Atheros Communications Q3 2007 Earnings Call Transcript

Oct.29.07 | About: Atheros Communications, (ATHR)

Atheros Communications (NASDAQ:ATHR)

Q3 2007 Earnings Call

October 29, 2007 5:00 pm ET

Executives

Deborah Stapleton - IR Counsel

Dr. Craig Barratt - President and CEO

Jack Lazar - CFO

Analysts

Adam Benjamin – Jefferies

Sanjay Devgan - Morgan Stanley

Mark Heller - Merrill Lynch

Jonathan Goldberg - Deutsche Bank

Eric Ghernati - Banc of America Securities

Romit Shah - Lehman Brothers

Allan Mishan - CIBC World Markets

Amit Kapur - Piper Jaffray

Rubin Roy - Pacific Crest Securities

Shaw Wu - American Technology Research

Edwin Mok - Needham

Kwang Kim - Eaton Vance

Operator

Welcome and thank you for standing by. (Operator instructions) I would like now to turn the meeting over to your speaker, Miss Deborah Stapleton. Thank you and you may begin.

Deborah Stapleton

Welcome to the Atheros’ third quarter earnings results conference call. Joining me in the call today will be Dr. Craig Barratt, President and CEO and Jack Lazar, CFO.

But before we begin I’d like to remind you that various remarks that we make on this call, including those about our future financial results; our future plans, goals and prospects; expected market trends; anticipated revenues from our expanded portfolio of communications products and our customers; our competitive position; our anticipated growth, profitability, leadership position in various markets and expected new product interjections, constitute forward-looking statements for the purposes of the safe harbor provision 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, 2006, and our quarterly report on 10-Q for the quarter ended June 30, 2007 previously filed with the FCC, and in particular the section entitled “Risk Factors” and to other reports that we file from time to time with the FCC, 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 day hereof and we disclaim any obligation to update these forward-looking statements.

Having said that, I’ll turn the call over to Dr. Craig Barratt.

Dr. Craig Barratt

Thanks to everyone for joining us today. I am pleased to report record revenue, operating profit and net income for the third quarter of 2007. The third quarter was our tenth consecutive quarter of revenue growth, and our ninth consecutive quarter of increased operating profits.

Also in the third quarter, we recorded Atheros’ $1 billionth accumulative revenue. Third quarter revenue increased to $106.3 million, while net income grew to $16.9 million or $0.28 per diluted share. Gross margins were again above our guided range, at 49.3%. Operating profit was a record 17% of revenue.

Our disciplined approach to revenue and income growth is clearly paying dividends. Jack will take you through the numbers in greater detail and discuss guidance for the fourth quarter.

We continued to expand our product platforms, customer base, and revenue opportunities in each of our three key markets: PCs, networking, and consumer. I would like to take you through some of the third quarter highlights in these areas.

Over the past few years, we’ve been very focused on both expanding our market share, and increasing our TAM with PC OEM customers. Today our wireless LAN products are used by almost all PC OEMs. These customers are serving as the launch pad for our expanded communications portfolio, including Ethernet and Bluetooth.

BY providing industry-leading communications solutions, we have steadily increased the Atheros dollar content among our growing PC customers. We are very proud of our break in this market. Two years ago, sales to PC customers made up 23% of our quarterly revenue; today those sales make up 40% of a revenue base that has more than doubled.

We’ve achieved this level of growth by focusing on our customers’ needs with technology leadership, cost-effective integration, compelling new products and superior customer service.

Coming off an extremely strong second quarter, third-quarter PC revenue was down slightly and in-line with our expectations. In addition, we continue to expand our PC market share, with platform wins at a variety of major PC OEMs, including Asus, Acer, Hewlett Packard, Lenovo, Toshiba, and others.

In the fourth quarter, we anticipate PC revenue will grow across a broad set of customers, although that growth will be partially offset by some share loss at one account. We are now seeing a much wider variety of PC OEMs adopted our 11n solutions, providing even greater revenue opportunities for Atheros in 2008.

In the third quarter, we continued to amass numerous design wins for our single chip, highly integrated 11g solutions. Laptops, such as Asus’ $200 ePC, featuring both our 11g wireless LAN and 10/100 Ethernet will go into mass production in the fourth quarter. We believe that we are well-positioned to serve the rapid growth in value segment laptops and their success will further expand the life and profitability of our 11g solutions in the PC marketplace.

In the third quarter, we recorded a double digit percentage increase in Ethernet ports shipped to our PC OEM customers. In addition to our ongoing work with Asus, the world’s largest motherboard manufacturer, our competitive Ethernet solutions are enabling us to win new designs at additional motherboard customers, including ECS, one of the top three motherboard manufacturers in the world, and at Biostar.

We’re also very focused on gaining additional design wins for our Ethernet products in T1 OEM accounts, and we look forward to sharing these successes with you in future quarters as these products go to market.

We’ve been sampling out Bluetooth solutions to a variety of PC customers and we’re engaged with a number of top tier ODMs and module manufacturers. The feedback that we have received has been very positive and we are confident at our opportunities for PC revenue for 2008.

Expanding our product lines in order to more fully serve PC OEM customers continues to be an integral part of our long-term strategy.

As expected our networking business was stronger than ever in the third quarter, with revenues up 17% sequentially. Revenue from our retail customers increased in both dollars and as a percentage of revenue in the quarter.

We increased our share in 11g and 11m products at several strategic accounts. And certain customers have successfully expanded their overall market share resulting in increasing demand for our products. 11g continues to be the technology of choice for entry-level wireless LAN solutions in the retail market. And 11n, with its increased range and throughput is clearly on the road to mass adoption.

Sales of our XSPAN 11n products to retail partners was particularly strong in the third quarter. NTD data shows that 11n has strong momentum in the retail channels, as US quarterly shipments of 11n products increased 2.5 times year-over-year.

