NETGEAR Inc (NTGR) 2012 Q3 法說會逐字稿

Greeting and welcome to the NETGEAR third quarter 2012 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).

It is my pleasure to introduce your host, Christopher Genualdi, of Investor Relations Specialists. Thank you, Mr. Genualdi, you may begin.

Thank you, Jen. Good afternoon and welcome to NETGEAR's third quarter 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 details on financials and other information.

We will then have time for any questions. If you have not received a copy of today's release, please call NETGEAR Investor Relations or go to NETGEARs corporate website at www.NETGEAR.com Before we begin the formal remarks, the Company advices that today's conference call contains forward-looking statements.

Forward-looking statements include statements, among others, regarding expected revenue, earnings, growth, operating income and margins, tax rates and other projected financial results, share gains, expectations, the market for our products, business prospects, competition, research and development efforts, including software development, sales and marketing efforts, market trends and opportunities, including trends and opportunities in the Smart Home, 21st century FMB market, and next generation service provider products, new product features and our product road map, our growth strategy, and expectations regarding our recent acquisitions 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 in 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. Information on potential risk factors are detailed with the Companies 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 obligations 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 accuracy of unanticipated events. In addition, several non-GAAP financial measures will be mentioned on this call, information relating to the corresponding GAAP measures as well as a reconciliation of the non-GAAP measures and GAAP measures can be found in our press release on the Investor Relations website at www.NETGEAR.com

At this time, I would like to now turn the call over to Mr. Patrick Lo. Please go ahead, sir.

Thank you, Christopher, and thank you everyone for joining today's call. First, I hope that you can all join us for our 2012 Analyst Day being held in New York city on November 8th, where we will update you about the next generation market opportunities we are targeting for each of our three business units. For additional details on this event, please reach out to NETGEAR Investor Relations on the IR portion of our website.

For the third quarter of 2012, NETGEAR generated 4.4% year-over-year net revenue growth. Non- GAAP diluted EPS came in at $0.65 per diluted share. Please see the press release for a full reconciliation of GAAP to non-GAAP financial results. These results are a reflection of the difficult economic climate that continues to proliferate within Europe, as well as into Australia.

The European market has weakened more than we had expected when we entered the quarter and this is evident in our channels throughout the region. However, we offset some of this European weakness with a very strong back to school season in the US, along with further market share gains. During the third quarter, Europe, the Middle East and Africa, or EMEA, net revenue was $104.4 million, down 13% year-over-year and down 11% quarter-over-quarter.

Unfortunately, the European slowdown which had for the most part been concentrated in Southern Europe spread into our traditional core markets of the UK and Northern Europe. As a result, we experienced a region-wide retreat in demand in Europe. America net revenue was $177.6 million, up an impressive 19% year-over-year and up 9% quarter-over-quarter. North America showed strength in back to school demands and on top of that, we were able to gain share.

Our Asia Pacific, or APAC, net revenue was $33.2 million which is flat from the prior years comparable quarter and down 16% sequentially. The softness in APAC is due to weakness in Australia across our channels, though this softness is offset somewhat by growth in the rest of the APAC region. As recently reported in the news, Australian business confidence is at a near-term low due to concerns over China's demand on Australian exports.

As we have done since we went public in 2003, we continue to focus on the largest market opportunities and run our business for the long run. Our increased R&D spend will continue to drive our product road map and should allow us to gain more market share over time. We will not let this cyclical slowdown disrupt the large opportunities we see ahead of us.

As always, we continue to closely manage our expenses, inventory and cash. Also in Q3, we completed the integration of the two acquisitions announced on our last earnings call, the VueZone cloud base video camera team in San Diego and the wireless controller development team in India. We are excited about the roll out of the VueZone products in North American retail, that is underway as we speak, and look forward to its worldwide roll out in the first half of 2013.

As for the wireless controllers, expect to see the fruits of this acquisition in the second half of 2013. In Q3, we maintained a high level of shipments with 6.7 million units shipped. We also introduced 30 new products during the quarter. Sales channel expansion continues to be a key focus for the Company as our sales channel remains a critical strategic asset.

