NETGEAR Inc (NTGR) 2012 Q4 法說會逐字稿

Greetings, and welcome to the NETGEAR, Incorporated fourth quarter and full year 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)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christopher Genualdi, Investor Relations Specialist. Thank you, sir, you may begin.

Thank you, Operator.

Good afternoon, and welcome to NETGEAR's fourth quarter and full year 2012 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 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 NETGEAR's corporate website at www.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 expected revenue, earnings, growth, operating income and margins, tax rates, and other projected financial results, share gains, expectations, the market and market size for our products, business prospects, competition, research and development efforts, sales and marketing efforts, market trends and opportunities, service provider purchasing expectations, new product features and our product road map, our growth strategy and expectations regarding our recent AirCard acquisition announcement, and pace of new product introductions.

Forward-looking statements made during the call are being made as of today. If the call is replayed or viewed 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 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 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 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 now like to turn the call over to Mr. Patrick Lo. Please go ahead, sir.

Thank you, Christopher; and thank you, everyone, for joining today's call.

NETGEAR revenues were up 7.7% for the full year of 2012 and flat year over year for the fourth quarter of 2012. We are extremely pleased with the holiday season retail performance worldwide. For the fourth quarter of 2012, we had the best fourth-quarter sequential growth for retail net revenue in the last three years. However, the challenging macroeconomic environment continued to prove difficult for the commercial segment's revenue growth, which succumbed to seasonal slow downs into the shortened selling period in the fourth quarter. Service provider revenue continues to be lumpy, and we saw a quarter-over-quarter decline.

Non-GAAP diluted EPS came in at $0.55 per diluted share and was impacted by a higher-than-expected tax rate. Non-GAAP EPS for the full year 2012 was $2.57. Please see the press release for a full reconciliation of GAAP to non-GAAP financial results.

During the fourth quarter, Americas net revenue was $170 million, up 9% year over year, and down 4% quarter over quarter. A strong holiday season for retail was offset by reduced spending among our service provider customers. Europe, the Middle East, Africa, or EMEA, net revenue was $110.5 million, down 12% year over year, and up 6% quarter over quarter. Europe's economy did show signs of worsening in the fourth quarter, although it remains sluggish. Our Asia Pacific, or APAC, net revenue was $30 million, which is up 9% from the prior year's comparable quarter, and down 10% sequentially. We saw continued softness in service provider revenue in Australia.

In Q4, we maintained a high level of shipments, with 6.9 million units shipped. We also introduced 32 new products during the quarter. Sales channel development continues to be a key focus for the Company, as our sales channel remains a critical strategic asset. By the end of the fourth quarter of 2012, our products were sold in approximately 35,000 retail outlets around the world. And, our number of value-added resellers stands at over 41,000.

Now, let's turn to a review of the fourth-quarter results for our three business units -- Retail, Commercial, and Service Provider. In our Retail Business Unit, or RBU, net revenue came in at $138.5 million, up 12% quarter on quarter, and up 7% year over year. It was a record quarter in terms of net revenue, driven by strong share gain in the US and international markets. Our Retail Business Unit experienced the best fourth quarter sequential growth in the last three years. We are very pleased with the share gain against our retail competitors worldwide.

Once again, we were a double honoree at the 2013 CES Innovations Design and Engineering Awards competition, the industry's highest accolade. The VueZone Add-On Night Vision camera and NeoTV Max Streaming Player both received awards at the event. The VueZone Add-On Night Vision camera is the only wire-free night vision camera that lets you see in the dark. Our NeoTV Max Streaming Player allows viewers to stream hundreds of HD channels on their TV, including Netflix, Hulu Plus, and many more.

At CES, we also unveiled our new NeoTV Prime with Google TV streaming player. We also announced at CES that all of our NeoTV products are now compatible with Sling Media's SlingPlayer, which enables viewers to extend their live TV experience to any other television that is connected to one of our NeoTV Players. We view the multimedia streaming player market as a rapid growth opportunity for our Retail Business Unit in the years to come.

