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Atmel Corporation (NASDAQ:ATML)

Barclays Capital Global Technology, Media and Telecommunications Conference

May 22, 2012 3:45 pm ET

Executives

Stephen Cumming - Chief Financial Officer and Vice President of Finance

Stephen Cumming

The company has been primarily focused on the areas of embedded microcontrollers, but we've been particularly successful in the areas of capacitive [ph] touch, and I'll talk a little bit about that a little bit more later on. So today, I'll discuss Atmel's business strategy, the overall operations, and the transformation of the company and the significant impact that had on the financial results of the company. Okay. Before I do that, I'd like to draw your attention to the Safe Harbor statement. During the course of this presentation, I may be making forward-looking projections about Atmel's business outlook. Actual results may differ materially from those expressed in this presentation due to a number of risks and uncertainties, and those risks and uncertainties can be found in our 10-Q and 10-K filings. I urge you to read them whenever you get a chance. There's a lot of interesting stuff in there.

So turning to a discussion on Atmel, many of you are probably familiar with the transformation of Atmel, but for those of you that are new to the story, I'll just address that a little bit in the summary form. Approximately 5 years ago, we put in place, to make a lot of changes at the company. The changes we pursued were actually relatively simple, but the impact they've had on the overall operations and the financials of the company have been substantial. We focused on 3 key main areas. First and foremost, we recognized that the most valuable, most important part of the business with the highest growth opportunity and margin expansion was our Microcontroller business. We made ourselves a microcontroller-focused organization. We redeployed R&D resources. We redeployed sales and marketing resources over to microcontrollers. We also went into acquisition mode over the last 4 years. We've acquired a number of companies that have build out the IP and technology around microcontrollers, some of which you may be familiar, Quantum Research back in March of 2008, to gain us media access into the capacity of touch sensing market. We acquired ZigBee company, to allow us to play in the high-growth, high-margin smart-power metering areas, and more recently, a power line communications company. On top of the acquisitions, we also went through a fairly substantial transformation in terms of businesses we divested and shut down. We actually shut down or sold about 21 non-core businesses as part of the transformation.

The second area of the strategy was to adopt a fab-lite strategy. About 5 years ago, we had 5 fabs. Many of those fabs were in the higher cost regions of Europe. We had about 95% of our capacity manufactured in-house. Over the last few years, we shut or sold 4 of those fabs. We roughly, as of 2011, had about 50% of our manufacturing going through third-party boundaries. The other third leg of the transformation of the company was really a change in the culture and the management team, and so we've -- over the last 4 years, it's pretty much a new management team. We've actually significantly cut our costs. We reduced our headcount by about 35% and moved ourselves to a position of potential profitability.

We've done a lot of rewiring of the company, but I think the biggest catalyst to the improvement of Atmel has really come from the microcontroller business. As this chart shows the shift of our mix in favor of our higher-margin Microcontroller business, Microcontrollers are up from 24% of revenues in 2006 to about 62% of revenues in 2011, a substantial increase in just a 5-year period. We also made a lot of changes in the other areas of the business. Our Non-Volatile Memory has gone from 22% to 14% of revenues. Our ASIC business declined from 31% to 13% of revenues, largely as a result of the Smart Card divestiture that we did in Q3 of 2010. Our RFA business declined from about 23% to 11% of revenues, again, as we exit some of the foundry business there. In our most recent quarter, Q1 of this year, our Microcontroller business represented 61% of the company's revenue.

For the full year of 2011, our revenues grew, year-over-year, about 10%. And if I exclude the Smart Card business that we divested back in Q3 of 2010, we grew something over -- a little over 15%. So it's a pretty substantial growth in the year for the semiconductor industry, which I think grew less than 0.5 point. A lot of this growth has been driven from the Microcontroller business and that's really attributable to our proprietary AVR architecture. Since we entered the market back in the mid-90s, we've seen growth in this business and I would say probably, explosive growth in this area over the last 5 or 6 years. And this growth has really come from a number of key milestones. We started off with the standard 8051 architecture. We developed our own proprietary AVR architecture for micros. We became licensees to ARM over the last few years. We've also, as I said earlier, made a number of key strategic acquisitions. We acquired IP to play in the ZigBee space to address the smart power metering market, which has been tremendous growth for us over the last few years. We also acquired Quantum Research, which allowed us to combine with our proprietary AVR hardware for microcontrollers, to come and become the #1 touchscreen provider in the market today with over 40% market share.