We also secured additional design wins for our 11n USB products. Our single and dual band USB solutions feature a very small form factor ideal for desktops and printers and can be used with a variety of consumer electronics products. Overall we are very pleased with our design win progress at the key retail accounts, as we have now won 11n sockets at all of the top four retail OEMs.

The enterprise and carrier portion of our networking business showed strong growth in the third quarter. This business was once again up in both dollars and as a percentage of revenue, and as we added new partners and customers, it benefited from the launch of the Atheros enabled gateway solutions by many customers.

The carrier market continues to be a key area of growth for Atheros. Our strategy is simple: partner with leading broadband chipset companies and OEMs, and develop reference designs that incorporate our wireless LAN and Ethernet solutions.

Our broadband partners include Infineon, PMC-Sierra, Trendchip and others. OEM partners such as Sagem, Siemens, 2Wire, Thompson and ZyXEL leverage our reference designs to provide carriers with low-class gateway products. The result is that carriers such as AT&T, British Telecom, Deutsch Telecom, France Telecom, Verizon and others are now shipping an Atheros enabled 11g gateway solutions in volume. And a number of them will roll out new 11m products over the next few quarters. We see significant opportunities in the carrier space in the fourth quarter and into 2008.

We’re also excited about the progress of some of our enterprise customers. One example is Aruba networks, whose adapted wireless LAN solutions deliver high performance, secure connectivity so users are always within reach of mission critical information. As governments, corporations and educational institutions increasingly adopt Aruba solutions, our vision of end-to-end Atheros wireless connectivity is being realized.

We’re excited to work closely with Aruba in developing their current and next-generation solutions which help provide seamless, secure connectivity for everyone.

Our 10/100 switch solutions have been designed in a variety of both wired and wireless products in the networking market. We expect to begin sampling our first Gigabit switch by the end of the year, further increasing our TAM.

These factors are enabling us to continuously expand our market share with our retail carrier and enterprise customers. The strength of our networking business is key to the success of Atheros, and we are very pleased with our results in the third quarter, and the outlook for the upcoming quarter.

Turning next to the consumer market, today we announced the ROCm AR6002, family of single chip products, which feature break-through low power for mobile wireless LAN. The Atheros AR6002 consumes 70% less power than competitive solutions in active mode. In addition, the AR6002 further extends battery life by drawing virtually zero power in standby, the mode that tends to dominate typical usage patterns.

Atheros’ power breakthrough results in much longer battery-life, enabling significantly more web-surfing, media streaming, downloads, game-playing and talk time between battery charges. This newest ROCm solution also features a Compaq design and industry-leading throughput.

We now have over twenty design wins for our ROCm products in dual-mode phones, including the first wins with our new AR6002 family. Our ROCm wins include Smartphones at two of the world’s top five handset manufacturers. Recently, LG Electronics announced the new KS20 phone, which is their first phone to feature our AR6001 wireless LAN solution. This Qualcomm-based HSDPA handset offers advanced touch screen functionality in a thin and sleek form factor.

Our ROCm solutions were also chosen to provide 11g connectivity in the world’s first wireless memory card for digital cameras, designed by Eye-Fi. This ROCm-based solution makes it easy for users to upload, save, share and print photos, removing virtually all obstacles to instant photo sharing, and is compatible with any existing digital camera that accepts a standard ST or Compactflash memory card.

In September, we announced our ROCm wireless LAN solutions were selected by Texas Instruments to support wireless connectivity for its new DaVinci-based processor. We’re excited to be working with TI on these high quality mobile video products.

Our breakthrough products, such as the AR6002 and our carefully chosen partnerships have positioned us well to meet our customers’ mobile wireless LAN needs. We continue to expect our ROCm wireless LAN solutions to be significant growth drivers in our consumer business during 2008.

Our third quarter PAS business was slightly better than we had anticipated, although it remains a small portion of our overall revenue. We are now shipping to multiple PAS customers including several new handsets at ZTE. Although this segment is a modest revenue contributor, the ? continues to be attractive for Atheros.

In addition to today’s announcement of the AR6002 ROCm family, we have an exciting pipeline of new products across all of our businesses, and we will look forward to announcing several of them this quarter. These products will help us extend our technology and cost-leadership, which enhances our ability to increase our market share in the larger markets we now address. Our products and customer pipeline is growing, and our financial results are stronger than ever. We are very optimistic about our growth prospects for the fourth quarter, and beyond. With that, I will hand it off to Jack for a detailed review of the financials.

Jack Lazar

First I’ll outline our financial results for the third quarter ended September 30, 2007, and then I’ll provide our fourth quarter guidance.

In summary, Q3 was another very strong quarter for Atheros. This was our tenth consecutive quarter of revenue growth and our ninth sequential quarterly increase in both operating and net income. We are particularly proud to have achieved record operating margin both in dollars and as a percentage of revenue.

Revenue was toward the high-end of our guidance range, and gross margins were above it. As a result, EPS came in $0.02 better than the top-end of our guidance. As a reminder, our Q3 guidance was for 4-6% revenue growth; gross margins between 47.5-48.5% and EPS of $0.25-0.26.

Q3 revenue increased 5% sequentially and net income was up $2.2 million to $16.9 million, or $0.28 per diluted share. In addition, our cash and marketable securities increased by just over $20 million in Q3. Revenue was a record $106.3 million, up $5.5 million from the $100.8 million recorded in the second quarter of 2007.

Our revenue for the nine months of 2007 exceeded our twelve month revenue total for 2006. Revenue in Q3 increased 34% compared with the $79.6 million recorded in the prior year comparable quarter. The 5.5% sequential increase in revenue was driven by a further expansion of our core wireless LAN business with particular strength in our 11g solutions.

