NETGEAR Inc (NTGR) 2010 Q2 法說會逐字稿

Greetings, and welcome to the NETGEAR, Inc. second 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 is 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 second 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 will then have any time for questions.

If you have not yet received a copy of today's earnings release, please call The Ruth Group at 646-536-7028, or you can 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, anticipate, 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 do not mean that the statements are not forward-looking.

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, and margin; the effect of the global economic environment on the Company's business; the market size of our new product categories; our position in the market relative to our competition; the long-term future and growth of NETGEAR's business; SMB revenue for the second half of the year; our ability to innovate; anticipated new product offerings; current and future demand for the Company's existing and anticipated new products; expectations of outpacing competitors and the new product introductions; the Company's strategy for innovation in new products; willingness of consumers to purchase and use the Company's products; larger revenue share from service provider customers during the second half of 2010; DOCSIS 3.0 products; deployment by our service provider customers; future Wi-Fi demand and the 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 of 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 adversely affect it by real-world operating conditions. The company may be unsuccessful or experience delays in manufacturing and distributing its new and existing products. Telecommunication 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 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 and 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 expressed or forecasted in such forward-looking statements.

Further information on potential risk factors are detailed in the Company's periodic filings with the SEC, including but not limited to those risks and uncertainties listed in the sections entitled Part 2, Item 1-A, Risk Factors, pages 32 to 47 in the Company's annual report on Form 10-Q for the quarter ended March 28, 2010, filed with the SEC on May 6, 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, or to reflect occurrence of unanticipated events. In addition, several non-GAAP financial measures will be mentioned on this call. Information related to the corresponding GAAP measures and reconciliation of non-GAAP and GAAP measures can be found in our press release, or on our investor relations website at NETGEAR.com.

At this time, I 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 announce a 35% year-on-year growth in revenue in the second quarter of 2010. Again, we are seeing year-over-year growth in all three regions with a very impressive 48% growth in North America. The growth in North America was primarily due to our achieving the number one position for US retail market share in the networking category, as well as significant growth in the retail market generally.

Other than gaining significant share in US retail, we also believe we continue to gain overall share in all regions in both the retail and VAR channels. Despite the recent financial market challenges in Europe, we continue to see growth in end market demand for NETGEAR products in this region from both consumers and businesses in both local currency and US dollar basis. Thus, we are pleased to be making significant progress in our business amidst the challenging yet improving macroeconomic environment.

In the second quarter, we increased our unit shipments by 26% over the same period of the prior year. In quarter two, our North America net revenue was $102.5 million, while our Europe, Middle East and Africa, or EMEA, net revenue was $68.6 million; and our Asia Pacific, or APAC, net revenue was $24.9 million.

We're also especially pleased that demand for our business products grew over 60% in Q2 compared to the same quarter last year, and about 7% over quarter one of this year. Our continuous growth of business products revenue in the last five quarters is a validation of the slow recovery of business demands for networking products worldwide.

In the second quarter, our net revenue from service providers accounted for approximately 16% of our total net revenue compared to 30% of total net revenue in the second quarter of 2009 and 19% in the first quarter of 2010. We expect the percentage of service provider revenue to increase in the second half of 2010 when our service provider customers worldwide begin rolling out DOCSIS 3.0 equipment. We are also pleased to have added Bell Canada, SingTel and Swisscom to our service provider customer list during the second quarter.

Our sales channels remained strong during the quarter despite a continued challenging economic environment. By the end of the second quarter 2010, our products were sold in about 27,000 retail outlets around the world, and our value-added reseller accounts still stand around 36,000.

From a product perspective, we introduced 18 new products in the second quarter. Notable new products include our ReadyNAS four-bay and 12-bay rack-mount network storage, our WiFi adapter for TVs, our 11n Wi-Fi repeater for connecting TVs to IP set-top boxes, and our Stackable Layer 3 Managed Switches for small businesses.

