Three months ago, things were looking down for chipmaker Atmel (UNKNOWN:ATML.DL). A shallow outlook, slow sales, and the uncertain future of Microsoft's (NASDAQ:MSFT) Windows 8 devices, and declining fortunes of Samsung's (NASDAQOTH:SSNLF) Galaxy S4 didn't paint a good picture of Atmel's business. However, Atmel bulls cheered the company's recently reported third-quarter results and shares spiked 14% in a single day.
But if you're thinking that Atmel soared due to terrific quarterly results or an outstanding outlook, you would be disappointed. Both revenue and earnings declined from the prior-year period and Atmel missed the revenue estimate. However, Atmel management boosted its share repurchase program by $300 million, bringing the total authorization to $1 billion. In addition, Canaccord Genuity reiterated its buy rating on Atmel with a price target of $9.
It looks like these factors boosted investors' confidence and Atmel was flying, even though it didn't do anything special. Its revenue expectation of $350 million to $364 million for the ongoing quarter isn't outstanding either, as this would result in a year-over-year gain of just 3.6% at the mid-point.
However, there were certain positive indicators about Atmel's business. Atmel was involved in several design wins in the previous quarter for its microcontroller business, which accounts for almost two-thirds of its revenue.
Gaining traction in mobile
Atmel is now supplying the controller to Chinese smartphone maker Xiaomi for its Mi3 smartphone. This could be an important win for Atmel, as the Mi3 was sold out in less than 90 seconds when it went on sale last month. In August, Xiaomi had announced that it expects to sell 20 million units in 2013, an estimate which should ideally be revised upwards given the initial success of its latest smartphone.
In addition, Atmel will also be supplying controllers for Samsung's new Galaxy Note 10.1, the Galaxy Tab 3, LG's new G Pad tablet, and a few other Chinese companies. Atmel has long waited for Android tablets to succeed and Samsung's rapid growth in tablets is what it desperately needed.
In the third quarter, Samsung's tablet shipments increased 123% year over year to 9.7 million units, according to IDC. Samsung had 20.4% market share and it is rapidly catching up with Apple, whose share fell to 29.6% from 40% in the year-ago period. The success of the Galaxy Tab 3 has helped Samsung's tablet growth and the South Korean giant is now aiming for the top spot.
Will Windows 8.1 be a savior?
Atmel is expecting sales of touch-based Windows 8 systems to pick up going forward. According to Intel, more than 50% of its fourth-generation core designs are touch-based systems while almost all Ultrabooks are expected to be touch-enabled in the future.
Now, Atmel believes that Microsoft's latest Windows 8.1 operating system will provide a boost to these touch-based systems. In fact, Windows 8.1 has got off to a good start, outpacing its predecessor in the first month of availability. Windows 8.1's market share doubled in October, as reported by TechCrunch, and it is now running on 1.72% of all desktop-based computers.
Microsoft would take heart from this robust roll out, and so will Atmel, which is Windows 8 and 8.1 certified in more than 115 devices. In addition, Atmel is currently involved in more than 190 different Windows 8 and Windows 8.1 programs. Atmel claims to have "enabled more Microsoft-certified touch products in the marketplace than any other touch controller manufacturer." The PC market might be declining, but sales of Ultrabooks are expected to grow, and this could be another tailwind for Atmel.
Cutting across lines
Apart from mobile devices, Atmel's touch controllers are now finding adoption in other areas such as industrial, automotive, and other consumer electronics applications. Japanese company Kyocera selected Atmel's maXTouch controller for use in a medical device. Moreover, Jaguar Land Rover, General Motors, and Mazda are also using the maXTouch technology of Atmel. Management also claims to have landed multiple design wins at the three largest auto makers in North America and Europe.
Hence, there were some nice positives for Atmel investors in the previous quarter, but it would be prudent to stay on the sidelines till the company delivers decent top line growth. There are quite a few challenges and headwinds in front of Atmel. The growing dominance of MacBooks over Windows-powered PCs and stiff competition from the likes of Synaptics (to whom Atmel reportedly lost the controller spot in the latest Kindle Fire) could weigh on Atmel's performance going forward.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.