NETGEAR Inc (NTGR) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). A replay will be available after 8 PM Eastern Daylight Time today, running through midnight Eastern Daylight Time on February 24th. The replay dial-in number is 719-457-0820 with passcode 849391. The replay will also be accessible at www.NETGEAR.com.

I would now like to turn the conference ever to Mr. David Pasquale. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to NETGEAR's fourth-quarter and full-year 2004 results call. Joining us from the Company today are Patrick Lo, Chairman and Chief Executive Officer; and Jonathan Mather, Chief Financial Officer. The format of the call will be a brief business review by Patrick, followed by Jonathan providing detail on the financials. We will then have time for any questions. If you have not yet received a copy of today's earnings release, please call Sharon Lou of The Ruth Group at 646-536-7026, or you can get a copy of the release off of NETGEAR's website.

Before we begin the formal remarks, the Company's attorneys advise that today's conference call contains forward-looking statements. The forward-looking statements represent NETGEAR's expectations or beliefs concerning future events and include statements, among others, regarding the expected performance, market acceptance, market growth, market position of NETGEAR and its products and technology. NETGEAR undertakes no duty to update these forward-looking statements. These statements are subject to risks and uncertainties, including without limitation the price and performance requirements of customers, the actual price and performance of NETGEAR's products, the ability of NETGEAR to sell products incorporating new technologies, the impact and pricing of competing technologies, the introduction of alternative technological solutions, the ability of NETGEAR's new products to gain wide market acceptance and other risks detailed from time to time in NETGEAR's SEC filings and reports, including but not limited to those risks and uncertainties listed in the section entitled "Risk Factors Affecting Future Results," pages 15 through 22 in the Company's quarterly report on Form 10-Q for the fiscal quarter ended October 3, 2004, filed with the Securities and Exchange Commission on November 17, 2004.

In addition, several non-GAAP financial measures will be mentioned on this call. Information relating to the corresponding GAAP measures and reconciliation of the non-GAAP and GAAP measures can be found in our press release in the investor relations site at www.NETGEAR.com.

At this time, I would now like to turn the call over to Patrick Lo. Please go ahead, sir.

Thank you, David. Thank you, everyone for joining us on today's call. We accomplished a great deal in 2004. We continued to leverage the momentum in our business globally, while also maintaining very strict financial controls. Our cash flow from operations and our strong balance sheet give us the financial strength needed to successfully compete and win in this marketplace. And we are benefiting from far more favorable terms throughout the supply chain, due to our increased volume and scale. We expect NETGEAR's leadership to continue, and we believe we can continue to gain market share as the penetration of broadband continues to grow.

We just received the latest industry analysis, the SRG Report, affirming our position as the fastest-growing wireless LAN supplier worldwide in 2004. The Dell'Oro Group also just reported that we gained over the market share of our competitors in the wireless LAN for the small office/home office market in Q4, making us a number-two global shareholder.

In terms of the fourth quarter 2004, demand for NETGEAR's wireless and broadband products was led by seasonal holiday consumer demand in Europe and the US, increased sales of new products and further channel penetration. We are pleased with our results, as we again demonstrated the operational leverage in our business and the benefits of newly introduced innovative products.

Our revenues would have been even higher, if not for the unexpected long delay in the port traffic in the Los Angeles area, which lasted from the beginning of October through the end of November, much longer than we expected. We have experienced traffic delays in the past, but never for this long. We definitely missed some revenue opportunities. We could havd used more airfreight to compensate for the short supply in November, but we decided against it because of its negative impact on our margins.

On the margin and profitability side, we're very pleased with the fourth quarter and full year's results. We beat our margin and profitability objectives and balance sheet targets. You will notice in the fourth-quarter release that we have added a link to some of the key product launches for 2004. We're providing this in order to illustrate the number of winning introductions we had across the small business enterprise and home sectors. Moreover, because we introduced a record number of new products, we were able to achieve record unit sales while holding the decline in average selling price, ASP, to about 3 percent for the full year, when compared to 2003.

On a geographic basis, consumer demand in Europe in the fourth quarter benefited from sales of NETGEAR's DSL2+ gateways, especially our recently introduced DSL2+ Super G wireless gateway. Consumer demand in the US in the fourth quarter was led by the sales of NETGEAR's Super G and Super AG wireless routers and adapters. Our small business segment continues to benefit from the momentum of our Smart Switches, which again grew 25 percent sequentially.

In the fourth quarter, we introduced another model of our Smart Switch, following demand that far outstripped supply for new models introduced early in the fourth and third quarters of 2004. We talked about our carrier channel efforts on the prior call. This remains a focus for us, and we have made further inroads in this important channel. We started the year with carrier sales representing 5 percent of total sales in Q1 '04. This grew to 9 percent of our total sales in the fourth quarter.

We have more room for growth, and we are adding more partners necessary to achieve our targets. In 2004, we added Strato AG in Germany, AOL in the UK, Charter Communications in the US and PCCW in Asia. There is a limited universe of carriers that we will target in 2005, but we will look to add on another two to four partners by year end.

Overall, we're confident about our proposed prospects, given our substantial achievements to date, our competitive position, market-leading product portfolio, technology roadmap and our superior cost structure. We remained active on the new product front in the first quarter, with the expected availability of our Smart MIMO wireless products, incorporating RangeMax technology. Our exciting new RangeMax solution can increase Wi-Fi data speeds and coverages significantly, compared to the normal WiFi products. The solution utilizes seven intelligent internal antennas, capable of transmitting a signal in 127 different directional patterns, thereby providing optimal speeds for the longest range and eliminating blind spots. Based on initial feedback, we have high expectations for this new product line.

In addition to our Smart MIMO RangeMax products, at Consumer Electronics Show in January, we recently showcased NETGEAR's latest advances in digital entertainment networking, voice over Internet protocol or VoIP networking, shareable and secure storage solutions, our Storage Central product line and our ProSafe line of business class solutions, including business wireless security and switch products. We expect all of these products to be revenue and profit drivers for NETGEAR in 2005.

In terms of core product detail, our overall Ethernet network product shipment was flat quarter on quarter, our Smart Switch grew 25 percent sequentially, our gigabit switch shipments flat quarter over quarter, our Ethernet sales continued to decline. We would like to note that there were 12.7 weeks in Q4, while there were 14 weeks in Q3.

