Executives
Robert Pursel - Director of IR
Stephen Cumming - VP of Finance and CFO
Steven Laub - President and CEO
Analysts
Suji De Silva - Kaufman Brothers
Craig Berger - FBR Capital Market
Edwin Mok - Needham & Company
Dough Freedman - AmTech Research
Kevin Rottinghaus - ClevelandResearch
Hans Mosesmann - Raymond James
Atmel Corporation (ATML) Q2 FY08 Earnings Call July 30, 2008 5:00 PM ET
Operator
Ladies and gentlemen thank you for standing by and welcome to the Atmel Second Quarter 2008 Earnings Release Conference Call. All lines have been placed on mute to prevent any back ground noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
I would now like to turn today's conference over to Robert Pursel, Director of Investor Relations. Mr. Pursel you may begin your conference.
Robert Pursel - Director of Investor Relations
Thank you, Christian. Good afternoon and thank you for joining us for Atmel's second quarter 2008 earnings conference call, our release 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 55624651. The webcast will be archived on the Atmel website for one year. Joining us on the call today are Steven Laub, Atmel President and CEO; and Stephen Cumming, newly appointed Vice President, Finance and Chief Financial Officer.
Stephen will begin the call with a review of our Q2 financial results and Steve will then provide a business update and progress report on the company's strategic and operational initiatives. At the conclusion of Steve's remarks, Stephen will discuss the guidance for the third 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 beliefs and predictions as of today and therefore are subject to risks and uncertainties as described in the Safe Harbor discussions 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 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.
I would now like to turn the call over to Stephen Cumming for a discussion of our second quarter financial results.
Stephen Cumming - Vice President of Finance and Chief Financial Officer
Thank you, Robert. Let me provide some details of our statement of operations. Revenues for the second quarter ended June 30, 2008 were $420.9 million, a 2.4% increase compared to the $411.2 million for the first quarter of 2008, and a 4.1% increase compared to the $404.2 million for the second quarter ended June 30, 2007.
Gross profit was $153.5 million for the second quarter, or 36.5% of revenues, an increase of a 100 basis points from the first quarter, and a 150 basis points increase, from the same period last year. The gross profit improvement was a result of enhanced utilization levels at our Colorado Springs and Rousset, France wafer fabs as well as from a mix of higher margin core products.
Research and development; R&D expense was $68.2 for the second quarter this was a $1.8 million higher than the $66.4 million for the first quarter of 2008 and $1.1 million less than $69.3 million reported for the year ago quarter. The sequential increase was due primarily to the continued weakness of the dollar to the euro and additional expenses to related to a full quarter of comps and expenses.
Selling, general, administrative; SG&A expense was $68.6 million for the second quarter this was a $5 million increase compared, to the $63.6 million for the first quarter of 2008 and $0.7 million increase compared, to the $67.9 million for the second quarter of 2007. SG&A expense was up sequentially due to higher legal fees associated with the plant sale of a fab in Heilbronn, Germany, combined with the continued increase in the strength of the euro.
For the second quarter stock-based compensation expense was $6.4 million of which $1 million was included in cost of sales, $2.8 million was included in R&D and $2.6 million in SG&A. Stock-based compensation expense totaled $6.3 million in the first quarter of 2008 and $3.3 million in the year ago quarter.
Operating profit was $0.2 million for the second quarter of 2008 or $0.1% of revenues which includes net non-recurring restructuring and acquisition related charges of $16.5 million related to the sale of the North Tyneside assets, charges from the Quantum Research Group acquisition and other restructuring charges for initiatives implemented during the second quarter. This compares to an operating profit of $15.4 million for the first quarter of 2008 and $7.1 million for the second quarter of 2007.
Included, in the first quarter operating results were non-recurring charges of $0.7 million primarily related to the North Tyneside and $2.6 million for second quarter of 2007 related to restructuring charges for employee severances.
The company's effective average exchange rate in the second quarter of 2008 was approximately $1.56 to the euro compared to $1.47 to the euro in the first quarter of 2008 and $1.35 to the euro in the year ago period.
We continue to reduce our exposure to European currencies and as a result of the sale of North Tyneside manufacturing facility, a $0.01 increase in the dollar-euro exchange rate reduced operating income by approximately $0.5 million during the second quarter of 2008.
We estimate a $0.01 increase in the dollar-euro exchange rate, will continue to reduce operating income by approximately $0.5 million going forward. This is an improvement over the $1 million operating income reduction we saw at the end of 2007, for each $0.01 increase in the dollar-euro exchange rate.
Other expenses, net was $0.9 million, for the second quarter of 2008. This compares to $5.4 million of expense for the first quarter of 2008, and $0.6 million of income for the second quarter of 2007.
Income tax provision was $4.3 million for the second quarter of 2008. This compared to income tax provision of $3.2 million for the first quarter of 2008 and a net income tax provision of $7.1 million for the second quarter of 2007.
Net loss for the second quarter of 2008 totaled $4.9 million or a $0.01 loss per diluted share, this compares to net income of $6.8 million or $0.02 per diluted share for the first quarter of 2008 and net income of $0.7 million or breakeven per diluted share for the year ago quarter.
