Atheros Communications, Inc. Q4 2008 Earnings Call Transcript

Feb. 2.09 | About: Atheros Communications, (ATHR)

Atheros Communications Inc. (NASDAQ:ATHR)

Q4 2008 Earnings Call

February 03, 2009 05:00 pm ET

Executives

David H. Allen – Director of Investor Relations

Dr. Craig H. Barratt – President and Chief Executive Officer

Jack R. Lazar – Chief Financial Officer and Vice President of Corporate Development

Analysts

Quinn Bolton – Needham & Company

Mark McKechnie – Broadpoint AmTech

Gus Richard – Piper Jaffray

Heidi Poon – Thomas Weisel Partners

Adam Benjamin – Jefferies & Company

Eric Ghernati – Banc of America Securities/Merrill Lynch

Dan Morris – Oppenheimer & Co.

Shawn Webster – JPMorgan

Jonathan Goldberg – Deutsche Bank

Operator

Good afternoon. My name is Christian. And I will be your conference operator today. At this time, I would like to welcome everyone to the Atheros Fourth Quarter 2008 Financial Results Conference Call. All lines have been placed on mute to prevent any backgrounds noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). Thank you. I would now like to turn the call over to David Allen, Director of Investor Relations. Please go ahead sir.

David H. Allen

Thank you, operator. Good afternoon everyone and welcome to Atheros Communications' fourth quarter 2008 financial results conference call. Joining me today are Dr. Craig Barratt, President and CEO; Jack Lazar, Chief Financial Officer and VP of Corporate Development. Before we begin, I would like to remind you that various remarks we make on this call, including those about our projected future financial results, including revenues, expenses, and earnings as well as remarks relating to the economic and market trends, product benefits, our future plans, and prospects, the adoption of our products, the anticipated benefits of our design wins, and our customers, and our competitive position, market share and leadership position in various markets constitute forward-looking statements.

These forward-looking statements and all other statements that maybe made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. These forward-looking statements speak only as of the date hereof and we do not undertake any obligation to update these forward-looking statements. We refer you to our Annual Report on Form 10-K for the year ended December 31, 2007 and our Form 10-Q for the quarter ending September 30, 2008 previously filed with the SEC, in particular to the section entitled “Risk Factors” and to other reports that we may file from time to time with the SEC for additional information on the factors that can cause actual results to differ materially from our current expectations.

Atheros reports net income or loss and basic and diluted net income or loss per share in accordance with GAAP and additionally on a non-GAAP basis often referred to as pro forma. Atheros' management believes that non-GAAP information is useful, because it can enhance the understanding of the company’s ongoing economic performance. The company uses non-GAAP reporting internally to evaluate and manage the company’s operations. Atheros has chosen to provide this information to investors to enable them to perform comparisons of operating results in a manner similar to the way the company analyzes its own operating results.

Full reconciliation of GAAP to non-GAAP financial data can be found in our earnings release issued earlier today and we ask you that you review this information in conjunction with this call. All numbers that are discussed in today's conference call are non-GAAP, unless otherwise noted. In addition to this reconciliation schedule, we have also posted on the Investor Relations section of atheros.com, a spreadsheet with Supplemental Financial data for your reference called Financial Metrics.

I will now turn the call over to Atheros' President and CEO, Dr. Craig Barratt. Craig?

Dr. Craig H. Barratt

Thanks Dave and thanks to everyone for joining us today. The fourth quarter was clearly a difficult one for both the semiconductor industry and Atheros. Our revenue of $98.3 million declined 29% sequentially from our record revenue in the third quarter. Net income for the fourth quarter was $10.8 million or earnings of $0.17 per diluted share. Fourth quarter gross margin was 49.2%, and operating profit was 7.6% of revenue. Our revenue growths, and operating margins, and EPS were all inline with the updated guidance we provided on December the 17. Jack will discuss the numbers in more detail and provide guidance for the first quarter shortly.

During the fourth quarter, we saw the combined impact of reduced consumer spending and the supply chain inventory contraction. One bright spot for us was our ROCm consumer product line, which experienced strong growth with revenue nearly doubling sequentially. I will discuss this and each of our channels later in the call. Given the current state of the global economy, 2009 will clearly be a challenging year.

In light of this switch change in the business climate, we acted quickly to reduce expenses during the quarter. The current environment requires our continued diligence. Fortunately, we ended 2009 with a highly competitive and comprehensive product portfolio, strong relationships with blue-chip customers and a world-class team focused on building Atheros into a larger diversified communications company.

We remain committed to working very closely with our customers and ensuring that our R&D investments are aligned with both our short-term and long-term revenue opportunities. Our customers are depending on us for leadership in innovation, product execution, cost, and flexibility in order to help them adapt to the current economic conditions. Additionally, we’ll continue to make the appropriate investments in our long-term diversification strategy that make us the partner of choice for these same customers.

We expect our customers will start fewer new designs and redesigns of their products. So, we are keenly focused on securing those opportunities and reinforcing our relationships to continue our progress in the market. To that end we’re encouraged by our design win activity and awards from the past quarter.

Before looking more closely at business trends within each of our channels, I would like to take a moment to look back on 2008, which in many ways was a year of significant achievement for Atheros. Not only did the year mark the 10th anniversary of Atheros' founding, we also achieved our 7th consecutive year of annual revenue growth, dating back to 2001 when Atheros first began shipping products. 2001 was a year of record revenue and EPS for Atheros. There were many important milestones during the year including driving broad-based adoption of Atheros' XSPAN 11n solutions in PC, access point, and home gateway platforms with our industry first single-chip 11n products, which drove our over 35% annual increase in our 11n revenue.

