NETGEAR Inc (NTGR) 2011 Q2 法說會逐字稿

Greetings, and welcome to the NETGEAR, Incorporated, second quarter 2011 earnings 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, Mr. Joseph Villalta of The Ruth Group. Thank you. Mr. Villalta, you may begin.

Thank you, Operator. Good afternoon and welcome to NETGEAR's second quarter 2011 financial results conference call. Joining us from the company are Mr. Patrick Lo, Chairman and CEO, and Ms. Christine Gorjanc, CFO.

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, or you could go to NETGEAR's corporate website at netgear.com.

Before we begin the formal remarks, the company advises that today's conference call contains forward-looking statements. Forward-looking statements include statements, among others, regarding NETGEAR's expected revenue, earnings, growth, operating income and margins, tax rates, and other projected financial results, the market for our products, business prospects, market trends, expectations regarding the company's restructuring into three business units, the company's commitment to research and development, and pace of new product introductions.

Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information.

Further, certain forward-looking statements are subject to certain risks and uncertainties and 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 such forward-looking statements. Further, information on potential risk factors are detailed in the company's periodic filings with the SEC, included, but not limited to those risks and uncertainties listed in the company's most recent form 10Q filed with the SEC.

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 on the 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're extremely pleased with our second quarter 2011 results, highlighted by sequential growth in what is normally a seasonally weak quarter. We had record revenue of $291.2 million for the quarter ended July 3rd, 2011, which represents 49% year-over-year revenue growth.

We also recorded non-GAAP net income of $24.7 million, which is another new record and represents an impressive 70% year-over-year growth. We achieved year-over-year revenue growth in all three geographic regions, as well as sequential double-digit growth in the Americas and APAC. We also experienced year-over-year growth in all three segments - retail, commercial, and service provider.

On the heels of a strong first quarter, the service provider business was the star of the second quarter, fueled by strong demand for our WiFi, DSL, and DOCSIS 3.0 products. In Q2, [end] market demand for networking products industry wide continued to grow globally, and we are pleased to be [witnessing about] market growth in our business.

In the second quarter, we maintained a high level of unit shipments with 6.7 million units, a 1.1 million unit increase over the previous quarter. We introduced 17 new products during the quarter, as we continue to build on our new product momentum. We plan to launch at least another 20 new products in Q3.

Our sales channels remained strong. By the end of the second quarter of 2011, our products were sold in about 27,000 retail outlets around the world, and our number of value-added resellers stands at around 37,000.

As previously announced, we officially reorganized into three business units at the beginning of Q2 2011, to improve our focus, nimbleness, and accountability. The three business units are the retail business unit, or RBU, the commercial business unit, or CBU, and the service provider business unit, or SPBU. We believe that this structure positions NETGEAR to achieve our stated goal of $2 billion in annual revenue by 2014. We also believe this new structure will enable us to better focus our efforts on our core (inaudible) and allow us to be more responsive to business opportunities.

We're now reporting results under this new business unit structure for the first time. In the press release we have disclosed historical data, including revenue and contribution margin by business unit, and we will provide commentary on the historical numbers. After this quarter, we will continue to report revenue by segment in our earnings releases and discuss them during our quarterly earnings call.

Contribution margin by business unit will be presented in the future in the formal quarterly and annual SEC filings. For your reference, please note that the historical segment numbers provided in the press release do not directly conform to our prior period reporting. Based on our new organized business units, we have [recapped] the historical numbers to conform to the new structure.

Total net revenue [in sales] are unchanged from previous reporting. Looking back at the business unit historical revenues, 2010 was driven by a strong rebound in market demand and market share gain in our retail and commercial businesses.

Comparing 2010 results to 2009 results, retail net revenues grew more than 50% year-over-year, and commercial net revenue also performed well, with 35% year-over-year growth during 2010. Both segments also saw expanding contribution margin in 2010, with the recovery of -- with the revenue recovery.

Due to the anticipated technologies transition to DOCSIS 3.0 among our service provider customers, our service provider business was slightly down in revenue in 2010 compared to 2009.

The key drivers of our business can change from year to year. Our three business unit structure enables us to capture the opportunities presented to us by the market. We believe we can maximize our potential by having three general managers running three focused business units. In a given year, we expect to capitalize on the segment that is leading the charge, which we believe will lead to a sustained market share gains in that year.

