Atheros Communications Inc. Q2 2008 Earnings Call Transcript

Jul.28.08 | About: Atheros Communications, (ATHR)

Atheros Communications Inc. (NASDAQ:ATHR)

Q2 2008 Earnings Call

July 28, 2008 5:00 pm ET

Executives

Deborah Stapleton - IR Stapleton Communications

Craig Barratt - President and CEO

Jack Lazar - VP, CFO and VP of Corporate Development

Analysts

Adam Benjamin - Jefferies & Company

Romit Shah - Lehman Brothers

Allan Mishan - Oppenheimer & Co

Jonathan Goldberg - Deutsche Bank

Heidi Poon - Thomas Weisel Partners

Ramesh Misra - Collins Stewart

Quinn Bolton - Needham & Company

Mark Heller - Merrill Lynch

Eric Ghernati - Banc of America

Shaw Wu - American Technology Research

Sanjay Devgan - Morgan Stanley

Gus Richard - Piper Jaffray

Ruben Roy - Pacific Crest Securities

Operator

Welcome and thank you all for holding for today's Atheros Communications conference call. (Operator Instruction).

I would like to turn the call over to Deborah Stapleton, who will introduce today's speakers. Ms. Stapleton, you may begin ma'am. Thank you.

Deborah Stapleton

Thank you. Good afternoon, everyone. Welcome to the Atheros Communications second quarter 2008 financial results conference call. Leading the call today are Dr. Craig Barratt, President and CEO, and Jack Lazar, Vice President and Chief Financial Officer and VP of Corporate Development.

Before we begin, I would like to remind you that various remarks that we make on this call, including those about our projected future financial results including revenues sources of the revenues, and expenses, our future plans, goals, and prospects, markets 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 maybe 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, 2007, and our Form 10-Q for the quarter ended March 31, 2008, 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 of factors that could cause 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. Atheros reports net income and basic and diluted net income per share in accordance with GAAP and additionally on a non-GAAP basis referred to its performance.

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 or non-GAAP reporting internally to evaluate and manage the company's operations. Atheros has chosen to provide this information to investors to enable them to perform comparisons of operating results in a manner similar to how the company analyzes its operating results.

The full reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued earlier today and we ask that you review it in conjunction with this call. All numbers that are discussed in today's conference call are non-GAAP, unless otherwise noted.

Now I will turn the call over to Dr. Craig Barratt. Craig?

Craig Barratt

Thanks, Deb, and thanks to everyone for joining us today. In the second quarter, our revenue increased to a $121.5 million slightly above our guidance. Net income was $19.3 million, or $0.31 per diluted share. Our gross margin remains strong at 50.8%, and operating profit was 17% of revenue. Jack will discuss the numbers in more detail, and provide guidance for the third quarter shortly.

The second quarter was another strong quarter for Atheros, as we continued our track record of execution by delivering our 13th consecutive quarter of revenue growth. We drove broad-based gains across multiple channels, and saw particular strength in our XSPAN 11n products, our PC OEMs, our ETHOS line of Ethernet products and our ROCm wireless LAN solutions.

Product revenue mix during the quarter was in line with our expectations and was largely driven by strong customer adoption of our 11n solutions. Revenue from our 11n products increased more than 50% sequentially. We have been particularly pleased with the success of our single-chip 11n solutions with PC and carrier customers, as well as our integrated 11n access point SOCs in the retail market. In addition to driving the 11n transition in PC and router products, Atheros is also unlocking new opportunities for 11g, enabling this portion of our business to remain strong

Revenue from our ROCm mobile wireless LAN solutions grew in the second quarter as more of our handset and mobile consumer electronics designs went into production. Our Ethernet business grew in the second quarter, driven by continued market share gains in PC OEMs, and the further adoption of our fast Ethernet switching products in retail access points and carrier gateway solutions. We have now shipped well over 40 million Ethernet ports, since we entered the market in 2007, as we have establish ourselves as a significant supplier of Ethernet connectivity solutions for PC, router, and consumer-networking platforms.

Let us now look at the channels we serve, PCs, networking, and consumer in more detail. In the second quarter, we saw accelerated adoption of our 11n solutions by our PC customers, continued demand for our low-end 11g products and market share gains with our Ethernet client solutions.

Revenue from PC customers grew 15% sequentially, driven by 11n adoption, and by customers shipping new platforms featuring our line of Ethernet products. We saw particular strength from our XSPAN, AR9280 and 9281 single chip PCI Express 11n client solutions. This family of singly chip 11n solutions features low-cost 1/2 products, in addition to high performance jewel band solutions, enabling PC OEMs to differentiate their line of 11n-based laptops.

As we expected our 11g PC business remained robust with continued healthy demand for our highly integrated single-chip AR2425 11g PCI Express solution. That solution and our line of Ethernet LOMs and FIs continue to be ideal for the growing market for sub-$500 laptops. Atheros's wireless LAN and/or Ethernet products were in some notable new platforms that launched in the second quarter, including new versions ASUS popular EEPC's Acer's recently launched Aspire 1 family of low cost notebooks.

Our PC Ethernet client solutions were strong in the second quarter, with our gigabit and fast Ethernet LOM and FI solutions shipping in to a broadening list of Tier 1 PC OEMs. We credit our successful entry into the highly competitive Ethernet market to our strong customer base and our core competency of delivering high-quality products at attractive price points.

Our diversification in the in the Ethernet has enabled us to expand our addressable market with PC customers, while increasing our value as a strategic vendor of multiple and complimentary products.

Revenue from our networking business, which includes retail, carrier, and enterprise end markets, was once again up sequentially in the second quarter despite some macro economic headwinds particularly in the retail segment. Our increased networking revenue was driven primarily by greater demand for 11n products in addition to further growth from our Ethernet switching solutions.

Our broadening portfolio of networking technologies consisting of wireless LAN, Ethernet switches, and our network processors, allows us to deliver valuable platform solutions targeting both the high end, as well as the more cost conscious segments of the market. Through the integration of our 11n MAC baseband and network processing technologies, Atheros has developed and brought to market compact SOCs, the AR 9130, and 9132, which have been adopted by a variety of retail vendors. By leveraging this SOC platform, customers have significantly reduced their bill of materials, enabling them to broaden their family of 11n route has being offered at sub $100 price points.

This strategy is working well, as customer demand for our 11n SOCs more than doubled sequentially in the second quarter. At the same time, we offer our customers flexibility in addressing the high end high performance retail, carrier, and enterprise networking segments, where they appreciate features such as jewel band, jewel concurrent XSPAN technology through a combination of our stand alone network processor single-chip wireless LAN clients, and our Ethernet switching products.

