Atmel To Increase Touch Sensor Production Capacity To 1 Billion In 2013

| About: Atmel Corporation (ATML)
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"We will therefore have a surge capacity available in 2013 for up to one billion screens per annum." is what Carclo's (OTCPK:CCEGF) chief executive Ian Williamson stated in Carclo's latest earnings report, speaking about Carclo's subsidiary Conductive Inkjet Technologies ("CIT") and its partnership with Atmel.

Atmel (NASDAQ:ATML) and CIT have joined forces to utilize CIT's Fine Line Technology high speed reel-to-reel manufacturing process to produce Atmel's newest touch sensor. The process consists of injecting metal lines into film so fine that they are virtually invisible. The result is a flexible touch sensor that is lighter, thinner and easier to apply than traditional Indium Tin Oxide ("ITO") sensors.

"Our touch sensors are around half the cost of the equivalent Indium Tin Oxide ones. At the moment, Indium Tin Oxide is the only material that is used on touch sensors, but indium is very rare and tin is expensive."

The industry has been in search for a feasible alternative to ITO sensors. The reason that touch sensors have not made big inroads into larger screens sizes is because ITO sensor are brittle, heavy, expensive and difficult to install. Atmel's solution to this problem is xSense, its new flexible touch sensor that is ideal for larger from factors. xSense is not a conceptual idea but a real product that is being produced right now in Atmel's production plant in Colorado USA and CIT's production facility in Cambridge UK. Shipments of xSense sensors are due to start this quarter and Atmel has committed the capital to triple its current production capacity and committed further capital to build another production line in 2013. The overall production capacity of xSense will reach to the equivalent of one billion 3.1 inch sensors per annum in 2013.

Atmel will not be increasing manufacturing capacity in this manner if it didn't have a lineup of costumers ready to purchase its product. Touch is a $4 billion industry that is expected to increase to $7.7 billion by 2016. A mayor catalyst for the growth of the touch sensor and controller market is the shift of the Windows OS to a touch interface. Atmel is one of Microsoft's partners for the release Windows 8 and market analysts estimate that Atmel will have 60 percent of the initial Windows 8 designs. Windows 8 will drive the need for touch sensors for larger screen sizes and Atmel has armed itself with a portfolio of Widows 8 certified touch controllers, xSense and a stylus option for the Windows 8 release. It was the 600ppi stylus option that started the rumor about Atmel getting the Microsoft's Surface tablet contract.

Of course Atmel is not aiming to build 1 billion of 3.1 inch sensors; their yield is aimed to meet the demand for larger screen sizes sensors that Windows 8 will drive. Their strategy is not only to sell the sensor but to combo it with Atmel's family of maXTouch controllers. A touch controller for Windows 8 is required to track up to 5 simultaneous touches compared to two touches for a regular smart phone or tablet sensor. These newer touch controllers can be sold for up $6 compared to under $2 for a regular smart phone controller.

Higher revenue with higher margins is Atmel's new war path to take over the touch sensor and controller industry. And with Atmel trading near its 365 day low and its ridiculously low PE of 11.38 there is little risk and a lot of upside for ATML. The question here is not about macroeconomics because the touch sector will continue to grow. The question here is about market share. Will xSense give Atmel the edge it needs to regain its market share or will Atmel's market share continue to erode away by its low cost competitors?

Disclosure: I am long ATML.