We continue to believe that we are gaining share in the fast-growing switching market for small businesses, led by our momentum in smart and gigabit switches. Shipments of wireless nodes were about 1.75 million units in the fourth quarter of 2004, a 13 percent growth over the third quarter. Shipments of our wired and wireless broadband router gateways up 9 percent from third quarter to about 900,000 units in the fourth quarter of this year.

Products introduced in the last 12 months constituted about 45 percent of our Q4 revenue, and products introduced in the last 15 months constituted about 56 percent of our Q4 revenue, about the same level as in Q3 of last year.

On a year-over-year basis, sales in North America were up 14 percent, with Europe, Middle East and Africa or EMEA up 39 percent and the Asia-Pacific region declined 7 percent. On a sequential basis, North America declined 6 percent, EMEA was up 22 percent and Asia-Pacific declined 9 percent. A year ago, we were building up channel inventory in Japan in Q4.

Looking forward, we remain very optimistic. The first calendar quarter is traditionally comparable to the December year-end quarter, due to the leveling off of consumer holiday demand, while with the pickup in business demand. We expect 2005 will follow historical trends. Our channel inventory is at a level for us to satisfy demands. We expect small-business purchases will be active in Q1. We have a strong product portfolio, due to the new products introduced in Q4 and the pipeline of new products in Q1. As with prior years, NETGEAR always pushes to achieve better than industry performance, and we expect a flat to slightly up Q1, compared with Q4.

Now, let me turn over the call to Jonathan for details on our financials.

Thank you, Patrick. Let me now provide a summary of the financials for you. Please note for the purposes of this discussion, there were 12.7 weeks in the fourth quarter 2004, as compared to 14 weeks in the third quarter of 2004 and 13.4 weeks in the fourth quarter of 2003.

As Patrick said earlier, the fourth-quarter 2004 net revenue increased 21 percent to 105.1 million, compared to 86.8 million for the quarter ended December 31, 2003. Net revenue in the fourth quarter 2004 derived from North America was 53.7 million; the Europe, Middle East and Africa region was 44.2 million; and the Asia-Pacific region was 7.2 million.

On a full-year basis, net revenue increased 28 percent to $383.1 million, compared to $299.3 million in 2003. On a product category basis, the Q4 net revenue split between wireless and wired was 59 percent and 41 percent respectively, in revenues, compared to 56 percent and 44 percent for the third quarter 2004. The quarter-four net revenue split between home and small-business products was about 59 percent and 41 percent, respectively, as compared to 56 percent and 44 percent for the third quarter.

On unit shipments, we shipped over 2.3 million units in the fourth quarter, a roughly 7 percent increase over the prior third quarter. Total unit shipments of our Ethernet products such as hubs, switches and network adapters were essentially flat quarter on quarter, both in units and dollars. With the Ethernet product category, we saw strong sequential growth in Smart Switches. We continue to see declines in Ethernet hub sales. The shipment of all wired and wireless routers combined increased by about 15 percent in dollars over quarter three 2004.

Non-GAAP cost of sales for the fourth quarter came in at 70.6 million or 67.1 percent of sales, which compares to $61.5 million or 70.9 percent in the year-ago period.

Non-GAAP gross margin in the fourth quarter was 32.9 percent, up significantly from 29.1 percent in the fourth quarter of 2003 and from 32.1 percent in the third quarter of 2004. The year-over-year improvement in non-GAAP gross margin was due to increased volume leverage in our buying power and operational efficiencies.

Moving to non-GAAP operating expenses, total non-GAAP operating expenses, which excludes stock-based compensation costs, came in at 22.5 million, compared to 19.5 million in the year-ago period and 22.6 million in the prior quarter. This was 21.4 percent of net revenues in the fourth quarter of 2004, as compared to 22 percent of net revenue in the fourth quarter of 2003 and 22.3 percent in the third quarter of 2004.

Sales and marketing expenses increased to 16.3 million, which compares to 13.9 million in the year-ago period. As a percentage of net revenue, sales and marketing increased from 15.2 percent to 15.5 percent from quarter three to quarter four. In quarter four of last year it was 16 percent.

R&D rose to $2.6 million from 2.2 million in the year-ago period. It was 2.4 percent of net revenue in quarter four of this year, compared to 2.6 percent last year.

G&A expenses in the fourth quarter increased to $3.7 million, or 3.5 percent of net revenue, from 2.9 million in the year-ago period and 4.4 million in the third quarter. It was 4.4 percent in quarter three of this year and 3.4 percent in quarter four of last year.

Operating income on a GAAP basis, which includes non-cash stock-based compensation expense of 345,000, came in at $11.6 million, compared to 9.5 million in the third quarter of 2004 and 5.8 million in the year-ago fourth quarter. This constitutes the trend of a positive operating income growth. On a full-year basis, operating income more than doubled to 35.4 million from 11.6 million for the full year 2003, again demonstrating the leverage in our business.

Net income on a GAAP basis -- the Company had net income of 8.6 million or 27 cents per basic and 26 cents per diluted share for the fourth quarter of 2004, compared to net income of 3.9 million or 14 cents per basic share and 12 cents per diluted share in the fourth quarter of 2003.

On a non-GAAP basis, net income for the fourth quarter -- December 31, 2004 increased 73 percent to 7.6 million, as compared to 4.4 million non-GAAP net income for the quarter ended December 31, 2003. This represents EPS of 24 cents per basic share and 23 cents per diluted share in the fourth quarter of 2004, compared to 15 cents per basic and 14 cents diluted share in the fourth quarter of 2003.

I would like to note that for the purpose of calculating non-GAAP basic EPS, we used 31,152,000 shares for quarter four 2004. On a diluted basis, we used 33,070,000 shares for quarter four 2004. On a full-year basis, non-GAAP EPS increased to 73 cents on a fully-diluted basis, compared to 41 cents on a fully-diluted basis for the full year 2003, again demonstrating the leverage in our business and focus on profitability.

The fourth-quarter 2004 non-GAAP net income excludes the non-cash stock-based compensation expense of 345,000 and also excludes a 1.3 million net tax benefit from exercises of stock options. Please also note that the non-GAAP tax rate increased to 37.9 percent from a previously projected rate of 37 percent.

Moving on to the balance sheet, we ended the fourth quarter with 141.7 million in cash, cash equivalents and short-term investments, up from 118.6 million at the end of the third quarter. The increase is primarily due to cash generated from operating activities.