On top of the multimedia streaming player, we also expect to maintain our success in retail with 802.11ac devices, VueZone cameras, and WiFi repeaters, all part of the solutions for the smart home. As we have said before, we believe smart-home products and services represent a rapidly growing market, with a 28% compound annual growth rate that will be over [$25 billion] in size by 2017.

Turning to our Commercial Business Unit, or CBU. Net revenue came in at $73.4 million for the fourth quarter of 2012. That's down 7% on a sequential basis and down 12% year over year. The sequential decline is typical for Q4 as there is shortened selling period due to the holidays. The year-over-year decline is reflective of the economic uncertainty in Europe throughout the year, which continued to curtail IT budget spending by businesses. Additionally, the fiscal-cliff threat in the United States caused further budget tightening in the private sector during the fourth quarter in North America.

Despite this difficult business climate, we see growth in 2013 for our Commercial Business Unit, driven by new products in 10Gigabit Ethernet switching, Unified Storage, and Campus Wireless LAN. As we highlighted on our Analyst Day in November 2012, while the core network moves into the cloud, we plan to be a leader in providing access network solutions to all small and medium enterprises. We are also rapidly expanding our footprint in the emerging markets, which are growing very fast in commercial network products.

For our Service Provider Business Unit, or SPBU, net revenue came in at $98.5 million for the fourth quarter of 2012, down 12% sequentially, and up 3% on a year-over-year basis. As we highlighted on our previous earnings call, the sequential decline in SPBU revenues were expected. Service provider customer spending continues to be lumpy, and we expect to see reduced spending in the first half of 2013 among our existing NETGEAR service provider customers.

Three years ago, we introduced the five key product categories we would be targeting for growth -- TV, tablet, video connectivity products with simple installation and high performance; network storage with easy-to-use user interface, high capacity, and resilience; security appliances that carry superior ability to block unwanted Internet intrusion; DOCSIS 3.0 gateways with more integrated functions; and finally, the 4G LTE-related repeaters and gateways. Since 2010, we have been addressing each of these estimated $1 billion market opportunities with innovative solutions for consumers and businesses.

Our recently announced agreement to acquire the Sierra Wireless AirCard business is another step forward in pursuing this vision, specifically for the 4G LTE gateway market. The assets of the AirCard business that we are acquiring includes a team of world-class engineers with expertise in developing LTE-access devices, over 200 worldwide patents and [asset] patent applications, and an existing customer base of wireless carriers.

As we highlighted in our conference call announcing the acquisition, the AirCard business had approximately $247 million in trailing 12-month revenue through December 2012. Specifically, in the fourth quarter of 2012, the AirCard business generated $54 million of net revenue. We plan to use NETGEAR's superior global distribution channel to expand the existing AirCard business. We believe as LTE service providers continue to upgrade to newer version, such as LTE advanced and LTE carrier aggregation, we can continue to see growth in the existing AirCard business.

As we have explained before, we believe that fixed mobile broadband gateways will be the Internet access device of choice for the estimated 4.5 billion people currently not connected to high-speed broadband Internet. Based on industry reports and our estimates, the market for fixed mobile gateways will grow from less than $100 million in 2012 to over $1.5 billion in 2017. We plan to capture this market by combining the 4G LTE expertise of the AirCard team with the WiFi expertise of our existing NETGEAR team to produce market-leading fixed mobile data, voice, and media gateways.

Last week, we announced that we are providing the NETGEAR 4G LTE TURBO HUB gateway to Bell Mobility, operator of Canada's largest 4G LTE network. The 4G LTE TURBO HUB gateway will play a key role in delivering high-speed broadband services to Bell Mobility, especially in the smaller, rural, and remote communities.

We are also starting to sell 4G LTE fixed mobile gateways that work on the Verizon mobile networks in US retail. We are still in the nascent stages of building our fixed mobile broadband gateways with LTE capabilities and look forward to adding more customers worldwide as service providers continue to expand their LTE coverage.