Turning to Q2 2011 results. In our retail business unit, or RBU, we saw typical seasonality with net revenues of $107.9 million, down 8% quarter-on-quarter, and up 15% year-over-year. The recently launched WiFi repeater booster for home use has been a hit product. And we also introduced the mini travel router for the Asian retail market.

We continue to be excited about the TV, tablet, video connectivity product category. We did see some signs of slowdown in US retail market demand in Q2. But as we look forward to the third quarter of 2011, we expect normal back-to-school seasonality uplift in the retail segment.

Net revenues in our commercial business unit, or CBU, came in as expected, which was slightly down sequentially at $77.1 million for Q2 2011, which is down 3% quarter-on-quarter, and up approximately 9% year-over-year.

New products introduced for CBU in Q2 2011, include the stackable 48 port gigabit [managed] switch with 10 gig uplink, and our 10 gigabit (inaudible) switch. We also delivered our first (inaudible) switch, which we [OEMd] from extreme networks.

We continue to invest in CBU by adding sales and marketing headcount to enlarge our resellers network, as well as incremental R&D resources to expand our product portfolio. We expect these investments to result and continue to grow in the CBU segment.

Our service provider business unit, or SPBU, net revenue came in at a record $106.3 million for the second quarter of 2011. This included net revenues from the CNS division, which we acquired from Westell in mid-April 2011. At 37% of total Q2 2011 NETGEAR net revenue, SPBU net revenues were well above the historical range of 20% to 30%. Q2 2011 net revenue also included a one-time order of $10 million from a major service provider, which we were able to fulfill within the quarter.

The core business is currently driven by strong performance across our service provider accounts for WiFi and DSL products and the continued worldwide rollout of DOCSIS 3.0, of which NETGEAR is a major supplier. We have also benefited from being the sole supplier to the service provider accounts as we have already indicated, and the historical segment results show the SPBU business remains lumpy. Taking out the $10 million one-time order and taking into account all the [startup from] (inaudible) amount, our service provider customers, we expect revenue for this segment to be down in Q3.

In summary, our vision for the [home] network has always been about having all devices connected to the Internet at all times. We continue to believe our target of $2 billion in revenue a year is achievable by 2014, by expanding into the five growth areas we have identified - TV, tablet, video connectivity products with simple installation and high performances, network storage with [easy to use] interface, high capacity, and [resilience], security appliances that carry super -- superior ability to block unwanted Internet intrusions, DOCSIS, the 3.0 gateways with more innovative functions, and, finally, the 4G [LTEU] related repeaters and gateways.

We're excited about the future of our business, as we look to continue to grow in each of our three business units.

I will now turn the call over the Christine for further details on our financials.

Thank you, Patrick. Let me now provide you with a summary of the financials for the second quarter 2011. As Patrick noted, net revenue for the second quarter ended July 3rd, 2011, was $291.2 million, compared to $195.9 million for the second quarter ended June 27th, 2010, and $278.8 million in the first quarter ended April 3rd, 2011.

Products introduced in the last 15 months constituted about 49% of our second quarter shipment, while products introduced in the last 12 months constituted about 43% of our second quarter shipment.

Additionally, last quarter we announced changed in our geographic revenue reporting regions, now organized into the following three geographic territories - first, Americas, second, Europe, Middle East, and Africa, or EMEA, and, third, Asia Pacific, or APAC.

In Q2, our Americas net revenue was $149.5 million, while EMEA net revenue was $110.3 million, and our APAC net revenue was $31.4 million. We are seeing great double digit growth quarter-over-quarter in the Americas and APAC region with very impressive year-over-year growth in all three geographic regions.

From this point on, my discussion points will focus on non-GAAP numbers. The reconciliation of GAAP to non-GAAP is detailed in our preliminary financial statements released earlier today. Non-GAAP gross margin in the second quarter of 2011, was 31.7%, compared to 36.3% in the year-ago comparable quarter and 32.1% in the first quarter of 2011. Gross margin was down both quarter-over-quarter and year-over-year, mainly due to the higher mix of service provider net revenues within the quarter.

