Atheros Communications Q4 2006 Earnings Call Transcript

Jan.29.07 | About: Atheros Communications, (ATHR)
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Atheros Communications, Inc. (NASDAQ:ATHR)

Q4 2006 Earnings Call

January 29, 2007 5:00 pm ET

Executives

Deborah Stapleton - Stapleton Communications Inc.

Craig Barratt - President and CEO

Jack Lazar - Vice President, CFO and Corporate Secretary

Analysts

Mark Edelstone - Morgan Stanley

Jonathan Goldberg - Deutsche Bank

Adam Benjamin - Jefferies & Co.

Rohit Pandey - HSBC

Charlie Glavin - Needham and Company

Arnab Chandra - Lehman Brothers

Shebly Seyrafi - Caris and Company

Presentation

Operator

Welcome and thank you for standing by. At this time all participants are in a listen-only mode. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I will turn the meeting over to Ms. Deborah Stapleton, who will introduce today's speakers. Ma'am you may begin.

Deborah Stapleton

Good afternoon everyone and welcome to Atheros Communications' Fourth Quarter 2006 Financial Results Conference Call. Leading the call today are Dr. Craig Barratt, President and CEO and Jack Lazar, Vice President and Chief Financial Officer.

Before we begin, I would like to remind you that various remarks that we make on this call, including those about our future financial results including revenues, sources of revenues and expenses, our future plans, goals and prospects, market trends, design wins and product development, our customers, our competitive position and our anticipated growth, profitability and leadership position in various markets, product announcements and shipments in 2007 constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act. These forward-looking statements and all other statements that may be 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

We refer you to our annual report on Form 10-K for the year ended December 31, 2005, and Form 10-Q for the quarter ended September 30, 2006, both previously filed with the SEC, in particular to the section entitled ‘Risk Factors' and to other reports that we file from time to time with the SEC, for additional information on factors that could cause actual results to differ materially from our current expectations. These forward-looking statements speak only as the date hereof, and we disclaim any obligation to update these forward-looking statements.

Atheros reports net income and basic and diluted net income per share in accordance with GAAP, and additionally on a non-GAAP basis referred to as pro forma. Atheros' management believes that the non-GAAP information is useful because it can enhance the understanding of the company's ongoing economic performance, and Atheros therefore uses pro forma 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 how the company annualizes its operating results. The full reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued earlier today, and we ask that you review it in conjunction with this call. All numbers that we discuss in today's conference call are non-GAAP numbers unless otherwise noted.

So now, I will turn the call over to Dr. Craig Barratt.

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Craig Barratt

Thanks, Deb, and thanks to everyone for joining us today. We're very pleased to report another outstanding quarter and year for Atheros. To briefly recap some specifics. We reported record revenue of $87.8 million, record net income of $12.7 million or $0.22 per diluted share, and a GAAP net loss of $953,000 or a loss of $0.02 per diluted share, which includes $11.4 million in estimated acquisition related expenses. Gross margins were 47.6% and slightly above our guided range.

Our operating income in the fourth quarter was 15.3%, up from 14.5% in the third quarter. Jack will take you through the numbers in greater detail and discuss guidance for the first quarter. 2006 was another exceptional year for our company. We recorded four consecutives quarters of sequential revenue and non-GAAP earnings growth. Revenue for the year was $301.7 million, an increase of 64% over 2005 and net income was up 269%. These dramatic increases in both revenue and profitability were driven by both market share gains in our core wireless LAN market, as well as the initial benefits of our diversification strategy.

In 2005, Atheros' revenue was driven almost entirely by our strength for wireless LAN, with less than 4% of our revenue coming from other product segments. During 2006, we became a significant player in the PAS market, gaining over 20% market share. And we began shipping our initial ROCm line of mobile wireless products. Revenue from our PAS and ROCm products made up over 20% of the $118 million increase in revenue during 2006.

In 2007, we are broadening our product offerings and addressable markets into a total of five different areas, adding the Ethernet business through our acquisition of Attansic and of course our internally developed Bluetooth family of products announced this morning. I'll go into more detail on each of our products segments in a few minutes.

There were several important highlights for Atheros in 2006, a year in which we diversified our areas of business to greatly increase our TAM, while we continue to take market share in our core wireless LAN business. One of the most significant events in 2006 was the industry's adoption of the Draft 11n standard and our leadership in that market. Our strong customer relationships and technology differentiation have enabled us to gain many 11n design wins resulting in significant revenue growth.

We succeeded in making the carrier market, a growth driver for 11g revenue during 2006. During the fourth quarter our enterprise and carrier business represented 25% of our revenue and it once again was up sequentially in both dollars and as a percentage of revenue. Another big contributor to our revenue growth in 2006 was our success in the PAS market. Our AR1900, the world's first single chip cellular solution helped us amass market share with PAS Handset OEMs. We continue to expect revenue growth from our PAS business in 2007. We also began shipping our ROCm family of embedded products. These lower power wireless LAN chips are targeted towards dual mode cellular handsets, low cost voice phones, gaming devices, cameras, camcorders, music players and PDAs.

Finally in addition to growing our business organically in 2006, we completed two acquisitions that will be important building blocks in our future growth. This terrific year was punctuated in December with the fabulous semiconductor association awarding Atheros the most respected emerging public fabulous company and favorite fabulous pick of the investor community.

Now let's look at each of our product areas in a little more depth. Our core wireless LAN business continues its strong growth in the fourth quarter. In fact, core wireless LAN revenue increased over 50% from 2005 to 2006. While 11n received much of the press joint in 2006, Atheros' 11g and 11ag revenue increased over 35% and represented more than 50% of our $118 million increase in 2006 revenue. Penetration into emerging markets such as the Carrier segment as well as a significant increase in our PC OEM related revenue helped drive Atheros to record revenue levels.