The carrier business grew once again in the second quarter as the attach rate of wireless LAN to DSL, cable, and phone continues to rise. Additionally our carrier customers are recognizing the increased throughput and range benefits of 11n and that Atheros's XSPAN 11n technology can provide a richer data voice and media experience for their customers.

Our single-chip AR 9220 and 9223 11n PCI client solutions are proving to be a perfect fit for these advanced home gateways. For those carriers for which basic connectivity is the primary requirement, our proven 11g based products continue to be the solution of choice. Many of the design wins we have accumulated over the past two years are now shipping in significant volume, and we continue to win additional 11g designs.

Atheros's Ethernet switch products are an important part of our platform strategy. Our Ethernet switching revenue was strong in the second quarter. More and more customers are using Atheros's Ether switching solutions in conjunction with retail and carrier 11g and 11n access points and gateway designs. In addition, we are excited about the prospects of our new AR 8316 five port Gigabit Ethernet solution, which is already sampling with customers.

In the second quarter, we recorded our first design wins for this new member of the Atheros family of products, and we are confident that it is an ideal product, for 11n access points and gateways requiring a feature-rich, and affordable Gigabit switch.

Our consumer business, which includes our ROCm mobile wireless LAN, GTS, Bluetooth and PAS solutions grew sequentially once again in the second quarter. Although our PAS business was week as expected, revenue from our ROCm wireless LAN solutions was strong as several new devices began shipping with our AR6000 family of products.

Mobile and consumer electronics customers are showing great interest in our ROCm mobile wireless LAN solutions due to our industry leading throughput and low power. We have now secured more than 40 design wins with our ROCm wireless LAN solutions. Exciting new products shipping with Atheros ROCm wireless LAN include the new Wi-Fi embedded SD flash cards from Wi-Fi that now include geotagging by leveraging an ever expanding database of Wi-Fi access point locations.

We expect continued revenue opportunities for our ROCm solutions in 2008 and beyond. Through our partnerships with industry leaders such as Qualcomm, Infineon and in video, our handset customers are bringing to market world class cellar products that integrate Atheros ROCm solutions featuring the industry's lowest power, highest performing mobile wireless LAN. Examples of Smart Phone products shipping with Atheros ROCm wireless LAN are the LG KS20, the Samsung SCH N-470 and the NEC 902 IL, and 906 IL.

The consumer electronics market remains important for Atheros, and one that we feel we are well suited to address with the suite of key communications technologies for these platforms, wireless LAN, GPS, and Bluetooth, across these mobile technologies, we have design wins in personal navigation devices, smart phones, mobile phones, ultra mobile PCs, headsets, car kits, personal media players, cameras, and gaming.

During the second quarter, we began to sample our second generation single-chip GPS receiver the AR 1511, and companion around 3.0 software suite. The combo is ideally suited for integrating advanced navigation functions into mobile devices, with state-of-the-art assisted GPS technology, advanced parallel search capability, and industry-leading tracking sensitivity.

We were also pleased in the second quarter that AVI research ranked Atheros second in its latest GPS IC Random Matrix ranking. Additionally we recorded our first Bluetooth revenue in the second quarter, an important milestone for the company as we continue diversifying our products offerings.

On the corporate front in the second quarter, we welcomed Christine King to our Board of Directors. We are also very pleased to be welcoming back Dan Artusi to the Atheros Board. Both Christine and Dan have long and successful careers in the semiconductor and communications industries and we are fortunate to have them on our Board. We look forward to benefiting from their considerable industry experience.

And finally, all of us at Atheros just celebrated our 10th anniversary. Back in 1998, Atheros was founded by Teresa Meng and John Hennessy, with the belief that the use of CMOS in radio designs could disrupt a variety of communications markets and bring affordable solutions to the consumer. Over these past 10 years, we have entered a variety of markets, recorded over $1.4 billion in cumulative revenue, and shipped over 250 million chip sets. While we are pleased with the first 10 years of Atheros's history, we are even more opportunistic about the coming decade. We cannot thank our employees enough for their contributions to Atheros's success, and we are excited about the opportunities before us.

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

Jack Lazar

Thank you, Craig. And thanks all of you for joining us today. First I will outline our financial results for the second quarter ended June 30th, 2008 and then I'll provide our third quarter guidance.

Although we faced a variety of macro headwinds during Q2, Atheros once again delivered results that were in line or better than our guidance. Q2 was our 13th consecutive quarter of revenue growth and our fifth consecutive quarter of revenue above $100 million. Revenue was slightly above the high end of our guidance, while gross margin and operating expenses were within the guided range.

As a result, EPS was $0.01 above the high end of our April guidance. As a reminder our Q2 guidance was for revenue growth of 4% to 6% sequentially, gross margin between 50%, and 51%, operating expense growth of between 0% and 2.5% and EPS of $0.29 to $0.30.

Q2 revenue increased 6.1% sequentially, and net income was 19.3 million, or $0.31 per diluted share. Revenue was a record $121.5 million, up $7 million from the $114.5 million recorded in the first quarter of 2008.

In Q2, we shipped our 250 millionth cumulative chipset. Revenue in Q2 increased 21% compared with the $108 million recorded in the same quarter a year ago. Based on the product-mixed data, the breakdown of revenue for our wireless LAN chipsets was as follows: 11a/g was 14% of wireless LAN revenue, 11g was 63%, and 11n was 23%. 11n up over 50% sequentially, was particularly strong, due primarily to the strength of shipments to PC OEMs and carriers, and to a lesser extent shipments to our retail customers. 11g and 11a/g revenue was in line with our expectations going into the quarter.

The percentage breakdown of revenue by channel based on data supplied by our ODMs was as follows; networking was 56% of revenue, PC OEM was 37%, and consumer was 7%. Revenue in units shipped to our networking customers increased to record highs in Q2. Strong XSPAN 11n shipments to enterprise and carrier customers and increased revenue from Ethernet switches was partially offset by an expected softness in retail.

Revenue from our PC customers increased 15% or 5.8% sequentially, as we saw strong adoption of our 11n and Ethernet products. Revenue in our consumer channel was driven by increased shipments of our ROCm mobile wireless LAN products and during the quarter we recorded our first Bluetooth revenue. In Q2, Hon-Hai Precision Industries was our only 10% customer.

Second quarter gross margin was 50.8%, and at the high end of our 50% to 51% guided range, as ASP declines were largely offset by supply chain efficiencies.

