Morgan Stanley on Atmel
by: JohnG18768
Long-Term Sentiment: Strong Buy 07/27/04 11:19 pm
Msg: 209222 of 209438
This may allready have been posted--just in case--a few words from Morgan Stanley
Atmel Corp – July 22, 2004
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A 1-2 week delay in completing the assembly and test
operations of processed wafers led to a product shipment slip and hence a revenue miss for Atmel Corporation during its second quarter. While second quarter revenues grew 3% sequentially, they were below management’s previously stated guidance of 4%-6% sequential revenue growth.
Earnings per share were below our estimate as well as the consensus estimate, and the earnings miss was driven by the lower than expected revenues and gross margin. Due to an unfavorable product mix, which primarily consisted of solid growth in low margin flash memory and smart card ICs, gross margins declined 120 basis points sequentially (to 28.4%) versus management’s expectations for a sequentially flat to slightly up gross margin. From a business perspective, Atmel delivered healthy year/year revenue growth in all of its business segments, but the ASIC and RF/Auto segments declined sequentially while the memory and microcontroller segments grew sequentially.
Given that more than 40% of Atmel’s revenues are
generated in Europe, and that region has just entered a
seasonally slow summer period, the company expects
September quarter revenues to grow 2%-6% sequentially and the guidance is still in-line with our prior expectation for 4.7% sequential growth. The company entered the September quarter with about 78% of its business already booked and this compares to the 85%-90% level achieved during the same period in the second quarter. Execution to plan is still the key to sustainable profitability
Our original thesis for Atmel to maximize its margin potential remains in place. We believe that management will need to transition many of its products to more advanced process technologies, specifically for its ASIC and memory products. In addition, management had embarked on a strategy to outsource some of its production needs to foundries as a way to reduce its long-term capital intensity and overall earnings cyclicality.
After being a dedicated manufacturing company since its inception, management had initially expected to start generating revenues from outsourced wafer production in the second half of 2004. We now believe that this schedule has been pushed out by at least one quarter to early 2005. While we commend management for initiating this program as a way to reduce the volatility and risk of its long-term earnings stream, near-term execution risk will likely remain
high as the company’s manufacturing strategy is
implemented.
We note that in the context of a solid economic environment, Atmel has continued to observe healthy demand for its products. While most semiconductor companies began to experience a slowdown in order momentum during the
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