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Atmel Corp. (NASDAQ:ATML)

Q1 FY08 Earnings Call

April 30, 2008, 5:00 PM

Executives

Robert Pursel - Director of IR

Robert Avery - VP of Finance and CFO

Steven Laub - President and CEO

Analysts

Doug Freedman - American Technology Research

Craig Berger - FBR Capital Markets

Hans Mosesmann - Raymond James

Edwin Mok - Needham

Operator

Good afternoon, ladies and gentlemen. My name is Gerald and I will be your conference operator today. At this time I would like to welcome everyone to the Atmel First Quarter 2008 Earnings 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, Director of Investor Relations; I will now turn the conference over to you.

Robert Pursel - Director of Investor Relations

Thank you, Gerald. Good afternoon and thank you for joining us for Atmel's first quarter 2008 earnings release conference call. Our released crossed today aftermarket close and it's available by going to 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 42968627. 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, Finance and Chief Financial Officer. Bob will begin the call with a review of our Q1 financial results and Steve will then provide a business update and progress report on the company's strategic and operational initiative. At the conclusion of Steve's remarks, Bob will discuss the guidance for the second quarter of 2008. We will 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 revenues, target growth and operating margins, as well as cost savings for 2008 and beyond. Our forward-looking statements and all other statements that are not historical facts reflect our belief and predictions as of today, and therefore are subject to risks and uncertainties as described in the Safe Harbor discussions on 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 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 made available on the company's Investor Relation's website at www.atmel.com.

Now, I would like to turn the call over to Bob Avery for a discussion of our first quarter financial results.

Robert Avery - Vice President of Finance and Chief Financial Officer

Well, thank you Robert. Let me provide some details of our statements of operations. Revenues for the first quarter ended March 31st, 2008 were $411.2 million, a 3.4% decrease compared to the $425.6 million for the fourth quarter of 2007, and a 5.1% increase compared to the $391.3 million for the first quarter ended March 31st, 2007. Gross profit was $146.1 million for the first quarter or 35.5% of revenue, an increase of 30 basis points from the fourth quarter and a 30 basis points decline from the same period last year. Gross profit was negatively impacted due to underutilization as production activity ended at our manufacturing facility in North Tyneside, U.K., and as the dollar continued to weaken against the euro.

Research and development, R&D expense was $66.4 million for the first quarter. This was $5.5 million lower than the $71.9 million for the fourth quarter of 2007, and essentially in line with the $67.3 million reported for the year-ago quarter. The sequential decrease was due primarily to savings recognized from lower R&D process development costs. Selling, general and administrative, SG&A expense was $63.6 million for the first quarter. This was a $5.2 million increase compared to the $58.4 million for the fourth quarter of 2007 and a $5.5 million increase compared to the $58.1 million for the first quarter of 2007.

SG&A expense was up sequentially due primarily to increased legal fees, stock based compensation costs, and the impact of the weaker dollar. For the first quarter, stock based compensation expense was 6.3 million, of which $800,000 was included in cost of sales, $2.8 million was included in R&D and $2.7 million in SG&A. Stock based compensation expense totaled $5.1 million in the fourth quarter of 2007, and $3.3 million in the year ago quarter.

Operating profit was $15.4 million for the first quarter of 2008 or 3.7% of revenue, which includes net non-recurring charges of $900,000 related to the sale of the North Tyneside assets as well as charges resulting from the Quantum Research Group acquisition completed during the quarter. This compares to an operating profit of $6.4 million for the fourth quarter of 2007 and $12.8 million for the first quarter of 2007. Included in the 2007 operating results were non-recurring charges of $13 million for the fourth quarter related to North Tyneside restructuring charges and $1.8 million for the first quarter of 2007, related to restructuring charges for employee severances at other locations.

The company's effective average exchange rate in the First quarter of 2008 was approximately $1.47 to the euro, compared to $1.43 to the euro in the fourth quarter of 2007 and $1.32 to the euro in the year-ago period. A one-penny increase in the dollar-euro exchange rate reduced operating income by approximately $600,000 during the first quarter of 2008. As a result of the sale of North Tyneside manufacturing facility, we estimate that a one-penny increase in the dollar-euro exchange rate will reduce operating income by approximately $500,000 going forward.