Total operating expenses were $41.6 million, a 1% increase from Q1, and towards the midpoint of our guidance. Operating income in the quarter up 15% sequentially, to $20.2 million was 17% of revenue and within our target model range of 17% to 19%. Compared with Q2 of 2007, operating income increased 24%.

Interest income declined more than anticipated in our guidance, due to continued reductions in the Fed funds rates. But, the impact was partially offset by slightly lower than anticipated tax rate of approximately 13%.

Net income was $19.3 million or earnings of $0.31 per diluted share for the quarter, compared with net income of $17.2 million or earnings of $0.28 per diluted share in Q1. Average fully diluted shares outstanding were 62.1 million in Q2 and 61.4 million in Q1.

GAAP net income for the second quarter was $10.1 million, or $0.16 per diluted share. This compares with GAAP net income of $3.4 million or $0.06 per diluted share in the first quarter and $9.3 million or $0.16 per diluted share in Q2 of '07. A full reconciliation of GAAP to non-GAAP financial measures can be found in our press release.

At June 30th, cash, cash equivalents and marketable securities were $276.6 million, up $21.1 million from March 31st. Included in this balance are $24.1 million of auction-rate securities, and as we've discussed in our prior conference calls in our last 10-K filed in February, and our 10-Q filed in May, these investments have been negatively impacted by the uncertainties in the credit markets and their exposure to the financial condition of the bond insurance companies.

In Q2, the value of these securities declined further, and as a result we recorded an impairment charge of $1.4 million during the quarter. We continue to classify these securities as long-term investments as of June 30th, and in future periods, the estimated fair value of our auction-rate securities could decline further based on market conditions, which could result in additional impairment charges which may be substantial. While our overall cash position and cash flow remains very strong, we continue to evaluate all potential means to remedy the situation.

Turning to the remainder of the balance sheet, DSOs were 56 days in Q2, a decrease from 57 days in Q1, and slightly above our target range of 45 to 55 days. Inventory turns for the quarter were 5.2 times, compared with 5.9 times in Q1, while days of inventory increased from 61 to 69. Inventory turns were at the low end of our 5 to 6 times target range, as we built up inventory to meet the strong customer demand expected in Q3.

The company continues to have no debt, total liabilities at the end of Q2 were $133 million. During the second quarter of 2008, our capital expenditures and depreciation were $1.9 million and $1.7 million respectively. Overall our cash flow was once again very strong in Q2. As of June 30th, we had 952 full time employees, up 19 from 933 at the end of Q1.

I will now move on to our guidance for the third quarter. Q3 will be a quarter of broad-base revenue strength for Atheros, with revenue increasing in each of our three channels, networking, PC OEM, and consumer. 11n product revenue is expected to increase significantly once again, and will be the primary driver of our growth in Q3. We anticipate our networking business will be the strongest, with much of the projected increase coming from sales to our retail customers. We also anticipate growth in our PC OEM channel driven by sales of our 11n solutions, and continued strong shipments of 11g products.

Revenue growth from our consumer channel will be driven by our ROCm wireless LAN products and increased GPS shipments. Based on these favorable trends, we currently anticipate revenue growth of between 13% and 15% sequentially. We anticipate the gross margin will once again be above our target model range at approximately 48.5 to 49.5, but down sequentially as we continue to grow our market share by driving entry level 11n products into the main stream.

We will continue to invest in the people, product takeouts and infrastructure necessary to support our continued growth and entry in to new markets. In the third quarter, we anticipate that operating expenses will come in between $43.5 and $45 million.

Our estimated pro forma tax rate for Q2 is expected to be approximately 13.5%, and we anticipate EPS to be approximately $0.35 to $0.36, based on fully diluted shares outstanding of $63 million.

Q2 was another strong quarter for Atheros, and we are quite optimistic about the remainder of 2008. As we head into the second half of the year, we are leveraging favorable product cycles, market-share gains, and expansion into new markets in order to fuel our growth. We believe our family of communications products is well positioned in each of their respective markets. We expect our investments and diversification will continue paying dividend through the year, and we will invest prudently in further efforts that we believe will help position Atheros for ongoing success and increased shareholder value in the second half of 2008 and beyond.

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

Craig Barratt

Thanks, Jack. We are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). First question comes from Adam Benjamin. Your line is open. State our affiliation, please.

Adam Benjamin - Jefferies & Company

Jefferies. Thanks guys. Nice job on the results and guidance there. Just have some follow-ups, first on the gross margin. You've been talking for some time about the expectation that gross margin would come down. Just curious if you can give some more detail in the puts and takes of that, and how the revenue mix place out? Obviously you are expecting retail to grow a little bit stronger than other businesses, and also ROCm comes into a higher percentage of the mix.

Can you just go through, Jack, a little bit more detail about how we should be thinking about the single chip and one by two versus two by two, as in how that place out for the gross margin going forward?

Jack Lazar

Sure. Thank you, Adam. Looking at the gross margins for the quarter, obviously very strong in Q2, still well above our target range in Q3, what we're seeing is the opportunity to actually go after customers where we can push our 11n solutions in particular, and obviously the low end of 11n, the one-by-two type solution are going to have slightly lower margins than some of the more premium products.

So, what we're seeing is a fair amount of success with our launch in to the one-by-two market, particularly with PC OEMs and you saw some of that this last quarter; you will see a lot more of it in the upcoming quarter, and that's certainly affecting the margins a bit. Retail does tend to be a little more price sensitive, so that obviously does affect the gross margins a little bit to the downside going forward. But I think just overall, we really have this mentality of using gross margins as a weapon to expand our business. We are really not trying to grow a $500 million company here. We are really trying to grow a much larger company.

In order to do that, we have to aggressively pursue market share. We've been very straightforward with investors for quite some time now, that this is our strategy. And it frankly has played out pretty well for us. Now overall, in the long run we have been able to gradually move up these margins pretty aggressively over the last couple of years, and that has worked to our advantage and we have done that by introducing new products, costing down, really taking advantage of multiple sources and we expect to continue doing that.

So I think this is really, it is evidence of the fact that we are aggressively going after market share. You see that in the 13% to 15% revenue growth, which is driven by 11n, and I think we are pretty optimistic that, that is the right strategy for us going forward.

Adam Benjamin - Jefferies & Company

Got you, that's helpful. Craig, you talked in the opening remarks a lot about the Ethernet switch and the ramp you are seeing there. Do you care to talk specifically about what your expectation is now for that business for the full year?