Non-GAAP net income for the second quarter of 2008 totaled $17.3 million or $0.04 per diluted share compared, to $13.3 million or $0.03 per diluted share for the first quarter of 2008, and $1.3 million or breakeven per diluted share for the year ago quarter.
Non-GAAP net income excludes charges and credits related to the stock-based compensation, acquisitions, grant repayments, restructuring activities, as well as the loss and gain on sale of assets and the income tax effects of these excluded items.
Turning to the balance sheet, combined cash balances cash and cash equivalents by short term investments totaled $375.8 million at the end of the second quarter of 2008 an increase of $39 million from the end of the prior quarter and $100.3 million decrease from $476.1 million at June 30, 2007.
Cash from operations totaled approximately $50 million for the second quarter of 2008, compared to cash used in operations of $40.2 million for the first quarter of 2008 and cash from operations of $1.5 million for the second quarter of 2007.
Cash used in operations in the first quarter of 2008, included 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.
Capital expenditures were $9.7 million for the second quarter of 2008, compared to $16.7 million for the first quarter of 2008, and $18.5 million for the year ago quarter. The company expects that capital expenditures for the full year will now be at the low end of our guidance range of $80 million to $90 million.
Depreciation and amortization, for the second quarter of 2008 combined were $36.3 million. This compares to $33.7 million for the first quarter of 2008 and $31.6 million for the second quarter of 2007.
Accounts receivable were $221 million at the end of the second quarter. This was a decrease of $2.7 million from the $223.7 million in the prior quarter. Days of sales outstanding improved to 48 days at the end of the second quarter, compared to 50 days at the end of the prior quarter.
Inventory was $336.4 million at the end of the second quarter. This was a decrease of $12.2 million from the $348.6 million in the prior quarter due to improved manufacturing efficiencies and sales expansion. Days of inventory at the end of the second quarter were a 115 days, a six negligent [ph] improvement compared to the 120 days at the end of the prior quarter.
Now let me turn the call over to Steve for commentary on our business.
Steven Laub - President and Chief Executive Officer
Thank you, Stephen, and good afternoon. Atmel's second quarter results reflect the solid progress we are making as we transform Atmel into a higher growth more profitable company. Microcontroller revenues continue to set new records as Atmel continues to gain market share and we believe, remain the fastest growing major 8-bit microcontroller supplier.
In addition, the company's gross profit reached its highest level since the first quarter of 2001. And our non-GAAP net income increased 28% sequentially despite a continued decline in the dollar-euro exchange rate.
The acquisition of Quantum Research Group is already contributing by extending our reach into the touch sensing market, one of the fastest growing applications for microcontrollers.
Let me now turn to a discussion of our microcontroller business unit. Microcontroller revenues set another record this quarter, reaching $143 million up 9% sequentially and up 29% in the same period last year. AVR products continue to be the major driver delivering record revenues, growing 6% sequentially and 28% as compared to the same quarter last year.
In addition, our 32-bit ARM microcontrollers were up 7% sequentially and 48% as compared to the year ago quarter. Touch sensing shipments grew rapidly and are up nearly 20% this quarter compared to last quarter. The [indiscernible] shipments a leading indicator of revenue growth potential rose nearly 11% compared to the first quarter of 2008.
Turning to our ASIC business segment revenues for this segment were $121 million for the second quarter, up 5% sequentially and down 3% from the same period a year ago. During the quarter we saw strength from our aerospace, cell base logic, as well as Smart Card products our PC crypto products were down slightly. During the second quarter our Cap Customizable Microcontroller was awarded the prestigious Electron d'Or award, a electronic magazine and the ASIC business group signed a major partnership agreement with European and Japan space agencies.
For our non-volatile memory segment, revenues for non-volatile memory segment which were impacted by normal seasonality as well weakness in the global memory market were $88 million for the second quarter, down 8% sequentially and down 2% in the same period last year.
Softness was felt throughout our non-volatile memory portfolio, including parallel and serial flash, data flash and prompt products as well as our market leading cell eastward prompt [ph].
Looking forward to Q3, we expect to see some stabilization of ASPs and we are forecasting solid growth ahead of the holiday build period.
Turning to our RF and Automotive segment, revenues for the RF and Automotive segment was $70 million for the second quarter, down 1% sequentially, and down 13% from the year ago quarter. However, excluding the CDMA foundry business, this segment was up 6% compared to the first quarter of 2008, and up 4% from the same period last year.
We continue to see significant success achieving qualifications for our local interconnect network products at most major auto manufacturers, and we continue to win new AVR based designs for high voltage and high temperature applications. In addition, our automotive RF business comprised primarily of Remote Keyless Entry products demonstrated solid growth.
From a geographical perspective for the second quarter, Asia continues to be our largest ship to location representing approximately 40% of revenues, while Europe represented approximately 37% and the Americas representing nearly 15%.
For this quarter, we're seeing strong bookings from Asia and expect most of our growth to come from there, but North America and Europe are essentially flat as compared with the second quarter.
