NETGEAR Inc (NTGR) 2008 Q4 法說會逐字稿

Greetings, and welcome to the NETGEAR Inc fourth quarter and full year 2008 conference call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Villalta of The Ruth Group. Thank you, Mr. Villalta. You may begin.

Thank you. Good afternoon, and welcome to NETGEAR's fourth quarter and full-year 2008 results call. Joining us from the Company are Patrick Lo, Chairman and CEO; and Christy Gorjanc, CFO. The format of the call will be a brief review by Patrick, followed by Christy providing detail on the financials. We'll then have time for any questions. If you have not received a copy of today's earnings release, please call The Ruth Group at 646-536-7026 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 US Private Securities Litigation Reform Act of 1995. The words anticipate, expect, believe, will, may, should, estimate, project, outlook, forecast, or other similar words are used to identify such forward-looking statements. However, the absence of these words does not mean that the statements are not forward looking. The forward-looking statements represent NETGEAR Inc's expectations or beliefs concerning future events based on information available at the time such statements were made, and include statements among others regarding NETGEAR's expected revenue, earnings, operating income, and tax rate on both a GAAP and non-GAAP basis; the effect of the global economic environment on the Company's business; the possibility that NETGEAR may repurchase its shares under the repurchase program; our position relative to our competition; the long-term future of NETGEAR's business, our continued success in the SMB market; our ability to innovate 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 and are subject to certain risks and uncertainties. Future demand for the products may be lower than anticipated; consumers may choose not to adopt the Company's new product offerings or adopt competing products; product performance may be adversely affected by real-world operating conditions; the Company may be unsuccessful or experience adversely -- affected by real-world operation conditions; 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 costs of developing new products; and manufacturing and distribution of its existing offerings; channel inventory information reported is estimated based on the average number of weeks of inventory and -- on hand on the last Saturday of the quarter, as reported by certain of NETGEAR's customers; changes in the level of NETGEAR's cash resources and the Company's planned usage of such resources; changes in the Company's stock price; developments in the business that could increase the Company's cash needs; and fluctuations in foreign exchange rates.

Further, certain forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expected or forecast in forward-looking statements. Further information on the potential risk factors that could affect NETGEAR and its business are detailed in the Company's periodic filings with the SEC, including but not limited to those risks and uncertainties listed in the section titled Part 2, Item 1A, Risk Factors, pages 31 through 44 in the Company's quarterly report on Form 10-Q quarterly period ended September 28, 2008, filed with the Securities and Exchange Commission on November 7, 2008. 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 site at www.NETGEAR.com. At this time, I would now like to turn the call over to Patrick Lo. Please go ahead, sir.

Thank you, Joseph. And thank you, everyone, for joining today's call. As we entered the global recession, Q4 became a challenging quarter characterized by declines in end market demand negative foreign exchange trends. Fourth-quarter profit and revenue were heavily weighted down by rapid declines in foreign currencies against the US dollar -- 13% in the British pound, 10% in the Euro, and 17% in the Australian dollar. During the quarter, we experienced a foreign exchange loss of $6.6 million on the remeasurement of our net assets, primarily related to accounts receivable in cash denominated in foreign currencies.

We achieved net revenue of $161.4 million, in line with our initial guidance. Given the current economic environment, we are embarking on a cost-reduction effort with the aim of cutting $10 million operating expenses in 2009 when compared to the Q4 2004 run rate. Our North America net revenue was $68.8 million in Q4 2008, while Europe, the Middle East, and India, net revenue was $76.7 million. Our Asia-Pacific net revenue was $15.8 million. Comparing to Q4 of 2007, our North America revenue was relatively flat, EMEA net revenue decreased by 28%, while Asia-Pacific revenue was also down about 27%.

We saw slightly weaker consumer demand in Q4 versus Q3. We experienced a sharper decline in shipment of our SMB products with the exception of our ReadyNAS Network Storage. As anticipated, we saw some reduction in channel inventory and would believe such reduction would accelerate in the first quarter of 2009 in preparation for a seasonally weak Q2.

In late December we closed the $14 million asset acquisition of CP Secure, a leading provider of integrated security appliances that protect organizations and businesses from internet-oriented originated web and email malware threats and virus. With this acquisition, not only are we entering a $800 million per year market, we are further solidifying our place in the SMB market by assuring that our customers' business networks, which consist of our routers, switches, network storage, and wi-fi equipment, are protected from internet threats of malware and viruses. We believe our end to end networking solutions strategically position us as a top vendor with our target smb customers and value-added reseller base.