Other expense net was $5.4 million for the first quarter of 2008. This compares to $1.1 million of income for the fourth quarter of 2007 and $1 million of income for the first quarter of 2007. Included in this amount was $3.8 million of loss on translation of foreign exchange, which resulted from foreign currency balances negatively impacted by the significant change during the quarter of the dollar to euro exchange rate.

Income tax provision was 3.2 million for the first quarter of 2008. This compares to an income tax provision of 5.8 million for the fourth quarter of 2007, and a net income tax benefit of $15.2 million in the first quarter of 2007. The company recognized tax benefit of approximately $3.2 million and $20 million from the receipt of French R&D tax credit in the first quarters of 2008 and 2007 respectively. Net income for the first quarter of 2008 totaled $6.8 million or $0.02 per diluted share. This compares to net income of $1.7 million or zero pennies per diluted shares for the fourth quarter of 2007 and net income of $28.9 million or $0.06 per diluted share for the year-ago quarter.

Non-GAAP net income for the first quarter of 2008 totaled $13.3 million or $0.03 per diluted share, compared to $20 million or $0.04 per diluted share for the fourth quarter of 2007, and $33.7 million or $0.07 per diluted share for the year ago quarter. Non-GAAP net income excludes charges and credits related to stock based compensation, acquisitions, grant repayments, restructuring activities, as well as the gain on sale of assets and the income tax effect of these excluded items.

Now turning to the balance sheet, combined cash balances which is cash and cash equivalents plus short-term investments totaled $336.8 million at the end of the first quarter of 2008, a decrease of $93.1 million from the end of the prior quarter and $141.9 million decrease from $478.7 million at March 31st, 2007. During the first quarter of 2008, the company used approximately $89 million for the purchase of Quantum Research Group. Also during the quarter, the companyreclassified approximately $26 million of auction rate securities from short-term investments to long-term investments.

Cash used in operations totaled approximately $41 million for the first quarter of 2008 compared to cash provided from operations of $90.4 million for the fourth quarter of 2007, and $59.2 million for the first quarter of 2007. Cash used in operations in the first quarter of 2008 include approximately $54 million of cash used for repayment of grants and other restructuring charges related to the closure of the North Tyneside, U.K. facility. Separately, the company received approximately $82 million of proceeds from the sale of North Tyneside fabrication equipment, which are classified as proceeds from investing activities.

Capital expenditures were approximately $16.7 million for the first quarter of 2008, compared to $16.4 million for the fourth quarter of 2007 and $26.2 million for the year-ago quarter. The company expects the capital expenditures for the full year will be approximately $80 million to $90 million. Depreciation and amortization was $32.7 million for the first quarter. This was a decrease of $1.6 million from the prior quarter and an increase of $300,000 from the year-ago quarter. Accounts receivable were $223.6 million at the end of the first quarter. This was an increase of $14.4 million from the prior quarter. Days of sales outstanding were 49 at the end of the first quarter compared to 44 at the end of the prior quarter. Inventory was $348.6 million at the end of the first quarter; this was a decrease of $8.7 million from the prior quarter due to lower inventory bills as production ended at the North Tyneside facility. Days of inventory at the end of the first quarter were 118 compared to 117 at the end of the prior quarter.

Now, let me turn the call to Steve for a commentary on our business.

Steven Laub - President and Chief Executive Officer

Thank you, Bob, and good afternoon. Atmel's first quarter results reflect the progress we are making in refocusing and transforming Atmel into a higher growth, more profitable company. Microcontroller revenues set a new record growing 8% compared to the fourth quarter of 2007. The acquisition of Quantum Research Group will build on this progress by expanding our reach in to high growth time sensitive [ph] market, one of the fastest growing applications for microcontrollers.