Craig Barratt

Well certainly we are not going to give full-year outlook, but I think our overall sense is, on the client side, as I said in my remarks, we certainly have an increasing footprint among Tier 1 PC OEMs. We have certainly nice momentum and trajectory there with the competitiveness of our products. And on the switching side, essentially every wireless LAN router or gateway has an Ethernet switch, so that represents a big opportunity to pull that silicon in to be one of our solutions and with 11n the data rates being offered are much higher than standard fast Ethernet supports. And so I think, the gigabit switch opportunity is significant, as more and more of the mid and high-end platforms add gigabit capability.

Adam Benjamin - Jefferies & Company

Got you. I just have one last question. Craig you kind of talked in the intro a little bit about new opportunities. I know you still have a lot more of a runway on some of the new businesses ramping, and you still have the shift of Ether to 11n helping you at least for the rest of this year and next year. As you look out and ramp Bluetooth and GPS and Ethernet, further you mentioned new opportunities. Can you elaborate a little bit on that? I know you guys have had a lot on your plate, but should we expect you guys to add some more legs to the stool?

Craig Barratt

I think our focus over the last two years is in a judicious way to increase the TAM in a meaningful way. And over the last couple of years that's what we have done through acquisition and plus our own organic developments. Looking forward, I think I can characterize our focus as being more on growing the businesses we have. We are certainly not TAM limited in any of the new businesses that we are in. And while it might make strategic sense for us to add some capabilities in some new areas, I think that will tend to be de-emphasized a little bit compared with really growing in the TAM that we have.

Adam Benjamin - Jefferies & Company

Okay. So as you look out over, you said your core wireless LAN business, you think you have got several more years of growth there?

Craig Barratt

Certainly. We are really in businesses that we think can provide protracted opportunities for the company. That's correct.

Adam Benjamin - Jefferies & Company

Got you. That's all I have guys. Thanks again.

Craig Barratt

Okay, thanks Adam.

Operator

Your next question comes from Romit Shah. Your line is open, sir.

Romit Shah - Lehman Brothers

Thanks a lot. Great job guys. You guys have talked about ROCm being a key driver this year and it looks like in Q2 the handset and mobile were drivers for that particular line. As we think about Q3, should we expect to see incremental revenues from additional applications?

Craig Barratt

Certainly, Romit. Just as we said in our remarks, I think we do expect, continued introduction of products in a whole variety of end-market segments. I think as we have mentioned a number of times, beyond the cell phone area, I think there are interesting opportunities in gaming and future opportunities as well, where we haven't got wins and as those come to market, that will certainly help us generate additional revenue growth.

Jack Lazar

Yeah, I think the thing to emphasize here is that our belief in how our ROCm business would developed this year has not changed at all.

Romit Shah - Lehman Brothers

Okay. Terrific. And then if we could just focus on opportunity in handsets first if I can, Craig, do you feel as though there is a sense of urgency to develop a combo Wi-Fi Bluetooth solution to sustain the design-win momentum that you guys have? Or do you feel like the market is still a few years away?

Craig Barratt

It really depends upon the sub-segment, the attach rate of these technologies is still relatively different in many of the sub-segments. Over time of course, the connect rate of these technologies will tend to increase. And so, yes, in the right time frame, I think combo products certainly are going to be important. And certainly you can think of that as a direction that we will follow. It certainly important for us to establish leadership in the building blocks that make up those Combos. And so, our focus is to really continue to push for the technology and road map in all of the technology areas we are addressing, so that we can be sure that as we bring the right combos to market at the right time, that we really have credibility and leadership in each of the underlying technologies.

Romit Shah - Lehman Brothers

Got you. Thanks a lot.

Craig Barratt

Thanks, Romit.

Operator

Next question will come from Allan Mishan. Your line is open, state your affiliation sir.

Allan Mishan - Oppenheimer & Co

Hi, I am with Oppenheimer & Company. Does your guidance include any revenue from gaming for Q3?

Jack Lazar

Allan, this is Jack. We are not going to get into that level of granularity. What we've said is that the broad based growth is across all of the sectors, and I think that that's kind of the level we are going to leave it at this point.

Craig Barratt

Yeah, I can mention the ROCm area in general is a minority contributed to the sequential growth that we guided. Jack in his remarks mentioned that one of the particular areas of strength is 11n, but it really is broad based.

Allan Mishan - Oppenheimer & Co

Okay. That's helpful. And the Bluetooth revenue that you experienced in Q2, was that headset or PC?

Craig Barratt

That was headset.

Allan Mishan - Oppenheimer & Co

That was headset. Okay, great. And then on the switching business it looks like the Ethernet switching in your networking starting to grow. Would you envision that in the next few quarters you might cross over between Ethernet switches versus Ethernet PCs or should the PC business stay larger for the foreseeable future?

Craig Barratt

I think the client side of the business will continue to be the majority of the revenue that is not because we are not positive about the switching side, but frankly, I think we have got very good momentum on the client side of the business. So we really see protracted growth there.

Jack Lazar

One of the things to point about the Ethernet client side is that when we entered the business it was very, very concentrated on a couple of particular customers, and over the last year we have increased our customer base to be well over 20 let's say. And that in turn has created a lot of opportunities. A lot of the growth, we saw this last quarter actually was from clients at new laptop manufactures that we didn't previously used to ship to. So we think clients, there is a lot of good momentum there and we have some pretty nice design wins going forward.

Craig Barratt

That said, on the switching side the 8316 that I referred to the 5-port Gigabit switch obviously has a substantially higher ASP than the equivalent fast Ethernet switch. And so, as we increase the connect rate of that product, I think that will definitely help the revenue growth on the switching side of the business too.

Allan Mishan - Oppenheimer & Co

Okay. Thank very much, guys.

Craig Barratt

Thanks, Allan.

Operator

Next question comes from Jonathan Goldberg. Your line is open, sir. State your affiliation.

Jack Lazar

You there, Jon?

Operator

Mr. Goldberg check your head set and mute button.

Jonathan Goldberg - Deutsche Bank

Can you hear me now?

Jack Lazar

Yes.

Jonathan Goldberg - Deutsche Bank

Hi, Jonathan Goldberg at Deutsche Bank. Thanks for taking my call. A couple of questions, I wanted to talk a little bit about the retail channel. How is the retail channel doing could you say overall? That whole segment, not looks like your prospect there but how is the whole end market doing? It seems to me there is not a lot of visibility. A couple of quarters back you did a strong and ended up being weak. This quarter, it sounds like it was pretty good and you think that's going to continue in Q3. Any update there would be appreciated.