With all these new product introductions, we are seeing our push into new product categories paying off. As discussed in last quarter's conference call, these five new product categories are network storage, TV Internet connectivity, DOCSIS 3.0 and VDSL, security appliances and 3G/4G wireless broadband equipment; each have the potential to reach over $1 billion in market size. Due to our ongoing commitment to research and development, we expect our pace of new product introductions to accelerate in the third quarter of 2010 with 20 or more new products expected to be launched, further positioning us for revenue growth and market share gain worldwide in the second half of the year.

For example, we just started shipping our newest high-end consumer network storage, ReadyNAS Ultra. The ReadyNAS Ultra is the first network attached storage device that is network-able to TiVo boxes. It will enable our customers to have up to 12 terabytes, or about 2000 hours of centralized recorded high-definition TV shows, serving up to any and all TiVo boxes in the home. We also believe the push into new category of DOCSIS 3.0 gateways will result in good revenue growth in the second half of the year when our service provider customers in the US, UK, Nordics, Spain and Australia will start mass deployment of this new technology.

We also won new DOCSIS 3.0 projects in Charter Communications and Cox Communications in the US, Virgin Cable in the UK and ONO Cable in Spain in Q2. With more new products scheduled in the second half of the year 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. We continue to outpace our competitors in new product introductions by seeking expansion into new product categories, new channels and new geographic markets. We believe demand for networking products will continue to be strong because of Internet usage trends and introductions of sophisticated Internet-enabled consumer devices. As Internet job searches and social networking become prevalent worldwide, more people are installing Wi-Fi home networks, thus increasing Wi-Fi penetration.

Further, with the proliferation of increasingly advanced Internet-enabled devices, such as iPhones, iPads, netbooks, Netflix-enabled Blu-ray players and set-top boxes and Internet-enabled TVs, we are seeing more and more families around the world upgrading their Internet connections and their Wi-Fi networks at home. With our continued new product introductions, we believe we are well positioned to capitalize on increased Internet usage trends and Internet device proliferation as customers seek more sophisticated networking products. This Wi-Fi demand will drive our market growth for the foreseeable 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 second quarter of 2010.

As Patrick noted, net revenue for the second quarter ended June 27, 2010, was $195.9 million compared to $144.7 million for the second quarter ended June 28, 2009, and $211.6 million in the first quarter ended March 28, 2010. We shipped a total of about 4.3 million units in the second quarter, including 3.3 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined in the second quarter were about 2.3 million units.

Moving to the product category basis, second-quarter net revenue split between wireless and wired was about 61% and 39%, respectively. The second-quarter net revenue split between home and small business products was about 63% and 37%, respectively. Products introduced in the last 15 months constituted about 39% of our second-quarter shipments, while products introduced in the last 12 months constituted about 35% of our second-quarter shipments.

Non-GAAP gross margin in the second quarter of 2010 was 36.3% compared to 29.6% in the year-ago comparable quarter and 35.2% in the first quarter of 2010. The increase is a result of a reduction in service provider product shipments.

Moving to non-GAAP operating expenses, total non-GAAP operating expenses increased by about 22% compared to the prior-year same quarter, reflecting our increased revenue level and investment in R&D. Total non-GAAP operating expenses came in at $45.5 million for the second quarter of 2010. This compares to non-GAAP operating expenses of $37.4 million in the second quarter of 2009 and $45.8 million in the first quarter of 2010.

On a GAAP basis, the Company recorded net income of $10.5 million or $0.29 per diluted share for the second quarter of 2010, compared to a net loss of $3.3 million or $0.10 per diluted share for the second quarter of 2009 and net income of $13.7 million or $0.38 per diluted share in the first quarter of 2010. On a non-GAAP basis, the Company recorded net income of $13.7 million for the second quarter of 2010 as compared to non-GAAP net loss of $522,000 for the second quarter of 2009 and non-GAAP net income of $17.1 million for the first quarter of 2010.

Non-GAAP net income was $0.38 per diluted share in the second quarter of 2010 compared to a net loss of $0.02 per diluted share in the second quarter of 2009 and net income of $0.48 per diluted share for the first quarter of 2010. In Q2 2010, we recorded a net foreign currency gain of $132,000 compared to a net loss of $443,000 in the second quarter of 2009 and net loss of $194,000 in the first quarter of 2010.