Introducing our single-stream Align product family to address the mid-tier and value segments of PC and access point platforms, significantly growing one of our first areas of diversification, mobile wireless LAN by ramping our ROCm wireless LAN solutions, with a variety of mobile gaming and handset customers. And achieving an important milestone in one of our other areas of diversification, ethernet, by shipping out 15 million cumulative ETHOS chip, and expanding our broad set of customers for these products.

The foundation for our success over the past 10 years has been our consistent strategy of striving for technology and cost leadership in the markets we address. It is this tenacious attitude and approach to our business that will continue to drive our future success. Let's now briefly look at the channels we serve. PC, networking, and consumer.

Revenue from our PC customers declined 37% sequentially. Going into the quarter these customers were optimistic about holiday season demand for their products, particularly low-end notebook and netbook platforms. As the quarter evolved a number of factors related to the overall global economic situation caused the entire PC industry to sharply curtail production and component orders. This in turn resulted in a revenue decline for both wireless LAN and Ethernet products.

2008 was still an excellent year overall for Atheros' PC channel. We added Dell to our customer base and now serve all of the top 10 PC OEMs. Atheros' PC opportunity in 2009 is to broaden our penetration into these accounts by driving further adoption of our XSPAN and Align wireless LAN products as well as our growing set of Ethernet 5 and controller solutions. Additionally, we are aggressively driving the adoption of our Bluetooth products in a growing number of PCs.

We're now shipping our XSPAN solutions in high volume to almost all of the top PC OEMs. Moreover, based on customer feedback, we expect to see strong adoption of our Align single-stream technology for both the mid-tier and the value segments of the notebook market. Customers are excited to take advantage of Align's three to five times improvement in throughput and significant reduction in power consumption, compared to the 11g based products in the market today.

We remain excited about the emerging category of netbooks being launched by virtually all of the major PC OEMs and now broadening into the so-called white-box market. While there is a wide range of forecast for the netbook market, most degree that this will be a key growth segment in 2009 and beyond. Exiting 2008, Atheros' enjoyed particularly strong market share in netbooks with our widely popular AR2425 11g solution. In 2009, we look to further expand our share in this growing market with our entire suite of technologies.

Moving onto our networking channel, which includes retail, carrier, and enterprise customers. Revenue was down 40% sequentially. Entering the fourth quarter, we expected networking to be weak, particularly in the retail channel. However, even slower than expected end demand and aggressive tightening of the supply chain resulted in networking revenue that declined much more than initially anticipated. In spite of this difficult environment, Atheros' has continued developing new and innovative products such as dual-band, dual-concurrent routers to address high-end networking needs while also continuing our relentless focus on costing down existing solutions to improve design and platform integration.

Atheros' third generation, 11n SoC, the AR7240, which includes an integrated network processor and 5-port 10/100 switch, has been well received by our customers. A particularly popular product configuration is to pair that SoC with our Align 11n single-stream radio to upgrade from their existing G or Super G skews. Given our design wins to-date, we believe that the adoption of these solutions in 2009 from mid to low-end routers will be broad based. The carrier portion of our networking channel continues to an important market for Atheros' wireless LAN and Ethernet products.

During the quarter, Atheros broadened its XSPAN 11n design wins within carrier, DSL gateways and increasingly cable modems. Our carrier revenue, which was up over a 100% from 2007 to 2008 will continue to be an important area of growth for us. Design wins for our Ethos Ethernet products have also been strong and we now have Ethernet client design wins with a majority of the top notebook and desktop motherboard manufacturers. Additionally, our Ethernet switches have been designed into products from five of the top wireless LAN router manufacturers.

Our Ethos products represent an important area of product expansion for Atheros has enabled us to garner a great share of the PC and router bill of materials and leverage our already strong customer base. An area of strength for Atheros in the fourth quarter was the increased revenue from our consumer channel, which includes our ROCm mobile, wireless LAN, Bluetooth, GPS and PAS solutions.

Consumer revenue grew nearly a 100% and was 20% of our fourth quarter revenue. Growth was driven largely by the launch of Nintendo's innovative new DSi in the Japan market. Our ROCm AR6002 used in this mobile game platform has extremely low power consumption, in fact near zero in standby mode, an office industry leading throughput and range.

We also saw strength beyond gaming due to a ramp of other mobile platforms within Atheros' ROCm solutions. Indeed, our consumer channel was up sequentially even without the benefit of the DSi launch as more handset customers launched products utilizing our high-performance, low power ROCm mobile wireless LAN solutions including the Samsung Saga SCH-i770 and the Motorola MotoSurf A3100. As in the past, many of our design wins came through our successful partnership with QUALCOMM, but we are also achieving success in other baseband platforms.

I should also note that in December, Atheros announced it had joined Google's open handset alliance, which will enable customers launching phones based on the Google Android platform to easily design in Atheros mobile wireless LAN solutions. Our ROCm GPS business continues to make progress. During 2008, we launched our single-chip AR1511 and ORION 3.0 software combination for assisted GPS, which helped us to recently achieve our first design wins at a Tier 1 PND OEM.

With industry leading power consumption, sensitivity and our patent pending advanced parallel search, this chip provides faster time to first fix, quickery acquisition time and longer battery life. All key advantages to our customers and users. Over the past quarter, we have strengthened our senior management team as an investment in our long-term growth. I’d like to welcome the recent additions to the Atheros management team including Reynette Au from the Portable Navigation Products group at NVIDIA and before that ARM, Incorporated, who now drives our Marketing and Strategic Alliances efforts. And George Chu, who holds senior management roles at Conexant and Broadcom, now leads our Ethernet Business Unit and China operations.