We firmly believe that smart homes will be commonplace in the not-too-distant future. Industry and research group strategy analytics predicts that the demand for small -- smart home products will double from $10 billion this year to almost $20 billion in 2017. We believe we are perfectly positioned to take advantage of this market opportunity with our industry-leading WiFi connectivity routers and repeaters, audio and video streaming players, home storage, monitoring cameras, and mobile platform management software genie.

In addition, the arrival of cloud-computing BYOD multimedia networks for voice, video conferencing, and video surveillance enables us to, once again, lead the technology revolution around small and medium-sized enterprises by providing the most advanced access network equipment. Our high-performance commercial products not only include industry-leading features while maintaining simplicity in operation, but also keep SMB IT spending within tight customer budgets. Our innovative 10Gigabit switches, PoE switches, Cloud-capable Unified Storage, and easy-to-administer Campus Wireless LAN are capitalizing on the new era of the 21st Century SMB networks.

Last, but not least, we are very excited about the acquisition of the Sierra Wireless AirCard business. Upon completion of the acquisition, we expect to be ideally positioned to target the brand new 4G LTE fixed mobile data voice media gateway market, which is expected to grow from less than $100 million last year to over $1.5 billion in five years. While we are currently affected by economic slow down in the developed countries, we never lose sight of the big potential of each market that we are pursuing. NETGEAR continues to be focused on long-term growth, driven by our mission to connect everyone to the high-speed Internet. We are fully committed to this mission and being the market leader. We are excited about growth opportunities for our Business.

I will now turn the call over to Christine for further details on our financials for the past quarter and 2012.

Thank you Patrick.

I will now provide you with a summary of the financials for the fourth quarter of 2012. As Patrick noted, net revenue for the fourth quarter ended December 31, 2012 was $310.4 million, compared to $309.2 million for the fourth quarter ended December 31, 2011, and $315.2 million in the third quarter ended September 30, 2012.

We shipped a total of about 6.9 million units in the fourth quarter, including 5.8 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 3.8 million in the fourth quarter 2012.

Moving to the product-category basis, fourth-quarter net revenue split between wireless and wired was about 72% and 28%, respectively. The fourth-quarter net revenue split between home and business products was about 76% and 24%, respectively. Products introduced in the last 15 months constituted about 30% of our fourth-quarter shipment, while products introduced in the last 12 months constituted about 24% of our fourth-quarter shipment.

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 fourth quarter of 2012 was 30%, compared to 31.1% in the year-ago comparable quarter, and 31.6% in the third quarter of 2012.

Total non-GAAP operating expenses came in at $57.7 million for the fourth quarter of 2012. Note that Q4 operating expenses were uncharacteristically low because the cost of our incentive-compensation programs were greatly reduced from previous estimates. We expect our operating expense to be in the normal quarterly range as we enter Q1, 2013.

We continue to invest in research and development in order to drive innovation in all three business units. Our non-GAAP R&D expense in Q4 was 4.5% of net revenue, in comparison to 4.2% in the year-ago period, and 5.3% net revenue during Q3. With the current weakened market demand in Europe, we have been shifting our sales and marketing resources to the emerging market, 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.

Our headcount decreased by net four people during quarter, bringing our total headcount to 850 at the end of Q4. We expect a significant increase in headcount upon the closing of the Sierra Wireless AirCard business acquisition, and we will provide additional details on this at our next earning call in April.

The non-GAAP tax rate was 39.4% in the fourth quarter of 2012, compared to 30.5% in the fourth quarter of 2011, and 30.3% in the third quarter of 2012. Please note that the higher tax rate is reflective of the shift in geographic mix of revenues and corresponding profits towards the Americas. Looking at the bottom line for Q4, we reported non-GAAP net income of $21.5 million and non-GAAP EPS at $0.55 per diluted share. As always, we tightly manage our expenses, receivables, inventory, and cash. This results in our balance sheet remaining strong. We ended the fourth quarter with $376.9 million in cash, cash equivalents, and short-term investments, which was driven by approximately $17.5 million in cash flow from operations during the quarter.