Total non-GAAP operating expenses came in at $57.6 million for the second quarter of 2011, reflecting our higher sales and marketing expenses and increased investments in R&D. In addition, we added 45 people to our headcount during the quarter, which included 25 employees from the Westell CNS acquisition. This compares to operating expenses of $45.5 million in the second quarter of 2010, and $54.2 million in the first quarter of 2011. Operating expenses are expected to increase in absolute dollars in Q3 2011.

The non-GAAP tax rate was 29% in the second quarter of 2011, compared to 47% in the second quarter of 2010, and 31% in the first quarter of 2011. The tax rate in Q2 was slightly lower than Q1, reflecting the latest projected full year 2011 profit split between Americas international and a benefit from (inaudible).

Non-GAAP net income was $0.65 per diluted share in the second quarter of 2011, compared to net income of $0.38 per diluted share in the second quarter of 2010, and net income of $0.65 per diluted share in the first quarter of 2011. Note that our fully diluted share count has risen to 38 million shares, and we expect this number to continue to trend upward in the second half of 2011.

We reported a one-time charge related to business unit restructuring and the Westell CNS acquisition transition cost, of approximately $2.1 million in the quarter. We have not included this charge in the non-GAAP numbers.

Our balance sheet remains strong, ending the second quarter with $277.9 million in cash, cash equivalents, and short-term investment.

DSOs for the second quarter were 66 days, compared to 64 days in the second quarter of 2010, and 66 days in the first quarter of 2011. We remain at the lower end of our normal range of 65 to 75 days.

Our second quarter net inventory ended at $137.8 million, compared to $125.7 million at the end of the second quarter 2010, and $140.1 million at the end of the first quarter 2011. Second quarter ending inventory turns were 5.8 as compared to four turns in the second quarter of 2010, and 5.5 turns in the first quarter of 2011. We continue to manage the inventory to optimize our freight costs between sea and air, while making sure we can deliver to our customers' expectations.

Channel inventory remained inline with expectations. Our channel reports inventory to us on a weekly basis, and we use a six-week trailing sell-through average to estimate weeks of stock. Our US retail inventory came in at 10.6 weeks of stock, which we believe positions the channel well [as] we enter the back-to-school season.

Current distribution inventory levels are inline with how we see the business growing over the next quarter. We were pleased to see the increase in the international distribution inventory over the first quarter of 2011.

We generated approximately $15.9 million in cash flow from operations during Q2 '11, and utilized $2 million for capital expenditures.

In summary, our growth strategy of aggressively expanding into new product category, new geographic regions, and new channels continues to produce positive results. With industry leading new product introductions, global brand recognition, and efficient distribution, we feel confident in our ability to stay ahead of our competition as we move into the second half of 2011.

Due to our continued commitment to research and development, we expect the pace of our new product introductions to remain at a rapid clip for the rest of the year.

Looking forward to the third quarter of 2011, we look to continue to gain market share with our strong product lineup. We intend to rollout 20 new products in the third quarter to continue our momentum and innovation. Also, we believe the third quarter of 2011, will present a sequential increase in market demand due to back-to-school purchases for both our retail and commercial business unit. However, we believe our service provider net revenue will be down from Q2 and back into our normal range of 20% to 30% of net revenue.

Specifically for the third quarter of 2011, we expect net revenue in the range of approximately $290 million to $300 million, with non-GAAP operating margin to be in the range of 11% to 12%. The non-GAAP tax rate in Q3 is estimated to be between 30% and 31%.

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

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) One moment, please, while we poll for questions. Our first question is coming from the line of Mr. Jeff Kvaal with Barclays Capital. Your line is now open, you may proceed with your question.

Hi. This is actually Lynn on behalf of Jeff.

Hi, Lynn.

Hi, Lynn.

Hi. How are you?

Good.

I was just wondering if we could delve a little bit into the guidance. If I take out the $10 million one-time deal this quarter, it still seems a little bit below seasonality. Could you just maybe talk a little bit more about some of the assumptions of variables? It sounds like back-to-school should be normal. You know, some of the assumptions going into the guidance.