By the end of the third quarter of 2012, our products were sold in approximately 32,000 retail outlets around the world and our number of value added retailers stands at 40,000. We are confident that the new views on cameras will bring us into new retail outlets that we did not have access to before. Now let's turn to a review of the third quarter results from our three business units. Retail, commercial, and service provider.

In our retail business unit or RBU, net revenue came in at $123.5 million, up 9% quarter-on-quarter and down 3% year-over-year. The sequential increase can be attributed to our strength in the back to school season in North America, and our release of the industry's first 802.11 AC Wi-Fi router. The year-over-year decline is a reflection of the further weakening of the European market during Q3. In Q4, we are releasing 11 AC DSL gateways in Europe and Australia and we believe that will spread the 11 AC upgrade cycle for the rest of the world.

During the third quarter, we continued to gain share in North America against our competitors in retail. We believe that we now have nearly doubled the market share of the number two player in North America. Looking forward, we expect a solid holiday selling season in North America with 11 AC, views on cameras, and Wi-Fi repeaters topping the charts of Christmas essentials. We are committed to developing and releasing products that will be relevant in the smart home.

We believe the smart home represents the rest of the growing multi billion dollar market opportunity. The smart home will feature full house wi-fi coverage with extenders. And multimedia streaming devices to TV and multi-room audio systems, home storage for multimedia content for in home or on the go secure access, as well as home monitoring and control devices.

We expect these products to be customizable by downloadable user apps. Our VueZone acquisition was a significant step in creating a new line of products necessary for the smart home. By using the patented platform technology of the VueZone camera, NETGEAR expects to pioneer this high growth market in 2013 and beyond. We will be discussing the smart home opportunities in depth at the AnalystDay in November.

Net revenue for our commercial business units, or CBU, came in at $79.2 million for the third quarter of 2012. That's down 2% on a sequential basis and down 13% year-over-year. The weakened performance of the commercial business unit this quarter was the direct result of the economic uncertainty that has curtailed European and Australian FMB networking demands. However, with the strong new product pipeline, we do see opportunities for market share gain going forward in all regions.

We were very pleased in Q3 with the performance of the newly introduced ReadyDATA 5200, our first foray into (inaudible) speed unified storage systems. Introduced in late Q2 of 2012, this enterprise class storage product with features including data de-duplication and unlimited snapshots was received very well around the world. We will continue to expand on this line of enterprise class products.

Leading with the ReadyDATA family, we will be focusing the commercial business unit on meeting the needs of the 21st century FMBs. In the future, we expect to roll out gigabit to desktop, both wired and wireless, 10 GigabitAggregation, unified storage, hybrid cloud, remote recovery and replication, virtualization, cloud managed solutions with switches, exit points and security appliances.

By way of the Genie applications platform, we expect to enable user customization of our unified storage and other products by downloadable apps so that the individual needs of our FMB customers can be met. We will discuss these 21st century FMB solutions in our upcoming AnalystDay.

In our service provider business unit or SPBU, net revenue came in at $112.5 million for the third quarter of 2012, down 11% sequentially, but up 34% on a year-over-year basis. The sequential decline was anticipated for this business unit as our customers made expected reductions in marketing activities following the 2012 Olympics. Due to the economic uncertainty, we expect the capital expenditure budgets of our service provider customers to be constrained further in Q4. Thus we expect further sequential decline of our service provider revenue in Q4.

Nevertheless, we will continue to release innovative products for the service provider business units, specifically 4G LTE routers that will use wireless instead of wired line for broadband access. Especially benefiting operators in rural areas and emerging markets, which were previously constrained by the reach of wired line telecommunications networks. These routers also enable mobile operators to be the alternative suppliers to the wired line providers of broadband internet access for urban households.