Based on the product mix data, the breakdown of revenue for our wireless LAN chipset was as follows: 11a/g was 16% versus 18% in Q2; 11g was 62% and that compares with 58% in Q2; 11m was 22% and that compares with 24% in Q2. Revenue from our 11g and 11n products were record highs in Q3, due primarily to the strength of both our retail and carrier customers, partially offset by an expected softness with PC OEMs. 11a/g solutions at 16% were in line with our expectations going into the quarter and slightly down on the dollar basis.

The percentage breakdown of revenue by channel based on data supplied by our ODMs was as follows: networking was 56% and that compares with 50% in Q2; PC OEM 40% compared with 45% in Q2; and consumer was 4% compared with 5% in Q2.

Revenue in units shipped to our networking customers set record highs: networking revenue increased $8.5 million or 17% sequentially, as we saw strength in shipment of our 11g and 11n products to retail and carrier OEMs.

Revenue from our PC OEM customers decreased $2.8 million sequentially and was in line with our expectations going into the quarter. Ethernet revenue increased sequentially resulting primarily from greater shipments of both our 10/100 and Gigabit Ethernet products.

PAS revenue in Q3 was slightly above our expectations due primarily to the shipment of PAS solutions to a new customer. In Q3, Hon Hai Precision Industry and Cameo Communications were only 10% customers.

Third quarter gross margins were 49.3%, above the high-end of our range of 47.5-48.5%. Our gross margin strength was due to favorable product mix, relatively stable 11g ASPs, and increased supply chain efficiencies.

We are continuing to benefit of our increased scale as Atheros now ships 75% more chipsets quarterly than we did just nine months ago. In addition, our compact designs and the use of widely available standard digital CMOS process technologies to continue to provide foundry flexibility and cost benefits.

Total operating expenses were $34.3 million, a 1% increase from Q2, and at the low-end of our guidance of $34-35 million. R&D decreased $700 thousand from Q2 and although we continue to invest in additional engineering headcount, our takeout expenses for new products decreased from that of Q2. As a percentage of revenue, R&D decreased from 21.8% in Q2 to 20% in Q3.

SG&A increased just under $1.2 million or 10% due to headcount additions and commissions as well as costs related to the successful implementation of our Oracle ERP system. SG&A as a percentage of revenue increased slightly from 11.8% in Q2 to 12.3% in Q3.

Operating income in the quarter was $18.1 million, up 12% from the $16.2 million recorded in Q2, and the 58% increase from Q3 of ’06. Operating income was a record 17% of revenue in the third quarter, and within our long-term target range of 16-18%.

The effective tax rate in Q3 and the nine months ended September 30 was approximately 20%.

Net income was $16.9 million or earnings of $0.28 per diluted share compared with net income of $14.7 million or earnings of $0.25 per diluted share in Q2. Average fully diluted shares outstanding were $59.6 million in Q3 and $59.1 million in Q2.

GAAP net income for the third quarter was $9.7 million or $0.16 per diluted share. This compares with a GAAP net income of $9.3 million or $0.16 per diluted share in the second quarter, and $6.3 million or $0.11 per diluted share in Q3 of ‘6.

During the quarter we recorded in $5.8 million in stock-based compensation expenses, and $3 million of charges related to the amortization of acquisition-related intangibles and compensation costs related to the earn-out obligations.

Turning to the balance sheet, it was very strong. Cash and marketable securities were a record $248 million as of September 30, a $20.1 million increase from Q2. DSOs based on our quarterly average receivables balances increased 2 days to 46 versus 44 days in Q2, and we are at the low end of our target range of 45-55 days.

Inventory turns for the quarter were 7.1 times compared with 7 in Q2, while days of inventory decreased slightly from 52 to 51 days. Inventory turns once again exceeded our target of 5-6 times.

The company continues to have virtually no debt. Total liabilities at the end of Q3 were $112 million. During the quarter our capital expenditures and depreciation were approximately $2.6 million and $1.3 million respectively.

Overall our cash flow and asset management metrics were once again quite strong. As of September 30, we had 762 full-time employees, compared with 727 at the end of Q2, with the majority of these additions being engineering related employees.

I’ll now move on to our guidance for the fourth quarter. Q3 was our strongest quarter to date, in terms of revenue and both operating and net income. We anticipate our networking business will once again be the strongest growth area for us in Q4, led by the strength of both our retail and carrier customers. Moreover we expect each of our three segments, networking, PC and consumer to increase in absolute dollars.

Accordingly, based on the strength of our combined business, we currently anticipate fourth quarter revenue will be in the range of $112-115 million. We anticipate the gross margins will remain very strong and in the range of 48-49%, and once again above our target model range.

We will continue to invest in the people, product take outs and infrastructure necessary to support our continued growth and entering into new markets. In the fourth quarter we anticipate total operating expenses will be in the range of $35-36.5 million. A majority of these increases will be research and development related expenses, as we anticipate a significant increase in our takeouts during Q4 to support our long-term product plans.

Operating income will once again be within our target range of 16-18% and our estimated pro-forma tax rate for Q4 is 20%. We anticipate EPS for Q4to be approximately $0.30 based on fully diluted shares outstanding of $60.5 million.

Our Q3 results and our Q4 guidance once again reflect the strength of our business, dividends from our diversification strategy, and the favorable product cycles that we continue to leverage. Our focus on disciplined revenue growth is paying dividends both in the expansion in the total addressable market and through increased operating profit. We will continue to invest in further diversification efforts which we believe will help position Atheros for ongoing success and increased shareholder value in 2007 and beyond. So with that let me hand it back over to Craig.

Dr. Craig Barratt

Thanks Jack. We are now ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Adam Benjamin – Jefferies.

