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Atheros Communications Inc. (NASDAQ:ATHR)

Q4 2007 Earnings Call

January 28 2008 5:00 pm ET

Executives

Deborah Stapleton - President of Stapleton Communications, Inc.

Craig Barratt - President and CEO

Jack Lazar - VP, CFO and Secretary

Analysts

Adam Benjamin - Jefferies

Romit Shah - Lehman Brothers

Jonathan Goldberg - Deutsche Bank

Quinn Bolton - Needham and Company

Anton Wahlman - ThinkEquity

Ruben Roy - Pacific Crest Securities

Eric Ghernati - Banc of America Securities

Ramesh Misra - Collins Stewart

Allan Mishan - Oppenheimer

Sanjay Devgan - Morgan Stanley

Shaw Wu - American Technology Research

Anil Doradla - Caris & Company

Mark Heller – Merrill Lynch

Operator

Good afternoon, ladies and gentlemen. (Operator Instructions)

I will now turn the call over to Ms. Deborah Stapleton who will introduce today's speakers. Ms. Stapleton, you may begin.

Deborah Stapleton

Thank you. Good afternoon, everyone, and welcome to the Atheros Communications fourth quarter and 2007 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 and product development, the anticipated benefits of our diversification strategy, our customers, our competitive position, and our anticipated growth, profitability and leadership positions in various markets, 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, 2006, and our Form 10-Q for the quarter ended September 30, 2007, previously filed with the SEC, in particular to the section entitled "Risk Factors" and to other reports that we may file from time to time with the SEC for additional information on factors that could cause actual results to differ materially from our current expectation. These forward-looking statements speak only as to 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, refer to as "pro forma". Atheros' management believes 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 is chosen to provide this information to investors to enable them to perform comparisons of operating results in a manner similar to how the company analyzes its own 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 are discussed in today's conference call are non-GAAP unless otherwise noted.

Now, I'd like to turn the call over to Dr. Craig Barratt.

Craig Barratt - President and CEO

Thanks, Deb, and thanks to everyone for joining us today.

The fourth quarter was our 11th consecutive quarter of revenue growth with revenue increasing 8% sequentially to $114.3 million, while net income grew to $21.4 million or $0.36 per diluted share. Gross margins were a record 52.3% and operating profit was a record 19% of revenue.

Revenue in 2007 was a record for the company at $417 million, an increase of 38% over $301.7 million in 2006, and we increased our operating profit by 59% year-over-year. Jack will take you through the numbers in greater detail and discuss guidance for the first quarter shortly.

2007 was an exciting year of diversification for Atheros as we strengthened our position in the Ethernet market, announced Atheros Bluetooth products, and entered the high-growth GPS market through the acquisition of u-Nav in December. We continued to strengthen our position as a leader in wireless LAN during the year, and increased our PC market share by offering a powerful combination of technology and cost leadership in both the 11g and 11n segments.

As we ended 2008, Atheros is delivering products in six important categories; wireless LAN for PCs and networking, mobile wireless LAN, PAS, Ethernet, Bluetooth and GPS. This new breadth of revenue opportunities has significantly expanded our TAM to well over $5 billion in 2008.

We are very proud of our 2007 results and I want to thank our team for their remarkable efforts in making this such a successful year. We have made significant strides toward our goal of becoming one of the world's great diversified communication semiconductor companies.

Now, let's look at the markets we served, PCs, networking and consumer, in more detail.

PC revenue was very strong in the fourth quarter, representing 43% of total revenue and 17% sequential growth. This increase was driven primarily by sales of our AR2425 11g product, the industry's most integrated PCI Express wireless LAN solution, which has been adopted by nine of the top PC OEMs, now including HP.

Due to its popularity among PC OEMs, unit shipments of the AR2425 have roughly doubled every quarter since its launch in the fourth quarter of 2006. With this high-performance, low-cost PCI Express solution, Atheros continues to be very successful in the rapidly growing value PC market, which includes such revolutionary products as the sub $300 Asus EE PC laptop, as well as the full spectrum of more traditional high-volume PCs.

In November, we announced the world's most integrated single-chip 11n PCI Express solutions in several configurations for the PC market. Currently sampling to customers and in mass production this quarter, the AR9280 and 81 are the industry's first-to-market, single-chip 11n solutions, providing customers with cutting edge 11n connectivity at price points that would drive mainstream adoption of 11n across a wide range of PC platforms. These solutions have wins with multiple tier-one PC customers, and we are excited about the favorable impact this family will have on our wireless LAN business in 2008 and beyond.

In 2004, we disrupted the industry with the first single-chip 11g solutions, and to-date, we have realized hundreds of millions of dollars of revenue from those initial products. We expect a new family of single-chip 11n products to have a similarly disruptive impact.

Our Ethernet business was slightly stronger than originally anticipated in the fourth quarter. We made two important additions to our ETHOS family; the AR8121, the world's most integrated gigabyte Ethernet PCI Express [LUM] controller and the AR8316, six-port, single-chip gigabyte Ethernet switch. By providing end-to-end connectivity platforms for PCs and networking products, Atheros is enabling customers with complete turnkey, go-to-market reference designs from a single dedicated vendor and partner.

We have achieved important Ethernet wins with tier-one PC OEMs and expect to further penetrate the PC market in 2008. Having shipped well over 20 million Ethernet ports in 2007, we have established ourselves as an important supplier in this market and are on track to continue to gain additional share this year. Indeed, we shipped Ethernet products to 20 different customers in 2007 compared to 1 in 2006.

Also in PCs, the attach rate for Bluetooth in laptops is estimated by IMS Research to be approaching 50% in 2008. With Atheros' highly competitive AR3011 PC Bluetooth solution and our strong relationships with the world's top PC OEMs and ODM customers, we expect our Bluetooth presence in PC platforms to grow significantly in 2008.

By leading with innovative products, such as our XSPAN 11n single chips and offering our customers a wide array of other connectivity solutions, such as Bluetooth, GPS and Ethernet, we are increasing both the depth and breadth of our product offerings in the segment, and are well positioned for new and expanded business at all of the top-tier PC OEMs.

Let's turn to our networking business, which includes the retail, carrier and enterprise channels. After a 17% jump to record levels in the third quarter, revenue was slightly down sequentially, but remained strong at 52% of the fourth quarter revenue driven by the growing adoption of our XSPAN 11n technology and our continued strength in 11g platforms. With the addition of our Ethernet switching products, we believe networking will be an even larger and more important part of our business in 2008.

