NETGEAR Inc (NTGR) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. (OPERATOR INSTRUCTIONS). A replay will be available two hours after the call today through midnight eastern time on Thursday, November 1, 2007. The replay dial-in number is 201.612.7415, with account code 3055 and pass code 257788. 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 third quarter 2007 results call. Joining us from the Company are Mr. Patrick Lo, Chairman and Chief Executive Officer, and Ms. 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 go to 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, Inc.'s 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 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 cost of developing new products and manufacturing and distribution of its existing offerings. Channel inventory information is reported-- estimated based on the average number of weeks of inventory on hand on the last Saturday as the quarter, as reported 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 1(a) - Risk Factors, pages 27 to 37 in the Company's quarterly report on Form 10-Q for the quarterly period ended July 1, 2007 filed with the Securities and Exchange Commission on August 10, 2007.

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 in the Investor Relations section of www.netgear.com.

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

Thank you, David. Thank you, everybody, for joining today's call. This was another strong quarter for us. Revenue growth was ahead of our prior guidance, led by stronger-than-expected back-to-school sales in North America and very healthy demand in Europe, the Middle East, and Africa and Asia Pacific regions.

Net revenue in Q3 increased 26% to $191.7 million compared to the year-ago period and up 17% compared to Q2 of this year. Our North American net revenue was $76.4 million in Q3, a sequential increase of 24%, while Europe, the Middle East, and Africa, or EMEA, net revenue was $95.5 million, a sequential increase of about 12%. And our Asia Pacific net revenue was $19.8 million, up about 14% over Q2.

Comparing to Q3 of 2006, our North American net revenue increased 36%, while Asia Pacific was up about 43%. Even against the very strong Q3 of 2006, partly attributable to the BSkyB ramp up at that time, our EMEA business continues to grow healthily at 17% year on year.

With 26% growth over Q3 of 2006, 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 on a percentage basis is significantly higher than our corporate average in Q3, and we expect that growth to continue. We believe the superiority of our product lineup has helped us gain share in the U.S. while further expanding our leadership in the EMEA region and propelling our growth in Asia Pacific.

We continue to execute on our growth plans in three directions - expansion in product offerings, channel diversification and penetration, as well as new geographic market entries. NETGEAR's attractive industrial design, ease of installation, superior performance, and compatibility with popular devices continue to give us a competitive edge.

On the new product side, response has been very encouraging for our recently launched NETGEAR-branded ReadyNAS network desk storage products, making it one of the fastest ramping new product lines in our history. ReadyNAS is paralleling the initial rapid growth rate of our ProSafe smart switches and RangeMax Wi-Fi routers, which have been solid revenue growth contributors for the past three years. Similar to last year, we introduced an additional ten new products in the third quarter, including two new configurations in our ReadyNAS line.

Net revenue from service providers accounted for approximately 22% of total net revenue in the third quarter of 2007 as compared to 24% of total net revenue in the second quarter of 2007 and 23% in the third quarter of 2006.

We added three new cable service operators to our list of customers - @Home in Holland, CJ CableNet, and CNM Communications in Korea. In Q3, we added about another 1,000 new value-added resellers to our reseller network worldwide, reaching a record high of close to 37,000 value-added resellers. We also added approximately another 1,000 retail outlets, many in emerging markets, bringing our total to over 18,400 worldwide, reaching another new record.

Q3 was a very successful quarter in executing our channel programs and product promotions across all three geographies. We are pleased with the markets' overwhelming acceptance of our new ReadyNAS product line. We continue to see momentum our smart switches and our RangeMax routers, including the RangeMax NIX wireless N routers. We believe the momentum will continue now a seasonally strong Q4.

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

Thank you, Patrick. Let me now provide you with a summary of the financials for Q3.

As Patrick just noted, net revenue for the third quarter ended September 30, 2007 was $191.7 million, a 26% increase as compared to $151.6 million for the third quarter ended October 1, 2006 and an increase of 17% as compared to $164.3 million in the second quarter ended July 1, 2007.

