NETGEAR Inc (NTGR) 2010 Q1 法說會逐字稿

Greetings, and welcome to the Netgear, Inc. first quarter 2010 results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded. It now my pleasure to introduce your host, Joseph Villalta, of The Ruth Group. Thank you. You may begin.

Thank you, operator. Good afternoon, and welcome to Netgear's first quarter 2010 financial results conference call. Joining us from the Company are Mr. Patrick Lo, Chairman and Chief Executive Officer, and Ms. Christine Gorjanc, Chief Financial Officer. The format of the call will be a brief business review by Patrick, followed by Christine providing detail on the financials. We'll then have time for any questions. If you have not received a copy of today's release, please call The Ruth Group at 646-536-7028 or you go to Netgear's corporate website at netgear.com.

Before we begin the formal remarks, the Company's attorneys' advise us 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 these 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, gross, and operating income, margin and tax rate on both the GAAP and non-GAAP basis, the effect of the global economic environment on the Company's business, our position in the market relative to our competition, the long-term future of Netgear's business, our ability to innovate, anticipated new product offerings, current and future demand for the company's existing and anticipated new products, the company's strategy for innovation and 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 limitations 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, product performance may be adversely affected by real world operating conditions, the Company may be unsuccessful or experience delays in manufacturing and distributing it's new and existing products, telecommunication service providers may choose to slow their deployment of the Company's products or utilize completing products, the Company may be unable to collect receivables as they become due, the Company may fail to manage costs, including the cost of developing new products and manufacturing and distribution of its existing offerings.

Channel inventory information reported is estimated based on the average number of weeks of inventory 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. Therefore, actual outcome and results may differ materially from what is expected or forecast in such forward-looking statements.

Further information on potential risk factors or details in the Company's periodic filings with the SEC including but not limited to those risks and uncertainties listed in the section titled "Part One, Item One a, Risk Factors, pages 10 to 27" and the Company's annual report on Form 10-K for the year ended December 31, 2009. Filed with the SEC on March 1, 2010. 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 which are reflected 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 non-GAAP and GAAP measures can be found in our press release on our -- or on our investor relations website at netgear.com. At this time would now like to turn the call over to Mr. Patrick Lo. Please go ahead, sir.

Thank you, Joseph, and thank you everyone for joining today's call. We are extremely pleased to start 2010 by exceeding our own expectations and reporting year-over-year net revenue growth in all three geographic regions, especially in the Americas and Asia Pacific which grew 63% and 91% respectively year-over-year. Our worldwide net revenue growth of 39% over the same quarter of the prior year was driven primarily by increased end market demand and further market share gains. We also increased our non-GAAP operating margin to 13.5% this quarter from 11.2% in the prior quarter. Thus, we are pleased to be making significant progress in our business and missed the challenging yet improving macroeconomic environment.

In the first quarter, we increased our unit shipments by 13% over the same quarter of the prior year. Our North American net revenue was $106.3 million in Q1, while our Europe, Middle East and Africa, or EMEA net revenue was $81.1 million. In our Asia-Pacific, or A-Pac, net revenue was $34.1 million.

From a product perspective, we introduced 16 new products in the first quarter. Notable new products include a 200 user firewall router for business users. Our third-generation power line AV home network adaptor, a 3G signal repeator to enhance in building 3G coverage and the industry's first sub $1,000 wireless land management system for business users. We remain focused on product development in 2010, and intend to introduce another 16 to 18 new products in Q2. Further positioning us for revenue growth and market share gain worldwide in the second half of the year.

In the first quarter, our net revenue from service providers accounted for approximately 19% of total net revenue, compared to 27% of total net revenue in the first quarter of 2009, and 28% in the fourth quarter of 2009. This lower percentage of service provider revenue on a relative basis was largely the result of record revenue from our retail business, which exceeded our expectations. But we are very optimistic about our service provider revenue mix in the second half of the year, when the deployment of DOCSIS 3.0 products among our service provider customers were commenced in earnest. We are also pleased to have added basic in Israel as a new service provider customer during the quarter.

Our sales channels remain strong during the quarter, despite the continued challenging economic environment. By the end of the first quarter, toward 2010, our products were sold in over 26,000 retail outlets around the world, and our (inaudible) seller remains at around 39,000. Our push into new product categories is paying off.

We are targeting five new product areas, network storage, TV internet connectivity, DOCSIS 3.0 and VDSL gateways, security appliances, and 3G/4G wireless broad band products. Based on current estimates, we believe each one of these five new product categories has the potential to reach over $1 billion in market size.