In terms of inventory trends, we ended the quarter with inventory of 53.6 million, 5.3 turns compared to 40.5 million and 6.8 turns at the end of the third quarter 2004. Days sales outstanding, DSO, was 72 days in the fourth quarter of 2004, compared to 71 days in the third quarter of 2004. The US retail channel inventory at 9.3 weeks; US distribution channel inventory was at 5.6 weeks; European distribution channel inventory ended at 5.4 weeks; Asia-Pacific distribution inventory ended at 5.9 weeks. Total assets, 300.2 million at December 31, 2004 compared to 205.1 million, December 31, 2003.

Now, let me make a comment on the first quarter. As Patrick said earlier, we feel good in our outlook for the first quarter of 2005. Our goal is to grow faster than average industry growth. For the first quarter 2005, we expect revenues to be in the range of 105 million to 107 million, with non-GAAP operating income in the range of 11.3 percent to 11.5 percent. Finally, we expect non-GAAP effective tax rate to remain about 38.8 percent.

Operator, we would now be happy to take any questions.

(OPERATOR INSTRUCTIONS). Tim Luke, Lehman Brothers.

Patrick, I was wondering if you could just talk us through a couple of things just on the US side, with inventory being slightly lower sequentially, if you could talk us through how that played out. I was also wondering if you could give us a sense -- on the inventory, it looked like that moved higher. And one of the things in the press release that you alluded to was that you had moved it higher in anticipation of January sales, retail sales. Could you give us a sense of how those inventory levels look now, or how they might look as you move out of the first quarter? And you also alluded to some issues associated with revenue and the traffic delays in the ports in California. If you would give us some color on that and what it meant to the quarter, that would be very helpful.

Certainly. Yes; actually, every year, usually in the fourth quarter, there is always a port delay because of the Christmas shipping into the US from China. But, as probably you are aware, reported this year in the newspaper, this year was extremely more severe than last year. Usually it lasts four weeks, and this year it lasted eight weeks, which basically prevented a lot of our goods being unloaded in the dock in the Long Beach port, as such, in order to satisfy the demand, because we all know that if we don't have the goods in November, then the Christmas stocking for retailers are pretty much over. So we used airfreight to complement the supply.

However, even the airfreights are congested, because everybody else is doing the same thing. So we have a choice to pay even more premium to get more airspace, or continue to use more airspace, but then we decided to go against it, because we believed that would significantly hurt our margins. And also, we are looking at the market; we believe that with our strong showing overall in the channel, as well as in Europe, we would be able to continue to gain market share, even though we would lose some revenue opportunities while protecting our profitability.

As it turns out, today, actually, and yesterday, two industry market reports coming from SRG and from Dell'Oro Group confirmed our belief that we indeed gained market share in Q4 on a global basis. So we are pleased with the results. And going forward in the Q1 -- at the end of Q4, we traditionally have a higher inventory level at the end of Q4. For example, we tend to make the distribution inventory five weeks, a little bit above five weeks, because we are having our physical inventory stocked in the first week, which we would not be able to ship. And also, the first week of the first quarter is very busy, and this year, it's exceptionally busy because we have been able to line up, actually, very good promotion in the first week, in both the retail and distribution channel. In retail, it was for the first time we have both the CompUSA, Best Buy and OfficeMax -- three major chains -- doing promotion for us in the first week of January. Same thing on the distribution side -- we have Dell also having a very successful promotion with us on the distribution side for Dell's laptops, together with our wireless routers.

So that is why we have inventory backed (ph) up both in the distribution, as was the retail channel, and both the promotions went off nicely. As we always say, that we will always try to bring the inventory down as the quarter progresses. We believe that we will end Q1 closer to our normal inventory level, both in the retail as well as in the distribution area.

What are the normalized levels? If you could just remind us what those targets are, that would be really helpful.

The target will continue to be four weeks in distribution and eight weeks in retail; same thing in Europe. Now, in Asia, we are now reporting Asia distribution inventory, as well. And for the first time, we have got accurate data on it. And as a matter of fact, in Asia, what we have found out is the optimal is six weeks in distribution, given the logistics challenge in China. And as a matter of fact, we took the effort in Q4 to bring the Asia distribution channel inventory down from seven weeks to six weeks, and we believe six weeks is the optimal level in Asia.

You also guided up for the first quarter from these levels. Could you give us a sense of how you would expect the regions to look in the first quarter? Would they all be flat to slightly up, are are there some regions that would be stronger than others in the first quarter?

Our expectation is all three regions should be flat or slightly up.

And then what -- lastly, just for Jonathan. If you could give us -- obviously, guiding the operating margin to this high level of 11.3 to 11.5 -- can you give us a sense of, on the gross margin side, should we expect that to be fairly flat with the current level? Or how do you see that, the balance between operating expenses and gross margin?

Frankly, the focus is, of course, revenue growth and then the operating margin. Now, in the guidance, we have said operating margin 11.3 to 11.5 percent. Now, this may involve on the gross margin -- could be flat, could be slightly better or even slightly lower. There's a band within which we will be working on our gross margin. And we don't provide guidance on the gross margin, except to tell you that we are confident about our operating margin, and on the gross margin, we should be in that range.

With the tax rate at this very high level of 38.8, should we expect it to go lower as we move through the calendar '05, Jonathan?

No, the reason being as we are projecting higher operating income for the year 2005 -- although we don't give guidance for the full year, we only give guidance for the quarter -- the credits we get, which is mainly the R&D tax credit, is relatively maybe slightly higher. The income is at a higher level, so therefore the rate is higher.

Now, the way we have always talked about this before is the tax restructuring, which we postponed from implementing last year because of our focus on Sarbanes-Oxley, implementing the whole Sarbanes-Oxley project. But we're kicking that project off. But the benefits of that tax restructuring, we don't expect to get it this year.

Samuel Wilson, JMP Securities.

The couple of questions also. First, just a question on kind of the whole port issue. You made the comment that you thought you lost business because of the L.A. ports. Was this business lost to the competition, or do you think it was something that can be made up as the products flow through?

And also, the delay in the ports -- do you think it caused US inventory levels to be abnormally high exiting the quarter, or inventory levels were exactly where you wanted them?

