NETGEAR Inc (NTGR) 2006 Q4 法說會逐字稿

(OPERATOR INSTRUCTIONS). A replay will be available two hours after the call today through midnight Eastern Time on Thursday, February 22, 2007. The replay dial-in number is 201-612-7415, with an account code 3055 and passcode 225168. The replay will also be accessible at www.netgear.com. I would now like to turn the conference over to David Pasquale. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome, everyone, to NETGEAR's fourth quarter and fiscal year 2006 results call. Joining us from the Company are Patrick Lo, Chairman and Chief Executive Officer, and Christine Gorjanc, Chief Accounting Officer. The format of the call will be a brief business review by Patrick, followed by Christine 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 The Ruth Group at 646-536-7003, or you can get a copy off of NETGEAR's corporate Web site at www.netgear.com.

Before we begin the formal remarks, the Company's attorneys advise that today's conference call contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. The forward-looking statements represent NETGEAR, Inc.'s expectation or beliefs concerning future events and includes statements, among others, regarding NETGEAR's expected revenue, earnings, operating income and tax rate on both a GAAP and on a non-GAAP basis, anticipated new product offerings, current and future demand for the Company's existing and anticipated new products, willingness of consumers to purchase and use the Company's products, and ability to increase distribution and market share for the Company's products domestically and worldwide. These statements are based on management's current expectations and are subject to certain risks and uncertainties, including without limitation the following -- future demand for the Company's products may be lower than anticipated; consumers may choose not to adopt the Company's new product offerings or adopt competing products; the Company may be unsuccessful or experience delays in manufacturing and distributing its new and existing products; telecommunications service providers may choose to slow their deployment of the Company's products, or utilize competing products; the Company may be unable to collect receivables as they become due; the Company may fail to manage costs, including the cost of developing new products and manufacturing and distribution of its existing offerings; channel inventory information reported as estimated based on the average number of weeks of inventory on hand on the last Saturday of the quarter, now supported by certain of NETGEAR's customers. Further information on potential risk factors that could affect NETGEAR and its business are detailed in the Company's periodic filings with the Securities and Exchange Commission, including, but not limited to, those risks and uncertainties listed in the section entitled Part 2, Item 1a, risk factors, pages 30 through 39 in the Company's quarterly report on Form 10-Q for the fiscal quarter ended October 1, 2006, filed with the Securities and Exchange Commission on November 13, 2006. NETGEAR undertakes no obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

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 on the investor relations site at www.netgear.com.

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

Thank you, David. Thank you, everyone, for joining us on today's call. The fourth-quarter revenue came in about the high-end of our guidance. We continue to build momentum, led by our successful new product introductions and service provider channel expansion. We continue to win over customers with innovative products consumer and business users want.

In the most recent fourth quarter, net revenue increased to $164 million, a gain of about 35% compared to the year ago period and a gain of about 8% over Q3.

On a geographic basis, end-user demand was strong in the U.S., following the momentum of the robust back-to-school season in Q3. After the summer recess, European demand increased substantially in Q4 for the Christmas season. In Asia-Pacific, we were hit by a significant slowdown in market demand in Australia sequentially.

Quarter-over-quarter our North American net revenue was $51.4 million in Q4, a sequential decline of 8% due to channel inventory reduction, while Europe, the Middle East and Africa, or EMEA, net revenue was $100 million, a sequential increase of about 23%. Our Asia-Pacific net revenue was $12.6 million, about a 9% decline over Q3, primarily due to the weak market environment in Australia. Comparing to Q4 of 2005, our North America net revenue declined 2%, EMEA increased 72%, while Asia-Pacific grew 12%.

The decline in Q4 revenue from North America on a year-over-year basis was primarily attributable to us working with our channel partners to optimize their channel inventory levels, which resulted in a significant channel inventory reduction from Q3 of 2006. Sellthrough, net of channel marketing expenses, however, grew double-digit in the U.S. in Q4 on a year-over-year basis.

In terms of new products, we further bolstered our position as the leader in innovation with the introduction of another 12 new products in the fourth quarter. This brings the total for the full year 2006 to 50 new product introductions. Notable fourth-quarter introductions included the Skype DECT Cordless Phone, Gigabit Stackable switches, and a cable VoIP gateway for TDC Kabel in Denmark.