In the retail market, we announced shipping our 11n solutions to all six of the top OEMs worldwide; D-Link, NETGEAR, Linksys, Belkin, Buffalo and TP-LINK. Our customers are bringing to market a broader portfolio of high-quality wireless LAN products than ever before.

We believe that by driving down the cost of this new generation of wireless LAN technology, we can help accelerate consumer adoption at the retail level. Overall, we expect revenue from our retail customers to grow in the first quarter and calendar 2008. It's not only the retail networking channel that we expect continued expansion of revenue and customer products.

Our carrier business grew steadily throughout the year and revenue increased more than 10% in the fourth quarter due to our strong relationships with the key providers in this market and our continued cost and performance leadership. Our wireless LAN solutions are now designed in at many major carriers in Europe, where wireless LAN attach rates on broadband gateways are growing quickly.

To adjust this expanding market opportunity, in the fourth quarter, we announced two single-chip 11n solutions that were developed expressly for the carrier gateway market. These latest designs provide reliable market proven 11n performance at price points that allow carriers to broadly deploy home gateways capable of supporting an array of multimedia services on a single wireless network.

While, we are leading the adoption of 11n in the carrier market, 11g continues to be the dominant technology in home gateways. And Atheros gained significant market share over the past year in this category. Both our AR2413 and AR2417, which was launched in the second quarter last year are on a variety of reference designs with our broadband partners and have been widely adopted by carriers around the world.

Additionally, our low cost highly featured 10/100 Ethernet switch is now included in several of our 11n and 11g router reference designs and we have secured multiple wins among our retail and carrier customers. We remain optimistic about our continued growth prospects with our carrier customers in 2008. Moreover, with a growing footprint of 11n products with our retail customers, the prospects for the networking portion of our business look strong in 2008.

Our consumer business, which addresses the mobile market increased in both dollars and as a percentage of revenue in the fourth quarter, fueled by solid growth in our mobile wireless LAN business and market share gains in PAS. During the quarter, we announced the world's lowest power mobile wireless LAN solution the AR6002. As we demonstrated at CES this year, our breakthrough single-chip solution consumes 70% less power in active mode than competitive solutions and consumes near zero power, when in standby mode. This substantial power reduction results in much longer battery life.

In the fourth quarter, we secured our first win at an additional top five handset manufacturer giving us wins at three of the top five. In total, our ROCm mobile wireless LAN products now have more than 20 handset design wins. Adding to our ROCm family in the fourth quarter, we introduced the AR3031, a low power SoC for Bluetooth mono headsets. The AR3031 achieved 20% greater power efficiency in active mode than competitive solutions. This solution is currently sampling with multiple ODMs and will be in volume production in the second quarter.

Our PAS business continues to be profitable and we began volume shipments to ZTE in the second half of 2007 and an additional customer in the fourth quarter. In fact, we have secured several new PAS platforms with these customers and we continue to work closely on new designs with our initial launch customer UTStarcom.

In December, we entered the GPS market with the asset acquisition of u-Nav Microelectronics, a privately held fabless semiconductor company specializing in GPS chipsets and software that enable mobile location-based products and services. u-Nav's product portfolio, which is shipping in volume today include single-chip low-cost CMOS solutions and complete GPS system software providing signal acquisition, tracking and GPS navigation.

u-Nav brings a mature and rich set of market proven GPS silicon and software and has already shipped over 4 million units to-date. We are excited about the addition of u-Nav's high quality team to Atheros. As we now have over 70 employees focused on this important new market. We are confident that our GPS team will make a strong contribution to Atheros's efforts in designing multifunction radio solutions for the mobile market and will enable us to be a growing player in the standalone GPS market for PNDs, PCs and mobile phones.

In 2007, Atheros became a truly global company establishing facilities throughout the world in geographies that are important to our customers. In addition to our teams in California, we now have world-class development centers in India, China and Taiwan and we successfully taped our products in each of these locations during the year. And we are pleased to welcome our Finland GPS group to Atheros's family of world-class design centers.

2007 was also the year that we delivered on our goal to become a diversified communications IC supplier to key customers around the world. With our internal development of Bluetooth and mobile wireless LAN solutions, coupled with our acquisition of leading-edge Ethernet and GPS solutions, we have profitably increased both our TAM and our strategic importance to top tier OEMs in each of our target market segments.

The significant TAM expansion, we have been working toward has yielded a variety of growth drivers for 2008. We continue to expect our XSPAN family of 11n products, which has contributed over $100 million in revenue to-date, three of the company's largest contributor to growth in this coming year. We have the world's most widely adopted 11n solutions and we plan to continue to gain 11n market share in 2008.

With this growing momentum, our ROCm family of solutions for the mobile wireless LAN market will also be a major contributor to growth this year, as well our Ethernet, Bluetooth and GPS products. We have made strategic investments in the markets that are most important to our customers, and we will continue to focus on expanding our presence in each of these markets throughout 2008.

On a separate note, we were very pleased that a variety of products from Atheros's customers received leading industry awards at this year's CES Show. Among them are the Asus EE PC Notebook, D-Link's DSM 210 Wi-Fi picture frame, D-Link's DGL 4500 Xtreme N Gaming Router, 11n routers from Belkin and NETGEAR, and Eye-Fi's innovative wireless SD memory card for digital cameras, which also won a Best of Show award at Macworld.

Additionally, Atheros was honored to have been chosen by the FSA as the Most Respected Emerging Public Fabless Company for the second consecutive year. We attribute this to the dedication and hard work of all of our employees worldwide. Also, Atheros was listed on Forbes Magazine Fast 15 list, which highlights attractive technology companies with the growth potential to make America's fastest-growing tech companies list in the future.

With that, I will hand it up to Jack for a detailed review of the financials. Jack?

Jack Lazar - VP, CFO and Secretary

Thank you, Craig and thanks to all of you for joining us today. First, I'll outline our financial results for the fourth quarter ended December 31, 2007, and then I will provide our first quarter 2008 guidance. Note that our Q4 results include the partial quarter impact of the u-Nav acquisition, which closed on December 14, 2007.

In summary, Q4 was clearly our strongest quarter to-date. It was our 11th consecutive quarter of revenue growth and our 10th sequential quarterly increase in both operating and net income. We are particularly proud to have achieved record gross and operating margins, both in dollars and as a percentage of revenue.

Revenue was towards the high end of our guidance range and gross margins were well above it. As a result, EPS came in $0.06 better than our guidance. As a reminder, our Q4 guidance was for 5% to 8% revenue growth, gross margins between 48% and 49%, and EPS of $0.30.

