Atmel Lives Up To Expectations ... And Then Some

What is the best thing a company can do when its shares look overvalued? Deliver excellent quarters with better-than-expected performance and grow into that valuation. That seems to be the theme for microcontroller maven Atmel (Nasdaq:ATML), as a great earnings report should help maintain what has been torrid momentum in the second half of this year. 

Nothing "Micro" About The Quarter
Despite plenty of evidence from analog giants like Linear Technology (Nasdaq:LLTC) and Texas Instruments (NYSE:TXN) that ship-ahead risks may prove real in many sectors (especially computers, but also industrial and automotive to some extent), Atmel logged a fine quarter and guided toward sequential growth.

Revenue jumped 40% this quarter on an annual basis, and 13% sequentially. The microcontroller business was even stronger, with 29% sequential growth and nearly $256 million in revenue contributions. All in all, it was good enough for a 4% beat, relative to analysts' expectations. (For more, see Strategies For Quarterly Earnings Season.)


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Maybe Atmel Beats The Cycle

I realize the news is already long out on Atmel's (Nasdaq: ATML) great quarter last week, but this is a story that still seems worth talking about to me. After all, Atmel was one of the first stocks I ever bought (part of an initial group of 3), so it has a certain amount of sentimentality to me.

By pretty much any reasonable standard, the second quarter was a success for this long-struggling chip company. Revenue exceed expectations by a pretty hefty margin, as the company saw sequential growth of 13% and annual growth of 38% (for what its worth, the expectations on the top line growth were in the mid/high single digits).

Atmel also managed to be more profitable this quarter, as gross margin hit 41% - building on the first quarter's 38%. It looks, then, as though Atmel's four-year restructuring effort is finally starting to show real benefits.

At the bottom line, the company did okay. I know that the "official" numbers make it look like a big beat, but I think those figures are a little deceptive. It was not a bad quarter ... just not as good as the initial breathless media reports made it appear to be.

So, what is driving the bus for Atmel? The company's microcontroller business - arguably the most desirable prize from back in 2008 when ON Semiconductor (Nasdaq: ONNN) and Microchip Technology (Nasdaq: MCHP) were attempting to acquire and slice-and-dice the company. In particular, the company's maXTouch product is really starting to get some traction in the touchscreen market - it is part of the new Motorola (NYSE: MOT) Droid X, the Samsung Galaxy S, and HTC Evo 4. I am also reasonably sure that it is going into some Nokia (NYSE: NOK) phones as well.

Even though things are going well for Atmel, I would be careful about chasing this one today. Sure, the maXTouch seems to be doing really well and sometimes an individual product cycle can be enough to carry the day. I am worried, though, that there has been a lot of channel-stuffing (or at least inventory-rebuilding) this past quarter and that might really put the breaks on the chip sector in the second half of the year. Overall, it just seems like things are closer to "cooling off" than "heating up" for the broader economy and I would be nervous holding a stock like ATML in that environment - even though I do think the company is well on the road to recovery.