Craig Barratt

Yeah, I think we did refer to the fact that we are seeing some of the economic headwinds, and there are some signs of that in the retail market. I think offsetting that to some degree is the fact that we have a pretty broad footprint internationally, especially in emerging markets, Europe and so on, outside of North America. And, I think that we are definitely seeing actually some growth in some of those geographies. And so, on a blended basis, I think that helps out that part of our business.

I think also, there is also a focus on value and one of the things we've been particularly good at is really enabling low-cost; think of them as entry-level products and technologies in some cases in North America, but also in emerging markets too. And there is this drive towards value where if people stop buying products altogether that's one thing but more likely they will just look to buy a product that is at lower cost. We see that trend in PCs, and we see that trend in retail as well.

And so, it's hard for us to tell the degree to which those factors offset the overall economic issues, but I think on a trailing basis, we have seen the combination of our market-share gains, our broad footprint in emerging markets and the drive towards value, certainly keep that portions of our business in a reasonably good range.

Jack Lazar

And remember with retail, it can be a pretty choppy little business, because it's really driven by events, whether that is back-to-school or Christmas or whatever it might be. So our goal over time has been to actually minimize retail to total percentage of our overall revenue and we have effectively done that. If you look back from the time in which we went public where it was well over 50% of our revenue is now closer to 25% to 30% of our revenue. And that in turn means that those fluctuations have less of an impact on us from an overall perspective.

Jonathan Goldberg - Deutsche Bank

Fair. And then on ROCm, you mentioned design wins with phones actually shipping the LG, Samsung, and NEC. Previously you had mentioned design wins of three of the top five handset OEMs. Is there a third one that you haven't spoken about yet?

Craig Barratt

That is correct. We only talk about end products when they are actually beginning to ship. So the ones we have mentioned are actually available in a variety of markets today.

Jack Lazar

There are others too that we did not mention but.

Craig Barratt

Yeah. Of course there are a significant number of platforms among the 40 plus design wins we talked about, only a modest number of those are actually shipping today.

Jonathan Goldberg - Deutsche Bank

You will anticipate that third one tops your handset in the shipping this year?

Craig Barratt

We cannot really go into that level of granularity.

Jonathan Goldberg - Deutsche Bank

Okay. Thanks, guys.

Jack Lazar

Thanks Jon

Craig Barratt

Thanks Jon.

Operator

Next question comes from Heidi Poon. Your line is open, madam.

Heidi Poon - Thomas Weisel Partners

Thank. Just a little bit more about the gross margin, as your Ethernet business ramp, how should we think about the impact on the gross margin from that business? Also, if you increase your penetrations to more markets, what is your operating margin target, given the outlook for the expenses?

Jack Lazar

So, I'll take those Heidi. First of all on the gross margin side, Ethernet does run a bit under our corporate average for gross margins. So as that does expand it will pull down on the overall margins of the company. Today, it is a relatively small part of the overall revenue stream, but certainly one that we expect to see growing over the next couple of quarters. That being said, in Q3 actually that's not one of the biggest drivers for revenue. It is just down the list a little bit further.

So we cannot really point to Ethernet as the thing driving down our gross margin guidance. So, I think it is more of just our very specific desire to focus on the low-end platforms, and PCs in particular and some cases with retail where we really want to push 11n into those platforms and one by two is a way in which we are actually getting that done.

From an operating margin perspective, our model has not changed. We are still focussed on the 17% to 19% operating margin, which includes, obviously a 45% to 47% target gross margins. So, we are running a little bit above the targeted gross margins, we are running a little bit above our R&D targets. SG&A is right at the edge of the 10% to 12% that we target. So no real change in our operating model today, other than we of course want to move that up from 17% to 18% and 19%.

Heidi Poon - Thomas Weisel Partners

Great. Can you also give an update regarding on the opportunities in the consumer business, such as the [Rockglue], set-up box.

Craig Barratt

I'm sure. As you correctly pointed out, one of their customers brought to market a set-top box that allows movies to be rented and streamed from networks, which we think is a great service. And I think that is just a small window in to the rich set of products and opportunities that will come, as carriers and service providers really want to deliver rich media experiences. It is not just about data and voices, its triple-play services, video on demand, and movies.

Now a lot of that's about connectivity around the home. To increase the ARPU, you really want homes to be able to use multiple TVs, each with different information sources. So that really means having rich communication capabilities around the house is very important. So that of course includes the Ethernet, it includes Wi-Fi and potentially some other technologies as well. So we think this is a positive trend, and I think one that's certainly going to grow.

Heidi Poon - Thomas Weisel Partners

Great. Final question. Does ROCm include a multi-function radio products for Bluetooth, GPS and Wi-Fi?

Craig Barratt

So, all of the products we have announced to-date are in the mobile area are single-function products. But as we discussed earlier, as the demand and attach rate of these technologies grows to similar levels, there will be an intercept point in the future where combined products or multi-function products begin to make sense.

Jack Lazar

I think our strategy on this has been pretty straightforward for quite sometime now. We do not want to be the ones evangelizing. We want to go there when the market is actually strong and when we feel like we can get a quick return on the investments that we need to make. I think the most important thing is that we accumulate it either through internal development or through acquisitions, the pieces that we feel are necessary to put together these multi-function radios going forward.

Heidi Poon - Thomas Weisel Partners

Thanks.

Craig Barratt

Thanks Heidi.

Jack Lazar

Thanks Heidi.

Operator

Next question comes from are Ramesh Misra. Your line is open sir.

Ramesh Misra - Collins Stewart

Good afternoon guys. My first question was in regard to the growth margin guidance in Q3. Is the lower number predominantly driven by your more aggressive 11n offerings?

Jack Lazar

Well 11n is the single-biggest drive for Q3. So that would particularly the one by two side of it, that would adversely affect the gross margins. But I should still point out that they are quite strong and above our historical levels, and frankly they are opening up 13% to 15% revenue growth. So our focus has always been market share focus, one where we can deliver to the contribution margin line, and that's why we are able to guide to $0.35 to $0.36 of EPS.

Ramesh Misra - Collins Stewart

Okay. In regards to the pricing in the 11n and 11g area, are there any obvious differences, or any trends that you can talk about between the two?

Craig Barratt

Well, certainly. As we have noted in a number of previous calls, there has been a separation in pricing, 11n has much richer set of capabilities and features in the overall complexity is much higher. And as we noted, the 11g business continues to be robust, but certainly over time, as everyone knows, more and more sockets will transition towards 11n. There is a segment of the business, really in the value segment, not really, the low-end part of the business, where that transition will occur, but it has to be at prices, which are obviously quite close to the 11g prices today.