Adam Benjamin – Jefferies

Craig, you mentioned some comments on the Ethernet side; I’m wondering if you can comment with regard to your original target of $25 million for ’07, whether you’re still on target for that. And then with respect to introducing a switch chip of a Gigabit for the end of the year, when we can expect to start seeing revenue there on the retail side; you mentioned some strength of the PC side and wins there, just looking to see when we can expect to see that to kick in on the retail side as well.

Dr. Craig Barratt

On the first question Adam we think we’re generally on track for the original guidance that we gave for 2007 Ethernet revenue of $25 million; we’re not going to give any more color than that at this point.

Your second question was about the availability of Gigabit Ethernet?

Adam Benjamin – Jefferies

Yes.

Dr. Craig Barratt

Particularly the switching product.

Adam Benjamin – Jefferies

Correct.

Dr. Craig Barratt

I just want to reiterate the comment we made during the script, we expect to be beginning sampling that solution at the end of the year, initial design wins and initial production should occur in the early part of 2008. The first target would be retail products and of course we expect to expand that into carrier and other footprint products as well.

Jack Lazar

I would also add that we’ve seen a tremendous interest in this product from our customer base and in fact, if we had the product available today we’d certainly see a lot of design wins that we could get. So we’re very optimistic; there’s no impediments that keep us from completing this development and we think this will be a good market for Atheros in 2008.

Dr. Craig Barratt

Two of the drivers there really is of course the penetration of 11n is really driving user throughputs well above 100 megabits per second so in many retail products and carrier products, the Ethernet switch can actually become the bottleneck and in some geographies the advent of VDSL2 and pond networks is also driving the actual delivered bandwidth to be a significant fraction or even higher than 100 megabits as well. So I think Gigabit is certainly something at the right price that can really drive aggressively into those markets.

Adam Benjamin – Jefferies

There was a lot there in the script, Craig, can you comment with respect to Bluetooth as to when we can start seeing initial shipments there; will we see some light shipments this year or will that be next year?

Dr. Craig Barratt

No, there won’t be any Bluetooth revenue this year; as I said we’re sampling products, our focus is on ? with important design wins, but certainly we expect Bluetooth to be a revenue driver in 2008.

Adam Benjamin – Jefferies

Last one, I think you commented regarding your 802.11n wins in your retail segment, that you have wins all four of the top four OEMs, I just want to make sure I caught that correctly.

Dr. Craig Barratt

That is correct, we do have 11n either product shipping or wins with all four of the top retail OEMs now.

Adam Benjamin – Jefferies

Okay, great, thanks a lot guys.

Operator

Our next question comes from Sanjay Devgan - Morgan Stanley.

Sanjay Devgan - Morgan Stanley

Congratulations again. Just a quick question, you talked about your new product that you announced today, your AR6002, second generation ROCm product. Could you tell me roughly when you do a new iteration of the new product, what kind of cost productions, basically typically what’s the cost savings on the part as you go from generation to generation?

Dr. Craig Barratt

Well we don’t want to go into specific numbers about the relative costs, but I should report that our design goal in the 6002 was to really create a solution that had substantially lower power than all the competing solutions. Certainly we don’t do a new product unless we can get it on a cost curve which is also substantially lower, so we think this is a tremendously competitive product, both the power consumption costs and form factor reasons. And as I mentioned in the prepared remarks, this product also has the highest throughput of any of the mobile wireless LAN solutions and that’s another contributor to offering low power.

It’s hard for us to benchmark this product competitively with all of the products that have been announced but perhaps aren’t sampling yet, but we do know that for example compared to nine nanometer products from competitors, we have power consumption which is roughly a factor of three lower; we have a cost which we believe is substantially lower as well. So we think this product is going to be particularly competitive.

But the in excess of twenty wins that we took to that in dual-mode handsets, the bulk of those were of course the previous generation products. And so we think the leapfrog that we have with this next product will serve us very well in terms of getting a broader portfolio of wins.

Sanjay Devgan - Morgan Stanley

Just a quick follow-up with that, going back to ROCm again, obviously 2008 hopefully that’s the year when we’ll really start to see the penetration in handsets kind of take off; from your perspective, as we think about it in our models, how should we kind of model it, do you expect it to be a mid-’08 phenomenon when we really start to see the inflection; or how should we think of the penetration I guess?

Dr. Craig Barratt

I think the handset penetration with wireless LAN is something that is really difficult for us to judge; the thing we control is which partners we work with and how many handset wins we get. Unfortunately, Atheros doesn’t dictate or control the volume; it depends on the carrier acceptance. Certainly there have been some exciting new phones that have come out with Wi-Fi which is really instrumental to the utility and so I think that’s going to trigger a lot of other carriers and handset OEMs to think about the handset, so it’s hard for us to give particular color about modeling. We know long-term there will be significant penetration of Wi-Fi into cell-phones and you just look at the numbers. Clearly the type of revenue opportunities and unit-volumes in this market are very large, it will of course take time to get there so certainly there will be steady growth next year, it’s hard to put a particular; more color on it, there’s no single inflection point that will occur.

Sanjay Devgan - Morgan Stanley

Thank you very much.

Operator

Our next question comes from Mark Heller - Merrill Lynch.

Mark Heller - Merrill Lynch

Congratulations on the good quarter. I was wondering one of your primary competitors in wireless LAN seems to be very aggressive with 65 nanometer and I was just wondering how do you view that, moving to that process mode, do you feel you need to move to 65 nanometer to be competitive on a power and cost basis.

Dr. Craig Barratt

I think that’s a great question, so Atheros does not believe it needs to use process technology as its primary competitive weapon. So our strategy on the foundry side is actually think of it as a contrarian strategy; we are leveraging our architectural and our design skills to create very very compact designs, very very low power designs that beneficially we can manufacturer in standard CMOS processes in many cases, point 1.3 or other technologies where many different foundries can supply that capability to us, and we’re actually finding the pricing environment for these more common processes and more established processes are very very favorable for us. So back to the AR6002, this chip is not done in 65 nanometer, it’s not done in 90 nanometer, it’s actually done in 0.13; the die size of the AR6002 is only about 15% bigger than a competitor’s 90 nanometer chip and the power consumption is a factor of three lower, so this sounds the opposite of what you’d expect.