During the quarter, we also made a $10 million earnout payment in connection with the 2007 acquisition of Infrant Technologies, which provides the platform for our ReadyNAS Network Storage. We introduced an additional 12 new products in the fourth quarter, making a total of 48 new products for 2008. Notable introductions include a 3G mobile wi-fi router, DOCSIS 3.0 cable modems, ReadyNAS Pro Pioneer Edition, and a 48-port advanced Smart Switch.

Our leadership in home and small and medium business products continued to be recognized by the industry and our customers. Among accolades we received the January 2009 CES Best Innovation Award in the home networking category for our new gigabit dual band 11n router. Computer Reseller News Magazine also awarded us the 2008 Storage Product of the Year for our ReadyNAS Pro. Also yesterday, we learned that small and medium business customers selected our ReadyNAS as the storage product of the year in the Small Business Computing Magazine 2008 survey.

In Q4, our net revenue from service providers accounted for approximately 18% of total net revenue, as compared to 18% of total net revenue in the third quarter of 2008 and 23% in the fourth quarter of 2007. Despite the current challenging macro economic environment, we believe our cost-control measure coupled with our ongoing strategy of leading in differentiated product introductions combined with new channel and market expansion will continue to keep us ahead of our competition.

On the innovation front, we are stepping up on our new product introduction pipeline. Especially on the wi-fi draft 11n products, DOCSIS 3.0 cable gateway, ProSecure security appliances, advanced Smart Switches, and the ReadyNAS Pro series. Our products in these categories carried distinct technology differentiation such as the meta material antennas for our routers and gateways for better wireless range; the stream scanning and active profiling technology for malware for our security appliances for faster detection of viruses and malware; the high-speed, redundant true stacking for our advanced Smart Switches for easier and cheaper local area network expansion; and superior speed and X-RAID 2 for easier and more secured data expand and protects for our ReadyNAS Pro.

Looking ahead, we will continue to expand our retail footprint as we did in 2008, with the addition of Walmart stores in the US. By the end of 2008 our products were sold through close to 29,000 retail outlets around the world. Our value-added reseller base continues to grow, especially with new ones joining us for our ReadyNAS network storage and ProSecure security appliances. We currently have about 40,000 reseller partners globally. We added TVCabo in Portugal, [Daki] Telecom in France, and Cablemas in Mexico as major new service provider customers in 2008.

We believe we will continue to add new service provider customers in 2009. We believe we are making good progress in further penetrating China and India and have had a great initial push into Brazil in 2008. We expect to start making some in roads in Russia in 2009. In the coming year, we expect to forge ahead in the face of continued macro economic headwinds. We believe we are better positioned than our competitors, given that we've continued to gain market share in the past year despite weak market demand. We strongly believe that growth will resume, hopefully in the not-too-distant future, because of the low penetration rate of broadband in developing countries and the continuous proliferation of broadband applications such as voice, video communications, and entertainment over the internet in the developed world. Once growth resumes, we are confident that we will emerge even stronger, thanks to our unrivaled product pipeline, global channel coverage, worldwide brand recognition, and strong balance sheet. We are confident that we will continue to win against our competition and gain market share going forward. Let me now turn the call over to Christine for details on our financials.

Thank you, Patrick. Let me now provide you a summary of the financials for Q4. As Patrick just noted, net revenue for the fourth quarter ended December 31, 2008, was $161.4 million, as compared to $198.3 million for the fourth quarter ended December 31, 2007 and $179.4 million in the third quarter ended September 28, 2008. On a constant currency basis, revenue would have increased by $5 million and operating profit would have benefited by $3 million.

In addition to foreign currency fluctuations, our operating margin was also negatively impacted by an unfavorable shift in product mix. We shipped about 4.25 million units in the fourth quarter, including 3 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined in the fourth quarter were about 2.15 million units.