And so clearly, as we deliver future products in our road map, we're very aware of the fact that we want to create a rich family of products, which covers everything from the entry level to the mid-range and the high end, so that, we can accelerate this transition from G towards N.

Ramesh Misra - Collins Stewart

Got it. And a final question. In regards to 11n again, distinguishing between the PC OEM market and the access-point market. In the past, I think you guys have said that your greater focus will actually be on the access points. Is that still the ongoing trend? Or do you think it will be a more balanced growth between the two?

Jack Lazar

So, Ramesh, I'm not sure we actually said that. So I apologize if it came across that way. We serve the entire market for wireless LAN, particularly in what we call our core market. So that is access points, NPCs, obviously both make up a significant portion of our revenue. We have an SOC for the access point market, we've got an integrated single-chip product for the PC market. Both of those are pretty critical to driving the overall acceptance of 11n. So definitely we are focused on both.

Ramesh Misra - Collins Stewart

Okay. Thanks.

Craig Barratt

Thanks, Ramesh.

Operator

Next question comes from Quinn Bolton. Your line is open. Sir, state your affiliation.

Quinn Bolton - Needham & Company

Hi, with Needham & Company. Jack just wanted to gauge sort of the mix in the third quarter. I know, you said one by two is probably the biggest driver, so should we be thinking about a mix shift towards the PC OEM business in Q3, or is retail strong enough that you see a relatively constant mix Q3 versus Q2?

Jack Lazar

Thanks, Quinn. So, one by two is an important driver in Q3. It is not the biggest driver. 11n in totality, is the biggest driver for us, as we go into Q3. What we commented on in the guidance was actually that networking is going to be the area that has the most strength in Q3, and in particular, actually retail. Now retail is a little softer this quarter, so it will increase from the levels that it was at in Q2. So really, no, I wouldn't say that that is the case. It is really overall networking is going to grow more, PC is going to grow too, pretty significantly. But, networking really should see strength to, both to retail and the carrier in Q3.

Quinn Bolton - Needham & Company

Okay, great. And then just can you remind us sort of a target percent of revs for the new businesses that GPS Bluetooth and if you want to throw Ethernet in there, I mean, either at the end of this year or maybe end of next year. What kind of range should we be thinking about? Seems like the Ethernet business is doing quite well, but Bluetooth may be a little bit slower to ramp than you guys had thought maybe three, six months ago. But just trying to get a sense.

Jack Lazar

Okay. Well unfortunately, I cannot remind you, because we haven't actually given one. What I can tell you is that we generally don't give a range like this, because what we found is that wireless LAN tends to grow pretty well. And so much like when people ask us about 11n versus 11g, what we find is that 11g has a lot of strength. When we look at the diversification of our markets, the wireless LAN business is continuing to grow at a pretty rapid rate. We expect that to continue to happen in the second half of the year.

So it is very hard to gauge the denominator and come up with the percentage. I think your general qualitative comments that Ethernet has been probably the strongest area is definitely true. We expect GPS to be up in this upcoming quarter. Bluetooth will certainly be up but from a very small base. But I would say that there is the mobile wireless LAN, ROCm products, which will certainly be a nice driver in Q3. So really Ethernet and ROCm are probably the bigger ones, Bluetooth and GPS are probably the lighter ones as we move to the second half of the year.

Quinn Bolton - Needham & Company

Okay. And then just lastly, I know the N business is still only just less than 25% of revs in Q2 of this year, but any sense when you might think you see crossover between G and N? Is that sort of mid to second half of next year or do you think it might be faster than that?

Craig Barratt

I think it is difficult to tell. The cross-over, I think, will obviously vary by segment. Clearly that the retail segment will probably transition a little bit faster. I think the PC segment will transition a little bit slower than that. And then, even further behind that will be carrier and enterprise will be lost. But that said, it varies really by geography and so on. In the carrier market, we are seeing some pockets where in Europe for example there is quite substantial and rapid adoption of 11n. So it is really hard to give color on that.

Jack Lazar

Yeah in Europe for example, AVM is now shipping product that incorporates our XSPAN 11n solutions, and they are very excited about the opportunities that it opens up with their customers, and the ARPU that becomes available. The issue is just really what design cycles are you hitting, and timing, etcetera. I think everybody recognizes the importance of 11n.

I think with the presence of SOCs and client solutions that are single chips, the cost opportunities are now there for those folks. It is just working it into their product road maps, and I think we will see that. That transition is obviously happening. It's something that becomes frankly necessary for virtually all of our customers who want to differentiate their products.

Quinn Bolton - Needham & Company

Okay. Great. Thank you.

Jack Lazar

Thanks, Quinn.

Operator

Next question will come from Mark Heller, your line is open. State your affiliation please.

Mark Heller - Merrill Lynch

Thanks. Merrill Lynch. Jack I am going to ask one more question on the gross margin. Sorry. I know that you said it is going to be down a little bit just because of the one by two solution for N and the retail, but are you also gaining share or regaining share or ramping at a new PC customers that might be influencing the gross margin in Q3?

Jack Lazar

So, Mark, I think there is a variety of different customer puts and takes out there that definitely affect the gross margin in the upcoming quarter, and I think, just in general, there is less opportunities for price decreases in some of the supply chain than there have been in the previous couple of quarters. So I think, it is a combination of both of those. Obviously, we do not want to get in to specifics of what we want and design-wise going forward, that will play out in the market as products start to ship.

Mark Heller - Merrill Lynch

Okay. And on Bluetooth, what are your expectations for a ramp in the PC market, and can you just give us an idea of what we can expect for that business in maybe 2008, 2009? How many design wins do you have, how many are ramping currently?

Craig Barratt

I think through the rest of this year, the Bluetooth revenue contribution will be relatively small in terms of our growth drivers, we would certainly put ROCm wireless LAN, Ethernet, and GPS ahead of Bluetooth in terms of growth drivers and revenue contributors. So really our goal this year is to secure PC OEM wins and of course the time to get those and to ramp them in to production is typically six-plus months. And so we would expect those platforms to be platforms that will launch and contribute revenue in 2009.

Mark Heller - Merrill Lynch

Thank you.

Craig Barratt

Thanks Mark.

Operator

Next question comes from Eric Gernati. Your line is open. State your affiliation, sir.

