Atheros Q4 2005 Earnings Conference Call Transcript (ATHR)

Feb. 1.06 | About: Atheros Communications, (ATHR)

Atheros Communications, Inc. (NASDAQ:ATHR)

Q4 2005 Earnings Conference Call

January 30th 2006, 5:00 PM.

Executives:

Ms Deborah Stapleton, IR

Craig Barratt, President, CEO

Jack Lazar, Chief Financial Officer

Analysts:

Mark Edelstone, Morgan Stanley

Arnab Chanda, Lehman Brothers

Jeremy Bunting, Thomas Weisel Partners

Adam Benjamin, Jefferies & Co.

Operator

Ladies and Gentlemen thank you for standing by. At this time all participants are in a listen-only-mode. Later we will open the call to your questions. Instructions for asking questions will be explained at that time. This conference is being recorded. I will now turn the call over to Ms. Deborah Stapleton, who will introduce today’s speakers. Ms. Stapleton, you may begin.

Deborah Stapleton, IR

Thank you, good afternoon everyone and welcome to the Atheros Communications Fourth Quarter and Year End 2005 Financial Results Conference Call. Leading the call today is Dr. Craig Barratt, President and CEO; and Jack Lazar, Vice President and Chief Financial Officer. Before we begin, I would like to remind you that various remarks that we make on this call including those about our future financial results, including revenues, sources of revenues and expenses, our future plans, goals and prospects, market trends, design wins, and product development, our customers, our competitive position and our anticipated 2006 and 2007 growth, profitability, leadership position in various market and products announcement 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 quarterly report on Form 10-Q for the quarter-ended September 30, 2005 previously filed with the SEC and particular to the section entitled, “Factors that may affect our results”, and to other reports that we file from time-to-time with the SEC. For additional information on factors that could cause the actual results to differ materially from our current expectations. These forward-looking statements speak only as of the date hereof and we disclaim any obligation to update these forward-looking statements. Having said that I will now turn the call over to Dr. Craig Barratt. Craig?

Craig Barratt, President, Chief Executive Officer

Thanks Deb and thanks to everyone for joining us today. We are very pleased with our record fourth quarter results and we expect continuing growth in 2006. To briefly recap our earnings press release, we’ve reported revenues of $53.1 million, non-GAAP net income of $5.9 million or $0.11 per diluted share. GAAP net income of $13.1 million or $0.24 per diluted share and gross margins of 46.7%, an increase of 320 basis points over the gross margins in the third quarter.

In addition, we generated over $9 million in cash during the fourth quarter. Our financial results in the fourth quarter were very strong and Jack will take you through the numbers in greater detail shortly. First I would like to talk about our fourth quarter growth and the significant growth drivers we see for 2006. Since Atheros went public in 2004, we’ve spoken to many of you about our main core competency, developing highly integrated radio solutions in standard digital CMOS.

In 2004, our revenue was driven by our core wireless LAN products for the data networking market. As we migrated both new and existing customers toward our single-chip wireless LAN solutions, we quickly established ourselves as a leader in the wireless LAN space, rapidly taking share from many of the established market players. At the time we began our diversification efforts, these initial efforts, our PAS single-chip cellular solution and our ROCm mobile/wireless LAN products, required a large investment in engineering resources, which we funded, they are highly profitable core wireless LAN business.

As we ended 2006, we expect to benefit from the investments we have made not only in our mobile wireless LAN and PAS businesses, but also from the ongoing investments we have made in our core wireless LAN business. In 2006, we expect to establish ourselves as a significant player in the PAS market, continue to be a leader in the core wireless LAN market and branch out into new high growth mobile wireless LAN field.

In short, we believe that the investments we have made will yield strong financial results as we enter 2006. We are also continuing to develop products for new markets that we will announce during 2006, which we expect will be additional growth drivers for our business in 2007. During the fourth quarter and indeed throughout 2005, we strengthened our position as the leader in single-chip solutions for wireless communication products.

In the fourth quarter, 74% of the chipsets we shipped were single-chip solutions, once again validating the demand for single-chip solutions from our customers. Our core wireless LAN business remains very strong and profitable and provides us with a solid base for continued growth in 2006. One growth driver for this business in 2006 is the expected adoption of the 802.11 and standard.

