NETGEAR Inc (NTGR) 2011 Q3 法說會逐字稿

Greetings, and welcome to the NETGEAR, Incorporated, third 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 third 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, our growth strategy, 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 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, including, but not limited to those risks and uncertainties listed in the company's most recent form 10-Q 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 www.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. Well, before reviewing the quarter, I would like to note that our annual analyst day will be on Wednesday, November the 2nd, next week, in Boston. Please contact Joseph at the Ruth Group if you would like to attend.

Now let's turn to the Q3 report card. We're extremely pleased with our outstanding third quarter 2011 results. We had record revenue of $301.8 million for the quarter end October 2nd, 2011, which represents 28% year-over-year revenue growth.

All three geographic regions, as well as all three business units, retail, commercial, and service provider, grew in double digits year-over-year. We also want to highlight our 9% sequential revenue growth in Europe, where a lot of uncertainty prevails. Both our retail and commercial units also experienced strong sequential revenue growth.

We recorded non-GAAP net income of $29.9 million, which is another new record and represents an impressive 86% year-over-year growth. Non-GAAP EPS reached a new height of $0.79 per diluted share. Despite global economic uncertainty, we were able to achieve worldwide record revenue, non-GAAP profit, and EPS based on our strength in new product innovation and our second-to-none worldwide distribution.

In Q3, end market demand for networking products industry-wide continue to grow globally, and we're pleased to be maintaining above market growth in our business. In the third quarter, we maintained a high level of unit shipments, with 6.4 million units shipped. We introduced 22 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 Q4.

Our sales channel remains strong. But the end of the third quarter of 2011, our products were sold in over 27,500 retail outlets around the world, and our number of value-added resellers stand at over 37,000. In the fourth quarter, we are planning to further expand our retail distribution in all three geographic regions.

Now let's turn to review of the third quarter results for our three business units - retail, commercial, and service provider. In our retail business unit, or RBU, we saw strong growth with net revenues of about $127.1 million, up 18% quarter-on-quarter, and up 10% year-over-year. We have seen that Europe following the trend in the US, with more tablets and WiFi-enabled devices being used at home.

We continue to be excited about the TV tablet video connectivity product category, particularly in Europe, which was a significant boost to our strong results for the RBU in Q3. Back-to-school sales in the United States provided a seasonal uplift, albeit at a slower rate than last year.

Notable new products launched in the third quarter include the industry's first 900 megabit per second WiFi router, and the NETGEAR NeoTV Player, which streams Netflix, VUDU, YouTube, and many other online content sources to TVs. We also introduced the Push2TV Universal, which can transpose the screen display of any laptop to a TV wirelessly.

Net revenues in our commercial business unit, or CBU, came in at a record high, with revenues of $91.1 million for Q3 2011. This is up 18% quarter-on-quarter, and up 21% year-over-year. Our strength in the commercial business was led by the strong market reception of our recently introduced switches, with 10 gigabit or power over Ethernet capabilities.

In our innovative [plug] switches, which are manageable [via] simple PC utility software, with only a small premium over unmanaged switches. In Q3, we introduced the industry's first modular unified threat manager, or UTM, for small businesses, with both WiFi and VDSL capabilities, and the 52-port 10/100 power over Ethernet Smart Switch. We're starting to see the results of our investment [and] expanding our sales and marketing and headcount to engage deeper with our resellers' network, which stands at 37,000 value-added resellers strong.

In our service provider business unit, or SPBU, net revenue came in at about $83.7 million for the third quarter of 2011. This is down 21% quarter-on-quarter. The revenues for the quarter were expected to be lower than the second quarter for two reasons. First, there was a $10 million one-time non-repeatable order in Q2 from a major [service] provider. Secondly, the business remained lumpy, and we saw reduced orders from the other service provider customers. At 28% of NETGEAR's total revenue, the SPBU revenues is at the high end of our historical range, which is between 20% to 30% of total NETGEAR revenues.