You would expect the leading process technologies would be roughly a factor of 2 smaller in die size for each generation and you would expect the power to be substantially lower.

So we think we have a significant competitive advantage by being able to design chips that are very, very compact and low power and leverage the favorable cost structure of more established process technologies.

Those die size comparisons are true with our Ethernet products. They're also true of our 11n products, head-to-head. So we don't think it's necessary to use leading edge process technologies as our only competitive weapon.

Of course, in time, we will design chips in more advanced process technologies as they become more stable, as they become more established and frankly, as more and more foundries can offer similar compatible processes. So our strategy is certainly different to our competitors.

Mark Heller - Merrill Lynch

Did you say you are shipping the Ethernet switch in Q3?

Dr. Craig Barratt

No, the gigabit switch we said will be sampling at the end of this year.

Jack Lazar

We're currently shipping our 10/100 switch.

Mark Heller - Merrill Lynch

Can you quantify what did PAS do for the quarter, in terms of the dollars?

Jack Lazar

We just said that it was slightly above what we had originally expected. So think of it as I think we had made some remarks, if it came in somewhere between zero and $1 million, we would be happy. It was above that.

Mark Heller - Merrill Lynch

Jack, any thoughts on the balance sheet cash at this point, what do you plan on doing with it at this point? Do you think you'll do more acquisitions or what are your plans for the balance sheet?

Jack Lazar

We certainly consider acquisitions, as a lot of you know. We look at a lot of spaces. We try to be pretty disciplined about approaches like that. Our cash is there so that we can grow the company in the best possible way and take advantage of particular situations as they come to the forefront.

So what we're really looking for is flexibility. We know that we get paid for growth, and so we are just trying to do that; to the extent we can do it internally, that's great. To the extent that we need to acquire to get some of that growth, that too can be great.

I wouldn't put it past us, using some of the cash for acquisitions. But as you all know, it's not our primary approach to addressing new markets.

Operator

Our next question comes from Jonathan Goldberg - Deutsche Bank.

Jonathan Goldberg - Deutsche Bank

Quickly on the PC OEM front, obviously there has been a lot of chatter around it this quarter. You say you're gaining share at a lot of vendors, but losing share at vendor which looking at the numbers would have to be a pretty big vendor. Could you just help us out? Are you out of that vendor entirely? Are you out partially at that vendor?

Dr. Craig Barratt

Jay, we're not going to give any more commentary beyond what we said in our prepared remarks.

Jack Lazar

I think the important thing to point out here is what I said in our guidance, which is that each of our segments -- networking, PC and consumer -- are expected to go up in Q4. We have a very diverse set of customers. That works to our benefit as we start to get some design wins; frankly, some pretty good-sized design wins, that will start shipping at some of these customers.

Jonathan Goldberg - Deutsche Bank

On the Bluetooth side, are you still focusing primarily on the desktop markets for that product, or are you starting to see interest in other areas as well?

Dr. Craig Barratt

One of the primary applications in the PC market which is our initial focus is actually the laptop area. So we see the connect rate of Bluetooth in laptops increasing significantly. But surprisingly, we see many of our wireless LAN customers in the laptop space paying less for 11g, the completely manufactured module for 11g, paying less for that than the Bluetooth module, which is obviously available from competitors of ours today.

So we think there's a terrific opportunity to have a very, very integrated and competitive product; one that has very, very compact die size and use that to really increase the penetration of Bluetooth into PC platforms, primarily laptops. Over time, we will of course address additional Bluetooth markets outside of the PC space.

Jonathan Goldberg - Deutsche Bank

How should we think about seasonality? Is Atheros a seasonal company? Are we going to have seasonality this year? What are the trends going to be?

Jack Lazar

Frankly, we really only look one quarter out. So we've given our guidance for Q4. As we get closer and closer to Q1, we'll certainly update everybody. Traditionally, we've been more of a product cycle company, but we are getting larger too. I think as we get closer, we'll have a lot more visibility to that.

Operator

Your next question comes from Eric Ghernati - Banc of America Securities.

Eric Ghernati - Banc of America Securities

Craig, a few quarters ago in 2006 you were talking about your carrier business, how you expected that to be very strong in 2008 and potentially even exceeding your retail revenue. Can you give us an update on your outlook for that segment, specifically and what sort of milestones should we look for you to achieve in that business?

Dr. Craig Barratt

It's difficult for us to give quarter-by-quarter color, but we can certainly reflect the fact that the strength of the carrier business and the retail business were major contributors to growth in our overall network market, which grew 17% sequentially. Certainly that whole segment will grow in Q4 again, based again on the strength of both the retail and in fact the carrier segment too.

Earlier this year we saw and we reflected on this in one of our earlier calls this year, we did see some temporary weakness in the carrier sector, which was really specific to one end carrier customer delaying some roll-out of some products. But that situation has certainly recovered. We're announcing very broad adoption of our products across a whole variety of carriers in a variety of different geographies.

Another factor, of course, is the 11n transition hasn't really even started in this market. We already have wins for 11n in the carrier space, but these products won’t ship until really next year. So we think there's a lot of opportunity to see growth in this market, not just through our market share gains, not only through increasing attach rates of Wi-Fi in these residential gateways, but the 11n transition helps further. So these are the factors that are making the carrier market look like a very, very promising opportunity for us for the foreseeable future.