While we decreased our historical reliance on the retail channel, the sales of wireless LAN products in 2006. This segment continue to demonstrate strong revenue growth as we obtained additional retail SKUs at some of the major OEMs and our 11n products were shipped in significant volumes.

As you have heard throughout the year, Atheros is leading the ongoing transition from 11g to 11n and we continue to expect significant 11n growth this year. A year ago, we announced our XSPAN family of 11n solutions, which includes the worlds only single-chip triple-radio design. At the 2007 Consumer Electronics Show, we demonstrated eight simultaneous applications including multiple HD video streams, audio, multi-play gaming and data, all on a single 11n wireless network. More importantly, we showcased the wide variety of OEMs that are now shipping XSPAN 11n products in the retail and PC OEM markets. Atheros is leading draft 11n solutions that featured in approximately 50 products worldwide.

Among those using our 11n solutions are D-Link, Belkin, Corega, IO Data, Lenovo, Linksys, NEC, Siemens and TRENDnet. Earlier this month, we announced our highest performance draft 11n solution, the AR5008AP-3NX2 chipset, the dual-concurrent networking, which combines Atheros XSPAN 11n technology with the industries most powerful wireless network processor, the Atheros AR7161. Our AR7100 family of networking processors was launched in the third quarter and has become an integral part of our 11n product strategy to drive system performance up and costs down. Just as importantly these network processors which feature up to 600 megahertz speed and gigabit connectivity are critical elements in unlocking the throughput potential of the 11n standard.

In our third quarter conference call, we guided that our 11n products would make over 15% of our fourth quarter revenue. The fourth quarter revenue from our XSPAN 11n products exceeded our expectations, accounting for 23% of our record wireless LAN revenue in the fourth quarter up sequentially 117%. These revenue levels clearly establish Atheros as a leader in the growing 11n market, which is expected to mature with the eminent approval of the 2.0 Draft. 2006 was a stand-out year for our core wireless LAN business and we continue to believe that our 11n products will be the most important driver to our revenue growth in 2007.

Revenue in our enterprise and carrier segment increased for the eight straight quarter and accounted for 25% of our fourth quarter revenue. Our revenue in this segment almost doubled in the fourth quarter compared with the year earlier. We have design-wins at five of the top broadband gateway vendors worldwide Sagem, Thomson, 2Wire, Siemens and ZyXEL.

Over the past year we forged partnerships with several of the leading DSL broadband chipset providers, assuring carrier customers that they will have the best performing competitively priced wireless LAN technology for broadband deployments. Over the past few quarters, we have seen a significant increase in gateway designs that incorporate wireless LAN. Our single chip products are well suited for gateways solutions and during 2007 we will introduce additional products, providing both performance and cost improvements.

Additionally, carriers are actively planning a rollout of gateway solutions featuring the 11n standard. The new standard is attractive to this segment of the market, since it will enable the delivery of Triple Play and IPTV services and therefore increase the service revenue carriers can derive from each home installation.

The carrier market is important to Atheros, as home installations of wireless LAN will increasingly be delivered by the consumer's broadband service provider. In fact, we forecast that in 2008 access point volume from the carriers will exceed that from the retail channel and we believe we are well positioned to serve the needs of this emerging market. Additionally, we continue to be the chipset provider of choice for a large number of the citywide, wireless LAN deployments that are happening around the world.

Let's move next to the mobile market. We anticipate our ROCm products will be an integral part of our revenue growth in 2007 as a wide variety of products featuring Atheros' mobile wireless LAN platform begin shipping.

In November, the software from our ROCm platform was chosen by Microsoft for inclusion in the Windows Embedded CE 6.0 Operating System. Our software provides handset and consumer electronics manufacturers with a Microsoft verified platform for immediate deployment of low-power, high-performances and security enhanced Wi-Fi capabilities in a variety of handset and mobile consumer devices.

Our partnerships with companies such as Compal, Microsoft and QUALCOMM are essential enablers to this revenue growth. We have design-wins in virtually every segment of mobile communications and consumer electronics, such as Voice-over-IP phones, dual-mode handsets, smart phones, PDAs, mobile gaming devices, digital cameras and camcorders.

Our ROCm products will play an increasingly important role in our revenue growth in 2007 and beyond, as the number devices incorporating low-cost, low-power wireless LAN solutions continues to multiply. With the establishment of our mobile business unit in 2006 and our continued investment in products for this segment, Atheros is dedicated to being a leader in this emerging market.

2006 marked the first year in which a substantial portion of our revenue came from a product line outside of wireless LAN. Our strategy to enter the PAS market provided great financial returns through out the year and was integral in driving our gross margin expansion. While some doubted that the PAS market needed another chipset provider, we proved that our ability to develop an integrated single chip complete system solution in standard digital CMOS would be welcomed by OEMs in this space. As a result, we effectively penetrated a market that has over 100 million subscribers and tens of millions of handsets shipping on an annual basis.

Through our partnership with UTStarcom and other OEMs, we believe our market share in the PAS market is now or 20%. The UT117 and the X30 handsets from UTStarcom were among most popular handsets sold in China throughout 2006 and we will be working closely with UT to introduce new and innovative handsets in the upcoming year. While we are not anticipating an increase in the TAM for PAS in 2007, we do expect to increase both our revenue and market share as more customers choose Atheros as their PAS solution provider.

Our PAS product line remains an important part of our strategy to develop a world-class, diversified, communications semiconductor company. Also in 2006 Atheros began to acquire companies that we believe are critical to our future success. In our acquisition of ZyDAS, we successfully added greater engineering capabilities and complimentary wireless LAN USB products and formed our Taiwan Research and Development Center. Our Taiwan base gives us a presence in a lower cost region that has the advantage of being close to many of our customers and suppliers.