GAAP tax expense was $10.6 million in the second quarter of 2010 compared to $4.4 million in Q2 '09 and $9.9 million in Q1 2010. Non-GAAP tax expense was $12.1 million in the second quarter of 2010 compared to $5.7 million in the second quarter of 2009 and $11.4 million in the first quarter of 2010.

Tax expenses increased from Q1 to Q2 despite overall profit decline due to the profit mix shift from Europe to the US as we continued to invest in expanding our sales and marketing efforts in Europe. 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 second quarter with $231 million in cash, cash equivalents and short-term investments. Our accounts receivable collections remain strong and DSOs for the second quarter were 64 days compared to 69 days in the second quarter of 2009 and 62 days in the first quarter of 2010. Our net inventory ended at $125.7 million compared to $75 million at the end of the second quarter of 2009 and $109.9 million at the end of the first quarter 2010.

Ending inventory turns were 4 as compared to 5.5 turns in the second quarter of 2009 and 5 turns in the first quarter of 2010. We are maintaining a higher inventory level in preparation for shipment growth in Q3 as well as to mitigate the longer lead time of components.

Looking forward, in the third quarter of 2010 we continue to see market demand growth in all three geographic regions. Our success has been driven by innovative product introductions, and we expect to outpace competitors in new product introductions for the foreseeable future.

We expect to have a larger revenue share from service provider channel during the second half of 2010 when DOCSIS 3.0 deployment among our customers should be well underway. Despite the recent financial market challenges in Europe, we continue to see growth in end market demand for NETGEAR products in this region from both consumers and businesses both in local currency and US dollar terms.

The third quarter of 2010 has 14 weeks and ends in early October, when sales have been historically slower. While the extra week will not be very accretive to our Q3 top-line revenue, we will incur a full extra week of operating expenses. We expect net revenue in the range of approximately $215 million to $225 million and non-GAAP operating margin to be in the range of 11% to 12%. We expect our non-GAAP tax expense for the third quarter of 2010 to be in the range of $11 million to $13 million.

Operator, that concludes our comments and we can now take questions.

(Operator instructions) Hamed Khorsand, BWS Financial.

Just a couple of questions here, one on the inventory. It seems like you guys took on an extra load of inventory. You did explain it on your general comments, but could that be a factor as far as gross margins go? I would assume that I would assume that components are now getting cheaper as we speak and you are carrying a larger inventory balance.

You know, the gross margin is really more driven by the lower carrier mix in the first half of the year. It was 16% this quarter.

On the other hand, (multiple speakers) -- yes -- getting a bigger inventory also reduces our freight costs because we don't have to use that much air freight. That has a positive effect.

Okay. And then, could you comment on the -- there was a 15% sequential drop in EMEA. Was that just a seasonal factor? Was there a mix in demand? Could you just comment on that a little bit more?

Yes, that is a seasonal factor. Q2 is seasonally a severe quarter for EMEA, simply because there is a lot of holidays in Q2, starting with the Easter holidays. And it just goes on and on, and plus there is no specific promotions in Q2 -- no Christmas, no New Year, no back to school. So, every year, the European downturn in Q2 is more severe and pronounced than the rest of the world.

Okay, and then my last question, just on your product introductions, it sounds like you're expecting immediate revenues from these products to be material. That hasn't been the case in the past, I guess, from the context of your comments today. Could you just expand on that a little bit?

Because we introduced 18 new products in Q2, even though they would not have immediate revenue impact in Q2, we certainly believe that they will have in Q3, and that in Q3 we are going to introduce 20-plus more new products, which will definitely have a revenue impact in Q4. Actually, some of them might even have pretty good impact in Q3, such as the ReadyNAS Ultra.

Okay, great, thank you.

Jeff Kvaal, Barclays Capital.

Thank you both very much for taking the question. On the gross margin, Christine, could you say -- obviously, service provider was a bit lower. Are there other variables that are going on there that we should be thinking about affecting our margin assumptions for the second half of the year?

I think, as Patrick mentioned also, that by taking on more inventory we did reduce our air freight cost in that. So I think that's the other, bigger factor that would be in there.