We also expect to expand our offerings to our service provided customers for home monitoring and automation solutions, in-home IP video distribution technologies and gigabit wired and wireless broadband access. All of these new frontiers we will explain more in our upcoming AnalystDay at our next generation service provider products. Despite a softness of European and Australian markets, we remain focused on capturing the large market opportunities, including opportunities to gain market share in smart homes, 21st century FMBs and next generation service providers.

We remain committed to our long-term product road map and are very aware of the short term challenges that we face with the global economy. I strongly believe that NETGEAR will be a growth Company for many years to come. I will now turn the call over to Christine for further details on our financials.

Thank you, Patrick. I will now provide you with a summary of the financials for the third quarter of 2012. As Patrick noted, net revenue for the third quarter ended September 30, 2012, was $315.2 million, compared to $301.8 million for the third quarter ended October 2, 2011, and $320.7 million in the second quarter ended July 1, 2012.

We shift the total of about 6.7 million units in the quarter including 5.5 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 3.8 million units in the third quarter of 2012. Moving to the product category basis.

Third quarter net revenue split between wireless and wired was about 71% and 29% respectively. The third quarter net revenue split between homes and business products was about 75% and 25% respectively. Products introduced in the last 15 months constituted about 31% of our third quarter shipments, while products introduced in the last 12 months constituted about 25% of our third quarter shipments. From this point on, my discussion points will focus on non-GAAP numbers.

As mentioned previously, the reconciliation from GAAP to non-GAAP is detailed in our preliminary financial statements released earlier today. Non-GAAP gross margin in the third quarter of 2012 was 31.6%, compared to 32.4% in the year ago comparable quarter, and up from 29.9% in the second quarter of 2012. The sequential uptick in gross margin is due to a lesser proportion of service provider in our revenue mix. Total non-GAAP operating expenses came in at $63.3 million for the third quarter of 2012.

As noted during our last two earnings calls, we are continuing to invest more in research and development on an absolute dollar basis and as a percentage of net revenues. Our R&D expense in Q3 increased to 5.3% of net revenue in comparison to 4.4% of net revenue during Q2. This is in line with what we expect our R&D expense to be in the upcoming quarters.

By maintaining and R&D spend of approximately 5% in the upcoming quarters, we will continue to develop cutting edge networking products and release them at our rapid pace so that we can continue to gain market share worldwide. However, facing the current weakened demand market in Europe, we are shifting our sales and marketing resources to the emerging markets where we believe there is growth to achieve and more market share to be gained. We will continue to spend wisely and streamline our operations to achieve more efficiency.

We increased our net head count by 36 people during the quarter, bringing our total head count to 854 at the end of Q3. Note that 28 of these additional headcounts came from our recent VueZone acquisition. The non-GAAP tax rate was 30.3% in the third quarter of 2012 compared to 20.2% in the third quarter of 2011, and 31.4% in the second quarter of 2012.

Please note that the 30.3% tax rate is reflective of one-time tax benefit which will not be repeated in subsequent quarters. Without that, because of our diminished European revenue and profit, we would have been at a 35% effective tax rate for Q3.

Looking at the bottom line for Q3, we reported non-GAAP net income of $25.3 million and non-GAAP EPS at $0.65 per diluted share. As mentioned, we tightly managed our expenses, receivables, inventory and cash. This results in our continued strong balance sheet.

We ended the third quarter with $362.4 million in cash, cash equivalents and short-term investments, which was driven by approximately $23 million in cash flow from operations, and which more than offset the investment made in the VueZone acquisition earlier in the quarter. DSOs for the third quarter of 2012 were 72 days as compared to 66 days in the third quarter of 2011, and 77 days in the second quarter of 2012.

As always, we closely manage our collections and try to effectively mitigate collection risks. There were no 10% customers for the third quarter of 2012. Our third quarter net inventory ended at $178.9 million compared to $136 million at the end of the third quarter 2011, and $152.8 million at the end of the second quarter 2012. Third quarter ending inventory turns were 4.9, as compared to six turns in Q3 2011, and 5.9 turns in the second quarter of 2012.

