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Atmel restructuring strategy baffles analysts

Posted: 08 May 2008 ?? ?Print Version ?Bookmark and Share

Keywords:Atmel restructuring strategy? semiconductor industry analysts? WiMAX?

Semiconductor industry analysts are focusing on the restructuring of Atmel Corp. following the sale of its WiMAX development group in Germany. Reports did not identify the buyer for the group, but they did indicate that the company's restructuring efforts are far from over.

It begs some simple questions: What's next? Is the worse over for the company? And what is Atmel in the first place?

It's somewhat hard to grasp the company's strategy. In recent times, Atmel has experienced a management coup, fab closures and various product divestments.

The latest move? ''Atmel sold the WiMAX team based in Germany, which should help reduce operating expenses,'' said Edwin Mok, an analyst with Needham & Co. LLC, in a report. ''We believe Atmel may decide to sell other product groups with slower growth or weaker margins.''

''Management made further progress realigning operations by announcing that it sold its WiMAX development team, completing the sale of its fab in North Tyneside, U.K., and actively pursuing the sale of its fab in Heilbronn, Germany,'' said Craig Berger, an analyst with FBR Capital Markets Corp. ''Atmel is a restructuring story, as management works to enrich its mix of high-margin microcontrollers, reduce exposure to expensive fab sites, and rationalize product development toward its best opportunities,'' Berger said.

Performance figures
Atmel reported revenues for Q1 08 at $411.2 million, a 3.4 percent decrease compared to $425.6 million for Q4 07 and a 5.1 percent increase compared to $391.3 million for Q1 07.

Net income for Q1 08 totaled $6.8 million or $0.02 per diluted share. This compares to net income of $1.7 million or $0.00 per diluted share for Q4 07 and net income of $28.9 million or $0.06 per diluted share for Q1 07.

MCU revenue grew 8 percent sequentially in Q1. Non-volatile memory revenues fell 9 percent quarter-over-quarter.

''Atmel's RF/automotive revenues grew 4 percent sequentially. Qualcomm is and has been shifting its transmitter/receiver BiCMOS foundry business away from Atmel, toward another foundry,'' Berger said in a report. ''ASIC revenue fell 13 percent quarter-over-quarter, primarily due to seasonality in its SmartCard business.''

It was not all doom-and-gloom. ''Atmel reported better-than-expected Q1 results and gave better-than-expected Q2 guidance,'' he said. Consistent with business seasonality and general market trends, the company anticipates Q2 08 revenues will be up 0-3 percent on a sequential basis.

Problems, solutions
The company's troubles started a long time ago. Simply put, it had built up too much fab capacity and sunk huge sums in the loss-ridden NOR flash business, causing a wave of red ink at the company.

On a positive note, there has been some stability at the company in recent times. In 2006, amid a stock-option probe and other issues, Atmel fired George Perlegos, its president and CEO, and three others over alleged misuse of corporate travel funds.

At the time, Atmel named Steven Laub, a director, as the company's president and CEO. Laub is still in charge of the company. Last year, Perlegos attempted to regain control of Atmel, but those efforts failed after a long and bitter proxy battle.

Even before the management mess, Atmel had been backpeddling and moving to dismantle its IDM-like strategy. In 2005, for example, Atmel's fab in Nantes, France, was sold to XbyBus, a France-based components supplier.

Seeking to cut more costs, Atmel in July 2006 sold its Grenoble, France subsidiary and a wafer fab in that location to e2v technologies plc for approximately $140 million in cash.

Then, moving towards a ''fab lite'' strategy, Atmel recently moved to sell two fabs and reduced its headcount by 1,300 employees. At the time, it was looking to sell its wafer fab in North Tyneside and Heilbronn.

In May 2007, Atmel sold its wafer fab in Irving, Texas, to Maxim Integrated Products Inc. for about $38 million. Then, in July 2007, Atmel sold its network storage unit to MoSys Inc. for an undisclosed sum.

And in October of 2007, Atmel entered into separate agreements with Taiwan Semiconductor Manufacturing Co. Ltd and Highbridge Business Park Ltd for the sale of its 8-inch wafer fabrication equipment and related property located in North Tyneside.

Under the terms, TSMC agreed to purchase Atmel's 8-inch wafer fabrication equipment. Highbridge Business Park Ltd has agreed to purchase the North Tyneside land and buildings for a combined total of $124 million in cash. It is still looking for a buyer for the German fab.

Looking forward
Now, suddenly, Atmel is looking to enter new markets. Earlier this year, Atmel signed a definitive agreement to acquire Quantum Research Group Ltd, a developer of capacitive sensing IP and solutions for user interfaces.

''A microcontroller is usually sold alongside one of Quantum's sensors, and Atmel is hoping to expand its microcontroller activities further into the capacitive sensor market with this acquisition, as well as realize other sales synergies,'' said FBR's Berger.

Look for more action at Atmel in 2008. ''Since CEO Steve Laub took the reins one year ago, Atmel has pursued strategic and cost-reduction activities, thereby lowering head count,'' Berger said.

''We think Atmel has other such activities to pursue in coming quarters,'' he said. ''Atmel's real opportunity to increase margins involves reducing its European manufacturing presence. This process would likely take two to three years or more once underway, given the need to requalify products moved to different facilities,'' the analyst said.

''The firm has fabs in Rousset, France, and Heilbronn, Germany, both of which have high costs and pension expenses relative to cheap Asian fabs. Management has not discussed these potential changes and is likely focused on other, lower-hanging fruit for now. In time, though, we think Atmel will pursue these important cost-reduction activities,'' he said.

Over time, it could become a pure MCU play. ''About 30 percent of Atmel's sales are in high-margin MCUs. These chips have long product life cycles, yielding a revenue annuity model, and are very broad-based products that can sell into thousands of customers and end devices. The firm increasingly focuses on this segment, which we think is a positive, given its noncommodity nature and strong profit profile,'' he said.

On the other hand, ''only 30 percent of Atmel's sales are in high-margin MCU products, while the other 70 percent of its sales are in commodity or other low-value parts,'' he said. ''Should management decide to make Atmel a microcontroller company, we would view a 70 percent revenue mix-out proposition as long and painful.''

- Mark LaPedus
EE Times

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