Additionally, we made two internal promotions recently. Aman Singla to Vice President of Engineering for our Mobile Business Unit, and Hing Chu to Vice President of Operations. Aman has been with Atheros since 2000 and has steadily increased his responsibilities in the engineering organization with outstanding leadership and results throughout. Hing joined the company in 2001 and has shown consistent excellence in manufacturing operations management. Hing will succeed Paul Franklin, who retired at the end of 2008 after five successful years with Atheros. Paul will continue his involvement with Atheros and I would like to take this opportunity to thank Paul on behalf of all of us.

Looking ahead there is no denying that we’re operating in challenging economic times. To win in this environment, Atheros remains focused on being both the technology and cost leader by continuing to increase our share of the markets we serve and extending our reach to new markets, we will position ourselves well for renewed and sustainable growth once the overall business climate improves. We will continue to invest in new product development and to prudently manage our business, including being prepared to further adjust our expenditure levels depending on the changes we see in the economic environment.

As I've said earlier, we also recognized the importance of reinforcing our culture of tenacity by working very closely with our customers to expand our presence in these accounts. Our design wins and current pipeline of design activity along with the success of our customers should provide us the opportunity to increase market share at a number of key accounts in 2009. With that I will now turn it over to Jack, who will provide more details on our fourth quarter results and our first quarter guidance. Jack?

Jack R. Lazar

Thank you, Craig. And thanks to all of you for joining us today. First, I will outline our financial results for the fourth quarter ended December 31. And then I will provide our first quarter guidance. While we anticipated a weakening economy going into the fourth quarter, overall demand slowed considerably more than originally expected, particularly with our retail and PC customers and the supply chain adjusted to reflect this decreased demand. As a result we issued revised Q4 guidance on December 17, our actual revenue gross margin operating expenses and EPS all came in within this revised guidance range.

As a reminder, our updated Q4 guidance was for revenue between $95 and $100 million, gross margins of between 48.5 and 49.5%. Operating expenses of $40.5 million to $41.5 million, and EPS of $0.14 to $0.19 per diluted share. Revenue was $98.3 million, down $39.8 million or 29% sequentially from the $138.1 million record revenue in the third quarter. Although, revenue from our networking and PC OEM channels declined in the quarter, our consumer revenue increased significantly in Q4.

Based on the product mix data, the breakdown of revenue for our wireless LAN chipsets was as follows. 11ag was 10% of wireless LAN revenue, versus a 11% in Q3, 11g was 62%, compared with 60% in Q3 and 11n was 28%, compared with 29% in Q3. 11g revenue was down in dollars, but increased as a percentage of overall wireless LAN revenue. A large decline in retail and PC OEM shipments was partially offset by stronger 11g shipments in our consumer channel.

Our 11n revenue declined in dollars and as a percentage of our overall wireless LAN revenue. While 11g as a percentage of revenue was boosted by significant ramp in our ROCm products. The rest of our business saw an increase in 11n as a percentage of revenue. We are especially encouraged that 11n now represents over one-third of the revenue in our PC OEM and retail channels.

Additionally, we have now shipped over $200 million of 11n revenue since its launch in 2006. The decline in our 11ag revenue during Q4 is consistent with the reduced demand for enterprise class wireless LAN solutions and the ongoing PC OEM transition from a 11ag to a 11n. The percentage breakdown of revenue by channel based on the data supplied by our ODMs was as follows.

Networking was 45% and that compares with 54% in Q3. PC OEM was 35%, compared with 39% in Q3. And consumer was 20%, compared with 7% in Q3. Networking revenue decreased 40% or $29.8 million sequentially from the record revenue recorded in Q3. Within networking, reduced retail shipments made up the vast majority of this sequential decline as demand in both the U.S. and emerging countries was weak.

Revenue from PC OEMs declined 37% or $19.8 million sequentially as general demand for PCs decreased and the supply chain contracted significantly throughout the quarter. Revenue from the consumer channel increased 100% or $9.6 million sequentially, driven primarily by the launch of new products featuring our ROCm mobile wireless LAN solutions including the Nintendo DSi and several mobile handsets. Fourth quarter gross margin was 49.2% down 20 basis points sequentially and inline with both our original and revised guidance.

ASPs were relatively stable during the quarter, as we expected. Total operating expenses were $40.8 million, a 7% decrease from Q3 and towards the low end of our revised guidance. During the quarter, we accelerated our efforts to reduce operating expenses by implementing a variety of actions including a headcount freeze, bonus reductions, reduced consulting costs, and limited travel with a focus on customers specific requirements.

Operating profit in the quarter was 8% of revenue down from 18% in Q3. And while cash and short-term investments increased $19.7 million during the fourth quarter, interest income decreased slightly to $2.2 million due to lower return rates on our investments. Income tax for the fourth quarter provided a net benefit of $1.1 million primarily due to the Federal government's reinstatement of the R&D investment tax credit, which provided us a $2.8 million benefit.

Net income was $10.8 million or earnings of $0.17 per diluted share for the quarter, compared with net income of $23.4 million or earnings of $0.37 per diluted share in the third quarter. Average fully diluted shares outstanding were $62.1 million in Q4 and $62.6 million in Q3. Revenue for the full year ended December 31, 2008 was a record $472.4 million, a 13% increase over 2007. Gross margins were 50.2% and operating expenses were $167.5 million.

Net income for 2008 was $70.6 million or $1.14 per share on 62.1 million diluted shares outstanding, up from $1.12 for the year-ended December 31, 2007. During 2008, we grew our cash balances by over $74 million, demonstrating strong operational performance and working capital management. GAAP net loss for the fourth quarter was $4.8 million or $0.08 per diluted share, this compares with a GAAP net income of $10.1 million or $0.16 per diluted share in the third quarter and $13.4 million or $0.22 per diluted share in Q4 2007.