Our inventory was at a slightly elevated level in anticipation of the Chinese Golden Week holiday for the first two weeks of October. Let's turn to our channel inventory. Our channel inventory partners report inventory to us on a weekly basis and we use a six week trailing average to estimate weeks of stock.

Our US retail inventory came in at 9.8 weeks of stock. Current distribution inventory levels are 8.4 weeks in the US, 4.4 weeks of stock for distribution in the EMEA, and 4.7 in APAC.

With regard to the fourth quarter of 2012, we intend to continue our high pace of new product introductions and plan to roll out approximately 25 new products. We anticipate we will continue to face a challenging economic climate in Europe and Australia, as well as a reduction in purchases from our service provider customers worldwide. And as a result we expect fourth quarter net revenue to be in the range of approximately $300 million to $315 million.

Additionally, the non-GAAP operating margin is expected to be in the range of 11% to 12%, and our non-GAAP tax rate is expected to be approximately 33%, which is higher than in previous quarters. We look forward to seeing everyone at our 2012 AnalystDay on November 8th in New York city where we will talk about the large market opportunities that will drive us towards our $2 billion net revenue goal by 2014. Operator, that concludes our comments and we can now take questions.

Thank you. (Operator Instructions). Our first question comes from the line of Mark Sue with RBC Capital Markets. Please proceed with your question.

Thank you and good afternoon. If I look at your service provider revenues, it seems to have peaked in June, it's declined and it might decline again. So I am trying to get a sense of what's a normalized run rate for this business segment? Do you think it's $100 million or $80 million? Patrick, since a lot of the European carriers seem very challenged at the moment, many are cutting their dividends, I'm just wondering when things might actually stabilize and at what level they stabilize to?

We all have a crystal ball of how the European economy and how the suffering credit crisis is going to be soft. We do see that these, with our 13-week visibility, that the service provider revenue is going to be range bound. As you say, around $100 million. But going beyond 13 weeks we just do not see how the European economy and how the service providers are going to react. But certainly, from our prospective we are, as Christy just pointed out, we are really shifting a lot of our sales and marketing effort in North America, as well as in Asia Pacific, and we're looking for new projects, we're looking for new projects and customers in those regions, and hopefully we will be able to overcome the weakness in Europe.

Okay, And then maybe on the SMB segment. Were there some shortages that are lingering or is it just kind of weak in demand as well? I guess a thought was that might reaccelerate but it's also kind of held in at this $80 million range. Does that kind of stay at this level for the next few quarters?

Again, this softness we saw was primarily in Europe, and a bit of that in Australia as well. Now, I don't have any crystal ball, but i do believe that after this Chinese political hand over, the Chinese economy is most likely going to re-ignite again, and as a result China will be back in good shape again.

I'm less worried about Australia in a quarter or two out. I'm more worried about Europe, but on the other hand we cannot sit around and wait for the economy to turn, and that's why we are introducing a whole slew of new products. We collectively call it the 21st century FMB solutions.

Pioneering that is our ReadyDATA. The first model of that, the model 5200 introduced in late Q2 but in full swing in Q3 was a tremendous success. And I would strongly encourage everyone to come to our AnalystDay that we can explain a bit more on what are some of the new exciting products and opportunities that is in front of us for the 21st century FMB solutions.

Okay. And then lastly I guess the target is $2 billion in, was it 2014?

Yes.

Okay, so with considering we're now at a base of about $300 a quarter, I guess we're going to have to see quite a bit of ramp late next year and into the following year. Does that mean you're going to accelerate your product development so that we're at a point where operating margins can actually go below your targeted range because if the environment is still pretty challenging for a while, you're going need all of these new products and to develop the new products, you have to gut it with the R&D?

Again, we have no crystal ball on how the economy is going to do, but we do know how to reach a product pipeline that we currently have. So you hit it right on the head, that we will continue to double down in R&D, and we're very confident that the products that come out in the next 12-18 months is going to continue to let us lead the market, in creating new market. And the good example is the VueZone camera. The good example is the ReadyDATA.