Net revenue in the third quarter of 2007 by geography was $76.4 million for North America; $95.5 million for the Europe, Middle East, and Africa region; and $19.8 million for the Asia Pacific region.

We shipped about 4 million units in the third quarter, including 3.1 million nodes for wireless products. Shipments of our wired and wireless routers and gateways combined were up sequentially 12% to about 1.94 million units.

Moving to the product category basis, the third quarter net revenue split between wireless and wired was about 61% and 39%, respectively, the same as second quarter of 2007. The third quarter net revenue split between home and small business product was about 63% and 37%, respectively, unchanged from the second quarter of 2007. Products introduced in the last 15 months constituted about 31% of our third quarter shipments, while products introduced in the last 12 months constituted about 16% of our third quarter shipments.

Non-GAAP cost of sales for the third quarter came in at $126.6 million, or 66% of net revenue, which compares to $100.8 million, or 66.5%, in the year-ago period and $106 million, or 64.5%, in Q2 of 2007.

Non-GAAP gross margin in the third quarter of 2007 was 34% as compared to 33.5% in the year-ago comparable quarter and 35.5% in the second quarter of 2007.

Moving to non-GAAP operating expenses, total non-GAAP operating expenses, which excludes litigation reserves and acquisition-related retention bonuses, as well as noncash stock-based compensation costs, came in at $42.8 million for the third quarter of 2007. This compares to non-GAAP operating expenses of $32.7 million in the third quarter of 2006 and $39.8 million in the second quarter of 2007. Both of the comparative periods exclude charges for in-process research and development, acquisition-related retention bonuses, and noncash stock-based compensation costs. This represented 22.3% of net revenue in the third quarter of 2007 as compared to 21.6% of net revenue in the third quarter of 2006 and 24.2% in the second quarter of 2007. The increase in operating expenses in the third quarter of 2007 in dollar terms is the result of a full quarter of incremental expenses of the acquired Infrant Technologies team of about 35 people, mainly in R&D and marketing, as compared to only six weeks in the second quarter and no such expenses in the year-ago third quarter.

Non-GAAP sales and marketing expenses were $29.7 million, which compares to $23.2 million in the year-ago period and $27.5 million in the prior quarter. As a percentage of net revenue, sales and marketing expenses were 15.5% in Q3 of this year as compared to 15.3% in Q3 of last year and 16.7% for Q2 of 2007.

Non-GAAP R&D expenses were $7 million as compared to $4.2 million in the year-ago period and $6.1 million in the second quarter of 2007. This represents 3.6% of net revenue in Q3 of this year and 2.8% for Q3 of 2006 and 3.7% for Q2 of 2007.

Non-GAAP G&A expenses in the third quarter were $6.1 million, or 3.2% of new revenue, compared to $5.3 million, or 3.5% of net revenue, in the year-ago period and $6.2 million, or 3.8% of net revenue, in the second quarter of 2007.

Operating income on a GAAP basis was $18.5 million, which includes $1.3 million in charges for amortization of purchased intangibles and acquisition-related retention bonuses, $202,000 in litigation reserves, as well as noncash stock-based compensation of $2.4 million. This compares to GAAP operating income of $13.7 million in the year-ago third quarter, which includes $3.1 million of adjustments related to amortization of purchased intangibles, in-process research and development, and acquisition-related retention bonuses. Operating income on a GAAP basis for the third quarter of 2006 also includes noncash stock-based compensation of $1.3 million. This also compares to GAAP operating income of $9.6 million in the second quarter of 2007, which includes $5.2 million of adjustments related to amortization of purchased intangibles, in-process research and development, and acquisition-related retention bonuses, and $1.3 million of impact to cost of sales for purchase price accounting adjustments to the acquired Infrant Technologies inventory. Operating income on a GAAP basis for the second quarter of 2007 also includes noncash stock-based compensation of $2.3 million.