We're also pleased to announce we have substantially completed the transfer of our North Tyneside fabrication equipment to TSMC and the property to Highbridge Business Park Limited. I would like to personally thank the many employees of our North Tyneside operation for their outstanding commitment and support during this difficult transition.

Let me now turn to our microcontroller business unit. Microcontroller revenues set another record this quarter, achieving $131 million of revenue, up 8% sequentially and up 21% in the same period last year. AVR products continue to be the major driver delivering record revenues, growing 8% sequentially and 30% as compared to same quarter last year. In addition, our 32-bit ARM microcontrollers were up 9% sequentially and 26% as compared to the year-ago quarter.

We are please that our focus in investments on microcontrollers led to substantial market share gains in 2007 and continue to positively impact our results as we remain the fastest growing major 8-bit microcontroller supplier into 2008. Of particular long-term significance for our microcontroller business was the introduction this past quarter of our new XMEGA AVR product family. This is a truly innovative 8-bit family, which exceeds the performance of our competitors' 8 and 16-bit product lines and does so at the industry's lowest power consumption. This family extends and strengthens our strong technology leadership and positions us well for future growth.

Turning into our ASIC business segments, revenues for the ASICS have been $150 million for the first quarter, seasonally down 13% sequentially and up 4% from the same period last year. We saw strength in the quarter for our space and custom log in products and strong design win momentum from our CAP customizable microcontroller, which was named 2007 product of the year by Electronic Products, China.

Now, looking at our nonvolatile memory segment, revenues for the nonvolatile memory segment, impacted by normal seasonality, were $95 million for the first quarter, down 9% sequentially, but up 10% from the same period last year. Series EEPROMs declined 15% sequentially, but we are also up 4% compared to a year-ago quarter. Despite the competitive memory landscape, we continue to maintain number one leadership position for Series EEPROMs during 2007, with our market share growing to 39% from 33% in 2006.

Now turning to our RF and automotive business segment, revenues for the RF and automotive segment was $71 million for the first quarter, up 4% sequentially, and down 18% in the year ago quarter. However, within this segment is included the RF CDMA foundry business. When you exclude that business, this segment was up 4% compared to the fourth quarter of 2007, and was up 5% from the same period last year. We are seeing continued success achieving qualifications for our LIN or Local Interconnect Network products at most major automobile manufacturers, and we continue to win new AVR based remote keyless entry designs.

By geographies, we view our business from a geographic perspective. Asia was once again our largest shipped to location. For the quarter, Asia represented approximately 48% of total revenues, down from 52% in the prior quarter, primarily due to seasonal softness and the Lunar New Year holiday. Europe represented approximately 35% of revenues while the Americas represented nearly 17% of total revenues.

Now I'd like to update you on our strategic and operational initiatives. As you know, we continue to take a number of actions to focus on core technologies. Through our acquisition of Quantum Research Group in early March, we have launched into the fast growing capacitive touch-sensitive market with numerous new products. Capacitive sensing products are rapidly penetrating the overall touch-sensitive market, which is expected grow from over $1 billion in 2007 to more than $3 billion in 2011. Touch-sensing in mobile phone alone is expected to grow from approximate 50 million units in 2007 to over 400 million units by 2011, especially significant with the Quantum's touch-sensing solutions support a wide range of large and high growth markets and applications. In addition to mobile phone handsets, these include PCs and peripherals, industrial equipments, consumer electronics, home appliances, medical, and automotive products.

With respect to our cost structure as you may remember, we targeted $70 million to $80 million of savings in 2007 and $80 million to $95 million in 2008. For 2007, we achieved cost savings in excess of $82 million and are on track to achieve the upper range of our 2008 target. Thus far in 2008, we have substantially completed the sale of the North Tyneside fab and recently entered into an agreement to sell our WiMAX engineering team, which is located in Germany.

