Color on Atheros Earnings: Impressive Transition To 802.11n Products

Couple of comments on Atheros Comm (NASDAQ:ATHR) following results:

- Piper Jaffray notes they were encouraged by strong sales of 802.11n products, which accounted for nearly 23% of Atheros' WLAN revenue during Q406. In fact, Atheros indicated 802.11n sales were above its original expectations. Further, Atheros indicated it expects 802.11n shipments to represent its primary growth driver during 2007, despite expectations for a modest seasonal decline during Q107. Given Atheros' early lead in this market, they believe the company is well positioned to benefit from the transition to 802.11n products over the next few years.

The firm was also encouraged the company expects to grow sequentially across all lines of business in Q107, given the March quarter is normally seasonally weaker. Based on stronger-than-expected revenue growth as well as the recent closure of the Attansic acquisition, they are adjusting their 2007 estimates from $0.91/ $371.8M to $0.91/$403.4M, and raising 2008 estimates from $1.10/$446.4M to $1.14/$479.9M.

Maintains Outperform and ups tgt to $28 from $26.

- Morgan Stanley is also very positive on ATHR saying that from a product perspective, the revenue performance was driven by strong sales of the company's 802.11g and 802.11n products, which increased sequentially by 24% and 117%, respectively, and more than offset a sequential decline in sales of the company's 802.11a/g products (which are being cannibalized by the market's transition to 802.11n).

Firm notes they believe that Atheros will likely continue to upside revenue and EPS estimates going forward, and given the weak environment currently affecting the overall semiconductor industry, this outlook is the polar opposite of what has been happening with virtually every other company in their universe. Since last summer, they have reduced 2007 revenue estimates about 3 times on average for approximately 80% of the semiconductor stocks in their universe, and the average decline has been 14%.

In contrast, Atheros is one of the only companies where they have been consistently increasing estimates. Furthermore, the firm expects Atheros to continue to grow significantly faster than the average semiconductor company over the next several years, with organic revenue growth (excluding the impact from the Attansic acquisition) of at least 30% in 2007.

While the firm is increasing their current estimates for Atheros, they believe solid upside potential to new estimates still exists. 2007 revenue and earnings estimates have increased to $420 million and $1.00 per share from $375 million and $0.95 per share, previously. Despite its strong performance last year and in the month of January, ATHR remains one of MSCO's favorite stocks, and they expect investors to react favorably to the company's fourth-quarter results and first-quarter guidance.

Maintains Overweight and $33 tgt.

Notablecalls: I'm somewhat surprised by the muted reaction in after hours. The results are surely worth more than $0.20. I think the stock is headed higher today.

Comments

[CrossProfit]

"I'm somewhat surprised by the muted reaction in after hours. The results are surely worth more than $0.20. I think the stock is headed higher today."

Perhaps it will head up today; however you do not mention the gross earnings ‘miss’ from +0.20 to -0.02! The miss is attributed to current Q4 stock options granted by the board to management, also recent acquisition is in the mix. We called 0 (zero) for Q4, so -0.02 is close enough.

Then again, perhaps the PE is just too high and a forward estimate of $1.00 for 2007 is unrealistic (closer to 0.80 in our opinion). Then again if it were to be $1.00, it would be reduced to 0.75 after the board got done granting new options.

PE multiples; 0.75 x 30 = 22.50, 0.75 x 40 = 30.00 If ATHR post 0.25 or more for Q1 2007, then 30.00 looks good by yearend. If ATHR posts 0.20 or less for Q1 2007, then 22.50 is at the high end.

CrossProfit evaluation line is pegged at 24 through 03/2007 (EOL). Rough calculation, 0.80 x 75% = 0.60, 0.60 x 40PE = 24.00, > note that we take into account the charges. Our colleagues somehow forgot to factor this in for Q4 2006. It makes a BIG difference on this stock. We are not talking about 0.5% of earnings. We are dealing with 25% of earnings!