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 launched into a fast growing capacity of touch sensitive market with numerous new products.
Quantum's touch sensing technology, provides Atmel of industrial leading solutions across a wide range of high growth markets such as mobile phone handsets, consumer electronics, home appliances, medical, and automotive products.
We're experiencing impressive growth and winning numerous new designs across major vertical markets. Particularly noteworthy is the growth we're experiencing in new mobile phone designs at three of the four largest handset suppliers. With respect to operational efficiencies, as you may remember we targeted $80 million to $95 million of cost savings for 2008 as a result of our previously announced restructuring initiatives.
I am pleased to say that through the first half of this year, we remain on track to exceed the upper range of our 2008 target. A significant portion of these savings are in our manufacturing operations, which contributed to the gross profit expansion we experienced in the second quarter and continued gross profit expansion we expect in the second half of 2008 and into 2009.
While Atmel continues to be heavily exposed to adverse changes in the dollar-euro exchange rate, the products we've made through our asset divestitures and restructuring initiatives have reduced this impact substantially. Furthermore, Atmel continues to weather ways to safeguard stability to compete in the market. In this context the French management is commencing a consultation procedure with the works councils in France in relation to potential redundancies in the operations in Rousset, and Nantes, France. Atmel is also continually viewing potential changes in its business and asset portfolio to add its full wide operations included what's located in Europe, in order to enhance its overall competitiveness and viability.
Now let me turn the call back over to Steven for discussion of our financial guidance for the third quarter.
Stephen Cumming - Vice President of Finance and Chief Financial Officer
Thank you, Steve. To better manage distribution resources on July the 1st 2008, Atmel implemented a change in revenue recognition with regards to its independent distributors in Europe, converting from a sell in, to a sell through revenue model. As a result, the company expects there will be a one-time revenue reduction of approximately $28 million to $34 million for third quarter revenues, including this one-time accounting adjustments, third quarter 2008 revenues are expected to be down 3% to 7% sequentially.
Exclusive of this change and consistent with the business seasonality and macroeconomic trend the company anticipates third quarter of 2008 revenues would be up 1% to 4% on a sequential basis.
Looking at our expectations for gross profit going forward due primarily to the closure of North Tyneside and improved loadings at our remaining fabs we expect 125 basis points improvement in third quarter of 2008 plus or minus 50 basis points.
Based on a dollar-euro exchange rate, we anticipate will average approximately $1.57 in Q3; operating expenses are expected to be approximately $134 million plus or minus $2 million for the third quarter of 2008.
Quantum acquisition related cost are expected to be approximately $7 million each quarter in 2008, in addition the provisions to income taxes is expected to be in the range of $3 million to $4 million for the third quarter.
This concludes our prepared remarks we will now open the call for your questions.
Question And Answer
Operator
[Operator Instructions]. Our first question comes from the line of Suji De Silva with Kaufman Brothers. Please go ahead with your question.
Suji De Silva - Kaufman Brothers
Hi, guys nice job on the quarter and Steven welcome aboard, look forward to working with you.
Stephen Cumming - Vice President of Finance and Chief Financial Officer
Thank you.
Suji De Silva - Kaufman Brothers
On the France initiatives that you are just announcing, what would say abut the timing of those Steve at this potential it will be driving the timing for them and then what could be some of the financial scenarios you would envision coming out of that review?
Steven Laub - President and Chief Executive Officer
Yes, hi, Suji, this Steve Laub. So let me tell you we can share at this point which is actually rather limited. We've made proposals to the French works council on potential redundancies of approximately 210 employees hoping that we say and non facilities [ph].
The discussions we have had with the works councils is expected to take it's cost for two to three months, and the best we can tell you to our more definitive information of full year, once we've completed that consultation process.
Suji De Silva - Kaufman Brothers
Okay, and then what's over the timing Steve just to understand?
Steven Laub - President and Chief Executive Officer
We're doing the timing out of -- ?
Suji De Silva - Kaufman Brothers
Of the review, you're starting to review at this point?
Steven Laub - President and Chief Executive Officer
I think the best thing for us given the parameters of this process of these it's called a social plan, that's the best thing first this point is really not to discuss any further of the respective context of that.
Suji De Silva - Kaufman Brothers
Fair enough. And then switching topics on the segments can you talk about your outlook for the third quarter by the segment?
Steven Laub - President and Chief Executive Officer
Yes, respect to the third quarter, and this is will alluded, we would say excluding the adjustment we are making because of the change in our European distributions a revenue recognition model.
In case we're assuming the 1% to 4% growth, excluding that, our outlook would be for example, our market controller business, should grow about approximately 5% sequentially. You should assume that our memory businesses would be at about... probably double-digits, sort of low double-digits sequentially.
The other businesses for us during the summer ASIC's business is essentially flat and I think we should expect that the RF and Automotive business is probably slightly down on a sequential basis, primarily due to seasonality, I think those have been... is in the European locations.
Suji De Silva - Kaufman Brothers
Got you and what's driving the recovery in memory Steven, is this pricing becoming more stable there or some other factors?