While Atmel continues to remain heavily exposed to average changes in a dollar-euro exchange rate, the progress we have made in our restructuring initiatives has reduced this impact substantially. During the past year with a reduction of our headcount in Europe, including the sale of our North Tyneside fab, we have decreased our quarterly dollar-euro exchange rate exposure to our operating profit to approximately $1 million to $500,000 for each penny change in the euro. From an operating expense standpoint, each penny change in the euro will impact operating expenses by approximately $1 million. This is down for approximately $1.5 million during 2007.

As we enter the second quarter of 2008 due primary to the weak dollar, our operating expense ratios continued to be significantly higher then are long-term operating model. Let me assure you that we intend to take strategic actions to address this challenge and align our operating expenses consistent with our long-term targets.

Now let me turn the call back over to Bob for a discussion of our financial guidance for the second quarter.

Robert Avery - Vice President of Finance and Chief Financial Officer

Well. Thank you, Steve. Now turning to our outlook; consistent with business seasonality and general market trends, the company anticipates second quarter 2008 revenues will be flat to up 3% on a sequential basis. Microcontroller products are expected to continue to grow on a sequential and year-over-year basis, driven by new product introductions, market expansion, and revenue provided by our Quantum acquisition.

Looking at our expectations for gross profit growing forward, due primarily to the closure of our North Tyneside fab, we continue to expect 100 basis points improvement in the second quarter of 2008, plus or minus 50 basis points in spite of the dollar-euro exchange rate weakening from $1.47 in Q1 to an expected average of $1.57 in Q2. Separately, due to the continued weakness of the dollar and the additional expenses associated with the Quantum business, operating expenses are expected to be approximately $136 million, plus or minus $2 million for the second quarter of 2008. Quantum acquisition related costs are expected to be approximately $7 million each quarter in 2008. In addition, provision for income taxes is expected to be approximately $7 million per quarter during 2008.

This concludes our prepared remarks. We will now open the call for your questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from Doug Freedman [American Technology Research].

Doug Freedman - American Technology Research

Hi, guys. Thanks for taking my question. Can you talk a little bit about the ASIC market to get started, because we've established [ph] strong seasonality down in the March quarter, but bouncing back in the June quarter? Are you expecting that same seasonality again?

Steven Laub - President and Chief Executive Officer

Hi Doug, this is Steve. In fact, we are expecting the same kind of seasonality; you are right. It does soften in Q1 and rebound in Q2, which is our expectation. The impact for us in Q2, we are expecting growth about ASIC and Micros predominantly. Those two areas for growth this quarter, which impacting us fundamentally is the memory business, we expect to be continued down in Q2; and our foundry business, primarily the core foundry business is also declining in Q2, which overall gives us the flat to up 3% guidance.

Doug Freedman - American Technology Research

Okay, and can you talk a little bit about what you are seeing happening in automotive business from just a seasonal nature as well?

Steven Laub - President and Chief Executive Officer

Right now, what we're seeing is that the automotive business for us is essentially flat between Q1 and Q2. There certainly has been a little bit of weakening relatively to our expectation there, but we are expecting to essentially flat this quarter.

Doug Freedman - American Technology Research

Okay. And you mentioned that you are selling the WiMAX engineering team. What impact is that going to have on the operating expenses and when do you think we will see them on the...

Steven Laub - President and Chief Executive Officer

Yes, on a full quarter basis, it's not very significant, but it's all... it's about $1 million a quarter on a full quarter basis, and our expectation is that we will only incur about half in terms of selecting [ph] this quarter, so it should be up by mid quarter.

Doug Freedman - American Technology Research

Okay. And then just looking at how are you doing as far as the rationalization of the different business is... clearly this was a business. Are there other businesses there that you are pre-revenue or that you are looking at if you could just update us a little bit on where you are taking, what you are looking at as far as where you are in the restructuring time?

Steven Laub - President and Chief Executive Officer

Clearly, the... I think I mentioned before that to the extent that we are taking actions, when we start our businesses, I don't like to be particularly clear on this call, because if single book customers, competitors, and frankly, the biggest impact is concerned to our employees. People are looking very hard to build those businesses and so forth. This company does have some businesses that are relatively lower margin and this company does still have a couple of businesses that I would say are low revenue, with the revenues are not sufficient to satisfy the expenses associated with those businesses. We are continuing to take a very sharp look at those businesses. And our sense is that, this yearthe expectations that we will continue to be making changes as appropriate, strategic changes respect to business that we participate in.