As a matter of fact, you bring up a good point -- I mean, two good points. Indeed, we believe that we did lose the business to our competition, because our customers typically -- it's not a backlog type of business. When they have goods, they buy. What you don't have the goods, they buy from somebody else. We believe that we did lose a little bit of the business to our competition in the US. Fortunately, we gained a lot more market share in Europe to compensate for that. And the whole team is committed; we gained a little bit of marketshare loss in the US in Q4. According to NPD data, we lost about 0.5 points of market share in the US, which we are confident that we will recoup it back in Q1.

In terms of the inventory level at the end of Q4, yes; it's actually slightly higher than what we would like it to be. Last year was right around 5 weeks, and this year is at 5.7 weeks. The issue is that, once we airfreight the goods into supply for the November demand, the ship is starting to unload, and then we are getting that also. So that's why it was slightly higher than what we would like it in our own warehouse.

And then, on a different subject, away from that, blended average ASPs -- it looked like basically, blended average ASPs, I think you said, for the year were down 3 percent.

That's correct.

So basically, in the fourth quarter, it seems like blended average ASPs are basically flat quarter on quarter?

You are dead right. I mean, it's exactly flat quarter on quarter.

And then last question for you. Can you talk a little bit about the voice over IP markets? Some of your competitors have made a lot of discussion about voice over IP with Vonage and CallVantage and everything. Where do you stand on your products, and how do you think that is going so far for NETGEAR?

Okay. For the voice over IP products, you are right; one of our competitor has it already certified with both Vonage as well as AT&T, and they are already on the retail shelves. And the take-up rate is still relatively slow on the retail shelves, and I think most of the shipment is actually directly through the service provider. And even though we cannot disclose it, we have been certified by a domestic service provider, and we have been shipping products to them, as well. We continue to certify our products, both domestically and internationally. And we believe that the selling of voice over IP products, together with the service in the retail channel, will still continue to be slow to ramp, but directly through the service provider in the short term will be probably the main channel going forward.

Just one question for Jonathan. You spoke somewhat quickly, and I'm not sure I caught this. What was cash flow from operations and CapEx for the quarter?

Cash flow from operations was about $20 million, and capital expenditure was just under $1 million -- 940,000.

Anton Wahlman, Needham & Co.

Just to wrap up this thing on taxes, are they actually going to continue to go up from kind of the 38.8 level, or is that roughly where you see them staying for the more longer term as well?

For 2005, we did a calculation based on what we expect 2005 operating income growth to be. We believe the 38.8 percent is the full-year rate. Having said that, if we do far better than what we are projecting on operating income, okay, then because the R&D credit is somewhat limited, the rate could inch up. So it will be a function of our performance even better than what we have internally projected.

Patrick, on the new products, could you give some sense of -- without any specific product announcements or anything, could you give some little feel for the product direction of -- not going to 802.11n g or a, but something -- are there any new, more radical product directions, such as your digital media adapter that you have now for video and audio combined, or something like that? Are you gunning for any more radical or new product directions for the year here?

I would say on the home side, the only radical product that we could talk about is our Storage Central solution. The Storage Central solution is basically a home server, and initially it would just provide the disk storage, which will self-backup, so you don't have to be afraid of losing the data. Over time, we would move our multimedia streaming software onto it, so that you don't need to turn on a PC to stream the media onto your entertainment devices. Certainly, the other areas are what we have already announced, is getting voice over IP technology, getting into a higher-bandwidth wireless technology. You know, those are in the works.

And on the small-business side, we believe that this year, one area that we would definitely go into a little bit more is provide voice over IP solutions, comprehensive voice over IP solutions for the small-business users, on top of the switches and the wireless security firewall.

Mark Sue, RBC Capital Markets.

If you had further expedited the shipments, and you hit 109 million in revenues, can you give us a sense what the gross margins and operating margins would have been?

Well, we believe that if we tried to airfreight that much, it probably would cost another $1 million of premium airfreight, and that would be at least a point.

And how many weeks are in the March quarter, for our calculations?

13 weeks.

And the decline in sales in Asia -- can you give just give us some more thoughts there, Jonathan?

If we look at the decline in Asia on a sequential basis, as I mentioned just now, we took the action to take the channel inventory down from about seven weeks to six weeks. And so that's one of the primary reasons. The other one is our biggest market today in Asia is to Australia, and in Q4 in Australia, they have the summer holidays, which also impact our revenue in Asia, as well.

And, Jonathan, assuming flat ASPs, which you just did, and then the volume benefits which you keep talking about, longer term, I would imagine gross margins could actually inch up higher from this level?

We are not giving any guidance on gross margin, Mark, except we have always said -- our target has been gross margin in the 30 to 33 percent. And we have said, once -- 30 to 33 percent as well as operating margin focus of 10 to 12 percent. As you've seen in quarter four, we achieved 11.4 percent. We'll work to continue to improve our operating margin without, of course, hurting the business in the long run.

Now, on the gross margin side, we haven't changed our long-term goal, but if it is achievable to do better, we will of course go for it.

But at this point, I would imagine you are more positively inclined, looking at the business on the gross margin line?

We hope so.

Brantley Thompson, Goldman Sachs.

This is Chris Fine for Brant. I just wanted to ask a quick question about if you had any further color on the flat Ethernet sales quarter on quarter, and just any more color on the small-business outlook in the fourth quarter and first quarter.

We believe that first quarter would see growth in the small-business section. As I mentioned before, it was flat, but then it was 14 weeks versus 13 weeks. So, if you normalize the 13 weeks for the small-business sales, we were actually slightly up. And we believe that we are in a healthy situation for the small-business market. And our Smart Switch momentum is still continuing to be very, very good. And now we have a good inventory position. With think that we could be able to capitalize on that momentum even more effectively in Q1.

Patrick, just following up on that a little bit, you said that you had introduced some products, some Smart Switch products, that demand outstripped supply. Was that related to the port shipping delay?

Yes. We just don't have enough, yes.

Maynard Um, UBS.

Jonathan, a quick question for you on the Accounts Payables. They were up quarter on quarter. Can you just talk to that?

And, for Patrick, can you talk a little bit about your channel strategy, and kind of the recent restructurings that took place there, and how that should help you going forward?

And lastly, if you can just talk about any kind of updates on cable apps and the potential there?