Moving to the product category basis, the fourth-quarter net revenue split between wireless and wired was about 58% and 42% respectively. The fourth-quarter net revenue split between home and small business products was about 59% and 41%. Products introduced in the last 15 months constituted about 36% of our fourth-quarter shipments, while products introduced in the last 12 months constituted about 32% of our fourth-quarter shipment. Non-GAAP gross margin in the fourth quarter of 2008 was 31.2% as compared to 32.4% in the year-ago comparable quarter and 35.5% in the third quarter of 2008.

Moving to non-GAAP operating expenses, total non-GAAP operating expenses which excludes in-process research and development, litigation reserves, restructuring charges, acquisition-related compensation, as well as noncash stock-based compensation costs, came in at $41.4 million for the fourth quarter of 2008. This compares to non-GAAP operating expense of $42.8 million in the fourth quarter of 2007 and $43.7 million in the third quarter of 2008.

Q4 2008 operating expenses represented 25.6% of net revenue. This increase as compared to the fourth quarter of 2007 is primarily due to lower revenue levels. To counteract the negative effect of the rising US dollar, we are gradually raising retail and distribution local currency prices and lowering the US dollar buying cost for products over the next few quarters. We are also renegotiating higher local currency pricing for service provider sales contracts once they expire in the coming quarters.

Non-GAAP sales and marketing expenses were $26.4 million. As a percentage of net revenue, sales and marketing expenses were 16.4% in Q4 of '08, as compared to 15.4% in Q4 of 2007 and 16.4% in Q3 of 2008. Non-GAAP R&D expenses were $7.4 million. This represents 4.6% of net revenue in Q4 of 2008, as compared to 3.2% in Q4 of 2007 and 4.1% in Q3 of 2008. Non-GAAP G&A expenses in the fourth quarter were $7.6 million or 4.7% of net revenue, compared to 2.9% in the year-ago period and 3.9% in the third quarter in 2008.

Operating income on a GAAP basis was $1.2 million, which includes $3 million in charges for in-process research and development, amortization of purchased intangibles, and acquisition-related compensation; $575,000 in litigation reserves; restructuring costs related to certain reorganization activities of $964,000; impairment of certain long-lived assets of $609,000; as well as noncash stock-based compensation of $2.7 million. This compares to GAAP operating income of $17.9 million in the year-ago fourth quarter and $14.7 million in the third quarter of 2008.

On a GAAP basis, the Company recorded a net loss of $7.7 million or $0.22 per diluted share for the fourth quarter of 2008 compared to net income of $12.5 million or $0.35 per diluted share for the fourth quarter of 2007, and $3.1 million or $0.09 per diluted share in the third quarter of 2008. On a non-GAAP basis, the Company experienced a net loss of $2.9 million for the fourth quarter of 2008 as compared to non-GAAP net income of $14.8 million for the fourth quarter of 2007 and non-GAAP net income of $6.9 million for the third quarter of 2008. Non-GAAP net loss was$0.08 per diluted share in the fourth quarter of 2008, compared to net income of $0.41 per diluted share in the fourth quarter of 2007 and $0.19 for the third quarter of 2008. For calculating earnings per share, we used a fully diluted stock count of 35 million shares for Q4 versus 35.7 million shares for the prior quarter and 36.1 million shares for Q4 2007.

In Q4 2008, there was a currency loss of $6.6 million, compared to a gain of $146,000 in Q4 of 2007 and a loss of about $4.7 million in the prior quarter. Non-GAAP tax expense was $6.2 million in the fourth quarter of 2008, compared to $8.8 million in the prior-year fourth quarter and $9.4 million in the third quarter of 2008.

I would like to make a comment on our Q4 tax expense. Because our tax expense is a function of the various taxing jurisdictions in which we operate, changes in local country profitability can significantly affect the tax expense. Our tax expense reflects the fact that international profits decreased significantly due to the strong US dollar in the second half of 2008, and profits were weighted more toward the US. The reconciliation of GAAP to non-GAAP is detailed in our financial statements released earlier today.

Moving on to the balance sheet, we ended the fourth quarter with $203 million in cash, cash equivalents, and short-term investments, compared to a total of $202.2 million at the end of the third quarter and $205.3 million at the end of the fourth quarter 2007. Please note that this number reflects the $14 million we paid for the acquisition of CP Secure, the $10 million earnout payment for the Infrant Technologies acquisition, and approximately $12 million for our stock repurchase program, all of which took place in the fourth quarter from a cash perspective.