Yes. If you look at the [$292] million of revenue and you take our $106 million, which is for the SPBU, then basically the CBU plus RBU revenue for the second quarter is roughly about [$187] million. And if you take the normal seasonality of Q3 over Q2, anywhere between 10%, 15%, we continue to expect that. But then, as we said, the service provider revenue actually is going to come down from $106 million because $10 million of that is a one-time order, it's not a repeat. So you would take that down, it's about $96 million. And we also say that we expect that it will come down a little bit from that level because of some of our accounts [will] start bringing in the [second] source of suppliers.

So the seasonality stays intact for the (inaudible) portion of our business, and we are still pretty confident seeing the normal seasonal uplift of 10% to 15% on that piece of the business. But on the SPBU side, it's going to be sequentially down quarter from the revenue standpoint.

Okay. That makes sense. And then could I just ask maybe just a broader picture on what you're seeing in Europe? I think everybody took out the [version need to resonate from us, quarterly, it looks like Europe was, I think up. Any softness in terms of the consumer market, just commentary we've been hearing in the news.

We're seeing continue the upward trend in the market demand on the non-carrier channel, and Q2 is a seasonally down quarter for Europe because Europe basically shutdown for business for two to three weeks during the Easter holidays. So we expect that in Q3 they're going to come back up, which is the normal. So we do not see any particular deviance of that. So Europe overall we're quite satisfied with performance, and especially we continue to see we are gaining market share both on the commercial, as well as in the retail segment.

Okay. That's it for me. Thank you.

Thank you.

Thank you. Our next question is coming from the line of Mr. Ryan Hutchinson with Lazard Capital Markets. Your line is now open, you may proceed with your question.

Okay, great. Good afternoon. So that's helpful on the guidance. But maybe if you could just provide what the Westell contribution in the quarter was and your expectations for next quarter.

We don't break out the revenue anymore because they are fully integrated into our SPBU operation. And once they're integrated, you bet, I mean, we're going to start selling -- cross sell a lot of other products into the same account. So it's pretty difficult to separate what's the old business versus the new business. So from here on out, we're going to basically report the SPBU as a whole.

Okay. Let me ask it maybe a different way. Just have revenues in general, following the acquisition, materialized, you know, roughly in plan? And the reason I ask, I'm just trying to understand if that's part of the dynamic, if at all, is as far as the decline related to the service provider and if it's at all tied to the $10 million one-time deal.

Well, definitely, one -- the $10 million is the major driver of the sequential downdraft from quarter-to-quarter. On the other hand, as we mentioned, the primary decline for the other portion is we just have to split some accounts, DOCSIS 3 revenue with some new competitors.

Okay.

But it's a normal industry practice. I mean, those accounts will not have single sourcing. So now they're bringing in some secondary suppliers to -- just to [make -- say] that they have [dual sourcing].

Understood. Which leads to the next question. Can you maybe just talk about the Virgin contribution and whether or not Virgin was a 10% customer? And then tied to that just how we think about the sustainability of the DOCSIS 3.0 upgrade cycle. I know on the last call you talked about, you know, you had visibility for a couple quarters. Has that changed at all?

No, the visibility is still there. The Virgin customer -- Virgin is still a very important customer of [ours], even though seeing as our revenue has grown, there are no more 10% customers. We continue to see a strong rollout of DOCSIS 3.0 around the world. As a matter of fact, we believe that next year in 2012, the rollout will be accelerated around the world.

Now, but that's the good news. The not so good news is some of our competitors are now starting to ship product. So that will give our customers the chance to put in a second vendor. So reluctantly we have to split some of the revenue because it's an industry practice to have dual sourcing.

Okay. And then finally for me, just I know you -- you urge us to continue to look at the operating margin. But I just want to understand the mix. And is it all interrelated with the increase in the service provider and/or the Westell contribution that drove gross margins into the 31.7% range, and then just how we think about that moving forward. That would be very helpful. Thanks.

Well, definitely as we mentioned all the time the gross margin's affected by two factors. One is the mix of the service provider business versus the RBU and CBU, which we now are splitting them out from a contribution margin standpoint. So clearly when the service provider revenue is up, then the gross margin will come down for the company overall. The second factor is, within CBU and RBU it depends on how they spend their marketing dollars. Every quarter they have a fixed marketing spend, call it, let's say $10. If they decide to spend that $10 in channel promotions, for example, running an ad jointly with a channel partner, or they're running a rebate promotion with a particular channel partner, that would lower the gross margin without any effect on the operating margin or the contribution margin.