Q4 revenue increased 8% sequentially and net income was up $4.5 million to $21.4 million or $0.36 per diluted share. In addition, although we paid $23.7 million related to the Attansic and u-Nav acquisitions, our cash and marketable securities still increased by just over $1.7 million in Q4.

Revenue was a record $114.3 million, up $8 million from the $106.3 million recorded in the third quarter of 2007. Revenue in Q4 increased 30% compared with the $87.8 million recorded in the prior year comparable quarter. The 8% 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 product mix data, the breakdown of revenue for our wireless LAN chipsets as follows; 11a/g was 16% of wireless LAN revenue, 11g was 67% of wireless LAN revenue and 11n was 17%.

Revenue from our 11g products was a record high in Q4, due primarily to the strength of both our PC OEM and carrier customers, partially offset by an expected softness in retail. 11n solutions at 17% were in line with our expectations going into the quarter and were down in dollars driven by an anticipated 11n weakness with PC OEMs. 11a/g was up in dollars and flat as a percentage of revenue at 16%.

Percentage breakdown of revenue by channel based on the data supplied by our ODMs was as follows; networking was 52% of revenue; PC OEM was 43% of revenue and consumer 5%.

Revenue in unit shipped to our networking customers decreased slightly in dollars as compared with the all-time high as recorded in Q3. Strength in shipments to enterprise and carrier OEMs was offset by a softness in shipments to retail customers. Revenue in units from our PC OEM customers set record highs in Q4. PC OEM revenue increased by $7.3 million sequentially as we experienced very strong demand for our 11g products. This was partially offset by expected decreases in shipments of our 11n and Ethernet products to PC OEMs.

PAS revenue was slightly above our expectations and our mobile wireless LAN revenue grew in Q4. We did not record any GPS revenue in the fourth quarter. In Q4, Hon Hai Precision Industry was our only 10% customers.

Fourth quarter gross margins were 52.3%, 330 basis points above the high end of our 48% to 49% guided range. Our gross margin strength was due to favorable product mix, favorable 11g and 11n ASP trends, and continued supply chain efficiencies.

Atheros now ships 85% more chipsets quarterly than we did just a year ago. 2007 was the first year which we shipped more than 100 million chipsets. Our compact designs and use of widely available standard digital CMOS process technologies continue to provide us foundry flexibility and cost benefits.

Total operating expenses were $38 million, an 11% increase from Q3 and above the high end of our guidance of $35 million to $36.5 million. The increase in operating expenses was driven by headcount additions, a full quarter of merit increases, a significant increase in tape out and professional fees related to our successful implementation of our oracle ERP system. In addition, we also incurred some expenses related to the u-Nav asset acquisition closing on December 14.

Operating income in the quarter was $21.8 million up 20% from the $18.1 million recorded in Q3 and a 62% increase from Q4 '06. Operating income was a record 19% of revenue in the fourth quarter and was at the high end of our long-term target range of 17% to 19%.

The effective tax rate in Q4 was 14.1% and 18.1% for the full year ended December 31, which was slightly better than anticipated in our guidance. During Q4, we recorded a $4.7 million GAAP tax benefit, which provided an additional $0.08 of GAAP EPS. The tax benefit resulted from the release of our deferred tax asset valuation allowance. This non-cash benefit has been excluded from our pro forma reporting.

Net income was $21.4 million or earnings of $0.36 per diluted share for the quarter compared with net income of $16.9 million or earnings of $0.28 per diluted share in Q3. Average fully diluted shares outstanding were $60.3 million in Q4 and $59.6 million in Q3. Revenue for the full year ended December 31 was $417 million, a 38% increase over 2006.

Gross margins for the year were at 49.9% and operating expenses were $138.2 million. Net income for all of 2007 was $66.7 million or $1.12 per share and $59.3 million diluted shares outstanding. And during 2007, we grew our cash balances by over $64 million demonstrating strong operational performance and working capital management.

GAAP net income for the fourth quarter was $13.4 million or $0.22 per diluted share and this compares with GAAP net income of $9.7 million or $0.16 per diluted share in the third quarter, and a loss of $1.2 million or a loss of $0.02 per diluted share in Q4, 2006.

As of December 31, we had a total of $250 million in cash and equivalents including $30.5 million in long-term marketable securities. We have a long history of investing excess cash under conservative corporate policy that will only allows investments in highly rated investment-grade securities with preservation of capital and liquidity, as primary objectives.

Our $30.5 million in long-term marketable securities at December 31 was held in auction rate securities that are currently rated double or triple A. While we have received all of our interest payments due on these instruments on a timely basis, the liquidity and fair value of these securities has been negatively impacted by uncertainties in the credit market and the exposure of these securities have to the financial condition of the bond insurance companies.

As a result, we believed, it was prudent to record another than temporary impairment charge of $2.3 million to reduce the value of our auction rate securities to their estimated fair value of $30.5 million, as of December 31. Based on market information provided by the broker dealer managing these particular investments.

This impairment charges recorded as a non-operating loss, which impacts GAAP fully diluted earnings by $0.04 per share. Because it represents future expected capital losses, for which we currently do not have available capital gains to offset, no tax benefits were recorded with this impairment. We classify these investments as long-term marketable securities, as of September 30th and continue to record them in the same manner as of December 31.

On January 24, we received an interim account statement from this broker dealer, which indicated a further reduction in the fair value of the auction rate securities of approximately $3.5 million. To the extent of this additional $3.5 million reduction in fair value still exist at the end of Q1 as well as any further changes in the fair value determined during the quarter, we would be required to take an additional non-operating impairment charges of that time.

While our overall cash position remains very strong. We are disappointed that we have been exposed even to the small extent to the recent credit market turmoil. We are now evaluating all potential means to remedy the situation and we have even tightened our investment policies to avoid similar risks in the future.

Turning to the remainder of the balance sheet, DSOs were 46 days in both Q4 and Q3, and were at the low end of our target range of 45 to 55 days. Inventory turns for the quarter were 6.2 times compared with 7.1 times in Q3, while days of inventory increased from 51 to 58 due in part to the addition of inventory related to our u-Nav acquisition. Inventory turns once again, exceeded our target of five to six times.

The company continues to have virtually no debt. Total liabilities at the end of Q4 were $121 million during the fourth quarter 2007, our capital expenditures and depreciation were approximately $2 million and $1.4 million respectively. Overall, our cash flow and asset management metrics once again were strong.

As of December 31, we had 878 fulltime employees compared with 762 at the end of Q3. The increase during the quarter included 51 fulltime employees added in connection with the u-Nav acquisition. The substantial majority of these additions were engineering related employees.

