Atheros Results Beat Guidance

Atheros Communications: Q1 Results Ahead of Guidance

Atheros Communcations (ATHR - Analyst Report, Hold), a major provider of communication solutions for the personal computer, residential gateway and mobile device markets, released its fiscal Q1 results yesterday. Both revenue and non-GAAP EPS came ahead of our and consensus estimates and exceeded guidance. Revenues of $87.9 million and proforma EPS of $0.06 exceeded our estimates of $80.0 million and $0.03, respectively.

Forward guidance also came ahead of our current expectation by a wide margin: Revenues are expected to increase by 15%-20% sequentially, or $101.1 million - $105.5 million (versus our $85.2 million) and non-GAAP EPS are expected in the range of $0.12 - $0.14 (versus our estimate of $0.05).

However, it appears that the company may be gaining market share at the expense of gross margin in its core WLAN and Ethernet businesses. During the reported quarter, gross margin fell 110 basis points q/q (below guidance) and is expected fall another 50-100 basis points in Q2. Part of this is also from sale of older product inventory and major focus on gaining market share in lower-margin Ethernet switches.

Nevertheless, the company expects gross margin to improve by end of Q2 after it secures its market share gains and moves to a ramp in low-cost version of its mainstream products.

The company had experienced weak demand during the first half of Q1, which rebounded in the latter part of the quarter and appears to have continued into the current quarter. Both Networking and Consumer revenue segment declined q/q, with 802.11n shipments increasing in dollar terms as well as a percentage of total WLAN revenue as customers continue to transition from legacy 802.11g and a/g solutions.

It is expected that the company will see a significant ramp in its Ethernet product line and higher adoption of its Align single-stream 802.11n products, driven mostly by strength in demand for low-end notebooks and netbooks.