I would like to note Q3 '11 was the second highest revenue recorded by the service provider business unit. On a year-on-year basis, we are placed with the impressive 85% growth in service provider revenue. Our vision for the home network has always been to have all devices connected to the Internet at all times. We continue to target $2 billion in revenue a year by 2014. We continue expanding to the five key growth areas that we have identified - TV tablet video connectivity products with simple installation and high-end performance, network storage with easy-to-use user interface, cloud capability, high capacity, and [resilience], security appliances that carry superior ability to block unwanted Internet intrusion, DOCSIS 3.0 gateways with more integrative functions, and, finally, the 3G and 4G (inaudible) 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, and we expect to close the fourth quarter in what we expect to be a record-breaking year.

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

Thank you, Patrick. Let me now provide you with a summary of the financials for the third quarter of 2011. As Patrick noted, net revenue for the third quarter ended October 2nd, 2011, with $301.8 million, compared to $236 million for the third quarter ended October 3rd, 2010, and $291.2 million in the second quarter ended July 3rd, 2011.

We shipped a total of about 6.4 million units in the third quarter, including 5.2 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 3.9 million units in the third quarter of 2011.

Moving to the product category basis, fourth quarter net revenue split between wireless and wired, was about 65% and 35% respectively. The third 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 50% of our third quarter shipment, while products introduced in the last 12 months constituted about 34% of our third quarter shipment.

In Q3, our Americas net revenue was $149 million, while EMEA net revenue was $119.7 million, and our APAC net revenue was $33.1 million. We are seeing solid growth quarter-over-quarter in the EMEA and APAC regions, along 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 third quarter of 2011, was 32.4%, compared to 32.7% in the year-ago comparable quarter, and 31.7% in the second quarter of 2011. Gross margin was comparable year-over-year and up quarter-over-quarter due to product mix and continued supply chain optimization.

Total non-GAAP operating expenses came in at $60 million for the third quarter of 2011, reflecting growth inline with our revenue growth. We hired an additional 25 people during the quarter, bringing our total headcount to 756 at the end of Q3. Operating expenses are expected to increase in absolute dollars in Q4 2011.

The non-GAAP tax rate was 20.2% in the third quarter of 2011, compared to 37.7% in the third quarter of 2010, and 28.6% in the second quarter of 2011. The tax rate in Q3 was exceptionally favorable due to a one-time benefit, which will not be repeated in subsequent quarters. This one-time tax benefit increased our EPS for Q3 2011, by about $0.09 per diluted share.

Non-GAAP net income was $0.79 per diluted share in the third quarter of 2011, compared to a net income of $ 0.45 per diluted share in the third quarter of 2010, and net income of $0.65 per diluted share in the second quarter of 2011.

Our balance sheet remains very strong, ending the third quarter with $321.1 million in cash, cash equivalents, and short-term investments, which was driven by approximately $43 million in cash flow from operations, a solid inventory position, and DSOs coming in at the bottom of our historical range. DSOs for the third quarter of 2011 were 66 days, as compared to 73 days in the third quarter of 2010, and 66 days in the second quarter of 2011. Our target historical range for DSOs is 65 to 75 days.

Our third quarter net inventory ended at $136 million, compared to $110.4 million at the end of the third quarter of 2010, and $137.8 million at the end of the second quarter of 2011. Third quarter ending inventory turns were six, as compared to 5.8 turns in the third quarter of 2010, and 5.8 turns in the second 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 weeks of stock, which we believe positions the channel well as we enter the upcoming holiday season. Current distribution inventory levels are 6.6 weeks in the US, 4.3 weeks in EMEA, and 3.9 weeks in APAC.

In summary, our growth strategy of aggressively expanding into new product categories, new geographic regions, and new channels, continues to produce positive results with industry leading new product introductions, global brand recognition, and extensive distribution, we feel confident in our ability to stay ahead of our competition as we move into the fourth quarter of 2011. We are also cautiously optimistic on holiday sales both in the US and Europe, and believe our new products will win a bigger piece of the market pie.