We are very pleased that the IEEE unanimously voted the EWC specification as the draft 802.11 in standard. Atheros and other market leaders worked together to establish a draft standard that will promote interoperable products that provide the customer with substantial improvements in both speed and throughput. With this draft specification in place, our customers in each segment including PCs, retail, enterprise, consumer electronics and handsets can now develop interoperable products based on the draft 11n specification thereby enhancing the wireless user experience.

We demonstrated a working draft 11n compliance product at the January CBS show and are now sampling product to our customers. The first chipset in our draft 11n product line: XSPAN, is the world’s first single-chip triple-radio RF design using our Signal-Sustain Technology or SST, we dramatically increased both link robustness and throughput compared to announced competing architectures by simultaneously transmitting across three spatially-diverse signal paths.

SST processes information from the three receivers simultaneously providing robust throughput that cannot be achieved by simply adding more antennas. The Atheros solutions delivered six times the throughput of 11g and 11ag products at extended range, and with greater reliability. Our XSPAN family of products leverages all of the mandatory technical elements contained in the draft 11n specification as well as several optional features.

We look forward to customer launches of products using Atheros XSPAN products, to live in new video, voice and data applications in the first half of the year. During the fourth quarter we were pleased to see continued adoption of our PCI Express based single-chip solutions by OEMs such as IBM Lenova. IBM Lenova began shipping the Z-Series laptops in mid fourth quarter and these notebooks have been well received by the market. We are working closely with IBM Lenova to expand the products that use our PCI Express-based wireless LAN solution, and we anticipate first quarter rollouts of additional Athero’s based platforms.

In addition, we are pleased to inform you that we have our first design wins at yet another major PC OEM, which recently announced new laptops, including our PCI Express single-chip wireless LAN solution. We also anticipate a variety of other laptop vendors will introduce Atheros PCI Express wireless LAN products during the first half of 2006. Our routers and access point solutions for the retail market were specific areas of strength in our business during the fourth quarter.

We are particularly happy to have secured many new design wins based on our router access point wireless LAN silicon while at the same time we increased the overall gross margins for the Company. While we expanded our revenue within our traditional customer base, we also added new low-end 11g design wins with customers such as Belcon and Linksys. At Linksys, in particular, we began shipping an 11g router client bundle that is our first major 11g win at this account.

To further support our efforts in expanding our router access point market share, we announced the world’s most integrated single-chip wireless LAN solution for access point and router products in November. The AR5007AP-G is a design breakthrough in wireless LAN and features a complete 11g wireless access point system on a chip. This compact and cost effective solution combines the wireless network processor; media access controller, baseband and all radio functions up to the antenna in a single-chip including an on-chip power amplifier, low noise amplifiers and an antenna switch. The components of the AR5007AP-G will enable us to further expand our market share of router access point solutions with a wide variety at the retail OEMs.

There are many other growth drivers for 2006 including our important design wins in the mobile wireless LAN markets. Our ROCm platform for mobile wi-fi applications, which we also featured at CES, is gaining momentum in nearly every major mobile market segment. The Atheros AR6001 family of wireless LAN solutions is based on a highly compact, power-efficient, single and dual-band single-chip design. Since its launch in May the AR6001 family has achieved design wins with leading OEMs in major segments of the mobile category including dual-mode cell phones, smart phones, single-mode Voice-over-IP phones, mobile gaming devices and digital cameras.

We expect some of the end products in these areas to begin generating revenue in the first half of this year and to become a significant growth driver in 2007. We look forth in telling you more about these initial OEM products as they begin shipping. We also expect to announce additional partnerships in the coming months. They will help us to further ramp our ROCm products.

As we expected our PAS business grew significantly for the third consecutive quarter. We continue to win important new handset designs, which will drive more PAS growth through 2006. Our single-chip cellular solution for the PAS market is the most cost-effective solution available. Our designs are being used for both traditional handsets that utilize the public PAS networks and for home gateways that provide both PAS cordless phone and broadband functionality.