Eric Gernati - Banc of America

Yeah, hi, Banc of America. Two questions, if I may. Again, on the gross margins side. My understanding please, from your prior commentaries was that as you transition to single-chip 11n solution, that it will the cost benefit from that transition will enable you to offset any price declines that you might witness, and thus will enable you to keep gross margins relatively steady. Has something changed on that equation?

Craig Barratt

No, certainly it hasn't. What we are doing in 11n is exactly what we did in 11g. what we have done is taken our capability of course to bringing products to market rapidly that do represent very impressive feature sets and plus points, but over time of course we introduce multiple products to really optimize our solutions for each segment of the markets that we are addressing, and so the timing of when the design wins occur, and when the products become available isn't something that we can control perfectly. And so over time we expect to introduce more and more capable products, and also more and more products that allow us to target to the lower end segment even more effectively than we do.

Remember, this is an overall context where our gross margins have continued to run well above our target model. And as Jack mentioned earlier, we are really using this as a competitive weapon to really focus on share gains, and to really get sockets that we care about.

Eric Gernati - Banc of America

And then let me ask about, can you quantify like the difference between the –what you describe as low-end 11n versus premium 11n?

Craig Barratt

Well, in terms of features, the throughput and range and features of those are different, so at typical low end product, a entry level product, will be a single band product. It most likely will have what is called a one by two configuration at the high end. At mid-range, they will have the dual band products and two stream products and two by two and three by three.

Eric Gernati - Banc of America

But from a pricing standpoint, what's the difference?

Craig Barratt

Well, I think, as we mentioned earlier, to really drive the adoption of 11n in the entry segment. Over time the pricing has to be very, very close to 11g pricing.

Jack Lazar

And just to be clear, Eric. This is Jack. We've been incredibly clear over time about our desire to grow the contribution margin dollars of this company, and we are going to do that by pushing product like low end the 11n and high-end 11n into the marketplace, and we are going to do it where the opportunities, where if we lower the price, the volumes increase at a more significant rate and thus provide us more profitability. So I think you see that when you look at where our business is going in Q3, with the EPS guidance that we were able to give and with the revenue growth that we are able to show.

Eric Gernati - Banc of America

Okay. My next question is on the PC OEM side. Given what you've recorded in terms of growth over the last two quarters, and your implied guidance for PC OEMs to grow, but albeit below the networking segment. It looks like your PC OEM segments in aggregate will witness sort of the slowest growth in like two or three years now. Can you walk us in to what, if anything you are doing on wireless LAN front to remedy the situation? Thanks.

Jack Lazar

I'm sorry, I don't know that I would necessarily agree with that statement, but I guess, what I would say is, I don't believe there's anything to be remedied here. Our PC OEM business has grown from being less than 20% of our business several years ago to being 35% or a much larger number. So 11n, the growth that you saw that last quarter, a lot of it was in PCs, where they have now adopted our single-chip 11n solutions.

I think the design wins as we have been saying all year, particularly with Montevina platforms as we move forward are frankly very strong. I think we are very optimistic about our PC business, and when you throw in the games that we are getting for Ethernet in there too, we really feel like we're in a pretty good spot for PC OEMs.

Eric Gernati - Banc of America

Okay. My last question is with respect to the carrier business; as you transition, as more of your mix is towards carriers, is there an impact gross margins? Thank you.

Craig Barratt

I think the gross margin profile is not substantially different in each of the segments we serve. It certainly varies by specific opportunity and specific technology. And our job is to manage the business in a prudent range.

Eric Gernati - Banc of America

Thanks.

Operator

Next question will come from Shaw Wu. Your line is open. State your affiliation, please.

Shaw Wu - American Technology Research

Okay. Thanks. American Technology Research. Just one question. When I look at your numbers historically, you generally grow Q4 at a faster growth rate than Q3. Now given that your Q3 growth rate is a bit higher this year, any help you can provide us on whether that trend changes or do you think the trend stays the same? Thanks?

Jack Lazar

Hi, Shaw, it's Jack. So, as far as Q4, we only give one quarter guidance, so unfortunately we really can't look out into Q4 at this point. I think what we get back to are the same things that we've been emphasizing for the year, which are the growth drivers there. We've 11n that's been kicking in, and certainly did sell in the second quarter and will continue to do so in Q3. We've got the ROCm solutions, which we'll have an expanded footprint of as we move through the second half of this year. Of the products that are actually shipping, Ethernet has clearly been a pretty good product line for us, and then there is GPS and Bluetooth which are adding on to that. So, we just cannot look at Q4 at this point and say that it is going to be high or low. We will have to save that for the October call.

Shaw Wu - American Technology Research

Okay. Can I ask this, when, the growth that you are seeing in Q3, it sounds like this is more of the results of share gains, as opposed to a stronger end market. Is that a right assumption there?

Craig Barratt

That's certainly I believe, we think that we are continuing to grow our business primarily through share gains, and of course some favorable product cycles as well.

Shaw Wu - American Technology Research

Now, I know it is early, but do you expect competitors to respond or you see this as a sustainable advantage that you have?

Jack Lazar

We compete with some of the best companies in the world, so we always expect them to respond. But, we think our road map of products both on wireless LAN, Ethernet, Bluetooth, GPS, mobile wireless LAN, they are all very strong. And feedback we are getting from our customers is quite good. And the design wins that we've gotten to date are really quite good.

So, we are relatively optimistic. We are cognizant of the external environment out there that the economy is not in the greatest shape. But at the same time, I think Atheros has historically been more driven by product cycles than anything else and we probably don't expect that to change all that much.

Shaw Wu - American Technology Research

Okay. Thanks.

Craig Barratt

Thanks, Shaw.

Operator

Next question comes from Sanjay Devgan. Your line is open sir. State your affiliation.

Sanjay Devgan - Morgan Stanley

Thanks, guys, Morgan Stanley. Just a couple of quick questions. You mentioned the 40 handset design wins just briefly, and I believe that's up from around 30 in the previous quarter, and 20 in the previous quarter prior to that. If you can just kind of give us a sense of what percentage of these handsets wins have gone into production, and as you look out across the landscape, how do you feel, I guess how should we model the design wins kind of going forward? Do you feel that may be 10 plus a quarter is kind of the right number or do you think that is poised to kind of accelerate?

Craig Barratt

So, Sanjay first a point of clarification, when we mentioned the 40 number that was actually total design wins. Clearly that very much concentrated in the handset area. Really only, well under 10 of those are in production today. We listed a handful in the prepared remarks, but there is certainly quite a nice pipeline of products that will continue to come to market in the coming quarters.