Looking forward to the fourth quarter of 2011, we intend to roll out at least 20 new products, specifically for the fourth quarter of 2011. We expect net revenue in the range of approximately $300 million to $310 million, with non-GAAP operating margin to be in the range of 11% to 12%. The non-GAAP tax rate in Q4 is estimated to be between 30% and 31%.

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

We will now be conducting a question-and-answer session. (Operator Instructions) One moment while we pool for questions. Our first question comes from the line of Jeff Kvaal from Barclays. Please proceed with your question.

Yes. Thanks very much. I have a question and a clarification, if I could. Patrick, Christi, you have traditionally given -- delivered seasonality in the fourth quarter not as good as back-to-school, but still in the double-digit range. It seems as though there's room for that now if you're cautiously optimistic on holiday sales, and it sounds like you're aiming for some share gains as well. And, yet, your guidance suggests kind of flattish, frankly. So I'm wondering if you could explain the delta for us.

Well, there are two reasons. I mean, one, the service provider revenue is becoming pretty big part of the equation. And as the absolute dollar [offers] provider revenue become big, the lumpiness of it would have a big effect. And it doesn't follow the seasonality of the retail business. So the degree of holiday season sales in retail has a lesser impact on the overall company revenue. And this would continue to show as our revenue gets bigger and bigger going forward from the service provider side.

Secondly, as we all know, even though we are cautiously optimistic, there is still a lot of uncertainty on the global economy with the unsettling situation in the sovereign debt crisis in Europe. Even though we heard today they have reached a new plan, there's a lot of doubt over whether the details of the plan will be worked out in the next few weeks, and the market is going to have a lot of swing in it.

So that's why I think our guidance is very prudent for something that we would be confident to deliver.

Okay. So that's a yes, we should see another down tick in service provider then? Is that right?

No. We expect the service provider is going to be flat quarter-on-quarter.

Okay. And inventory is where you need it to be in that realm?

Yeah. Inventory is staying at a very good level, both on hand, we have inventory turns of six, and in the channel as well, we're pretty pleased, the channel in the retail with 10 weeks. I think that's -- will serve the holiday sales pretty well. And our distribution channel is pretty healthy in the US, as well as in Europe. A little bit light in Asia. But we'll fix that pretty quickly.

Okay. And then lastly, you have been at or above the high end of your operating margin guidance for the full year. So why not in an up quarter should you not be at or above again?

Well, as we say all the time, right, we would like to plow the profit back into further expanding our [profits] in the distribution, as well as in product portfolio. And Q4 will be a good time for us to do that, because, as you just said, we have accumulated quite a bit of upside, and we would like to continue our momentum in taking share away from our competitors.

Okay. Thank you very much, Patrick.

My pleasure.

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

Good afternoon. I have a couple questions as well. First off, just on the service provider, if I could dig into that a little bit more. I understand it being down 21%, partly due to one-time order. But if you still back that out, it's still down about 13% on an apples-to-apples basis. So I guess I'm trying to get a better understand of exactly the dynamics around there. And specifically, are you seeing a slowdown with the DOCSIS 3.0 rollouts? Have you seen any, perhaps dual sourcing opportunities? And just an update there. And then just in terms of lead times, my understanding, it's still 13 weeks. So as far as visibility in the fourth quarter, that would be also helpful.

Well, definitely, you pointed right [in the head], there is the $10 million that we [could have] take it out. As we alluded to last time, I mean, the service provider business is characterized by two things. One is the dual sourcing. So we're starting to see some of that, which it has an effect on a [quarter-quarter] downturn. But also, the service provider business is pretty lumpy. It really depends on the service provider's CapEx, budget for a particular quarter or particular year. And we'll continue to see this going forward.

There is no special event happening in Q3. But those two factors are leading to what you say apparently a 13% sequential decline. But I would like to also point out to the fact, let's -- don't lose sight on the fact that we grow that revenue 85% year-over-year for the same quarter. So that's a very, very good accomplishment.