We expect that UT Starcom, our initial PAS OEM partner will be a greater then 10% customer in the first quarter. And by the way the Atheros AR1900 PHS cellular chip won the 2005 portable design magazine’s Editors’ Choice award in January, first unprecedented integration. Our PAS solution is a perfect example of what Atheros can achieve by utilizing its core competency of developing radio solutions in standard digital CMOS. The fourth quarter result represents the second consecutive quarter in which our PAS products contribute operating profits to Atheros. As we move into 2006, we anticipate that our AR1900 PAS line of products will be a significant contributor to the profitability of Atheros. As we discussed in past quarters, we continue to invest in developing products the new high growth markets outside of wireless LAN to drive toward our goal of expanding our product offerings and further diversifying our revenue base.

We expect to announce each of these new products during the year. Also today Atheros appointed Gary Szilagyi as its new Vice President of worldwide sales. Gary served previously as the Vice President of sales at Marvell Semiconductors Communications business unit, where he led the sales initiative and design-win activity for all of its communications products, including its Wireless LAN business. Immediately prior to joining Atheros, he was Vice President of worldwide sales at Greenfield Networks, a semiconductor startup company focused on advanced Ethernet switching and routing solutions.

Gary is an important addition to the Atheros management team, and we are pleased to have someone of his talent and experience to lead our sales efforts. Tom Foster, who led our sales organization since 2001, will be transitioning out of the company during the first quarter. I would like to thank Tom for all of his efforts in establishing Atheros as a wireless LAN market leader. We wish him the best in his new endeavors.

There are many opportunities for continued growth and profitability in 2006. As we have discussed today, Atheros is benefiting from its investments over the last two years and from the resulting product cycles that are now beginning. We remain bullish of our continued growth in our core wireless LAN business, the mobile and embedded markets and our strength in our single-chip PAS solutions and focused efforts in new markets, which we will be announcing later this year.

Our first quarter guidance, which Jack is about to share with you is evidence that these growth drivers are real and generating results right now. Now, Jack will give you details on our fourth quarter and 2005 numbers.

Jack Lazar, Vice President and Chief Financial Officer

Thank you Craig, and thanks all of you for joining us today. First, I’ll outline our financial results for the fourth quarter and fiscal year ended December 31st, 2005, and then I’ll provide you with our Q1 guidance. Unless otherwise noted, all financial data in my remarks reflect the exclusion of non-cash stock-based compensation charges and the income tax benefit resulting from the partial release of our evaluation allowance on deferred tax assets.

In summary, our financial results for Q4 were very strong. Revenue, gross margins and net income all came in above the ranges as we guided to in our last quarterly conference call. Revenue for the quarter increased 16% and net income was $5.9 million or $0.11 per share. Gross margins for the quarter were 46.7% and were 170 basis points above our target gross margin model. As a reminder, our Q4 guidance was 10% to 15% revenue growth, gross margins in our target range of 43% to 45% and EPS of $0.07 to $0.08. Q4 revenue was $53.1 million, an increase of $7.3 million from the $45.8 million recorded in the third quarter of 2005. The 16% increase in revenue was driven both by further expansion of our core wireless LAN business as well as our third consecutive quarter of growth from our PAS chipset product line. Based on the product mix data for our third generation and lighter chipsets, the mix of wireless LAN chipsets were as follows: AG multi-node chipsets made up 34% of revenue, and 11g and Super G MIMO chipsets made up 66%. This compares with 37% and 63% in Q3.

The percentage breakdown of revenue by market segment based on the data supplied by our OEM’s is as follows: retail is 47% of our business, PC OEM is 22%, enterprise and carrier was 21% and consumer electronics and other was 10%. So this compares with 46%, 23%, 23% and 8% for Q3. Revenue from each of the market segments increased in absolute dollars over that of the third quarter. Q4 and Q3 revenue both include shipments of our AR1900 chip for using PAS products. That revenue is reflected in the consumer electronics and other category of the previously mentioned market segment breakdown.