Sure. We'll just take the Accounts Payable. We pay our vendors normal terms that we have negotiated with them -- no special extra days, et cetera. And we also take advantage of some vendors who offer us discounts; we pay them and earn the discounts. So it's a matter of timing of our purchases, and the end of the year -- you notice our inventory level was higher than -- slightly higher. And that included transit inventory. Inventory in transit is treated as inventory, and the corresponding credit for the liability is in our Accounts Payable.

Just note also the fact that at the end of the year, we bill the transit accepter (ph) because of Chinese New Year towards the latter part of January. So nothing abnormal in Accounts Payable, other than the fact that we have inventory and we have transit inventory.

And in terms of the cable app side, we maintain very steady stream of certification with the cable apps. And I think the major focus going forward in the next few months is to try to certify against packet cable, so that we will be able to offer voice over IP gateway for the cable operators, as well. So that will be our major focus over there, and we believe that the MSOs are pretty gung-ho in been rolling out voice over IP service throughout the year, and having the packet cable product available will be beneficial to our business over there. We just mentioned that our carrier product sales have been progressing very nicely, and we would like to continue that growth.

When do you think we start hearing more about the results of the RFP that was put in place, I think, in December?

You know, we will announce it if we win any particular deal that's of significance, and our partners would be open to the announcement.

And then, can you just talk a little bit about the channel strategy and (multiple speakers)?

About the channel strategy, which we actually have not changed our channel strategy in any shape, way or form. It's just the tactics that sometimes we deploy. What we have been doing is that we use five channels to address our customer base. For the consumers, we use both the Web channel as well as the brick and mortar stores, and the service provider channels. For the small-business users, we use the mail-order catalog or direct marketing resellers channel, as well as the value-added resellers channel.

Now, to approach the value-added resellers channel, we traditionally had both what we call an inside sales team as well as outside sales to. Internationally, we have been doing very successfully with just an inside sales team. So in the US, in Q1, we have adopted that method. It's purely use inside sales team by significantly expanding the resources over there, so that we can focus on getting a bigger number of smaller value-added resellers in the US to be able to benefit our reach to the marketplace.

Erik Suppiger, Pacific Growth Equities.

First, on the gross margins, can you highlight what was the driver for the big upside there?

As we have said always, you know, a combination of factors. One, of course, definitely when we have been introducing new products, we tend to enjoy good margins with our products. Secondly, even in the mix as we have talked about -- take the Smart Switch, et cetera -- that even though we introduced those products in the last 12, 15 months, we continue to enjoy good margins because we're the only game in town. So those are the main factors.

Then, of course, working on reducing costs, chip suppliers, et cetera, we have been seeing the benefit on product costs that have helped drive the margins. Finally, of course, the operational efficiency -- even this choice of should we airfreight to meet the demand, making those choices on logistics costs, efficiencies across helped deliver better margins.

And then, can you give us the consumer versus small-business mix again? I didn't get that.

As just mentioned by Jonathan, it's 59/41 -- 59 percent consumer, 41 percent small-business in Q4.

Did you pick up OfficeMax during the course of the December quarter?

Yes, indeed.

Was there any initial stocking that would be one-time in nature, or is that --?

Minimal.

Very minimal. (Multiple speakers).

Are you across their entire chain of stores?

No, because for OfficeMax, we only account for revenue when we sell through.

Oh, it's on a sell-through basis?

That's correct.

Is that different from your normal procedures?

It varies from store to store.

From chain to chain?

From chain to chain, yes.

And R&D and G&A were both down sequentially. Any comments as to why?

The G&A -- partially the Sarbanes-Oxley project completion. And third quarter was the most for Sarbanes-Oxley, and second quarter was tapering down, to some extent. Then on R&D gain, we didn't cut any projects as such, but basically as a percentage of revenue, our revenue picked up slightly, but nothing abnormal.

So these levels are sustainable going forward?

Again, something that we have always said we will keep our R&D in the 2.7 to 3 percent; we will not take reductions in R&D, because that's an area that we will continually invest and keep the percentages in the 2.7 to 3. However, in the G&A, as our revenues increase, we hope to get more efficiencies.

Ryan Hutchinson, WR Hambrecht.

I want to revisit this port issue -- try it from a different angle. Can you help us understand the revenue loss associated with the delay, and then the impact, in terms of basis points that airfreight had on the gross margins?

I think the impact on the basis on gross margin -- I answered that question already, previously. We believe that in order to hit 109, it would probably cost us another $1 million of airfreight premium.

So let me ask it this way, then -- the estimated revenue loss was roughly $4 million?

Yes. It's hard for us to estimate how much would that be. There is no way for us to know. We only know is that we cannot ship during that period to a lot of the demand.

The other question you were asking is how much is airfreight in this quarter? We don't provide that kind of detail, but we can only tell you that our airfreight cost was slightly higher than what we had incurred in the prior couple or couple of quarters.

So gross margins would have improved from the level that you reported?

I mean, if we had all the right inventory, if we had the right inventory and we hit -- and these are very hypothetical (multiple speakers) revenue, maybe we would have.

And basically, at the end of Q3, we were actually at a much lower inventory level than we would like. So it is compounded. The matter is compounded.

Understood. On the carrier business, doing a nice job there. Can we talk just about pricing there over time, and the impact that you believe that will have on gross margins, and then just an update on telco certification, please?

From the impact of gross margin, as we have said all along, the gross margin on the carrier business is generally lower than the other channels. However, the operating margin is about the same, because we do not have to show the tech support, we don't have to give them stock rotation rights, we don't have to provide marketing dollars. And there is certainly no marketing rebates over there.

So from an operating margin perspective, that should be similar to the other channels. As far as pricing is concerned, I don't see any significant difference in behavior on the pricing on that front versus the other channel. It basically follows the lifecycle of the technology. And on the certification front, on the cable side, we certified primarily against cable apps. Once we're certified with cable apps, then we're able to sell to any MSOs in the US and mostly in the UK, as well.

But then on the telco side, then we actually have to do certification one after another. As I mentioned, we are certified with some voice over IP service providers, and we're still working on some others.

So, Patrick, are you involved in these RFPs out there for fiber to the home or anything like that?

We certainly invited to participate, and if the spec is right, we certainly will participate. And as I mentioned, if we are awarded of any win and we are allowed to talk about it, then we will announce it.

So is it fair to say that you are going to have telco certification by the end of the year?

It depends on how you define telco certification.

Understood (multiple speakers) carrier.

If you define about (multiple speakers).

For a specific carrier.

Yes.