Yes, understood. And I appreciate that. But just in terms of maybe the dual sourcing, can you quantify the two levers that you highlighted and the impact that you think dual sourcing is having on the business and then as far as it relates to expectations going into the fourth quarter?

Well, one, if you subtract 106 by 10 million, so we have 96 million as the [gate]. So 96 and 84, the difference is 12 million. So the 12 million is the result of two factors - one is dual sourcing and one is some lumpiness of the orders. We're not [going] to be clear on what the separation of the two is. As we go forward, as we talked about it, we always try to defend, all right, dual sourcing. So I hope that we can get 90%, the other guys get 10%, or even better, 99% versus 1%. So that's the path we're taking on.

And clearly, I mean, it really depends on how our customer relationship is, how our product going to excel. But that's the path that we will continue to take on.

As for going forward, how do we look, we just commented we believe that in Q4, our service provider revenue is going to be flat. So we're going to maintain a similar level going forward in Q4.

Okay. And then just a follow-up to that in terms of what you see now as you look forward. You're pretty comfortable with the fact that from a dual sourcing standpoint, you'll take the lion share with some of the key accounts that you've had on a historical basis?

Well, I mean, given this only $12 million difference quarter-on-quarter and part of it is due to the lumpiness of the ordering process, yes, we feel pretty confident that we'll continue to maintain the bigger share of the pie.

Okay. And then finally for me just on that, and I'll jump back in the queue, any update on Westel and the integration there, specifically as it relates to traction with new and existing customers?

The integration is complete. I think it is a very smooth integration. All the functions are totally integrated with NETGEAR. And I think our customers are very happy with the transition. And we certainly are getting great feedback from them. And we look forward to expanding our business with them.

Our next question comes from the line of Jonathan Goldberg from Deutsche Bank. Please proceed with your question.

Hi --

Hey, Jonathan.

Hi. Can you hear me now?

Yes. Yes. Yes.

Hi, guys. So I was hoping you could just give us an update on the commercial side. We talked carrier. We talked about consumer. Can you talk a little about SMB and what kind of trends are you seeing there? Color geographically would also be very helpful.

Yes. We've seen growth actually in all three geographic regions for the SMB business. And as we commented earlier on, we had a record quarter on commercial business unit. We reached a new height of $91 million of revenue, which represent a good 21% year-on-year growth and a good sequential 18% growth. So we're very pleased on that.

In particular, taking into account that, I mean, quarter three of 2010, was a 13 week -- 14 week quarter, and this year Q3 is a normal 13 week quarter. And even with that, we're able to grow 21% year-over-year. So you [normalize] 13 week, the growth is actually even more.

Clearly, we're doing something right on [mobile] front. And on the switching front, our [plug] in a 10 gigabit is proving to be absolutely right on the market, customers asking for that. So we have a line of 10 gigabit switches, both from ourselves, as well as the OEM product from [Extreme]. Both are doing very well for us.

Also, we definitely hitting all the right notes on the [NAS] side, especially on the high end, right amount. It's getting a lot of acceptance. Our partnerships with software vendors such as VMWare, such as Acronis, it's really positioning us very well on the SMB side for readiness.

And also we're seeing some really good steady implementation of campus-wide network for small and medium businesses. So we have had a few success in outfitting campuses of motels, hospitals, manufacturing, schools.

So those are the three really strong points. Last, not the least, we continue to plow along in expanding our worldwide coverage, as well as penetration in the security market. So that pretty much sum up the fabulous -- a fabulous performance that we had in Q3 versus last year in the commercial side.

And how seasonal is that business?

That business, generally speaking, is concentrated in Q3, and also in Europe is also in Q4. Q1 is generally a little bit [cautious] and Q2 is the worst.

Great. Thank you.

Sure.

Our next question comes from the like of Jonathan Kees from Capstone Investments. Please proceed with your question.