On a GAAP basis, the Company reported net income of $13.3 million, or $0.37 per diluted share for the third quarter of 2007, compared to net income of $8 million, or $0.23 per diluted share, for the third quarter of 2006 and $6.1 million, or $0.17 per diluted share, in the second quarter of 2007.

Net income on a non-GAAP basis for the third quarter of 2007 was $16 million, a 34% increase compared to non-GAAP net income of $11.9 million for the third quarter of 2006 and a 17% increase compared to non-GAAP net income of $13.7 million for the second quarter of 2007. Non-GAAP net income for the third quarter of 2007 excludes $811,000 of adjustments related to amortization of purchased intangibles and acquisition-related retention bonuses, net of taxes, related to our recent acquisitions. Non-GAAP net income for the third quarter of 2007 also excludes noncash stock-based compensation, net of tax, of $1.8 million and $124,000 in litigation reserves, net of tax. Non-GAAP net income for the third quarter of 2006 excludes $3 million of adjustments related to amortization of purchased intangibles, in-process research and development, as well as acquisition-related retention bonuses, net of taxes. Non-GAAP net income for the third quarter of 2006 also excludes noncash stock-based compensation, net of tax, of $910,000. Non-GAAP net income for the second of 2007 excludes $4.8 million of adjustments related to amortization of purchased intangibles, in-process research and development, and acquisition-related retention bonuses of $814,000 of impact to cost of sales from purchase accounting adjustments to inventory, net of taxes, related to our recent acquisition. Non-GAAP net income for the second quarter of 2007 also excludes noncash stock-based compensation, net of tax, of $1.9 million.

Non-GAAP net income was $0.44 per diluted share in the third quarter of 2007 compared to $0.35 per diluted share in the third quarter of 2006 and $0.38 for the second quarter of 2007. For calculating the EPS, we use a fully diluted stock count of 36 million shares for Q3 versus 35.8 million shares for the prior quarter.

In Q3 of this year, there was a currency gain of $1.7 million, compared to a loss of $315,000 in Q3 of 2006 and a gain of about $1.1 million in Q2 of this year. In Q3, the foreign exchange gain represents a benefit of $0.03 per share.

The non-GAAP tax rate was 38.4% in the third quarter of 2007, compared to 38.6% in the prior-year third quarter and 37.3% in the second quarter of 2007. Our tax rate is based on the annualized projected geographical split of revenue and earnings that change from time to time.

Moving on to the balance sheet, we ended the third quarter with $177.2 million, or approximately $4.93 per diluted share, in cash, cash equivalents, and short-term investments, compared to a total of $155.8 million at the end of the second quarter, or approximately $4.35 per diluted share, and $151.1 million at the end of the third quarter of 2006, or approximately $4.38 per diluted share.

In terms of inventory trends, we ended the third quarter 2007 with inventory at $79.3 million with ending inventory turns at 6.5, compared to $77.8 million with ending inventory turns at 5.2 at the end of the third quarter of 2006 and $85.6 million with ending inventory turns of 5.1 at the end of the second quarter 2007.

Day sales outstanding were 66 in the third quarter of 2007 compared to 71 days in the third quarter of 2006 and 75 days ended the second quarter of 2007.

Retail channel inventory in the U.S. ended the third quarter of 2007 at 8.8 weeks compared to 10.6 weeks in the third quarter of 2006 and 11.3 weeks in the second quarter of 2007. U.S. distribution channel inventory ended the third quarter of 2007 at 4.2 weeks as compared to 6.3 weeks in the third quarter of 2006 and 5.2 weeks in the second quarter of 2007. European distribution channel inventory ended the third quarter of 2007 at approximately 4.9 weeks as compared to approximately 3.8 weeks in the third quarter of 2006 and 4.8 weeks in the second quarter of 2007. Asia Pacific distribution channel inventory ended the third quarter of 2007 at approximately 4.7 weeks as compared to approximately 4.3 weeks in the third quarter of 2006 and 4.6 weeks in the second quarter of 2007.