Fourth quarter gross margins were 46.7%, up 320 basis points from the 43.5% reported in Q3 and above our target range of 43% to 45%. Overall blended ASPs declined sequentially only 5% to $6.93, compared with ASPs of $7.28 in Q3. The ASP decline in Q4 continue to be below our historical quarterly declines of 10% to 15%. One reason for this is that we have been largely successful in our goal of transitioning our customers and their mainstream products to our unique single-chip solutions. We shipped approximately 5.7 million of these single-chip solutions, amounting to almost 74% of our total units during Q4 compared with 4.3 million or just under 70% in Q3.

Total chipset shipped in Q4 were approximately 7.7 million, up 22% from 6.3 million chipsets shipped during the third quarter. Total operating expenses were 19.7 million, which represent a 6% increase from Q3 and was at the low end of our 5% to 8% guidance. Net income was 5.9 million or earnings of $0.11 per diluted share for the quarter compared with net income of 2.6 million or earnings of $0.05 per diluted share in Q3.

Average shares outstanding were 53.7 million in Q4 compared with $53.6 million in Q3. GAAP net income for the fourth quarter was $13.1 million or earnings of $0.24 per diluted share. This compares with net income of $2.2 million or earnings of $0.4 per diluted share in the third quarter. During Q4 we recorded a $7.5 million GAAP tax benefits, which provided an additional $0.14 of GAAP EPS. This tax benefit resulted from the partial release of our deferred tax asset valuation allowance due to the achievement of our profitability milestones. This non-cash benefit has been excluded from our Pro forma reporting. Revenue for the year ended December 31st was $183.5 million, an 8% increase over 2004. Gross margins were 44.2% and operating expenses were $73.7 million. Net income for 2005 was $11 million or $0.21 per diluted share on $53.5 million weighted average shares outstanding.

Turning to the balance sheet, cash and marketable securities were a record $173.6 million at December 31st. Total cash and marketable securities increased $9.1 million during the quarter and we generated $6.8 million in cash from operations. Free cash flow from operation was $7.6 million. DSO’s based on our quarterly average receivables balance decreased to 48 days versus 58 days in Q3 reflecting the more linear pattern of our shipments in Q4. Inventory turns for the quarter increased to 5.5 times compared with 4.8 times in Q3.

The Company continues to have virtually no debt. Total liabilities at the end of Q4 were $42 million and during the fourth quarter 2005, our capital expenditures and depreciation were approximately $849,000 and $569,000 respectively. Our balance sheet continues to be very strong, 73% of our $239 million in total assets in the form of cash and marketable securities. As of December 31st, we had 327 full-time employees compared with 312 at the end of Q3. Most of the current quarter additions were R&D personnel.

I’ll now move on to our guidance for Q1. Our bookings in Q4 were the strongest on record, reflecting the strength of our wireless LAN business and the further expansion of our new PAS revenue stream. As we enter the new quarter, we anticipate that our strong product cycles will offset any seasonality that may otherwise be typical for Q1. Accordingly, we currently anticipate first quarter revenue to increase between 7%and 12% sequentially. We expect to expand both our wireless LAN and our PAS revenue in the first quarter and we foresee UT Starcom becoming our newest 10% revenue customer. Gross margins are expected to be 45% to 46%, slightly 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 entry into new markets.

In the first quarter, we anticipate the following functional expense breakdowns: research and development $13 million to $13.75 million, and SG&A of $7.25 to $7.75 million. Total operating expenses are anticipated to be between $20.25 and $21.25 million in the first quarter of 2006, representing a growth of 3% to 8%.

We anticipate our EPS for Q1 to be approximately a $0.11 based on shares outstanding of approximately 54.4. Atheros has now shipped more than 45 million chipsets with well over 50% of these shipments occurring in just the last 12 months. Our strength in developing single-chip solutions has enabled us to establish ourselves as a leader in the wireless LAN marketplace and to increase our operating leverage as the market continues moving toward these solutions.

The profitability of that business has allowed us to aggressively invest in products for new markets that represent diversification opportunities for Atheros. Our Q4 results and our Q1 guidance reflect the strength of our business in the initial dividends from our diversification strategy. We will continue to invest in further diversification efforts that we believe will help position Atheros for ongoing success and increase shareholder value in 2006 and beyond.

