NETGEAR Inc (NTGR) 2007 Q2 法說會逐字稿

Greetings, 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 in two hours after the call today through midnight, eastern time, on Thursday, August 2nd, 2007. The replay dial in number is 201-612-7415, with account code 3055 and pass code 246520. 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 second quarter 2007 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 of it at NETGEAR's corporate website 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 and its expectations or beliefs concerning future events, and include statements, among others, regarding NETGEAR's expected revenue, earnings, operating income and tax rate, on both a GAAP and 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 to 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 the 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 costs of developing new products and manufacturing and distribution of its existing offerings.

Channel inventory information reported as estimated based on an average number of weeks of inventory on hand on the last Saturday of the quarter as reported by certain of NETGEAR's customers. For further information of 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 20 through 29 in the Company's quarterly report on Form 10-Q for the quarterly period ended April 1, 2007 filed with the Securities and Exchange Commission on May 11, 2007. NETGEAR undertakes no obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the day 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 in the investor relations site at www.netgear.com.

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

Thank you, David. Thank you, everyone, for joining today's call. Net revenue in Q2 increased 26% year-on-year to $164.3 million, and down 5% compared to Q1 of this year. Net revenue came in a tad below our plan, due to a slightly higher seasonality weakness both in north America and in Europe after a stronger than normal first quarter. Unlike in Q2 2006, we were not able to counter the seasonal weakness with new major account shipments such as (inaudible) and AOL U.K. last year.

North America net revenue was $61.8 million in Q2, a sequential decrease of 6%, while Europe, the Middle East and Africa EMEA net revenue was $85.2 million, a sequential decrease of about 8%. And our Asia Pacific net revenue was about $17.3 million, up about 16% sequentially. Comparing to Q2 of 2006, our North America revenue increased 9%, EMEA increased 42%, while Asia Pacific was up about 21%.

With 26% growth year-on-year, we believe we continue to gain share globally. Especially encouraging is the performance of our emerging markets, including China, India, Eastern Europe, the Middle East, and Brazil. The growth of this group is significantly higher than our corporate average in Q2, and we expect that growth to continue.

We continue to execute on our growth plans in three directions. Expansioning product offerings, channel diversification, and new to graphic market entries. Product-wise, we continue to see increased adoption of our 802.11N wireless products. Among the 13 new products introduced in the second quarter of 2007, notable launches included the ProSafe smart wireless switch, which brings a centralized management of office-wide, wireless LAN for SMB for the first time in the market.

The two-in-one powerline network expander that not only supplies power but also enhances the existing NETGEAR wireless or wired router with powerline networking capabilities and the power over Ethernet Layer 3 10/100 stackable switch and the very popular VPN DSL modem router firewall.

Net revenue from service provided accounted for approximately 24% of total net revenue in the second quarter of 2007, as compared to 21% of total net revenue in the first quarter of 2007 and 15% in the second quarter of 2006. More exciting is that we won over a few new important cable internet service providers as our customers. They include [Optics] Cable in Australia, Osaka Bay Communications in Japan, [New Numericale] in France, and (inaudible) Media in Germany. We also added the U.K. Post Office DSL service to our service provider customer list in the U.K. We expect to see meaningful revenues from these new customers starting Q3 this year.

We ended the second quarter with our wire base growing to about 38,000, a record number. We also increased our retail outlets to over 17,000, another new record. We added to our retail presence with [half] warehouse in the U.K., [half] in Italy, Media Mart in Sweden, the Good Guys in Australia, and B.J. Warehouse in the United States.

Finally, during the quarter, we announced the acquisition of privately held Infrant Technologies. This acquisition expands our network storage product portfolio with five new models which complement our current storage central family and accelerates NETGEAR's participation in the expanding market for network attached storage.

The addition of Infrant's seasoned team forms a dedicated world class group focused on delivering storage products for the LSMB and professional home users. Overall, as we enter the traditionally stronger second half of the year, we expect to benefit from favorable N market demand upswings in our core home and SMB markets. Our strong product lineup and customer base position us well in taking advantage of the second half upswing and N market demands. Our focus remains on profitably expanding our market share worldwide.