I'll now move on to our guidance for the first quarter. Q4 was our strongest quarter to-date in terms of revenue in both operating and net income. We anticipate our networking business will be the strongest growth area in terms of dollars in Q1, led by revenue increases from both our retail and carrier customers.

We anticipate a seasonal decline in our PC OEM revenue, and we expect that our consumer revenue will increase by over 30% based on the addition of GPS products and increased ROCm cellular wireless LAN shipments.

Based on the above, we currently anticipate first quarter revenue to be sequentially flat. We anticipate the gross margins will remain very strong at 50% to 51%, and once again well 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 anticipate total operating expenses will be in the range of $40 million to $41 million, with the vast majority of this increases related to the addition of our new GPS team. Our estimated pro forma tax rate for Q1 is 16%, and we anticipate EPS to be approximately $0.27 to $0.28 based on fully diluted shares of $62 million.

Q4 was the best quarter to-date for Atheros. With the expansion of our TAM opportunities and the introduction of industry-leading solutions, such as our single-chip 11n family of products, Atheros is well positioned for growth in 2008. We expect our investments in diversification to pay dividends throughout the year, and we will continue to invest prudently in further efforts, which we believe will help position Atheros for ongoing success and increase shareholder value in 2008 and beyond.

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

Craig Barratt - President and CEO

Thanks, Jack. We are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Adam Benjamin from Jefferies. Your line is open.

Adam Benjamin - Jefferies

Thanks, guys. Nice job again. Just on the gross margin, obviously, everyone is going to ask about that. Can you talk a little bit about what specifically are the benefits you got in the quarter? And then, just broadly speaking, I mean I think everyone has been expecting 802.11g to go away and pricing to get worse there. Obviously, you've seen the reverse of that as you brought your low cost solutions and gained significant shares there and getting good margins on those products. So as you mix in more 'n' into '08, how does that translate into your margin? Does that actually work negatively for you going forward?

Jack Lazar

Adam, this is Jack. As far as the gross margin benefit, we certainly had a very favorable mix, certainly better than what we had originally anticipated going into the quarter, of products that helped us on the gross margin side. Contrary to popular belief, 11g is actually a pretty good business to be in. And if you can leverage your design prowess to design chips in a way that are very cost effective, yet still meet the price targets of your customers, you could actually both expand the business and do it at relatively good margins. And that's clearly the thing that had the most impact on this last quarter.

I think we pointed out in the script that the 2425 has doubled quarter-over-quarter over quarter over quarter now. And that's clearly been a significant impact on our gross margins. I think as we look forward, we have been pretty clear that we don't expect 11g to go away. It's a great way to enter the market for people who need basic connectivity. And for those who need 11n or just more throughput or even more range, 11n is there for them. And our job is to make sure we have solutions that address both of those markets.

Now, of course, the big thing we've got coming up with 11n is single-chip 11n. And we are sampling that and expect to be in volume production by the end of this quarter. So we think we're in a pretty good spot for that. And that will probably have the most variation on our margins as we go forward as we would expect overtime that there would be a transition to 11n.

So, it's a little hard to look forward right now. We're going to price to the market. We're going to do the best job of maintaining the margins that we can. But in the end, it's all about gathering as much share as possible and, of course, continue to cost down those 11n solutions as we move forward.

Craig Barratt

Adam, our basic business strategy is to do in 11n exactly what we have done in 11g. So the march towards single-ship, the aggressive roadmap we have through 2008 with a whole variety of exciting 11n products, the first of which is our single-chip 11n of course, we expect to be able to essentially apply the exact same capabilities we have successfully applied in 11g to 11n to drive the adoption of 11n, and to do it in a way that allows us to both increase share and do it at attractive margins.

Adam Benjamin - Jefferies

So given that Craig and you guys have done that pretty effectively the last five or six quarters, and there was obviously less competition in 'n' than there was in 'g', why can't that 52% target that you just had in Q4 continue to increase as you exit 2008?

Jack Lazar

Slow down. There is plenty of competition in 11n. There is a variety of different people that we're working against out there. And frankly, it doesn't take a lot of competition to create some sort of pricing environment that is favorable to a customer. So I think as 11n continues on, we think we're taking the right path with our products. But we certainly don't expect the competitors to go away anytime soon.

So, our job is to execute. If we execute, we think we'll do well. But, for now, we did a great job of executing on the gross margin line in the last quarter. We expect that Q1 should be pretty favorable compared to our long-term targets. But looking at our path I think it's just a little bit tough to do it at this point.

Adam Benjamin - Jefferies

All right. As long as I'm getting out of hand, one last question, you guys have historically talked about and as you exited 2007, as a percentage of your revenue at the beginning of '08, you guys care to take any -- make any predictions as to where you think you can finish the year and as a percentage of rest?

Jack Lazar

I think those who try to predict that far ahead are predicting on information that -- but in general what has to be flawed? We are certainly going to do everything that we can do to drive the adoption of 11n and certainly our competitors are going to do the same thing. So, clearly, 2008 is the year of 11n. What that transition will look like, as we move throughout the year is really for the customers to tell us.

Craig Barratt

Right, and from a business and product point of view we are certainly hedged in terms of having very competitive 11n products and of course very competitive 11g products. So, as the mix moves, I think we are in a good position in both segments.

Adam Benjamin - Jefferies

That's all I have guys. Thanks.

Jack Lazar

Thanks, Adam.

Operator

Thank you. Romit Shah from Lehman Brothers, your line is open.

Romit Shah - Lehman Brothers

Thanks a lot. Just to clarify, there was no revenue contribution from u-Nav, but there were some expenses associated with the transaction?

Jack Lazar

That's correct, Romit.

Romit Shah - Lehman Brothers

Okay. And can you guys share with us what the contribution will be in Q1?

Jack Lazar

We're not going to be breaking out the GPS. As we mentioned, it will flow into our consumer electronics category. We did say that category would be up 30% in Q1, so, clearly we do expect some contribution. Yeah, the revenue amounts are relatively small at this point. We have a lot of internal goals for the GPS team that we are going to work towards executing on. And it really means focusing on PNDs, PCs and to a lesser extent the mobile phone market.

Romit Shah - Lehman Brothers

Okay, great. And just a final question, I know you guys are pushing for 11n mass adoption. Is there a risk of some sort of time lag between, when ASPs for the chip drop and when units actually ramp?

Craig Barratt

You are referring to 11n, is that correct?

Romit Shah - Lehman Brothers

Yes.

