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Fan Zhou

ATML AT A GLANCE

P/E ► -132   EV/EBITDA ► 86.0 VERY HIGH ROA ► -0.3% AVG ROE ► -1.6% AVG Debt to Equity ► 0.752 AVG Current Ratio ► 2.43 AVG Interest Coverage Ratio ► -4.97 AVG

 

 

 

 

 

 

Consumers can find products by Atmel Corporation (Nasdaq: ATML), which makes integrated circuit boards and computer chips, in everything from printers to cell phones to car keys. Its main customers include Cisco Systems (CSCO), Siemens AG (SI) , Sony (SNE), and Toshiba (TOSBF) who, in 2007, contributed to the more than $1.5 billion in revenue that ATML earned. ^[1]

Semiconductor Equipment and Materials International, the main trade association within the semiconductor industry has estimated that overall sales in the industry will decrease by 20% in 2008.^[2] In response to this outlook, in 2007, Atmel began moving towards a fab-lite manufacturing model, which emphasizes the use of third-party foundries for part of the manufacturing process and helps to decrease costs.^[3]

Specifically,the movement to the fab-lite model has been driven by the increasing cost of raw materials; in particular, the silicon wafers used to form the foundation of nearly all microchips have seen price increases of more than 25% in 2008.^[4] ATML must also contend with an industry where annual price decreases can be as high as 33%, reducing profit margins.^[5]

In 2008, Atmel purchased Quantum Research Group which is a company that specializes in developing innovative user interfaces, specifically "touch" technologies. Ever since the introduction of the IPhone, the market for touch interface devices has seen significant growth, with more than 50 million cell phones in the market today that have some aspect of this technology and projections by Quantum predicting more than 400 million units by 2011.^[6]

Business Overview

Atmel is divided into four main division with each group specializing in microchips that are related to a unique consumer end market. Each microchip, before it is shipped to consumers, is placed through a battery of tests to measure its performance along a defined set of metrics that are common in the semiconductor industry . Some of the key metrics used in this industry are laid out below.

Atmel sells a large majority of its products to customers located outside of the United States.

ASIC's are ATML's largest sector bringing in more than a quarter of its annual revenue.

While ATML has maintained positive revenues over the years it has seen annual losses that were mainly the result of structural changes.

Application Specific Integrated Circuit (% of net revenue: 30%, % of net income: N/A)

The ASIC division is responsible for the design and manufacturing of integrated circuits that are able to be custom tailored based on customers demands. Additionally, the ASIC division manufactures secure microcontroller-based smart cards that often appear in such devices as the SIM cards that are often placed inside of cell phones . In the second quarter of 2008, net revenues for the ASIC department decreased by 4% mainly as a result of decreased demand associated with its PC CryptoMemory product line which are microchips that are used primarily for the purposes of identification, authentication, or encryption.^[8]

Microcontrollers (24%, 50%)

The microcontroller division of ATML is its most profitable division with revenues increasing during the second quarter of 2008 by 29% to $143 million.^[8] The two main products are ATML's proprietary AVR and ARM-based microcontrollers both of which have seen double digit growth in sales between 2007 and 2008. The former is a heavily used microchip, particularly in the automotive industry , that has the ability to both store and process information without the need for any external add-on devices.^[9] The latter is also a microchip that is based on a separate architecture that is most noted for its power saving features, making it one of the most popular microchips used in the mobile communications industry.^[10]

Nonvolatile Memories (22%, 44%)

Nonvolatile memory (NVM) in the technology industry refers to any product that can retain information even when its power is turned off. In the case of ATML, its NVM division saw revenues decrease by 2% during the second quarter of 2008 primarily due to a decrease in sales from its Serial Interface Product line which designs specialized "low-pin count" aka. small, storage devices.^[8] The NVM market is the most competitive one in which ATML sells its products resulting in continued price decreases. The spot price per gigabyte of storage in NVM devices fell more than 30% in just the first two quarters of 2008.^[11]

Radio Frequency and Automotive (23%, 6%)

In the second quarter of 2008, this division saw net revenues decrease by 10% primarily due to decrease in sales of its communication chipsets that are used in certain brands to cell phones.^[8] The automotive division in ATML specializes in manufacturing wireless key fobs as well as software systems that can detect and prevent car theft. This department is also home to ATML's radio frequency identification (RFID) tags that have become heavily used in the retail industry to track inventory as well as shipments.^[12]

Key Trends and Forces

Falling prices in the semiconductor industry force firms to rapidly adapt or lose money

Since 2005, the average price per gigabyte of NVM has fallen from more than $45 to less than $10 in 2008.^[13] This precipitous price drop is reflective of the larger trend of large annual product price decreases in the semiconductor business. Another important component of the cost involved in producing a microchip is the cost of the transistors, or the "switches" on the chip that help to relay electrical signals. A metric that examines the cost of building one million transistors onto a signal microchip demonstrates that prices fall an average of 35% each year.^[14] This pattern of continuously decreasing prices has lead ATML to post a profit margin of only 1.20% over the 2007 fiscal year.^[15]

More broadly, in an industry with profit margins on average of less than 3%^[16], ATML, along with other firms, are forced to introduce numerous new products each year that are solely geared towards maintaining profit. The longer ATML keeps the same microchip in the market place the smaller the profit it will earn on that product. However, this rapid development can lead to numerous negative repercussions. On average, less than half of all product launches in the semiconductor industry actually meet their scheduled launch date.^[17] These pressures to innovate can also cause budget overruns and raise quality concerns. Along these lines, on February 12, 2007, ATML issued a recall of a defective microchip that had been placed into more than 5,000 fire alarms purchased by consumers.^[18]

