Atheros Expanding in Tough Times

It looks to be a season of acquisitions, and one of the latest companies to make a notable addition to its portfolio is chipmaker Atheros. Atheros (NASDAQ:ATHR), with annual revenue of $472 million, is best known for its Wi-Fi chips. It recently announced plans to buy Intellon Corporation (NASDAQ:ITLN), a provider of HomePlug® compatible products, for $244 million. Let’s take a closer look.

Atheros was founded in 1998 as T-Span Systems Corporation, and in May 2000 it changed its corporate name to Atheros Communications, Inc. From its initial focus on WLAN solutions, Atheros has expanded its portfolio through both organic and inorganic development. Past acquisition include ZyDAS, a Taiwan-based developer of integrated circuits and software for USB solutions for WLAN in 2006; Attansic, a Taiwan-based provider of Fast and Gigabit Ethernet solutions to the personal computing and networking markets, in 2006 and 2007; and in December 2007 it acquired certain assets and liabilities of u-Nav, a fabless semiconductor company specializing in GPS chipsets and software that enable mobile location-based products and services.

Atheros sells its Wi-Fi chips to all of the top 10 PC makers. In 2008, Wi-Fi chipset sales grew 26% to 387 million units, with growth driven by cell phones, handheld games, music players, and cameras. About 144 million units sold were in laptops, representing growth of 23%.

Atheros has also been expanding to other markets such as Ethernet, GPS, and Bluetooth. At the end of 2008, it introduced its first WLAN products with integrated Ethernet. Since entering the Ethernet market, Atheros has shipped over 50 million of its ETHOS™ Ethernet chipsets, and these chipsets are designed into products at five of the top WLAN router manufacturers.

This month, it introduced another such integrated chip: the AR9002WB-1NGB add-in card, the industry’s first single-stream 802.11n and Bluetooth combo solution on a Half MiniCard form factor. The card supports the Windows XP, Windows Vista, Windows 7, and Linux operating systems and is targeted at the high-growth netbook market.

Another high-growth market Atheros is targeting is the smartphone market. Its cellular baseband partnership with Qualcomm for CDMA/WCDMA-based handsets has got it many design wins with tier-one handset OEMs. At the end of 2008, Atheros ROCm mobile WLAN solutions were designed into over 50 handsets. Atheros is also actively participating in the Open Handset Alliance to support the use of its WLAN solutions in phones based on the Google Android platform.

The new NEC N-06A dual-mode handset is the first smartphone with Atheros’ AP Mode technology, an optional feature of the Atheros AR6002 ROCm WLAN solution. The Atheros AR6002 chip is shipping in handsets from four of the top five manufacturers, including the new launched Samsung Jack and Propel Pro models. Its WLAN chips are found in many consumer products including Portable gaming, PNDs, and media players. The AR6002 is also featured in the popular portable game system Nintendo DSi.

The company’s consumer channel revenue more than doubled in 2008, led by the innovative product launch of the Nintendo DSi as well as Atheros’s growing range of mobile game and handset platforms. To get an accurate idea of its revenue channels, let’s look at the revenue breakdown in Q4 2008: networking accounted for 45% revenue, PC OEM 35%, and consumer 20%. Most of the company’s sales are to customers outside the United States and Canada. In 2008, sales to customers in Asia accounted for 90% of revenue with Hon Hai Precision Industry Co. Ltd. accounting for 19% of its net revenue. Atheros’s main competitors include Broadcom, CSR, Intel, Marvell, MediaTek, Ralink, Realtek, and SiRF.

As of December 31, 2008, Atheros’s headcount was 1,079 including 752 employees in research and development and operations, 240 employees in sales and marketing, and 87 employees in general and administration.

As for its latest financials for the second quarter reported in July, revenue was up 28% sequentially to $112.2 million but down from $121.5 million in Q208. GAAP net loss was $0.3 million or $0.0 per share, compared to net loss of $7.6 million or $0.12 per share in the previous quarter and net income of $10.1 million or $0.16 per share the previous year.

Non-GAAP gross margin was 47.4%, compared to 48.1% in Q109 and 50.8% in Q208. The company ended the quarter with $340.6 million in cash, up by $51.8 million from Q109.

Atheros recently raised its third quarter guidance. It now expects Q3 revenue to range between $145 million and $150 million, a sequential increase of 29% to 34% and a y-o-y increase of 5% to 9%. Its previous guidance for Q3 was for revenue to be up 15% to 20% sequentially, resulting in a range of $129.0 million to $134.6 million. The stock is currently trading around $28 with market cap of about $1.7 billion. It hit a 52-week high of $29.05 on September 17.