We recently reiterated our Neutral recommendation on Atmel Corporation (ATML).
Atmel is in the process of transforming itself into a purely microcontroller-based company, which it believes will improve its cost structure and unlock value. The company is focusing on its core Microcontroller business and is halting development in non-core areas with the aim of targeting high-growth and high-margin businesses.
Atmel Corporation’s top-line growth continues to accelerate, driven by solid growth in 8-bit and 32-bit microcontrollers and touch sensing products. The company’s 8-bit microcontroller revenues continue to show strength. In addition, the 32-bit microcontrollers also continue to gain traction.
Microcontrollers are poised to grow significantly as the economy revives due to their versatile application in various end-markets, such as communications, industrial, automotive, computer, and consumer. Atmel is well placed in the microcontroller market as the company is now one of the top ten players in this segment.
With the acquisition of Quantum in 2008, the company launched numerous new products into the fast-growing capacitive touch sensing market. Management estimates that capacitive sensing products will rapidly penetrate into the overall touch sensing market, which in turn, is expected to grow from over $ 1 billion in 2007 to more than $ 3 billion in 2011. Atmel is aggressively marketing its new MaxTouch technology.
Touch-sensing technology is the fastest growing area in Atmel's microcontroller business and is expected to remain a major growth driver in the coming quarters. As smartphones become ubiquitous in use, touch sensing products will continue to gain traction. Moreover, Atmel has strong ties with Nokia (NOK), Motorola, Sharp, Toshiba, HTC and Samsung.
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 the microcontroller customers.
Management has been taking steps to streamline the workforce and improve profitability in response to the challenging economic environment. These actions include selling non-core wafer fabrication operations, consolidating or eliminating numerous product lines.
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. The sale of the Rousset manufacturing operation marks a significant step in Atmel’s transformation to a “fab-lite” supply chain structure with lower fixed costs. The company has already reduced its wafer fabrication facilities from five to one.
Estimates have been more or less static in the last sixty days. Given the recent run up in the stock price, we see limited upside going forward and hence maintain our NEUTRAL recommendation. Our recommendation is supported by the Zacks #3 Rank, which translates into a short-term rating of Hold.
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