In terms of inventory trends, we ended the fourth quarter 2008 with inventory of $112.2 million with ending inventory turns of 4,compared to 6.5 turns at the end of the fourth quarter 2007 and compared to 3.7 turns at the end of the third quarter 2008. We expect our ending inventory to improve further in Q1 and beyond. Day sales outstanding were 81 in the fourth quarter of 2008, compared to 73 days in the fourth quarter of 2007 and 76 days ended third quarter of 2008.

Total assets were approximately $585.9 million at the end of the fourth quarter 2008 compared to $551.1 million at the end of the fourth quarter 2007 and $602.4 million at the end of the third quarter 2008. Deferred revenue increased to $21.5 million as compared to $13.3 million at the end of the prior quarter, and $7.6 million at the end of the fourth quarter 2007. Given the current economic environment, we have converted some customers to a cash basis revenue model, which in turn increased our deferred revenue balance.

Now I would like to discuss the Company's common stock repurchase program. During the fourth quarter of 2008, the Company repurchased approximately 1.2 million shares of our common stock at a total cost of approximately $12 million or at an average repurchase price of approximately $10.29 per share. In light of the current economic challenges, we anticipate a slight decline in customer demand during Q1 with the SMB market remaining steady. Despite the slight decline in end-user demands, we do anticipate an acceleration of reduction of channel inventories ahead of the seasonally weak second quarter. Thus, negatively affecting our net revenue.

In addition we foresee further erosion of our growth in operating margins due to our foreign currency business exposure, which will not begin to see a rebound until the second quarter of 2009 when both our local currency pricing and our lower product costs will catch up with the strengthening of the US dollar. Additionally, we would expect our new products to have meaningful margin impact by then.

In order to counteract such significant economic fallout, we are taking immediate action to reduce our cost structure and improve our operating margins going forward. As such, we will reduce the variable components of employee compensation, cut the base compensation of executives by 10%, forego bonuses for all executives and eligible employees, reduce IT and facilities costs, as well as reduce headcount through natural attrition. We are targeting a $10 million in operating expenses on an annualized basis in 2009.

With these efforts in place, as well as a healthy balance sheet, we believe we will successfully weather the storm. We will continue to win over more channel partners, customers, and market share during this downturn and will emerge stronger once economic growth returns. Specifically, we expect our first-quarter net revenue to be in the range of approximately $135 million to $145 million with non-GAAP operating margin in the range of 0% to 3%. Operator, that concludes our comments. We can now take questions.

Thank you. At this time we will begin conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Maynard Um with UBS. Please proceed with your question.

A question on the reduction in inventory by the distribution and retailers. In terms of impacting the revenue, I mean, does that presume that when we look at Q2 you should see a sequential increase in revenue as the inventories level out, or do you think the market weakness will continue into the second quarter? And then related to that, can you think about what you think the new levels of appropriate weeks of inventory are by region and channel? Thanks.

We do believe that most of the channel inventory reduction will be accomplished in Q1. So in Q2, our net revenue will be a truer reflect of the real end-market demand. So it's hard to predict what Q2 is going to be. Seasonally, Q2 from a market demand perspective is slightly less than Q1. So we would update everybody in the next earnings call what our Q2 net revenue will be. Certainly we intend to get most of the channel inventory reduction in Q1.

Okay. And then just on the appropriate weeks of inventory levels by region and channel?

We always would like to drive to around between four to five weeks of distribution channel inventory. And between eight to 10 weeks in the retail channel inventory. However, we do see that our channel partners would like to drive below that.

Okay. Great. Thank you.

Sure.

Our next question comes from the line of Samuel Wilson with JMP Securities. Please proceed with your question.

Good afternoon. Sorry, a few small questions. I didn't hear -- what was cash from operations and CapEx for the quarter?

CapEx for the quarter was $1.6 million and cash flow for Q4 was $38.4 million.

Given your current sort of what's going on, do you think you will be cash flow positive in the first quarter?

We're typically cash flow positive in the first quarter. We definitely will be generating cash during the year. There's a little dependency on that. But typically, Q4 and Q1 are good cash flow quarters for us.

Okay. Did you say headcount?

Headcount was 579 at the end of the year and that did include our recent acquisition of CP Secure in late December.

Perfect. Okay. Now to the business questions. Patrick, for the fourth quarter give us your gut feeling here on the delta between selling and sell-through or sellout from the channel as they're taking the inventory? How big do you think the difference was?