DSOs for the fourth quarter of 2012 were 76 days, as compared to 76 days in the fourth quarter of 2011, and 72 days in the third quarter of 2012. As always, we closely manage our collections and try to effectively mitigate collection risk. Our fourth-quarter net inventory ended at $174.9 million, compared to $163.7 million at the end of the fourth quarter 2011, and $178.9 million at the end of the third quarter 2012. Fourth-quarter ending inventory turns were 5, as compared to 5.2 turns in Q4 2011, and 4.9 turns in the third quarter 2012.

Let's turn to our channel inventory. Our channel partners report inventory to us on a weekly basis, and we use a 6-week trailing average to estimate weeks of stock. Our US retail inventory came in at 8.8 weeks of stock. Current distribution inventory levels are 10.2 weeks in the US, 4.4 weeks of stock for distribution in EMEA, and 7.2 in APAC. The US distribution inventory is on the high side, while retail inventory is on the low side. We expect to normalize inventory levels in subsequent quarters, closer to 6 to 8 weeks for distribution and 10 to 12 weeks for retail.

With regards to the first quarter 2013, we intend to roll out approximately 20 new products. We anticipate further reduced spending among our existing service provider customers in the first half of 2013, while we see growth in our Commercial Business Unit, driven by new products in 10Gigabit Ethernet switching, Unified Storage, and Campus Wireless LAN. We expect that our Retail Business Unit will follow the seasonal pattern with a slow first half, followed by growth in the second half of the year. We expect first-quarter net revenue to be in the range of approximately $290 million to $305 million and non-GAAP operating margins to be in the range of 11% to 12%. For 2013, our annualized non-GAAP tax rate is expected to be approximately 33%.

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

Thank you. We will now be conducting the question-and-answer session.

(Operator Instructions)

Ryan Hutchinson, Lazard Capital Markets.

A couple quick questions here. Just on guidance, going back to, gosh, even early 2000s I think, you never had a sequential decline from Q4 to Q1.

Q2 has always been your seasonally weakest quarter. And obviously, Service Provider contribution is far greater, so we are dealing with those dynamics. But, how should we think about NETGEAR's new seasonality, both on an organic basis, and then, following the close of AirCard, how do we think of that? That's question number one.

Then, number two is just on AirCard's operating margins -- where were they on a historical basis? And, as we close the acquisition, how do we think about NETGEAR's overall operating margins? And, how long does it take to get back to the 11% to 12%? Because clearly, that seems to be an area of confusion. Thanks.

Yes. First, on the seasonality, we understand that as the Service Provider Business can be a bigger portion of our revenue, it certainly would basically disrupt our easy-to-predict seasonality. That's why we started segment reporting about two years ago.

So going forward, from a modeling perspective, if you look at the CBU, RBU, combined, then it will follow the same seasonality that we have had for years, which is basically a flat Q1 verses Q4. And then a down Q2, and then big jump in Q3, and then a further jump in Q4 for that part of the business.

And then, specifically, for the Service Provider segment, as we mention all the time, we only have visibility of 12 weeks out. And that's why we will be able to provide pretty good idea of the current quarter's guidance on the Service Provider. So, that remains to be lumpy. Some quarters it will be really big, and some quarters would be low. But overall, we believe that on the year-over-year basis, it will maintain growth.

It's like last year we had tremendous growth in the first half because of the lumpiness -- they decided to spend a lot of money in the first half, but then they retracted in the second half. But, if you look at the overall year-over-year basis, the Service Provider Business Unit still grew pretty well, like up in the 20%, 25% range for the full year. So, that is the new seasonality that we have to be going through.

Now, regarding the operating margin, and certainly, last week Sierra Wireless disclosed the operating margin of that discontinued business, certainly we will not be able to comment on how they calculated and what is their way of doing it. However, we did extensive modeling and study in the due-diligence phase and believe that the business that we are acquiring is pretty much along the same line of the rest of our Service Provider Business Unit.