Steven Laub - President and Chief Executive Officer
We are seeing both pricing is more stable and we're also saying that this is a seasonal quarter as well for memory business which is you start getting a lot of orders and shipments due to people ordering ahead of a holiday build.
Suji De Silva - Kaufman Brothers
Got you. And then last question Steven, you have a cash build that could work with here, what do you're thinking about in terms of buybacks or especially additional acquisitions for the funds you have versus the macro economy and trying to kind of greater than [ph] Thanks Steve.
Steven Laub - President and Chief Executive Officer
With respect to our cash position, the cash we have three different at least three different purposes, one is obviously standard business requirements that we have.
Secondly, clearly with respect to issues such as stock buybacks and so forth our acquisition. On stock buybacks, still we can talk about before we'd actually do that, but I think given the macro environment, people are hesitant right now to do much activity there, as far as comparing that to perhaps holding on your cash and using it for potentially business purposes, depending what happens in the macro environment.
Also in respect to activities that we have our acquisition, clearly we did the acquisition of the Quantum Research Group, we are not... that's again certain acquisitions is, as a company we continue to evaluate different things.
But essentially we will only do those things that are very strategic for our core business and finally with respect to our cash also we have certain business deeds as this company is going through a process of looking at different and evaluating alternative both asset divestures as well restructuring initiatives with some of the restructuring initiatives are utilized a fair amount cash. So we make sure that we have plenty of cash going for those activities as well.
Operator
Our next question is from the line of Craig Berger with FBR Capital Markets.
Craig Berger - FBR Capital Market
Hi guys, how is it going?
Steven Laub - President and Chief Executive Officer
Good, how are doing you Craig?
Craig Berger - FBR Capital Market
Doing well, can you talk about order visibility in recent weeks are things stabilizing getting better, getting worse?
Steven Laub - President and Chief Executive Officer
Order for us so our backlog for the quarter just to give you a sense for that is actually higher than it was at the same time of last quarter and year ago quarter. So the numbers that we're giving you guys as far as our outlook for the quarter. So we are actually selling relatively... on a relative basis we're feeling reasonably comfortable at this point with respect to our backlog and coverage for the quarter number.
With respect to the trends and bookings and so forth we have not seen anything at this point that would indicate to us any change with respect to that. So we're seeing as an industry, this industry so far we delved into many, continues to be I think a little bit healthier with some of the other industries in the general economy.
Obviously, this is a seasonal quarter, the end of summer quarter so Europe for example, is soft to this quarter typically and so of course we're also mindful of that but overall right now I would say there is nothing to indicate to us, any particular correction positive or negative respect to the trends we are seeing.
Craig Berger - FBR Capital Market
Okay. On the French works seeing how much is this 210 employee save you?
Steven Laub - President and Chief Executive Officer
We are not at liberty to discuss that and right now, this is a proposal that we have made to the works counsels, this is consultative process and so the final, the final conclusion is to how that comes out is much to refer us at this point to give you any sense for that.
Craig Berger - FBR Capital Market
With respect to the microcontrollers up 9% sequential that's nice, congrats how much of that is the Quantum contribution in the quarter.
Steven Laub - President and Chief Executive Officer
Since we are not breaking out comps specifically the one thing I'll share with you is, you guys do have a sense for much AVR businesses is, and how much the ARM business is and actually the C51 but the Quantum contributed I'll give a little bit of indication and Quantum contributed to this particular quarter on that and I thought I will give you much contribution after this particular conference call going forward. But I would say roughly 3% to 4% I think of the... for the revenues for the business.
Craig Berger - FBR Capital Market
Great. And what's your design win outlook look like and I guess in microcontrollers or for the Quantum capacity of products in particular?
Steven Laub - President and Chief Executive Officer
We are seeing a very significant level of design activity, desired winds with some, very impressive OEFs we feel very, very good about the acquisition, feel very good about the momentum of that.
Craig Berger - FBR Capital Market
Any update on Heilbronn or other fab rationalization projects?
Steven Laub - President and Chief Executive Officer
With respect to Heilbronn I think there was one indication that were hired because we are actively in the sales process with respect to that, that will announce that to obviously we are at a point where its profit to announce, with respect to other activities I think it's a premature to talk about that at this time.
Craig Berger - FBR Capital Market
Okay, thanks guys.
Steven Laub - President and Chief Executive Officer
Thank you.
Operator
Our next question is from a line of Edwin Mok with Needham & Company.
Edwin Mok - Needham & Company
Hi, thanks. I will start by saying what is your current headcount right now. I know you can talk about your European headcount values give some detail on that?
Steven Laub - President and Chief Executive Officer
I think the best I could share with you Edward is I think our headcounts at the end of 2006 was about 8,000 employees and our headcounts today is probably under 7,000 employees.
Edwin Mok - Needham & Company
Great and then actually in the current quarter do you guys still expect to see any revenue from the core foundry business?
Steven Laub - President and Chief Executive Officer
In the current quarter?
Edwin Mok - Needham & Company
Yes.
Steven Laub - President and Chief Executive Officer
We will see a single-digit revenue from the core company.