Our more recent acquisition of Attansic based in Taiwan and Shanghai gives us an entirely new revenue stream in the Ethernet NIC, PHY and later this year the Ethernet switching markets, further diversifying our business in an area complimentary to our core wireless LAN market. We continue to expect our Ethernet business will generate approximately $25 million in 2007 revenue with a large portion coming from the NIC and PHY products we are already shipping to customers.

The integration of ZyDAS and Attansic is going very smoothly to-date, and both have powered up new designs since the closing of each transaction. These acquisitions helped us build our engineering presence in Asia where many of customers and suppliers are located, as we now have design centers with over a 100 employees in each of Hsinchu and Shanghai.

2007 is already shaping up to be an exciting year for Atheros. As you know, today we announced the first of the Atheros' family of solutions for the Bluetooth market, the industry's first 2.1 + EDR solution for PCs. Today Bluetooth PC solutions are based on repurposed handset solutions with external flash memory, which drives the need for more expensive packages and modules. Atheros is the only company to deliver Bluetooth chip uniquely designed for the PC market. We have a fundamentally lower cost structure than our competitors having started with a clean-sheet design. Our Bluetooth technology builds on our expertise in the mobile and embedded markets to deliver the most complete wireless networking experience.

Atheros has architected the AR3011 to achieve the highest level of integration, and it is implemented in standard digital CMOS in a small, low cost, QFN package and eliminates the need for external flash. With an integrated low cost design, we believe we can both exploit and drive increasing Bluetooth attach rates in PCs, and of course we are very familiar with the customers in this market. We have developed our Bluetooth solutions entirely organically for the past 1.5 years, and believe we have the most technologically advanced and cost effective design in the market, and this is just the first of our Bluetooth announcements. We are already doing interoperability testing with products from all the major silicon vendors, and we will be addressing each of the major Bluetooth market segments overtime.

The fourth quarter was another strong quarter for Atheros, and we are optimistic about our prospects for 2007. This year we plan to increase revenue in each of our five main businesses. Core wireless LAN, PAS, mobile wireless LAN, Ethernet and Bluetooth, while developing additional products that will increase our level of diversification. We're well on our way toward our goal of becoming a major communication solution provider to a variety of broad markets including personal computers, residential gateways and mobile devices.

With that I will hand it off to Jack for a few detailed review of the financials.

Jack Lazar

Thank you, Craig and thanks all of your for joining us today. First I will outline our financial results for the fourth quarter ended December 31, 2006, and then I will provide our Q1, 2007 guidance. In summary, our financial results for Q4 were very strong. This was our seventh consecutive quarter of revenue growth and our sixth sequential increase in both operating and net income. Revenue and gross margins exceed the high-end of the range, as we guided to in our last quarterly conference call and EPS was $0.02 better than the high-end of our guidance.

As a reminder, our Q4 guidance was for 6% to 9% revenue growth, gross margin between 46.5% and 47.5%, and EPS of $0.19 to $0.20. Q4 revenue increased 10% sequentially, and net income was up $2.2 million or -- to $12.7 million or $0.22 per diluted share. Gross margins for the quarter were 47.6%, above the high end of our guidance and 260 basis points above the high end of our target model range.

Revenue was a record $87.8 million in Q4, up $8.2 million from the $79.6 million recorded in the third quarter of 2006. Fourth quarter revenue increased 65%, compared with the $53.1 million recorded in the prior year comparable quarter. The 10% sequential increase in revenue was driven by a further expansion of our core wireless LAN business, with particular strength in both our 11g and our 11n products.

Based on the product mix data, the breakdown of revenue for our wireless LAN chipsets was as follows: 11a/g was 20% of revenue, 11g was 57% of revenue, and 11n was 23% of wireless LAN revenue. Revenue from our 11n solutions increased $10 million or a 117% versus Q3 due primarily to the strength of our PC OEM business. You will recall that in Q1 we commented that we would consider 11n a success for Atheros in 2006, if the revenue we derived from it in Q4 was greater than 10% of our overall wireless LAN revenue.

Q4 11n revenue of 23% is more than double what we had anticipated at the beginning of the year. 11g solutions increased $8.7 million or 24% due to the strength in our enterprise and carrier business, and 11a/g solutions decreased in dollars by 39% as some of our PC OEM customers began the transition from the 11a/g to 11n. The percentage breakdown of revenue by market segment based on the data supplied by our ODMs is as follows: retail was 28% of our business, PC OEM was 36% of our business, enterprise and carrier 25% and consumer electronics and other was 11%.

Revenue in units shipped to customers in our PC OEM and enterprise carrier segments set record highs. The enterprise and carrier channel was up $3 million or 16% sequentially due primarily to our growing presence in broadband wireless LAN gateways. The quarterly revenue contribution from this segment was up almost 100% over Q4 of 2005. In addition, our PC OEM channel was particularly strong due to the continued adoption of 11n and PCI Express solutions. Revenue in this segment increased over $9.4 million or 43% sequentially. Our Attansic acquisition, which closed in late December, contributed approximately $250,000 of revenue in Q4. And In Q4, Hon Hai Precision Industry was our lone 10% or greater customer.

Fourth quarter gross margins were 47.6%, above the high end of our 46.5% to 47.5% guided range and well above our corporate target range of 43% to 45%, although down 40 basis points from Q3. On a same chip basis excluding the impact of ZyDAS chips, core wireless LAN ASPs were relatively flat in Q4 compared with Q3.

Total operating expenses were $28.4 million, which represents a 7% increase from Q3 and was within our guidance of $27 million to $28.5 million. R&D increased $1.4 million or 9% sequentially due to headcount additions, including the cost of Attansic personal and software and licensing fees. As a percentage of revenue, R&D declined from 21% in Q3 to 20% in Q4. SG&A increased $300,000 million due to headcount additions, consulting costs, and professional fees but was down as a percentage of revenue from 13% in Q3 to 12% in Q4.