And more recently, mSilica, which gave us access to LED drivers and ADD, to participate in the power line communication market. As you can see from this chart, the trend of micro business grew from over $270 million in 2005 to over $1.1 billion in 2011. Last year, that was over 25% growth year-over-year, and over the last 6 years we've seen a CAGR of somewhere around 26%. I think it's worth noting that the growth of the microcontrollers is not just from our touch business. We've seen substantial growth in our core microcontroller area and continues to take market share over the last 6 or 7 years, and I do expect that to continue going forward.

So talking about share. If you take a look at the rankings by suppliers in the microcontroller area, this is ranked by sales. Prior to 1996, Atmel was really a non-player in the microcontroller space and since 1996 we've really grown substantially, far faster than any major competitor in this space. In '98, we were the 14th largest supplier. We become the eighth largest in 2008, and jumping to the fourth largest in 2010. A few weeks ago, Gartner published their analysis of the largest semiconductor microcontroller companies. I'm proud to say that once again, that Atmel moved up the rankings. It moved up one place. It's now the third largest microcontroller supplier in the market, excluding the Smart Cards. And I expect to continue that upward trajectory.

So what are the areas of future growth for microcontrollers and for Atmel? If you look at the overall microcontroller market, over the last 5 or 6 years, we've been growing at probably double-digits, while the market has been growing roughly around a lower single-digit. Obviously, that's been driven by our ability to continue to invest in a high-growth, higher-margin vertical market. And we've identified them here for you. Probably Touch is the biggest opportunity. As I say, we're the #1 in touchscreens today, with over 40% market share. With some of the other areas where we expect to see substantial growth going forward; factory management, smart energy, lighting, percent to market, wireless connectivity, which includes ZigBee, and automotive. The term [ph] of these areas today represents roughly around $8 billion, and we expect this to grow to somewhere around $12 billion by 2014.

Now let's dig a little bit deeper into Touch, because that's one of the fastest-growing areas in the semiconductor space, if not the fastest-growing area in the semiconductor space. Q1 of this year, I had just predicted, the shipments of touchscreen controllers will reach 2.4 billion units by 2015. And according to Gartner, global smartphone units reached over 470 million units in 2011 and are expected to exceed over 1 billion by 2015. Tablets are forecasted to go from over 60 million units in 2011 to over 320 million units by 2015, according to Gartner Research. You'll see laptops adopting Touch. You'll see, with the arrivals of Windows 8, which is a very touch-centric operating system, you'll -- will drive the next generation of touchscreen solutions for larger form factors. In fact, IHS is predicting that non-Apple Ultrabook shipments will soar to over 29 million units in 2012, from less than 1 million units to -- in 2011. And by 2015, Ultrabook -- non-Apple Ultrabooks could be as high as 136 million units. So again, as a good example of the sustained growth of Touch, as it moves into the larger form factors, and we are forecasting Touch to grow into a number of new applications whether that's GPS, whether that's automotive, portable media players, Ultrabooks, et cetera. All these areas will show the sustained growth of Touch. As you can see, Atmel is very well-positioned in capacities touch. It's an area that we invested in substantially over the last few years, particularly with the acquisition from Quantum Research. Even through the recession, it's an area that we continue to invest in, and we expect to continue to grow.

