Atmel Corporation (NASDAQ:ATML) is in the midst of an earnings recovery driven by a improving end markets and new product offerings. Atmel is exposed to touch screens, and can gain market share with new device wins in that market. It has an opportunity with its XSense business that is not fully accounted for in the share prices and can act as the nearest term catalyst as management more closely defines the total opportunity.
The above average earnings growth will come from a cyclical recovery in its core MRU business, growth in Win8 related touch screens and a recapture of some lost share in smaller touch screens, growth in the new XSense business, and margin improvement behind higher utilization levels, cost cutting measures and the expiration of an unfavorable contact with LFoundry. In addition new sensor hub opportunities, improvement in the industrials market, faster than expected growth in automotive are also all positives headed into 2014.
Touch Screen Business Will Improve in 2014
Touch screen shipments will be down in 4Q but the outlook for 2014 has recently improved from a double digit decline to a growth market for ATML in 2014. Growth in Win8 devices from LG, BlackBerry, and ZTE and others as well as a potential Samsung opportunity can drive incremental demand. It is continuing to win in large screen touch with the Kindle Fire HD 7in, Google Nexus 10in and MS Surface all using their displays. ATML has around $3-$6 of content per device with the higher end of the range driven by the inclusion of its sensor hub.
In addition in smaller screens, ATML used to have a 40% market share ex. Apple. This has declined to the single-digits due to the company’s focus on larger screens. It can recapture some of the share losses with a renewed focus on this business which will be aided by its maXTouch product.
The opportunity for XSense is significant with current analysts stating the size could exceed $5 billion. There is current one competitor, Uni-Pixel. The product is a lower cost alternative to ITO-based technology and prints copper electrodes on flexible thin PET. Management stated it has already partnered with Asus to test the technology and should start to see wins for the product announced throughout the next 18 months. Management has indicted it will have manufacturing capacity in this business for $100 million of sales in 2014 although it may not ramp those levels that quickly. The ASP of the content in touch screen devices for XSense as a standalone is expected to be around $10. In addition, it will have an XSense optimized maXTouch controller ATML will pair with it, increasing the content by $4-$8 per device and leading to total content of $14-$18 per device. This compares to the $3-$6 of content it has with its current large screen touch offerings.
Also in sensor offerings, its maXFusion sensor is in the Samsung Galaxy Note and Galaxy S4. ATML has the potential for new wins in this technology as well.
Margins are in the Early Phases of a Rebound
EBIT margins will improve in 2014 significantly based on cost cutting (350 bps), higher utilization levels (350 bps) and the expiration of the LFoundry contract (250 bps). Management has set a target gross margin of 54% and believes cost cutting and utilization will each contribute around 500 bps to the improvement. That is probably a little aggressive but presents significant upside if management can come close to delivering.
Low Expectations for Windows 8 Leaves Upside to Estimates
The company’s exposure to Win8 devices does present some risk as it is the third place OS in terms of mobile and lags behind Droid, iOS and Amazon in tablets. While signs are improving for the mobile devices, Win8 adoption for tablets and laptops has been slow. We see the Street broadly having priced in low expectations for Surface 2 and Win8 devices so most of the risk in our view is to the upside. In addition, ATML has exposure to the substitute devices, with the Google Nexus and Amazon HD 7 in. tablets.
Industrial and Auto Represent Upside
The industrials end market is weak but inventory levels are low and a small improvement in demand would quickly translate to sales and could lead to a restocking opportunity. Also in touch screens auto has outperformed versus expectations and may continue to do so. ATML has over 100 wins in auto and new programs from GM for the 2015 model year and others could lead to wins that will be announced over the next twelve months.
Atmel is poised to gain share and grow its business in a difficult industry. It seems expectations at levels that should allow for earnings beats and raises. The new technology, parts of its business improving off of a low base, and room for a large jump in margins lead to the conclusion that Atmel’s earnings power is significantly above current levels. As it starts to approach these levels, the shares should follow.