now be able to develop new industrial designs that our edgeless or have narrow borders that create wider, sleeker and revolutionary new form factors. The technology also enables much larger touchscreens. Although we are in the early days of sampling XSense, customer response has been very positive. We are on track to our previously announced schedule of production qualification during the third quarter of this year. Given customers are at the beginning of their design cycles, major volumes are expected to ramp in the second half of 2013.

This is a higher performance and lower-cost technology than that used in traditional sensors. We are confident that the gross margin profile for this product will be higher than the corporate average. We are taking a leadership role with this disruptive new technology that will penetrate into rapidly growing multibillion-dollar marketplace. As XSense is synergistic and complementary to our maXTouch product line, the 2 technologies have the opportunity to drive sales for one another, extending Atmel's leadership position in the broader touch marketplace.

Turning the discussion to our Non-Volatile Memory segment. Total revenue was $48 million in the first quarter, down 13% sequentially and down 25% as compared to the first quarter of last year. We typically experience seasonally lower demand for memory products during the first quarter. The sequential decline in our memory business was also a result of the end of life for some of the order legacy parallel flash products.

Looking ahead, we are seeing an improvement in the PC market, as the market experiences a recovery in issuance of hard disk drives from Thailand, which were impacted by flooding.

In the RF and Automotive segment, revenue declined to $44 million in the first quarter of 2012, down 7% sequentially and down 14% compared to the first quarter of 2011. The decline during the first quarter was a result of weakness in the nonautomotive portion of the business, including our legacy foundry business. The automotive portion of our business was up slightly for the quarter. Some of the new products recently introduced includes a secure ultralow power, micro-module transponder for car key fob applications such as remote keyless entry, which allows the car manufacturers to transition from older, more expensive solutions to more secure encryption standards. We also introduced a new generation of cost-optimized 8-bit AVR automotive microcontrollers with LIN connectivity, which feature low-power operation.

Automotive remains a significant and growing business opportunity for Atmel, and we continue our focus on growing our presence in the marketplace.

Moving to the ASIC business segment, first quarter revenue of $49 million was down 26% sequentially and declined 9% as compared to the first quarter of 2011. This is primarily due to a decline in our aerospace and military businesses, as we addressed outstanding customer delinquencies in Q4, and this business is seasonally softer in Q1. Going forward, we expect to see moderate growth for our ASIC business for the remainder of the year.

Looking at the first quarter revenue by geography, our largest ship-to location was Asia, representing 57% of revenue compared with 54% in the prior quarter. EMEA decreased by 1 percentage point sequentially to 28% of revenue, while the Americas dropped to 15% of revenue as compared to 17% of total revenue in the prior quarter.

In summary, based on improving order activity and stronger backlog, we are confident that Q1 marks the bottom of this industry cycle. As has been true in the past, Atmel was late to experience the softening industry environment, which began in the second half of last year, and our recovery typically begins slightly later from some of our peers. We expect our revenue will grow this quarter in all of our business segments, and our overall revenue to accelerate during the second half of the year. Given the very substantial number of new product releases, particularly in AVR, ARM and maXTouch product lines, along with our new XSense product introduction, we are well positioned for continued customer penetration and market share gains.

Now let me turn the call back to Stephen for our Q2 financial guidance.

Stephen Cumming

Thank you, Steve. Consistent with what we mentioned on last quarter's call, we're announcing a recovery in order rates. For the second quarter of 2012, the company expects revenue to increase between 2% to 6% on a sequential basis. We expect the GAAP gross margin to be between 43% and 44% in the second quarter of 2012, due primarily to higher fab utilization.

On a non-GAAP basis model to 43.5% to 44.5%. Assuming a sustained recovery in our end markets, we expect gross margin to increase throughout the year and GAAP gross margin should exit the year between 47.5% to 48.5%, a non-GAAP gross margin of 48% to 49%.

Second quarter GAAP operating expenses are expected to be approximately $139 million plus or minus $2 million. Non-GAAP operating expenses are expected to be approximately $123 million plus or minus $2 million.

For the second quarter, depreciation and amortization is expected to be approximately $19 million and stock-based compensation is expected to be approximately $19 million.

We expect capital expenditures to be approximately $5 million to $10 million for the quarter and between $30 million and $40 million for the full year.