All of these are new markets that we are establishing, helping to create, and the hope is that with all those, we'll be able to get back to double digit growth, and accelerated growth, as you said, late 2013 and in the year of 2014. We've just been in the technology industry for quite a while and knowing that the only way to counteract cyclical downturn is to have fantastic products is always the case, so we'll continue to double down on R&D.

All right, that's helpful. Thank you and good luck.

Thanks.

Thank you. Our next question comes from the line of Lynn Um with Barclays Capital.

Hi Patrick, hi Christy.

Hi Lynn.

I guess first a question on North America. You talked a lot about Europe and Australia, and the back to school strength in North America. Could you maybe walk us through what you saw in North America from the commercial side as well as the service provider side?

Actually in North America we're very encouraged as we just said. America grew 19% year-over-year and 9% sequentially quarter-to-quarter. In all three business units we continue to have sequential growth and we continue to gain share. The new products that we introduced in each of the three business units in America is getting traction on the retail front.

Needless to say, if you go to the retail stores, you will see the 11 AC. We continue to be very excited about it. And of course, as we just mentioned, the VueZone camera is being rolled out as we speak today, to some existing retail partners and some new retail partners. We believe this is a hot Christmas selling item.

On the commercial side, we couldn't help the excitement on the ReadyDATA line. The product is really well-received. In North America we're getting so much good review, as well as so much substance from our channel, as well as our customers. And it is a product that's very unique in the marketplace that you can do unlimited snapshot and resume, and remote replication. And frankly even among the enterprise providers, not many of them could provide similar features, but with the graphical use interface somebody could configure the whole thing in 30 minutes.

It's just unheard of. So we're very excited about that. We'll follow-up with more of that product line and then with the other products we're going to discuss on our AnalystDay.

We feel very good about the North American market that not only the market continues to have good demand, we continue to gain share, we continue to have great products. And even on the service provider side, we've seen the fruits of our acquisition a year and a half ago with the CNS division Westell, that really help us getting into a lot of the operators to provide DSL as well as fixed mobile. We usually get certified from Verizon on the open ban for the fixed mobile router that actually could use the 4G LTE band as broadband access.

We started rolling that out in retail in Q4 and we're very excited about it. In all three business units, we're leading charge with really, a first in market technology. And the market seems to be having a very good reception of it, and the economy continues to be cooperative in North America. Albeit, you could argue that it's not going as gang buster as what we would have liked. At least it's growing about 2%, so that is enough for the demand to hold up and further on our share gains. So we're very happy with the North American market.

Okay. Then I guess in terms of guidance for 4Q, it's down a little bit sequentially. I think you mentioned service providers should be down again. Should we assume both retail and commercial will be down or is there, can we maybe pencil in some [gold] in retail?

We expect the seasonality of retail and commercial will continue to kick in like before. Generally speaking, retail is flat quarter over quarter because in Q3 we have back to school, and then in Q4 we have Christmas. Now if Europe actually performs during Christmas, because they don't have back to school, then we should see a sequential growth. But now we can't count on Europe anymore, so Christmas in US, it will be just even with back to school in Q3.

However, if our VueZone camera does fantastically well, then we will be able to see even sequential growth in North America. Overall we feel good about the retail business unit at least flat. On the commercial side, with all of these new products, ReadyDATA, yes we do see sequential growth on a worldwide basis.

Okay, great. Thank you and good luck.

Thanks.

Thank you. Our next question comes from the line of Hamed Khorsand with BWS Financial.

Hi, just a couple of questions here. Could you talk about the service provider side? Is there some issues as far as the AC coming out and product transitions on that end being part of the slowdown?

No, not at all. As a matter of fact, the service providers usually will not pick up the latest Wi-Fi technology, especially for those that have not been certified at the high triple [year] has nothing do with that. It's purely the cautiousness of the service providers on the consumers sentiment, especially in Europe. We basically see the slowdown in Europe as well as in Australia on that uncertainty.