Hello, Jonathan?

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

Hi, guys. Just a few questions here. I actually wanted to get some comments from you here. You guys didn't talk about it. What kind of exposure do you have as far as the storage goes, given the flooding in Thailand? How much inventory do you have as far as raw goods is concerned? How much exposure? Could that happen in Q4, as far as revenue goes?

Sure. Hamed, this is Christi. At this point, we do know of the situation, and we feel like we will be able to secure the supply for Q4, albeit, we know we're going to pay some higher prices. And our goal is to really just pass on that to the customers in the pricing, keeping our margins the same, and that would simply just pass on the additional cost as we secure that. And then we're working on Q1 also.

Okay. And then as far as the operating margin goes, you guys usually have a good steady history of being within that 11% to 12% range. Was it the revenue that just came in towards the end of the quarter? Or how did show up that you guys just didn't spend enough?

Well, I think given everything going on, we were probably a little cautious on our spending. And we always like to make sure that when we start spending it or hire a person that we're going to keep them. So we were probably a combination of a little cautious, and revenue was a little bit higher than we anticipated at the end of the quarter.

Okay. And my last question is, the inventory levels at the distribution or retail levels that you provided, it seems like they're at the comfortable range that you guys want. But your inventory on your books is declining. Are you guys just laying off just waiting for better prices? Or why aren't you preparing for more sales given the peak numbers you guys usually get in Q4?

Well, I actually think the key is the turns. And though we're bringing in a lot of inventory, we're turning it within the quarter too. So by the turns going up to six this quarter, we do feel like we're adequately supplied. But the key is the turns on that because we bring it in and we get it back out during the quarter.

Okay.

The operations folks just feel like they're more efficient. They can turn the inventory faster.

Okay. Thank you.

Sure.

Our next question comes from the like of Jonathan Kees from Capstone Investment. Please proceed with your question.

Jonathan?

Hello?

Hello?

Can you hear me now?

Yes. Yes.

Yes, we can.

Oh, super. Sorry about that. I'm calling on a high-tech VOIP system, but my mistake was very low tech - I left the mute button on. Sorry about that. Thanks for taking my questions.

And I wanted to ask first off, just try to get a little understanding in terms of where the upside was on the top line versus what you had planned and what you were preparing for. I understand you're a little bit cautious. But I guess you have a pretty good handle in terms of your process there. And we're -- is there any specific areas that provided that upside, especially if it came in at the end of the quarter?

Well, I mean, basically I think we kind of alluded to it in the earlier comments. The strength of our retail business in Europe is actually slightly above our expectation. Going into the quarter, we fully understand the turmoil in Europe and we also fully understand the slowing down of the GDP growth in Europe. But then we were surprised by the strength of the market [receiving] our new products in Europe, especially that those products were [will later] be connecting tablets, smartphones over WiFi. So we're seeing very strong acceptance of those kinds of products, so that really gives us the strength.

And also, on the commercial side of the business as well, overall on a worldwide basis, I think our switch performance is slightly above our expectation, especially on the 10 gig side. So I think those two are the major drivers of us performing at a high end or a little bit above high end of our guidance.

Now, that's interesting. [I was going to say] if you listen to -- you have the macro backdrop of Europe and the malaise that's going on there, the debt contagion. And if you dig a little deeper, you hear from a lot of retail stores, they're talking about the consumer there pulling back in terms of spending, and it's actually worse compared to the US. But you're actually saying retail was [certainly] strong for you guys. So that's what I'm hearing. If that's the -- that's great.

Yes. I think it really depends on what you're selling, if you're selling things that the consumers want. And certainly we have been riding on the coattails of the acceptance of tablets, both an Apple as well as from Samsung as well as the smartphones, both on the IOS as well as the Android platform. That really drives a lot of WiFi sales both for our high-end routers as well as our WiFi extenders.

So I do -- we do believe that we're taking a lot of share from our competitors who are slow to introduce those kinds of products.

