Profits Multiply at Atheros

Atheros Communications (ATHR - Analyst Report) recently reported revenues of $156.6 million for the third quarter, up 13% year over year and up 40% sequentially and surpassed management’s guidance of revenues around $145 million – $150 million. The strong growth in revenues came from personal computers and wireless handsets.

Gross margin came in at 48.4% compared to 47.4% in the prior quarter and 49.4% in the year-ago quarter. Operating margin came in at 19.4% compared to 10.8% in the previous quarter and 17.7% in the year-ago quarter. Net income almost quadrupled to $38.6 million in the reported quarter from $10.0 million in the year-ago quarter and a loss of $0.2 million in the previous quarter and due to growth in sales and orders. EPS of 46 cents easily beat the Zacks Consensus Estimate of 25 cents.

Management stated that the economic environment remained challenging but the strength of the company’s product cycles and increasing diversification helped the company to grow the top-line and bottom line.

Last month, Atheros announced that it would acquire Intellon Corp. (ITLN - Analyst Report) for $181 million and expects to close this transaction by the fourth quarter of 2009. Intellon designs, develops and markets integrated circuits (ICs) on a global basis for powerline communications or high-speed communications over the existing electrical wiring. Management expects that by combining Atheros’ wireless LAN and Ethernet products with Intellon’s market-leading powerline communications products, the company will become a leader in providing networking solutions throughout the digital home.

Going forward, management expects revenues between $170 million and $175 million. Revenues from PC and networking products are expected to increase even though pricing remains competitive. Gross margin is estimated around 48% and 48.5%. EPS is projected between 51 cents and 54 cents.

ATHR is among the smaller U.S. publicly traded companies in the WLAN space and competes with bigwigs like Broadcom Corp. (BRCM - Analyst Report) and Texas Instruments (TXN - Analyst Report) in this space. California-based Atheros Communications is a leader in the designing of chipsets used in WLAN devices.

Increased penetration in WiFi access point market and share gains in the Ethernet controller/switch markets and the Bluetooth chip market are the expected growth drivers.  Atheros also appears to be making headway in the embedded WiFi market with its new innovative 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.