Other income expense is expected to be approximately $2 million to $3 million expense, and Quantum and ADD Semiconductor acquisition-related costs are expected to be approximately $1.9 million for the quarter. We expect our Q2 GAAP tax expense to approximately $7 million to $8 million, and for those doing non-GAAP models, we expect the non-GAAP or cash tax rate to be approximately 1% to 3% in Q2 and low single-digit percentages for the rest of the year.

For modeling purposes, assume a reduction in fully diluted share count to be approximately 440 million for GAAP and approximately 450 million for non-GAAP share count as we see the full weighted average impact from the repurchases made in Q1.

I'd also like to add that today, Atmel announced that our Board of Directors has authorized an additional $200 million to its existing common Stock Repurchase Program.

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

Robert Pursel

Misti, can we take our first question?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Craig Berger with FBR Capital Markets.

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

I guess, first question is on maXTouch. Do you still expect to grow that business this year? Do you still expect to grow it in each of the 3 segments you talk about? And can you just go in to some of the competitive dynamics that you're seeing around pricing and margin?

Stephen Cumming

Craig, this is Steve. With respect to our maXTouch business this year, we had mentioned last year that we had exceeded $375 million in sales for that product family. We do expect to do the same this year as well. So I do you want to reaffirm that. With respect to growing in each of the 3 segments in smartphones, tablets and sort of other new applications, our expectation right now is that we will grow significantly in both tablets and in the other new applications, but smartphones are probably going to be a little bit down from 2011. At least that's our expectation at this point. From a competitive dynamic standpoint, I think we're seeing what everybody is seeing in the marketplace, there was rapid growth that combined with, obviously, the move to single-chip solutions in the tablet space, which we are extremely well positioned for. The other dynamic going on is the growth of, I'd say, the media tablets and the second half of this year growth of Win 8, we're extremely well-positioned in both of those areas. And I think the other thing people are seeing there has been some pricing reductions that's occurred in the marketplace. These are things that we had expected and planned for. We are seeing that perhaps little's bit more aggressive on the low end but we don't participate nearly as much as some of the other guys. But that's primarily what we're seeing in the marketplace.

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

Thanks for the detail. And then I guess this a follow up. Can you give a little more color on the gross margin impacts from your restructured take-or-pay deal? How does that impact margins and can you just talk about utilizations in your factory and how that should impact your ramp back to 48% by year end?

Steven A. Laub

Craig, this is Steven. So, yes, significant piece of the gross margin downside for us or the miss on the guidance was really due to the re-negotiation of our wafer supply agreements with our European foundries. Both of these foundries have gone through management change in the last 6 months and are seeing softer business levels as the result of the market downturn. And so at their request we did go ahead and renegotiate our take-or-pay agreement, which increased our near-term wafer requirements but shortened the term of the agreement to one year. The adverse impacts that it has had or will have on a go-forward basis is about 1 point in gross margins for the company and primarily impacting the automotive business. The majority of that did get impacted in Q1 and will impact going forward for the rest of 2012. And in terms of utilization, we have been working hard to correct our overall inventory situation. As you saw from the call, we've reduced inventory by about $20 million taking days down to about 148, the impact that's had on overall utilization is we were running the fab in the 50s percentage range of utilizations in the upper 50s. We do expect that to improve going forward, so we do get some gross margin uplift as we go into Q2 as a result of that. Some of that's offset from some of these renegotiated foundry agreements, partially offset from these renegotiated foundry agreements. As we go out for the rest of the year, as I said on the prepared remarks, we do expect gross margins to continue to improve. They are going to be slightly lower than we had thought. We we're expecting sort of exit the year at around the 49% threshold. I think with a lower revenue and the result of these revised wafer supply agreements that's putting us down to the sort of 47.5% to 48.5% range from a GAAP basis.

Operator

Your next question comes from the line of Suji De Silva with ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC, Research Division

As you try to reduce the inventory and ramp the utilization, how long is the COGS impacted by the higher cost, the product that you're working through? Would that be a couple of quarters or just really the next quarter?

Steven A. Laub

So Suji, this is Steven. What you're going to see as we go into Q2 is there's a piece of the underutilization that we would have period expensed that no longer exists as we go into Q2, so that gives us a gross margin favorable. I think really there's a -- as we start to ramp the fabs through the rest of this year, and I don't think we're really get to the upper utilization until the end of this year. There's always roughly around one quarter delay in until you see the full impact of that lower-cost inventory coming through to the P&L.