Operating income in the quarter was $13.4 million, up 16% from the $11.5 million recorded in Q3 and a 162% increase from what was recorded in Q4 of '05. Operating income was at a record 15.3% of revenue in the fourth quarter up from 14.5% in Q3.

The effective tax rate in Q4 was 19%, down from 24% in Q3. During the quarter we received a tax benefit resulting from the recent passage of the Federal R&D tax credit in December. This favorable tax rate contributed one penny to our EPS during Q4.

Net income was $12.7 million or earnings of $0.22 per diluted share for the quarter compared with net income of $10.5 million or earnings of $0.19 per diluted share in Q3, and average shares outstanding were $56.6 million in Q4 and $55.4 million in Q3. GAAP net loss for the fourth quarter was $953,000 or loss of $0.02 per diluted share. In Q4 we recorded an $11.4 million estimated non-cash acquisition related charge resulting primarily from the write-off of in process research and development related to Attansic acquisition. As we finalize the Attansic transaction we will or adjust the acquisition related accounting accordingly. This compares with GAAP net income of $6.3 million or earnings of $0.11 per diluted share in the third quarter.

Revenue for the year ended December 31, 2006 was $301.7 million, a 64% increase over 2005. Annualized gross margins were 48.2%, 400 basis points above the 2005 gross margins of 44.2%. Operating income for 2006 increased to $43.9 million up $36.5 million or almost 500% from the $7.4 million recorded in 2005. Net income for 2006 was $40.7 million or $0.73 per diluted share compared with net income of $11 million in 2005 or $0.21 per diluted share.

Turning to the balance sheet, cash and marketable securities were $186 million at December 31. A $30.3 million increase in cash and marketable securities during the quarter was offset by $35.1 million in net cash consideration paid to the Attansic shareholders upon the initial close of the transaction in December. DSOs based on our quarterly average receivables outstanding decreased 6 days to 47 versus 53 days reflecting strong cash collections.

Inventory turns for the quarter increased to 7.2 times, compared with 5.2 times in Q3, while days of inventory decreased 27% from 70 to 51 days. Inventory turns significantly exceeded our target of five to six times. The company continues to have virtually no debt. Total liabilities at the end of Q4 were $83.1 million. During the fourth quarter of 2006, our capital expenditures and depreciation were $1.2 million and $957,000 respectively. Overall, our cash flow and asset management metrics were particularly strong in Q4.

As of December 31, we had 660 full-time employees compared with 526 at the end of Q3. We doubled our headcount year-over-year and most of the fourth quarter additions were R&D personnel with 80 resulting from the initial close of the Attansic acquisition in December.

I will now move on to our guidance for Q1, which includes the revenue and expenses related to the acquisition of Attansic. Q4 was once again our strongest quarter-to-date in terms of revenue and net income and it capped off an outstanding year.

The first quarter of each year generally tends to be seasonally week for the semiconductor industry. However, we will once again increase revenues sequentially due both to our traditional product lines well as our newly acquired Ethernet business. During Q4, we saw a large increase in 11n revenue as several PC OEMs began shipping Atheros enabled products. In Q1, we anticipated that 11n revenue will decline from Q4 levels and will up less than 20% of our wireless LAN revenue. We expect that retail wireless LAN segment to increase both in dollars and as a percentage of revenue.

Overall, revenue will increase in each of our lines of business, core wireless LAN, PAS, mobile wireless LAN and Ethernet. Accordingly, based on the strength of the combined business we currently anticipate first quarter revenue to increase between 5% and 9%. Gross margin are expected to be in the 46% to 47% and once again above our target model range. We will continue to invest in the people, product tape outs and infrastructure necessary to support our continued growth and entry into new markets.

In the first quarter, we anticipated total operating expenses to be in the range of $31 million to $32 million, a vast of these increases will be research and development related expenses as we anticipate a significant number of tape outs during Q1. Additionally, the operating expenses related to a full quarter of Attansic operations will make up over 50% of this projected increase.

Our pro forma tax rate for Q1 is estimated to decline to 20%. We anticipate our EPS range for Q1 to be range of $0.20 to $0.21 based on fully diluted shares outstanding between 58 million and 58.5 million.

Our Q4 results and our Q1 guidance once again reflect the strength of our business, dividends from our diversification strategy and the favorable product cycle that we continue to leverage. We will invest in the further diversification efforts that we believe will help position Atheros for ongoing success and increase shareholder value in 2007 and beyond.

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

Craig Barratt

Thanks Jack. We are now ready for questions.

Jack Lazar

Operator, you're there?

Question-and-Answer Session

Operator

My apologies, we are in a fire alarm here at the facility. We are trying to transition the call to another operator, so he can handle you without this alarm in the background. I am going to get on mute so you don't have to hear this, one moment.

Craig Barratt

Folks we are going to try and give the operator about two minutes here to see if they can transition this over to another facility. In the meantime, if you have questions that you would like to get answered one option we may end up using is to get email. So, if that is the case may be you could just start drafting some email questions so that we can address them as possible.

Deborah Stapleton

I think the best thing to do here is if could email your questions to alexis@stapleton.com and then she can get those to us and we can just read out the question and answers. So, why don't you begin doing that and we will answer as soon as we get the first question. That email address again is alexis@stapleton.com, thanks.

Jack Lazar

Okay. We do have a question, this is the first question. Can you give us some clarity on which PC vendors are adopting Bluetooth, and as a second part of the question, you mentioned Attansic will be 25 million in 2007 revenue, any idea what Bluetooth can be?

Craig Barratt

So, for the first question Jack, which PC vendors are adopting Bluetooth. We generally announce our end products when they are actually shipping. There will of course be a typical design-win and design in-cycle, and so we will only talk about those customers as they begin shipping solutions. With regard to Bluetooth revenue in 2007, because of the design in-cycles, we only expect initial revenue to occur late in 2007 and therefore will not make a significant contribution to full year '07 revenue. We do anticipate that Bluetooth will be an important growth driver for our revenue in 2008.