And, Jonathan, I missed the wireline/wireless breakdown. Could you just provide that, and headcount as well, please?

We ended the year with headcount of 269.

The wired and wireless -- wireless is 59, wired is 41.

Erik Zamkoff, Independent Research Group.

Congrats. Nice quarter. I was wondering if you could talk strategically a little bit, regarding strategy for the consumer market, as some of these products start to converge or be embedded, whether it's the router potentially being in the set-top box, or the access point in the set-top box, or some of the streaming devices. Are you having any troubles moving upstream, and do you have a strategy, should the market go that way?

Certainly, for now, we are always looking at any new platforms. To us, the embeddedness will always be there, but there are always legacy device for us to connect to. There are still millions if not hundreds of millions of TVs and stereos and ordinary phone sets out there that we will be able to connect them into the Internet.

And also, there are other applications like home security surveillance, like environmental controls, and all of that will offer new applications and new devices to go into. And today, set-top box -- we don't have any projects in doing that, but the technology, as it evolves, maybe it will open up the opportunity for us to do that, as well. We are always looking at new opportunities. For example, the Storage Central is a new opportunity that we believe is opening up for us.

Greg Spiegel (ph), Pilot Advisors.

A couple quick questions. The first one -- I just wanted to clarify something that you had said earlier, Patrick, in terms of the voice over IP certification. Did you say that you were actually certified with one of the voice over IP providers now?

That's correct.

And you are shipping directly to the service provider?

To them, yes, that's correct.

And the second one relates to the cash balance. It seems like it's building up pretty nicely; it's over $4 a share in cash right now. Any plans or uses that you guys have earmarked for that cash?

Absolutely.

M&A opportunities? You know, kind of elaborate on that a little bit?

As we mentioned many times in prior calls and numerous conferences, we believe that having a cash reserve that will enable us to capture any opportunities that come our way will be a strategic advantage for us to pick up additional technology, products, channels or geographies. And as the industry continues to consolidate, as we continue to widen our lead in the marketplace, we do believe there will be a lot of opportunities opening up for us in the months to come. And we believe that that cash reserve would help us to be able to capitalize on those opportunities.

Is there anything imminent, or that you have queued up currently that you'd be willing to share with us? Or is it really just kind of (multiple speakers)?

No, I cannot comment on that.

Ben Atkinson (ph), Gagnon Securities.

Patrick, you mentioned that you are getting good feedback on the RangeMax product, and that you plan to release that sometime in the quarter.

That's correct.

I kind of imagining that that's really more of a contributor to second quarter and the rest of the year revenues?

That is correct.

Could you give us a little color on what sort of feedback you are getting, or why you are encouraged about that product?

Right. Basically, we have put together a launch kit of the products that we showed off, both to the press as well as to our channel partners, and they were very, very pleased -- both with the feature set capabilities as well as the look and feel of the products. This product is drastically different from any of the competition or any prior products that is aesthetically very pleasing. There are seven internal antennas. Even the product itself, housed in a slightly protruded dune-shaped (ph) translucent with blue LEDs indicating how the antennas are working, so it blings (ph) very nicely and it's very pleasing. So any channel partners, any press looking at it would say this is a lovely piece of product that I would like to own in my room.

And secondly, it works with very great performance, even though you do not have an accompanying client card. It works with the Centrino laptop, it works with ordinary existing cards, and will still boost your performance, unlike some other technologies that must have pairing, both on the router site and on the client side, in order to get the advantage.

So, because of that, we are getting a lot of good receptions from partners around the world. They would like to stock them up as quickly as they can, and they're giving us shelf space, endcaps, demonstration booths and all that. So we are pretty encouraged with the reception.

So it makes all the equipment you already own, all the client cards you already own, work better?

It also even made our competitors' client cards work.

Well, couldn't you cut that out? Just kidding. By the second quarter, by the beginning of the second quarter, will you be able to sell or ship as much of the product as you have demand for? Will your manufacturing be ramped up by the end of the first quarter?

Again, it depends on how the market demand is going to be. We always have a forecast, and we tend to be conservative, because we really don't like inventory. So if the market demand is significantly higher than what we forecast, then we might have a shortage. But we'll try to react as quickly as possible. We have engaged our best contract manufacturers on this project, and they are prepared to ramp as quickly as they can.

I would imagine you're thinking that this could come out as a decent-sized SKU, relative to some of your other products?

Yes.

Vincent Damasco, Sentinel Asset Management.

My question has been answered. Thank you.

Rob Crystal (ph), Bradpoint Capital (ph).

I was trying to understand the inventory again. Can you help me out a little, in terms of OfficeMax? I guess that was the new promotion for you in the first quarter. Can you help quantify how much that might have increased the inventory that you built at the end of the fourth quarter?

Certainly, we would not disclose exactly the detail (indiscernible), because the sell-through -- because the revenues recognized on sell-through, then whenever they are carried in the store, we consider it as our own inventory.

And is it fair to say that if you didn't have -- I guess everyone seems concerned; your stock is trading down $2 in the aftermarket because of inventory levels.

That's corrrect.

It seems to me like your inventory is very seasonal, where it builds to the nine-week level in the second quarter and the fourth quarter, and then you have been able to work it down to your more average inventory levels in the first and the third quarters. Can you maybe comment on your confidence level of doing that again? Because that seems to be what everyone is concerned about.

Yes, I know. So we built up the inventory this quarter towards the end, because we know the first week is a very important selling week, and our sales is shutting down for the first week for our physical inventory checkup. So that we build inventory back up, so just like last year, it's about the same level, except that we are additionally hit a little bit by the port congestion that -- the late arrival of the ships.

So we would work through Q1, the inventory back down into the eight weeks or four weeks -- same thing for Q3. Before the start of Q3, because of back to school, we have to build inventory back up to prep for back to school, but after the back to school is over, we will work it back down. But unfortunately, in Q3 last year, the inventory was worked down more than what we would like. That compounded our problem in Q4.

So if I understood you correctly, Patrick, you're comfortable with where your inventory levels are, and that you will be able to work them down?

Absolutely.

Robert Upton (ph), Smith Corners (ph).

Operationally, you guys have performed very well. This is the sixth quarter since becoming public, and your operating margins have gone from 6 percent to 11 percent. Your stockholder equity is up 37 percent for the year to date. I'm not sure why the rest of the street seems to not love you guys. But what kind of horse and pony show are you planning on doing over the next year, to try and let the rest of the street know about your company? Because it seems to me that you're doing very well.