Craig Barratt

Yes, I didn't think there is significant risk. I mean clearly, we are in a competitive market. But I think by being first to market with a product that has a very high degree of integration and low cost, it gives us the most flexibility in determining how to exploit the elasticity in the market.

So, we can decide essentially how much we want to push our design wins and we have a lot of flexibility and cost structure to open up more options to us. I think that something more that we are driving in the market rather than being victims of market on things imposed by competitors.

Romit Shah - Lehman Brothers

Okay, great. Thanks a lot.

Operator

Thank you. Jonathan Goldberg, Deutsche Bank, your line is open.

Jack Lazar

You're there, Jay?

Jonathan Goldberg - Deutsche Bank

Can you hear me?

Jack Lazar

Yeah.

Jonathan Goldberg - Deutsche Bank

All right. Thank you for taking my call. Just following up on Adam's questions earlier, are you seeing any new competitors, I mean, material competitors in 11n?

Craig Barratt

The current competitive landscape is primarily the well known name. So, clearly Broadcom is probably our broadest competitor in 11n. Intel obviously just in the context of the Centrino laptop brand is a competitor in a sense, but we can't really influence what Centrino or what's not Centrino to a big deal. So, they are not really a direct competitor.

And then, we see, I'd say a diminished presence from Marvell in the broad market. Their focus appears to be more and more just in the mobile space. And in Taiwan, we see Raylink, as a competitor in 11n and we are seeing a little bit of a presence initially I think from Realtek as well but that appears to be the full scope of competitors.

Jonathan Goldberg - Deutsche Bank

Largely unchanged in the last six months.

Craig Barratt

Yeah. I think that's correct, yes.

Jonathan Goldberg - Deutsche Bank

And then just going on to ROCm, you now have three of the top five handset vendors. In your comments, actually in your script you said, ROCm would be a major contributor to growth in 2008. I'm just curious where is that growth coming from, is it going to be handsets, is it going to be games, or is it going to be miscellaneous?

Craig Barratt

So, I think we've been -- we try to be pretty clear about this one. I don't think our tone has changed here. We still -- we do believe that the ROCm mobile wireless LAN solutions will be a big driver in 2008. We've been more optimistic about the consumer electronic side of things and in particular in the world of gaming, but also you see a variety of other solutions out there that are now more and more interesting.

I know, we've talked a lot about this Hi-Fi solution, it's really very innovative and I think you will see more and more products like that. So, when you look at 2008, gaming is probably the biggest slug in there. The cellular side is really just a dependency on how successful the particular handsets that we are attached to, actually end up doing.

Jonathan Goldberg - Deutsche Bank

Of the 20 design wins you have for the top three handset vendors, are any actually in the market yet?

Craig Barratt

Oh, yeah. There is a whole slue of them there in the market today. There are several phones from LG and you have to look back, I think, I don't have the list in front of me, but certainly we have a whole bunch of folks with products in the market today.

Jonathan Goldberg - Deutsche Bank

Okay. And my last question is what's the timing for getting integrated wireless LAN, Bluetooth chip on one chip?

Jack Lazar

Joe, obviously we don't talk about our product roadmap. We just talk about products when we announce that they are sampling to customers. So, clearly, we are now growing a portfolio of solutions that we expect will be integrated in the marketplace. But of course, we have to make the right decisions related to the attach rate of each of these technologies in particular market segments. So Bluetooth Wi-Fi do not simultaneously have high attach rates in segments today certainly some products have high attach rates for Bluetooth and lower attach rates for Wi-Fi.

Overtime both of those attach rates will increase and therefore integrated products will certainly become interesting. But there are other combinations that could be interesting in the market, for example, Bluetooth together with GPS, and several other possibilities as well. So, the good news is, as we entered the year with the building blocks to make the right decisions about what integrated products make sense, and then of course we want to rely on our execution machine to deliver those products in a cost effective way, as we have done in our other market segments.

Jonathan Goldberg - Deutsche Bank

Great. Thank you.

Operator

Thank you. Quinn Bolton, Needham & Company, you may ask your question.

Quinn Bolton - Needham and Company

Hi, guys. I just wanted to follow-up on the single-chip 11n wins that you mentioned. I just wanted to check, you said that there was going to be in volume production by the end of the March quarter?

Craig Barratt

That's correct.

Quinn Bolton - Needham and Company

And you also mentioned some wins with the tier-one PC OEMs. Are those the productions referred to that will be in volume production or do you have retail or other customers launching before the tier-ones?

Craig Barratt

We don't want to break it up by specific customers, but certainly the production ramp in the first quarter of this year is related to wins at our PC OEM customers. And as we mentioned separately, we have another family of single-chip 11n solutions for the carrier market, which will also start to ramp into production during the first half of this year.

Quinn Bolton - Needham and Company

Okay, great. And then, Jack, in your commentary you mentioned the favorable pricing trends. I was just wondering if you could be a little bit more specific on what you saw quarter-to-quarter in the fourth quarter for both 11g and 11n.

Jack Lazar

Yeah. What I would say is that we didn't see anything that stuck out as abnormally bad, right? So I wouldn't say it was really, really favorable or really unfavorable. Overall, when we look at 11g I would say it was pretty similar to Q3 as far as ASP decline. Actually it may be even just a little bit more, but the cost face of the chips has actually declined quite significantly. And so, that helped us out. And as far as 11n, it was due to the mix actually. 11n ASPs were somewhat favorable.

Quinn Bolton - Needham and Company

Okay, great. And then, lastly, just on the Ethernet business you mentioned shipping over 20 million ports in 2007. Just wondered if you're prepared to give a sort of a bogie for 2008? Do you have any internal targets?

Jack Lazar

Now, really we gave that bogie out once. I think we got a lot of internal targets, obviously. But we don't want to get into that level of detail going forward. Ethernet really becomes a portfolio play for us. Clearly, we need to execute in the PC business. But really, our primary goals for this year are to establish ourselves as a switching provider, both on the gigabit and 10/100 side, and most often in the case where a wireless LAN is included. So I think that's really the focus.

Craig Barratt

And another key milestone for 2008 is really penetrating tier-one PC OEMs with Ethernet solutions, since essentially all of our '07 revenue came from mainly motherboard manufacturers located in Asia.

Quinn Bolton - Needham and Company

Great. Thank you.

Operator

Thank you. Anton Wahlman from ThinkEquity, your line is open.

Anton Wahlman - ThinkEquity

Yes. A question on the ever high taxes; they were lower this quarter, but you talked about 16% for Q1, which I believe is a little bit lower than people have been looking for in the longer term. I mean I know you don't give guidance per se beyond Q1, but is 16% sustainable or it should be modeled something more like 20%?