Jack Lazar

Okay. I got another question here from Mark Edelstone of Morgan Stanley. The question is, what is the expectations for inventory in Q1?

I will go ahead and take that. Obviously we were very pleased with our ability to take down our days of inventory this most recent quarter, and at 7.2 times turns, it far exceeded what our internal targets are. I would also point out that we did this without having shortages. So, we were very pleased with the way in which it worked out this last quarter. As we move forward, while we are always striving to increase our targets in areas such as inventory turns, we are still are focused on a five to six times turns which would mean that we would expect inventory to go back up a bit in the first quarter. Clearly with our guidance that we've given today, we are expecting significant increases in revenue and therefore we are going to need the inventory to fulfill those sales.

Okay. Next set of questions are from Arnab Chandra at Lehman Brothers and there is a series of questions here, so I will try and hit them all.

Wireless LAN, what is the source of the wireless LAN growth if 11n is declining in Q1? So, Craig.

Craig Barratt

Yes, I think overall Arnab the 11g market is certainly showing strength for us. The carrier business, we expect to continue to be strong, and as we noted in the call, the retail segment which has been somewhat weak in the latter part of '06, we do expect to show growth in the first quarter as well. So, the two main factors will be the carrier market and the retail market driving our wireless LAN business in the first quarter.

Jack Lazar

Okay. So, the next part of his question is related to PAS. Is growth from a new customer did decline in Q4?

I will go ahead and take that one. PAS was actually a little bit weaker than we had anticipated for Q4, but we are anticipating it going up in Q1 based on the orders that we have outstanding, and we are shipping to multiple customers at this point.

Next question is ROCm. How much of the revenue could it be as a percentage? He doesn't clarify whether it's Q1 or throughout the year, but go ahead.

Craig Barratt

So Arnab, we are not giving specific guidance on the full year number. We expect ROCm for wireless LAN to certainly be a growth driver for 2007. We do expect that revenue to increase steadily in each of the quarters in '07. ROCm, our Bluetooth products which are also a part of that ROCm business and brand, as I mentioned earlier, wont contributes significant revenue in '07 and will -- we do expect however to get up initial revenue from our Bluetooth products later in the year.

Jack Lazar

Okay. I'll take the next one which is, how much of the quarter, and I guess this is Q1, is related to Attansic?

We are not actually going to give detail on that, other than to say that we do expect all of the areas of our business to be up in revenue in Q1. We do expect a ramp throughout the year and we are focused on a $25 million number for Attansic as we move through 2007.

And the last question Arnab had was, tax rate, is 20% the constant tax rate for the year?

At this point, we guide only on a one quarter basis. So, 20% is what we are starting the year with as what we believe our affective tax rate will be. We will have to see how that lands as we move through the year. And Arnab also points out he did not start the fire.

Craig Barratt

Thanks Arnab for that. Thank you.

Deborah Stapleton

Operator, Kim, are you on with us now. I believe we have transitioned the call to someone else.

Operator

Yes, Ma'am I am here.

Deborah Stapleton

Great, can you continue the Q&A then please?

Operator

One moment please. Our next question comes from Mark Edelstone, sir your line is open.

Mark Edelstone - Morgan Stanley

Hi, hey guys, nice quarter, thanks for barring with us here. I had two questions. The first one was here, for Craig or Jack, can you just talk about your current level of backlog as you are entering Q1 and compare it with the backlog levels that you had entering the last several quarters on a percentage basis turns need, that type of input as well I am kind of looking for?

Jack Lazar

Yes, Mark, unfortunately we really don't give out information on our backlog. I guess the only trend we can point to over the last year is that, increasingly we have become less reliant on turns, particularly as we move away from more of the business being concentrated in the retail space. So, when we move into a quarter, we give guidance based on the best information that we have which historically at least for the last several quarters has been pretty good. So, we're certainly -- our visibility has increased over the last year and half due to the nature of the business.

Mark Edelstone - Morgan Stanley

So, I guess to put it in another way, then it sounds like, the visibility you have to that guidance for Q1 is as high as its been over the past few quarters, is that a fair statement?

Jack Lazar

Well, when we give our revenue guidance clearly, we are not trying to miss it, so.

Mark Edelstone - Morgan Stanley

Okay. Keep up the good work there. The other question is, obviously you are starting of 2007 on a good note and you talked about the Attansic revenues will ramp as you go through the year and you obviously have other drivers like ROCm that will be incremental for the embedded Wi-Fi as you go through the year and I assume that its 11n will start to show growth again as you go through the year. Can you just comment on what you think the shape of growth could look like as you through all of 2007, based on just how strong the past several quarters have been and starting out the first quarter as strong as it is, is there a risk that we get some plateauing here or do you think that you see growth on a steady stay basis as you go through the year?

Craig Barratt

Yes, it's hard to really comment on the year, because as you know things change very quickly in our industry. We have got a lot of good macro factors that should help us out as we move through this year, the biggest of those being 11n and clearly that's not going to have as much of an impact on Q1 as it did on Q4. So, we are optimistic about what the opportunities are as we start to have some of these other product lines really start to kick in some revenue that should be favorable for us. All that being said a year is a long period of time.

Mark Edelstone - Morgan Stanley

Thanks a lot guys. Keep up the good work.

Craig Barratt

Hey, thanks Mark.

Jack Lazar

Okay, can we grab the next question, next person for question, please?

Operator

Our next question comes from Jonathan Goldberg. Your line is open.

Jonathan Goldberg - Deutsche Bank

Hi, guys. Thanks for taking my call. Just a quick question, I am trying to understand Attansic better. I was wondering if you can give us a picture of how seasonal that business is?