We recently received an unprecedented five innovation awards at the CES show in Las Vegas in January. Let me take a couple of minutes to review each of the products nominated as Best of CES.

First, among numerous awards our products received, our Digital Entertainer HD was awarded Best of CES show by the Laptop Magazine. This is a very exciting product for us given how strong a product this is and the fact that it is the first product to come out of our SkipJam acquisition. The Digital Entertainer HD is like no other IP set-top box. It has unique follow-me and party modes to make the entire house part of the entertainment experience. In addition to streaming Internet content such as YouTube and BitTorrent videos to the TV, we also offer RSS Reuters news feed, weather and Internet radio, with the potential of more Internet content streaming for the future. The Digital Entertainer HD will also do photo slide shows and digital music playback from any PC on the home network. It plays most formats of digital content, including Apple iTunes music, on Windows PC. It is the ideal IP set-top box for everyone.

The second award-winning product is our Dual-Mode Cordless Phone with Skype. It brings Internet phone calling to the masses. It works just like any other land line cordless phone that all of us are familiar with. It supports up to four cordless handsets and 13 different languages. From any one of the handsets, users can both place and receive any calls. Upon dialing, the handset will provide a choice of placing the call over a traditional land line, or over the Internet at a super-low long distance calling rate, or without a monthly [commitment]. There is no learning curve for anyone. For existing Skype users, the handset offers a comprehensive set of Skype calling functions.

Next we have our Skype WiFi phone. This product shipped in September 2006 with a three-month lead in the market. We are still in the process of fulfilling our worldwide demand. It enables our customers to make Skype calls at home, in the office or in Hot Spots, where free WiFi access is available, without being tethered to a PC.

Next up was our Storage Central Turbo. The whole storage space is getting even hotter as consumers download and accumulate more and more digital content. Anything to help better manage and preserve the content is in demand. Our Storage Central Turbo is the latest in our Storage Central family.

The mirrored (indiscernible) storage for safety has been another big hit. This latest introduction has capacity for two SATA drives of up to 1.5 terabyte, with Gigabit Ethernet lightning-fast speed for connectivity. We expect this to be a winner in 2007.

The fifth NETGEAR product to be honored was our Powerline HD Ethernet Adapter. This is simply one of, if not the fastest and most reliable ways to connect any IP or network set-top box, game console, Slingbox or TiVo to network storage and other PCs on the network.

In addition to our product achievements, it is equally impressive that in just one year we have grown revenues from our service provider customers to approximately 28% of total revenue in the fourth quarter of 2006. Our latest service provider customer additions in Q4 are Vodafone UK and TDC Kabel in Denmark.

Our run rate business with our existing major service provider customers, such as BSkyB, AOL UK, Time Warner Cable and Comcast, continues to do well. Specifically, our shipments to BSkyB are in sync with their deployment rate and their desired inventory level. We believe we will have a steady shipment rate to them for the first half of this year.

However, as previously noted, the service provider business is not expected to be [linear] given service providers' approval process and buying pattern. This will likely lead to up and down periods versus a straight growth trajectory. However, we continue to believe the service provider business to be a growth area for us for each year in the coming years. We have built a critical mass with the service providers in terms of revenue and number of accounts, and expect to continue our success.

We ended the fourth quarter with our (indiscernible) base growing to 33,000 and added approximately another 2000 retail outlets, for a total of 16,000 worldwide.

In conclusion, this is an exciting time for all of us at NETGEAR. We're executing on our business strategy quarter after quarter. Working in our Silicon Valley ecology of great R&D partners, we have honed the collaborative process of providing our customers with a continual stream of innovative broadband applications products. Our leadership in innovation has given us sustained momentum in the past 10 years.

Importantly, our global distribution channel is among the best. It continues to expand and is capable of supporting the continued growth we expect worldwide as consumers and business adopt exciting new broadband applications at accelerated rates, led by voice over the Internet, Internet video and music streaming and network storage applications. We're in a great position entering the first quarter of 2007 with an exceptionally compelling product lineup across all key product categories we serve, with another 12 new products planned.

Let me now turn the call over to Christine for details on our financials.