Jack Lazar

One of the other things I'd point to in the carrier business is that historically if you look at the customers that have driven this, it's been relatively concentrated. Now you heard some of the names that Craig said in his script, some of the large carriers are now rolling this out. It's a much more diversified customer base now than it was even just earlier in the year.

If you couple all these things together, rapid adoption of wireless into these gateways, the fact that we're in with more and more of these customers, the fact that we're partnered with more and more of the folks out there and the 11n transition; clearly, we do view carrier as one of the most interesting opportunities for us in 2008.

Eric Ghernati - Banc of America Securities

If you look through next year, as far as the carrier business again, do you think that 11g would be the main grow driver, or would it transition to 11n?

Jack Lazar

We're going to start the year with 11g. That's what the design wins are. Those are the things that are actually shipping, I should say. There's a fair number of design wins out there that are 11n, but it really just depends on how quickly these guys can get the product to market. Of course when they do bring 11n to market, it will be at a higher ASP than 11g so that we would benefit from that.

I think that to start off the year, you're going to see predominantly all of these carrier wins being 11g-oriented product.

Operator

Our next question comes from Romit Shah - Lehman Brothers.

Romit Shah - Lehman Brothers

Nice quarter, guys. Could I just ask, are you a bit surprised that 11n isn't a bigger percentage of your total wireless LAN mix at this stage? Could you perhaps just provide some perspective on the market there?

Dr. Craig Barratt

I think part of it is you have to look at what's in the denominator. Our low-cost strategy with 11g has really caused some terrific growth, very, very strong growth in the value segment laptop part of the business and also in retail and carrier; tremendous growth in 11g.

So I think it's a little bit incorrect to conclude that the 11n percentage is lower, really because of that factor. I think overall 11n growth is going to be strong. We think as we look into Q4 and next year on a steady basis, 11n will be an important growth area for us.

As I reflected earlier, the carrier market in 2008 will be another important area of growth for 11. So I think we're very happy with how the mix is evolving.

Jack Lazar

One last point on 11n, we have shipped almost $100 million worth of 11n products to-date. That's a pretty sizable number. Of course, if it was two, three years ago when Atheros had just gone public, that would be a massive increase for the company. Today it's just part of the overall revenue number which is much larger, so it gets masked a little bit.

$100 million of 11n tells us it's here to stay and that the adoption is actually happening. We can't control the market. All we can do is build the most cost-effective solutions and try and get those to our customers in a way that really encourages them to push their products in the marketplace.

Romit Shah - Lehman Brothers

Jack, I know you don't want to comment on Q1, but you guys do have a nice streak growing with 10 consecutive quarters of revenue growth. Can you comment at all on the dynamics necessary to keep that streak going? Is it g to n? Bluetooth? ROCm?

Jack Lazar

You are right; we don't want to comment on Q1. I mean, we've tried to really focus on what's in front of us and really execute in a way that has given us this ten consecutive quarters of revenue growth. Look, we have a lot to talk about for the upcoming year, a lot of TAM expansion that we'll be addressing. In some sense you can't control the macro environment. There are puts and takes that are involved here. As we get closer we'll be happy to talk about it some more.

In fact, we'll certainly be talking about the increase in TAM quite a lot at our analyst day on November 8th. So I'm sure we'll see you there and we'll chat some more.

Operator

Your next question comes from Allan Mishan - CIBC.

Allan Mishan - CIBC World Markets

Congratulations, Jack, on the Red Sox victory. Can you give us a little bit of an idea of how many points of growth it might cost you in that share loss you're talking about? Looking into Q1, does that repeat again, or is the entire effect falling into Q4?

Jack Lazar

We're not going to get to that level of granularity on the actual revenue. All I can say is that clearly we have worked through and we'll look forward to our 11th consecutive quarter of revenue growth in Q4 and I think that shows the diversity of our business.

Frankly, maybe it shows the strength of some of the other design wins that we've gotten that have brought market share in our direction. Like I said, there's a lot of puts and takes out there. The tales of our death have been greatly exaggerated you might say.

Allan Mishan - CIBC World Markets

You talked about a very stable pricing environment in 11g. Can you talk about pricing in 11n or the competitive landscape, and specifically, if you can mention whether Raylink has been a factor at accounts or in terms of pricing that would be very helpful. Thanks.

Dr. Craig Barratt

Certainly there's a variety of competitors out there. We think we're very well-positioned. The wins that we did describe, we don't necessarily have to be at the lowest price to win business. I think our performance, our product features and differentiation certainly help us. So definitely I think we're positioned to really take the business that we need to.

I think we have a very, very competitive road map of products, and I think taking our experience in 11g the way we've driven integration in 11g towards some highly integrated products that are very, very low cost, that's really told us well how to drive things forward with 11n.

So absolutely, prices will be something we use as a competitive weapon. We don't have to be the lowest price, but we know we have to be competitive and we have to do it in a way that makes it good business for us. I think we have all of the ingredients to continuing the success in that area with 11n.

Operator

Your next question comes from Amit Kapur - Piper Jaffray.

Amit Kapur - Piper Jaffray

Turning back to ROCm for a second, in the design activity you're seeing, is it still primarily high end phones that you're seeing or are you starting to see some early signs that it's wireless LAN starting to penetrate into the mid-tier of the market?

Dr. Craig Barratt

It's primarily high end phones at this point. Really, many of them would be described as smartphones. There are a couple of phones you would consider as higher end feature phones. But typically it's the higher end segment.

Jack Lazar

Of course, they tend to be pretty dominated by Qualcomm-based platforms. We've had a partnership with Qualcomm for a couple of years now and that seems to be paying some dividends now.

Amit Kapur - Piper Jaffray

In terms of the AR6002, the underlying technology that enabled the near zero stand-by power, how much of that technology can be applied to other end markets you're targeting? Say Bluetooth, and what opportunities do those power savings open up in those markets?

