Atheros Communications ATHR

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Atheros Communications (ATHR)

• The Perfect Growth Play

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Topics

• Understanding of Technology
• What is WiFi?
• Technology Trend
• Industry Outlook
• Why Atheros?
• Financials
• Risks
• Industry
• Competitors (Broadcom)
• Conclusion and Proposal

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What is Atheros (ATHR)?

• Founded in 1998
• Developer in semiconductor systems for wireless
  networks
• IPO February, 2004
• Key Technology wireless single-chip solutions

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Quick Technology Facts

• What is WiFi?
• Local Wireless Networks, usually for internet
  connections (think RedRover)
• Spreading rapidly in major cities and
  universities
• Why WiFi?
• Easy to Install Network Servers (Hotspots)
• Readily available
• Usually Free

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Quick Technology Facts

• Growth in WiFi
• 5M users worldwide in 2004
• Expected to exceed 700M users by 2008
• 80 of all laptops have WiFi capabilities
• 300 cities in 30 countries, including Tokyo,
  Amsterdam, Paris, Philadelphia embarking on
  projects to create Metro WiFi
• More applications cell-phones, gaming consoles,
  etc.
• Research WiFi users will outnumber cellular
  users by 2007

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Quick Technology Facts

• Problems with WiFi
• Privacy, infrastructure all problems on the
  macro-level, hasnt stopped growth
• Small range covered will be solved by WiMAX
• High energy consumption for user
• Large amounts of heat
• High battery consumption problem especially
  when most applications are mobile devices
• Solvable using single-chip solution

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Quick Technology Facts

• With a single-chip solution
• Lower battery consumption (60 less)
• Better bandwidth available, faster Internet
• Cheaper price
• Makes it easier to open new markets
• Wireless network security systems
• Portable electronic newspapers and books
• Portable music/TV on demand
• Home automation/smart homes
• Industry expected to grow 42/yr to 2.4B in 2008,
  from 805M in 2003.

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Why Atheros?

• Best technology ready in the market
• Founder/Director Teresa H. Meng Stanford prof.
  in Electrical Eng, top expert in
  wireless-in-a-chip solutions
• Good management, experienced in this field
• Most of management has EE degrees, successful in
  industry from other companies

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Why Atheros?

• Technology is proven by numerous vendors
• Includes HP, IBM, Dell, NEC, Sony, Toshiba,
  Microsoft, Netgear, Linksys, Philips, Lenovo,
  Fujitsu, Samsung, Siemens, 3COM, Cisco,
• Involved products include pretty much any
  wireless card used by any laptop/wireless card
  user
• Plays ahead of technology

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Key Financials
All units are in k
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ATHR Financial Statistics

• Market Cap 962.33M
• P/E 62.37
• Forward P/E 28.19
• P/B 4.66
• Cash/Share 3.51
• Insider/Institutional Holding 13.58, 44.5

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ATHR Stock Performance

• Trending upward after earnings surprise, however,
  stock is volatile

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Risks

• Industry bust
• Future competition (Broadcom, Conexant, Intel,
  TI)
• Future product development
• Inability to become efficient
• Operating Margins 3.03 vs. BRCM 18.28
• Possible price wars may decrease margins
• Dog-eat-Dog competition (Intersil)

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Broadcom vs. Atheros

• Broadcom
• Larger company (Mkt Cap 23.6B)
• Largest no-fab semiconductor company
• Producer of single-chip solutions for
  communications in general
• Major Clients Dell, Buffalo, HP, Apple
• Outsources the production of all chips
• Low RD costs
• Loses flexibility in making products
• Largest threat creating mobile/WiFi single-chip
  solution

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Broadcom vs. Atheros

• 2004 Market Share
• Compared to size, Atheros creates much more
  income than Broadcom, and Atheros is gaining
  market share w/ superior technology

Source Lehman Bros.
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Current News

• Created WiFi/Cellular dual chip compatable with
  Qualcomms
• Downgraded by Needham Co to hold

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Conclusion

• Corporate View
• High growth, both in industry as a whole as well
  as an industry leader
• Founding to IPO 5 years
• Solid financials
• Solid technology/potential
• Strong ties with related industry leaders
• Somewhat undervalued compared to revenue/market
  share
• Could be more efficient
• Stock is volatile

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Conclusion

• Industry View
• Very rapidly growing market
• World taking large strides into infrastructure
• Rapid technological advancement
• Many competitors, price wars can be a problem
• Broadcom large company, but losing market share
• Atheros playing ahead with superior technology
• Conclusion
• Although somewhat risky, it is a very calculated
  risk that will guarantee large returns when
  successful
• Largest risk in competition, but currently
  beating the market

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Proposal

• Asking for 8-10 of portfolio
• 1800-2200
• From 92-113 shares
• Current Price (2/10/06) 19.45
• Limit 14.50 (-25)
• Target 27.00
• Horizon at least 1 year