Microsoft, the world’s biggest software maker, has not scheduled the new operating system for immediate release; however, it reported that it would adapt Windows to run on devices that compete against Apple’s (NASDAQ: AAPL) iPad, which currently dominates the tablet market. Moreover, the company demonstrated that it is now able to offer computer makers and semiconductors suppliers a new operating system that can be competitive in mobile computing.

Shortly after the introduction of Windows 8, Qualcomm Inc. (NASDAQ: QCOM) announced that its upcoming award-winning Snapdragon family of smart mobile processors are designed to power devices running the next version of Windows. It seems that Microsoft and Qualcomm joined forces to address the booming tablet market. In fact, Microsoft is trying to leverage its PC expertise and successful long time partnership with Inter Corp. (NASDAQ: INTC) and establish a new partnership with Qualcomm to cover the mobile arena.

The companies reported that the collaboration would address the converging and fast-changing mobile computing landscape, and Qualcomm’s Snapdragon family of dual-core and quad-core processors will enable optimal computing performance, extended battery life and connectivity, and top-notch graphics and multimedia in devices. The first processor in the Snapdragon family to power devices using the next version of Windows will be the MSM8960, which is sampling this month, followed by the quad-core Snapdragon APQ8064, which is anticipated to sample in early 2012.

Microsoft’s shares have lost 13% this year after a number of research companies lowered their forecast for PC sales in 2011 and the latest results revealed that the company’s flagship Windows division is losing customers. The company saw the Windows division revenue, which stands for almost one-quarter of its sales and nearly half of all operating income, down 4% for the fiscal third quarter. The negative trend is believed to be caused by the momentum of computer tablets, which are expected to steal market share from plug in personal computers.

According to a report from consulting firm Deloitte, sales of computer tablets and smartphones could outnumber traditional plug in PCs already in 2011. It reported worldwide sales of smartphones and tablet computers would come to 425 million, well above sales of 390 million PCs. The trend is challenging Windows division sales, as the world is moving away from standardized PC-like devices containing standardized software, to a far more heterogeneous environment of tablets and smarphones, where Microsoft is still an outlier.

In a recent report, Gartner forecasts 2011 PC growth at 10.5% down from 15.9% previously. Worldwide PC shipments will hit 440.6 million units in 2012, a 13.6% increase from 2011, down from Gartner’s previous outlook of 14.8% growth, the market watcher added. Meanwhile, Gartner has further claimed that the global tablet market could almost quadruple in 2011 to 70 million units from 15 million in 2010, and eat into the slowing PC market over the next four years. The iPad would control about 69% of the 2011 tablet market, dropping to 47% by 2015; when nearly 300 million units would be probably sold.

Microsoft is moving aggressively to address this opportunity, however many analysts believe it could be too late. Gartner for instance is not expecting Microsoft’s Windows to make any significant impact on the tablet market even by 2015. The partnership with Qualcomm can certainly accelerate the penetration of the mobile computing market and help Microsoft to establish a decent niche.

Microsoft overall sales for the fiscal third quarter rose 13% to $16.4 billion, beating the $16.2 billion expected by analysts, helped by sales of Office and its Xbox game system. The Company reported a 31% increase in net profit, posting $5.2 billion, or $0.61 per share, compared with $4 billion, or $0.45 per share, in the year-ago quarter. Excluding the onetime tax benefit, net income met the $0.56 cents expected by analysts, according to Thomson Reuters.

With a market capitalization of $205 billion and a cash balance in excess of $50 billion, the company is traded at a modest 8.82 times expected earnings for the next 12 months, below the average for direct competitors. Despite the modest valuation, the company is still generating significant growth, has strong Windows and Office divisions and sufficient resources to catch up with its mobile rivals.

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The Company was founded in 1984 and is headquartered in San Jose, California.

Source: Reuters.com, SEC Filings.

Investment Highlights

ATML shares gained $1.44, or 9.8%, to close Wednesday at $16.10 after reaching a new 52-week high of $16.80 early in the session.  About 30.51 million shares have traded hands Wednesday, versus the average daily volume of 10.31 million shares.  ATML enjoyed a strong session after the semiconductor maker beat Wall Street’s expectations for the fourth quarter, bolstered by demand for its products in many consumer and industrial applications.

Notably, the Company said its microcontroller revenue hit a record $288 million, up 107% year-over-year, on the strength of its 8-bit and 32-bit products. Sales of the Company’s flagship MaXTouch products grew to more than $140 million in the year, easily topping the Company’s expectations.  ATML president and CEO Steve Laub stated that the Company remains confident in its business with continuing design win momentum in its microcontroller products and recently announced new generation of touch solutions.

For the first quarter, ATML expects revenue to range from up 1% to down 4% compared to the fourth quarter, against the backdrop of seasonal weakness, with gross margin expected to be in a range of 48.5% to 49.5%, slightly lower than the fourth quarter’s 49.5%. The Company’s sequential revenue outlook indicates $439.5 to $462.4 million in revenue, well ahead of analysts’ consensus of $420 million.

Following the Company’s report and guidance, a number of analysts maintained their positive stance on the stock.

“We expect continued outperformance from the company’s dominant market share in tablets, as they ramp in the first half of 2011,” Collins Stewart analyst John Vinh wrote in a note to clients.  He reiterated his “Buy” rating on the stock, and upped his target price from $17 per share to $17.

Keeping a Strong Buy rating on the stock, Needham stated that ATML remains its top large cap idea.  The firm raised its target price from $13 to $20.