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

Thank you, Patrick. Now let me provide you with a summary of the financials for Q2. Net revenue for the second quarter ending July 1, 2007, $164.3 million, a 26% increase as compared to $130.7 for the second quarter ended July 2, 2006 and a decline of 5% as compared to $173.6 million in the first quarter of 2007.

Net revenue in the second quarter of 2007 by geography was $61.8 million for North America, $85.2 million for the Europe, Middle East, and Africa regions, and $17.3 million for the Asia Pacific region. We shipped about 3.5 million units in the second quarter, including 2.8 million nodes and wireless products. Shipments of all wired and wireless routers and gateways combined stayed relatively flat sequentially at about 1.7 million units.

Moving to the product category bases, the second quarter net revenue split between wireless and wired was about 61% and 39% respectively, compared to 62% and 38% for the first quarter of 2007. The second quarter net revenue split between home and small business products was about 63% and 37% respectively, compared to 54% and 36% for the first quarter of 2007. Products introduced in the last 15 months constituted about 33% of our second quarter shipments, while products introduced in the last 12 months constituted about 32% of our second quarter shipments.

Non-GAAP cost of sales for the second quarter came in at $106 million, or 64.5% of net revenue, which compares to $85.3 million, or 65.2% in the year ago period and $113.3 million, or 65.3% in Q1 of 2007. Non-GAAP gross margins in the second quarter of 2007 were 35.5%, as compared to 34.8% in the year ago comparable quarter and 34.7% in the first quarter of 2007.

Moving to non-GAAP operating expense. Total non-GAAP operating expenses which excluded in process research and development and acquisition-related retention bonuses as well as non-cash stock-based compensation costs came in at $39.8 million for the second quarter. This compares to $30.8 million in the second quarter of 2006, which excludes non-cash stock-based compensation costs and $38.9 million in the prior quarter, which excludes adjustments for non-cash stock-based compensation costs.

The first quarter of 2007 also excludes acquisition-related retention bonuses. This was 24.2% of net revenue in the second quarter of 2007 as compared to 23.6% of net revenue in the second quarter of 2006 and 22.4% in the first quarter of 2007. The increase in operating expenses include six weeks of incremental expenses of the acquired Infrant Technologies team of about 35 people, mainly in R&D and marketing.

Non-GAAP sales and marketing expenses were $27.5 million, which compares to $22.4 million in the year ago period and $27.2 million in the prior quarter. As a percentage of net revenue, sales and marketing expenses were 16.7% in Q2 of this year as compared to 17.2% in Q2 of last year and 15.7% for Q1 of 2007.

Non-GAAP R&D expenses were $6.1 million, as compared to $3.8 million in the year ago period and $5.4 million in the first quarter of 2007. This represents 3.7% of the net revenue in Q2 of this year and 2.9% for Q2 of 2006, and 3.1% for Q1 of 2007.

Non-GAAP G&A expenses in the second quarter were $6.2 million, or 3.8% of net revenue, compared to $4.6 million, or 3.5% of net revenue in the year ago period and $6.3 million, or 3.6% of net revenue in the first quarter of 2007.

Operating income on a GAAP basis of $9.6 million includes $4.9 million of adjustments related to amortization of purchased intangibles and in-process research and development, $1.3 million of impact to costs of sales for purchase accounting adjustments to the acquired Infrant Technologies inventory, and $292,000 in acquisition-related retention bonuses related to our recent acquisition. GAAP operating income for the second quarter of 2007 also excludes non-cash stock-based compensation of $2.3 million. This compares to GAAP operating income of $13.7 million in the year ago second quarter, which includes non-cash stock-based compensation expense of $1 million and $19.1 million in the first quarter of 2007. Which includes $367,000 in charges for amortization of purchased intangibles and acquisition-related bonuses as well as non-cash, stock-based compensation of $1.8 million.

On a GAAP basis, the Company reported net income of $6.1 million or $0.17 per diluted share for the second quarter of 2007, compared to net income of $9.8 million or $0.29 per diluted share for the second quarter of 2006 and $14 million, or $0.40 per diluted share in the first quarter of 2007.