So let's talk a little bit about our maXTouch product for our capacitive touchscreen controller. Many of you have probably heard of the fully integrated capacity of our touchscreen controller, maXTouch, which we launched back in May of 2009. It really achieved touchscreen performance, which exceeds those of any leading-edge competition today. What we did is we took our engineers from our AVR microcontroller team and got them to work exclusively with the guys that we acquired from Quantum Research, to come up with a leading-edge touchscreen solution, primarily for the smartphone market, recognizing it would be moving into larger form factors as well. The response from the smartphone guys and the T1 handset guys was tremendous, and we went into volume shipments in 2010. From 0 revenues, we did over $140 million in 2010. We achieved over $375 million in 2011.

Some of the product features, which really differentiate the maXTouch solution, is it's truly unlimited touch. You can have as many touch points on the screen as you wish, and it will recognize all of them. It has very fast response time, and that's becoming particularly important where people are using their smartphones for texting, for typing, also as it's moving into new applications like gaming. It's maximum precision, so when you're doing gestures, the overall pinch separation, your ability to do very precise gestures, is becoming more and more important. And because it's leveraging from our AVR architecture, it has extremely low power, the lowest power in the industry.

So to give you a sense of how we're doing in the marketplace with regard to maXTouch, here are some of the recently announced design wins. We have a strong history with customers such as Samsung, Nokia, Motorola and HTC and recently we added another significant customer in the handset area, which was LG a few quarters ago. So as you can see in 2 of the fastest-growing markets of the world, both handsets and tablets, our customers are already trusting us with their flagship products. This list is getting extremely extensive. We might have to split it into 2 slides to keep showing you the level of design wins that we're getting in this area. We continue to expand our customer base, including a growing number of new Chinese customers and market design, particularly with our enhanced smaller screen solutions like our maXTouch 112 E product, which is starting to address some of the growing feature phone markets, as they move from resistive touch to capacitive touch.

The second half of 2012 will bring Windows 8-based tablet to the market, convertible PCs and Ultrabooks. And as the market leader in touchscreen controller solutions, combined with our most recent announcement of our S series products of maXTouch, we're very well-positioned to maintain our overall leadership position. And if you look at the market expansion of Touch, we really believe it's a multi-year growth opportunity. Mobile phones and tablets were the first to adopt the capacitive touch screens. It really started off with the smartphones, where you're seeing over 1 billion unit potential in this space, but it's really moving into applications like tablets, and now with the arrival of Windows 8, you're going to see that in the second half of this year proliferate into Ultrabooks and convertible PCs, et cetera. And then you're going to see a number of new applications, GPS. Gaming is another area of growth. Last quarter, Sony announced their Vita PlayStation solution, which has maXTouch controllers in it. We just announced a win with Ingenico, a world leader in payment solutions, which selected maXTouch for its portable payment terminals with touch capability. And you'll also start to see it moving to automotive, and we have a number of design wins now, both in North America, Europe and Japan for the automotive space. So it really is a multi-year growth story.

So what does this mean overall for global market share? Really, as the touch market has grown, Atmel has really been a big winner in this space. This chart is excluding Apple to do their own touch products, but Atmel's market share has risen from less than 5% back in 2009 to over 40% in 2011. Clearly, the market is very competitive and others want our business, so it's critical that we deliver new products on time to the market with outstanding support for our customers. So tremendous success here. We're investing heavily in this area. We continue to invest heavily in this area, and expect to continue to grow our market leadership position.

Now let's talk a little bit about our touch sensor announcement that we made last month. A few months ago, we announced our intention to enter into the touch sensor market with a unique and proprietary technology with a product that we call, XSense. XSense is based on fine-line metal mesh technology and is a high performance alternative to traditional touch sensors most commonly used today. We see the term of this market for touch sensors today, roughly around $5 billion, growing to over $9 billion by 2015. The term for this market for touch sensor technologies should be roughly the same unit size as the capacitive touchscreen controller, but from a dollar point of view, the opportunity for touch sensors could be potentially larger, due to the fact that the dollar value increases substantially as the screen sizes get larger. We believe we're at the beginning of a multi-year rapid growth of this technology as it penetrates into the broader touch sensor market. In the near-term, given XSense production qualification is currently scheduled for Q3 of this year, and we are sampling it now with customers. And we do expect major volume ramps in the second half of 2013.