Dr. Craig Barratt

Certainly it's a set of basic technologies, some that were uniquely developed and some a combination of some of the more standard capabilities and technologies. Absolutely they can and are being applied to other markets. So we think in other mobile markets especially power consumption and battery life will be really key. So we think as we introduce new products in other areas, power consumption will certainly be a differentiator for us.

Operator

Your next question comes from Rubin Roy - Pacific Crest Securities.

Rubin Roy - Pacific Crest Securities

Jack, you mentioned that all three of your segments will be up in Q4. I was wondering if you could break Ethernet out? Will Ethernet revenues be up sequentially? Also, are you collecting revenues from some of the motherboard manufacturers outside of the ones that you mentioned in the script?

Jack Lazar

We're actually not going to break out Ethernet. It's going to stay as part of our networking segment so I apologize for that. As far as we mentioned ECS and Biostar, I think there is some Ethernet that will come from them in the fourth quarter. But clearly, it's more focused on 2008.

Dr. Craig Barratt

Remember in the networking business, we have growing switch revenue from our 10/100 switch which is already shipping.

Rubin Roy - Pacific Crest Securities

In terms of the carriers rolling out 802.11n next year, are any carriers trialing .n equipment today and if you could talk about what those limiting factors are, perhaps that are keeping carriers from going into production, if any? Is the design cycle different on the OEM side or the service provider testing side? Any help there.

Dr. Craig Barratt

There's quite a collection of trials and tests that are being done. There are RQs and design in processes that are occurring in all various stages. All of that is proceeding in an orderly type of manner. No particular surprises. I think carriers are looking to 11n to be one of the key technologies they use for driving triple play services throughout the home. They would love to increase their ARPU by offering a richer set of services and those services more and more will be used in multiple locations in the house.

So they can minimize truck rolls and provide more services, multiple TV streams multiple VoIP streams and so on throughout the house. So I think its very exciting. I think that said, they of course have to figure out the actual feature and form of the products and obviously qualify and test them before they go into production.

Operator

Your next question comes from Shaw Wu - American Technology Research.

Shaw Wu - American Technology Research

Could you give us an update on your Wi-Fi progress in consumer electronics, namely digital cameras, printers, and game consoles?

What's your view on GPS? Is it a technology that you need to own? Thanks.

Dr. Craig Barratt

Obviously we talked in the prepared remarks about a number of our key wins in the consumer area related to mobile Wi-Fi. Digital cameras, we already have a number of wins there. Sony is already shipping a digital camera using our Wi-Fi built in, and in the prepared remarks we talked about quite an innovative product that allows any legacy camera that accepts an SD or compact flash card to actually take a Wi-Fi card that includes flash as well.

So it looks just like a flash card to the camera, that unbeknownst to the camera, allows you to transfer and send images. So that's a way of providing a Wi-Fi capability to in fact any digital camera that accepts the right kind of memory card. So we definitely see positive things in the digital camera market.

We think the gaming market and the printer markets are actually important markets, and we think in 2008 we'll definitely have more to talk about in the coming quarters in those areas.

GPS is on the list of a whole family of other technologies where our core capabilities of developing very high performance systems and implementing them in low-cost digital CMOS can be applied. As we develop a richer portfolio of products, as we try to serve more and more key customers with a more comprehensive set of technologies, it's likely that we will implement new technologies outside of the ones we have already talked about.

GPS is certainly one that is intriguing to us. There are others as well. Typically, we don't tell people ahead of time what our next key priorities are. As we develop these products, perhaps we might do acquisitions in certain areas that are relevant to us. Over time, you should expect us to have an increasing footprint in a variety of technologies.

Shaw Wu - American Technology Research

Now just back to the first question. The question I meant to ask was, do you see these newer areas, is this something to expect to be a more material driver next year? What could we look for in terms of milestones in terms of that becoming a bigger portion of your business?

Jack Lazar

I think when it comes to the ROCm-based business, we tried to be very practical about this over the years. If you look historically at what we do, we tend to go after markets that are already established: things like Ethernet, like PAS, and clearly we are an established player in the Wi-Fi market.

When we look at mobile Wi-Fi, it is the one area that we do that is a little bit more of we'll call it a market gamble, just because you don't find it in a lot of handsets and cameras and camcorders and gaming today. We think that our strategy for addressing this market is a solid one. It's anchored with some key design wins that will certainly be significant drivers for the upcoming year. But frankly, a lot of this is just really dependent on the consumer itself.

Do you care if you have Wi-Fi in a camera? We think you're going to care, but we don't know yet. All right. Are you going to care about having Wi-Fi in your phone? Well, if you talk to a variety of folks who have it today, they'll tell you that they do. But the widespread consumer doesn't necessarily know yet.

I think that what we should be looking for in the marketplace is really the consumer pullthrough. Does the consumer care about this? If they do, clearly we're in a good position to benefit from it. But I think it is a little too early on to actually say that what level of driver it's going to be for next year. We just know that we have some design wins that should position us well to get some significant revenues and others that could provide a lot of upside.

Operator

Our next question comes from Edwin Mok - Needham.

Edwin Mok - Needham

My first question is on AR6002. Given that it's a new chip, does that mean your partners like Qualcomm and these other guys will have to requalify that chip?

Dr. Craig Barratt

It is a great point. Certainly on the hardware side, the actual form factor is substantially smaller than the 6001 previous generation. So the hardware design in some cases will have to be requalified.

However in many cases, a customer is using a module level solution from a partner of ours and it's quite possible that that module itself does not change and can be forward compatible with the new product.

The key architectural approach we made is on the software side. The AR6002 is exactly compatible with the AR6001 when viewed from the host side interface. So at the host interface it's 100% compatible. That means that is the area where most of the integration effort occurs and that does not have to be repeated. So we see this as a seamless migration path for our customers.