Thank you, Patrick. Let me now provide a summary of the financials for you. Net revenue for the fourth quarter ended December 31, 2006 was $164 million, a 35% increase as compared to $121.8 million for the fourth quarter ended December 31, 2005, and an increase of 8% as compared to $151.6 million in the third quarter of 2006. Net revenue in the fourth quarter of 2006 by geography was $51.4 million for North America, $100 million for the Europe, Middle East and Africa region, and $12.6 million for the Asia-Pacific region.

We shipped 3.9 million units in the fourth quarter, including 3 million nodes of wireless product. Shipments of all wired and wireless routers and gateways combined increased sequentially about 12% in units to 1.85 million units.

Moving to the product category basis, the fourth-quarter net revenue split between wireless and wired was about 68% and 32%, respectively, compared to 65% and 35% for the third quarter of 2006. The fourth-quarter net revenue split between home and small-business products was about 69% and 31%, respectively, compared to 66% and 34% for the third quarter of 2006. Products introduced in the last 12 months accounted for about 28% of total fourth-quarter shipments, and products introduced in the last 15 months constituted about 33% of our fourth quarter shipment.

Non-GAAP cost of sales for the fourth quarter came in at $110.6 million, or 67.5% of sales, which compares $83.6 million, or 68.7% in the year-ago period, and $100.8 million, or 66.5% in Q3 of 2006. Non-GAAP gross margin in the fourth quarter of 2006 was 32.5%, as compared to 31.3% in the year-ago comparable quarter and 33.5% in the third quarter of 2006.

Moving to non-GAAP operating expenses, total non-GAAP operating expenses, which excludes adjustments related to amortization of retention bonuses related to the SkipJam acquisition and stock-based compensation costs, came in at $34.3 million, compared to $24.3 million in the year-ago period, which excluded adjustments for stock-based compensation and litigation reserves, and $32.7 million in the prior quarter, which excluded in-process research and development and amortization of retention bonuses related to the SkipJam acquisition, as well as stock-based compensation costs. This was 20.9% of net revenue in the fourth quarter of 2006, as compared to 19.9% of net revenue in the fourth quarter of 2005 and 21.6% in the third quarter of 2006.

Non-GAAP sales and marketing expenses were $24.5 million, which compares to $17.7 million in the year-ago period and $23.2 million in the prior quarter. As a percentage of net revenue, sales and marketing expenses were 14.9% in Q4 of this year, as compared to 14.6 in Q4 of last year and 15.3% for Q3 of 2006.

Non-GAAP R&D expense was $4.5 million, as compared to $3.2 million in the year-ago period and $4.2 million in the third quarter of 2006. This represented 2.8% of net revenue in Q4 of this year, 2.6 for Q4 of 2005, and 2.8% for Q3 of 2006.

Non-GAAP G&A expenses in the fourth quarter were $5.3 million, or 3.2% of net revenue, compared to $3.4 million, or 2.8% of net revenue in the year-ago period, and $5.3 million, or 3.5% of net revenue in the third quarter of 2006.

Operating income on a GAAP basis, which includes $405,000 in charges for amortization of purchased intangibles and retention bonuses, as well as stock-based compensation expense of 1.4 million, came in at $17.3 million. This compares to $13.5 million in the year-ago fourth quarter, which includes litigation reserves of $202,000 and non-cash stock-based compensation expense of $168,000, and $13.7 million in the third quarter of 2006, which includes $3.1 million in charges for in-process research and development and amortization of purchased intangibles and retention bonuses, as well as non-cash stock-based compensation of $1.3 million. The increase in non-cash stock-based compensation expense from the prior year was due to the Company's adoption of FAS 123R as of January 1, 2006.

On a GAAP basis, the Company had net income of $13.4 million, or $0.38 per diluted share for the fourth quarter of 2006, compared to net income of $8.9 million, or $0.26 per diluted share for the fourth quarter of 2005, and $8 million, or $0.23 per diluted share in the third quarter of 2006.