Craig Barratt

Jonathan this is Craig here, we certainly don't have enough experience in this market to really judge. Certainly Attansic is already shipping their solutions in to number of motherboards today, primarily with ASUS the number one motherboard manufacturer in the world. So, I think it's too early to tell whether there will be sort of seasonal effects in this business. Overtime as we ramp up more products in that business, we certainly hope to accelerate the growth in revenues. So, the initial products as I mentioned are NIC and PHY products mainly target at the client side meaning desktops today and of course potentially laptops in the future. But going forward we are developing switch products which will be a very easy sell for us into wireless LAN routers and a variety of other applications too. That we hope will help us accelerate the revenue growth in Ethernet later in the year.

Jonathan Goldberg - Deutsche Bank

But do you think this is a kind of business that can grow quarter-on-quarter through the year?

Craig Barratt

We would certainly hope so, but we're not necessary including that guidance. In general by targeting the Ethernet NIC and PHY business, if you look at industry data, that represents roughly $500 million TAM. The lower end unmanaged switch business and lightly managed switched semiconductor products and Ethernet adds another $700 million in TAM. So there is well over $1 billion in aggregate TAM that we hope to add as we develop new products and certainly in contrast to PAS we are targeting markets that are large and growing markets and our goal is to increase our share in a growing market and that's our goal with Ethernet that's our goal with Bluetooth as well.

Jonathan Goldberg - Deutsche Bank

Okay, then on the new Bluetooth product, what kinds of ASPs are you charging for that that product and what are the margins look like that relative to corporate averages?

Craig Barratt

We are not going to break that out in general markets that we do go after, we hope to manage them somewhere in line, or hopefully in some cases above our corporate margins. So, we generally won't do things that are significantly inconsistent with our current model. Obviously we are not quoting ASPs, so an effectively pricing is what we needed to be to get the business that we want, and so very much our goal is to use price as a weapon just as we've done in wireless LAN. And I should point out ironically that we are seeing customers in laptops today pay more for our complete 11g module than they pay for their Bluetooth module and the ratio of the silicon die-size between the two products is substantial. Wireless LAN is a lot more complex and so we think there is significant opportunity for disruption of this market.

Jack Lazar

Yes, and one of the things Craig pointed out in his prepared remarks was we have the advantage of this clean sheet design and we started on this about a year a half ago with a focus on both cost and power and we think that we have a very compelling solution for the market both from our cost side but also from a performance side and that coupled with entering a market where we already know the customers we think is a logical first step.

Jonathan Goldberg - Deutsche Bank

And last question to housekeeping, what was cash flow from operations?

Jack Lazar

I don't have it at my fingertips, let me get back to you, follow-up later.

Jonathan Goldberg - Deutsche Bank

Great, thank you.

Craig Barratt

Thanks Jonathan.

Operator

Our next question comes from Mr. [Morashy]. Sir your line is open. Excuse me sir your line is open now?

Deborah Stapleton

Operator, please go to the next question please.

Operator

I do apologize Mr. [Morashy]. Sir your line is open.

Deborah Stapleton

I think he is probably disconnected. Can we go to the next question please?

Operator

Your next question comes from Adam Benjamin. Sir your line is open.

Adam Benjamin - Jefferies & Co.

Thanks. Good afternoon.

Craig Barratt

Good afternoon.

Adam Benjamin - Jefferies & Co.

You guys have talked about finishing '07 with 802.11n represent about 50% of your wireless LAN revenue and I am assuming this implies that n will represent about 30% of those units. Can you provide some details as to the assumptions you are making as it relates to your retail enterprise and PC OEM segments in terms of adoption of n that would -- have you achieving that 50% target? Essentially in reaching that target, we should, what should we assume for year-over-year decline in your core 802.11a/b/g business?

Craig Barratt

Adam, this is Craig. So, the thing behind that assumption, certainly we expect in the retail segment, we do expect measured by revenue, certainly 11n will be the dominant technology at the end of this year. Certainly, as 11n displaces 11g products, there is a benefit to us because the ASPs are higher. But 11n also enables a whole new set of applications related to media and of course a whole upgrade cycle in the installed base. The households that have 11g today are unlikely to upgrade to a new a 11g router that of course will be targets for upgrading to 11n. So, 11n increases opportunities for more units to ship and of course at a higher ASP. PC OEMs will tend to lag the attached rate in retail somewhat, but probably not by a whole lot at the end of next year. But the other category that won't be significantly penetrated in '07 is the enterprise carrier market. We see that as a transition that will happen more in 2008. So, for more than 2007, 11n will be a significant driver for us, going into 2008 the enterprise carrier adoptions will further increase the ramp of our 11n business.

And I would take issue with you mentioning the decline of the rest of the business. We continue to show strength in our non-11n products. 11g and 11a/g have shown significant strength, partly because of the strength in the career market which today is dominantly 11g. But also during 2007, we believe we have a particularly competitive family of 11g solutions for penetrating additional laptop and desktop SKUs. The desktop market for wireless LAN is largely untapped and we think there is terrific opportunity for low cost 11g in desktops. If we can drive that to just several points of attached, that represents a large number of corresponding unit. So, 11n is really on top of the continuing strength of our core business.

Adam Benjamin - Jefferies & Co.

So, Craig just to clarify, as you look out today, your core 802.11a/b/g business you would expect that revenue to increase year-over-year '06 to '07?

Craig Barratt

We are not giving specific color on that. But, specifically in those segments, the carrier 11g market absolutely will increase '07 compared to '06.

Deborah Stapleton

Operator, can we go to the next question please?

Operator

The next question comes from Mr. Pandey, sir your line is open.

Rohit Pandey - HSBC

Thank you, a few questions here. Firstly, if I look at your revenue drivers for '07 and '08, can you rank them, let's say, from one to five, one being the highest one for the five product categories and also for the four end markets?

Craig Barratt

I mean, that's a difficult question. Obviously, we don't go into that level of granularity on each of our businesses. I mean, are you talking on a percentage basis? The ranking will be different to on a dollar basis.