For the network storage category, shipments grew almost 50% year-over-year in Q1, and these products have become a significant portion of our overall revenue. For the TV internet connectivity category, the introduction and the subsequent sell-through of the push to TV product in Q1 in Best Buy, exceeded our expectations. We are very excited with the response from the market, and the enthusiasm and interest shown by retailers around the world. We have taken a leadership position worldwide in this all important internet to TV connectivity product category. Push to TV will be introduced worldwide throughout the rest of this year.

For the DOCSIS 3.0 category, we believe the push into this new set of products will result in good revenue growth in the second half of the year, when our service provider customers in the US, UK, Nordic, Spain, and Australia will start mass deployment of this new DOCSIS 3.0 technology. For the security appliances category, our prosecure line takes the unique approach of combining Netgear patent-pending stream-scanning technology with cloud-based symmetry defenses to create what we believe is a ground breaking new approach to securing business networks. By pondering with best in class security providers, Caspersky, Sofos, Comtouch and Mailshell, we are bringing enterprise-grade security capable toy small and medium-enterprises. Recently, the prestigious Secured Computing magazine, rated our prosecure product five stars in all categories.

For the 3G broadband category, the introduction of our 3G signal repeators, in the mobile world congress held in Barcelona in February, helped to establish Netgear's leadership position in providing centrally manageable, noise free 3G signal repeators for low-cost in building 3G coverage. With more new products scheduled in each of the five new product categories in the second half of this year and beyond, we believe future revenue contribution of these new product areas will be accretive to our overall growth.

We are confident in our strategy of being the innovative leader in connecting the masses to the broadband internet as we continue to seek expansion into new product categories, new channels, and new geographic markets. The strategy has paid off, taking us through the worldwide recession ahead of our composition, and manifesting itself through very strong results in the last two quarters. We will continue to focus on executing this strategy in the future. 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 the first quarter of 2010. As Patrick noted, net revenue for the first quarter ended March 28, 2010 was $211.6 million. Compared to $152 million for the first quarter ended March 29, 2009, and $218.8 million in the fourth quarter ended December 31, 2009. We shipped a tote of about 4.7 million units in the first quarter, including 3.9 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined in the first quarter were about 2.8 million units.

Moving to the product category basis. First quarter net revenue split between wireless and wired, was about 65% and 35% respectively. The first quarter net revenue split between home and small business products was about 70% and 30% respectively. Products introduced in the last 15 months constituted about 37% of our first quarter shipments, while products introduced in the last 12 months constituted about 34% of our first quarter shipment. Non-GAAP gross margin in the first quarter of 2010 was 35.2%, compared to 29.2% in the year-ago comparable quarter, and 31.1% in the fourth quarter of 2009.

The increase is a result of the product mix, both year-over-year, and sequentially and foreign currency as compared to the year-ago period. Moving to non-GAAP operating expenses, total non-GAAP operating expenses increased by 18%, compared to the prior year same quarter, reflecting our increased revenue levels and investment in R&D. Total non-GAAP operating expenses came in at $45.8 million for the first quarter of 2010, this compares to non-GAAP operating expenses of $38.8 million in the first quarter of 2009, and $43.5 million in the fourth quarter of 2009.

On a GAAP basis, the Company reported net income of $13.7 million, or $0.38 per diluted share for the first quarter of 2010. Compared to a net loss of $3.8 million, or $0.11 per diluted share for the first quarter of 2009, and net income of $7.9 million, or $0.22 per diluted share in the fourth quarter of 2009. On a non-GAAP basis, the Company reported net income of $17.1 million for the first quarter of 2010. As compared to a non-GAAP net income of $1.4 million in the first quarter of 2009, and none GAAP net income of $11.8 million for the fourth quarter of 2009. Non-GAAP net income was $0.48 per diluted share in the first quarter of 2010, compared to a net income of $0.04 per diluted share in the first quarter of 2009, and net income of $0.34 per diluted share in the fourth quarter of 2009.

In Q1, 2010, we recorded a net foreign currency loss of $194,000, compared to a net gain of $1 million in the first quarter of 2009, and a net loss of $466,000 in the fourth quarter of 2009. GAAP tax expense was $9.9 million in the first quarter of 2010, compared to $3.4 million in Q1 '09 and $9.6 million in Q4 '09. Non-GAAP tax expense was $11.4 million in the first quarter of 2010, compared to $5.5 million in the first quarter of 2009, and $12.3 million in the fourth quarter of 2009.