Doug Freedman - American Technology Research

All right, congratulations on the strong execution in that tough environment.

Steven Laub - President and Chief Executive Officer

Thank you.

Robert Avery - Vice President of Finance and Chief Financial Officer

Thanks Doug.

Operator

Your next question comes from Craig Berger [FBR Capital Markets].

Craig Berger - FBR Capital Markets

Hi, guys, thanks for taking my question.

Steven Laub - President and Chief Executive Officer

Hello, Craig.

Craig Berger - FBR Capital Markets

Let's see here; on the ASIC weakness, I know it's seasonally down. What specifically was driving the weakness? Was it Smart Card or was it other?

Steven Laub - President and Chief Executive Officer

It's a combination of Smart card was down in Q1 and then there is little bit of sort of ASIC that we are also down in Q1.

Craig Berger - FBR Capital Markets

Okay, and with respect to Qualcomm RF business being down in the second quarter, how much left on that declined?

Robert Avery - Vice President of Finance and Chief Financial Officer

The business with second quarter should decline by frankly approximately $4 million and after that decline, there is only about $4 million to $5 million at quarter end, [ph] which we expect by the end of the year will be gone.

Craig Berger - FBR Capital Markets

Great, can you talk...

Robert Avery - Vice President of Finance and Chief Financial Officer

And to give you some perspective by the year, on a year-over-year basis, the Qualcomm, if you compare Q1 to Q1 of last year is down 19 million on a quarterly basis. So, the company grew 5% independent of that and it's down a lot $19 million from Qualcomm.

Craig Berger - FBR Capital Markets

Okay. And then on the WiMAX sale, so that means definitively you guys are out of that. There is no products that you are retaining for sale or other efforts that's...

Robert Avery - Vice President of Finance and Chief Financial Officer

We are retaining some IP, but we are effectively not going to be participating in that business.

Craig Berger - FBR Capital Markets

Okay, can you comment on customer inventory levels out there, channel inventory levels?

Robert Avery - Vice President of Finance and Chief Financial Officer

Yeah, our sense is that from a customer standpoint, the inventory levels that we are saying are pretty stable if not down from where they have been a quarter ago, so we do not think there is any inventory issues respect either distributors or our customers.

Craig Berger - FBR Capital Markets

Okay, with respect to Quantum in the first quarter, are you able to quantify the revenue contribution?

Robert Avery - Vice President of Finance and Chief Financial Officer

The first quarter for Quantum, which was basically some period of March, the revenue for us was... again was part of March, was just over $1 million. We will not be breaking our Quantum separately. It will be rolled up into our microcontroller business as we move forward.

Craig Berger - FBR Capital Markets

So, just $1 million is in March?

Robert Avery - Vice President of Finance and Chief Financial Officer

A little over a $1 million.

Craig Berger - FBR Capital Markets

Got it.

Robert Avery - Vice President of Finance and Chief Financial Officer

And just for a part of March.

Craig Berger - FBR Capital Markets

For a part of March. And then I think you said your market share in EEPROM is almost 40%?

Unidentified Company Representative

That's correct.

Craig Berger - FBR Capital Markets

Who are your biggest competitors in that market?

Steven Laub - President and Chief Executive Officer

That would be ST for microcontroller [ph] and microchip.

Craig Berger - FBR Capital Markets

In microchip, is there I mean has pricing been... how is pricing been in that market?

Steven Laub - President and Chief Executive Officer

It's pretty good until more recently. And I am sure that the pricing in both the flash marketeven in the low that we participate in as well as the series market has become more aggressive than it had been typically.

Craig Berger - FBR Capital Markets

Got it. Thanks for the color, guys.

Steven Laub - President and Chief Executive Officer

Good bye.