Sujeeva De Silva - ThinkEquity LLC, Research Division

On the touch side, can you remind us what the percent was the tablet last year, and then what do you expect the mix to be between smartphones, tablets and new product this year?

Stephen Cumming

This is Steve. With respect to our mix last year, the smartphones were probably about 60%, 70% of our total. New tablets, 25% to 35% and new applications was 5% to 10%. We haven't put out a forecast for this year, what that would be. So I'm not going to do that today. I'll just give you a sense for what that was. I can tell you that in the first quarter, the quarter we just completed, the mix was higher to smartphones than tablets. So as compared to 2011, and the new applications was also -- actually it was above 10%.

Operator

Your next question comes from the line of Jim Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

I was wondering if you could give us some sense of what the trends are in the Microcontroller business excluding the touch control part of it, industrial and otherwise? Do you expect that that's going to grow in line with, undergrow or outgrow your overall corporate guidance for Q2?

Stephen Cumming

With respect to the sort of general microcontroller markets excluding touch, what we are seeing is we're seeing our biggest end market there is industrial by far, and we saw during Q1 that the industrial end market through the consumption of our micros stabilized, where it had been declining in the previous quarters. So that's very good news from that standpoint. Our expectation is that, that market will grow or that business for us will grow mid- to high-single digits for us in this quarter. So actually, higher than the overall company expectation or outlook.

James Schneider - Goldman Sachs Group Inc., Research Division

Great. And then just some follow up on touch. Steve you talked about smartphone sales potentially being down in touch this year. Can you talk about how much of that is pricing or in other words, do you expect your smartphone unit share to decline as well? And then maybe you can talk about what kind of revenue contribution we can expect from the Windows 8-based products this year?

Stephen Cumming

From a standpoint, actually what I've been mapping for this meeting was on a revenue basis. So our revenue basis, it's down. And assuming a part of that is the pricing. But I can also tell you that probably the unit outlook for us in that marketplace today as vis-à-vis I'd say a comparison where we were a quarter ago, is probably a bit lighter than where we were. But nevertheless, with respect to the other markets, what we're seeing actually is the pickup there is stronger for this year than we anticipated a quarter ago. And I think you can see that both as I mentioned, both these media tablets, e-book, e-reader tablets, as well as Windows 8 sort of mixture of different of Windows 8 devices that we expect to be launching in the second half of this year.

Operator

Your next question comes from the line of Anthony Stoss with Craig-Hallum.

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

Steve, can you comment about sort of your recent launch into the low end of the market, if you're talking about stiffer competition on ASPs at the low end, do you pull in horns on the low end and just stick to the higher end or I'd love to hear your thoughts on what you think this year ends percentage of your handset revenue low end versus high end? Also whatever detail you can share on inventory levels in the channel would be helpful.

Stephen Cumming

With respect to the sort of high end and the low end of the market, we have a very strong -- I'd say in the high end and mid range for the market, we expect to sustain that quite well throughout the year. We are participating more in the low end today than we did. We will continue to participate in that market, but we'll be selective with who we participate in. And there's a lot of growth, I'd say, in Asia particularly in China, and also generally in that part of the marketplace. And I think what we've seen is there's parts of it that are extremely commodity oriented. They will let the other guys have some of that business. But we're going to participate with a major sort of Tier 1 OEMs in that marketplace where they do appreciate the value that we provide?

I don't have a breakout today to give you how much of the business will be low end versus high end. We have that, but we don't typically break that out in a public fashion. That's something that we think others would appreciate knowing as well being our competitors. And what was your other question?

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

Inventory levels.

Stephen Cumming

I'll let Steven answer that.

Steven A. Laub

Yes, Tony, this is Steven. On the distribution inventory, we've decreased it, we said on the last earnings call that we were planning to reduce inventory in the channel. We decreased it by approximately 2 weeks. So it's roughly around 10 weeks in the channel, roughly a decline about 18%, and that went pretty much across all of the geographies. So we're actually approaching close to our target ranges. There may be a slight decline in Q2 as we just refined some of the final rebalancing. But overall, we've made some very good progress in this area.