So let me ask you, would you say you're rate of share growth, is that still at the same rate as in the past or has it actually picked up?

As a matter of fact, we believe that we would be able to pick up share gain, as we alluded to earlier in our comments, that we actually would expand pretty materially our retail distribution in all three geographic regions in Q4, which will certainly give us more power in 2012.

Sounds great. And just setting up for a good next year. Let me ask you this now. Who were the 10% customers for the quarter?

Yes. Ten percent customers are pretty much the same. It is Best Buy and Ingram.

Okay. Did the levels there, were they about -- the dollar amounts were they about flat with Q3 or did it tick up?

They're slightly up. They're right in the same -- similar percentage range of the total revenue.

Great. All right. Thanks. Congratulations on a really solid quarter and setting up framework for next year.

Thank you.

Thank you.

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

Thank you. Product cycle wise, you 802.11 and 10 gig UTM all going well. Are there areas that might be a little bit slow that's kind of giving you thoughts that you might have to clear the channel or price stimulate, for example? Anything that could be doing a little bit better?

I mean, frankly, in Q3, we actually had some, of course, (inaudible) products and kind of [know] that our desktop at the low end of the ReadyNAS line has been slow to refresh for the last three, four years. There's a firefight over there on terms of mega -- gigahertz of CPU. So that would be our weak point. However, we've corrected it and we just announced and launched our new generation of low end desktop, our ReadyNAS tool, [NV]-plus, which will be significantly faster and with a tremendous new operating system that supports a very robust cloud computing capability. And we're pretty excited about it. And we think that in Q4, that issue will be resolved.

Okay. Understood. And then maybe as you target for the revenue growth over the longer term, can you touch on maybe online retail? It's something that you've tried to address. How should we think about opportunities to gain share in that distribution segment over time? What plans of action have you taken? And how should we gauge your success over the near term and longer term?

Well, online is a very interesting marketplace. I think online give us two opportunities. One is to really engage deeper with our direct customers. Selling through brick and mortar, we actually do not know who's buying from us and when they bought and how they buy. Online we have a much deeper engagement. So that's one area that we would really go forward to in order to help us to shape the service level, the products, and the features that our customers want that will help us increase our share.

Secondly, online, interesting enough, that you probably -- all of us have noticed, that online enable us to sell a full price range of products, all right. People go online to buy some really cheap products, but they -- people also go online to buy $40,000 diamonds. So that presents us with an opportunity to sell some really high-end products that brick and mortar retailers will not be able to carry. So those are the two areas that we could focus on going forward to really capitalize on the online market.

Got it. Patrick, is there a target percentage of revenues for retail that you want to do online over time?

Well, frankly, we don't, because it's really blurred right now because you talk to any brick and mortar retailers, they all are going online really, really aggressively. And you talk to any of the management, they all have targets to [chip] a chunk of their sales to online. And actually, some of the retailers are trying to make in-store purchase like an online purchase. So it is very difficult to really set a target.

However, you do have some merchants which are purely online, all right. And certainly we do have internal target, but, certainly, we do not like to disclose it.

Got it. Helpful. All right. Well, thank you, and good luck.

Sure.

Thank you.

Our next question comes from the line of Kent Schofield from Goldman Sachs. Please proceed with your question.

Thank you. Patrick, you mentioned some sales investments and to help the channel interact on the commercial side. So what all are those investments? Are they in heads? Are they in processes? And what extra are they doing to drive that channel?

Well, clearly, the most obvious one is the increase in the headcount of salespeople covering the channel. So what we do is we have deep engagement with our increased headcount with our channel partners, means that we can do more training, we could do more co-selling. We actually invest heavily in our portal, our [VOIP] portal, which would make us more efficient in terms of information dissemination, rebate calculation on their volume achievement, as well as [deal] registration. So all those really benefit our resellers to have [tighter] relationship with us.

Thank you. And also, there was a little bit of a jump in R&D spend quarter-on-quarter. Was there anything more to this, other than using some of the upside?