So it's a great upgrade path for existing SKUs that are shipping with the 6001 or have the 6001 designed in, and of course it also represents a great opportunity for new ones as well.

Edwin Mok - Needham

It looks like you guys are going after a lot of new opportunity out there with Bluetooth and wireless LAN and new customers. Are you in any way resource constrained? Any thought about that you might need to increase your spending in headcount?

Dr. Craig Barratt

Well, certainly we have grown our headcount prudently, but quite aggressively over the last one and two years. We have increased our presence in several geographies around the world which have benefits for us. One is the proximity to customers and suppliers in Asia, and one of course is on a blended basis, the overall cost structure is quite favorable.

Approximately a half of our engineering teams are now located in greater Asia, if we include our Indian team as well. So that has certainly helped us to prudently grow our engineering capability at more modest expense.

I think the other area is we had some discussion earlier about our process technology and foundry strategy, and this is something also that helps our OpEx as well because, frankly, using the very advanced process technology tends to be incredibly expensive from a tool, flow and tape-out cost point of view. So that's something that's favorable as well.

So I think the company is sized well. Certainly, we are prudently investing in the company in the form of increased OpEx. But in general, we're trying to do that at a rate that's modestly lower than our revenue growth and you definitely saw that in the most recent quarter, where our revenue grew quite nicely sequentially and OpEx really grew very modestly and you see it once again in the guidance for the fourth quarter.

We have guided revenue growth to be greater than our OpEx growth.

Edwin Mok - Needham

In terms of ASP pressure I know that, Jack, you talk about your ASP was pretty stable. Can you maybe give a little more color? Do you see for pressure in g or n? Which one do you see more pressure and which one do you see less?

Jack Lazar

We can give a little color on that. We actually saw pretty similar ASP erosion across all technologies in the last quarter. Now we of course expect 11n will come down over the next couple of quarters a little more aggressively than the other ones, since frankly we'll have new products that will help drive that down. And, we'll be pushing for mass adoption of 11n. So that's the area where we would expect to see some more ASP erosion, but overall it's pretty reasonable across all three technologies this quarter.

Edwin Mok - Needham

Maybe a different way to ask is this: in terms of the erosion, with these new consumer related products, would you expect to see more ASP erosion, just because those products carry a lower price, basically?

Jack Lazar

Well, in some sense. The ROCm products generally do sell for less than our core wireless LAN products. Let's just put it this way, I look forward to the time in which we can have that type of ASP pressure because we will be growing the market pretty significantly at that point.

Dr. Craig Barratt

That's also why products like the AR6002 are very important. The power consumption is really revolutionary, but the cost structure is also very favorable.

Operator

Your final question comes from Kwang Kim - Eaton Vance.

Kwang Kim - Eaton Vance

I was wondering a little bit about the share loss in the PC OEM business, and I was just wondering if you can maybe give us some reasons in terms of what attributed to that share loss?

Dr. Craig Barratt

Kwang, to continue the baseball analogy, we would love to bat 1,000, but we don't quite bat 1,000. We win the vast majority of things we go after. I think our slugging percentages leads the league as well. So we don't win absolutely everything. There are cases where competitors can be particularly aggressive. There can be some must-win accounts or platforms or SKUs where they can do whatever it takes to win.

We view this as just one round in an ongoing battle, and frankly, we would love to re-win this piece of business and that could create more opportunities for us next year as well. We think it's a multi-round battle and we're more than happy to be back in there going at it in the next round.

Kwang Kim - Eaton Vance

Craig, I'm impressed with the baseball analogy.

Dr. Craig Barratt

I could give you a cricket analogy, but I thought that wouldn't ring so true.

Kwang Kim - Eaton Vance

So there is, from an economic standpoint, reason for to you go back and try and win that business?

Dr. Craig Barratt

Absolutely. We're going to be back in there. Of course, in the future there are roll-outs of new product generations, some of which can favorably coincide with a customer's window and sometimes they don't exactly line up. We think we can be in a good position in the future.

Kwang Kim - Eaton Vance

What gives you the confidence that you can actually win that back?

What is Atheros doing from a business process standpoint that is going to prevent situations like this from the future?

Dr. Craig Barratt

I don't think it's really appropriate to go into that level of detail. As I said on an overall basis, I think we're very, very happy and excited about the trajectory of our business. There are gives and takes. But as I said, the batting average is really high. I will say it's not quite 1,000.

I think we're very positive at opportunities across all of our businesses at a variety of customers. We're diversified enough to where any one customer doesn't make a huge difference to our business and outlook, as you can see from the guidance we gave.

Jack Lazar

I'd like to just add one other thing which is there is a lot of talk about this particular topic when I speak with investors. I would also like to point out there have been some significant body blows. Sorry, to getting off the baseball analogy here; there have been some significant blows that we have given to our competitors out there too. Clearly that's been happening over the last couple of years as we've continued to take market share. But it's also specifically happened in this last quarter and some that is reflected in the numbers that we're guiding to.

So we just don't think that it's proper to get into all sorts of descriptions about what's going on at each individual account. We're very focused. We know this business pretty well. We're going to win most of the battles that we engage in, but every once in a while, we are going to lose some.

Dr. Craig Barratt

I think that's the end of the questions. I would like to thank everyone for joining us today, and with a special thanks to all of our employees for their continued dedication and hard work.

Atheros will be hosting its first ever analyst and investor day on Thursday, November 8th in Santa Clara. Space is limited. But if any of you are interested in attending, please contact Stapleton Communications.

We will also be attending several investor conferences during the fourth quarter, including: the AEA Conference November 5 and 6 in Monterey, The Credit Suisse Annual Technology Conference November 29 in Scottsdale, and the Lehman Brothers Global Technology Conference December 5 through 7 in San Francisco.

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

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