The reconciliation of GAAP to non-GAAP is detailed in our financial statements released earlier today. We continue to maintain a strong balance sheet. Ending the first quarter with $240.9 million, in cash and cash equivalents and short-term investments. DSO's for the first quarter were 62 days, compared to 74 days in the first quarter of 2009. And 71 days in the fourth quarter of 2009.

Our net inventory ended at $109.9 million, compared to $92 million at the end of the first quarter of 2009. And $90.6 million at the end of the fourth quarter 2009. Ending inventory turns were five, as compared to 4.7 turns in the first quarter of 2009, and 6.7 turns in the fourth quarter of 2009.

Looking forward, in the second quarter of 2010, we expect to have the typical second quarter seasonal slowdown, along with lower service provider revenue, due to our customers transitioning to DOCSIS 3.0. However, we expect to gain market share in the retail and SMB channels with recently introduced new products, including those from the prior two quarters. We expect to have a larger revenue share for the service provider channel during the second half of 2010, when DOCSIS 3.0 deployment among our customers should be in full swing. We entered 2010 with a strong new product line up and we remain focused on continually driving growth through new products and channel present expansion. We believe this is a winning strategy.

Specifically, for the second quarter in 2010, we expect net revenue in the range of approximately $190 million to $200 million, and non-GAAP operating margin to be in the range of 11% to 12%. We expect our non-GAAP tax expense for the second quarter of 2010, to be in the range of $9 million to $11 million. Operator, that concludes our comments and we can now take questions.

Thank you. We will now be conducting a question-and-answer session. (Operator instructions). Our first question is from Jeff Kvaal with Barclays Capital. Please go ahead with your question.

Yes. Thanks very much, and I was wondering if I could be able to ask a margin question, the sustainability, I guess of the gross margin strength is one thing to inquire about. And then secondly, you obviously had a really, a fantastic operating margin quarter this quarter, if the gross margin is stablish, why would we expect the operating margin to be down so much sequentially? Thanks.

Well, Jeff, it's Christy. I really think our gross margin this quarter was due to the product mix. If you look at the service provider percentage and as that goes back higher, you will see that gross margin go down but you would see the bottom line, remain again in the range that we guided 11% to 12%.

Let's see you guys did a little bit better than this quarter, so I mean, did the revenue surprise you on the upside, is that why it dropped through the bottom line, or --

Yes, I think we had revenue came in a little higher than expected, and with expenses relatively fixed that drops through to the bottom line.

Okay. So I would imagine, then, the same principal would apply if -- in the second quarter? I think it will be a little bit better.

Yes.

Okay. Good. And then secondarily, if DOCSIS 3.0 is a driver in the second half, would we be able to think about slightly better than seasonal growth?

Possible.

Possible?

Yes.

Patrick, you are usually so much more loquacious than that.

Hey, you know, I mean this macroeconomic environment is too unpredicable.

Okay. All right. Thank you. And thanks, Christine.

Sure.

The next question is from Hamed Khorsand with BWS Financial. Please go ahead with your question.

Hi, good afternoon. Just a couple of questions here. Could you provide a split on 11 and 11G?

11N is now higher than 11G. It's like 55/45, 11N.

All right. Was that one of the major driving points this past quarter as far as the end market went?

Correct. From an ASP perspective, it has driven up significant ASP on a year on year basis.

Okay. And my other question was that now that OpEx is above the $40 million level, you were trying to hit, is there a new level that you are expecting now that business is -- is staying around the $200 million level?

No, you know, I think what we'll do is OpEx will be in line with the revenue, because as the revenue goes up, there's certain sales expenses in that that drop to the bottom line. R&D expense we're going to continue to invest, but we will keep that in line with the revenue growth.

Okay. But -- previously -- I mean, I was -- you guys were saying that -- you're goal was OpEx around $40 million, depending on how well revenue was, so now you have put up two consecutive quarters of over $200 million, and we're seeing OpEx over $40 million. I'm just trying to get an understanding of what kind of controls are there as far as OpEx goes or can we see operating margin expansion?

I think -- you know, again, as we guided to the 11% to 12% operating margin -- you will see the OpEx go up as the revenue goes up for freight, for sales expenses, in that it just naturally has to go up to take the additional revenue. You will see we have a lot of controls within the Company to make sure those numbers are not exceeded, and they will stay in line.

And we will continue to invest in R&D for sure. And we certainly will continue to invest in hand trading new markets, especially Latin America, which is relatively new for us.

Okay. Thank you.

The next question is from Min Park with Goldman Sachs. Please go ahead with your question. Ms. Park, your line is live. Ms. Park, if you v have your phone on mute, please un-mute it. Our next question is from Doug Ireland with JMP Securities. Please go ahead.