Non-GAAP net income for the fourth quarter of 2006 was $14.9 million, a 64% increase compared to non-GAAP net income of $9.1 million for the fourth quarter of 2005, and a 25% increase compared to non-GAAP net income of $11.9 million for the third quarter of 2006. Non-GAAP net income for the fourth quarter of 2006 excludes 278,000 of adjustments related to amortization of purchased intangibles and retention bonuses net of taxes related to the SkipJam acquisition, and non-cash stock-based compensation expense net of tax of $1.2 million. Non-GAAP net income for the fourth quarter of 2005 excluded total net charges of $278,000, including litigation reserves net of taxes of $122,000 and non-cash stock-based compensation net of tax of $156,000. Non-GAAP net income for the third quarter of 2006 excludes $3 million of adjustments related to in-process research and development, amortization of purchased intangibles and retention bonuses net of tax, as well as non-cash stock-based compensation net of tax of $910,000. Non-GAAP net income was $0.43 per diluted share in the fourth quarter 2006, compared to $0.27 per diluted share in the fourth quarter of 2005 and $0.35 for the third quarter of 2006. I would like to note that due to the continued weakening of the U.S. dollar throughout Q4, we had a beneficial exchange gain of approximately $0.03 per share. The non-GAAP tax rate was 35% in the fourth quarter of 2006.

Moving on to the balance sheet, we ended the fourth quarter with $197.5 million, or approximately $5.64 per diluted share in cash, cash equivalents and short-term investments, compared to a total of $151.1 million at the end of the third quarter, or approximately $4.38 per diluted share.

In terms of inventory trends, we ended the fourth quarter 2006 with inventory at $77.9 million with ending inventory turns of 5.7, compared to $77.8 million with ending inventory turns of 5.2 at the end of the third quarter 2006, and $51.9 million with ending inventory turns of 6.5 at the end of the fourth quarter 2005.

Days sales outstanding was 66 days in the fourth quarter of 2006, compared to 71 days in the third quarter of 2006 and 77 days ended the fourth quarter 2005. Retail channel inventory in the U.S. ended the fourth quarter of 2006 at 8.4 weeks, compared to about 6 weeks in the fourth quarter of 2005 and 10.6 weeks in the third quarter of 2006.

U.S. distribution channel inventory ended the fourth quarter of 2006 at 3.5 weeks, as compared to 4.4 weeks in the fourth quarter of 2005 and 6.3 weeks in the third quarter of 2006.

European distribution channel inventory ended the fourth quarter of 2006 at approximately 5.1 weeks, as compared to approximately 5.2 weeks in the fourth quarter of 2005 and 3.8 weeks in the third quarter of 2006.

Asia-Pacific distribution channel inventory ended the fourth quarter of 2006 at approximately 4.2 weeks, as compared to approximately 4.6 weeks in the fourth quarter of 2005 and 4.3 weeks in the third quarter of 2006.

Total assets were $437.9 million at the end of the fourth quarter 2006, compared to $393.4 million at the end of the third quarter 2006 and $356.3 million at the end of the fourth quarter 2005.

Deferred revenue decreased to $8.2 million, as compared to $12.5 million at the end of the prior quarter, and increased from $4.3 million at the end of the fourth quarter 2005.

As for the first quarter 2007, we expect net revenue to be approximately $160 million to $165 million, with non-GAAP operating margin in the range of 11% to 12%. Finally, we expect the non-GAAP effective tax rate to be approximately 37.5%. Now I would like to turn the call back to Patrick.

I would like to update everyone on the search of our CFO. We have been meeting all qualified candidates who have solid public company experience, excellent leadership and management skills in the finance and business areas, and fitting into the lean and mean culture of NETGEAR. The entire board and myself are putting a lot of attention into the search, and we're committed to find the best possible candidate who will benefit NETGEAR for the long-term. We're not compromising on the quality of the candidate for a deadline, but we are progressing in the most expeditious manner. We will immediately update everyone once the search is successfully completed.

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

(OPERATOR INSTRUCTIONS). Jiong Shao, Lehman Brothers.

My apologies; I'm on a cellphone. I have a couple of quick questions, if I may. First, did you have any 10% customers during the quarter?

Certainly, as usual, BSkyB is a 10% customer; so is Ingram Micro and Tech Data as well.

So, BSkyB was a 10% customer. Okay. And just following-up on that, I know, Patrick, you mentioned that, obviously, you have done extremely well in the service provider vertical over the last year. And (indiscernible) all these customers. Is there any reason not to believe the high 20% of revenues should be sort of the steady-state ongoing sort of percentage of revenue from service providers?