We believe that the difference is quite big. To the tune before -- in the mid-teens of millions.

Okay.

It's not done yet.

I get that. I want to get a sense of how big it was in the fourth quarter. Can you give us a sense of what's going on in Europe in general with your products? Maybe if you have any update on the UK, where you've previously been very strong?

UK is in a freefall. Even though that -- I mean, we did not lose any market share over there to any great extent. The UK market from a British pound basis and based on the market report has dropped 33% on a year-to-year basis. But then on the US dollar basis, it's like almost like 60%. So UK clearly is the driving factor for our European business. As a matter of fact, if we take the UK market out, the rest of the Europe was pretty much flat for us year over year.

Okay. Your gut feeling -- the freefall, is it going to stop in the next couple of quarters or is it an ongoing thing? Or you don't know?

I don't know. I wish that I knew. Because it has fallen so much, the number's getting so small that the impact to the rest of the European business is getting smaller.

I'm not sure that's good or bad.

I don't know either.

One last thing. Inventory levels on your balance sheet.

Correct.

The boat traffic and what you're doing there and the fact that oil's come down and airline. Just where does the Company stand now on how much inventory it wants to carry on its balance sheet and how is it moving inventory around the world right now?

Basically, because of the accounting, right, all deferred revenue is carried as inventory as well. So you take -- those are actually not on our hands. They're actually in customers' hands. Because we registered it as deferred revenue, we also have to carry it as inventory as well. Now, if you take that out, our ideal inventory turn will be between 6 to 7 turns. I mean, that's what we would like it to be. So we work on two fronts. First we like to bring the deferred revenue down. Secondly, we would also like to bring our own inventory down. So combined with some deferred revenue 00 because in the normal operation of a business, we always carry something like -- between $10 million to $12 million deferred revenue. With that on the balance sheet, anywhere between 5.5 to 6 turns of inventory will be satisfactory.

Last question for you. Sort of a multipart question. I'm sorry to ask so many questions today. But HP, Tek Data, Cisco, everybody's announcing some sort of channel VAR financing program. Are you going to do anything there, number one? And number two, just in general, with 40,000 VARs and a lot of retailers, how are you dealing with the credit quality issues of your customers right now? I mean, how are you trying to keep yourself from getting caught holding the bag?

Well, we are super conservative. I think you brought up good point. The lucky thing about our VAR base is our VARs are generally much smaller scale than the VARs at HP and Cisco are facing with. So in a way, we're spreading our risk. Any particular VARs -- the average purchase from our distribution is relatively small. So our distributors have been able to shoulder off all that credit risk on our behalf because they know that our business is spread over so many number of VARs.

So as such, we just do not see that there's significant impact because of the credit availability to our VARs and the ability to buy our products. Because the average purchase from our VARs on a monthly basis, we're talking about a few hundred dollars. We're not talking about even a few thousand dollars. They could finance it, and actually most of our VARs would finance it through credit cards. So we're not worried about that.

In terms of those bigger customers such as our service provider customers as well as our retailers, you bet. I mean, we're watching very carefully on all of the S&P, Moody's report, and we're also watching the CDS market on the debt, as well. We will react almost in real time with the movement of the CDS. And sometimes -- we always have a conservative approach that we would rather minimize our credit risk than trying to stick our heads out and really try to get a few million dollars of revenue. The strategy has proven to be working with the fact that we did not lose any money with the Circuit City, and we are not going to have any impact on Charters Communication, which announced today that they are about to file chapter 11. So I think the -- the credit watch procedure that we had put in place has served us well, and will continue to do so.

Thank you very much.

Our next question comes from the line of Jeff Kvaal from Barclays Capital. Please proceed with your question.

Thanks very much. Patrick, I was wondering if you could talk about the effects of the [forward] currency contracts. To what extent are they going to be fully rolled off in the second quarter? Will they linger into the third? To what extent the next time around will you be able to insulate yourself, should currencies move around a bit?

Let me answer that. At the moment what we're doing is what we would call is FAS 52 balance sheet hedging. We're hedging our receivables and our cash and basically the balance sheet against the remeasurement every quarter. We are now looking into certain contracts to decide if we're going to hedge what we call on the revenue side. And we would -- on both sides on the balance sheet and that, we would layer them out over the next anywhere from three to six months based on when we expect to collect the money or invoice the customer. So we're working on -- we've implemented the hedging program, and we will continually modify it as the needs of the business demand that or given what we're seeing out there.