Operator

Your next question comes from Hans Mosesmann [Raymond James].

Hans Mosesmann - Raymond James

Thank you, and yes, good execution, guys. The fab in Germany; can you give us an update there? You mentioned that the WiMAX team is going. What about the fab?

Steven Laub - President and Chief Executive Officer

I think our expectation we stated last time as we expected that fab would sell this year. And we do have serious parties going through the fab. It was actually the point of... I don't like to get into too much detail when you are actually selling an asset, but we are confident that the fab is going to sell this year and probably more closer to the midpoint of the year than the end of the year.

Hans Mosesmann - Raymond James

Okay. And in terms of the other two remaining fabs, what are the utilization rates going to look like as you progress through the year? Assuming that they go up as North Tyneside product gets spread up between those two fabs?

Steven Laub - President and Chief Executive Officer

That's correct. Right now, let's say that both fabs are running at over 95% utilization today. The expectations... so long as the business environment remains normal, which is we are not going to go into a real soft patch that utilization of fab will remain 95%, Quantum perhaps even higher closer to 100%. And that obviously what we are doing aggressively is bringing on outside foundries to carry on our requirements beyond what our internal patch can handle.

Hans Mosesmann - Raymond James

Okay. And then one last question, do you share with us historically, I forget, the development tool shipments for microcontrollers and how they do sequential.

Steven Laub - President and Chief Executive Officer

We have I think shared it inconsistently is the best thing I can say. Sometimes I think we share it, sometimes we have it. I think it is big part of it because we find that the way that our competitors tend to define and their particular shipments and ours are different. And so it's not a real good standard of comparison. But overall it is one of indicators that we do follow and we are very satisfied with the level of sales that we are seeing and shipments we are seeing in our development tools.

Unidentified Company Representative

And we are also very satisfied with the designing momentum we are saying with respect to our micros.

Hans Mosesmann - Raymond James

And across all your product lines, the AVRs 32 bit arm and such?

Unidentified Company Representative

That's correct.

Hans Mosesmann - Raymond James

Okay, thank you.

Unidentified Company Representative

Thank you.

Operator

[Operator Instructions]. And your next question comes from Edwin Mok.

Edwin Mok - Needham

Hi guys.

Unidentified Company Representative

Hello.

Unidentified Company Representative

Hi, Edwin.

Edwin Mok - Needham

Hi. First question I have is on I guess that was backlog coverage, what was backlog coverage were in your guidance that you provide right now?

Unidentified Company Representative

One second. We'll provide that for you.

Edwin Mok - Needham

Great, thanks.

Unidentified Company Representative

Our backlog coverage is approximately 80%, just under 80% right now for the quarter, for the guidance that we gave you and I think last quarter may be one or two points higher. And we ended up doing as saw the upper end of our guidance.

Edwin Mok - Needham

Great. So, that's actually my follow-up question there right. So, last quarter I remember you mentioned that your backlog coverage was higher than what we historically being doing with more closer to 75%. And you mentioned part of your concern is because of the micro concern and that's you want to provide a little more conservative guidance as a result of that. Is this kind of same conservative some bake into your current guidance there as well?

Unidentified Company Representative

I would say that our current guidance is probably a little bit conservative. But I'd say not quite as much as we put in last quarter, because we're continuing and actually to go back to work historically from the last say four to five quarters I believe. We actually had been hitting the upper end of our guidance each quarter, and so you were fine tuning that coverage, and fine tuning numbers as well as what is the appropriate thing to use. But we are comfortable that with vapor [ph] coverage we have, but our guidance is probably part of that.

Edwin Mok - Needham

Great. Going on to gross margin, looks actually voice came in close to what you guys were expecting for the quarter. Yes, you know your gross margin will expand to 30% 30 bass points, sorry. Was that mostly due to the delay of utilization expansion on the outer fab because it's sounds like your utilization is now up to the level that you want and therefore you provide better guidance there. Am I looking at that correctly?