The other area is, you probably see the SMB portion is a little bit higher. And as we know, the SMB these days are carrying a little bit higher margin than the other two sectors.

Yes, okay. And then, turning to the inventory, it seems as though carrying a little bit more inventory is a bit of a statement of confidence in the outlook for the second half of the year. It suggests that you're reasonably comfortable with the trajectory in Europe. Is that a fair assessment? I'd certainly love your thoughts on the European demand.

Absolutely, you know, there are a few things going on, as we mentioned in the comments that we have won a few DOCSIS 3.0 projects that we have orders in hand that we have to ship. Secondly, back to school starts right now, from middle of July. So we have to be ready to replenish the shelf space as well as to supply the online website sales.

So, generally speaking, you were right that we're pretty bullish for Q3 and we've got some early sales going on in terms of commitment to service providers' deployment, as well as back to school in the US, and that's why we take on a bit more inventory.

Okay, and that inventory suggests confidence, clearly, in North America, where obviously great share performance there. How about your feelings in the European business?

We actually feel pretty good in Europe, as we mentioned in the comments that we have won a few DOCSIS 3.0 projects in Europe. One is Virgin Media, which is very big in the UK, and then ONO Cable in Spain also is the number one cable operator in Europe -- in Spain. We do believe that the recovery is on track in Europe, and there is back to school in Europe as well, and especially in the UK as well as in France, and that would happen sometime in August, late August. So we generally have a very positive reading of the demand of our products in all three regions.

Okay, perfect, thank you very much.

Douglas Ireland, JMP Securities.

First of all -- sorry -- just a little housekeeping item; I missed the wireless versus wired node counts.

Sure -- wireless versus wired is 6139.

Sorry, on the nodes.

Oh, on the nodes -- 3.3 million.

[6.3] million

3.3 million.

3.3 million -- is wireless

Yes.

Yes, out of the (multiple speakers)

And then the total?

Total is 4.3.

Then, could you talk a little bit about how the increase in the set-top box business might impact margins? I mean, should we be modeling margins?

You mean, the set-top box that we sell in retail?

No, no -- the DOCSIS boxes.

Oh, okay. Yes, DOCSIS, actually, what we are focusing on is selling -- is gateway, rather than set-top box. So it is like a DOCSIS 3.0 cable modem combined with a wireless router with voice edit in sometimes. That generally is a lower gross margin product because it's part of the carrier product portfolio. But, from an operating margin basis, our aim is always to get it to the normal corporate average. And it certainly varies from customers to customers, depending on the sophistication of the box as well as the volume.

Okay. And, could you talk a little bit about how we should think about the rollouts at the various carriers? You've announced a fairly wide variety of carriers. Are we talking about only going to incremental new customers that order some specific service, or are they refreshing their set-top boxes in the field? Can you give us a sense of what this is going to -- how this deployment will look?

Generally speaking, what they would do is to really entice their installed base for an upgrade so that they would generate more average revenue per user. And, also, they would like to use that to attack the competitors to try to switch them into a higher speed. So, yes, that's basically what the deployment is going to be.

But, however, over time actually, the pricing for these higher-speed broadband Internet is going to come down to the point that all of the end users will have no reason not to upgrade, because the beauty of DOCSIS 3.0 is, once you install the DOCSIS 3.0, then you can add a lot more services to the customers to the point that you can actually switch off the VDO channels and just push all the TVs through the digital channels, the IP channels. That's the ultimate Holy Grail.

So there is a lot of incentive for the cable operators to switch everyone, every subscriber, to DOCSIS 3.0.

Great. Now, when you win a relationship -- I don't know if you call this a design win, or when you win one of these contracts, are you one of a multi-vendor deployment, or is this mostly, if you win, you win?

Yes. Generally speaking, carriers will never buy from only one single source. Most of them will have a dual vendor strategy, so we would be one of the two, and then certainly, in most cases, we are the bigger ones.

Good, okay; then you mentioned on the call three that were shipping in Q2. I didn't know if those were DOCSIS customers or simply service provider customers. You said Bell Canada, Swisscom, and one other?

