Atmel Reports Solid Quarter - Analyst Blog

Atmel Corporation (ATML) reported a net income of $219.8 million or 47 cents in the third quarter of 2010 compared to a net income of $36.4 million or 8 cents per share in the previous quarter and a net loss of $36 million or 8 cents per share in the year-ago quarter.

Excluding one-time items but including stock-based compensation expense, net income came in at 16 cents per share, easily beating the Zacks Consensus Estimate of 12 cents.

Revenues came in at $444.3 million in the quarter, up 13% sequentially and up 40% from the year-ago quarter. This beat management's expectation of 6%−10% growth on a sequential basis.

Based in San Jose, CA, Atmel designs, develops, manufactures and sells integrated circuit products. The company operates in four segments: Application-Specific Integrated Circuit (ASIC), Microcontrollers, Nonvolatile Memory, Radio Frequency (RF) and Automotives.

On a segment basis, revenues from the Microcontroller business unit − accounting for approximately 57% of total revenues − grew 29% sequentially and 113% year over year to $256 million. The improvement was driven by a solid growth in 8-bit and 32-bit microcontrollers. Atmel saw strength across a broad cross-section of end markets, particularly the consumer and industrial markets.

Atmel experienced rapid growth in areas such as capacitive touch, smart meters, battery powered applications, home and building automation markets, point-of-sale terminals and many other consumer and industrial applications which use the 8-bit and 32-bit microcontrollers. Atmel's leading touch screen solution – maxTouch − recorded strong growth, primarily driven by four largest smartphone customers.

The ASIC business segment generated revenues of $77 million, flat sequentially but down 4% year over year. The smart card business, which generated revenues of $27 million in the third quarter, was sold off at the end of the quarter. Atmel has retained the remaining businesses in the ASIC segment, which primarily comprise custom products leveraging proprietary AVR and ARM microcontroller technologies, as well as the company's aerospace business. Custom ASIC products were up 7% sequentially, driven by a strong demand of security products, point-of-sale terminals, and Pay TV applications. The aerospace business (part of the ASIC segment) was down 18% sequentially. Demand for aerospace products was steady but Atmel was supply-chain constrained due to specialized requirements. However, Atmel expects the revenues to rebound in the fourth quarter.

The Nonvolatile Memory segment posted revenues of $66 million, down 10% sequentially and down 16% from the year-ago quarter. Management stated that the company had lower unit shipments of memory products with higher ASPs for most products due to supply constraints. Atmel has allocated wafer supply to support the growth of its microcontroller business, which would otherwise have been used to support the memory business. This has adversely impacted the memory business revenues. The memory business experienced lower unit shipments but higher selling prices for most products. 

The Radio Frequency (RF) and Automotives segment generated revenues of $45 million, flat sequentially and up 17% from the year-ago quarter.

Asiaaccounted for 58% of revenues, compared to 54% in the prior quarter. Europe contributed 24% of revenues, down from 28% in the prior quarter, driven by the normal seasonality of the summer quarter. The Americas accounted for 18% of total revenues, flat sequentially.

Margins

Moving onto margins, gross margin increased to 47% in the quarter from 41% in the previous quarter and 31% in the year-earlier quarter, surpassing management's guidance of 43%−45%. The sequential improvement was the result of the sale of manufacturing operationsin Rousset, increased factory utilization levels, higher business volumes and a favorable mix of higher margin microcontroller products.

Atmel generated $95.3 million of cash from operating activities in the quarter compared to $49.2 millionin the second quarter of 2010 and $59.4 millionin the third quarter of 2009. Capital expenditures of $27 million in the quarter were up from $12 million in the previous quarter and within the management's guidance range of $25 million–$35 million.

Last quarter, Atmel announced that its board of directors has authorized the company to repurchase shares up to $200 million. During the quarter, the company repurchased 7 million shares at an average price of $5.79.  As of September 30, 2010, Atmel had cash and cash equivalents of $597.4 million, up from $552.2 million at the end of the previous quarter.

Guidance

Atmel has completed the sale of manufacturing operations in Rousset, France, thereby reducing its wafer fabrication facilities from five to one. Atmel also sold its Smart Card business based in Rousset, France and East Kilbride, U.K., to INSIDE Contactless S.A.

Going forward, Atmel expects revenues to be up 2%−6% sequentially in the fourth quarter of 2010, assuming base revenues of $417 million in the third quarter (excluding smart card business). This implies a revenue guidance of $417.0 million−$432.7 million.

Gross margins are projected around 48%−49% driven by improved utilization of manufacturing assets and an increasing mix of microcontroller revenues. With the sale of its Smart Card business, Atmel successfully divested or closed 15 non-core product lines or businesses since early 2007. This has also led to a 35% reduction in the employee base.

Atmel will turn into a purely microcontroller-based company and will focus on its core microcontroller and touch products. Management believes that this move will improve its cost structure and unlock value. Atmel is aggressively marketing its new maxTouch technology. Touch-sensing technology is the fastest growing area in the company's microcontroller business and is expected to remain a major growth driver in the coming quarters. The microcontroller business is now expected to generate over $140 million of revenues in 2010, up from the previous estimate of $100 million, driven by the solid demand of smartphone customers and a continued rapid adoption of maxTouch into new high-volume customers and applications.

Atmel expects Asia to be its fastest growing region, driven by the growth of local electronics companies in Asia and the continued outsourcing of production by large North American and European OEMs, particularly by microcontroller customers.

As expected by management, Atmel continues to see touch-sensing market expand rapidly beyond smartphones into new applications such as tablets, netbooks, cameras, printers, automotive and other areas. Samsung, one of Atmel's smartphone customers, is expected to begin shipments of their recently announced mobile tablet devices.

Atmel has a growing microcontrollers business that should maintain its solid growth, going forward. In anticipation of strong results, we maintain an Outperform recommendation on the stock supported by a Zacks #2 Rank.

 
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