Net income on a non-GAAP basis for the second quarter of 2007 was $13.7 million, a 30% increase compared to non-GAAP net income of $10.5 million for the second quarter of 2006, and a 12% decrease compared to non-GAAP net income of $15.6 million for the first quarter of 2007.

Non-GAAP net income for the second quarter of 2007 excludes $4.6 million of adjustments related to amortization of purchased intangibles and in-process research and development, $814,000 of impact to cost of sales from purchased accounting adjustments to inventory, and $179,000 in acquisition-related retention bonuses all net of taxes related to our recent acquisition. Non-GAAP net income for the second quarter of 2007 also excludes non-cash stock-based compensation net of tax of $2 million.

Non-GAAP net income for the second quarter of 2006 excludes non-cash stock-based compensation net of tax of $622,000. Non-GAAP net income for the first quarter of 2007 excludes $254,000 of adjustments related to amortization of purchased intangibles and acquisition-related retention bonuses net of taxes and also excludes non-cash, stock-based compensation net of tax of $1.3 million.

Non-GAAP net income was $0.38 per diluted share in the second quarter of 2007, as compared to $0.30 per diluted share in the second quarter of 2006 and $0.44 for the first quarter of 2007. In future of this year, there was a currency gain of $1.1 million, compared to a gain of about $272,000 in Q1 of this year. The non-GAAP tax rate was 37.3% in the second quarter of 2007, compared to 34.9% in the first quarter of 2007.

Moving on to the balance sheet, we ended the second quarter with $155.8 million, or approximately $4.35 per diluted share in cash, cash equivalents, and short-term investments reflecting the $60 million acquisition of Infrant Technology, compared to a total of $216.2 million at the end of the first quarter, or approximately $6.11 per diluted share and $158.9 million at the end of the second quarter 2006, or approximately $4.61 per diluted share.

In terms of inventory trends, we ended the second quarter of 2007 with inventory at $85.6 million, with ending inventory turns of 5.1, compared to $69.3 million with ending inventory turns of 4.9 at the end of the second quarter of 2006 and $58.4 million with ending inventory turns of 6.6 at the end of the first quarter of 2007. The increase in inventory is for the stocking for the expected back to school demand and increased in-transit inventory for delivery to our service provider customers.

Day sales outstanding were 75 in the second quarter of 2007, compared to 74 days in the second quarter of 2006 and 65 days ended the first quarter of 2007. The increase in DSO is due to seasonality of quarter two, in which a larger concentration of shipments were made in the last month of the quarter.

Retail channel inventory in the U.S. ended the second quarter of 2007 at 11.3 weeks, compared to 13.3 weeks in the second quarter of 2006 and 10.4 weeks in the first quarter of 2007. U.S. distribution channel inventory ended the second quarter of 2007 at 5.2 weeks, as compared to 4.7 weeks in the second quarter of 2006 and 4.4 weeks in the first quarter of 2007. European distribution channel inventory ended the second quarter of 2007 at approximately 4.8 weeks, as compared to approximately 6.1 weeks in the second quarter of 2006 and 5 weeks in the first quarter of 2007.

Asia Pacific distribution channel inventory ended the second quarter of 2007 at approximately 4.6 weeks, as compared to approximately 5.1 weeks in the second quarter of 2006 and 5.1 weeks in the first quarter of 2007. Total assets were $481.6 million at the end of the second quarter of 2007, compared to $367.9 million at the end of the second quarter of 2006 and $451.2 million at the end of the first quarter of 2007.

Deferred revenue increased to $8.7 million, as compared to $5.8 million at the end of the prior quarter, and $6.9 million at the end of the second quarter of 2006.

Looking ahead, we expect a seasonally strong third quarter, further augmented by the incremental [sale group] generated by the ReadyNAS product line we acquired from Infrant Technology. Overall, we estimate our Q3 net revenue to be approximately $178 million to $182 million, with non-GAAP operating margins in the range of 11% to 12%.

Finally, we expect the non-GAAP effective tax rate to be approximately 36.5%. Operator, that concludes our comments and we can now take any questions.

Thank you. We will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) Our first questions comes from the line of Maynard Um with UBS. Please proceed with your question.