Well, we have two mentioned. One is that the new customers, the Swisscom, SingTel and Bell Canada; and, as the name implied, they are mostly telcos. They have nothing to do with DOCSIS 3.0. But in the comments, when I talk about DOCSIS 3.0 rollout, we specifically talked about there are three new wins -- Virgin, ONO, Cox and Charter. Those are new DOCSIS 3.0 wins which we will deploy in the second half of the year.

Okay, so Bell Canada, Swisscom and SingTel are customers of another product?

Right, right, they are telcos; they don't use DOCSIS.

Could you tell me if you have customers on your femtocell products and how that might be rolling out? Because there has been a lot of chatter around femtocells, but I haven't seen much business.

There are very few actual femtocell deployment in the field. There is limited deployment in the US by AT&T, I believe, and then some limited deployment in Europe by Vodafone. We are not in those deals. Of course, we're working with some of the customers, but for today we do not have a win yet, and the worldwide deployment is very limited.

Okay, so that's still something in gestation?

Correct.

Okay, great. Now, my understanding is your target operating margin is around 12%, and when you go over that, like this quarter, it's usually your intention is to spend the overflow on expansion into India and China, etc. Does that mean that there was a surprise at the end of the quarter that increased your operating margin this quarter?

Well, generally speaking, most of our expenses are in people. If you look at it, our single biggest line item is labor, and we find that we are not hiring fast enough and that's why we are coming under expenses. So I think that's basically what is helping us out.

And certainly, I think in Q2 the shipment of the service provider is actually a little bit below what we expected, slightly, because of the delay of the deployment of the DOCSIS 3.0. So the combination of those get our operating margin a little bit higher.

I see. So, if you had shipped those, they would have had slightly lower gross margins that would have brought the operating margin into -- in line with the corporate average?

Right. When we started deployment, we actually would expend more. More expenses would come, especially in initial deployment, in testing and certification, in on-site, people help and things like that.

Okay, great. Yes, there's a lot of attention on the DOCSIS business that this is going to be a big impact, and I wanted to make sure that I understand it clearly. Thank you for answering the questions.

Woo Jin Ho, Banc of America/Merrill Lynch.

Patrick, can you just discuss about -- discuss the composition of your inventory qualitatively? I believe you said during the Q&A that there was a buildup due to service provider. But if you strip out service provider, how is the level of inventory for your retail and your SMB segments?

Well, we feel pretty good, actually. Yes; there certainly some initial shipment requirement in July for service provider, but we also have pretty strong shipment requirement for retail in the US, for back to school as well. SMB is actually on a pretty good track, so I would say the inventory is well distributed across all three areas -- service provider, retail US as well as the SMB worldwide.

So seasonally speaking, would you say that it's for the SMB as well as retail, higher than in prior years because of new products? Or, is it essentially similar to prior years?

From the SMB standpoint, certainly this is much better than last year. Last year, Q2 was a significant downdraft from Q1. But this year, actually, we went up 7%. And even if you look at Q2 of 2008, right before the blowup of the financial market, the uptick in SMB from Q1 to Q2 was not as pronounced as this time. So that's why it's pretty clear that SMB is on the mend. The recovery is pretty encouraging, and we are seeing the trend continue on into the second half of this year.

Retail, especially in US, is recovering very strongly. As I mentioned in the comments, over the last 12 months I think probably the number of Facebook users has doubled. With proliferation of the iPad, the strain on the Wi-Fi home network is pretty hard. So we've seen a lot of upgrades. We are seeing a lot of families who do not have Wi-Fi networks before now getting the Wi-Fi networks. That is really driving the growth of the retail market.

So, according to NPD, the US retail market actually grew roughly about 12% in the first quarter and then accelerated into close to 15% towards the end of the second quarter. We analyze the data. It's pretty clear that the penetration of Wi-Fi at homes in the US is accelerating, and the upgrade of the home network from 11g to 11n, and the higher end of 11n is accelerating as well. That's pretty much what's driving the overall market situation.

Got it. In terms of the service provider market, the service providers typically give you fairly long lead times. And I'm not asking for fourth-quarter guidance, but qualitatively what can you say about the order commitments for service provider? You have been fairly bullish for the third quarter, clearly.