But instead, if they decide to use their $10 more on running a trade show or putting an ad on Google, a search ad on Google or putting a display ad on Facebook, then it actually would [boost up] the gross margin, even though it would not touch the operating margin.

So those are the two factors that would come into play in the gross margin line.

Thanks, guys.

Thank you.

Thank you. Our next question is coming from the line of Mr. John Goldberg from Deutsche Bank. Your line is now open, you may proceed with your question.

Hi. Thanks for taking my question.

Hi, John.

Sure.

I just wanted to follow up on the margin question then. If the gross margins are dependent on trade promotional activities, I guess I would have expected -- I'd always thought of the service provider business as having a lower gross margin, but higher operating margin because there's less service cost associated. But there seems to be a pretty wide disparity between your service -- your different business units' operating margins. Is that something that you think will continue going forward? And how should we think about margin structure by business unit?

No. As a matter of fact, the service provider businesses always have a much lower gross margin, as well as a contribution margin because the pricing power of our customers are pretty high because very concentrated purchasing.

However, the cost of servicing that channel is significantly lower than the CBU and RBU. So you're right. I mean, from -- if you purely look at from an operating margin perspective, the service provider business unit is not that far off from the other two. It's still lower, but it's not that far off. So when the service provider business unit revenue is higher, you could see the gross margin coming down, but our [overall] operating margin would stay within 11% to 12%.

So then looking forward, you don't think there's any -- we shouldn't be expecting any drastic changes to your gross margin structure? It sounds like gross margins --

No. No, it won't.

-- [are going to vary] with mix, but they're not going to -- you think pricing trends are stable in the market?

Correct. If you look at the historical numbers that we put out in the press release, when the service provider business unit is below, say 20% of our net revenue, our gross margin could go all the way up to 36%, coupled with a [quarter] which has much less in-channel promotion for the RBU and CBU, and mostly do general advertising or trade show, then the gross margin go up to as high as 36%.

But for example, in a quarter where you have service -- [our] service provider revenue go all the way up to about 37%, then the overall gross margin will come down to the 31.6% level, but the operating margin variant is very little.

Okay. And then, Christine, a quick question. Tax rate you got it for the quarter at 30% to 31%?

Yes.

Is that the number we should use next year as well?

We haven't really guided to next year, but -- and so we haven't guided to that. I don't expect it to go way back up. I mean, it'll just depend really on the mix at that point.

Okay. Great. Thank you, guys.

Okay.

Thank you. Our next question is coming from the line of Mr. Mark Sue with RBC Capital Markets. Your line is now open, you may proceed with your question.

Hi. It's Chris, for Mark Sue.

Hi, Chris.

Hi. Can you talk about the competitive landscape and if you've seen anything different? Do you think Cisco's refocusing on their business, [undecided] business? And also, for 3Q, can you kind of give us a sense of what you're seeing with the macroeconomic environment?

Okay. First, from a competitive landscape, we haven't seen any change in the various geographies or the various channels. It's the same crowd, as we say it. As far as Cisco (inaudible) is concerned, we haven't seen much difference in their behavior in the channel. They continue to introduce new products. They continue to run back-to-school promotions. So as far as we're concerned, it's still business as usual. And certainly, the announcement of Cisco's refocusing is having some concern in the market from a channels perspective. So we do see them continue to have shrinking shelf space. But they're still competing pretty aggressively in the market. So we treat them as a very [formidable] competitor.

As far as macroeconomics situation's concerned, we do not really see much difference in behavior from the retail as well as from the service provider side. Clearly the commercial is a little bit different because the businesses are concerned about the, what we call the instability from the policymakers which would have effect on the overall economy. So if governments around the world do not make the right choices, then certainly we expect effect on the overall economy and the demand in the commercial channel.

Great. Thanks.

Thank you. Our next question is coming from the line of Hamed Khorsand with BWS Financial. Your line is now open, you may proceed.

Hi, guys.

Hi, Hamed.