We do not really -- and after all these years, we do not really put what is a target level of service provider revenue. I think we would react and adapt to what customer, end customer wants. If our end customers would prefer to obtain their home network through the service providers, clearly, then we will sell more through that channel. But if the customers prefer to buy through other channels, then it will shift away. As we see in the last 12 months, the customers demonstrated they prefer a little bit more through the service provider. And that's why we see the sales through that channel improving.

Okay. And going forward, (indiscernible) dynamics (indiscernible) changing momentum (indiscernible) change, it's still possible for that number to continue to move up a little bit.

That is true if the dynamic doesn't change as it is right now. But you know, consumers are fickle.

Great. You do have pretty good visibility in the channel, right?

That is true.

Okay. My second question is on your Q1 guidance. I noticed it's sort of -- if you pick midpoint, it's kind of a little bit lower. But in the last couple of years, I think, your Q1 guidance tends to the flat. Last year you actually showed growth, pretty nice growth. Could you just talk about that's because you're conservative, or there are some reasons that you want to highlight?

Historically, the market seasonality dictates that Q1, the market is slightly lower than Q4. So, I think, traditionally we always would like to be realistic and guide towards the market. But as we mentioned all along every year that we will always want to counteract the seasonally downward trend by focusing on new product introductions and new channel expansion, and certainly the whole team would love to hit the high-end of our guidance.

Okay. Talk about new products. The (indiscernible) dates for the Digital Entertainer -- is that still -- do you have further information on that?

We are pretty confident that we'll ship it in this quarter.

Last question before I pass the floor. On the FX (indiscernible) I didn't quite get the sort of (indiscernible) $0.03 negative impact -- or positive impact, sorry, from FX. How is that -- where does that show up on the P&L?

That's actually in your other income and expense, and it's a positive impact.

(multiple speakers) impact topline of the revenue, or it's just going to the other income/expense line?

There was minimal impact in the income statement between revenue and expenses in foreign currency.

(multiple speakers) foreign exchange gain.

Thank you very much, guys. Great job.

Samuel Wilson, JMP Securities.

I hope you don't mind I have a few questions also. First, I just wanted to get a clarification on the number of retail outlets and the number of VARs. Patrick, in your script you said it very fast, and I didn't write it down quick enough.

Let me do it one more time. The retail outlet is 16,000 around the world. That's 2000 more than before. And VAR is 34,000.

Okay. Second, I just wanted to get sort of your color on U.S. channel inventories. You talked about sellthrough being very good, and sort of where you ended the quarter in terms of U.S. channel inventories. Are they where you want them to be. What's your sense for kind of what you think on a go-forward basis?

I think we probably overdid it a little bit. We would love actually to have the retail channel inventory a little bit closer to the 9 to 9.5-week range. And we'll try to get it back up a little bit. But on the distribution side, also, we probably went too far. We would love to have it at the 4-week range rather than the 3.5.

Okay. And then, I just wanted to get your sense -- because I know you're always talking to the end customers -- just about sort of gift card sales in January, and Vista, and all this stuff sort of going on in the consumer space. Just what is your general sense in terms of end-market demand?

As far as we're concerned, the gift card is not a this-year phenomenon; it has always been like that. And that's why -- what's keeping Q1 only slightly down from Q4. I mean, Q4 is a phenomenal quarter. We grew 35% year-on-year. And the fact that after so strong a quarter we can still point to a very, very good flattish Q1 is all due to this behavior.

My last question for you is just N versus G, just a sense for technology adoption and how the premium products are going.

Certainly N, at the very high price of 149 to 179 from a unit sale perspective, is certainly not comparable to G, which is being sold on a $59 basis every day. But we see that will continue to change, because (1) we're seeing continuous ramp of the end products, and certainly we expect the end price to come down in the coming months to closer to the G price. As we said all along, from 149 we'll go to 129; from 179 we'll go to 149. And you'll certainly see the mix shift.

[In other words], what you're saying is the market is elastic. Basically, as the price comes down, you expect unit volumes to ramp, and there's nothing on the horizon to make you change that thought.

No. I don't see there is any difference. We have been in this business for 10 years, and it's a pattern that we have observed over the last 10 years.

Thank you very much and congratulations on a great quarter.