[Safe] to say that for the next two quarters, we hope we would be able to minimize all those foreign exchange gain and loss on the remeasurement of our accounts receivable and cash. So those $4.7 million to $6.6 million of exchange loss would be significantly smaller. But that's outside of operational revenue. However, we have not started the hedging on the revenue side, which to be fair to say for the next two quarters, we're still very exposed to currency fluctuation on the revenue side. So any significant volatility either way would have significant impact on both our top and bottom lines for the next two quarters.

Okay. And then by the September quarter, the revenue hedging will be in place then, is that fair?

That's what we hope so. Unless the whole world stabilizes. That makes it irrelevant.

Yes. Well, fingers crossed. Okay. Thank you both very much.

Sure.

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

Good afternoon, Patrick.

Hi.

I'm trying to understand what's going on with the gross margin this past quarter. You guys had an unfavorable mix. Could you explain what that unfavorable mix was?

Well, if we dissect the numbers that we just announced a little bit, you would find out that in the Q4 shipment, the significant decline compared to Q3 was the SMB products. That was a little bit unexpected. We did not anticipate that. So the mix of less SMB and higher consumer was the one that really tipped us on the gross margin side. And then overall because the currency was moving against us, that also depressed our US dollar revenue. And that also hurt our gross margins. So those are the two major issues.

Okay. And then -- it's been now two consecutive quarters where service provider revenue is under 20%. Do you have any insight as to where inventory levels stand in the channel as for the service providers?

No. Actually, unfortunately, because the service provider revenue is mimicking the kind of split of the general business, which is -- close to 60% or more of our revenue for service providers is international. However, that's all in local currency. Unlike our international nonservice provider revenue, a lot of it is still in US dollars. The service provider revenue outside of the US are all in local currency, and when you have a weighted decline of currency against the US dollar to the tune of about 13% in the quarter, that clearly hurt our service provider revenue overall.

Okay. And last question, on the revenue guidance that you provided for Q1, what is your assumption as to the mix? I mean, what are you expecting from the consumer SMB side of the business?

We believe that it would be pretty steady compensation across all three areas, consumer, SMB, and the service providers.

Okay. Thank you.

Sure.

(Operator Instructions). Our next question comes from the line of Ryan Hutchinson with Lazard Capital Markets. Please proceed with your question.

Good afternoon. A couple of questions. On the currency loss, one of the expectations specifically for Q1, you said significantly smaller, but for modeling purposes I know it's not going to be $6.5 million or $4.6 million. To the tune of $1 million to $2 million?

I would say when we estimate it, we estimate in for the quarter at $0. But that would mean we have perfect hedging. We think it will be much smaller in the normal range of what we used to have in the past. So we're basically hedging our biggest currencies, and we anticipate -- every month layering them out. So we don't expect a big gain or loss. It might be a gain, it might be a loss.

Okay. That's helpful. And then as we think about margin improvement in the second half, does that imply both gross margins as well as operating margins?

Yes. We expect that starting from second quarter we will have improvements both in gross margin and operating margin.

Okay. And then on the buyback, roughly $4.8 million left. How aggressive should we think you're going to be here? In Q1 specifically as it relates to share count as it ties into the model?

We continue to meet with the Board and get directions on that. So we will just be buying back according to what the Company decides is good for the Company at the time. We won't disclose that until the end of Q1.

Okay. And then finally, tax rate for the full year?

For 2008?

No, 2009.

2009. We're not guiding the tax rate for the full year because I would have to know what the revenue number is. And what countries I was going to make it in for 2009. So we're not guiding the tax rate.

Okay. Fair enough. Thank you.

Our next question comes from the line of Ro Chopra with Wedbush Morgan. Please proceed with your question.

Hey, guys, a couple of questions. Christine, I think you mentioned there were some actions that you were going to take as far as raising prices. Especially also as it relates to service providers when contracts are up. How realistic is it to think that you can increase prices?

Well, I would tell you right now that that's in progress. And that has actually happened in cases. It's really a matter of what when does it go into effect, at the beginning of what quarter or at beginning of what product. So I think we're having very good success on that. And both in the local currency -- in local jurisdictions where they're raising their local prices, and on our buy price from customers buying from us.