At December 31 total cash, cash equivalents, and short-term marketable securities were $293.8 million. Excluded from this balance is $15 million of auction rate securities. As we discussed in our prior conference calls, and our last 10-K filed in February 2008, and in our 10-Q filed in October, these investments have been negatively impacted by the uncertainties in the credit markets and their exposure to the financial condition of bond insurance companies.

In Q4, their estimated fair value declined further and as a result we recorded an impairment charge of $4.6 million, against GAAP earnings. We continue to classify these securities as long-term investments as of December 31. In future periods, the estimated fair value of our auction rate securities could decline further based on market conditions, which could result in additional impairment charges that may be substantial. While our overall cash position and cash flow remains very strong, we continue to evaluate all potential means to remedy the situation.

Turning to the remainder of the balance sheet. DSOs were 53 days in Q4, a decrease from 59 days in Q3 and in our target range of 45 to 55 days. Inventory turns for the quarter were 2.9 times, compared with 5.4 times in Q3. Inventory turns were below our target of 5 to 6 times as we initially expected higher revenue levels in Q4 and we built inventory accordingly.

Over the past few months we’ve taken significant steps to bring our inventory turns back to a more normalized level going forward. The company continues to have no debt total liabilities at the end of Q4 were $144.2 million. During the fourth quarter of 2008, our capital expenditures and depreciation were $2.5 million and $1.8 million respectively. Overall cash flow was strong once again in Q4 and we generated $16.4 million of cash from operations. As of December 31 we had 1,079 full time employees up 39 from the end of Q3.

I’ll now move on to our guidance for the first quarter. Of course providing Q1 guidance is particularly challenging, given the current macroeconomic environment we are all operating in. We, like others in the semiconductor industry anticipate continued weakness and demand in the upcoming quarter and we are cautious in our outlook. In regards to our particular channels of revenue, we anticipate a majority of the weakness to be with PC OEMs and to a lesser extent networking and consumer customers.

Based on these trends, we currently anticipate revenue to be down sequentially 12% to 18%. We expect our gross margins to be in the range of 48.5 to 49.5% and once again well above our long-term target model. We will continue to invest prudently in the people, product tape outs and infrastructure necessary to support our continued long-term growth and entry into new markets. But we will do so with a moderation that is appropriate for these uncertain economic times.

We've put a tremendous focus on cost controls for the first quarter and based on these efforts, we currently anticipate operating expense will be between $39.5 million and $40.5 million, representing a range of down 1% to 3%. R&D expenses are anticipated to decline and SG&A is expected to increase in absolute dollars. Our pro forma tax rate for Q1 is expected to be approximately 15%. And for the quarter we anticipate EPS to be in a range of $0.03 to $0.05 based on fully diluted shares outstanding of 62.2 million.

We are committed to dealing with the realities of this current economic slow down and managing our company prudently during these turbulent times. However, we also remain very focused on making the appropriate investments that help us to achieve our longer-term goal of building a stronger diversified communications company. In 2008, our commitment to our non-core wireless LAN businesses enabled us to grow both revenue and gross margin dollars from these product lines by well over 50% year-over-year while still growing our market share with our core wireless LAN customers.

As we navigate through the current period of economic uncertainty, we remain confident that our product portfolio and financial strength will enable us to gain further market share and emerge even stronger.

So, with that let me hand it back over to Craig. Craig?

Dr. Craig H. Barratt

Thanks Jack. Operator, we are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Quinn Bolton with Needham & Company. Please go ahead with your question.

Quinn Bolton – Needham & Company

Hi guys. Just wanted to ask you a question, Craig in the guidance, looking forward do you expect all three businesses to be down or could we see the consumer business continuing to ramp. And then I have got a couple of followups?

Jack R. Lazar

Okay. Quinn, it's Jack. As far as the guidance itself, we are actually only very specific about PC OEM, I think, in a time where we have a relatively larger guidance range, I think we know for a certain or relatively certain, certain if you can be these days that PC OEM will be down. As far as the other two, the magnitude if there was a decline would certainly be significantly less. So, it's I think what we know for sure, relatively sure is that PC OEM will be down.

Quinn Bolton – Needham & Company

Okay, great. And then just wanted to ask about the design wins, you made the comment in the prepared remarks that your customers will be initiating less new designs and so current design wins are pretty important. With that in mind, could you sort of give us a sense how you feel about the Align product wins and specifically, what sort of timeframe do you see that product line ramping is that over the next couple of quarters, when does it become significant percent of the wireless LAN business?

Dr. Craig Barratt

Quinn as we mentioned in the prepared remarks, we are very excited about how our Align product family, it really provides a 11n class performance at price points, which will be very, very competitive with existing shipping G products. So, we think this is – this is really the inflection point that allows in 2009 for a lot of more of the G business to transition over to a 11n. So, we are seeing broad-based adoption in PCs, we are seeing broad-based adoption in the retail and networking segments. So, overall, we are positive, where actually the three initial products we announced in our Align family are all shipping and production this quarter. So, we expect to see a ramp beginning this quarter. We don’t give specific color on when that will actually be material or significant revenue, but it's definitely an important growth driver for us this year.

Quinn Bolton – Needham & Company

Great thank you.

Operator

Our next question comes from the line of Mark McKechnie with Broadpoint AmTech. Please go ahead with your question.

Mark McKechnie - Broadpoint AmTech

Great. Yes. Thanks for taking the question and nice cash flow there Jack, in terms of the guidance, you are only going after March of course and, we’re just trying to get a sense for, how much of this is inventory burn and the same question everyone is asking you, when do you think the rope gets tight. So, any you can help us out there we’d appreciate in terms, if you think you get a snap back in June, September where do you think or what do you for plan for things to bounce back? Thanks Jack.

