Touchscreen chipmaker Atmel Corporation (ATML) reported third-quarter 2014 adjusted earnings (including stock-based compensation expenses) of 8 cents per share, up 14.3% from 7 cents per share in the year-ago quarter, and in line with the Zacks Consensus Estimate. The bottom line was driven by broad-based revenue growth, combined with strong execution of cost-control initiatives.
However, despite year-over-year revenue growth, Atmel expects slowing semiconductor industry trends and softening end-market demand to hurt its top line in the coming quarters.
Share price fell over 9% in early trade yesterday, but later recovered some of the losses to close at $6.95, registering a drop of nearly 4% in the trading session following the earnings release.
Financial Details
Atmel witnessed net revenue growth across the board, as sales aggregated $374.5 million for the quarter, up 5.1% year over year. Revenues were driven by robust performance in the core microcontroller business and considerable new product introductions, partially offset by weakness in the mobile market led by slowing tablet demand. Net revenue beat the Zacks Consensus Estimate of $373 million by a whisker.
Geographically, Atmel enjoyed sequential improvement in sales in all regions, with America standing out as the strongest region. Asia accounted for 59% of total revenue, while EMEA (Europe, Middle East and Africa) and the Americas contributed 24% and 17% of revenues, respectively.
Adjusted gross margin improved for the sixth successive quarter to 47%, up 390 basis points from the prior-year period. Atmel’s operating margins also climbed an impressive 410 basis points year over year to 14.7%. Successful execution of its planned cost-reduction strategies led to the notable margin expansion.
Quarter Developments
During the reported quarter, Atmel acquired Wi-Fi and Bluetooth solutions maker Newport Media to increase its footprint in the ‘Internet of Things’ (IoT) market. Integration of Newport Media’s solutions will enable Atmel to create the industry’s most comprehensive wireless portfolio of smart connected devices for the IoT market.
Additionally, Atmel expanded its offerings with two new turn-key system-on-chips (SoCs) and four new modules featuring these SoCs to offer compatible solutions for battery-powered IoT applications. These products will aid in making smaller and faster IoT devices with low power consumption and optimized battery performance, and have applications in industrial, healthcare, smart energy, residential and wearable markets.
Atmel also announced a partnership with ARM Holding plc (ARM) on their mbed IoT device platform and an alliance with IHR to expand its automotive offerings.
Balance Sheet and Cash Flow
The company ended the quarter with combined cash balance of $219.9 million, down $44.1 million sequentially. The decrease in the cash balance was on account of the Newport Media acquisition as well as stock repurchases. Cash provided by operations in the reported quarter totaled $43.9 million, down significantly from $82.1 million in the year-ago period.
As part of its share repurchase program, Atmel repurchased 2.9 million shares during the reported quarter at an average price of $8.50 each. Since the initiation of the share repurchase program in the second-half of 2010, the company has repurchased about $759 million worth of common stock.
Guidance
For the fourth quarter of 2014, the company expects revenues to decline sequentially, and provided a range of $337 million to $356 million. Adjusted gross margin looks set to meet the targeted 49% set by Atmel about 2 years ago as the company expects it to increase by about 200 basis points. Adjusted operating expenses are expected to be flat sequentially.
The weaker revenue outlook is partly attributable to fragility in the semiconductor market that is seeing waning end-market demand. Also, the company is expecting lower demand from two of its largest customers, which will have a significant negative impact on the fourth-quarter sales figure.
Our Take
Industry experts are anticipating a broad slowdown in the semiconductor space, and such negative macroeconomic conditions are expected to affect Atmel as well. However, we expect Atmel’s sustained gross margin expansion and new product launches to fuel growth, going forward. In addition, the recent acquisition of Newport Media is expected to broaden Atmel's Wi-Fi offerings and its RF (radio frequency) technologies, enabling it to capitalize on the lucrative prospects in the IoT market.
Atmel currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the semiconductor industry that are worth a look include Silicon Motion Technology Corp. (SIMO) and FormFactor Inc. (FORM), both sporting a Zacks Rank #1 (Strong Buy).
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