Jack Lazar

16% in Q1 is certainly what we see. There is a possibility that it will be less than 20% next year. Usually what we put out in Q1 is our current view of what the tax rate is going to be for the year. So I would say that it's going to be closer to 16% than it's going to be the 20%.

Anton Wahlman - ThinkEquity

Okay. That's very helpful. Maybe just one clarification, Craig, on the whole handset situation, obviously, you've got some wins there. But in terms of application driver, do you see that voice is the application driver for the handsets or is it other things because you always talked about the various gaming platforms. Is it data-driven or is it more of a UMA-type converged voice? Where do those drivers come from there?

Craig Barratt

Are you specifically talking about our business or the market as a whole?

Anton Wahlman - ThinkEquity

Your kind of group of handset wins for the ROCm?

Craig Barratt

I think it spans a variety of the applications you mentioned. I think in the handset area it's probably more focused on smartphone-type devices where it's to provide a richer data and voice capability. There are some voice-related wins and products that we are working on as well. So I think we see opportunities in both of those areas in handsets.

Anton Wahlman - ThinkEquity

But there aren't like a kind of fairly basic phones where the main application is just telephony.

Craig Barratt

We are working on products that do relate to low-cost telephony-type products. So stay tuned in that category.

Anton Wahlman - ThinkEquity

Thank you very much.

Craig Barratt

Great. Thanks, Anton.

Operator

Thank you. Ruben Roy from Pacific Crest Securities, your line is open.

Ruben Roy - Pacific Crest Securities

Thank you. Jack, I was wondering if you could give us a little more clarity on what happened in the retail networking segment. It sounded like it was a slow Q4 but you expect it to come back in Q1. Was that an inventory build after a strong Q3 or if you can give us any more color there? Thanks.

Jack Lazar

Yeah. Actually, Ruben, I think you hit it pretty much right on the nose there. If you look across at what happened over the last several quarters, we had a pretty good size run up in retail in Q3, certainly it was the highest on record. I believe it was in the neighborhood of 37 million in that quarter. And it went down a bit in Q4 as we had anticipated just based on demand. Most of the demand for the holiday season gets filled in Q3.

So as we look into Q1, clearly, we do see an increase on the retail side of our business. We're seeing a lot of good design wins there. So, pretty promising trends, but I wouldn't say that it's anything other than probably typical here.

Ruben Roy - Pacific Crest Securities

Okay, thanks. And just a quick follow-up on 'n', do you think, either Craig or Jack, that there was a little bit of delay from some of your customers to wait for the single-chip, and now that it's out that's why we're going to see some 'n' [going to] accelerate into '08. Was there any of that going on?

Craig Barratt

No. We don't think our customers change the timing of their products to reflect launch dates from their suppliers. I mean, certainly our goal as we develop products is to intersect as many of the key design cycles as possible. But we don't get the sense that people have been delaying products, waiting for new generation chips to come out from their suppliers.

Ruben Roy - Pacific Crest Securities

Enough. Thanks, Craig.

Craig Barratt

Okay. Thanks, Ruben.

Operator

Eric Ghernati, Banc of America Securities, your line is open.

Eric Ghernati - Banc of America Securities

Hi. Just a few questions for you, Jack. As it relates to gross margins for 2008, and specifically what happened in Q4, do you believe that these gross margin levels should be sustainable under the benefit that you got from ASPs, and your products mix and efficiencies should continue to sustain into 2008.

Jack Lazar

I mean, obviously, the short-term outlook is that we expect it to be in the 50% to 51% range. I think we're going through a period of some nice product mixes. And it's really going to depend on what happens in the pricing environment with 11n as we move throughout 2008. So, I really don't want to take a gander as to what it's going to look like in the second, third or fourth quarters of this year at this point.

I would point out one thing now. It gives us good evidence of our growth. In the first five years of Atheros, 2001 through 2006, so we started shipping products in 2001, we shipped fewer products cumulatively than we shipped in all of 2007. So, clearly, some of the benefits that we've gotten are scale-related, and that's one of the reasons why we kicked up our gross margin targets when we had our Analyst Day.

Our goal is to run a business where we can maintain good gross margins. But frankly, we're always going to be focused on market share first. And that's working for us right now, and the side benefit is we're getting good gross margins. Hopefully, we can continue with that in the future. But right now, I think it's a little hard to look forward PAS Q1.

Eric Ghernati - Banc of America Securities

Just to quantify how much you got in Q4 from manufacturing efficiencies or product mix as far as the sequential jump in gross margins from Q3 to Q4?

Jack Lazar

Yeah. I think that's getting to a level of granular detail that's a little bit difficult to frankly hit on. So, I'd say that, really, it's the combination of all of them. We shipped the right products to the right folks in Q4 and we did a good job of getting our cost bases down. I don't want to pin it to supplier versus ASPs at this point.

Craig Barratt

It's hard to separate that just operational efficiencies because our benefits in supply chain really only come through our design ability. So, by developing products based on standard digital CMOS, targeting essentially generic low cost production lines is really the ingredient that allows us to leverage our supplies as effectively as possible and that's been a competitive technique that we've used to really reduce our supply chain cost more than just you would expect from just the volume curve, we've experienced.

Eric Ghernati - Banc of America Securities

Secondly, on OpEx, if you don't mind. Q4, what is the contribution to OpEx from u-Nav, Q4 to Q1? And if that, shall we assume that Q1 operating expenses of 41 million or the cost associated for the company may will level off into June?

Jack Lazar

Well, I don't want to look forward past Q1, what I can point out is that clearly a vast majority of our expense increase in Q1 will be directly related to taking on the u-Nav team and clearly that's an investment that we think makes a lot of sense. As we move forward, we are always trying to prudently grow the bottom line of the company. But along the way, when you see opportunities like this, you are going to take advantage of them.

Craig Barratt

And in fact your original question, the Q4 contribution, the acquisition closed on December 14. So, it was really just the stub period of a couple of weeks of expenses.

Eric Ghernati - Banc of America Securities

Okay. The PAS business was down quite a bit in 2007, but it seems it was little bit better than expected in Q4. Just to give sort of an outlook for 2008, as far as whether this business should be flat or down or up?

Craig Barratt

Yeah. I think our goal in this market is to maximize our market share. Certainly the overall market dollars -- or TAM -- is certainly declining. But our goal of course is since we are not investing a lot in terms of engineering in this business, it is essentially to maximize the contribution margin dollars and total dollars we can get out of this product line. Think of it, for 2008 something in the $10 million to $15 million of revenue for the year range for PAS.