Mark Sue, RBC Capital Markets.

This is Jennifer Tennenbaum for Mark. Just a few questions. First on, Patrick, I know you're always -- not to focus on gross margins, but they were down 100 basis points sequentially. Can you just talk about the relationship between selling the products to the carrier customers and the gross margins, kind of like the volume discount that you are giving?

We don't divulge all these commercial terms and secrets. I have pointed many times in the past that more selling to the operators, to the service provider operators, will mean lower gross margin. But it should not affect the operating margin, because the costs of selling to them are much lower. And that's why we reiterate almost in every single earnings call that please focus on the operating margin rather than on the gross margin.

Okay. Why was North America down sequentially if you said the holiday season was pretty robust?

I think I discussed it just now in the discussion. The fact that we have reduced the channel inventory from 10.6 weeks in retail to 8.4 weeks, and distribution from 6.1 weeks to about 3.5 weeks, we could not ship quite a bit into the channel in Q4, and since our revenue has taken on a selling basis. So on paper, our revenue was down.

Just one last question. Can you just talk about the top-performing products or the best-selling products during the quarter? And also, are you on track -- you had previously stated that you're looking to sell about 120,000 of the Skype WiFi phones. Are you on track to meet that goal in the first 12 months?

We believe that our top-selling SKUs as we look at the data are still the things that we really need, both in technology and differentiation. For example, the RangeMax line of products. Secondly, our integrated DSL modem router. Clearly, those are the top-performing product categories. And then the third following that will be the smart switches; always a very unique technology to us. Skype phone certainly is a start, and we still believe that we can do that 120,000 in the first year.

Stanley Kovler, Merrill Lynch.

The first question I have was just in terms of hashing out the onetime items. There was $0.03, you said, of FX gains. And if your tax rate hadn't moved relative to expectations -- I think you expected 39.5%. There's probably another $0.03 of delta. Just wondering if you can help me out with that.

The tax rate difference is about $0.02.

Okay. Perfect. I was just wondering if you can touch on, in terms of the carrier business, some of the -- maybe a number or geographically-speaking, where do you see the most opportunities in terms of deal flow, and how you look at that going forward?

Certainly, we have a very high market share in the service providers already in the UK. So, clearly, everywhere outside of the UK, we see a lot of deal flow.

Is there an opportunity with Vodafone to expand into other geographies, perhaps, outside of the UK? Or is that not sort of on the table?

That certainly is one of the avenues that we will chase after. For specifics, certainly, we will not comment for competitive reasons.

Last question, just in terms of cash flow. The cash flow from operations sort of bounced around quite a bit this year, a lot of puts and takes in working capital. Just wondering if you can take us through maybe what you expect on a go-forward basis, what you think a quarterly or annual cash flow number should look like. That's all for me. Thank you.

For us, we would like to also get the investors to understand we don't [quite] manage our business on a quarter-to-quarter basis; we manage our business on a long-term basis, so we would rather look on an annual horizon. Certainly, we will continue to keep an eye on inventory, on DSO, which will all affect our cash flow. If you look at this year, we had some bulge in inventory in the middle of the year, which we -- we actually brought it down at the end of the year to reasonable levels. And as such, given the fact that we spent about $8 million of cash in [the] purchase of SkipJam, I think that's a reasonable assumption that our free cash flow for every year should -- we manage inventory growth less, that it should be pretty close to our net income.

Erik Suppiger, Pacific Growth.

First off, just to be clear, what was the cash from operations?

Cash from operations is -- we're still going to file that with the K on March 1st, but it's approximately for the year about $23 million.

Okay. You don't have an approximation for the quarter, though?

The quarter was quite a bit higher than that, was around, say, 38 -- $38 million to $40 million, positive cash flow.

BSkyB you say was greater than 10%. Can you give us anymore color there? Or if you can't do that, can you give us a little sense for what your non-BSkyB business was -- your non-BSkyB service provider business did?

The total service provider business is 28%, so you can probably calculate it; 164 times 0.28. We would not disclose further details of [account] breakdowns for competitive reasons. But certainly, for stating the 10% customer, we will state that in the 10-K.

Okay. But no comment as to -- if we look at the service provider business, it was up pretty dramatically in the quarter. Can you just discuss how that would -- how that was -- what the contribution was outside of BSkyB?