Total assets were $500 million at the end of the third quarter of 2007 compared to $393.4 million at the end of the third quarter of 2006 and $481.6 million at the end of the second quarter of 2007. Deferred revenue decreased to $7.8 million as compared to $8.7 million at the end of the prior quarter and $12.5 million at the end of the third quarter of 2006.

Looking ahead, we expect the seasonally strong fourth quarter net revenue to be approximately $195 million to $200 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 38%.

Operator, that concludes our comments, and we'll now take any questions.

(OPERATOR INSTRUCTIONS). Our first question comes from the line of Samuel Wilson with JMP Securities. Please proceed with your question.

I have just a couple very small questions here. First, can you give us cash flow from operations and CapEx for the quarter?

Sure. Let me give you that. Cash flow from operations for Q3 - approximately $24.2 million. And CapEx for the current quarter is approximately $2.7 million.

Perfect. And what was headcount?

Headcount at the end of the quarter-- let me look.

Is about 500.

About 500. And then, while you pull the exact number, Patrick, two questions for you. Channel inventories looked like they were a little bit below historically where they've been going into holiday selling season. Can you comment a little bit on that? And is there--? Should we read anything into that about your feelings on the market in general? And, also, it looks like the emerging markets initiative is doing pretty well here. Can you sort of give us an indication as to how it is in the magnitude of the overall Company and maybe a little bit of color on what your expectations are over the next couple years?

Sam, you know that we manage our inventory pretty tight, right? So, while the actual result in Q3 was actually quite a bit above our expected range, it certainly eats into the channel inventory. So we are quickly replenishing that. The good thing is October is usually a pretty quiet month, and things do not get eaten up until closer to Thanksgiving. So we think that we'll be able to recover in channel inventory.

Market demand is very good, as we said just now, across the board in all regions.

As far as the initiatives in the emerging markets, yes. We're very pleased with the results. And, as a matter of fact, those markets have been doing very well for us for a good number of years, and we expect that will continue.

Perfect. Thank you.

Our next question comes from the line of Maynard Um with UBS. Please proceed with your question.

Congratulations. Two questions, if I could. First, there's been some recent articles where NETGEAR is cited as pointing to 25% year-over-year revenue growth for the next several years with some of the emerging markets obviously growing faster than that. And, clearly, that's a trend we've seen this year and last. But you've historically said the overall industry should grow around 15% to 20%. Is the change there related to the growth in the emerging markets? And then I have a follow-up.

Well, first, I have to apologize. I think that's a misquote from the press. We actually said that, in the last few years, we have been growing 25% year on year. We have no intention-- Our people in Asia have no intention of pointing to the future. But then, again, we always maintain the fact that the market is not going to slow down any time soon, and it will continue to grow anywhere between 15% to 20% on a global basis. And we have always said that we're very confident that we will outgrow the market. Whether it's going to be 20% or it's going to be 25% really depends on how strong our lineup is, how good our channel program is. But we're certainly very confident that we'll continue to outgrow the market in the years to come.

Great. And then, kind of on the near term, if you look at your guidance and the high end of your guidance, you're expecting an implied sequential growth of around 4%. If you look back the last couple of years, the seasonal Q4 trend's been almost double that on a sequential basis. Can you talk about what assumptions are going into guidance, or is there some level of conservatism or lack of visibility there? Thanks.

You have to understand that we have a great Q3, and Q3 was actually higher than what we expected. So, normally, the market is actually going to have sequential growth of 5%. In the last year, because of our major account, BSkyB, that continued to ramp from Q3 to Q4, that helped us to really outgrow the market. And, clearly, BSkyB is a pretty stable account right now. And so we believe that we will continue to grow, just like where the market is. And, certainly, we would love to do better than that. But I think that's a pretty good range, especially after we have a great Q3.