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

Craig Barratt, President, Chief Executive Officer

Thanks Jack. To summarize our core wireless LAN business is growing in the low end 11G, PCI Express and enterprise carrier segments while the introduction of draft 11n products will create growth at the high end of all wireless LAN market segments. Our diversification in the past and mobile wireless LAN will be growth drivers for 2006. Moreover, we continue to develop exciting products for new, not yet announced markets.

We expect every part of that business to be a growth driver in 2006 and beyond. With that we are now ready for questions.

Questions-and-Answer Session

Operator

Thank you, Operator Instructions. Mark Edelstone with Morgan Stanley, your line is open.

Q - Mark Edelstone

Good afternoon guys, great quarter and welcome there to Gary.

A - Gary Szilagyi

Thanks Mark.

A - Craig Barratt

Thanks Mark.

Q - Mark Edelstone

Question is on the gross margins, certainly understand the reasons behind getting above the target, the target level but I guess as you look at how the business mix is going to change here over the next couple of years, do you expect that we just slowly move back into that range as we go through the year? Or what do you see as some of the factors that could allow that gross margin to hold above your long-term targets for, you know, may be ’06 and part of ’07?

A - Jack Lazar

Yeah Mark, it’s Jack. On the gross margins, obviously we are very pleased with the way they turned out this last quarter. And looking forward, clearly we are guiding just a little bit above our normal range of 43% to 45%. We certainly would like to keep those gross margins up, but we would like to demonstrate some history of giving those gross margins consistently over prior to actually guiding that way. The things obviously that help us are clearly the mixture of the types of products in the wireless LAN market, clearly Super G type products are very good for us, 11n should be good for us. And of course PAS is as we have always said is at or above the normal gross margin model for the company. So it’s just a bunch of product mix discussions as we move forward and we are just going to do, we can’t keep moving those numbers up.

A - Craig Barratt

Well, and that said Mark, I think our instincts are we would obviously like to take our stronger margins as more leverage in the way we attack our business, and attack our markets. So frankly we will continue to look out towards top line revenue growth somewhat ahead of margins, now to the extent that we can do both, obviously that’s all the better, but our emphasis will be on revenue growth.

Q - Mark Edelstone

Okay, just two quick follow-ups if I could, obviously there are still lot of OpEx leverage here as you move through the next couple of years of strong growth. Can you just review where, you see a long-term targets there for OpEx or operating margins, excuse me, and when you think you might get there, and then just a follow-on onto revenue growth, you just talked about how you expect the ramp of revenues to play out for the next couple of years on the embedded Wi-Fi stuff?

A - Jack Lazar

So I’ll go ahead and take the first one on the operating model. On the operating model, our models in the same since we went public that is 43% to 45% gross margins. Sorry engineering of 15% to 17%, and then of course SG&A of 10% to 12%, which would result in 16% to 18% operating profit. We have always said that we are attempting to get to that point at roughly at $300 million run rate. So, you know, obviously we are making some good strides towards that at this point. As far as the revenue growth for the embedded market, I’ll let you just – I’ll let Craig to talk about embedded.

A - Craig Barratt

Yeah, I’ll be happy to take that, so Mark I think long-term the mobile Wi-Fi area is one we find tremendously exciting, if you look across the whole marketplace, you know we think of it as a billion units per year, as potential targets to add Wi-Fi capability cell phones and all of the other hand-held devices as well. So long-term this a very exciting opportunity. That said I should say that the product development times among our customer tend to be quite long because there is reasonably complex integration issues and so on that make the time from design win to shipping relatively long 9 to 12 months. And so really that’s a big issue for us in the short-term is securing the key design-wins, which will create substantial growth in time. So, I think in 2006 we’ll see many of our initial customers begin to ship products that we really think as a revenue growth driver for us it will be more substantial in 2007. I think the carrier adoption of Wi-Fi in cell phones and so on still has to prove itself in the marketplace before this more widespread adoption. So ’06 is about design-wins, mind share, ’07 is where we think the more substantial growth will be.