Just a few questions here. Are you able to correlate any of the -- any contribution for tablets could be having on the demand for WiFi routers?

We cannot really quantify it. But we can see very strong demand, as we mentioned in the release, on our WiFi repeater booster. And clearly from the product reviews that people posted on the website, clearly a major part of that is for the tablet. So we clearly see the tablet is driving more than one device -- WiFi devices now in the house, and sometimes as big as three or four devices in the house. So we're pretty happy to see the [liberation] of tablet.

Okay. And then are you seeing any kind of change in retailer purchasing habits, given the change in Cisco's presence in the market?

As I just mentioned, yes, we do. Retail is shrinking their shelf space.

Okay. And my last question is, what needs to happen third quarter for operating margins? Stay around 12%?

Well, basically, if everything goes to plan, then it would definitely be there.

But your guidance is for 11% to 12%. And in this quarter you had 11.9%. So I'm just trying to see, what -- what's the outcome that you need to get another 11.9%, so operating margin doesn't go down sequentially.

But clearly, I mean, if the revenue is at the high end, then certainly the operating margin will be at the high end.

Okay.

And it also depends on the product mix as well. But generally we work hard to try to maximize our profit.

Great. Thank you.

Sure.

Thank you. Our next question is coming from the line of Mr. Kent Schofield with Goldman Sachs. Your line is now open, you may proceed with your question.

Thank you. As you look at the move [up] market on the commercial side, can you talk a little bit about the success you're seeing there across some of the different product lines?

Oh, definitely. The move up market (inaudible) has always been among companies with 25 to 75 employees. Our target has always been servicing to -- up to companies with 250 employees. There is a little bit of difference among the two groups of companies. Those companies with more than 75 employees, more than likely will have a dedicated IT manager or CIO, per se. So the selling process is a little bit different and the resellers are a little bit different. So we have been investing in expanding and training our own sales team, commercial sales team, as well as our reseller base in order to sell to those customers with 75 employees and above.

So this requires quite a bit of investment in terms of sales and marketing. And at the same time we have to bring up products that service that segment, so that will require incremental R&D as well. We're making progress over the last 18 months. For example, just like what we discussed in the earnings comments that there were two products that we introduced in Q2. One is -- actually, we delivered. We introduced them in Q1, but we delivered them in Q2 [in volume]. One is the (inaudible) switch that we OEMd from extreme networks. We installed quite a few of them in Q2 in customers' premise.

We also introduced an install, the 10 gig [top-of-rack layer] three switch. We're pretty encouraged by the acceptance of the market from our customer base for those products. We also introduced last year's (inaudible) high-density ready (inaudible). That would be very good for backup, duplication, and hybrid cloud application. We offer all the way up to 36 terabytes of storage.

Earlier this year we introduced a UTM 150 that could support up to 150 users. Certainly that's not good enough for 250 users, but we will continue to up that range.

So a combination of investment in sales and marketing and in R&D, we believe that we're gaining more and more acceptance in that particular market segment.

That's great. Are there any particular verticals that you're seeing success in first? And if you are, why are you winning in there particularly?

Yes. Generally, our initial success is in the education market. Clearly in the education market either they have school administrators [be under stress] because of budget worldwide, so they look for the best value, while demanding for the highest quality.

So we're kind of right in that particular spot that would deliver the quality that is second-to-none, but much better value than the Cisco and the 3-Com/HP type. So that's the first entry that we have seen success around the world. And then we also seeing success in hospitality like in some hotels, like in some resorts, as well as in some hospitals, healthcare. Those, we also are seeing some success over there. And we expect that we will be able to get even more into other industry such as manufacturing, because of the reliability of our products. So those are the few areas that we're seeing success and will focus on.

Great. Thanks for the detail.

Sure.

Thank you. (Operator Instructions) Our next question is coming from the line of Mr. Ari Bensinger with Standard and Poor's. Your line is now open, you may proceed with your question.

Yes. Thank you. It seems like service provider revenue is largely success based and, therefore, tends to be some what volatile quarter-to-quarter and it's dependent on subscriber end demand and carry inventory level. So how should we view seasonality going forward for the company, given that service provider's become a large part of the business?