Everybody contributes.

Okay. Just looking at the U.S., it was up about 2% year-over-year. Your ending channel inventory was not too far off, in terms of weeks, compared to the year-ago quarter. Any sense for why that hasn't been somewhat stronger?

Two things. You don't look at the ending inventory; you have to look at the differential of inventory between Q3 and Q4. That determines what can be sold into the channel which determined the revenue. So, if you look at that change, just look at the distribution channel. From Q3 to Q4 in 2006, it decreased from six weeks to 3.5 weeks. But in Q3 to Q4 in 2005, it actually slightly increased from 4.1 to 4.5 weeks. So that delta contributes to the contrast in revenue.

Is it fair to say that you feel comfortable with the consumer demand in the U.S. right now?

I think I discussed it just now, saying that in the actual channel sellthrough, net of marketing expenses, the U.S. grew double-digit year-over-year.

Very good. Just one last one. Any revenue breakout on Tech Data or Ingram Micro?

You will see that in the K.

(OPERATOR INSTRUCTIONS). Maynard Um, UBS.

This is Thomas Lee on behalf of Maynard. A couple questions. First one, just clarification. On the lower tax rate, can you give a little bit of color in terms of what drove that?

Sure. For Q4 [and the year] we had a full R&D credit come in in Q4, since Congress put that back into law in late December. In addition to that, being year end, we have several onetime state tax adjustments, and a few in the area of 123R. So as you come to year end, we have a lot of true-up for filing versus provision.

Okay. And then my question is, as you kind of look at the competitive environment heading into '07, has your view changed much versus last year? And then, I guess, specifically, from a market share perspective, I was just wondering -- do you expect similar gains in '07 versus kind of what you were able to achieve in 2006? And if so, which areas or product lines do you feel, I guess, most strongly about or excited about?

Certainly, we have always maintained in the last 3.5 years in all our interaction with the investment community that we do not see the market growth slowdown anytime soon. The market will continue to grow somewhere between 15 to 20%, depending on the market condition, each year. And we have always maintained our stand that we will always outgrow the market. We did it in 2006, and we do not believe why we cannot do it in 2007. And as we always said, our growth, our gain of share is always developed in three areas. One, penetrating new channels and new accounts. Two, expanding into new territories, such as Latin America this year for us. Three, exploring new product categories; for example, IP set-top boxes. Our entertainment -- Digital Entertainer HD, as well as our VoIP phones, our Skype WiFi phone and our Skype DECT phone. And there will be more to come.

Great. Just to add onto that -- so specifically, though, in terms of any -- do you see any additional competitive pressures kind of accumulating this year versus maybe what you saw previously, or not necessarily? That's not -- anything from that that you could share or elaborate on?

So far we have not seen any new competitors on the horizon, or likely to come into the horizon. Traditionally we compete in the retail channel against the Linksys brand of Cisco, (indiscernible) of Taiwan, and some local brands in every single region. In the SMB business, we traditionally compete with 3Com and HP. And in the service provider channel, which we entered about three years ago, our traditional competitors are, as you probably know, Motorola, Scientific Atlanta of Cisco, [Thompson], Alcatel. So those are the usual suspects, and we just have not seen any newcomers.

And then lastly, as you -- you talked about seasonality playing a role in terms of the guidance you gave for Q1. Specifically, for each of the different -- the three different geographies, can you talk a little bit to the different sellthrough trends you're seeing right now, specifically I guess in Europe, and then Asia-Pac?

Interestingly, all three regions behaved pretty similarly in Q1 for different reasons. In Europe and in the U.S. it is all the gift cards or the cash that people get over Christmas that drive the after Christmas sales, and also business entering into a new year, and will spend. In Asia, then you have the Australians coming back from the summer holidays and the end of year in Japan. Those drive the Q1 to be flat. But on the other hand, the Chinese, the Koreans are going off on the Chinese New Year holiday parties, so they're not going to buy that much. So overall, the three places behave similarly, but for different reasons.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you so much again for everybody joining us. We're very, very pleased and excited about our performance in Q4 and our product and channel lineup in the year of the pig. So, happy Chinese New Year for everybody.

This concludes today's conference. Thank you for your participation.