Jack R. Lazar

No problem. Mark, thanks. So, I guess in regards to snap backs or inventory corrections or any of those types of topics. The simplest thing to say is that, I think for anybody to standup here and say they know when it's going to happen, the only thing that we will tell you is that they are wrong. The economy is the economy right now, what we can control are the design wins and that’s what we've really tried to focus on is winning each and everyone of these design wins because that in essence will help us in an even greater way as the economy picks backup. I think as we move through the quarter and head into Q2 clearly we’ll start to get more and more visibility, but right now I think we’re giving you all our best guidance based on the, backlog that we have, based on the design wins that we have and we try to be prudent in coming up with that guidance, cautious as we pointed out, but at the same time realistic and as that changes we will be happy to update you guys, I wish we could provide you a little bit more color on that, but it clearly is a very unique moment and time right now.

Mark McKechnie - Broadpoint AmTech

You bet. Thanks Jack.

Operator

Our next question comes from the line of Gus Richard with Piper Jaffray. Please go ahead with your question.

Gus Richard - Piper Jaffray

Yeah. Thanks for taking my question. Could you talk a little bit about the pricing environment out there are you seeing anything abnormal, and still a little bit about inventories of product downstream?

Jack R. Lazar

So, I will take the pricing environment here. So, we did point out in our call or in our prepared remarks that our pricing was relatively stable going into the quarter, and of course that makes logical sense. Because we deal in relatively elastic markets, if they are not elastic then it doesn’t make sense to actually see declines in prices and that kind of played out during Q4. As we look into Q1 you can kind of tell from our margin guidance that clearly we are not expecting any significant ASP changes as we move through Q1. So, I’d say it's relatively benign environment right now, it doesn’t mean that it's not going to get worse or better, but right now from what we see, pricing isn't really the issue, it's demand that's the issue.

Dr. Craig Barratt

Yeah now comment there Gus is in some sense the elasticity that we normally enjoy in the semiconductor market has certainly diminished, and so obviously the concern here is that by driving prices down being more competitive, one is not likely to generate the proportional or disproportional increases in demand that we saw before. So, we have to be cautious about pricing, we also realize an environment where competitors will quite likely will be more aggressive and I think our strong product roadmap and our new product introductions will continue to allows us to, be very, very aggressive when we need to, but of course maintaining existing designs as well. I think your second question was regarding inventories downstream, I think it's really difficult to tell, we are just getting back from Chinese New Year, certainly we are doing checks and trying to see at the ODM and OEM level, I think it varies significantly by customer and by channel, we see a whole range of issues and our picture there will certainly improve in the next few weeks.

Jack R. Lazar

Yeah, I mean we see pockets frankly both ways, we see some customers that are actually starting to pickup a little bit more, we see others that are still relatively dead. So, I think to make it sweeping generality, sweeping statement it's a little bit tough at this point and as the quarter progresses we will obviously get more and more visibility into that, and certain pockets are going to recover quicker than others. But right now I don’t think there is a trend that we can point to that says, everything is up or everything is down. I think its really much more customer specific as Craig pointed out.

Gus Richard with Piper Jaffray

Right. And then just one more quick one if I may. Can you talk a little bit about or just give me an idea of cellphone revenue was up sequentially in Q4 and do you expect that strength in momentum to continue into Q1?

Jack R. Lazar

I think that there is basically a bunch of different design wins that we have on the handset side, and as we have mentioned they're both QUALCOMM and non-QUALCOMM related designs. It really just depends on the timing of the handsets themselves being released into the marketplace obviously the trends in Q4 were actually relatively good. Right now, as we look at consumer we don’t see that as the big area of weakness for us for this upcoming quarter. But again it's a little early to tell.

Dr. Craig Barratt

Yeah, yes through the main dynamic force in that market is really increasing our share by getting designs and new designs to market the overall behavior of that market is less significant just because we are starting at a more modest share.

Gus Richard with Piper Jaffray

Got it. Thanks so much.

Jack R. Lazar

Thanks Gus.

Dr. Craig Barratt

Thanks Gus.

Operator

Our next question comes from the line of Heidi Poon with Thomas Weisel Partners. Please go ahead with your question.

Heidi Poon - Thomas Weisel Partners

Thanks guys. As much of your expectation for PC segment is low, starting to hear some chatter from your competitors that there has been some XSPAN orders on the PC side, are you also seeing that?

Dr. Craig Barratt

There are pockets where, in each of our segments where we actually even see reports of shortages because inventory levels have been brought down to unsustainable levels. I think it’s a function of the mix of some of those customers potentially shifting from one area to another, and so there are some pockets, I would say isolated pockets where we do see that dynamic as well, but it very much varies by specific customer.

Heidi Poon - Thomas Weisel Partners

So, you don’t expect that to continue through the quarter…

Dr. Craig Barratt

Well I think there will be a time in the future where it actually becomes more significant whether it happens in this quarter or not I think is difficult to predict.

Heidi Poon - Thomas Weisel Partners

Gotcha. Also it seems like you have done very well in the netbook arena, but for the next assigned cycle do you anticipate any change in market share, there has been some rumor about your competitors gaining more sockets in the existing customers that you have?

Dr. Craig Barratt

Now, I think remarks about our design win trajectory I can certainly specifically repeat for the netbook market, we’re actually very happy with how things are going there in fact also expanding our technology footprint in new areas. In addition, we have our Align product family in the PC channel is specifically focused on the netbook market. So, I think we’re going to be very well positioned in the netbook market continuing our momentum very nicely out of 2008.

