Wednesday, May 2, 2007

Atmel (ATML) Gets Skinny

Atmel makes semiconductor chips, notably microcontrollers and microprocessors for embedded systems. These kinds of chips are used everywhere these days: consumer electronics including cell phones, automobiles, kitchen appliances, toys, industrial control systems all incorporate them. The demand for them has grown rapidly and is expected to continue to grow rapidly. But the 21st century has been difficult for Atmel investors so far.

There is new management at Atmel. Though they seem to be putting things to right, we don't even have clear hindsight because the company is still preparing an accounting restatement due to misdating of stock option compensation.

The new stategy is to get skinny. This isn't just a matter of propping up earnings by cutting costs and employee head count. The company has disposed of assets. It has taken a look at its many lines of semiconductor chips and has dropped some; it is looking at dropping some more. It wants to compete only in the profitable segments of the industry where it has a competitive advantage. When you are up against the likes of Microchip, Freescale, and Texas Instruments, to name just some top competitors, that sounds like a good idea.

In 1999 Atmel was a hot company for investors, a member of the Nasdaq 100, rocketing from just under $2 per share to over $30 per share in just over a year. In 2001 volatility was high but the general trend was downward as orders started shrinking with the economy. For a time in 2002 you could buy the stock for well under $2 per share. Quarter after quarter passed with net losses and profitability just two quarters away. You know the drill.

All through this Atmel produced some very good products that were popular with engineers designing all kinds of gizmos. They sold lots of chips. It really seemed like a management problem, and finally the old management was ousted in 2006.

Atmel reported first quarter 2007 results yesterday and had their analyst conference (See my summary). Like much of the semiconductor industry they saw a slump in the second half of 2006 that was due mainly to inventory corrections at end users, and partly due to weakness in demand in certain communications sectors. Q1 revenues of $391 million were down 4% sequentially and 2% from year earlier on a comparable basis. In 2006 they sold their Grenoble operation; the numbers discount that.

Not much was reported in accounting details but their cash position grew by $34.5 million to end at $478.7 million. That should be a sign that they had net income non-GAAP if not GAAP.

Another important piece of news was they announced the sale of their Irvine Texas wafer facility for $38 million. So they will have even more cash going forward. They will be outsourcing manufacturing when necessary; that model has worked well for several companies.

Market capitalization as I write this stands at $2.7 billion, so cash is around 17.5% of market cap. It is not a buy for cash hounds, but it is a nice amount that could be used to make acquisitions, pay dividends, or do a stock buy back. Management won't announce any plans for the cash until they are caught up with their accounting and SEC filings.

Atmel has four business segments, all contributing between 20 and 30% of revenues. Two have not done well lately: memory products and ASICs (application specific ICs). Two have done well: microcontrollers and automotive/RF (radio frequency).

Atmel has stopped developing certain new products such as mobile phone baseband, wireless LAN, VoIP, USB, and digital audio broadcast. They don't feel they can compete profitably in these areas (of course they will sell current lines until demand drops off). They are focusing on their microprocessor/microcontroller lines. Their AVR line of flash microcontrollers is seeing rapid demand growth.

At this point I see Atmel as a healthy company in a highly competive field. They are becoming smaller but more competitive. With energies focussed on profitable products they can rebuild the company and keep an eye out for new opportunities.

As to the stock price, I would like to see the SEC filings before making a call. I would like to see a couple of quarters, at least, of net income. And I would like to see if Q2 revenues meet guidance of up 1% to 4% sequentially.

You can also look at my Atmel page.

You can see a list of companies whose analyst conferences I summarize.

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