Q - Mark Edelstone

Thanks a lot guys, nice job.

A - Craig Barratt

Okay thanks Mark.

Operator

Our next question comes from Arnab Chanda with Lehman Brothers, your line is open.

Q - Arnab Chanda

Yes, couple of questions. First, on the data 11n you were talking about you have a unique product there compared to the competition with the triple antenna. Do you think that you could see share gains in this market in, you know because of the product? And the second question about that would be is do you think that would be 10% on wireless phone revenue this year or is that premature? Thanks

A - Craig Barratt

Well, Arnab so I think that certainly leadership in 11n will be very important to securing additional market share because for two reasons. One of course is that overtime the market will migrate to these new technologies and the first people in with the best technology will be in the stronger position. But, secondly we believe there is a halo effect where companies with leadership in 11n, leadership in the next new technology will be able to command more business to customers, you know, basically to avail themselves with the new technology. So I think in combination 11n will become important. With regard to revenue growth that is a little bit harder to tell because while we have made tremendous strides in the standard process, some segments of the market enterprise and so on will obviously wait for the final stand to be ratified. But we do expect retail to ship products quite rapidly. So, revenue will be not that significant for 11n in the first half of the year but the types of launches and design-wins will be key.

The second half year it could be quiet significant, if you look back to 2003 when 11g just started to come out of the draft standard at the start of the year by the fourth quarter, I believe it was over 30% of the market. We are not suggesting 11n will actually be that fast, but there is the potential for, you know, this factor of 5 to 6 increase in speed and better range to really be a big inflexion point in the market. There is of course a whole upgrade cycle where existing users who are quite satisfied with their current year will nevertheless want to upgrade to the high performance gear. So it is not just new customers its also upgrades for existing customers, so long-term its obviously great opportunity.

Q - Arnab Chanda

Thanks Craig. A couple of other questions, one for regarding the ROCm product, it sounds like you think this is a, you know, still a design-win year for ’06. Could you talk a little bit about at what time do you think that could be again another 10% type of contributor, it sounds like, you know, PAS is already there in Q1 and, you know, how we should think about that qualitatively at least, thanks?

A - Craig Barratt

Yes, once again it’s a difficult pursuit to specifically guide at what point it will cross that threshold, I mean, certainly we have been emphasizing design-win activity in ’06. But it will be contributing revenue and many of our major Q1 OEM’s will introduce product during this year. But with that said, as I mentioned, if you particularly look at the dual-mode cell phones market, the carrier utilization of those features in the ends - the end customer services that are of it, it is still unclear and I think that will take sometime to work out. So, its something we can’t put a specific timeframe on. But, if you look at the long-term market projections in mobile Wi-Fi market does become 40% to 50% and greater of the total market over a three plus year timeframe if you look at third party market research. So, clearly this is a very important segment.

A - Jack Lazar

Yeah I think the good news here Arnab is that we understand it’s an important segment. We have got products that we believe is the most competitive in the marketplace. If it takes off faster, we are really going to benefit from that. It takes up a little bit slower, we will certainly be there to take a significant piece of that market over the upcoming years. It is a very important piece of business to us as we move forward.

Q - Arnab Chanda

And one last question, you know, the PHS market you have always been pretty resolute even in spite of some initial skepticism, it sounds like obviously that’s paying off. Could you talk a little bit about just quantitatively speaking, is it sort of continued translation in the current customer rate, should we look for another customer and sort of what the projector of that market is that, you know, 30%, 40% of revenues in a couple of years? Just any qualitative idea you could give us on that, that will be great, thank you.