Our XSense touch sensor technology are highly flexible and enable a new generation of smartphone tablets and emerging applications. OEMs will now be able to develop new industrial design that are edgeless or have narrow borders that create lighter, fleeter [ph], revolutionary new form factors that don't exist today, particularly in smartphones, in tablets, moving into the automotive space as well. And this technology also enables much larger touchscreens. It has borderless solutions, which fully utilize the screen size and can eliminate, given the flexibility, the need for mechanical buttons around the edge of the solutions that you see today. As XSense is synergistic and complementary to our maXTouch product line, the 2 technologies really have the opportunity to drive sales for one another, extending Atmel's leadership position in the broader touch space.

Now I think it's worth talking a little bit about some of our other businesses. We have an automotive business. This business primarily focuses on security, power train safety, engine management, primarily analog and mixed signal products. We also, in this space, have RF solutions that address access to the car, so passive entry go, remote keyless entry, tire pressure monitoring, that are also leveraging both our ARM and our AVR core technologies. The reason that this business is so strategic for us is that over 30% of the industry's microcontrollers are selling into the automotive space and for us, it's a pretty strong percent. So we do think longer-term, given the fact we've got product sale or automotive qualified, that we can continue to penetrate this space. We also have a Non-Volatile Memory business. Our products are focused on the higher growth serial memory segment, and we offer both E2PROM and serial flash-based technologies.

So what does this all this mean to the financials of the company? You can see, using 2006 as the base, which was really the starting point for our transformation, we had non-GAAP gross margins of a little under 34% and non-GAAP operating margins of low single-digits. For 2010, our non-GAAP gross margins were just under 45% and non-GAAP operating margins in the high teens. For 2011, we achieved a record for the company as we had worked for a lot of the transformation issues, as I said earlier, in terms of divesting the businesses and divesting our fabs. We had a gross margin -- pro forma gross margin of a little under 51%, and non-GAAP operating margin of almost the mid-20s. In the first quarter, which we believe was the trough of the cycle, our gross margins were 43.2%. If I compare this to the last trough, we were seeing gross margins in the low 30s, so tremendous improvement there. Clearly, our ability to extend our gross margins, our operating margins and generate significantly more cash flow, to enable us to invest in our business.

So I'm now turning to the balance sheet, and we've always been quite conservative with our cash which I think is good thing in the semi space. We really generated a lot of cash even through 2009, through the down cycle, which has allowed us to invest in the business, make strategic acquisitions, continue to execute on our buyback strategy and really return some cash to our shareholders. Our plans today on our buyback of $500 million buyback, which we instituted back in Q3 of 2010 -- we approximately repurchased about 50 million shares amounting to around $490 million. And we just received -- on our last earnings call we announced an approval from our Board of Directors to continue and extend our buyback program by another incremental $200 million.

So in summary, we continue to focus on the outstanding microcontroller franchise and continue to be the fastest-growing microcontroller player out there with tremendous overall top line growth. We have a leadership position in capacitive touch and continue to ramp that, where we achieved over $350 million -- $375 million in 2011. Our financial footprint has changed dramatically, as you saw from the gross margin and operating margin results of the company, that's allowed us to continue to reinvest, to build an ever-stronger balance sheet and return cash to our shareholders. We've transformed our automotive business and our Memory business, and we've now introduced XSense, our touch sensor technology, which is a disruptive technology for a multi-billion dollar market opportunity. And finally, with regards to growth, we expect to continue to take market share within our Microcontroller business. So that concludes the presentation. Just in time, I think, and I don't know if you want to take questions here for the breakout?

Unknown Analyst

[indiscernible]

Stephen Cumming

Okay.

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Source: Atmel's Management Present at Barclays Capital Global Technology, Media and Telecommunications Conference (Transcript)
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