Eric Ghernati - Banc of America Securities

Okay, fair enough. Thank you so much.

Jack Lazar

Thanks.

Craig Barratt

Thanks.

Operator

Ramesh Misra from Collins Stewart, your line is open.

Ramesh Misra - Collins Stewart

Good afternoon, gentlemen. My first question was in regards to your expectation for the PC OEM decline in Q1. Can you give us a sense of is it mostly units or mostly pricing?

Jack Lazar

Well, it's mostly unit.

Ramesh Misra - Collins Stewart

Mostly units. So, you think pricing should be relatively stable?

Jack Lazar

I think we are not expecting big surprises in the PC OEM business, pricing-wise, ASP-wise in the upcoming quarter. It really just again depends on the product mix. So, frankly some of our lower-price products can be very good gross-margin products for us. So, low prices don't necessarily mean bad gross margins.

Craig Barratt

And certainly that's half of a baseline in Q4 that was very, very strong since we delivered 17% sequential growth in PC segment revenue in the fourth quarter.

Ramesh Misra - Collins Stewart

Right, okay. In regards to the increase in inventories in dollar terms, Q4 to Q3, was that mostly due to u-Nav?

Craig Barratt

I wouldn't say it was mostly due to u-Nav. I think, if you strip the u-Nav inventory out, the turns probably would have maybe been down half a point. But, remember, we've been running, and we've been pretty consistent about this that running at seven-times turns is not our goal.

We know that as the small company out there, we need to have product available at all times. And given the strength of our balance sheet, it's a risk that we're certainly willing to take and that we will continue to take. So, our targets -- five to six times -- were well above that, and I think we're pretty happy with where it ended up in the last quarter.

Ramesh Misra - Collins Stewart

Okay. And then finally in terms of the growth drivers in '08, can I try to get it to be a little more specific? Where do you see more growth coming from -- is it from the ROCm side or is it from u-Nav portion of the GPS portion of your….

Craig Barratt

It's hard to give specific color on that throughout the year. But, as we described earlier, the main growth driver will be the growth in the 11n, and we do expect important contributions from the segments you mentioned – and, of course, Ethernet and Bluetooth as well.

Ramesh Misra - Collins Stewart

Okay. So, I guess that's all across the board.

Craig Barratt

Absolutely, I mean really our goal is to really drive market-share gains in the additional businesses that we've entered in the last year and a half.

Ramesh Misra - Collins Stewart

Okay. Do you see any other holes that you are looking to plug in your portfolio, Craig?

Craig Barratt

Certainly there is a whole range of communication markets where our capabilities and design skills can certainly allow us a competitive advantage. But I think that said we have certainly expanded this scope of businesses quite quickly over the last 18 months.

And I think our strategy going forward is certainly to prudently add new areas as necessary. But probably our focus is a little bit more towards really executing and delivering share gains and revenue growth in the businesses that we've already announced and entered.

Ramesh Misra - Collins Stewart

Okay, great. Thanks very much.

Craig Barratt

Thank you.

Operator

Thank you. Betsy Van Hees from Cowen, your line is open.

Unidentified Analyst

This is actually [Daniel] calling in for Betsy. Congratulations for a good quarter. All my questions actually have been answered. But can I get you to talk a little bit about your gigi product, specifically when you expect revenue contribution to start to contribute materially?

Jack Lazar

Well, remember, we've multiple gigi products. So, on the client side the new gigi LUM product, the gigabit controller product we announced is already sampling with a variety of customers. We expect initial revenue from that product in this quarter in first quarter 2008. The gigabit switch product, the six-port gigabit switch product, we expect to have initial production shipments sometime in the middle of this year 2008.

Unidentified Analyst

Okay. Thank you very much.

Jack Lazar

Great. Thank you.

Operator

Thank you. Allan Mishan from Oppenheimer. Your line is open.

Allan Mishan - Oppenheimer

Hi guys, can you please enlightening us as to when we should expect material revenues from Bluetooth and same question for gaming?

Craig Barratt

So, on the Bluetooth side, I think we mentioned in the script that we expect initial production shipments of our Bluetooth headset product to be in the second quarter of this year. And they will probably be for the PC side, probably I think of it is the middle of this year, maybe going into Q3 of this year that design cycles there are quite long, so Q2 and Q3 for Bluetooth. And for the gaming segment, I think it's hard to give specific color on that. We certainly expected in all of 2008 to be an important revenue contributor.

Unidentified Analyst

Okay, great. And then on the PC market, a number of component vendors have guided less than seasonal in Q1. I know obviously you have market share and product cycle situation is going on. But in terms of your view of overall demand for PC related components, are you seeing that as well or are you worried about that? What do you think about PCs?

Craig Barratt

I think it's actually very hard to tell, for exactly the reason you mentioned. Historically, and even in the present quarter, we believe the market-share gains are of the same order or in fact bigger than some of the broader market effects that you described. So, it's pretty hard from our perspective to get a lot of color on the broader market and broader picture because we are certainly driving aggressively for share gains to grow our business.

Allan Mishan - Oppenheimer

Okay. Thanks very much.

Craig Barratt

Okay. Thanks, Allan.

Operator

Thank you. Sanjay Devgan from Morgan Stanley, your line is open.

Sanjay Devgan - Morgan Stanley

Thank you so much. Hi, Craig and Jack, thanks so much for taking my question. Most of my questions have been answered. I just have one brief question going back to the margin. You guys did a great job there -- obviously I think you are benefited with the cost reductions you did in G, as well as the better-than-expected revenues in the PAS business. But I was just wondering where you kind of think this can go given your cost reduction with the single chip end solution coming out.

So, that obviously tail win, but then again, you have some guys like Raylink in Asia as well as couple of other-tier and lower-tier customers coming in with low-cost solutions. So it is reasonable to assume that margins [are] pretty much flattish, given the increased competition from Asia, but you have some good product cycles and cost-reduction stories in the pipeline.

Jack Lazar

Clearly, we are very happy with where the margins headed up this quarter, and we two were bit surprised by how successful we where on the gross-margin line. I think that looking forward past the next quarter, which is where we have the visibility, is just a very difficult and dangerous thing to do at this point. We see lots of very good competitors out there that we will be fighting with, and there will clearly be competition that has the possibility of downwardly driving gross margins.