Okay. Could you talk about market share on the service provider end? You've never talked about that but it seems as though there's a lot of opportunity for you to grab market share in the service provider realm.

Yes, it's very certain difficult to gauge, the service provider market share on a product-by-product, segment-by-segment basis because the product changes all the time. But if you look at an overall scheme of things of the worldwide suppliers of CPE, counting, for example, Arris Motorola, Cisco-Scientific Atlanta, Thomson Technicolor, compared to them, we are tiny, we're very small. If you look at our run rate of service provider at about $110 million in Q3, which kind of amplifies the $450 million a year roughly and you combine the revenue of CPE from all these big guys, which is into the $3 billion to $4 billion range, we still have a lot of market share to gain.

Okay. The last question for me is on the guidance you provided, given that you're guiding down the revenue line, what's the risk here that we could actually see the operating margins decline? What are you planning to do on the OpEx side to offset that?

Well, as we said all the time, we are closing at the low end of the range of revenue and certainly our operating margin will be at the low end of the range, and vice versa. We have been very, very vigilant in controlling our expenses, so a lot of expenses that we look at on a weekly, not on a daily basis, and it's good thing, the bulk of expenses causes labor costs and our labor cost is very performance based so that really helps leverage of our operating expense line, and so we will continue to be very vigilant. On the other hand, we will continue to prime the pump for R&D for new products.

Okay, thank you.

Thanks Hamed.

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

Great, thank you. On your commentary around sales and marketing spend and the emerging markets, are we to take that as an actual increase or is that just shifting resources?

Yes, shifting resources. In other words, that we would let the reduction, the natural reduction of head counts in Europe to go, then move those head counts to India, China, Russia.

Okay, thanks for the clarification there. On the NAS business side of things, are you still seeing challenges from HDD pricing?

Not any more. As a matter of fact, the hard disc prices are coming close to where before the flood was in Thailand, so we're very encouraged by that. We starting this quarter, we will be able to price that competitively as we used to.

Okay, great. And then on the inventory side of things, you mentioned China. Is there anything else going on there though? I know it's a snapshot in a specific point in time, so it can be a little bit cloudy that way, but it was a big build. Is there anything else going on there?

No. You know, the Chinese calendar is pretty weird. They have this big, call it mid-Autumn festival which flows from year-to-year. And this year that festival coincides with the National Day in early October, so the usual five, six days holiday extended to become two weeks. That's pretty much what it is. And if you have your factory shut down for two weeks not supplying to you, then you have no choice but to stock it up before they shut down, right.

Okay. Great. Thank you.

Sure.

Our next question comes from the line of John Kees with Capstone Investments. Please proceed with your question.

Great. Hi Patrick, hi Christy.

Hi.

Hi.

I wanted to ask and I guess Patrick, you kind of touched on it, to offer competitive pricing. I guess I wanted to get a sense in terms of the environment, the pricing environment in Q3 and what you're seeing. Obviously gross margin has picked up, but that was probably more from the service provider being down. Are you having to run more promotions? Are you seeing some of your competitors being more aggressive especially going into Q4?

We actually do not see a lot of pricing action in North America nor in Asia, even in Australia, but we do see some pricing actions in Europe. We're spending a little bit more marketing dollars over there in Europe. But other than that, we don't see any particular anomaly.

Alright. Let me ask you, what is most effective, and I guess you can focus on North America or you can talk about the regions too. In the past you talked about shelf space and how you've been increasing shelf space and that kind of stuff. Is that still the trend or have you just been holding steady in terms of your shelf space?

We continue to increase shelf space. It's pretty clear that shelf space is now driven by new products because frankly, in the networking aisle, in many of the developed markets like North America and UK, I don't think the retailers are willing to give us even more shelf space. We have so much shelf space already, so we're using new products, expanding to other parts of the store.