Sanjay Devgan - Morgan Stanley

Okay. And then, briefly shifting to the GPS business, you mentioned the second generation single-chip GPS receiver has started to ship. As you look at the u-Nav acquisition over the past six months, now that you have had it, how has that business played out with respect to where you thought it would be and do you actually, how do you project it going forward?

Craig Barratt

I think overall we're doing well. With the introduction of our new software and second generation AR 1511, we really have some leadership performance. And this is being drive tested in a whole bunch of cities around the world and really the tracking and navigation performance is really world class. So, we are very happy with the underlying technology. I think, we mentioned that GPS is certainly an area where we expect to see sequential revenue growth in Q3.

As I mentioned earlier, really one of the key things for us is to really prove that we have very strong capabilities in each of the technology areas. Not only so that we can improve the footprint of our stand alone products today, but of course to have leadership combo product as well.

So GPS is a very important building block technology in those multi-functioned products. So I think we're well positioned with a proven set of standalone products and a strong road map there and the capability that allows us to integrate and create very strong, multi-function products too.

Sanjay Devgan - Morgan Stanley

Okay. Thanks so much.

Craig Barratt

Thanks, Sanjay.

Operator

Next question comes from Gus Richard. Your line is open. State your affiliation please.

Gus Richard - Piper Jaffray

Yes, Gus Richard with Piper Jaffray. Sorry to beat the dead horse. On the gross margins, can you talk a little about the plans for cost down on the 11n, specifically the one by two and when you might think those come in? And secondly in order to drive your market share, have you been doing a little bit of forward pricing on the older products or the recently introduced single-chip? And, is that some of the headwind in gross margins in Q3 and might that gets offset with cost downs in Q4 next year?

Jack Lazar

Hey, Gus this is Jack. So, as far as future products there are multiple generations of cost downs for our 11n client and SOC solutions coming to market. We are not going to get into the details of that for competitive reasons, but I think that in talking to our customers, and having them evaluate our road map, we feel very confident in the applicability of those products as well as the existing products to their product base that they are trying to get out to market.

So I think that we're very comfortable with where our product set is going. We obviously have to deliver those products and get them into production, but they too, will give us more flexibility with pricing, or potentially the ability to have favorable gross margin expansion from there. So I think that although we can't touch on when it's going to be, I think we have a very well thought out and well-mapped strategy in order to frankly gain further penetration of 11n into the marketplace.

As far as forward pricing or historical products, I think historical products in the second quarter actually had pretty favorable ASP trends, and we don't expect that to change in the future quarters. What we are really trying to do is open up new markets here. And I think that's happening, and that's why you get 13% to 15% revenue growth this quarter.

Gus Richard - Piper Jaffray

Okay. And then, just switching to the G side of things, I think you guys are pretty much done doing the cost-downs on that. I would imagine at the lower end of the market there is some cost pressure. Can you talk about the gross margin trends in that product line as well as given the sizable portion of your revenue you sell?

Craig Barratt

Well first of, Gus, this is Craig. Not all of our customers necessarily use our latest 11g products and so there is a whole family of generations which are in wide use. And, I think as Jack mentioned, the ASP trends on some of these existing products, haven't been particularly unfavorable, and as a result we think the gross margin profile of that part of the business, isn't really changing in a significant or disruptive way in the coming quarter.

Gus Richard - Piper Jaffray

Got it. So, is the way to think about this is, N will sort of play out like G played out when you rolled that product out a few years ago, in terms of your driving the market share, and basically, driving up unit growth but at the cost of some margin?

Jack Lazar

Well, but at much higher gross margin levels.

Gus Richard - Piper Jaffray

Right.

Jack Lazar

When we were doing 11g, we were at much, much lower gross margin levels than we are at today. So we've really kind of optimized our ability to do cost-downs. You see that with the ships, the 9280, 9281 that we're shipping into the marketplace today, they give us a lot more flexibility in order to get penetration into the market, expand 11n, to keep costing them down from there and you end up in a situation hopefully like 11g has evolved for us. We don't expect to go to levels of 11g margins of 2005.

Gus Richard - Piper Jaffray

Right. But you've got, the guys who are standing are lot tougher competitors than what was around in G in 2005?

Jack Lazar

But they were all there in 2005 too.

Gus Richard - Piper Jaffray

Correct. Correct, okay. All right, fair enough. Thanks.

Craig Barratt

Thanks, Gus.

Operator

Next question comes from Ruben Roy. Your line is open, state your affiliation please.

Ruben Roy - Pacific Crest Securities

Hi thanks. Pacific Crest Securities. Jack, I know you mentioned the inventory growth understandable given the revenue growth guide. I was wondering if you have a target level for DOI, and what you expect DOI to do in Q4?

Jack Lazar

So, we look at it more from a turn's perspective, so that obviously translates into DOI. We mentioned that it increased up to about 69 days. I think if you look at it from a turn's perspective based on the mid point of the guidance and kind of the margin ranges that we gave, we were probably sitting at about 6-1, 6-2 in inventory turns on a look forward basis. We'd like to be higher than that. We have been running at over our 5 to 6 times range until the last two quarters, but we knew we had a big ramp-up coming here and we had to get product into the supply chain.

So we really didn't have much of a choice but to build up inventory. Going forward, we don't want to keep it at quite the 5.2 level that we are at right now. We like to see that migrate up towards six that will in turn translate into probably a little bit below 60 days of inventory on hand.

Ruben Roy - Pacific Crest Securities

Okay. And then just a quick one for Craig. In terms of the Gigabit, Ethernet controller, I am sorry if I missed this, but when do you expect the full-scale ramp of that into production ramps going?

Craig Barratt

This is going to be in the second half of the year. It is certainly up to the customers in terms of when their platforms actually ramp.

Ruben Roy - Pacific Crest Securities

So potentially this quarter Q3 then?

Craig Barratt

It might be little bit near the end of Q3, correct.

Ruben Roy - Pacific Crest Securities

Okay. Thanks very much, Craig.

Operator

At this time, I show no further questions. I would like to turn the call back to Craig Barratt. Sir?

Craig Barratt

I would like to thank all of you for joining us today. We will be attending several investor conferences in September including the Citi Investment Research 15th Annual Global Technology Conference in New York, September 3rd. The Jefferies second annual technology conference in New York September 10th, the Deutsche Bank 2008 Technology Conference, September 11th, in San Francisco, and the Banc of America 38th Annual Investment Conference, September 17th in San Francisco. Thanks again for your interest in Atheros. Good-bye for now.

Operator

At this time that will conclude today's conference. You may disconnect. And thank you for your attendance.

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