We are guiding the 50 to 51 points and the first quarter, though. So, that's a pretty significant increase above our long-term plan. All that being said, we need a couple of quarters to see how this thing is going to play out. Right now, we are happy with the results. We are happy with the outlook for gross margins. But I think that implying that this is where it's going to remain for a long-term isnot consistent with our long-term plan. If it happens, that's great -- but right now that's really not our focus.

Sanjay Devgan - Morgan Stanley

Thanks so much. And good job on the quarter.

Craig Barratt

Thanks. Thanks, Sanjay.

Operator

Thank you. Shaw Wu, American Technology Research, your line is open.

Shaw Wu - American Technology Research

Okay. Thanks, and just two quick questions. First, how should we think of your Ethernet business -- in terms of sequentially, could it be seasonality or is it still too early? Second, just a little more clarification in terms of your consumer business: You are guiding it up 30% sequentially, just trying to understand, is that mostly the GPS business or is there Wi-Fi ROCm as well.

Jack Lazar

Okay. On the consumer electronics side, I can tell you that it's both GPS and ROCm wireless LAN. I think we particularly pointed out for cellular solutions, so both of those will be helping to drive the consumer electronics portion. As far as Ethernet, Ethernet is a business that can be seasonal in Q1. That being said, we actually expect the Ethernet to be pretty decent in the first quarter. Mostly because we are going to see more of a movement to Gigabit as opposed to Fast Ethernet in this upcoming quarter. So the mix is actually pretty favorable there for this upcoming quarter. So we would not expect Ethernet to be down in Q1, but we will have to see other quarter plays out.

Shaw Wu - American Technology Research

Hey, thanks for the call.

Jack Lazar

Thanks, Shaw.

Craig Barratt

Thanks, Shaw.

Operator

Anil Doradla from Caris & Company, your line is open.

Anil Doradla - Caris & Company

Yeah, thanks for taking my question. Based on the latest status, if we look at the 802.11 standard it's expected to be completed sometime in June '09 and until then we are going to be basically seeing the pre 'n' draft standards. Couple of questions: Is there any particular end market that perhaps is holding off on evolving towards the 802.11? Because could that also be one of the reasons why we are seeing G extending. And specifically, I'm interested perhaps in the cellular adoption and the enterprise adoption on this front.

Craig Barratt

One clarification, the actual products that are shipping were actually dropped 2.0 certified products,so the actual timing of the completion of the standard is now quite irrelevant to the launch of any customer's product. So, essentially the formalities, the administrative formalities of completing the standards and now be coupled from customer launches, the Wi-Fi lines is now for several months now, has been certifying products that are 11n draft compatible.

So, I think what we are seeing now is just more logical roll out -- orderly roll out of products across each of the segments. Retail traditionally has very short product cycles, [and it] tends to come to market first. PCs follow that, and then the customers with longer cycles, such as carrier and enterprise, tend to be late to market.

So we are seeing a number of enterprise players now already announced and beginning to ship 11n products such as the Aruba and others so that even enterprise is already launching and shipping draft to products. I think in the mobile and hand -held areas, we haven't yet seen 11n products come to market, and I think part of that is that the type of bandwidth needed by applications in those mobile devices might not see a huge amount of benefit from 11n.

And of course 11n infrastructure is fully backward-compatible with any wireless LAN mobile device products. So, I think probably the later adoption will be in mobile devices, but certainly all of the major traditional segments -- retail, carrier,enterprise and PCs -- are all aggressively launching 11n products.

Anil Doradla - Caris & Company

So, from your point of view, it’s kind a relevant in terms of the standardization, and between now and the final completion of the draft, is something even comes up keeping in mind some of the controversy about the Australian consortium. Is there a way to upgrade legacy systems from your point of view?

Craig Barratt

I certainly think changes in the draft towards completion of standard can occur. Clearly many, many players in the industry have an invested interest in making sure that any changes a minimal or certainly backward compatible with what so already had in the field, given the very substantial volume of products that we've already shipped. We know that to date we've already shipped an excess of $100 million revenue from the 11n products, and so I think any substantive changes are highly unlikely, and any big changes would become part of a whole new standard and not part of the current 11n effort.

Anil Doradla - Caris & Company

Thank you.

Craig Barratt

Great, thanks.

Operator

Thank you. Our last question comes from Mark Heller from Merrill Lynch. Your line is open.

Mark Heller – Merrill Lynch

Hi guys, thanks for squeezing me in here. I'm just wondering if you would talk a little bit more in detail about the end weakness that you saw in fourth quarter was that from the PC market or the retail market, and was that driven by share loss?

Jack Lazar

The weakness is more driven in PCs, as we mentioned in the prepared remark, and it was one that was anticipated. So, I think that's about as much detail as we get into now. 11n overall in the retail market we saw good push from retailers, although a little more Q3 below than it was Q4.

And if you look, D- Link now has over 20 products on their website that actually feature 11n. And they started at $59 at the low end. So, what you are seeing is, these guys wanting to push more and more products, and I think that's a good sign. As we roll into Q1, where we do expect the 11n to be? Obviously, up in Q1. But as we roll into Q1 with the breadth of products that are out there, I really honestly believe that 11n is going to make a nice showing in 2008.

Craig Barratt

Yes, in addition to the top-line growth that Jack referred to, I think we also see quite a few exciting opportunities in 2008 to also increase our share in the 11n market as well. So, putting those two factors together is one of the reasons we point out XSPAN 11n is being a major growth driver for this year.

Mark Heller - Merrill Lynch

And have you commented on what's the average ASP for n right now, and where do you expect it by the end of '08?

Jack Lazar

We haven't commented on it other than I think I just made a comment in the Q&A here that 11n pricing trends for this most recent quarter were very favorable. I think overall I will tell you that it is hovering around that $10 range with some times getting under and some times still over it.

Craig Barratt

And with the transition to single-chip our product has that mix increases in 11n. Certainly, we have a lot more flexibility on the pricing and cost side to really exploit the elasticity in the market.

Mark Heller - Merrill Lynch

Okay, thanks.

Craig Barratt

Thanks, Mark. I believe that was a last question. So, thank you for your questions. We will be attending several investor conferences during the first quarter, including the Thomas Weisel Technology Conference, February the 4 in San Francisco, the Deutsche Bank Small & Mid Cap Conference, February 13 in Florida. The CIBC Fifth Annual Semiconductor Summit on February 21 in Dale, Colorado and the Collins Stewart Technology One-on-One Day on February 29 in Park City, Utah.

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

Operator

Thank you. That concludes today's conference. You may now disconnect from the audio portion.

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Source: Atheros Communications Incorporated Q4 2007 Earnings Call Transcript

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