Unidentified Company Representative

I'd say the biggest impact is probably the fact that I think our guidance was a hundred plus or minus 50. We came up about 30. I think one of the thing yet, two probably affects. One is that the utilization of the fab in North Tyneside run so low and a little bit longer than we had planned for, and those expenses just closing up a fab or probably little bit higher than we had modeled. And respect to the other fabs, they are really ramping now. You don't really ramp at the same time and so the effects of, positive effects of ramping in other fabs is something that we really feel now. As you know, when you start ramping the fab and you have the offers [ph] in that fab, it initially goes into your inventory. It doesn't get hit, it's not a merely shipped out to your customers and your products and count your costs that ways. It goes in inventory first and then resold, so typically there is a quarter lag of that impact.

Edwin Mok - Needham

Great. So you are not barring that for it's continued work against you guys, if that in fact is the case and it looks like you might be squeezed a bit more gross margin expansion in the second half of this year?

Unidentified Company Representative

We expect to have some gross margin expansion in the second half of this year, barring as you said any further deterioration in the euro/dollar exchange rate and so long again as business conditions remain relatively normal.

Edwin Mok - Needham

Great. And, one clarification you mentioned that CDMA should be down, but automotive you expect to be flattish. Is that what you expect for the second quarter? Sorry, I missed that.

Unidentified Company Representative

Yes. We expect call count to be down. I think we said roughly 4 million or so that automotive would be essentially flat.

Edwin Mok - Needham

Great. And one last thing for Quantum you mentioned, say how much of Quantum revenue is expect to recognize it approximately a mix quarter given it's the first quarter you guys are going to have that?

Unidentified Company Representative

We did not say that because we're actually holding Quantum into our micro business, and so we will be reported as part of the micro in number each quarter. I don't think any of our while we internally obviously will be monitoring that number, our sense is that none of the people that we compete against in the marketplace in micros breakout how much is due to the capacitive sensing IP versus their micro cell and so forth. And so we think the best thing to do is we reported consistent with the rest of the through reporting the Quantum number inside the micro number and so forth as we go forward.

Edwin Mok - Needham

But wouldn't it be fair to say though given that you only recognize few weeks of Quantum revenue in the March quarter. And then you will have the fourth quarter and the June quarter. Wouldn't it be fair to say that your guidance effectively already bake in that growth mean that your revenues going down?

Unidentified Company Representative

Our guidance for the June quarter does reflect Quantum.

Edwin Mok - Needham

I see. Okay, great. That's what I have. Thank you.

Unidentified Company Representative

Okay, great.

Thanks Edwin.

Operator

All right. And your next question comes from the line of Bruce McFadden [ph].

How you are doing?

Unidentified Company Representative

Hi Bruce.

Unidentified Company Representative

Hi Bruce.

Unidentified Analyst

Good. Actually, you guys answered my question. Let me just make sure a clarification, your gross margin progression through the rest of the year, what general color can you provides on that?

Unidentified Company Representative

Obviously as you what's happened the euro/dollar moved against us in pretty considerable fashion. I think we did analysis here which said, we are going to be targeting 40% ending Q4, not for Q4 as of end of the year. Now we got the time where I believe the euro/dollar was over $1.36. We are now at a $1.57 on modeling, and so we have brought that down toward targeting 38% for Q4 ending the year.

Unidentified Analyst

That would be the Q4 number or exiting the year?

Unidentified Company Representative

That would be the Q4 number.

Unidentified Analyst

Okay. All right, thanks guys.

Unidentified Company Representative

But a lot more challenging than the 40 was $0.20 a year ago in euro/dollar.

Unidentified Analyst

Right.

Unidentified Company Representative

Thanks Bruce.

Unidentified Analyst

Thanks guys.

Operator

Your next question is a follow-up from Craig Berger.

Craig Berger - FBR Capital Markets

Follow-up, when I averaged the Q1 euro for the quarter, I got something like $1.50. Why is that different from $1.47 you are referencing?

