Atheros Handily Beat Q3 Expectations; Increases Guidance

Lost in last night’s celebration over Apple (NASDAQ:AAPL) [great report by the way] was a nice performance by wireless semi play Atheros Communications (NASDAQ:ATHR).

Atheros Communications, Inc. develops semiconductor system solutions for communication integrated circuit products. Its products comprise wireless local area network, mobile WLAN, Ethernet, bluetooth, global positioning system, and personal access systems.

I had cut this position down a bit late last week, but they executed very well and beat already the increase in guidance they had offered on September 8th. [Sep 10, 2009: Bookkeeping – Starting Atheros Communications]

In a separate statement, Atheros also raised its third-quarter adjusted profit outlook to 35 cents to 39 cents per share, from its prior view of 29 cents to 31 cents a share.

It now expects revenue of $145 million to $150 million for the quarter, up from its prior forecast of $129 million to $134.6 million.

Analysts were in for 38 cents on $147M after the guide up so aside from beating that, they similarly increase guidance for the next quarter. A closer look… a whopping 40% sequential revenue growth to $156M, and unlike most companies posting sequential revenue growth (far lower than 40%), they even had a 13% increase in year over year sales (a rarity). EPS at 46 cents.

Revenue in the third quarter was a record $156.6 million, up 40 percent from the $112.2 million reported in the second quarter of 2009 and 13 percent higher than the $138.1 million reported in the third quarter of 2008.

Non-GAAP gross margins in the third quarter were 48.4 percent, compared to 47.4 percent reported in the second quarter of 2009, and 49.4 percent in the third quarter of 2008. Non-GAAP operating income in the third quarter of 2009 was 19.4 percent of revenue, compared to 10.8 percent in the second quarter of 2009 and 17.7 percent in the third quarter of 2008.

Non-GAAP net income in the third quarter was $29.3 million or $0.46 per diluted share, compared with $12.3 million or $0.20 per diluted share in the second quarter of 2009 and $23.4 million or $0.37 per diluted share in the third quarter of 2008.

Cash flow from operations for the first three quarters of 2009 was $79.5 million. (emphasis added)

A have a lot of beefs with non GAAP versus GAAP but this is the world of make believe we live in, where executives handing themselves boat load of options and other such measures are not considered a “cost”…. we won’t rehash it in each post; every company does it at this point.

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Reuters is reporting an increase in guidance; but I can’t seem to find it in the press release. Looks like it was in the conference call – annoying.

The company, whose chips are is used in PCs, networking equipment and consumer gadgets, expects fourth-quarter earnings of 51 cents to 54 cents a share, on revenue of $170 million to $175 million.

In a conference call, a company executive said over the past two quarters the company gained from strong product cycles in personal computers and wireless handsets and continued market share gains. “In the fourth-quarter, we once again expect business to improve,” Chief Financial Officer Jack Lazar said on the call.

The company also expects revenue from its PC and networking products to increase, with the networking channel being the stronger of the two.

It sees fourth quarter gross margins in the range of 48 percent to 48.5 percent. (emphasis added)

Analysts are in for 39 cents at $151 million in revenue; once more – I am not sure what planet analysts live on but it sure makes it easy to “beat the number” and keep this party going.

As noted above, we took off a bit of a portion going into earnings so we would have less than 1% exposure to the name in case some strange blow up occurred. Now that the coast is clear we’re happy to get back our stake and in fact more. Not that valuation matters when paper US dollars are the new toilet paper, but going into the report analysts were expecting $1.03 in earnings for 2009. Atheros bet this quarter by 8 cents, and if they hit the low end of their guidance (51 cents) will have bested current estimates by 13 cents… thats a 21 cent increase! While Apple is sucking up all the oxygen in the room I’d call that impressive and the stock is suddenly much cheaper.

Instead of $1.03 for the year we add 21 cents and we’re talking $1.24 in EPS- the stock goes from 27x 2009 estimates to 22x. Heck people are paying 40, 50, 60x+ for casinos, REITs, retailers, or “early cycle recovery” stocks. The stock was only up 2.5% in after hours – I am boggled by that considering how much speculators run up other stocks on far less impressive results. Oh well, just let’s us get back in cheap – since we’ve lost Starent Networks (NASDAQ:STAR) to the Cisco buyout we’ll have to increase exposure in other areas that are kind of related.

A move over $29 would be a distinct positive for the technical outlook.

Disclosure: Long Atheros Communications in fund; no personal position

About Mark Hanna 543 Articles

Affiliation: Hanna Capital, LLC

Mark Hanna is President and Owner of Hanna Capital, LLC, a registered investment advisory firm. Mark has been a follower of markets since the late 80s, with a focus on individual equities since the mid 90s. He has been a well known commentator in the financial blogosphere for the past 5 years, following a career in corpoporate finance and accounting. Mark attended the University of Michigan where he graduated with a degree in Economics.

As an avid reader, Market Montage is the personal blogging site for Mark to share his views on economics, markets, and the like. Occasional cynicism and wit shall be deployed in his postings.

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