I apologize if I missed this. Can you just give us the wireless versus wired units? And then I have two other questions.

The wireless-- let me go back in and get this back out. The wireless would be 61% and the wired is 39%. And what's the second part you wanted?

In terms of units.

In terms of units, it's total 3.5 million units, of which 2.8 million units are wireless products.

And then, your [mix up] service provider revenue went up but your gross margins also saw some sequential strength. And if we assume OpEx relatively flat or up in the third quarter implies gross margins would be at or above Q2 levels, can you just help us understand some of the dynamics that are particularly given the higher mix of service provider revenue? And then I have a follow up.

As we mentioned many a time, we focus our business in the operating margins. Gross margin is a factor of how we spend the marketing dollars on top of the product mix and channel mix. For example, if we spend more of our marketing dollars in the channel rebate and the in-store display or website banner ads, then our gross margin will go down. But then our sales and marketing expenses will go down as well.

However, on the reverse, if we would spend them marketing dollars in hiring more people, going to trade shows, advertising more of ourselves in PC World or PC Magazine, then the gross margin actually would go up and then the sales to marketing expenses would go up as well. So it's a matter of how we spend the marketing dollars. As you notice, both our sales and marketing expenses went up in Q2 and our gross margins went up as well.

Okay, great. And then lastly, can you just provide us with an update on the Infrant integration? How much success have you had early on in integrating them into a distribution channel, and when do you think we start to see the really material revenue benefit set, kind of Q4 and ramping through 2008? Thank you.

Sure. It took us six weeks to fully integrate them, and I think actually as a matter of fact, the NETGEAR branded readiness product was ready to be sold in the channel by the last week of Q2. So we should see incremental revenue generated through the sell-through in Q3, and we believe that we have a very good integration process [built] completely on our R&D methodologies. And we've taken over the manufacturing and logistics and distribution worldwide for them, and they have been introduced to all our channels on a worldwide basis. All our sales force have been trained on the products. The technical support have been integrated, so I would say that for now, it's just the goal to sell.

And in terms of revenue per head, still on track to achieve that in 2008?

Yes, we believe so. Certainly, we took a big hit in Q2, because all of a sudden we acquired 35 people. So that's tough. But we think that we'll get back on track after Q3.

Great. Thank you.

Thank you. Our next question comes from the line of [Inder Singh] with Lehman Brothers. Please proceed with your questions.

Thank you. Patrick, I wanted to ask you about the linearity I think you alluded to in your comments earlier in the quarter. Can you give us some more color on that, what sort of drove that, and whether you see that playing into the following quarter as well, or is that going to be something that was pretty much a one-off?

The linearity is always the same in Q2. As more of our business shifted to international, the linearity is actually more pronounced. For example, in Europe, which is right now almost half of our business, they have [Easter] holidays and many, many bank holidays, including the May Day in April and May, so frankly, they didn't do much. They didn't do much buying in the first two months of the quarter. So they're very back-end loaded in June. It's always the same. Similarly, in Asia.

Australia has the financial year-end in June, so June is a rush to spend whatever dollars they have for tax deductions and for write-offs for companies, so June is a huge month. And in Japan and China, they all honor May Day, where they have something called Golden Week and they just take off. So again, the sales is concentrated in June. So as we shift more and more of our revenue to the international market it's the natural cost because international there's simply more people than in the U.S. And you will see that linearity more pronounced as the year goes by. So that's the linearity in Q2.

And so you expect even the next quarter with back to school and vacations for the first month or two in Europe that it should be also a back-end loaded sort of linear quarter, then?

That is true. But it's not as bad as Q2 because the Europeans come back to work by mid-August, so we have a little bit uptick right after mid-August.

And then just one question on your ProSafe smart wireless switch that you announced. Can you give us an update on that and see whether that's getting any traction in the market so far?

Unfortunately, no significant volume has been able to be manufactured and shipped to the channel in Q2. But we'll see that trickling in in Q3. And because it's a rather sophisticated piece of product, we need to do some channel training before they can really deploy them. So even though that is generating a lot of interest in the channel, we will not see significant revenue coming out of that until Q4, because we really want to do it right.