Unidentified Company Representative

The way we do it, is we use the December month end exchange rate to record January transactions. January rate for February and February rate for the March, so if you like to buy a much you should get about $1.47

Craig Berger - FBR Capital Markets

I see. Mostly we are using for interest in Q2?

Unidentified Company Representative

Just interest in another income and expense minus 2 million.

Craig Berger - FBR Capital Markets

2 million of expense?

Unidentified Company Representative

Yes.

Craig Berger - FBR Capital Markets

Why is that slip so dramatically. I mean I know auctionary interest is down and interest rates are down but I am not so what was in Q1 that the cost are deferred so dramatically and why is it still staying as an expense?

Unidentified Company Representative

So, what we have interest in other net income right? I think we had an expense of 5.3 million or is that right.

Right 5.4 million expense.

Unidentified Company Representative

Yes. Big chunk of that was foreign exchange loss. Obviously million plus, so we don't expect to have that normally and so but what you left over is about 2 million.

Craig Berger - FBR Capital Markets

I see. And then thank you. And then share count, there's no sure buyback going on, so just a little bit of growth in the share count?

Unidentified Company Representative

Yes, a little bit of growth by the million shares a quarter.

Craig Berger - FBR Capital Markets

Okay. And then, are there any other outstanding cash payables or receivables, grant payments, money received on equipment sales, any of the other cash factors that I know you listed four or five a little more quarter ago?

Unidentified Company Representative

Yes. Coming up in Q2, not really. There's a million here, two million there kind of thing, but nothing major like we experienced in Q1.

Craig Berger - FBR Capital Markets

Got it. And then finally, if I look at the balance sheet, you guys have reclassified intangible assets or something changed versus a quarter ago?

Unidentified Company Representative

Let me take a look here and see. I don't remember doing anything. We have the Quantum acquisition, of course where we have some intangible assets.

Craig Berger - FBR Capital Markets

Okay. Will take offline.

Unidentified Company Representative

Yes, okay.

Craig Berger - FBR Capital Markets

Thanks guys.

Unidentified Company Representative

You bet.

Operator

[Operator Instructions]. Your next question is a follow up from the line of Edwin Mok.

Edwin Mok - Needham

I've just follow-up there on in terms of guidance; you mentioned that Quantum acquisition cost will be around $7 million of quarter. Is that bake into is that part of that OpEx guidance you provide or is that in addition to that?

Unidentified Company Representative

That's an addition to that.

Edwin Mok - Needham

In addition to that. So I imagined that's late intangible like impairment or some write-downs in that?

Unidentified Company Representative

That is another aspect of the purchase, yes.

Edwin Mok - Needham

I see. Okay, that's great. One other question is I think what I was going to ask is regarding you add a new line of current asset, how is that relate to your Germany fab on your balance sheet?

Unidentified Company Representative

No, it's not Edwin. That is breaking out the North Tyneside land and building. We are coming down, we kept that on our balance sheet because of our occupancy even though we received cash flow last call. And now as we vacate the premise we wanted we have to break that out, make it clear it's out for sale. And then that will off our balance sheet in Q2.

Edwin Mok - Needham

Okay. So, I see that just a one quarter thing. And one last thing in you prepared remarks. You talk about moving some of your short-term investment into a long-term investment. I missed that amount and those auction rated securities or what they were?

Unidentified Company Representative

Yes, it was $26 million roughly and exactly right auction rate securities.

Edwin Mok - Needham

Great. Just one clarification of that, thanks.

Unidentified Company Representative

Sure. You bet.

Operator

And, sir there are no further questions. Do you have any closing comments, you wish to make.

Unidentified Company Representative

Yes I do Joe. On May 29th Atmel will be participating and Bob Avery will be presenting at the SPR 12th Annual Screen Investor Conference in New York City. Webcast information for this event will be published on the company's Investor Relations website. Thank you for joining us today. This now concludes our conference call.

Operator

Ladies and gentlemen this does conclude today's Atmel first quarter 2008 earnings conference call. You may now disconnect.

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Source: Atmel Corp. Q1 2008 Earnings Call Transcript
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