It seems like every quarter only serves to heighten the anxiety and uncertainty around Atmel (Nasdaq:ATML). Despite leading touch controller technology, the company seems caught up in a market where price rules and customers swap slots freely. Although this semiconductor stock could be a great rebound candidate if the revenue outlook firms up, it's now firmly a "show me" stock.
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Plenty of Disappointment to Start the Year
Although headline numbers at Atmel didn't look all that bad at first, there really wasn't all that much positive news this time around.
Revenue fell 22% from the year-ago period and 7% from the prior quarter, slightly surpassing the average analyst guess. MCU revenue was up 1% sequentially (likely on reasonable strength in touch), while non-volatile memory (down 13%), RF/auto (down 7%) and ASICS (down 26%) were all down significantly on a quarter-on-quarter basis.
While revenue was a little stronger than hoped, margins were pretty rough. Almost all of the damage was at the gross margin line (down more than five points sequentially and eight points year-on-year) - a byproduct of weaker utilization, adverse mix and a renegotiated water supply agreement. Operating expenses were OK, but the company's operating income still dropped nearly by half from the fourth quarter.
SEE: Understanding The Income Statement
Guidance and Slot Losses
Management's guidance didn't help boost investors' spirits. A 4% cut in revenue relative to prior expectations may not sound like a big deal, but bears were looking for bad news here and longs have had to absorb a lot of challenging news over the past few quarters.
Underscoring the challenges here, management acknowledged that handset touch controller shipments would likely fall this year. Losing slots like the HTC One X ((to Synaptics (Nasdaq:SYNA)) and the Samsung Galaxy SIII (to Melfas) stings, and serves to highlight just how tenuous slots can be. Although Atmel still boasts a majority of the top 10 smartphones on the market using their chips, they don't seem likely to break into Apple (Nasdaq:AAPL) ((which uses Texas Instruments (Nasdaq:TXN)) and investors are clearly worried that more slots are going to go to cheaper competitors.
Against that Atmel has a few pieces of good news. Shipments for Windows Ultrabooks should boost second half results, and there's a chance that its new xSense technology can grab some share.
SEE: Earning Forecasts: A Primer
Is This a Market Worth Having?
One of the concerns I have is that a lot of phone designers just don't seem to prioritize the touch controller as a key component to the phone. I say this because there seems to be little dispute that Atmel and Cypress (Nasdaq:CY) have excellent technology, but many companies nevertheless go with cheaper Asian suppliers.
In fact, Silicon Labs (Nasdaq:SLAB) cited this price pressure as a reason why it was considering leaving this line of business (though Silicon Labs competed only on the lower end of the market). So, if customers don't value the technology accordingly, that would seem to suggest that Atmel is stuck in a situation where they're trying to market a differentiated (and higher-priced) product to a customer base that sees it all as something more like a commodity.
SEE: A Primer On Investing In The Tech Industry
The Bottom Line
I've wanted to like Atmel for a long time now, but have not stepped up with my own money. I'm not sure I'm in any rush to do so. On one hand, I do believe that Atmel has very good technology and I do think that the company should be able to gain slots and grow revenue in touch. I also believe that a recovery in industrial MCUs will help boost revenue.
Against all of that is a certain reality of tech stocks - these stocks seldom outperform in a scenario where estimates are coming down. With bears hammering the story that touch controllers are a commodity, it's going to be hard for the stock to outperform until the company shows some real growth and outperformance again.
I'm sorely tempted to go long on the turnaround or rebound potential here, but buying into floundering tech stock stories is usually a good way to rack up some capital losses.
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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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