And, if you look at our segment reporting, our Service Provider Business Unit is doing contribution margin of anywhere between 8% and 9% over the years, verses our Commercial Business Unit, which is roughly around 22% and our Retail Business Unit, which is roughly about 17%. So, the AirCard business, you fold it in, it really depends on how the other two business units going to come into the mix.

Right now, we don't have clear visibility as yet for Q2, so we would not have a good estimate on what that overall company operating margin is going to end up. And certainly, clearly, you could do some modeling on how big the CBU and RBU business has to be to balance the increased AirCard business in order to maintain our 11% to 12% operating margin overall. But, we do expect that.

Our focus, right now, with the acquisition of AirCard is that focus on the growth opportunity of the smart homes, so the RBU, Retail Business Unit, and focus on the move to the hybrid cloud access network architecture on the Commercial Business Unit so that they would grow much faster than the previous 12 months. So that they will be able to balance the increased weight of the Service Provider Business Unit. Our aim, eventually, is to maintain 11% to 12% operating margin in a steady state.

Mark Sue, RBC Capital Markets.

It's Mark Sue, RBC.

Patrick, if I look at your business for the full year, if I exclude the AirCard business, does it feel the business, the base business, might actually grow? Or, should we think about a decline year over year? The guidance near term, I'm not sure if it's just a change in seasonality, but rather some fundamental declines in the business?

Just wondering what might be causing that? Is there maturation? Is it penetration? Or, is it service providers who actually need to digest a lot of the purchasing that they did last year?

Clearly, without a doubt, over the last 12 months, the one that suffered the most from a growth perspective is the Commercial Business Unit. There are two reasons for that. One is the general economic climate that is really causing the small business piling up the IT budget. It did not really help, even in Q4, that we had intense discussions of fiscal cliff in the United States, which certainly affect our sales in North America for the Commercial Business Unit.

The other thing was the -- is well documented is because of the hard disk drive price raise in 2012. Now, unlike our competitors, we refused to absorb that shock, and we pass on the prices increases to our end customers. And as such, it really number one, reduced the market demand. Number two, we admitted that we lost some share to our competitors who are willing to swallow, but things are going to change in 2013.

The hard disk drive is finally getting normalized, and our inventory is being cleared out, so we are no more in a price disadvantage against our competition. And also, we are refreshing our line with the beginning of the ReadyDATA; in fact, we are showing great success in the marketplace. You will continue to see, throughout this year, that we will continue to refresh our ReadyNAS line, as well as introducing more ReadyDATA. And with more competitive pricing and completely refreshed of the NAS line, we feel very confident that the temporary setback in 2012 will not be repeated.

Our fundamental core of the Commercial Business Unit is still very, very sound. Because frankly, if you look at going into the hybrid cloud and access architecture. There is nobody who has more suitable products than we do, with the 10Gig switches that with recent introduction of more 10Gig switches we are covering end-user customers from an entry price point of below $1,000 to about $8,000.

Certainly, we have more PoE switches than anybody else on the market today that would cover the extensive use of multimedia in the office to support video conference, video surveillance, Voice over IP, and as well as bring your own device, and all that. Needless to say, we have been the leader in WiFi for especially among the small businesses.

With the acquisition of the Firetide wireless controller team last year, and ready to have products coming out by second quarter of this year, then we believe that we should be able to enjoy a significant boost in that particular area. From a product standpoint, from a market standpoint, from a technology disruption evolution standpoint, we feel very good about our Commercial Business Unit.

Then on the retail front, needless to say, we have been gaining a lot of share against our competitors in the developed world. Clearly, in the US, we are by far number one, even with the recent possible announcement of the merger of Linksys and Belkin. And they are combined still a distant second to NETGEAR, our momentum is continuing to be there.

We are ahead of any of our major competitors in 11ac introduction in the US at least by three months. And frankly, in Europe we are the only game in town. We are the only player in 11ac. So, 11ac will continue to give us a lot of momentum.