Jack R. Lazar

One of the things to point out is that in times like this when people are dealing with economic uncertainties. Actually, they’re going to tend to gravitate the customers or to vendors that they’ve actually done a lot of business with and they are very comfortable with. And we think this is one of the areas that we’ve actually excelled out over the last couple of years is creating good, solid, long-term relationships with these customers, and having a design path that actually helps them in situations like this. Align is a classic example I mean it really provides them a significant improvement in their product set, but at the same time can do at a very reasonable price, and so we clearly will be pushing Align in both netbooks, notebooks, in a variety of platforms where people are very value conscious, but at the same time are looking for that extra bit of performance.

Heidi Poon - Thomas Weisel Partners

Great. And a little bit more about the inventory, could you give us a sense of how much of that would be related to the consumer segment?

Jack R. Lazar

You mean the, what portion of our inventory is related to the consumer segment?

Heidi Poon - Thomas Weisel Partners

Right, right the mobile Wi-Fi.

Jack R. Lazar

Yeah. So, we don't get into that level of detail. What I can tell you and what you will see I’m sure in our K is that we are sitting on a lot more finished goods obviously going out of this quarter. And, clearly a lot of its going to be related to core wireless LAN business, since it was the real under performer in the most recent quarter. I think we are very comfortable that overtime, we will be using these products and we had some obsolescence charges that we took, but they weren’t significant enough to really point out as part of our prepared remarks. The products we have been shipping for in some cases, our single-chip 11g products have been shipping for almost five years now. So, I think the products will get moved there is a variety of design wins that already incorporate each of these products. So, I think we are pretty comfortable with the inventory levels there, just obviously demand changed quickly on us.

Heidi Poon - Thomas Weisel Partners

Great. Thank you.

Jack R. Lazar

Thanks.

Dr. Craig Barratt

Thanks Heidi.

Operator

Our next question comes from the line of Adam Benjamin with Jefferies & Company.

Adam Benjamin - Jefferies & Company

Thanks guys. I was wondering if you can go into a little more detail about your Align strategy, if you look at specifically the PC market and the router market, there are different dynamics in both and as you look at those markets, just wondering if you can help us better understand how you're attacking that with the Align, for example, the router space it seems that its an upgrade from Super G to the one-by-one and if you can net out how that works further, share gain opportunity as well as ASP that will be helpful. And then as it relates to the PC market, it'd be helpful to understand how Align is incremental for you, is it share gain, is it ASP bump, is it a combination, how are you looking at that?

Dr. Craig Barratt

Yeah, I mean I think on the router side definitely our goal is provide an upgrade path for 11g not necessarily Super G, and I think there is really the opportunity for share gains by positioning that technology appropriately and really, getting customers to buy into the compelling price performance benefits that we can provide. So, I think that’s anecdotal, there is certainly favorable on the share side. On the PC side, we obviously have a very, very good share of the G business across the PC market, but also if you remember as we first started to introduce one-by-two solutions last year into the PC market, Align actually presents us with both opportunities in that space. We can provide a significant performance upgrade to 11g in many cases our own-installed base at a better sort of price performance level. So, that's a win for the customer and for us, but in the one-by-two case, we can also provide performance, which is very, very close to the prior generation one-by-two products, but at a very, very compelling price points. So, that’s once again a win for both the customer and for us. So, I think there are cases where we can provide benefits and it's not just price points, it's also benefits like power consumption, we have a solution, which is substantially better power than our 11g. So, I think there is opportunities for share gain in both of those channels, and I think it's favorable from a product cost structure point of view for both us, and for the customer too.

Jack R. Lazar

Yeah, Adam in the end I mean we sat down with our customers early last year, and we asked them what they wanted, and they came to us because they trusted that we would actually design products that met their needs, and their needs really vary based on, it being the low end or the high end, and we have to serve all of the those different product lines. I mean todate we’ve shipped over $1.5 billion worth of wireless LAN revenues since our beginning, and we think we know just a little bit about wireless LAN and we hopefully know how to listen to our customers when it comes to those products. I mean at the same sense, we shipped over 275 million wireless LAN chipsets. So, we do know the market, but we know it a lot better when we sit down and talk to our customers and Align and the one-by-two products they all meet those needs of the customers and we’re seeing it in the form of design wins right now.

Adam Benjamin - Jefferies & Company

Right. No, I am just trying to get my arms around the opportunity, and for example, I’ve heard one of your competitors has a new one-by-one chip that's priced with a three in front of it. And so I am just trying to better understand if you think about upgrading your existing customer for example at G or Super G, how you look at that as incremental, as you move them to a one-by-one, do you get an ASP bump, do you look it as a share gain opportunity because I think some people are confused as to what the incremental opportunity is as it relates to maybe specifically the router market?

Jack R. Lazar

Yeah, I think the answer to that is yes. I mean we look at it as a way to actually get an ASP bump, remember we sell those portfolio of products, right. So, usually our customers are going to come to us, and they are going to say they want this that and another product, and what you really care about is what’s the blend of what you’re getting from that particular customer. We also look at it as a way to get market share, and, I think we’ve had some nice success with the Align products in gaining market share that will be reflected later this year. And so the combination that you really give the flexibility to grow our core business, which is important since that clearly generates a lot of the cash that that makes this company bigger.

Adam Benjamin - Jefferies & Company

Gotcha. Just one last question guys, thanks. In the quarter, PC was down 37, networking as a whole was down 40, if you break it out between retail and carrier was there a big delta in terms of the sequential decline?

Jack R. Lazar

Yeah, retail was down, the vast majority of the decline. So, and it was not just the U.S. it was throughout the world so emerging countries Europe, U.S. retail was very weak this last quarter. So, it definitely makes up a very good chunk of the networking decline.