Edwin Mok - Needham & Company
Great. Regarding the change of revenue recognition in the French. I was wondering at this did you guys sell everything in euro base, or you actually have some U.S. dollar base and by changing that revenue recognition, can you switch everything to euro base just to do some natural hedge here?
Steven Laub - President and Chief Executive Officer
Most of the sales for European industries are euro based already so that's fully panel some only the OEM business in Europe is both euro as well as dollar so there is a mixture of the OEM side. But the industry side is primarily euro, so its really not going to change that mixture with respect to the way we are changing the revenue recognition.
Edwin Mok - Needham & Company
I see you don't expect to see much benefit from in terms of euro exchange rate in that part of the business right now?
Steven Laub - President and Chief Executive Officer
That's correct.
Edwin Mok - Needham & Company
I see. Great. One more question. On the... you talked a little bit about volatile memory pricing. What about pricing for your auto products. Have you seen any unusual pricing pressure or you know better pricing. Why don't they expect the pricing trend in any of the auto products?
Steven Laub - President and Chief Executive Officer
I think the best way to think is pricing for the products is relatively normal environment. In this industry pricing is always going down. We're not seeing any particular activities, which would say that pricing is either stronger for us, or that's more aggressive with the exception of memory.
Edwin Mok - Needham & Company
Great that's all I got. Thanks.
Operator
Our next question is from the line Dough Freedman with AmTech Research.
Dough Freedman - AmTech Research
Hi guys. Thanks for taking my question. I guess if you could start with, what is the present fab utilization that you're running? If you want to give an aggregate or by location?
Stephen Cumming - Vice President of Finance and Chief Financial Officer
Yes. Dough we're currently running at a blended rate of about 95%, and the expectations so long as the business environment remains steady is that utilization of the fabs will remain around that level. As you know we are working with outside foundries to manage our requirements above and beyond the internal fab capacity.
Dough Freedman - AmTech Research
Okay, what is your present external fab? What percentage is coming from external?
Steven Laub - President and Chief Executive Officer
At this point, it's still less than 5%. One of the things that's happened with respect to the closure and the sale of the assets in North Tyneside we've moved the production from that facility to both the Colorado facility as well as we to Rousset, France fab and what's that's done it allowed us to run those fabs at a much higher utilization level. We expect that going forward as our requirements go up we will be moving more and more production to outside foundry. But what we're seeing is really the benefits of the increased utilization and wafer costs, because of that in our existing facilities. I think you can talk from the capital expenditures or the very small amount of capital expenditures that we're doing. We're not expanding capacity in our existing facilities. But we aren't extending capacity from a equipment standpoint. We're actually working at expanding capacity from a productivity standpoint.
Dough Freedman - AmTech Research
Got it. I mean I noticed with your guidance, if I was to include the revenues from the facility [ph] change and your gross margin guidance. If I understand correctly. You're going to be pretty close to 38%, that had been the target by the end of the year. I just want to make sure that we are going to be modeling this right. The number you're going to report is going to be number well less than that, because you're still going to have all those costs with less revenues correct?
Stephen Cumming - Vice President of Finance and Chief Financial Officer
No. Actually it's a very good question you're asking. And it's a question we want to make sure you guys understood. The number that was forecasted to you with respect to gross margin takes into account the one-time revenue adjustment.
Dough Freedman - AmTech Research
Okay, all right, moving on, if I was to look at your comment about backlog being up. I just want to make sure that it's a backlog isn't ageing. Are turns required for the quarter decreasing, meaning that backlog really in the 90 day window is up or is backlog starting to expand and guys are giving you visibility?
Stephen Cumming - Vice President of Finance and Chief Financial Officer
Yes what we are largely seeing is the backlog is fairly well filled within this quarter we are in its not stretching out above and beyond this current quarter. So it does mean that we don't require excessive turns to get to our full cost in outlook.
Dough Freedman - AmTech Research
All right, longer term Steve do you... are you felling comfortable now that you have done a good job on the gross margin so far in reducing the manufacturing costs? You want to give us some sort of where you think it will be somewhere next year?
Steven Laub - President and Chief Executive Officer
I am not going to give you a number for next year yet, I think there is no need for that but we'll work on that for the next call. But I can't tell you, our expectation is that yes we are going to see the 125 basis point improvement plus or minus 50 this quarter even with the one-time revenue adjustment. We expect to see an increase in Q4 as well, not as significant but nevertheless an increase in Q4 as well.
So we should be assuming of course that the business remains relatively healthy which it is today. And assuming of course if exchange rate doesn't go through any more negativity for us which dampens the dollar continue to depreciate. We should be at the 38% target that we earlier talked about with respect to closing out Q4 closing out this year with respect to gross margin. As we go into 2009 we do expect gross margin continue to go up and we will give you guys more guidance on that I think in our next call.
Dough Freedman - AmTech Research
All right, great. Thank you so much.
Steven Laub - President and Chief Executive Officer
Thank you.
Operator
[Operator Instructions]. Our next question is from the line of Kevin Rottinghaus with Cleveland Research.
Kevin Rottinghaus - ClevelandResearch
Thanks, can you hear me.