Now granted, last year, we only grew our RBU business single digits, due to some of the product transition as well as the depressed economic situation. However, as we have seen in the US, in Q4 in particular, the return of retail is pretty significant. And, we saw the tremendous Casio's numbers, as well as some of the apparel chains, so we feel pretty confident that the consumers are back in North America.

Granted, Europe is going to continue to have hesitance; however, that's why we did the restructuring. Moving a lot of our sales and marketing resources in Europe in Q4 into the developed countries, such as China, India, and Japan, which are still growing pretty extensively for the RBU-related products, where we have the, whether it be small market share, in China against the local vendors. We are making great stride over there.

So, the core business of connecting consumers to the Internet is still pointing to growth and significant growth. And, we are well positioned to capitalize on that growth, both in the developed world, as well as in the developing world.

Service Provider, yes, it has been lumpy, but as we said, we grew 25% year over year in 2012. In 2013, with the combination of the AirCard team, pending closing, we dare say that we are the best team in providing fixed mobile gateway because we're combining the best talent in 4G LTE engineering. And the best talent of WiFi engineering to come together to provide a fixed mobile gateway, based on LTE as to wireless LAN access and WiFi to local area network distribution.

Our fundamental core is still there, and we believe that we can capitalize on it. And 2012, basically, is the year of a temporary slow down for all kinds of economic, macroeconomic environment, as well as some special like the hard disk drive price situation. But, looking beyond that in 2013 and the years after that, we feel very, very good about our core business.

Patrick, combining all your comments, will you -- the revenue is implied that you would have to really accelerate in the back half of the year. Is the $1.27 billion is what you did in 2012, we should grow that base business and show a big hockey stick in the back half? Is there some comfort there with all the commentary?

That's why we continue to see growth in the core business, excluding the Service Provider. We do believe that in the second half, when all these seasonality as well as the new products helping us out, wider adoption of 11ac, wider adoption of the hybrid cloud access architecture will certainly help it, and we are planning for that.

On top of that, the Service Provider Business Unit will be augmented by the AirCard team for us to go into a brand new -- not only that we're committed to continue to grow the existing AirCard products of mobile hot-spots and 4G USB downloads, the most important thing is combining the two teams. We'll be able to attack the brand new market called fixed mobile gateway, which we already talked about at Bell Mobility in Canada is deploying and Verizon's starting that. And, we believe that, according to the strategic -- the industry report as well as internal estimate, that market is going to balloon from almost nothing, last year, to $1.5 billion in five years.

So, in all three BUs we feel pretty good that we have significant growth opportunity in front of us and that we're definitely going to maximize the opportunity and get to $2 billion next year.

Patrick, just on that -- the $2 billion, that seems really heroic. I don't even know if it's possible without meaningful acquisitions. Is that just a target where we have to make acquisitions, buy companies, to get to that $2 billion number --?

We have been buying companies every year for the last three years, so we are not going to say that we are not going to buy companies. You will continue to see us to buy companies this year and next year. That is definitely in the works.

But, buying companies, sometimes we buy the technology that will drive revenue with our existing channels. Sometimes, we buy revenue together with the technology. We will not predict what it is going to be like.

But clearly, with all these new shifts in technology, such as shifting from 3G to 4G LTE, shifting from 11n to 11ac, shifting traditionally from the data center networking into the cloud access architecture networking, we believe that 2014 will be able to provide us with really healthy double-digit growth across all three business units. And that will be able to take us to the $2 billion mark.

Okay. Thank you.

Hamed Khorsand, BWS Financial.

Essentially, my main question is -- it seems as though ac is getting embedded into smartphones at a faster rate than n was. So would that essentially mean that we could see a larger and quicker growth curve, compared to n, or do you think the consumer is still getting adjusted to the 802 11n.

We see a 15% quarter-on-quarter growth in unit sales of 11ac during the holiday season. And as, you are right, Hamed, pointed out that more and more smartphones are incorporating 11ac for the speed, as well as for the lower power consumption. So that will drive more people moving onto 11ac. And clearly, that is part of our equation of our growth of the 2013 and 2014.