Adam Benjamin - Jefferies & Company

The carrier was flattish?

Jack R. Lazar

Carrier was down just slightly, but nowhere near what the rest of the business look like?

Adam Benjamin - Jefferies & Company

Gotcha. That’s all I need guys. Thanks.

Jack R. Lazar

Thanks.

Dr. Craig Barratt

Thanks Adam.

Operator

Our next question comes from the line of Eric Ghernati with Banc of America Securities/Merrill Lynch. Please go ahead with your question.

Eric Ghernati - Banc of America Securities/Merrill Lynch

Yeah. Hi it's Ghernati for Sumit Dhanda. Thanks for taking my question. Just Jack just to clarify with respect to your guidance, can we infer from it that the PC business will be down more than the midpoint of the guidance?

Jack R. Lazar

We did not say that specifically, all we have said is that the PC business will be the weakest portion of our business going forward in Q1. To get to the midpoint something is got to be higher something is got to be lower. So, I guess it's probably a fair assumption to think that PC will be a little bit lower.

Eric Ghernati - Banc of America Securities/Merrill Lynch

Okay. Just a little bit lower?

Jack R. Lazar

Sorry, just it will be lower.

Eric Ghernati - Banc of America Securities/Merrill Lynch

Okay. And then with respect to your inventories obviously pretty high by historical standards, can we expect an inventory reduction in Q1, and if so how much?

Jack R. Lazar

Well, I think you can’t really quantify what that inventory line is going to look like until we see the whole quarter play out. Clearly, we've reduced our wafer orders over the last three to four months and that in turn should help us with kind of getting inventory back to a more normalized turn. I think I specifically said in the comments that we expect turns to get to a more normalized level, it will take a little while to get there, but we certainly are not in a mode of building up more inventory right now.

Eric Ghernati - Banc of America Securities/Merrill Lynch

Okay. And then the I guess a little bit worse the consumer business is becoming a bigger portion of your business faster than you had originally expected, obviously these are still smaller volumes, yet albeit meaningful in terms of dollars right now given the shortfall in the other businesses, but as you move towards the back half of the year where, hopefully some seasonality will drive the volumes higher and you will be, these designs will mature, how should we think about their impacts on the overall gross margin of the company going forward?

Jack R. Lazar

Well I think looking out at the back half of the year this point is a pretty tough task. So, I really can't go there. You can see that obviously it didn’t have much of an impact this quarter, right I mean it rose quite a bit as a percentage of our revenue in Q4 and the gross margins came in pretty much where we had anticipated. So, I don’t think that the current pricing levels that we are at for products in our consumer channel, I don’t think that has few significant impact one way or the other on the gross margins.

Eric Ghernati - Banc of America Securities/Merrill Lynch

Okay. Just one housekeeping – two housekeeping questions. Your pro forma tax rates in Q4 please and then your ESO guidance in for Q1 please, thanks.

Jack R. Lazar

I have to, why don’t we take that off-line afterwards because I don’t have it right here in front of me, Q4 tax rate did included a $2.8 million benefit. So, that's what makes us a little bit odd. So, it's in the low teens as the pro forma rate without it and ESO going forward we actually don’t provide that level of guidance.

Eric Ghernati - Banc of America Securities/Merrill Lynch

Okay. Thank you.

Operator

Our next question comes from the line of Dan Morris with Oppenheimer. Please go ahead with your question.

Dan Morris – Oppenheimer & Co.

Hi guys. Can you hear me?

Jack R. Lazar

Yes, we can.

Dan Morris - Oppenheimer & Co.

Okay, great. Yeah, you did a nice job of trying to bring down OpEx during the quarter, I just wanted to find out how that my trend throughout the year I mean, I know you have certainly with some of the big marketing events in the first quarter that that’s probably the reason for a little bit of a spike in your guidance for that segment, but just looking how that might trend through rest of the year?

Dr. Craig H. Barratt

Yeah obviously Dan we’re just giving one quarter's guidance and, the OpEx guidance we gave, which was referred to decline just a very modest amount from the decreased levels in Q4 is just showing our focus on discretionary expenses and travel and some other areas. That said we are trying to balance the business with our investment in the products, which are so important to our future and growth. So, in the up quarters it definitely is a function of what we see happen to the business and I think we will be very prudent and responsive in terms of managing the expenses in Align with the overall pictures that the company faces later in the year.

Jack R. Lazar

Yeah. I think that’s right and SG&A does spike a bit this quarter because of as you mentioned Dan. That, we do have trade shows this quarter we have some more legal expenses we’re going through this quarter. There is a bunch of kind of miscellaneous things, how that will play out as the year goes by, I don't know, but no matter what we’ve taken into our overall profitability goals and make the appropriate investment. So, we are trying to do our best to really maintain normal and rational operating expense levels with the hope that the design wins that we have will actually help us for our business as we move throughout the year, but we are realistic too, we are continuously keeping our finger on the pulse of what's going on out there.

Dan Morris - Oppenheimer & Co.

Okay, great. And just, with regards to some of your comments about running the product portfolio, could you just give maybe a little bit of an update on how your attach rates with your Ethernet products are going especially, in conjunction with any Wi-Fi design wins that you have?

Dr. Craig Barratt

Sure, Dan. I mean in the prepared remarks we pointed out that we are actually very happy with our design win momentum in the Ethernet business. On the Ethernet client side, we have a significantly growing share in laptop and motherboard manufacturers. And then on the switch side, we noted a couple of things, one is that we have some important wins, top five of the top networking OEMs. And additionally the Ethernet switch technology is now integrated into one of our first combo chips, which is the AR7240 that I mentioned also in the prepared remarks and this integrates our network processor technology with a 5-port Ethernet switch. And so that will further increase our presence. In many cases on the router side, our Ethernet switch wins are coupled with a Wi-Fi socket, but there are many cases actually where, we are also winning Ethernet sockets separate from our Wi-Fi technology as well. So, that indicates that our Ethernet technology and competitiveness is really quite good. So, overall with our cumulative 15 million Ethernet shipping, we are optimistic about the trajectory of this business.