A - Craig Barratt

Well, we continue to be very focused on serving UT Starcom because they are the dominant player in this market. And our goal of course is to be the dominant supplier to them and thereby we of course the dominant supplier by implication to the overall market. So, that continues to be our focus. I think PAS continues to enjoy sequential strength its at a low cost price point for the Chinese market where the server technologies just simply can’t address that segment to the market. The delays in deploying or granting 3G licenses and deploying 3G technology in China has helped PAS to some extent but that said, even as 3G is deployed in China, that will largely displays the GSM subscriber base, not PAS, since PAS is targeted at much lower price points. The rollout of these broadband gateways that we described did include a PAS cordless phone feature. It means that PAS will actually have an existence, even separate from the public networks. So basically by combining DSL broadband technology and PAS code with telephone technology there is a compelling service bundle that wireline carries can offer subscribers, even if they don’t subscribe to the public network. So I think there are ways that the PAS market can continue to grow quite rapidly. We believe the Chinese subscribers or the worldwide subscribers base is now over 90 million subscribers and if you just look alone at the replacement market, you know clearly people do replace their equipment every couple of years and that alone represents a sizable opportunity. Then we expect the topline subscriber numbers to continue to grow as well.

A - Craig Barratt

Yeah, obviously we have invested a fair amount of money in PAS. We are starting to see some very nice returns, this is the third consecutive quarter of revenue growth. It’s been operating profitable for two quarters now. We think, we are just at the beginning of the expansion for PAS. So, so far this investment is starting to pay off, and we hope we can do as well in the future markets that we get into.

Q - Arnab Chanda

Thanks Craig, thanks Jack.

A - Craig Barratt

Yeah thanks Arnab.

Operator

Our next question comes from Jeremy Bunting of Thomas Weisel Partners. Your line is open.

Q - Jeremy Bunting

Couple of competitive questions or competitive issue questions. First on the PCI Express products, when do you expect to see competitive products from Intel in the markets or its being used on Intel Centrino platforms?

A - Jack Lazar

I am not exactly sure, I think, frankly you have to ask Intel, I mean I think they are coming out of course with PCI Express solutions as part of their Centrino platform. But in general I think we can get substantial success in PCIs. PCI Express actually separate from Intel as we have seen with previous generations of wireless LAN technology, we can get these technologies to market sooner. And of course the same thing will happen with 11n where it will have product leadership for a considerable period of time.

A - Craig Barratt

Jeremy, I would point out that we actually view the PC OEM business as a particular area of strength for Q1.

Q -- Jeremy Bunting

Okay, thank you. Secondly what competitive impact do you think the purchase by Marvell, UT Starcom internal operations might have on your PAS opportunity?

A - Jack Lazar

I think that’s a great question. First of all, I should point out that the internal team that was acquired by Marvell was developing just a baseband part of the solution so first off that’s only a portion of the complete solution that Atheros has already developed in-house. This is something of course we knew about since the summer of 2005, and I think overall actually it’s neutral to positive. I think the fact that this team is no longer internal and it is now part of an external supplier effectively levels the playing field, so even though the team was internal to the company previously, we were able to go head-to-head and win designs and I think our platform in design-win track record recently has suggested that that picture only continues to strengthen after the acquisition. So I don’t think it will have anything but a positive impact on our business.

Q - Jeremy Bunting

Okay thank you and Jack, I missed the breakdown for OpEx guidance in Q1, could you just read that to me please?

A - Jack Lazar

The actual detail breakdown or the…?

Q - Jeremy Bunting

Yes please.

A - Jack Lazar

Okay, so research and development is that $13 million to $13.75 million. SG&A is $7.25 to $7.75 million. So we are seeing a total of $20.25 million to $21.25 million, which is a 3% to 8% growth.

Q - Jeremy Bunting

Thanks very much

A - Jack Lazar

Thank you.

A - Craig Barratt

Thanks Jeremy.

Operator

Adam Benjamin with Jefferies your line is open.

Q - Adam Benjamin

Thanks guys, nice quarter and couple of questions. First is on the gross margin side, is there anyway Jack you can kind of quantify for us a little bit in more detail as to, you know, the 200 plus basis points improvement whether it was largely due to the cost down for the low-end solution on the G side or is it PAS or can you give us some quantification there?

A – Jack Lazar

I think a couple of things and I really can’t into a whole lot of granularity here Adam other than to tell you its driven by product mix, I think that in this last quarter we had nice concentration of super G type revenues. Its also driven by price declines that we’ve gotten from our suppliers over the last couple of quarters that were feeding into Q4 and then frankly its also due to a higher concentration of PAS in the overall revenue stream. So, I think all of those combined together actually each added something in its own way to driving the 320 basis point improvement and much of that you are going to see obviously we are forecasting for this upcoming quarter.