Operator

Your next question comes from the line of Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

Just a question on touch. I mean, you were up a little bit in the March quarter. Obviously that's counter seasonality. You talk about what drove that, was it share, was it new ramps inventory restock? Any color will be helpful.

Stephen Cumming

We were pleased to actually be up in touch in the March quarter because it counter-seasonality. And certainly counter to our competition, who I think saw significant reductions during the quarter. I think obviously it's a combination of we're in a lot of new applications, a lot of new customers that as we continue to expand in this marketplace. And then also some of our existing customers are doing very well. I think you've seen the popularity, for example, of the Galaxy Note that was extended to AT&T. It's been a very popular phone. Those kinds of things also help contribute to that.

Blayne Curtis - Barclays Capital, Research Division

I got you. And then as you look out, do you expect touch to grow into June, and then you're still back in your guidance for the whole year to grow, smartphones down, what's making up the delta there, is it Windows 8? And any color there will be helpful.

Stephen Cumming

Well, especially June quarter, we do expect touch will be down during the June quarter. Off a pretty good Q1. With respect to the year, I think as I said earlier in the call and in the prepared remarks, what we're saying is we're seeing very strong growth in anticipation of very strong growth as well based on the design activity that we have and our customer's forecast in both tablets and new applications, and we think that, that will be sufficient to affirm being -- to achieve sort of a greater than 375 number for the 2012 year.

Operator

Your next question comes from the line of Steven Eliscu with UBS.

Steven Eliscu - UBS Investment Bank, Research Division

First question on the low-end part of the market in touch. I guess, one of the things we've seen and reflecting on some of the comments by competitors that may not be participating in the market, it seems that there has been a change where there have been new entrants that are willing to take sub-40% gross margin, perhaps, integrate LCD drivers. And overall deliver a solution that's good enough that moves the cost base significantly lower in that part of the market. And, I guess, the concern is when they think about the part of the market where you're strongest in is the potential for those competitors to encroach up into your part of the market and do it in a way that's dislocative to the assumptions that you've been making for growth this year.

Steven A. Laub

Steve, in every marketplace that I think we all can participate in, there's always different segments of it. There's always a high-end market, there's mid-range, there typically a low end as well. The question, what's the different mix of that and so forth. Today, the marketplace and our expectations going forward is that we bring meaningful differentiation with respect to our product, vis-à-vis the others. Now a customer who's buying a low-end product is really not caring so much for the quality of the touch as they are caring about -- does it actually just work -- does it do some semblance of working. And to a great extent, the vendors who are making those products and the customers buying them have a much different expectations to the product they're going to have. I think what we've also seen is a couple different things. We've seen that in certain times when a product has been chosen to be used in the marketplace that the quality of the touch has been a huge difference, and that's something that has led to our success in this marketplace. We think we'll continue to. And the market that we participate in the areas that we are pushing and focusing on, it is an area where it does make a difference to the customer what we bring, out of the performance of it, the noise immunity and so forth. So I appreciate everyone's sort of concern about what happen because the market is so dynamic. But at the same time, when you look at that the marketplace, we've continued to grow our market share, and we continued to grow our market share this past quarter. I think in a way in which other people didn't have an expectation.

Operator

Your next question comes from the line of the Li-Wen Zhang from Pacific Crest.

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

And just to follow up the touch, you give guidance outlook for the smartphone this year. So you mentioned that it is to be down slightly from last year level, how about in terms of units?

Stephen Cumming

Yes, I was asked that question. I said what was talking about was revenue will be down. You can anticipate that units would also be down as well, because I think that is the diversification but I'm not going to give out much different color than that -- excuse me, excuse me, I want to clarify. Revenue is down -- units may not be down because ASPs haven't come down for that particular part of the marketplace, and I'm not going break out to you right now how much that will be, because we haven't disclosed that previously.

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

Also, maybe I missed it. What was the utilization rate for March quarter?

Steven A. Laub

Utilization rate of -- Steve...

Stephen Cumming

It was in the 50, upper 50s.

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

Up 50s. Okay.

Stephen Cumming

Upper 50s

Operator

Your next question comes from the line of Raji Gill with Needham & Company.