Dan Morris - Oppenheimer & Co.

Thank you.

Operator

Our next question comes from the line of Shawn Webster with JPMorgan. Please go ahead with your question.

Shawn Webster - JPMorgan

Yes, thank you. For your guidance for Q1 can you give us any kind of color on what you are seeing in terms of backlogs, bookings, visibility to the extent you can, if you can quantify that, then I got a couple of other questions?

Jack R. Lazar

Okay, Shawn it’s Jack.

Shawn Webster - JPMorgan

Hi.

Jack R. Lazar

We actually don’t disclose backlog as I think folks know, what I will tell you is that I don’t think there is any abnormally large amount of turns that we have to – to go through, and nor do we run a very large turns business.

Shawn Webster - JPMorgan

Okay. Would you characterize your visibility now versus this point last quarter as better same or worse?

Jack R. Lazar

Well, clearly my visibility going into last quarter was not very good, and I didn’t know it. So, unfortunately it’s hard to really compare to what is hopefully one of the worst things we are all going to go through, which was the fourth quarter of last year. We have done a lot of digging over the last month and half really focused on the validity of designs, the inventory levels at our customers. We've tried to put together what we think is, a rational and relatively cautious outlook of what we think the quarter will look like, and we certainly use things like our existing backlog as a means to evaluate that. So, this is our best idea of what is going on right now, and what we can achieve, and we have all the reason in the world to believe that this is something, this range is very achievable.

Shawn Webster - JPMorgan

Okay. I like to circle back on the pricing question, I understand there is not a lot of elasticity now for you guys and a number of other semiconductor companies, but I guess what I am trying to figure out is, does the current environment where inventories are sitting broadly the demand environment, does that add any kind of pricing pressure to your design win cycle or you are negotiating prices for future design wins I am no talking about pricing changes this particular quarter, but prices that will happen in the future as you win your new design wins do you have to be more aggressive there?

Dr. Craig Barratt

I mean Shawn that happens on a case-by-case basis in the course of normal business any how, and so certainly that dynamic will still be present, there could be pockets where its stronger, but really our goal is with our product strategy is to be very well positioned to make sure that we can continue to be aggressive and have a leadership at the customers, where it really matters to us. So, I think that’s something that we feel like we can manage quite effectively.

Shawn Webster - JPMorgan

Okay, thank you.

Jack R. Lazar

Thanks

Dr. Craig Barratt

Thanks Shawn.

Operator

Our final question comes from the line of Jonathan Goldberg with Deutsche Bank. Please go ahead with your question.

Jonathan Goldberg - Deutsche Bank

Hi, a quick clarification question. Could you just repeat the comments you made about GPS and your PND prospects, I am going to have a more exceptional question following that?

Dr. Craig Barratt

Yeah, so Jonathan in our prepared remarks we said, we talked about the launch of AR1511 and ORION 3.0 software solution for GPS. We are getting some very good interest from customers and in particular we noted in the prepared remarks that we do have our first design wins at a Tier 1 PND OEM.

Jonathan Goldberg - Deutsche Bank

And following up could you just talk a little bit about how you can balance keeping cost down and maintaining OpEx discipline, but at the same time being able to retain necessary talent and keep up the R&D base and tape outs and all the necessary infrastructure that you need to keep growth going?

Dr. Craig Barratt

Sure. And I think you’ve seen some of that already in our Q4 actuals and our Q1 guidance around OpEx as Jack mentioned we’ve been - we do have a headcount freeze, but on the other hand we have not and nor do we plan currently to have layoffs at the company. And this reflects the fact that we think we can manage the business in a way consistent with the overall business, remember over the last few years we’ve been investing heavily in Asia and that’s helped the overall average OpEx per employee be relatively favorable and we think that cost structure will allow us to be quite competitive and I think to mange our business successfully. We've looked very closely at the projects, we are focused on delivering and we think we are well prepared to deliver the kinds of products and technology advancements we need to while still managing the OpEx in a very prudent way.

Jonathan Goldberg - Deutsche Bank

And then last question you mentioned a ROCm win with Motorola, which phone was that?

Dr. Craig Barratt

That was, let me just, I will look that up. Yes, so it’s, we mentioned two products, so the Motorola one was the MotoSurf A3100.

Jonathan Goldberg - Deutsche Bank

And that's okay. Great, thank you.

Dr. Craig Barratt

Thanks Jonathan.

Operator

That is all the time we have for questions. Mr. Allen are there any closing remarks.

Dr. Craig Barratt

Yes, there are. I would like to thank everyone for their questions. And then I’d like to thank all of you for joining us today. Atheros will be participating in several investor events in February and March. On February the 9, we will be presenting at the Thomas Weisel Partners Technology & Telecom Conference 2009 in San Francisco. On February the 10, we will be presenting at Deutsche Bank's Small & Mid-Cap Growth Conference in Naples, Florida.

On February the 12, we will be celebrating our fifth year anniversary as a public company and opening the Nasdaq market. On March the 2, we will be presenting at the Morgan Stanley Technology Conference in San Francisco and on March the 10, we will be at the Credit Suisee Semiconductor and Communications Equipment Conference in Boston. Thanks again for your interest in Atheros. Good-bye for now.

Operator

Ladies and gentlemen this concludes the Atheros fourth quarter 2008 financial results conference call. You may now disconnect.

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