Switching to a fab-lite manufacturing model increases dependence on outside foundries

Since 2005, ATML, along with much of the semiconductor industry , has been slowly transitioning towards a fab-lite model of manufacturing where the majority of chip production is delegated to third-party foundries. Fab-lite is distinct from outsourcing in the sense that production could still take place within the borders of one country. However, this production is now carried out by specialized firms, or foundries unlike ATML, that have are focused solely on the manufacturing end of the process. A key part of this transition has been the dissolution and sale of many of its previously utilized factories. Between 2005-2007 ATML sold facilities in Nantes, France, North Tyneside, UK, Heilbronn, Germany, and Irving, Texas.^[1]

In 2008, ATML made plans to sell one of its largest factories in Rousset, France, which would result in a loss of 210 workers.^[19] The advantage of a fab-lite model is cost, allowing a firm to specialize in design and engineering.^[20] However, this strategy creates an increased dependence on outside suppliers coupled with a decreased ability to internally compensate for any lapses in production.^[1]

Due to ATML's sales structure it is sensitive to downturns in the Asian economies

ATML, in 2007, completed more than 87% of its sales to customers outside of the United States.^[1] In particular, more than 50% of its revenues come from sales in Asia, exposing it to the risks associated with Asian economics. A 2008 report by the Semiconductor Equipment and Materials International (SEMI) trade group predicts that spending in the semiconductor industry will fall by more than 20% in 2008, lead by the Asian economies.^[21] Japan, the largest purchaser of semiconductor goods in the region, has seen its economy come to a standstill amidst the backdrop of higher energy prices and weaker financial services, posting a Q2 gross GDP growth of only 1.4%.^[22] This is a nearly 30% increase from a year ago in 2007 when annualized GDP growth was 2%.^[23]

Atmel's acquisition of Quantum Research exposes the company to the growing touch interface cell phone market

In 2007, Atmel acquired Quantum Research Group, which makes touch interface technology. In 2008, the cell phone market saw almost 20 different models that operate primarily through the use of a touch screen introduced to the market.^[24] Sales in 2007 for ATML in the mobile communications industry represented 20% of total revenues with demand for cellular products expected to remain strong in 2008-2009 even with a weakened economy.^[25]

Research firms have also predicted that 40% of all cell phones will incorporate some aspect of touch technology by 2012.^[26] The technology developed by Quantum Research Group has been used in a wide variety of products including the first ever mobile phone to incorporate an iPod style scroll wheel into its interface^[27], making the company a likely beneficiary of touch screen market growth.

Competitors

AMTL competes in the diverse semiconductor industry alongside such companies as Advanced Micro Devices (AMD), Qimonda AG (QI), STMicroelectronics N.V. (STM), and Microchip Technology (MCHP) . Each of these five companies produce a wide array of products and operate under essentially the same sales model of selling to consumer end product manufacturers in every industry from aeronautics to telecommunications.

References

1. ↑ ^{1.0 1.1 1.2 1.3} Amtel 2007 10K page 32
2. ↑ DigiTimes Taiwan 9/11/2008: "The state of the semiconductor industry: Q&A with SEMI president Stanley Myers"
3. ↑ EE Times India 10/11/2007: "Japan chip industry quietly embraces fab-lite model"
4. ↑ Clean Tech 9/9/2008: "China solar industry faces rising silicon costs"
5. ↑ CBR Online 6/14/2007: "Chip growth drops on free-falling prices"
6. ↑ Quantum Research Group Press Release 2/6/2008: "Atmel to Acquire Quantum Research Group"
7. ↑ Datasheet Catalog
8. ↑ ^{8.0 8.1 8.2 8.3} Atmel 2008 Q2 10-Q Page 33
9. ↑ ARV TV: Short Video Clip Explaining ARV Technology
10. ↑ ARM Microchip Overview
11. ↑ Ars Technica 6/16/2008: "NAND flash prices continue to fall on soft demand, high supply"
12. ↑ The Register 6/27/2003 "RFID Chips are Here"
13. ↑ CNET News 1/4/2006: "Bye-bye hard drive, hello flash"
14. ↑ IC Knowledge 2008: "Price Per Function Trend"
15. ↑ Yahoo Finance: ATML Key Statistics
16. ↑ Reuters: ATML Company Statistics
17. ↑ Kalypso White Paper 2006: Semiconductor Product Lifecycle Management"
18. ↑ Consumer Product Safety Commission 2007: ATML Product Recall
19. ↑ EETimes Asia 8/5/08: "Atmel Plans to Trim Down French workforce"
20. ↑ EETimes Asia 2/19/2007: "Sony to follow fab-lite model on semi biz"
21. ↑ MarketWatch 8/25/08: "Seventy Fab Projects Brighten Industry Outlook in 2009"
22. ↑ International Herald Tribune 8/25/08: " Deep economic downturn in Japan unlikely"
23. ↑ Trading Economics 9/12/2008: "Japan Economy Shrank 3% in Q2"
24. ↑ CNET Reviews 5/5/2008: "Touch-screen cell phones: More than just the iPhone"
25. ↑ Reuters 9/11/2008: "Qualcomm says 3G demand healthy"
26. ↑ Forbes 11/26/07: "Reach Out and Touch--A Phone Screen"
27. ↑ Quantum Research Group Mobile Showroom
28. ↑ Yahoo Finance: ATML Competitive Comparison
29. ↑ The chip used for comparison amongst ATML, MHCP, and STM was a 2-wire SerialEEPROM. This is a type of NVM that is used to store small amounts of data when power to the main device is turned off