Yes, clearly. I mean, we see opportunities to really push hard on the R&D spending. Now, R&D spending is separated into two. On is headcount, which is very difficult to jump because it takes time to hire people. But the other one is what we called outside services that we could [lighten] some -- subcontract some source code development, we could lighten some source code. We could do a new industrial design, all those that we could really turn on pretty fast.

Great. Thank you.

Sure.

Thank you.

(Operator Instructions) Our next question comes from the line of Rohit Chopra from Wedbush Securities. Please proceed with your question.

Hi, guys. This is Sanjit Singh for Rohit Chopra. Just a few questions. So on the US, that was flattish sequentially. What was driving maybe the sub-seasonal growth in the US?

Actually, again, we saw the strong growth in retail and in commercial. And with the service provider being down, it was really down in all three regions. So I think that really explains that.

So [ex] service provider, commercial and retail were basically seasonal, right?

Yes, which is growing in Q3.

Got it. The channel inventory down in APAC. What was the reason for that? And you guys said you're on top of that. What's going on there?

I mean, it really could just be in transit or something as it goes through. Or if we should stock -- if they start selling through more towards the end of the quarter, the way we calculate that, the weeks of stock go down. So we make sure we monitor that weekly and go ahead and replenish those numbers.

Got it.

It's just a point in time that you take that measurement.

Right. Okay. So no issues there. On the competitive environment, you guys are expecting continued share gains. From your largest competitor, are you seeing no pickup in any type of aggressiveness over there in terms of maybe pricing or new product introductions?

We actually did see some of that in the US in Q3 during the back-to-school season. We did not participate in that kind of pricing exercise. Instead, we responding by introducing new products at the higher end. So today if you go to the store, you would see us occupying the highest price point at $179. So we'll continue to use that. And it's proven many of times in the past by doing that we will be able to continue to gain share. We're pretty confident with that. In the US, as well as in Europe, we are at a pretty good share percentage right now. But we still do believe there is room for us to grow. And, clearly, the biggest opportunity will be in Asia Pacific, especially in China as well as in India, where we still have relatively low share compared to the local vendors. And we believe that there's tremendous opportunity for us to grow in the next few years.

Got it. And my last question, related to guidance for next quarter. We're about one month into the current quarter. Is there anything that you're seeing now that causes you to be a little more cautious going into the December quarter?

Well, clearly, the economic uncertainty, no doubt, is what is the worry on everybody's mind.

But from a, maybe from an order perspective, are you seeing any down tick since the end of September?

From the service provider side, because we get 13 week [advance] PO, so we pretty much know what we're going to do in Q4.

Okay.

On the commercial, as well as on the retail side, we only -- we see POs week by week. So it is hard to say whether we're seeing a weakness or a strength in the POs that [are going to] come in December or not. So it's hard to comment. However, we believe that based on our base case estimate, given all the uncertainties that we factored into the future for the next two months, our guidance was in the prudent range that we believe that we can deliver.

All right. Thanks, Patrick.

Sure.

It seems there are no more questions at this time. I would now like to hand the floor back over to Patrick Lo for closing comments.

Thank you. Thank you, everyone, for joining our earnings call for quarter three 2011. I started the call saying that we're extremely pleased with our year-on-year growth, 28%, as well as our sequential growth. And I believe that we're winning key markets in our respective business units. We remain one of the fastest growing networking companies, and we will continue working hard to maintain that status.

With continued investment in R&D, as well as in sales and marketing, we believe that we will be able to stay ahead of the market and continue to show sequential and year-on-year growth.

We look forward to speaking with you again at our next quarterly earnings call in February next year. If you have any further questions about our Q3 numbers, as well as our overall market situation, please feel free to contact the Ruth Group to set up a potential call with us. T

Thank you very much, and I'll talk to you again in the new year. For t hose of you who will be attending the NETGEAR analyst day next week, we will see you then. Thank you.

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