Rohit Pandey - HSBC

Just one, two, three and four.

Craig Barratt

So, in general as I mentioned in our prepared remarks, we believe 11n will be the single biggest driver, but we see important drivers in each of our businesses. Certainly we do expect PAS to increase year-over-year. We see 11g being particularly strong in the carrier business is one example, and of course, mobile wireless LAN, Ethernet, and Bluetooth all represent significant increases, obviously of a small basis in 2006. So, there are several drivers in each of our businesses creating revenue growth in 2007.

Rohit Pandey - HSBC

And for the end markets, which end markets do we think should drive growth in '07 and '08?

Craig Barratt

I am sorry, which end markets, END markets?

Rohit Pandey - HSBC

Yes, like retail, PC, enterprise, consumer, which should be the key drivers? Again, if you can, let say 1,2,3,4, in the order?

Craig Barratt

It's hard to put color on that again. I think, as retail adopts more 11n there will certainly be retail growth, as carrier continues to ramp 11g and begins to adopt 11n, there will be growth there too. As we penetrate more in laptops and desktops with 11n and low cost 11g there will be growth there too. I think it's not really appropriate for us to try to put specific color on, which one is a bit bigger than the other. They are all important directions for us.

Jack Lazar

Yes, the only thing we have said specifically was going into Q1, we expect retail to be up both in dollars and as a percentage of revenue. So obviously, we expect to see strength in retail in Q1. Post Q1, I think we have to address that as we get closer to those time periods.

Rohit Pandey - HSBC

And then on the Bluetooth solution, what's the kind of cost advantage you have over the alternate lowest cost solution right now? Is it 50% or is it 20%?

Craig Barratt

Once again, we don't want to put specific numbers on it, but, we have a tremendous amount of experience with doing very, very competitive low cost designs, working with our suppliers very, very closely to really optimize the cost structure in the supply chain and we have learned that as we have grown in the wireless LAN market and we have learned, of course, how to compete with some of the large companies in our space. And I think all of those skills carry over extremely well in to this adjacent market. And so certainly we have done all of the usual things people in this industry do, of carefully studying other companies solutions in terms of die-size and cost infrastructure, and based on that we have real confidence that we can be successful in this market.

Rohit Pandey - HSBC

And last housekeeping question, what was the stock-based compensation per share in the quarter?

Jack Lazar

Per share?

Rohit Pandey - HSBC

The stock-based compensation per share what was the number?

Jack Lazar

No, no I can't tell you the per share number, I can tell you that in Q4 we recorded about 2.5 million stock-based compensation.

Rohit Pandey - HSBC

Okay, got it thank you.

Operator

Our next question's from Charlie Glavin of Needham Company. Sir your line is open.

Charlie Glavin - Needham and Company

Thanks. Hey Jack, just a quick housekeeping if you still would. In terms of overall units in ASP for the wireless LAN?

Jack Lazar

Yes, Charlie we are going to avoid actually going in this direction going forward. We are going to try and give you guys color every quarter. The reason being that, our business is changing quite a bit, and we are trying to find different ways of characterizing our revenue and expenses that will actually be helpful to the investment community in evaluating our results. What we said in the prepared remarks was that wireless LAN ASPs were essentially flat quarter-over-quarter, and they literally were almost to the penny flat. I think they were down may be $0.05 or something. So, it's a pretty minor amount. As far as chipsets, that's one that really becomes less relevant. I mean it's good for us, because we are not shipping a lot of chips, but they happen to be some lower price chips like Ethernet chips, the NIC and PHY chips are obviously with lower ASP, we sold more of them. And things like the baseband products that we receive from ZyDAS also create more volumes. So, we are trying to avoid that a bit. What I will tell you is that on a quarterly basis chips are probably up about 15%, but that's an amalgamation of a lot of different pieces now. So, be careful with that.

Charlie Glavin - Needham and Company

How about looking at it in a different way, Jack? I think it may be one of the questions in regards to 11n. And particularly what seems to be a bit of a migration yet, a bit of a pause in the first quarter, can you at least give an idea of what the premium is right now between 11n and the other products that are displacing?

Jack Lazar

Yes, so we've always colored this as it's a kind of two to three times premium for 11n versus some of the products they are displacing. It really depends on what it's displacing, of course. I mean some of the wireless LAN solutions are lower priced than some of the others, and therefore the amount can be much higher as a spread multiplier at that point. But I would say two, probably more closer to three times as a good rule of thumb.

Charlie Glavin - Needham and Company

Okay. Alright since you are dodging that one, may be.

Jack Lazar

I am sorry. Charlie I am actually trying not to dodge it. I mean we don't.

Charlie Glavin - Needham and Company

Yes. Without getting into details, dodge probably isn't right word Jack, but--

Jack Lazar

Okay. Sorry.

Charlie Glavin - Needham and Company

No. But Craig may be in terms of, you mentioned as far as the Bluetooth adoption being occurring a little bit later in the year. Can you give an idea may be in terms of your strategy, how much of this you are going to sell on a standalone basis as opposed to bundling with other products and particularly the 11n. I mean should we expect 50% of the Bluetooth will actually be bundled with other solutions?

Craig Barratt

No. Initially we really expect to target the standalone opportunities. Because, if you remember in the PC market this is the one segment where Intel does have a significant presence with their Centrino bundle and marketing dollars and of course Intel doesn't have a Bluetooth solution to our knowledge, and so, all of the TAM in laptops is available to us to try to grab. So, if we only bundled it with our wireless LAN solution, we would miss out on a significant portion of the market. That said, we are not going to be shy about the fact that we can now offer a complete portfolio of comps solutions to the PC OEMs. We have wireless LAN, we have Ethernet and now we have Bluetooth. And so, if it's bundling at the board level, at the silicon level, even at the pricing level, we are certainly happy to play those games now. And effectively neutralizes one of the competitive angles that we have had to fight against and now we have this advantage ourselves to in-house.