We believe that with the readification of 11ac by Itrip the later this year, even among the SMB, the move to 11ac will be fast and furious. And that's why we bought that Firetide wireless LAN team that we would be quickly moving our Wireless Campus LAN from 11n to 11ac when that happens. All that points to 11ac to be a significant driver of revenue growth in the next two years.

Thank you.

Kent Schofield, Goldman Sachs.

Following the commentary on 1Q 2013 OpEx guidance, can you reiterate as to what you are referring to there, again? Then, how should we think about the 11% to 12%, and the fact that, typically, you think kind of high end of revenues, maybe you can get to the higher end of that range, but does OpEx inhibit that from happening?

No, our OpEx, we manage pretty well. As we said, OpEx will go back to the normal level, and we are very prudent, right, as you just saw.

Q4, as we saw the progression of the quarter, is going to be within our guidance, we are not going to take on new people. As a matter of fact, we have a net decrease of four headcount.

Also, we know that we are not going to have tremendous growth here overall in 2012, so we significantly reduce our incentive compensation. So, we use a lot of tools to help us to ensure our operating expense is in line with our growth of profit.

So in Q1, as we mentioned in our discussion during the opening of this -- the call, is that we see continued depressed service provider spending in the first quarter. So that is going to drive -- even though that, for the other two business units, we will see slight sequential growth, it's not going to be enough to offset the decrease in the Service Provider Business Unit revenue in Q1. As such, faced with this, of course, we will manage our operating expenses very carefully, so that we will stay within 11% to 12%.

Okay. And when we think about -- you've talked about the service provider side of things being weak in 1Q in the first half of this year. On the organic side of your business, what gives you confidence in the back half of this year that we should look for better service provider spending?

As we said, many times, service providers -- we have very little visibility beyond 12 weeks. But with the acquisition of AirCard, with the development of the fixed mobile gateway market, with the launch of the fixed mobile gateway business with Bell Mobility, as well as going into the Verizon Wireless open band, those are the things that we are banking on that, in the second half of this year, we will have better growth.

Thank you.

(Operator Instructions)

Rohit Chopra, Wedbush Securities.

Patrick, I wanted to clarify something -- when Ryan asked you a question up front, you gave a combined target of 11% to 12% for the combined company. That's where you would like to be.

Do you have a -- is there a timeframe for that? Or, are you thinking that in 2012, you'd be there? Obviously, it can't be like that right off the bat, but is there a timeframe?

It really depends on how fast the CBU and RBU can grow. Just a rule of thumb, right? We have been at 11% to 12% when Service Provider Business Unit is as high as 38% of our total revenue.

So, when you see that our Service Provider revenue is lower than -- equal to lower than 38% and our RBU CBU business is equal or higher than 62%, that's when we'll be able to comfortably stay in the 11% to 12% range. Of course, if Service Provider revenue is becoming 50%, then we can't do that.

But, as we just said, we would not be able to gauge that until we finish and we own the company, as well as understand what Q2, Q3 number for the RBU and CBU is going to be. And then we'll be able to give you a better idea.

Okay. Then, I just want to get a sense, also, on new products in this category, I know you have some, but to have a combined product, what's the product cycle time on that? Is that a 12-month time frame before you're able to have some new LTE gateway products that use new technologies?

That's the beauty of this acquisition. We have been working with this team as the supplier to produce those products, so that's why we already have those products on the market. We already have customers.

Bell Mobility is a customer that deploying those fixed mobile gateway using LTE circuitries and modules from that very team that we are acquiring. So, practically from day one, we have the product, except that now, we keep all the profit. And we also can direct those engineers to cater to our customers rather than their old bosses' customers. So, we will be more adaptive and nimble to our customers going forward, and we'll be able to target even more customers.

Two other really quick financial questions. One, just on the gross margin, Christine, down just a little bit, but you had lower service provider. So what's the other dynamic that's driving the gross margin down, if you have less service provider?