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

On the touch part, you talked about the unit outlook a bit lighter on the smartphone side. That would seem to kind of contradict of what's going on with overall smartphone growth, as well as the massive unit growth that's going on in China and some of the other ZTE and Huawei phones. So I'm just wondering, are you seeing any share shifts in some of your tier -- your top customers? Any color there? And on the pricing environment, you'll be looking on to 2013, do you not expect that to kind accelerate even further, limiting even more smartphones -- putting more pressure on the smartphone segment in 2013?

Steven A. Laub

With respect to the sort of unit outlook, I want to make sure I'm clear on my communication of that. The revenue side, we expect smartphones will be down done between 2012. Units side, smartphones will be up. So let me just make sure that that's clear from us. From a standpoint of share shift within our top customers, I think that we are saying -- I think that one thing that we always say is, we have a been in a -- if you go back to 2010, we initially ramped our first maXTouch generation of products. That time, we were 100% market share for many -- from some of the largest customers or close to 100% market share, which is something that we communicated a year and half ago that's not something that's going to be sustained. They like to have multiple sources, they're going to more sources where they can on different phones and so forth. That is something that has been undergoing for the last year and a half within our customers, where they have multiple sourced. And these are the particular areas where we participate with them on. We went 100% and they on the low end, 100% in the mid end and the upper range of their phones. So that is something that we are seeing, we're still seeing some of that in some of our Tier 1 customers. So I would tend to think that we may see some, in the smartphone area, some reduction in share, but nevertheless be the dominant share guy on the mid and high-end we respect to their phones is what I would expect this year. And as far as pricing goes, see, our expectation is that this is a marketplace for pricing where we'll continue to come down. But what you'll also see is that when a market goes through I would say sort of very rapid consolidation change, which is what's happening here, you begin to see some people begin to get out of the marketplace. And that's actually happening now as they see that the skill required, resources required to participate don't favor somebody who's relatively small, at least with respect to this particular part of the marketplace. So we actually expect that this market will actually have, from a supplier standpoint, it may actually be where it sort of favors really the top 3 guys that have been in that marketplace that looks like continues to favor the top 3 guys in that marketplace. We think that actually bodes well longer-term, as well as the fact that this is a market where new applications continues to emerge.

Operator

Your next question comes from the line of Sidney Ho with Nomura Securities.

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Can you help us understand where the growth and operating margin of the touch business relative to the rest of the business or just the micro business? The reason I asked is because in the past, I think you said margins are kind of comparable with the corporate average. And with the price pressure that many companies talked, I wonder how that contribution has changed?

Stephen Cumming

So with respect of the growth, I think what we've indicated is in 2011, the maXTouch business generated over $375 million in sales. We have reaffirmed we expect that to happen this year as well. But we don't give out Op margin. We do give out indications of gross margin. The gross margin for that business, what we tell people is whether or not it's above or below the corporate average, and that, that business is above the corporate average.

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Okay. So if you exclude touch, and I think you're talking about mid- to high-single-digit growth for the next quarter, when do you think that business can get back to your previous peak level? And when revenue ramps, starts to ramp, how should we think about the incremental margins of the business?

Stephen Cumming

I would say getting back to the levels where we were would be a 2013 event, probably not in this year. But we do expect to see solid sequential growth each quarter for the sort of general microcontroller business. With respect to when it gets back to those certain margin levels and so forth. Again, we don't sort of break that out of that level within a business unit, within a product line.

Operator

Your next question comes from the line of Chris Caso with Susquehanna Financial.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

I wonder if you could expand on one of your prior comments, and I think you said you expected the touch to be down sequentially in the second quarter. Could you give some comment? I think it's counter to normal seasonality. So is that a function of some new designs moving around inventory. How should we read that?

Stephen Cumming

First of all, we expect the seasonality, and the one thing we're saying is, one guy drops almost 40% last quarter, he's up by this quarter, but his well below where he was in Q4. The other guy from what I understand, his outlook was to be down this quarter as well. So I'm not sure -- I think seasonality is actually to have stronger second halves as compared to first halves. With respect to what's happening -- the reason what's down for us, one, is has to do with the transition of which designs and so forth are occurring with your customers. There is a major design with one of our major customers that will be coming to an end in the sort of first half of this year, and we are not part of the next design on that particular platform, and so that is impacting our Q2. That's probably the most meaningful impact we're seeing in the number for Q2. That is being made up, however, by a lot of the growth also, with other customers and other new applications other new designs, but not sufficiently for us to grow sequentially in our touch business in Q2.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Okay. Understood. And just on the foundry take-or-pay agreement, and you explained the impact of that for this year. What's the impact of that going forward into next year? Do you see a benefit from that in 2013? And how does that affect your longer-term margin goals?.