We want to make sure our channel partners will be able to install it. It's basically a wireless switch just like what Cisco, Aruba, or (inaudible) offer, except that it's for a much smaller scale, it only handles up to 48 access points for a small-medium business. And certainly, it offers a lot of the sophistication and the capabilities in a much simpler way. So that's why we need to train the channels before we can really roll that out in a very aggressive manner.

Thank you.

Thank you. Our next question comes from the line of Samuel Wilson with JMP Securities, LLC. Please proceed with your questions.

Thank you. A couple questions here today. First, for Christine. Cash flow, CapEx, and head count, please?

Cash flow from operations is a negative cash flow, $7.7 million for the quarter, positive for the six months YTD. CapEx about $2.4 million, and we ended the quarter with 502 full-time equivalents.

Did you recognize any revenue at all on the acquisitions?

Yes, we did recognize revenue in the acquisitions.

But it was a small-- I mean, from the top of it, what you said earlier, it seemed like it was a pretty small, immaterial amount.

Right, from an incremental basis.

And then just sort of an update on competition and pricing, and this is all for Patrick, competition pricing. And our channel inventories, where do you want them?

From the channel inventory standpoint, I think we're pretty pleased on where we are. We're up a little in the U.S. but we're down a little in Europe, and we're still short in Asia, which I still have not been able to get them to six weeks. So channel inventory, we're fine. From a pricing standpoint, it has been pretty stable out there. I mean, we don't see any aggressive price moves by any of our competitors, so we're pleased.

Perfect. Thank you very much.

Thank you. Our next question comes from the line of Stanley Kovler with Merrill Lynch. Please proceed with your questions.

Thank you. This first question is basically I wanted to understand if you had any 10% customers this quarter, and I had a little question after that.

We definitely do. I mean, Ingram Micro, Tech Data, those are 10% customers. And very likely [these guys] are also going to be a 10% customer again.

Got it. One question on just some of the forward-looking things in the inventory. Deferred revenue went up slightly, and I was wondering if you can help us understand if that's related to some carrier business that you're expecting going forward, something that you alluded to. And on the inventory, the channels, you said where you'd like them to be, but generally speaking, where do you see, in terms of products, what type of products are there in inventory and how much of that is N routers? I'm just trying to understand if that doesn't sell through, how much pricing will come down for N in the second half of the year. That's an important factor for you.

Well, first question about the deferred inventory. Deferred revenue, as we've said many a time before, it's very hard for us to control. The deferred inventory, a majority of it is something we put on the truck, we ship to customers. So we shipped out of the warehouse before the end of the quarter, but it did not arrive. Or it would not arrive as we estimated at the warehouse of the customers, so we have to defer it.

The other component is that in certain retail areas where we have too much inventory over 12 weeks, such as Radio Shack, as we said many a time, we defer also. So there is no way we can control when the truck's going to arrive and when the customer's actually open the warehouse and accept the truck's arrival. So it kind of swings back and forth. For example, in Q1 it actually swing in our favor for $2 million, and in this quarter, it swing unfavorable for us for $3 million. So it's just a toss-up.

So in terms of the channel invest, I think all the products are where they should be. There is no overstock of any particular product in the channel right now. I think the end products is right in its place. If anything, we actually probably are short a little bit on the end products in the channel right now. Our gigabit N routers are especially in shortage right now, but we're rushing it to the channel. We don't believe that there is an oversupply of N products in the market.

Thank you very much.

Thank you. Our next question comes from the line of Brant Thompson with Goldman Sachs Group, Incorporated. Please proceed with your questions. Mr. Brant Thompson, your line is live. All right, our next question comes from the line of [Bub Buefner] with Diker Management. Please proceed with your questions.

Yes. Can you tell us how much currency added to the top line in the quarter?

To the top line, no. I mean, we have both currency coming in both on revenue and the expense side. I think we did mention the FX gain that's in other income and expense, and that did add $0.02 to the quarter.

Added $0.02 to EPS.

Yes.

So of the 26% year-over-year growth in revenue, you're not going to tell us what currency added to that?

There is no currency added to the top line growth, it's only to the earnings.