Steven Laub - President and Chief Executive Officer
Yes.
Kevin Rottinghaus - ClevelandResearch
Okay. What products are you running through foundry now and could you update us on which foundry exactly you are using?
Steven Laub - President and Chief Executive Officer
We don't really break out which particular products we're running through the foundries at this point it's a mix we're processing [ph] it doesn't really help you because it's just a small percent of out total production. The foundry that we are using today primarily are UMC. And also we're doing a little bit of a extra out [ph] as well and a little bit of TSMC.
Kevin Rottinghaus - ClevelandResearch
Okay. The lead times in that your product lines and microcontroller in the product lines are they extending or they've stayed relatively stable?
Steven Laub - President and Chief Executive Officer
Little bit of extended lead time in microcontroller area and to some extension lead time also in the automotive area. But there is still relatively healthy withstand from a customer standpoint but they are a little bit stretched up than they were say a quarter ago.
Kevin Rottinghaus - ClevelandResearch
Okay. And jump back a little bit the OpEx line the legal fees there for the fab sale, does that encompass the whole I guess $5 million growth that we saw in 2Q or whether something else there as well or I guess how much of the $5 million currency in there how much of the $5 million I guess is legal?
Stephen Cumming - Vice President of Finance and Chief Financial Officer
Yes, so Kevin this is Stephen Cumming to be honest most of that was going to be the impact of the FX changes I would say about over $3 million of it was that and the remainder was the legal expenses.
Kevin Rottinghaus - ClevelandResearch
Okay and I guess Steve you still forecast with I think you said mid year getting some resolution without that
Steven Laub - President and Chief Executive Officer
With respect to the fab in Germany?
Kevin Rottinghaus - ClevelandResearch
Yes.
Steven Laub - President and Chief Executive Officer
its these kind of transactions are delinquent to predict but we are actively engaged in selling the fab and our expectation is that certainly we will sell our expectation is that we should hopefully have an announcement for you guys this quarter.
Kevin Rottinghaus - ClevelandResearch
Okay, and last question, and I'll jump back in the queue assuming everything stayed the same in the business environment right know, how much... how would the change that you're making in distribution flow through results in 4Q, you outlined how much you may miss in 3Q but how much would come back, or how should flow through the P&L in 4Q?
Steven Laub - President and Chief Executive Officer
We expect the impact in the fourth quarter to be insignificant.
Kevin Rottinghaus - ClevelandResearch
And will you recover any of the 28 to 30 plus that you will lose this quarter, I mean--
Steven Laub - President and Chief Executive Officer
Yes the indications that you are having, just having a change with respect to that inventory, that's a one-time adjustment because of the fact you have made this change between sale in or ship in versus sell through but you will have a... you will have in the fourth quarter the revenue that you would have expected other wise had in the fourth quarter.
So for example if we did a 1% to 4% percent growth this quarter and let's say for example, we anticipated another 1% to 4% in the fourth quarter, the fourth quarter number would be that number, it will be some different number from that.
Kevin Rottinghaus - ClevelandResearch
Okay, great thank you.
Steven Laub - President and Chief Executive Officer
Yes.
Operator
Our next question is from the line of Hans Mosesmann with Raymond James.
Hans Mosesmann - Raymond James
Thanks, Steve a little more detail on the Quantum Research dynamic over at the top tier handset OEMs are those relationships or engagements, chip design wins or the IP and do they include microcontrollers?
Steven Laub - President and Chief Executive Officer
The answer is sometimes it's IP, but the micro controller they must that they are using with the IP is ours, so the answers is yes, it does include the microcontrollers, but the actual transaction or the way that the agreement maybe performed or done with the customer maybe that they want to do an IP agreement and then they want to buy the microcontroller separately or they don't want to do part of together and we do it either way, the either way its our micro that starts servicing that... that particular application.
Hans Mosesmann - Raymond James
So you've structured it so that you can't use another or they can't use another microcontroller if they wanted to?
Steven Laub - President and Chief Executive Officer
I don't want get into specifically what we can or cannot do but I could assure you that it's using our micros with the IP.
Hans Mosesmann - Raymond James
Okay. And then a follow-up on the revenue recognition issue with that European distribution does that have anything to do with your proposal with or your engagement with the works council?
Steven Laub - President and Chief Executive Officer
No it will depend on the events the reason we made this change and most other companies by the way especially those who have proprietary products do recognize or use ship in debit model and then recognize revenue as a sell through and we do that by the way in North America. The reason that we're doing that in Europe now, is it allows us to implement and work with the distributors to put in our programs to reward proprietary product designs.
And so what this does, it allows us to pay higher margin, what the distributor is doing actual demand creation for us, and driving the designs, and they could be trapped. And so, it's really a win, win for us, and for them, because it allows us to help motivate and sent them to do the kind of thing we want them do for example which is design our microcontroller products in our customers. And so, that's why we did it. It's completely independent of the other activity.
Hans Mosesmann - Raymond James
Very well, thanks. Congrats on the quarter.
Steven Laub - President and Chief Executive Officer
Thank you.