Charlie Glavin - Needham and Company

Craig, speaking of which, I mean you have seen Intel actually start to ship 11n products before Santa Rosa in sort of the May time period, which would seem to imply that the infrastructure within 11n is getting slightly more robust, certainly helping not only you but probably Boardcom as far as about you are the only guys out there. Is that a fair way of looking at that? Actually Intel shipping a good quarter ahead of the next platform and is probably helping the infrastructure and the adoption of 11n?

Craig Barratt

Absolutely, we consider Intel's presence in this market to be positive. Certainly they do capture a portion of the laptops but they help drive our silicon in the retail platforms, in the carrier platforms and routers. And I think them shipping a little bit ahead of the Santa Rosa platform is definitely positive in terms of their endorsement of the stability of the standards. The schedule of 11n has roughly followed pervious generations where Intel has shipped roughly a year behind us, that continues with 11n. But the difference here is Intel for the first time is shipping before the final standard is finished. And so, I think that really does give credit to the notion that the standard is really stable and overall their ramping 11n solutions is positive to the overall market and certainly positive for us.

Charlie Glavin - Needham and Company

Great, thanks guys.

Craig Barratt

Thanks, Charlie.

Operator

Next question from Arnab Chandra of Lehman Brothers, your line is open.

Arnab Chandra - Lehman Brothers

Hey guys, one I was actually referring to the (inaudible), but anyway. Quickly on the--

Craig Barratt

Arnab, that's a lot of questions already, come on.

Arnab Chandra - Lehman Brothers

I don't know, you guys are doing so many things it's hard to figure everything out, easier to ask I guess. You kind of answered the Intel entry question that you don't think, maybe Craig if you talk a little bit more about that. Do you think because you have Bluetooth now, it helps you kind of fight of that, historical what 70% of the market would go to Centrino, and then I have just one follow-up?

Craig Barratt

I think that Bluetooth is largely unrelated to that. Bluetooth for us is not a strategy to try to penetrate to or display Centrino. We just want to offer more and more products and be more and more of a compressive full line supply to our major customers. Another point with Intel's 11n is that, it largely will represent an upgrade of their existing 11g or a/g SKUs to their 11n. It's not really going to be a significant change of the boundary line between what Centrino and what's not Centrino, if you see my point.

Arnab Chandra - Lehman Brothers

Great, no, I understand what you are saying. And the last question, just a little bit about the Attansic acquisitions. I think when you guys announced the acquisition, one of the thoughts of that, all of their revenue that you are talking about '07 is not Ethernet, there are something's in there that maybe legacy. If you could just enlighten on that, if that's true or not and if that's the case whether the rest of it will kind of continue or decline or grow, that will be great. Thanks.

Jack Lazar

Yes, Arnab, it's Jack. Yes, historically they have some power products, basically some legacy products, kind of motherboard type products, low-priced products. That, frankly aren't all that interesting to us. So, I wouldn't expect that we would be driving that business going forward, in fact, we would be looking at a variety of different alternatives with it, which I am sure will update folks on in the future. But, really we don't view that as a piece of business that we would spend a lot of resources on, nor do we believe that it would be, something that would be worth our time to do that. The $25 million is Ethernet. Okay, so it's without the power or any of the legacy. There might be some nominal amount, but I mean essentially its Ethernet.

Arnab Chandra - Lehman Brothers

Thanks.

Craig Barratt

Thanks Arnab.

Operator

And our last question at this time is from Shebly Seyrafi. Your line is open now.

Shebly Seyrafi - Caris and Company

Yes. Thank you very much. Congratulation on a great quarter.

Jack Lazar

Hey, thanks.

Shebly Seyrafi - Caris and Company

Few questions, the PAS revenue, what was it exactly in calendar Q4?

Jack Lazar

It was just down slightly from what it was in Q3.

Shebly Seyrafi - Caris and Company

So, it's like $7 million or some like that?

Jack Lazar

Yes. So, I don't think we have got into that level of granularity in the script. But, obviously the overall fee in another was the 11% and the PAS mix up, a large majority of it. I can't tell you that UT was not a 10% customer this quarter, but there were some other customers in there. So, it was just down slightly from what it was in Q3.

Shebly Seyrafi - Caris and Company

Okay. Also the gross margins, they have been trending down the last few quarters, but they are also above your guidance or long-term target of 43% to 45%. But, may be you can talk about, why you expect gross margins to decline in the first quarter, considering that PAS is expected to increase, turnaround from the decline in calendar Q4 and PAS being a higher margin segment?

Jack Lazar

Yes, fair point Shebly. But, really the big driver to that would be 11g. If you remember from our guidance, we expect wireless LAN to be particularly strong in the upcoming quarter. Also we have the addition of Ethernet which is, as we have said kind of in our target model range. So, there is some counter weights working against an increase in PAS, and the increase in PAS business in Q1 is nice but it won't be a dramatic amount of.

Shebly Seyrafi - Caris and Company

Thank you very much.

Jack Lazar

Thank you.

Operator

Again, I have no further question at this time.

Craig Barratt

We really appreciate people's patience during this call. I would really like to thank all of you for joining us today and with a special thanks to all of our employees for their continued dedication and hard work. The fourth quarter was yet another great quarter for Atheros and we are enthusiastic about 2007 and beyond. Over the next couple of months we will be attending several investor conferences including the Thomas Weisel Technology Conference, February 5th in San Francisco, the D.A. Davidson Technology Conference, February 22nd in Scottsdale, and Morgan Stanley Technology Conference, March 8th in San Francesco. Jack and I will also be visiting with investor in various parts of the country during the quarter. So, if any of you are interested in arranging a call or meeting, please contact Deborah Stapleton our IR Counsel at deb@stapleton.com.

We thank you for your interest in Atheros and we look forward to speaking to you along the way. Goodbye for now.

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