Is Atmel Due for a Stretch of Uninterrupted Growth?

In the first quarter, semiconductor maker Atmel  (NASDAQ: ATML  ) recorded $337 million in revenue, $7 million above the upper end of its own guidance range. Additionally, management claims that 2014 will be a year of growth and increased profitability for the company, driven by continuing demand for microcontrollers and an improving picture in Atmel's touch business. What's lying behind the surprising revenue numbers, and can Atmel prosper in spite of increasing competition from such solid companies as Microchip Technologies  (NASDAQ: MCHP  ) and Synaptics (NASDAQ: SYNA  ) ?

A look at the numbers
In December 2013, Atmel's semiconductor fab in Colorado suffered a fire, and this disrupted supply to several customers. Following the fire, management estimated that about 75% of the disrupted business could be recouped over the next several quarters. However, the recovery was surprisingly fast and effective, leading to approximately $10 million more of recovered business in the first quarter than expected, which explains the first-quarter revenue numbers above the guidance range.

On the other hand, EPS for the first quarter was $0.01. This is hardly impressive, but it's a definite improvement over the first quarter of 2013, when Atmel recorded a loss of $0.11 per share. Also, management's forecast for the second quarter calls for EPS of $0.08-$0.11, a move in the right direction. Is Atmel's underlying business strong enough to sustain this healthy trend?

Microcontrollers
Atmel's largest segment is microcontrollers, essentially small computers that combine a processor, memory, and input-output peripherals on a single chip. The number of applications for Atmel's microcontrollers for is vast, ranging from industrial and automotive industries to consumer goods such as washing machines and refrigerators.

In the first quarter, Atmel's core microcontroller business (not including touch controllers, discussed below) grew in the double digits year-over-year, and would have grown even faster if not for the fab disruption. In addition, the company has introduced over 100 32-bit microcontrollers in the last year. This has led to more design wins with customers, and should help increase revenue down the line.

However, the competition is also intense, and it looks set to increase further. In particular, Microchip Technology has also been investing in its 32-bit microcontrollers line, with CEO Steve Sanghi claiming that Microchip has reached a "magical critical mass" of 32-bit products at which it will increasingly win new customers and take market share. Considering that Microchip already leads Atmel in 8-bit microcontrollers, and that its 32-bit line grew 66% in 2013, this poses a genuine threat to Atmel.

Touch
Atmel's microcontroller segment also includes its touch controllers, which are used for human-computer interfaces such as touchscreens and touchpads. While tablets and smartphones form the most visible uses of this technology, Atmel's touch controllers are also used in a number of automotive and industrial applications.

According to management, 2013 was a "challenging year" for the touch business, but things are starting to pick up. In December, Atmel refreshed its touch portofolio with the maxTouch T series, and as a result, management expects that revenue from touch products will grow in the double digits in the second quarter. Growth is expected to continue throughout the rest of the year across PCs, tablets, and smartphones, as well as in non-consumer applications.

However, Atmel is facing stiff competition here from Synaptics, which has been the go-to name in touch interfaces for almost 20 years. Synaptics is expected to post revenue growth of almost 40% in the fiscal year ending this June, and it's recently made a string of acquisitions to strengthen its position. Particularly worrying is that Synaptics' management has listed large touchscreens, an area where Atmel currently holds the top position, as one of its areas of primary focus for the current year.

In conclusion
Atmel seems to be getting back on track following several rough patches in the last year. However, investors who believe that Atmel is set for a period of uninterrupted growth should beware of the intense competition that Atmel will face from well-run companies such as Microchip and Synaptics.

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