Right.

And how should we think about order commitments going past the third quarter?

Well, clearly, we see Q3 will be significantly better than Q2. And the trend stands that Q4 is even better than Q3. That's how we see the trends going.

Okay. And, lastly, in terms of the guidance, how should we think about ASP versus volume going into third quarter, in terms of the ASP lift relative to the shift from g to n, as well as the ASP lift from the newer products, especially given that you are coming out with new, higher-end products in the SMB, especially?

Well, the ASP has been growing over the last several quarters, and we do see this trend continue. By how much, it's very difficult to say because it really depends on how the market pricing is. But we're generally confident that the ASP will grow for the rest of the year.

Great, thank you.

Erin Riley, Goldman Sachs.

Hi, this is Erin. I have two quick questions for you. So, what is the pull you're seeing for back to school, specifically? Where is it versus normal levels?

And secondly, based on some of the softest we are hearing about in the PC supply chain, to what extent might that translate into softer retail sales?

Well, as we look at it, actually, because Wi-Fi networks are serving primarily the mobile applications -- if you have desktops, you don't probably need a Wi-Fi network -- when we see a lot of iPad sales, a lot of iPhone sales, that's very good for us. Those things kill the Wi-Fi networks, so they need to upgrade. So I see, as long as the iPad and iPhone continue to sell well, I think we will do well.

Okay, and one last quick question -- what was the g versus n split in the quarter?

The split from a revenue base is 2 to 1 in favor of the n.

Thank you.

Sanjit Singh, Wedbush Securities.

So, one of the questions I wanted to ask was regarding some of your competitors -- Linksys and D-Link. It seems like they've been dropping out of the market. What are you seeing in the competitive environment in the US and maybe in Asia and Europe?

It's pretty clear that the US is probably moving faster than the rest of the world in terms of consolidation into what we call the Marketing 101 theory -- you're finally down to two players. And it's pretty clear that in the US is consolidating into us and Cisco's Linksys, and us being the number one vendor now. Q2 was the first quarter that we finally get to the number one position in the US; we are very glad about that.

We believe that trend will always be true in any market, but the US is ahead of Europe. In Europe, actually, in certain mature markets like in Nordics as well as in the UK, it's happening that way as well, and again us being the top brand. So that's what's going on. But in some of the markets like Germany, France, Italy, it will take a little bit longer to get there.

Right. And then you mentioned ramping R&D investments next quarter and, I guess, for the rest of the year. Christine, what would the OpEx impact would be on the R&D line, looking into Q3 and beyond?

Well, you know, we are always sitting somewhere slightly up or down of 4% of net revenue. But we would expect, in absolute dollars, it's going to continue to grow.

In absolute dollars?

(Multiple speakers) will be in R&D and in, then, sales and marketing.

Right. And then, could you quantify the FX impact of this quarter? Was it a net negative? And what are your expectations going into next quarter?

Well, really, what we do again is we hedge every quarter, somewhere at the beginning of the quarter, actually prior to giving guidance. So we were really not affected, based on the guidance we gave during the quarter. And then every quarter we reset that hedge, to which we have done for Q3.

Got it.

And if you recall, actually, during Q2 the rates didn't really drop until the end of the quarter, anyway.

Right, right. My last question is, coming back to Europe, the 15% sequential decline seems a little bit more than just seasonal. Did we not see any effects of some of the macro weakness in the regions where -- do the strengths in some of the stronger countries offset some of the weakness in the other countries? I just thought that 15% was a little bit more than seasonal.

Well, it's basically mostly due to slowing down of the service provider shipment. It has very little to do with the market demand, other than the seasonality.

Thanks, Patrick.

(Operator instructions). I'm showing no further questions in queue. I'd like to turn the call back to management for closing remarks.

Sure, and thank you once again for, everybody, joining our call. We are very excited about our momentum in the market, especially our product momentum, and we believe with the ever-increasing in pace of product introductions, we will continue to outdistance our competitors to be even further out number one in all the markets that we compete, and look forward to talking to you again in the next earnings call after our Q3 results. Thank you.

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