Hi, good afternoon.

Hi.

I wanted to ask a little bit about your cash situation. You have about $240 million in cash now. I was wondering if you had any idea what uses you would make? And then I was hoping that you could give us a cash from operations number, and maybe a CapEx number if available.

Sure, as far as the cash balance, we continue to look at many alternatives with that, including M&A opportunities that would be accretive to the business that would add a product portfolio that we could find or maybe some channel expansion through that. We also additionally look at a stock buyback in that, and we have those discussions regularly at the Company. As far as my cash flow from operations, it is negative, $7.6 million for Q1. And CapEx, I believe is about $1.2 million.

Okay. Yeah, I saw the inventory went up like 50%. Was there something going on there?

Inventory went from about 90 to 109, and what really -- at -- again, given our expanded revenue levels and the growth we're seeing, we wanted to make sure we had the inventory on hand, and it was always our goal to try to reduce some of the air freight. So last quarter, with some of the product shortages, component and that, we weren't able to get as much inventory over here as we had anticipated, and we were able to do that this quarter. Okay. Great. Thank you. Uh-huh.

(Operator instructions). The next question is from Fans Etsling (phonetic) with Redbush Morgan Securities. Please go ahead with your question.

Yes, high, guys. I was wondering had -- if you could talk about your growth projections for service providers? What are you seeing that is going to drive the second half uptick if they are currently not -- are they still in transition with DOCSIS 3.0 right now?

Yeah, the driver will be primarily the mass deployment of the DOCSIS 3.0 in the second half of the year among our service provider customers.

Okay. And was Best Buy, a 10% customer this quarter?

Yes, it was.

And on competition, was there any -- how does the pricing environment look terms of discounting from your domestic versus international competitors?

We haven't seen any major moves from our primary competitor, Linksys.

Wonderful. Thank you very much.

Sure.

(Operator instructions). We have a follow-up question from Sanjay Singh. Plead go ahead with your question.

I just had one quick follow-up. On the component and the transistor surges. I think on the press release you said that that's -- you know, we're nearing the end of that. What about the wireless chipset pricing? Are you still seeing benefits from lower pricing on the chipset side?

Well, the chipset pricing continues to fall as usual. I don't see any stoppage to it. As more volumes are being generated, as more of the R&D's amortized then pricing continues to fall.

Thank you.

(Operator instructions). Next question is from Jeff Kvaal with Barclays Capital. Please go ahead. Mr. Kvaal, your line is live. Please go ahead.

Patrick, Christine, I was wondering if you could comment a little bit more about the channel inventory, and how you are feeling about that, and would it be possible for it to be a little fuller or a little thinner, you know, over the next quarter or so?

Sure. So, US retail at 9.8 weeks, I would say our average is around 10 weeks, so we feel good about that number, that that's adequately stocked. Both US distribution is 5.7. We expect that to remain over there between the 4 to 6-week range, and in Europe we did see their channel stock back up to normal levels at around, I think it's 5.7, 5.5 is their probably average So we feel good that it's stocked and ready to move forward.

Okay. Fantastic. And then, components -- just to broaden on that -- component-constraint question. Anything that you feel is particularly tight for you, heading out a couple of quarters?

We feel pretty good on the supply of the components. As we mentioned the last time, the lead time of components have lengthened, but we have adjusted our manufacturing process to accommodate that. Right now there's no -- any hint of further lengthening of the lead time. Of course we would like to see shortening of the lead time but I don't think it is going to happen any time soon yet.

Okay. Okay. Sounds great. Thank you.

Yes.

(Operator instructions). There are no further questions in queue. I would like to turn the call back to management for closing remarks.

Okay. Thank you everybody. We're very excited at this beginning of this year with a very, very good result. And we're especially confident that this year will be a growth year for Netgear into record-high revenue levels for two reasons. One we believe the market demand is finally coming back as we see it in the end market report in all three geographic regions, and we're benefiting from it. And secondly, we are absolutely gaining shares in all of those markets because of our efforts we put through the recession, and R&D investment. These five new category categories of (inaudible) of TV internet connectivity, of security appliances, and of the 3G/4G wireless broadband, and the DOCSIS 3.0 gateway has presented significant market opportunities of up to $5 billion plus that we believe we have a run at grabbing our fair share, which will fuel our growth in the second half of this year, and beyond. We look forward to reporting back to you on further progress in the next earnings call, and we'll give you more color about the second half of the year. Thank you very much, everybody. Talk to you again, enjoy.

This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.