Okay. And then the other question was related to pricing and promotions. There seemed to be a lot of people pushing a lot of product last quarter. I guess due to inventory levels. Should we expect that some of that promotional activity declines as we move over the next couple of quarters? Does it stay the same? What's your thought there?

Q4 is usually a heavily promoted quarter. And so is January. So we really have not seen any significant deviations in Q4 and in January from prior years. So we do not expect that it would be anything different going forward. Q2 is usually a pretty quiet quarter from a promotions standpoint. And then Q3, it will be back to school. Then Q4 is Thanksgiving and Christmas. We do not anticipate any significant difference this year.

So let me just get this straight. Even though you see demand where it is now, I mean, is there any reason to even do the promotions? I mean, if demand is there -- if there's no demand, for example, why would you even do that? If -- ?

Well, there is --

Like why bother?

There is still demand. There is no doubt about it. I mean, so as you see, probably over this weekend, there is a lot of President's Day Sales from all the automobile dealers. Clearly that promotion's to incite people to go buy. And as a matter of fact, I mean, if you do not do any promotions, the retailers are not going to list you. So I think promotion's just a normal way of life.

Okay. Thanks, Patrick.

Sure.

Our next question comes from the line of Stanley Kovler with Banc of America Securities. Please proceed with your question.

Thank you. First of all, I just wanted to confirm that the constant currency margin, if you add the amounts that you gave on the call was somewhere around 7% of -- if my map is right. And I was also hoping if you could walk us through maybe some of the assumptions that you have for the market in general in Q1 -- just to go back to the inventory a little bit and discuss what the sellout forecast might be. Get the sense of that?

I think your math is correct. There's about -- a little bit, about 7%. In terms of the market, we believe that Q1 from a market demand standpoint is generally flat to slightly down from Q4, which is what our assumption is. That's the market demand. However, we do believe that there is another significant channel reduction of inventory that is going to be negatively impacting our revenue. And that's why we we guide the range from $135 million to $145 million .

Got it. So if we think about the true number going from Q4 to Q1 on the margins, you're really going from about 7% to at the mid-point about 1.5%, that much of a decline?

That's correct.

So when your gross margins come back potentially in the second half, how much of that do you think will be attributed to volume? You mentioned some of the other factors.

Well, I mean, you're 7% assuming the currency is going to stay at the September level, which, of course, is not a reality. Since September the currency not only has already gone to the real Q4 level, it actually has gone even further down, all right. Imagine the British pound, for example. In December it was still trading at $1.58. And right now it's trading at $1.42, and it was traded as low as $1.35. So I don't think using the 7.2% is a fair starting point. So I think using the 5% is a fair starting point because that reflects the weighted average exchange rate in Q4. Unfortunately, that exchange rate has already gone further worse for us. So that's one area.

The other area is that because of the further channel reductions, that our top line is going to go down from $161 million to the range of $135 million to $145 million and our cost reduction effort will not be as speedy as that. So that also, again, would have impact on our operating margin. And remember, the way the US tax system is working is that in Q1, we'd pretty much pay all our FICA for our employees, so that much pretty expended. And 401k, as well, that's an expenditure in Q1. So all those factors added together, to summarize it for you again, the foreign currency further deteriorates from the Q4 level; extra expenses in the employee compensation because of tax; and thirdly, a further decline in the revenue because of the channel inventory reduction. When you add those three together, and that's why the operating margin would go from 5% ish down further.

Okay. Great. Thank you.

(Operator Instructions). There are no other questions in the queue. I'd like to hand it back over to management for closing comments.

Thank you. So the management team and with everybody in NETGEAR is very confident that we will emerge from this economic recession as a winner because we are stepping up our R&D effort and we're very confident with all the differentiated products that's coming out in this year. We also believe that our effort in our cost control will help us to be continue to be operationally profitable throughout the year. Our balance sheet is strong. And our customers have been with us, knowing that we're financially strong, and we have been winning customers. And we believe that based on the market report that we have seen, we continue to gain share. So when the economic situation turns better, we believe that we will accelerate our growth and accelerate our market share gain. So I look forward to talking with all of you again in the next earnings call. And we'll give you more update on how the market performs at that time. Thank you.

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