And can you quantify how much in front added in revenue to the quarter?

We could not. And it is for competitive reasons we don't break out powerline revenue.

Is it under $5 million or over $5 million?

We're not going to comment on it.

Okay. Another question is on pricing. You said you don't see competition in pricing. There was a UBS Taiwanese research report on D-Link that compared Lynx's NETGEAR D-Link and Belkin's Dot N pricing. And D-Link looked like they were extremely competitive and aggressive with their Dot N pricing. Can you maybe comment on whether you think these guys are going after market share? And are you going to have to lower the prices of the Dot N routers to compete with them?

We have been competing with Taiwanese vendors for ten years, and they have always competed on price. D-Link has been giving away the D routers for free, and we're not going to go there.

But their Dot N is close to $30 cheaper than Lynx's and $20 cheaper than you. That's Dot N in Best Buy in the U.S. Are you competitive with D-Link on pricing? Do you think you'll take your pricing down?

We have never competed with D-Link on price.

Thank you.

Thank you. Our next question comes from [Jack Annan] with Rolls Asset Management. Please proceed with your question.

I had a question. I want to know why the NETGEAR doesn't seem to promote the 200 Mbps powerline (inaudible) product, given that WiFi doesn't seem to work very well in homes here on the East Coast?

Well, we actually did. We actually are the most aggressive in putting it on the retail shelves. We actually put it even on the retail shelves in Japan. So we're the one that is promoting the 200 Mbps. The only difference is that we are promoting the 200 megabits from DS2, not currently from [Interline].

I see.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Jiong Shao at Deutsche Bank. Please proceed with your questions.

Thank you. Hey, Patrick. I just wanted to clarify. Did you just say there was a $3 million product in transit, the usual, like in a ship but didn't get to the destination on time for it to (inaudible) revenue (inaudible)?

No. It's what I explained, the deferred revenue was actually things that shipped out of our warehouse. Those are usually on trucks already, they're not on the ship to our customers. But they did not arrive at our customers premise. So we have to defer it. The other element is that they are actually in some of the retailers already, but the retailers have over 12 weeks of channel inventory for that particular retailer. So we defer those except inventory.

Okay, great. Thanks.

Thank you. Our next question comes from the line of Kevin Moore with KM Moore & Company. Please proceed with your questions.

Good afternoon. I just wanted to talk a little bit about guidance going forward. How would you compare the September quarter versus the June quarter and visibility and [confidence] that you're going to have in your outlook?

Usually the market on a year-on-year basis would grow about anywhere, 5 to 15% from Q2 to Q3. So we feel pretty good the market will take the midpoint and go up 10%. Of course, to get some insurance, we also would like to mend it with new products and new customer base. And with the new products that we acquire from Infrant Technology called the readiness line, and also with the new service provider customers that we acquire, like New Numerical in France, like U.K. Post Office in the U.K., we believe that we have enough insurance there to help us to ensure that upswing.

Thank you.

Thank you. Ladies and gentlemen, at this time there are no further questions. Mr. Lo, do you have any further remarks?

Sure. So if there are no other questions, I would like to comment a few things on the closing. We have accomplished quite a bit in quarter two. We completed our second acquisition, which significantly increased our present in the fast-growing network attached storage market for SMB. As a matter of fact, the readiness product line we acquired was rated recently by PC World magazine as one of the top 10 tech products of the year.

We continued to introduce ground breaking products such as the ProSafe wireless switch, which is unprecedented in the SMB market in terms of its capabilities and cost of ownership. We reached new records in the number of VARs and the number of retail outlets around the world. We added top cable internet operators [as] our customers in France, Japan, Germany, and Australia. We further strengthened our leadership position in the U.K. DSL service provider market with the addition of the U.K. post office as our customers.

The emerging market as a group, including China, India, Eastern Europe, and Middle East and Brazil continues to grow significantly faster than the company average. We are pleased in the continuous execution of our growth plans in the directions of products, channels, and markets. We have confidence in the fundamental growth of the internet connectivity markets with consumers and SMB, and we're committed to continue to grow about market rates.

So thanks everyone for joining us today, and I'll talk to you again in October.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.