Rohit, I really think it's also the CBU business unit, the revenue coming down in the CBU, so it is the mix. But, it's not just the service provider.

Okay. Then, a last one on taxes -- you mentioned for the full year 2013 where you would like to be. Does that mean it still could be a little bit higher in the first quarter, and that's why you didn't give that number? And, what does it look like on a combined basis?

On a combined basis, again, we'll give numbers when we acquire the company. It is a predominantly US company, probably two-thirds of that business. The guidance is 33% for the year, barring any discrete items that come through, so I would -- that's going to be up and down during the quarters, but continue to average it around 33%.

Okay. Thanks very much. Appreciate it.

Shaw Wu, Sterne Agee.

First question, just on Linksys, in terms of that being sold to Belkin -- any benefit you are seeing from that, now? I guess, did it help out your retail business? Also, Patrick, your thoughts on what that means going forward in terms of competitive dynamics? Thanks.

Basically, in one fell swoop, you eliminated one competitor without having to pay anything, so that's a positive for us. And right now, basically, when we go to a retailer, we are fighting just one competitor rather than fighting two, so we like that.

Also, I think it really depends on what they're going do, and whether they're going to keep two distinct products lines with two distinct R&D teams with very distinct products. Or they're going to mix them together and just have one line of products with two different packaging and two different price points. It really depends on which strategy that they're going to take. Then, we'll see how we're going to respond to that.

But overall, when you have one less competitor in the market, it's always a good thing.

Okay. Then, does this impact -- any color on does this impact one of your business units more than the others, or would it benefit all three?

Clearly, it is primarily retail because over the last 10 years after Cisco bought them, they basically have already restricted the Linksys brand just to retail. They retreated from commercial, giving that back to Cisco's proper, and they have retreated from service provider, giving it to Scientific Atlanta. So frankly, this is all about retail, and it was is even more interesting -- it is more retail in North America; because over the last four or five years, the Linksys brand has pretty much vanished from international markets. So to be fair, we only eliminate one competitor in North America because their presence outside the US is practically nonexistent.

Okay, thanks. Then, just on -- just a question on I noticed your headcount was about flat sequentially. You've been adding quite a bit.

I guess -- a question, I guess, this is an effort, in terms of reducing costs, or is this ahead of, I guess, the acquisition of Sierra Wireless data card business? Just a little more color there?

Clearly, we manage our operating expenses very tightly. So, when we see that the core is actually going to be sequentially less, then we are going to control our expenses.

And, everybody knows, in a tech company, the biggest expense is headcount. That's why we purposely control the headcount, and actually, make it flat -- actually, we reduced four headcount, net, over the quarter. So not until we see an uptick in our overall business, we're not going to increase headcount.

Clearly, we're going to naturally increase headcount with the acquisition of AirCard because we are inheriting a bunch of their people, as well as hiring more people to support that business. Because we're not getting everyone we want from Sierra, so a lot of the people they're retaining, so we have to replace those for our own business. Not only that we are acquiring a bunch from them, we are also hiring a bunch to support the business going forward.

Okay, thanks.

There are no further questions at this time. I would like to turn the floor back over to Management for closing comments.

Thank you.

Clearly, as I mentioned, that we are very bullish about the long-term growth of each market that we pursue. The smart-home market, which according to industry analysts, just the product revenue alone is going to double in the next five years. And, same thing for the 4G LTE fixed mobile gateway, according to industry estimate and own internal estimate, it is going to be a $1.5 billion market within five years from nothing.

Then, with the Commercial Business Unit, I think there is tremendous gain for us to be had while the world is moving towards cloud computing, BYOD, multimedia, and all that. So, all that will enable us to continue to lead in that space.

All three business units, we are seeing tremendous growth opportunity over there. We are certainly not phased by the temporary slow down that we experienced in 2012. And, we continue to focus on providing the best products, leading-edge technology in the market, continue to be the market leader, and continue to grow faster than the market. We look forward to a very bright 2013 and 2014.

Thank you, everyone, and I will talk to you in about two months.

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