Q - Adam Benjamin

Right, so you are guiding for 45 to 46 for Q1, which is above your target of 43 to 45, should we expect that should continue because the product mix two out of six I would think would continue kind of along the same lines as we saw in Q4?

A - Jack Lazar

Yeah, I am not sure that we want, you know like I said we would like to see a couple of more quarters of, you know, pricing trends etc. in the wireless LAN market. Of course you have to remember the supply basis a little bit tighter than it’s been in the past. So we probably won’t be able to achieve some of the cost down, cost downs we have been able to get at some of the other suppliers. But, you know, we are confident that we can keep it at a nice level in the upcoming quarter and hopefully beyond.

Q - Adam Benjamin

Okay, with respect to 802.11n there has been a lot of discussion in the marketplace is the timing of the product brands and launched by some of the OEMs. Can you give us your view as to when we can expect to see that?

A - Craig Barratt

Yeah Adam its Craig here. I think the most likely timeframe for 11n products to start to appear is in the second quarter, it could well be early in the second quarter for n products will start to appear in the channel.

Q - Adam Benjamin

Okay, so will you be shipping in the latter part of Q1?

A - Jack Lazar

Yeah, first Silicon provide us to meet those schedules would require shipping, you know, several weeks prior to that.

Q - Adam Benjamin

Okay and I assume that’s factored in your guidance?

A - Jack Lazar

Yes, of course, I mean, our guidance is a reflection of the overall mix of our business and all of the products we expect to ship.

Q - Adam Benjamin

Okay, great. And then, just one last question on PAS, it appears that your wireless LAN business was a little bit stronger than expected in Q4 and you are guiding in Q1 that UT will be greater than 10% customer, you previously talked about PAS representing about 20% of revenue in ’06. Is that a target that we can still look for given the wireless LAN strength or should we be looking at it a little bit differently at this point? Thanks.

A - Craig Barratt

Adam, the biggest risk to that 20% is the strength of our wireless LAN market and we are, we have been very pleasantly happy with the way in which the wireless LAN markets has been performing and we were very happy obviously with the way PAS is progressing at this point with the design-wins. But fairly if wireless LAN grows at a much greater pace than we’ve previously anticipated than that puts the most pressure on the 20% number. Both are growing.

Q - Adam Benjamin

Okay, so taking wireless LAN out of the equation I am just doing pure dollar for dollar basis, that would be, you think would you be able to attain those targets that you previously discussed?

A - Jack Lazar

Yeah, I mean we are certainly not, certainly not guiding anything other than that.

Q - Adam Benjamin

Okay, it’s great.

A - Craig Barratt

Internally clearly we’re targeting certain dollar numbers, which we continue to be very comfortable with and, you know, once the ratios turns out to be as Jack points out the biggest risk is what else is in the denominator.

Q - Adam Benjamin

Sure, sure, yeah, that’s why I was trying to get to the actual dollar amount instead. Okay great, thanks a lot guys.

A - Jack Lazar

Thanks Adam.

A - Craig Barratt

Thanks Adam.

Operator

I will now turn the call back over to Mr. Craig Barratt.

Craig Barratt, President, Chief Executive Officer

So, thanks to all of you for joining us today and a special thanks to all our employees for their continued dedication and hard work. The fourth quarter was a great quarter for Atheros and as you can tell from my comments, we are enthusiastic about the first quarter and 2006. Over the next few months, we will be attending several investor conferences including the Thomas Weisel Technology conference, February the 6th in San Francisco, the Jeffrey’s Wireless Broadband conference on March the 1st in New York and Morgan Stanley Semiconductor Systems and Solutions conference March 6th to 8th in Dana Point. If any viewer interested in arranging a call or meeting, please contact Deborah Stapleton, our IR counsel at deb@stapleton.com. We thank you for your interest in Atheros and we look forward to speaking to you along the way. Good-bye for now.

Operator

This will conclude today’s conference call, you may now disconnect.

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