Stephen Cumming - Vice President of Finance and Chief Financial Officer
Thank you.
Operator
Our next question is a follow-up from the line of Edwin Mok, with Needham & Company.
Edwin Mok - Needham & Company
Thanks, first question is regarding OpEx. Let me just clear, right that's $134 million it's excluding the $70 million number that you have referred for restructuring, right?
Stephen Cumming - Vice President of Finance and Chief Financial Officer
Yes, that's correct, Ed.
Edwin Mok - Needham & Company
That is correct right, and that $134 million is lower than what you guys are have done in the June quarter, how do we visualize OpEx going forward, do we expect... more cost reduction in OpEx going forward, excluding the such things obviously is unclear right now so --
Steven Laub - President and Chief Executive Officer
I think one of things that's important to say when is, we've recognize there is too many levels that coming into focus on right, one is gross profit, and one is operating expenses.
And from gross profit standpoint, I think you guys will now begin to really see the impact of some of the steps in actually that we've taken over the past 12 to 18 months and specifically the impact of the fab change and so forth.
And you'll also begin to see the impact I think next year, or the move to one, utilizing our existing fabs that are very high utilization and then utilizing outside foundry for all the production requirements above that.
And so I think that's one of reason that as I talked about 2009, I expect to see gross margin continue to improve for us, because we'll beginning at that point, we are getting a lower cost rate for some existing facilities as well as getting lower cost rates from foundry. And we've actually put in place some programs in our existing fabs to raise the productivity there as well which will give in lower cost as well. So I think one of the things we'll see is we'll see continued growth profit improvement I think much this year nut throughout 2009, and beyond by the way.
Secondly because everybody we assist that that we have as a target as a company 45% gross margin and that's not something that we are we are going to take for able to get to, that's something we take very seriously here. The second thing, it's from an operating expense standpoint, we've been really adverse impacted by the dollar-euro exchange rate.
We've done some analysis here to take a look if the exchange rate hasn't changed we've be about 30% right now. If hadn't changed in the last two years our OpEx as percentage of revenues would be about 30% today. Now we recognize it's a 32.5% a rate driven by that and so what we are going to do is we are work term model to get it below 30% and so that's going to require us to take certain actions to do so, which will be putting....putting freezes on certain places for additional hiring and making changes with respect to how we're doing that today or how we doing some of our sales and G&A activities and functions. It will require changes. It will require probably some reductions in certain areas and we are fully prepared to do that.
Edwin Mok - Needham & Company
Great. That was really very helpful Steven. Sorry to be the dead horse, but the 210 employees that you mentioned on the French... France. Is that above the line or below the line?
Steven Laub - President and Chief Executive Officer
Again, we're not able really to comment on anything, because this is really a proposal that we make and nothing at all is really definitive until after consultation with the first councils.
Edwin Mok - Needham & Company
That's fair. And then one last question on OEM. Regarding depreciation, do you guys have a guidance for the year, this year and may be outlook for next year?
Stephen Cumming - Vice President of Finance and Chief Financial Officer
Yes, for the rest of this year when, I don't it's really changed much. It's about the, we'll be tracking about a $130 million this year.
Edwin Mok - Needham & Company
Great thanks.
Operator
[Operator Instructions]. Our next question is from the line of Craig Berger with FBR Capital Market.
Craig Berger - FBR Capital Market
Thanks for taking the follow up. Can you just remind us how much RF foundry business you guys still do, if any?
Steven Laub - President and Chief Executive Officer
Sure, so Craig just to let you know the RF foundry business was specifically...I think what you are talking about is look at the business we do for the particular handset, our IP handset manufacturer which is what way I'm going to answer this question. That business this pass quarter was approximately $4 million.
Craig Berger - FBR Capital Market
$4 million.
Steven Laub - President and Chief Executive Officer
Yes, and that was down by the way sequentially to share with you down about $4 million so on a sequential basis and on year-over-year basis, it is down almost $13 million, so again our numbers indicate that we're grew 4% year-over-year despite the fact that we dropped $13 million, but that one we took [ph] customer.
Craig Berger - FBR Capital Market
Are you guys doing any RF products?
Steven Laub - President and Chief Executive Officer
From a foundry standpoint.
Craig Berger - FBR Capital Market
No just regular.
Steven Laub - President and Chief Executive Officer
We do automotive RF products. We do...for example we do remote centrally [ph] products. We do RF products that we do with our micros. So they are...those are the one's that we do of own products, our RF business and RF foundry. There really isn't too much other that we do besides what we've been doing.
Craig Berger - FBR Capital Market
And you could going to my next question. Can you just give us any color on the automotive sector. Is it stable or is it shrinking at the back half?
Steven Laub - President and Chief Executive Officer
It's tight, but it's actually been growing, and it grew sequentially as well year-over-year. Again you separate out the RF foundry business and our expectation in the back half of the year as the business will be essentially flat for both Q3 and Q4, on a special basis.
Craig Berger - FBR Capital Market
Last question, on the 45% gross margin target, have you guys have set what revenue levels you need to achieve that or any other pre conditions that would need to happen in order to get there?