Great. Thank you.

Our next question comes from the line of Mark Sue with RBC Capital Markets. Please proceed with your question.

Hi. This is actually Jennifer dialing in for Mark. First, can you just actually repeat the three new cable customers that you got this quarter? I missed that.

It's @Home, in Holland, and then CMN, one of the (inaudible) in Korea, and CNJ, also in Korea.

Okay. Thanks. And then, just a couple of questions. If you could just talk a little bit-- I know you don't like to. But if you could just a little bit about why the gross margins declined sequentially and just kind of maybe give a little bit of color on the product mix there. And then my last question is - if you could just talk a little bit more about what drove the strength in Europe, besides some of the emerging countries there in eastern Europe. Was it more the carrier side or more on the retail side?

We maintain the same stance that gross margin is relatively irrelevant in our discussion of the business because it really depends on how we do marketing. I mean, if we do more in-channel advertising or rebate, then gross margin goes down. But, if we don't do that, then gross margin goes up. But then we will spend the same amount of dollars if we don't do it in channel rebate and we do it in magazine advertising anyway. So I think the most important thing I would continue to stress is to look at the operating margin. And we're very pleased with the sequential increase in operating margin.

And in terms of the strength, I mean, certainly, on a quarter-to-quarter basis, a lot of strength coming in the U.S. because of back-to-school. As a matter of fact, this back-to-school is better than the past back-to-school, both in this strength as well as in our ability to gain share. In Asia Pacific, as I mentioned just now, it's all based on these emerging markets, India and China, doing very well for us. Europe is also a pretty good strength. Generally speaking, in Europe, there is no back-to-school, per se, but we'll still be able to capitalize on people coming back from summer holidays and getting into buying for business and all that. So, overall, we see a significant demand across all three regions. And, certainly, in Q4, it's Christmas everywhere. So there is a uniform demand increase across all regions, particularly in Europe, because they don't have back-to-school. So the increase in Europe will be a little bit more pronounced than the other two regions in Q4.

Okay. Thank you very much.

Our next question comes from the line of Stanley Kovler with Merrill Lynch & Co. Please proceed with your question.

Thank you. I just wanted to see if you could give us the numbers for the unit shipments-- I may have missed that-- and the wired/wireless mix. I wanted to see what that was like this quarter.

The unit shipment is 4 million even, roughly. And wire and wireless switch-- Wire and wireless split-- Wired is 39%; wireless is 61%, unchanged from last quarter.

Great. Thanks. I'm wondering if you can update us on some of the consumer product categories that you see doing well. You mentioned that you had a robust back-to-school season. I'm wondering what specifically in terms of the product categories were doing well, and especially touch on the 802.11 end market - if you're seeing a boost in ASPs maybe as a result of that. ASPs went up slightly, I see, in the quarter.

The consumer uptick in the back-to-school season is still primarily focused on wireless products, wireless gateways, wireless cards, as well as storage central and also Skype phone. Those are the products that picked up during the back-to-school season.

In terms of the overall growth in our ASP, certainly the shipment and the ramping up of our ReadyNAS line helps.

Great. Thank you. Going into Q4, could you help us understand what the factors are that could lead you to wind up at the high end versus the low end of the guidance? And there was a little bit of chatter towards the end of the quarter that one of your competitors perhaps may have some channel inventory. And I'm wondering if there's any concern related to pricing in various markets related to that.

Well, not that I know of. As you probably know, in Q3, stores in Europe are busy with Christmas promotions. Stores in the U.S. are busy for Thanksgiving promotions. And all those ads are already placed - printed. So, at this point in time, there is no pricing information. You cannot get it into the quarter. So we have pretty good visibility into the pricing, so we don't see any significant difference in that.

About the rumor of other competitor's channel inventory, I have no way to confirm that. I don't even know my-- Our own channel inventory is in a very, very healthy situation.