Looking forward, ATML expects significant growth in the microcrontroller business, and said it has taken action to procure substantial additional wafer and back end capacity to support its customers’ requirements.

“So with respect to the microcontroller business, excluding touch, I think the expectation you should have is that we’ll continue to outpace the industry, and we expect to gain substantial share in the market generally as you go through 2011. With respect to the touch business, we believe that for 2011, our touch business should more than double from what it was in 2010. The progression would be, you know, I think you’ll see increasing revenues throughout the year,” ATML’s management commented in a conference call with analysts.

ATML is currently trading above its 50-day moving average of $13.38 and 200-day moving average of $9.42. Market capitalization currently stands at $7.38 billion.

Visit ATML at www.atmel.com

Financial Summary

ATML reported revenues of $457.8 million for the fourth quarter of 2010, a 3% increase compared to $444.3 million for the third quarter of 2010, and a 33% increase compared to $343.6 million for the fourth quarter of 2009. Fourth quarter results for 2010 exclude the Smart Card business which was divested at the end of the third quarter of 2010.  Adjusting for the Smart Card divestiture, fourth quarter revenues increased 10% sequentially and 44% from the fourth quarter of the prior year. For the full year 2010, revenues increased 35% to $1.64 billion, compared to $1.22 billion for 2009.

Net income, on a GAAP basis, totaled $223.1 million or $0.47 per diluted share for the fourth quarter of 2010.  Included in fourth quarter 2010 results was a tax benefit of $133.1 million, which included $118.1 million, or $0.25 per diluted share, primarily from releasing reserves for certain deferred tax assets. The fourth quarter 2010 net income compares to net income of $219.8 million or $0.47 per diluted share for the third quarter of 2010, which included a $150.4 million, or $0.32 per diluted share tax benefit related to the resolution of an IRS tax audit, and a net loss of $83.3 million or $0.18 per diluted share for the year-ago quarter, including one-time charges. For the full year of 2010, net income was $423.1 million or $0.90 per diluted share, compared to a net loss of $109.5 million or a loss of $0.24 per diluted share for 2009.

Non-GAAP net income for the fourth quarter of 2010 totaled $119.5 million or $0.25 per diluted share compared to non-GAAP net income of $88.6 million or $0.18 per diluted share for the third quarter of 2010, and non-GAAP net income of $11.3 million or $0.02 per diluted share for the year-ago quarter. Non-GAAP results for the fourth quarter of 2010 exclude the tax benefit of $118.1 million. For the full year 2010, non-GAAP net income increased 960% to $284.3 million or $0.59 per diluted share, compared to $26.8 million or $0.06 per diluted share for 2009.

Gross margin improved to 49.5% in the fourth quarter of 2010, the highest level achieved since the third quarter of 1996.  This compares to gross margin of 46.8% in the third quarter of 2010 and 37.0% in the fourth quarter of 2009. The sequential gross profit improvement was the result of increased volumes and improved mix of higher margin products, as well as the third quarter divestiture of the Smart Card business.  For the full year 2010, gross margin increased to 44.3% compared to 33.9% for 2009.

Fourth quarter income from operations improved to $93.8 million, or 20.5% of revenues, compared with $77.7 million, or 17.5% of revenues for the third quarter of 2010, and a loss from operations of $71.8 million for the fourth quarter 2009. Third quarter 2010 income from operations included a $5.7 million loss from the sale of the Smart Card business, while fourth quarter 2009 included a $79.8 million asset impairment charge.  For the full year of 2010, income from operations was $107.5 million, compared to a loss of $124.6 million for 2009.

Income tax benefit totaled $133.1 million for the fourth quarter of 2010. This compares to an income tax benefit of $136.6 million for the third quarter of 2010 and a provision of $10.5 million for the fourth quarter of 2009. For the full year 2010, income tax benefit was $306.7 million which compares to an income tax benefit of $26.5 million for the full year of 2009.  During 2010, the company favorably settled tax audits and released reserves for certain deferred tax assets which contributed $247.9 million of the total tax benefit recorded for the year.

Cash provided from operations totaled approximately $84.6 million for the fourth quarter of 2010, compared to $95.3 million for the third quarter of 2010 and $55.2 million for the fourth quarter of 2009.  Combined cash balances (cash and cash equivalents plus short-term investments) totaled $521.0 million at the end of the fourth quarter of 2010, a decrease of $76.4 million from the end of the prior quarter.  During the fourth quarter of 2010, the company repaid $80 million of its revolving credit facility and repurchased $48 million of common stock.  Net cash balance (cash balances less current and long-term debt) was the highest in the company’s history at $517.0 million at December 31, 2010.

Source: finance.yahoo.com

Source: Reuters.com, SEC Filings.

Analyst Consensus

This is the consensus forecast among 14 polled investment analysts. Against the Atmel Corp company.

The 13 analysts offering 12-month price targets for ATML have a median target of 13.00, with a high estimate of 18.50 and a low estimate of 7.00. The median estimate represents a -11.32% decrease from the last price of 14.66.

Source: markets.ft.com

Consensus Estimates Analysis

Source: http://www.reuters.com/finance/stocks/financialHighlights?symbol=ATML.O

Technical Analysis

Source: http://stockcharts.com

ATML is trading above its 20-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

ATML is trading near its upper Bollinger Band. This suggests that the stock price is high relative to its recent price action.

The MACD for ATML currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0 which implies that the underlying moving averages are trending higher.

Comparative Analysis

Source: Thomson Financial

Source: Yahoo Finance

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