Yes. Thank you, Ari. You hit in the right point, that for service provider really there is no seasonality. You're right. I mean, as we had pointed out, I mean, at times very lumpy, and it's based on success sometimes because in a lot of these account, there's not even [any success] on winning the account. It's in success in winning projects by project. And some of them are kind of one-time project like the one we had in Q2, which is the second time we had this kind of one-time project in the last two years.

So what we're doing is actually try to win more [account] so we can spread what we call the lumpiness across more accounts and, clearly, I was -- right now we're also investing quite heavily in both, in the CBU and the RBU business so that they will become -- they would maintain the higher portion of our overall revenue so that they could absorb that lumpiness off the service provider.

We always say that our ideal share of the service provider business is somewhere between 20% to 30%. So we believe that we're working towards that. And as the RBU and the CBU continue to grow in the, for example, in Q3 because of the seasonality uplift, then our SPBU revenue will go back down to the more normal 20% to 30% range.

That makes sense. And I apologize if you covered this before. But it seems like EMEA was down 10% sequentially. Obviously demand's being hurt by negative economic headlines. What's your outlook for this region for Q3 and the rest of the year?

Yes. As a matter of fact, the down quarter for the EMEA is primarily driven by the (inaudible) channel's seasonality. Every year Europe basically shuts down for the month of April because of Easter holiday. We do expect that it will be an up quarter in Q3 from the sequential basis. And clearly, I mean, Europe is doing very well on a year-over-year basis. Actually Europe grew about liked 30% plus year-over-year compared to 2010. We expect that the EMEA growth continue in Q3, but Q3 will be a sequential up quarter from Q2 for Europe.

Okay. Thank you.

Sure.

Thank you. Our next question is coming from the line of Rohit Chopra from Wedbush Securities. Your line is now open, you may proceed with your question.

Thanks. Couple questions, Patrick, just on some products in the commercial space. Security. Could you just talk a little bit about how you're doing over there? I know you had some cloud-based security products. You have a UTM. If you can comment on how those are doing. And also maybe on your commercial WiFi products and how they're doing as well.

Oh, definitely. Both are doing quite well. We actually, seeing as we introduced the UTM product lines about a year and a half ago starting with five users, 10 users, we have been growing this business very rapidly in terms of shipment. And we continue to see ourselves being a major player in this particular space. The growth of this particularly category is very rapid. And we believe that compared to our usual competitor such as WatchGuard, SonicWALL, yes, we're still small, but we're not that far behind from, for example, WatchGuard in terms of overall market share and market presence. And we continue to build out, train our existing channel partners how to sell these products. We're very confident that we will be able to be one of the major providers in the next two, three years.

In terms of the commercial wireless, right now we have products that could support up to about 100 access points in the marketplace has been very successful in education around the world. And we also are very successful in some hospitality, as I said, both in hospitals as well as in small hotels around the world. We will continue to expand the penetration of these products into the manufacturing area.

So we're pretty confident that these (inaudible) for the smaller installations of the commercial WiFi, we are ranked the top three in both Europe as well as in North America.

Thanks. And if I could just ask Christine one question. I know you've changed the categories and everything like that. I was wondering, is there any way to get the number of wireless units shipped and your wireless wired split?

Yes. The wireless unit shipment is $5.6 million versus overall $6.7. So that's a unit shipment.

Yes.

And the other one you want, Rohit?

The wired --

Wireless wire?

Yes.

The wireless wire is 68%, and then 32% for wired.

Thanks, Christine. Thanks, Patrick.

Sure.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Sure. So thank you, everyone, for joining our Q2 quarterly earnings call. As I started the call saying that we extremely pleased with our year-on-year growth, as well as sequential growth. I would believe that we continue to win in the marketplace. We are probably one of the fastest growing networking company, and we are very proud of that achievement. With the investment in R&D, as well as in sales and marketing, we believe that we will continue to stay ahead of the market and would continue to show sequential and year-on-year grown.

And we look forward to talking to you again at the Q3 quarterly earnings call. And if you have any further questions, about Q2 numbers as well as our overall market situation, please feel free to contact The Ruth Group to set up a potential call with us.

Thank you very much, and I'll talk to you three months from now. Thank you.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful afternoon.