Now, it depends on-- You ask me whether we're going to end up in the low end or whether we end up in the high end. There is a lot of factors. One simple thing is to defer revenue. It depends on when the trucks arrive and when the truck's not going to be arrived. That is going to swing. So it's hard to say. And that's why we always give a range.

Great. Thank you very much.

Our next question comes from the line of [Jonathan Curtis] with Nollenberger Capital Partners. Please proceed with your question.

Thank you very much. So, first, on the Infrant products, it sounds like they're ramping quite nicely. How much business did you guys do with the Infrant products this quarter?

I would like to-- Now the name has changed to ReadyNAS of NETGEAR.

Forgive me. All right. So how much business did you do with ReadyNAS of NETGEAR?

Certainly doing quite well. And it's not our tradition to disclose product split revenue, but, as we mentioned both in the release as well as the discussion just now, it's one of the fastest ramping products. It's paralleling RangeMax routers ProSafe smart switches in the past. So, certainly, it is a very, very healthy (inaudible).

It sounds like you guys introduced eight sort of new, organic products, ex the ReadyNAS stuff. Why was that down? Is that an indication that we've got a lot new products coming for the holiday season that we're going to see here soon? Just a little color there.

Yes. It's just a timing thing. It looks like that every quarter three. In the summer, ten products is about the right amount for us to introduce to the market. There is so much the market could take, especially when the Europeans are pretty much on holiday for a lot of the weeks. So it's similar to Q3 of last year. We can introduce ten new products. So it happens that two of the new products are ReadyNAS. You're right. In Q4, we have a pretty busy product introduction schedule.

Okay. And then, finally, it sounds like you guys have set up-- or you're working on getting new headquarters set up in San Jose. Just a little sense of when you went about signing those leases or the lease. How long do you think this new facility is going to last you? Clearly, you've got a sense of sort of how long you're going to need that for and the like. Can you just sort of walk us through the thinking on how big of a site you got?

Well, the lease agreement has been signed. We are scheduling to move into the building and starting paying rent somewhere around April of next year. Right now, we have two offices in Silicon Valley, one with close to 80,000 square feet, the other one close to 220,000 square feet, with a combined of 100,000 square feet. This new facility will be 140,000 square feet. So that's 40% more than what we have today. Well, I would love to run out of it in a year, but-- That means we outgrow that place in a year. But I think it will last us for at least two or three years.

Great. Well, nice job, guys.

Our next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.

Congratulations. My question was regarding your increase in retail stores internationally. Could you provide some breakout as to where the increases were - what kind of relationships you have set up?

As I mentioned in the discussion, many of them are actually in the emerging new markets. If you log onto our Website, www.netgear.com, go to Investor Relations and Corporate Presentation, in the Channel slide there is a detailed listing of the new accounts in retail and new accounts in service providers.

Okay. And could you also provide any of the products that were 10% or more for this quarter?

I just mentioned that we don't provide that data for a variety of reasons - obviously, for competitive reasons.

Okay. Thank you.

Our next question comes from the line of Brant Thompson with the Goldman Sachs Group. Please proceed with your question.

Hi. This is Tom for Brant. I had-- I just had a question on the emerging markets. Can you talk about-- Can you talk a little bit about the product mix in that region and kind of which-- what drove-- what products are you seeing strong demand in the emerging markets?

As a matter of fact, the emerging market product mix is pretty similar to the developed world. There's about 67%/33% home versus business, and it's very wireless. It's pretty much the same mix. But, of course, within the category is a little bit different. In the developed world, you will see more towards the high end, like the N, like the RangeMax MIMO. But, in the developing, emerging markets, more towards G. Also, in the business world in the developed world, it's more towards the smart switches, the ReadyNAS, while, in the developing countries, it's more towards the unmanaged switches, low-end firewalls.

Got it. So is it--? From a margin profile-- Is it reasonable to assume that the margin profile in the emerging markets is likely to be a little bit lower than maybe your corporate average?