It's like three brothers and sisters in the family. There is always some favorite and there is always some less favorite. All we need to do is continue to perform, and try to meet up with as many investors and potential investors as possible, explain to them our business and what our direction is. And I think, as we continue to deliver the profit, to deliver the margin, we would eventually get the love of the parents.

I don't think anyone has asked, but you guys were on track to do 12 new products a quarter. Do you continue to do that over the next year?

That will be the minimum that we will keep at pace.

I know you have a relationship with Atheros, and they came out with a new video module. Are you planning on making some products to go along with that?

We cannot disclose what our future chip supply is; otherwise, I think we are flouting the law (ph). But we certainly would look at all angles. We are definitely providing products to integrate VDO transmission as a very important component, and our sales will be competing for that platform, together with other chip suppliers.

Hassein Karim (ph), Pacific Edge.

I just have two questions. The first one is regarding the inventory burn in the channel. Does this makes sense? If you want to burn down about a week of inventory in your channel, then point-of-sale has to be up about 8 percent in the March quarter. And so with your flat guidance, it sounds like you are expecting an up quarter for your products on a sell-through basis?

Yes, in order to have a flat quarter. You are right.

Okay. And so, is this different than what you saw in March of '04, in terms of the end market?

No. I think March 2004 was a pretty similar pattern. I mean, for us.

In terms of -- well, I guess -- I don't have your inventory levels for March of '04, so I can't compare --

(Multiple speakers) in the release. In March '04, our channel inventory at the distribution was at about 5 weeks. And this time, it's 5.7 weeks.

Oh, so that was at -- it was 5.7 weeks at the end of March?

No, at the end of Q4.

Okay. It was 7.8 weeks US retail, December '03, and then 5 weeks?

That's correct.

Right. So I don't know what it fell to in March of '04. So I'm trying to figure out, if it falls about a week in the US, then it sounds like you're expecting an up quarter from a point-of-sale side, and is that similar to what you saw last year?

We certainly see the upside in the US (ph) in order to burn that one week of inventory. You're absolutely right. Yes.

And the other question is, who are your 10 percent customers? And can you break that out for the quarter?

10 percent customers?

Yes.

Yes, the usual same accounts. Basically, it's Ingram, TechData and -- those two.

And then, can you give what the percentages were?

Don't have that information right now. It will be out with the 10-K.

Mike Hughes (ph), Delaware Investments.

A couple of questions. I figured I'd ask one more inventory question. I think this was asked earlier, but could you just state where the inventory in weeks was at the end of January? Is that something you are willing to disclose?

We don't disclose anything inside the quarter.

Okay. Well, did January meet your internal plan?

Again, we would not make comments on that one. The only thing is that the team is working toward our goal, which is hitting our guidance and hitting our target of weeks of inventory in both distribution and retail around the world.

And then, just on to the cash balance, I think you've got about $4.40 a share in net cash. Your stock is trading right now at 14.40. So according to my math, the stock is trading at about 11 times earnings. It seems like it would be a real good use of some of that cash to do a buyback, and I think it would send a really positive signal. What are your thoughts on that?

Unit, we talk about that at Board meetings -- various uses of our cash. But again, as Patrick pointed out earlier, focus -- of course, I can't disclose anything on the cash stock buyback, because if there is something you will always announce it. But our focus is to make sure we find the right opportunity to grow our business through acquisitions, when there is product channel or customer (ph). So at this stage, we are -- as we have always done from the time of the IPO -- take the cash to see how we can use it better.

We will look at all options.

What level of cash is adequate? It seems to me you've done a phenomenal job generating cash in the past year, and we all appreciate that. But it seems like a small portion of that could be done to execute a buyback, and it would be a real positive signal to the market.

We'll definitely take that into consideration.

Greg Spiegel, Pilot Advisors

Just two quick follow-ups. Is there any way you can elaborate further on potentially the number of OfficeMax stores you guys currently have inventory in?

It's about 1200.

So is it you currently have physical inventory that's included in your inventory number of 1200 stores. Is that right?

That's correct

Now, the second one is just a comment. Clearly, you guys can appreciate that the stock is off a lot (ph) in the after-hours (ph), and there is clearly a lot of confusion and concern about the inventory situation. To the extent possible, I mean, we have a month and a half under our belt, in terms of January and half of February. Any commentary on the progress you have made in working off that inventory would be very helpful for the market, I think.

As we said, as we previously discussed, the inventory is seasonal. And the team is working towards hitting our revenue target, as well as hitting our inventory targets. And we feel good about it.

And you feel good about it?

Yes.

Anton Wahlman, Needham & Co.

Patrick, a quick onw. When will the storage product, the home storage product, the Satera (ph) stuff, start shipping?

We will try to ship it within Q2, and then we will try to put the media streaming software on it in Q4.

Media streaming software in Q4?

Right.

So in Q2, it will serve primarily as a disk server, but in Q4 it will serve it as a media home server.

And in the meantime, the MIMO product -- you could also double-sell it as a disco lighting product? (Multiple speakers) your earlier comments correctly?

That's right, for home parties.

Erik Suppiger, Pacific Growth Equities.

A couple quick questions. When did the ports down in L.A. finally free up?

Unfortunately, after Thanksgiving.

So it was the beginning of December?

Right.

Then, secondly, I just want to check my logic. Basically, you increased your channel inventory during the December quarter by roughly two weeks, and now you are taking your channel inventory down by one week. So if you had a two-week benefit this quarter and you are reducing it by one week, is that presuming -- then you are looking at -- on a normalized basis, the sell-through has to be even more than one week's increase, isn't it?

I'm sorry. I don't quite exactly follow the logic.

Well, basically, you filled the channel with two weeks of inventory during the quarter, so you had a benefit of two weeks of inventory filling during the December quarter. Correct?

Yes. I mean, it went from a little bit over seven weeks to a little over nine weeks. Yes, that's the logic. Yes.

So then, this quarter you are projecting -- I guess that's diminishing by one week?

That's correct.

So net effect is you are working from -- so I guess that's normalized. Okay. Thank you very much.

Rob Crystal, Bradpoint Capital.