Steven Laub - President and Chief Executive Officer
We've not said about what revenue levels we would need to achieve that and probably of achieving there is to me is obviously revenue levels are relevant but that's not the most essential component. My sense is to achieve that we're going to have achieve an ability to attain not lower cost wafers within our wafers at a price we're consistent with what our competitors have achieved and what outside foundries has achieved.
Craig Berger - FBR Capital Market
Great. Thank you guys.
Operator
Our next question is from the line of Kevin Rottinghaus with Cleveland Research.
Kevin Rottinghaus - ClevelandResearch
Thanks the handset design when you talked about to call some are we starting to see those at all now or when should we really start to see the impact from those.
Steven Laub - President and Chief Executive Officer
Actually we are going to see the impact of those now a large part of our growth this past quarter on sequential basis on that business was from two of those the top four handset manufacturers. So we are going to see that and we expect to be ramping throughout this year and next year.
Kevin Rottinghaus - ClevelandResearch
Okay and in that just expanding into new platforms or is that expanding with new OEM's or what going to drive it over the next year.
Steven Laub - President and Chief Executive Officer
It's actually both its going to be expansion that the fact that a lot of these handset manufactures are taking this technology and extending it more modern model. it's also winning designs are using more of the touch screen type technologies which we will be participating with these manufactures and it's a fact that we'll be penetrating and we are saying that now.
Wining designs in new manufactures as well. So expansion with an existing manufacturers, and penetration to our lets say the other two in the top four as well as number five and six are in this triple area [ph]
Kevin Rottinghaus - ClevelandResearch
Okay, and maybe I didn't catch this but, did you say give any expectations for how long you expect this strategic review to last?
Steven Laub - President and Chief Executive Officer
We said for approximately two to three months, those are mutual understanding, but again this is a review of that, may take longer than that probably not going to be shorter than that. But our expectation is two to three months.
Kevin Rottinghaus - ClevelandResearch
And is there potential this is wider than kind of a the target you originally set off in your reviewing 210 employees or narrower at the end of that?
Steven Laub - President and Chief Executive Officer
Again, all I can share is what we have stated here, which is we made a proposal for a approximately 210 employees.
Kevin Rottinghaus - ClevelandResearch
Okay, thank you.
Steven Laub - President and Chief Executive Officer
Thank you.
Operator
Our next question is from the line of Suji De Silva, with Kaufman Brothers.
Suji De Silva - Kaufman Brothers
Hi, guys couple of quick follow ups, At this point are you a 100% sale through with the conversion in Europe?
Steven Laub - President and Chief Executive Officer
We are --
Stephen Cumming - Vice President of Finance and Chief Financial Officer
We will be about 90% sale through in Europe once we go through this conversion in Q3.
Suji De Silva - Kaufman Brothers
Okay so not completed and then can you remind us what the 4Q seasonally is typically?
Steven Laub - President and Chief Executive Officer
The fourth quarter historically and it should be a quarter that is probably up relative to Q3 and the Q1 is you look at the quarter that's down because of post business and China's new year.
Suji De Silva - Kaufman Brothers
And I know Quantum is smaller base in AVR can you talk about which way you think it will grow faster on a relative basis of the two?
Steven Laub - President and Chief Executive Officer
Between quantum and AVR?
Suji De Silva - Kaufman Brothers
Yes
Steven Laub - President and Chief Executive Officer
I'll tell you, I would expect them on percentage basis I would Quantum to go much faster than AVR.
Suji De Silva - Kaufman Brothers
Okay sure and lastly can you talk about the quantum competitiveness?
Steven Laub - President and Chief Executive Officer
If Quantum hits the numbers I expect from AVR then I will be very, very happy.
Suji De Silva - Kaufman Brothers
Okay fair enough, and then lastly can talk about Quantum competitive landscape you guys will be doing all there? Thanks.
Steven Laub - President and Chief Executive Officer
Competitively I will say that, it was a lot of people now that are going in to this space, so I expect more and more people to get into this space overtime.
I think that the decision we made to get in with a proven leader in there it's big defense force, because there we have got ability and customer want to work for somebody that they can trust, we really have the solution so credit bill [ph] is very, very important here.
I would say that from the standpoint of what we see, such as the soft solutions is something that we do see in the space and we do see a couple other people as well as our primary sort of alternate supplier.
Suji De Silva - Kaufman Brothers
Okay thanks.
Steven Laub - President and Chief Executive Officer
Thank you.
Operator
Mr. Pursel there are no further questions at this time. Are there any closing remarks?
Robert Pursel - Director of Investor Relations
Yes, Christian, thank you. During the third quarter, Atmel will be participating in several investor conferences on August 7th, Atmel will be participating and Steve Laub, will be presenting at the RBC North American Technology Conference in San Francisco. And on September 3rd, Atmel will be presenting at the Kaufman Brothers 11th Investor Conference in New York City.
Webcast information for these events will be published on the company's Investor Relations website. This concludes our conference call. Thank you for joining us today.
Operator
Ladies and gentlemen this concludes the Atmel second quarter 2008 earnings release conference call. You may now disconnect.
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