Oh, certainly, if you enter a new market, then the contribution margin of the new markets certainly will be much smaller than the established market, because you have a lot of sudden cost. But, over time, we expect that they will be contributing the same margin. Now, mind you, though, the standard margin of the products that we sell in emerging markets may be lower; however, the costs of operation, eventually, will be lower as well. So we expect the contribution margin to be pretty similar.

I see. I see. And then-- And I also had a clarification on your tax rate. What was the reason for the higher tax rate in the quarter again?

It's really just based on the jurisdictions in which we earn our money each quarter. And we have a lot of actual for up through nine months. So it's really just based on what of the many countries we're in that we earn the money in.

Got it. Going forward, what's the right tax rate to think about? Is it maybe higher than traditionally what you've guided to or maybe in that 37% to 37.5%?

I think we guided to relatively flat going forward, approximately 38% on a non-GAAP basis.

Got it. And then, lastly, I just had a question - kind of longer term OpEx trends. Is the way to think about it still SG&A or sales and marketing - kind of at the low 15s and then R&D in kind of the high 2% or 3% range?

I think R&D going forward is almost at the 4% range, and that's because we've added the Infrant folks and a lot of the acquisition. We've added mostly engineers. So I think you're looking at the 3.8% to 4% range on R&D. G&A will be relatively the same percentage as it is today. Sales and marketing is in the mid 15 range, and that's really dependent on, again, as we've said, our marketing expenses - whether those decrease revenue or they go in OpEx. So that does change from quarter to quarter, depending on how we spend that money. But the totals don't change a lot.

Got it. Thank you.

Our next question comes from the line of Ari Bensinger with Standard & Poor's. Please proceed with your question.

I was wondering if you could comment on the service provider channel. It seems to be stabilizing in the low 20% of sales. Do you think that that's going to be a channel that's going to become increasingly more important to your sales growth, and what's the opportunity there?

Well, we certainly believe that that is a significant channel, because, as more and more broadband penetration are going to the ordinary, less-geeky people, they would need to have some types of installation and maintenance service. And the service providers will be in the best position to provide that. So we expect that it's going to continue to be a very significant channel for us. Whether it's going to go up any further or stay at the low 20s, it's going to vary as we go along. And, as you probably understand, this service provider channel business, as we mentioned in our 10-K and 10-Q, was pretty lumpy. If we all of a sudden win a big account, then you will see the percentage jump up. Then, over time, if we don't win another big account then because the growth of the other channels, then this percentage will come down. But we fully expect that this would, at least, in the near term, stay in the 25% range, plus or minus.

Great. And then, on the new products, how has your acceptance been with Digital Entertainer and the Skype phone?

Well, the reception of the Skype phone has been encouraging, and, with our criteria of establishing revenue as a new, successful product, it met our guideline. And we continue to work very well with Skype, and we will continue to introduce new products in this category. We absolutely have confidence in this category.

In terms of the digital entertainer, we are pretty encouraged by all the [acceptance] of the people who have reviewed it, who have used it. But, at this point in time, since there is still limited availability of legal entertainment content from the studio on the internet, we are not expecting any time that this will be a significant revenue and volume generator. But things could turn on a dime. And we're just waiting for any one of the studios or any one of the cable operators to put legal content on the internet. And then things will change overnight.

Thank you.

There are no further questions in the queue. Would you like to make some closing comments?

Sure. Certainly. Thank you, again, for everybody joining us. And we believe that we have a significant product lineup which will lead position us very well against our competitors, as shown in our year-on-year and sequential growth. And we're very, very pleased with the product lineup that we have introduced in the last few quarters, especially the ReadyNAS and the RangeMax (inaudible) and router. And, going forward, we are going to have a very busy Q4 season of new product introductions, which will come in the CES in January. So, if any one of you have time, please come to our booth in January, early, in Las Vegas to see us in CES, and you will see a lot of new products, which will be very exciting. So thank you very much, and I look forward to talking to you again in February.

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