For example, we recently introduced a very small compact and low-cost Wi-Fi repeaters that we're now getting our retailers to place them next to the phone, the smartphone and tablet aisle. So that's the kind of shelf space that we could get. Clearly, with the VueZone cameras which will allow us to enter stores that previously would not be open to networking products from us, and those are increased shelf space, so we do see continued increase in shelf space because of new product categories.

So then let me parlay that in terms of one particular customer of yours. I know you don't like to talk about specifics, but you can talk in general, if you could at least. Best Buy hasn't been a 10% customer for the last three quarters and I'm just trying to understand, especially if you're gaining, I know you talked about an increase in shelf space in general across all of the retailers, but if you were just to pick one particular customer, if you're increasing shelf space, are you seeing your marketing efforts, your presence, point presence, helping in terms of with these customers or is it more in some of these cases, is it more of a retailer specific issue?

No. Basically our shelf space in Best Buy continues to be very strong, and we actually increasing our shelf space in all of the other stores. For example, over the last two quarters, as we announced previously, we're now in Target, we're now in Walmart Canada, so there's clearly market share shift among the retailers, among the store chains, among the store chains versus online.

Frankly, we're not going to play the role of a referee, we're not allowed to. So all we are focusing on is maximizing our shelf space and market share in each individual store chain and online site so as to achieve an overall increase in market share as I talked about recently and just about 20 minutes ago because of all of that effort, we believe that we reached a new height in North America retail market share, which is close to double the number two player, so we're very pleased with the progress we're making.

Okay. It does indeed sound, well it is something to be pleased about. Thanks for that elaboration. That's all of the questions I have. Good luck, guys.

Sure, thanks.

Thank you.

Thank you. Our next question comes from the line of Rohit Chopra with Wedbush. Please proceed with your question.

Thank you very much. Patrick, I wanted to square something with you in the SBU market. Arris had a record quarter, q-over-q. I think they reported on their DOCSIS 3.0 products, and they didn't see a slowdown. Obviously, they deal with cable companies. So I just wanted to see if we could square what they're seeing and what you're seeing?

Maybe that's more geographic, or maybe it's more the end customer. Can you maybe elaborate on what you're seeing versus what they saw? Is there a way to do that to help us out?

Yes, I have to congratulate them. That 95% and 99% of the sales in cables and gateways in North America. I wish that I could do that.

North America as we explained all along in the last 30 minutes is doing great. The economy is chugging along, customers are accepting new technology, it's the Europeans who are actually in the doldrums. And unfortunately, unlike Arris, we have always been a more international company and that's why we're more affected by Europe, that's the only difference.

And then I just wanted to ask you a question on commercial. I know there was a question asked about competition, but are you seeing any of the larger players come downstream? We've heard from some of the people that you deal with that the larger vendors have started to move downstream as some of the larger customers have dried up, some of the spending has dried up, so they started to move downstream. Are you seeing any competition on the commercial side from some of the larger vendors? Is that having any impact?

They have always been there. As a matter of fact, it's a consolidation in the industry. For example, right now we're competing more on a global basis against Cisco and HP. But we have been competing against Linksys and HP forever, but then since Cisco took over Linksys then we ended up competing with Cisco. Which is the same.

I didn't see any, we have been competing with HP since day one, so on the commercial side we did not see so called coming down. For example, if you asked me did people like Juniper come down, I don't see that. Did you see Fortinet come down, I don't see that. Did you see (inaudible) I don't see that.

Okay. So no incremental competition? Everything is status quo?

No, it's a sustained group of people.

Thanks, Patrick.

Sure.

Thank you.

(Operator Instructions). It appears there are no further questions at this time. I'd like to turn the floor back to management for any closing comments.

Great. Once again I would like to see you all at the AnalystDay in New York city. We're really excited about the three new solution sets that we're going to present, which is the 21st century smart home, the next generation SMB, as well as the new service provider solution based on the LTE technology. And we certainly will be sharing with you a lot of new exciting technology and products we're going introduce to drive our revenue towards our $2 billion-dollar goal and look forward to seeing everyone in November. Thank you. Operator.

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