I just have one quick follow-up regarding the share repurchase program. I understand that you'd rather do acquisitions than buy back your stock, but I guess the way I think about it is, given where your stock is trading, if you just took the free cash flow you expected to generate this year, you would have a decent buyback -- not what I would like, but it would still give you the 140 million of flexibility to use the cash for acquisitions. What about thinking along those lines?

As I said is that we look at it regularly. For the past one year, the stock has been trading even at lower than the 14.40 that you are talking about today. But at the right time, we believe we will do what is best for the Company and put that cash into real good use. And whatever we do, we will definitely announce it at the right time.

Sure. I figure, if the market is concerned about your inventory levels and you are not, now would be one of the better times, particularly since, as was mentioned previously, your performance has been excellent in terms of operating margin expansion. And so the health of the Company hasn't been better, in my mind, unless I'm missing something.

Yes.

Tim Luke, Lehman Brothers.

Quickly, for Jonathan, the financial income -- the net was about 300,000 this quarter. Should we think about that being the same going forward?

And secondly, for you, Patrick, could you give us your sense of how you would see the shape of the year going forward, if you are guiding up 1 percent in the midpoint approximately this quarter, first quarter? Should we then think usually about a flattish second quarter and then a better third and fourth? Could you just give us some color on that? That would be helpful.

To answer your questions with respect to the other income, two main components -- one is interest we earn on the cash invested. And as we generate more cash and we have that cash throughout the quarter, it will help us generate better interest. At the same time, the interest rates have been going up. So, on the interest side of it, you could expect improvement from where we were in the fourth quarter. Okay?

Secondly, with respect to exchange, that's where the realized and the unrealized element of it -- where there are unrealized (ph) you don't really know, because we don't do any currency hedging at this stage. So, since we don't give guidance on the components, with respect to our statement of operations, your port (ph) pattern has some merit.

And regarding for the rest of the year, judging from all the market reports that we receive, the market growth continues to track on a global basis at the 19, 20 percent range. And, as we maintained all along, that we would grow faster than the market. And as a matter of fact, I looked back in the last four years; actually, every year, our annual growth rate is better than the prior year. And so, that's what the team is striving to do.

Do you think, just as you go forward in the March quarter, will your sale from marketing (ph) be higher because your sales have been guided up? Or how should we think about that line, just for modeling?

For modeling purposes, I think you have done a reasonably good job. Let's look at it (ph). It's difficult to -- we are not providing that kind of detail, other than to tell you that -- the comment I made about gross margin, there will be a range, slightly plus or minus. But, at this stage, our guidance six weeks into the quarter of operating margin of 11.3 to 11.5.

And, gentlemen, this concludes our question-and answer-session. I apologize; actually, we will take the next question from Samuel Wilson with JMP Securities.

I guess I get to squeak one last question in. This has nothing to do with inventories. I just wanted to ask about store expansions this year and how store expansions have gone in China and Japan.

They have grown steadily. As a matter of fact, recently, we actually expanded probably a few tens (ph) of stores in China by having a co-marketing campaign with HP. Wherever HP laptop is sold, they would co-market with our wireless product. So that's going pretty nicely. In Japan, as well, we're expanding Yamata Danke (ph) big camera (ph). So we're seeing that doing very well. And same thing in Europe; we just expanded into Benelux. We just signed up a new store called KCC, and that will give us another 50 or so outlets. And we believe that we will continue to expand worldwide. We picked up OfficeMax towards the very tail end of Q4, and we will continue to look at possible expansion in US, as well.

And then, are you still looking at places like India and some of the emerging markets?

As a matter of fact, yes. This year, we believe that we will have the bandwidth to go into two new markets. It would be India and Russia.

A.J. Doohan (ph), Selectman (ph).

Just from listening to the questions, I think there might be some confusion in terms of your revenue recognition. The 105 that you reported this quarter is separate from any inventory build. That's your best estimate what actually sold through. And so, the fact that the inventory built up from the previous quarter -- that hasn't helped your 105 that you reported; that's actually the stuff that sold through. Correct?

We recognize revenue when title passes, and in the US with respect to most of our customers, it is when we sell the product to them.

Right. But then you have a contra revenue account, based on your estimation of how much inventory they hold.

We have a contra revenue account, (indiscernible) of course, and if that channel has more than X number of weeks, as in retail if they have more than 12 weeks, in distribution if they have more than 8 weeks, then we defer the revenue.

Now, what we do for our internal management purposes -- this statistic that we give you of retail we would like it to be optimal 8 weeks and distribution 4 weeks -- what we have talked about before is that's annual guidance. However, during each quarter, there are seasonality factors that affect it, as Patrick was talking about quarter two and quarter four.

Mike Hughes, Delaward Investments

This may have been covered, but I might have missed it. As far as the share count for the first quarter, is there any reason to believe that that will be up materially from the fourth quarter?

Let me just talk about fourth quarter, because I was hoping somebody will ask me this question. I think the part that maybe needs to be clearly noted is the share count, the way we do the treasury stock method increased from what was projected for most of the models and what we did in quarter three. Quarter three it seemed (ph) we were around 32.4 -- sorry, 32.6. And here we had 33.1 -- 500,000 more shares, basically accounting for something like 50 basis points. So in quarter four, we have the 33 100 (ph), main reason being the price of the shares, the price at which NETGEAR shares were trading.

Now, it's a function of, since we don't -- there are no new issuance, other than some stock options, which we don't have material granting of stock options. In quarter one, it will be a function of how our stock will trade. And we don't give guidance on how many shares we expect it to be in this quarter.

So if I run through the numbers, I come up with about 23 cents for the first quarter, and the current consensus is 21 cents. I'm assuming you guys are cognizant of where the consensus number is. So if you're guiding a couple of pennies above consensus, things can't be all that bad.

That's a good interpretation.

So if there is no more questions, I would like to thank everybody for joining the call, and the management team, as well as the employee team of NETGEAR is very proud of what we have achieved so far in 2004, as well as since IPO, our gross margin has gone up, our operating margin has gone up, our net margin has gone up, all according to what we have been proclaiming as our model. We have unprecedented lineup of product portfolio, and we are very confident with the pipeline of products we're coming out, we are winning with our Smart Switches and our innovative products on the small-business side, and we are winning with the Super G, both gateway and DSL gateway as well as the RangeMax, very exciting. And we are bringing some new breakthrough areas such as voice over IP, such as Storage Central. We are looking positively to the year 2005, and we would like to see you all in the next call.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may disconnect your phone line at this time.