Atheros Tops in Q2

Atheros (ATHR), a leader in the design of chipsets used in WLAN devices, recently reported revenues of $112.2 million, down 7.6% year over year, but up 27.7% sequentially. Management had earlier guided revenues to increase by 15% - 20% sequentially, but the reported revenues surpassed management’s guidance and consensus estimate of $103.7 million. 

Management stated that the better-than-expected results were driven by strong product cycles and market share gains, particularly in the PC and retail router markets. The company also saw strength in notebooks and growth in consumer markets. 

Gross margins dipped to 47.4% from 48.1% in the previous quarter and 50.8% in the year-ago quarter, but were in-line with the company’s projection of around 47% - 48%. We believe the company is gaining market share at the expense of gross margin in its core WLAN and Ethernet businesses. 

On a GAAP basis, the company managed to report breakeven profits. Non-GAAP EPS (excluding extraordinary items) came in at $0.20, beating consensus estimate of $0.14 and was at the high-end of management’s guidance of $0.12 - $0.14. Inventory declined by $16.2 million sequentially while inventory turns improved to 6.7x from 3.5x in the prior quarter. 

Going forward, management guided revenues to increase 15% to 20% sequentially. This implies revenues between $129 million and $135 million, against consensus estimate of $110.9 million. The company has good visibility going into the third quarter and the increase in revenues is being driven by strong growth of Ethernet solutions, ROCm mobile products and consumer revenues. Gross margin is forecasted around 47.5% - 48.5%. EPS is projected between $0.29 and $0.31, against the consensus estimate of $0.17. 

It is expected that the company will see a significant growth 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. However, it appears that the company may be gaining market share at the expense of gross margin in its core WLAN and Ethernet businesses. 

ATHR is among the smaller U.S. publicly traded companies in the WLAN space. Although the company is gaining strength in this area, it still trails the largest player, Broadcom Corp. (BRCM). All other competitors (Broadcom, Intel Corp. [INTC], Texas Instruments Inc. [TXN], Marvell Technology Group Ltd. [MRVL], even QUALCOMM Inc. [QCOM]) have larger development budgets and sales forces that can effectively compete with ATHR’s core WLAN business. We maintain our Hold rating on the stock.