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Ouch. Hitting the bottom hurts.
Touchscreen microcontroller specialist Atmel (Nasdaq: ATML ) had previously warned that its first quarter should see the bottom in its business, and the company reported its first-quarter earnings last night. Atmel's figures did go low, and CEO Steve Laub said, "As we predicted, our business bottomed during the first quarter, and we are well positioned to capitalize on the improving industry environment." Yet shares were still hurting today, down by 16% at the low.
Revenue in the first quarter fell 22% to $357.8 million, with adjusted earnings per share of $0.08, which was actually well ahead of the Street's best guesses. CFO Stephen Cumming said the figures were hurt by customers' rebalancing of inventory. Gross margin also deteriorated from 51.5% a year ago to 43.2% this quarter.
The real kicker was the guidance. Even though the first quarter is the bottom, revenue isn't bouncing back as quickly as investors were hoping for. Cumming said Atmel sees revenue putting up a sequential increase of 2% to 6%, which translates into about $365 million to $379.3 million in dollar terms. Even the high end of that range comes up short compared with the consensus estimate of $385.9 million in the coming quarter.
During the quarter, Atmel repurchased a total of 9.5 million shares at an average price of $10.18 per share. It also announced an additional $200 million authorization to its stock-repurchase program, adding on to the existing $500 million authorization, which is nearly exhausted.
Any day now ...
Atmel continues to wait on Google (Nasdaq: GOOG ) Android tablets to take off, and it simply hasn't happened yet. The company has certainly benefited from its dominant lead providing touchscreen controllers in Android smartphones, but investors had been expecting that to similarly pay off in the Android tablet space -- and it hasn't.
Of course, the tablet king remains Apple's (Nasdaq: AAPL ) iPad, but Atmel has never been invited to that party. Cupertino has been comfortable letting Texas Instruments occupy that seat in iDevices for years, including in the new third-generation iPad. Indeed, Laub conceded, "The growth of the non-Apple tablet market has been below expectations from a year ago."
On the bright side, Laub sees a couple positive catalysts in the tablet space for Atmel that should "drive dramatic growth." The first one is media-based e-reader and e-book tablets, which Laub notes comprise more than half of current Android tablets. The second: none other than Microsoft (Nasdaq: MSFT ) Windows 8, which is expected to launch during the second half of the year.
Atmel has partnered with Microsoft in engineering, so it expects to be a "favored touch supplier" of the Windows 8 tablets that will hit before the holiday shopping season.
That first catalyst is particularly interesting, because it pretty much confirms recent rumors that Atmel may be about to win a spot in Amazon.com's (Nasdaq: AMZN ) second-generation Kindle Fire. "Media-based e-reader and e-book tablets" can really only refer to the Kindle Fire and Barnes & Noble's Nook Tablet, neither of which carries an Atmel controller.
The Kindle Fire carries one from Ilitek, while the Nook Tablet sports a FocalTech controller. The Kindle Fire is lighting up more than half of the Android tablet market (again coinciding with Laub's comments), so why else would Laub see it as a major catalyst unless he was confident of a design win in the next iteration? A Nook win would be nice, but the Kindle Fire would be a show-stealer.
Backing up this theory, Canaccord Genuity is out today reiterating its "buy" rating and sees 70% upside from current prices. Part of Canaccord's bullishness is predicated on Atmel's winning some share in Amazon's refreshed and possibly expanded Kindle Fire lineup.
The Windows 8 tablet storyline is promising, if nothing new, but investors should tread with caution, as heightened expectations over Android tablet performance have burned Atmel.
I think Atmel has truly bottomed, even though next quarter's guidance was somewhat soft. Looking beyond the next quarter, the potential Kindle Fire win and Windows 8 tablets are promising. I'm pretty confident that Windows 8 tablets will fare much better than Android ones, which should benefit Atmel, assuming it maintains its touchscreen controller leadership.
Today's sell-off has driven Atmel near its 52-week low, and it now trades at less than 11 times earnings, providing an opportunity for patient investors who are willing to wait for growth to resume. That's why I'm giving Atmel an outperform CAPScall today, because I think this really is Atmel's bottom.
Touchscreen controllers are part of The Next Trillion-Dollar Revolution, and another company is also banking on it by supplying the applications processors of today's smartphones. Get the free report to find out who.