Stephen Cumming

We don't want to get into because a lot of it is sensitive and obviously this very public as well. What we can tell you is that the agreements now both conclude in the first half of next year.

Operator

Your next question comes from the line of Hans Mosesmann with Raymond James.

Brian C. Peterson - Raymond James & Associates, Inc., Research Division

This is Brian Peterson stepping in for Hans. Just wondering about the new wafer agreement. Is that improving your gross margins at all in the second quarter? What are -- the gross margin drivers you mentioned for 1Q, which ones are actually getting better in the second quarter?

Steven A. Laub

This is Steven. So I think the big driver for gross margin improvement for the Q2 is really coming from our own improved fab utilization in Colorado as we increase that. That's the biggest driver. Actually, it partially offset a little bit from these foundry agreements, they are a headwind for us in 2012. And as Steve mentioned, they roll into 2013, they're impacting gross margin roughly by about 1 point. But we're seeing the remaining full impact of that in Q2 and a lot of that is offset by the improved gross utilization.

Stephen Cumming

I can add to that just a follow up to the prior question as well. The expectation is that the impact in 2013 as compared to 2012 will be less..

Operator

You have a follow-up question from the line of Steven Eliscu with UBS.

Steven Eliscu - UBS Investment Bank, Research Division

I wanted to ask a more strategic question on the non-touch microcontrollers. One of the things that seems with products such as the Cortex-M4 base products is they are -- some of your competitors are talking about using sub-100 nanometer-type technology, which for microcontrollers seems quite advanced. And how is this affecting the way you define some of your new products and what some of the expenditures from an OpEx point of view that you're going to need to incur to do more work on the foundry relationship side and making sure that you are working more in leading-edge processes with leading-edge EEPROM or E-Squared technology?

Stephen Cumming

It's a good question. Just to let you know that we also are introducing Cortex products this year at sub 100-nanometer as well. So this is something that's a general term marketplace. And this is happening because the memory requirements, the memory of our customers and the kind of products that they want to use for embedded microcontrollers are such that moving onto on to those technologies makes a lot of sense to kind of get the cost and efficiency that's important to achieve the kind of performance the customers want. So that is something that we're consistent with that, we're developing products and introducing products at those levels as well. And that's, the thought you put into it is make sure you're doing it into products that have a broad customer base and a reasonably high expectation of return of revenue, which these do, because the beauty of this products is they go into thousands of different types of customers and applications, have a very long life, and so the return on this is quite substantial from that standpoint.

Steven Eliscu - UBS Investment Bank, Research Division

And just one last quick thing here on each of the product lines directionally. How do you expect them to trend in Q2? But you talked about microcontrollers, but the other product lines?

Stephen Cumming

Our expectation for this year, obviously, for Q2 is that all the product lines should be growing. To give you a sort of sense for that, MCUs is kind of a low single-digit expectation with the general MCU mid- to higher-single digits with maXTouch will actually be down during Q2. ASIC should be up in the low- to mid-single digits. The RFA business up probably high-single to low-double digits. And memory up low- to mid-single digits.

Operator

At this time, I would like to turn the call back over to Mr. Peter Schuman, Director of Investor Relations for closing remarks.

Peter Schuman

Thank you, Misti. During our second quarter, Atmel will be presenting in San Francisco at the Bank of America Merrill Lynch Technology Conference on Tuesday, May 8, the Barclay's Media and Telecom Conference in New York on May 22 and we will also meet with investors at 2 one-on-one conferences; the Craig-Hallum Institutional Investor Conference in Minneapolis on Wednesday, May 30, and the RBC Capital Markets Investor Day in Boston on Tuesday, June 5. Webcast information for these events will be available on our company's Investor Relations site. In the meantime, you're always welcome to contact our Investor Relations Department at (408) 518-8426 with any questions that arise. Thank you for joining us for the call today and this concludes our call.

Operator

Ladies and gentlemen, that conclude today's quarterly all hands meeting. Thank you for your participation. You may now log off.

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!

Source: Atmel's CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts