NETGEAR Inc (NTGR) 2013 Q1 法說會逐字稿

Greetings and welcome to the NETGEAR, Inc. first quarter 2013 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. If anyone should require Operator assistance during the conference please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Christopher Genualdi, Investor Relations Specialist. Thank you, Mr. Genualdi. You may now begin.

Thank you Operator. Good afternoon and welcome to NETGEAR's first quarter 2013 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 the detail 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 the NETGEAR corporate website at www.NETGEAR.com.

Before we being the formal remarks, the Company advises that today's conference call contains forward-looking statements. Forward-looking statements include statements among others regarding expectations for the 802.11ac product market, the TV connectivity market, and the range extender market, growth in emerging markets for our retail products, expectations for our commercial business unit products including cloud based features and wireless controllers, expectations regarding the AirCard business integration, LTE, WiFi and gateway development, our focus on growth, investment in research and development, expected revenue, earnings, operating income, and margins, tax rates, and other projected financial results.

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 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-K 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. For the first quarter of 2013, NETGEAR net revenues were $293.4 million which is down 9.9% on a year over year basis and down 5.5% sequentially.

Non-GAAP diluted EPS came in at $0.30 per diluted share. Please see the first quarter 2013 earnings press release for a full reconciliation of GAAP to non-GAAP financial results.

Net revenue for the first quarter of 2013 came in at the lower end of our original guidance range of $290 million to $305 million. We are very disappointed with the non-GAAP operating margin of 10% for the quarter which is lower than our original guidance of 11% to 12%. This lower than expected non-GAAP operating margin was driven by product mix and mainly due to difficulties in the transition to our new ReadyNAS line of products.

The new ReadyNAS product transition occurred late in the quarter and we experienced difficulty securing components coupled with some last minute spot fixes which lead to unanticipated delays. This marked the first time we completely replaced an entire line of products which involved obsoleting ten models and replacing them with seven brand new models. The execution was much harder than anticipated and we learned a valuable lesson in engineering and manufacturing and planning. The good news is that our supply is now in full swing and customer feedback on the new product line has been very positive thus far.

In addition to the ReadyNAS transition delay, our total revenue had a slightly stronger weighting than anticipated towards service provider. The combination of these two factors caused our operating margin to be lower than planned.

During the first quarter, the Americas net revenue was $156.7 million, down 6.9% year over year and down 7.8% quarter over quarter. The year over year decline is primarily driven by lower revenue from the service provider business unit. The quarter over quarter decline is primarily driven by lower sales into retail stores as they prepared for a seasonally slower Q2 as well as the short shipment in the new ReadyNAS.

Europe, the Middle East, and Africa, or EMEA, net revenue was $107.1 million, down 14.4% year over year and down 3% quarter over quarter. While the economic situation in Europe has been challenging for the past year we see the decline in market demand starting to stabilize.

Our Asia Pacific, or APAC, net revenue was $29.6 million which is down 8% from the prior year's comparable quarter and down 1.3% sequentially. The year over year decline was primarily driven by lower revenue from the service provider business unit and the slight quarter over quarter decline was driven by the Chinese New Year holiday.

While we saw a year over year decline in revenue in Australia and Japan, we are seeing good growth in China. In Q1 we maintained a high level of shipments with 6.6 million units shipped. We also introduced 19 new products during the quarter. By the end of the first quarter of 2013 our products were sold in approximately 36,000 retail outlets around the world and our number of value added resellers stands at approximately 43,000. In particular, we are excited about adding the [Nanovel] stores in China as our retail partners during the last quarter.

Now let's turn to a review of the first quarter results for our three business units -- retail, commercial and service provider. In our retail business unit, or RBU, net revenue came in at $126.3 million, down 2.1% year over year and down 8.8% sequentially. This quarter over quarter decline was reflected in our comments during our last earnings call. It was due to two factors, two less selling days in Q1 this year versus Q4 last year and also reduced purchases from our North American retail channel customers in preparation for a seasonally slower second quarter.

On a positive note, based on the in-market sales report we continue to gain share in retail channels in all three regions and we look for this trend to continue. The 802.11ac product cycle continues to gain momentum as an increasing number of client devices with .11ac compatibility are released each quarter. More and more new smartphones and tablets are supporting 11ac WiFi and we expect that will drive more 11ac upgrades in the coming quarters worldwide.

As the market share leader in 11ac products we further distanced ourselves from competitors in technology by announcing Beamforming plus support for our 802.11ac products this week which improves WiFi performance and range.

We also continue to gain traction with our new TV/Internet video streaming device. Having entered Target stores in the fourth quarter of last year we recently expanded distribution of this line of products into Walmart this month. We are also excited about our new Push2TV products that support Miracast which transposes the screens of Android smartphones and tablets on to the larger screens of TVs. With the next version of Microsoft Windows supporting Miracast as well, we believe our Push2TV product will be a significant tool for the smartphone, tablet and PC users to enjoy video streaming at home.

We continue to see the proliferation of WiFi range extenders into more households in the developed world. As more and more mobile devices are used in homes for video streaming, WiFi range extenders are being widely used in homes to extend WiFi coverage to every corner of the house. As the undisputed market leader in this category we continue to outperform our competitors with a lineup of five products in the markets. We are seeing attachment rates of WiFi range extenders rising to one in five routers sold and we believe that this positive trend will continue.

With Nanovel China as a retail partner we are anticipating strong growth in China for our retail business unit. We also expect growth in India and Russia to accelerate as we start to introduce specific products for the expanding middle class consumers in those two markets.

Turning to our commercial business unit, or CBU, net revenue came in at $70.9 million for the first quarter of 2013 which was lower than expected. That is down 5.1% on a year over year basis and down 3.5% sequentially. We have already discussed the ReadyNAS transition delay which cost us valuable revenue and margin during the first quarter. Nevertheless, we are pleased with the latest Gartner Group report on storage market share for 2012 which again ranked NETGEAR as the number one revenue share leader in network storage for under $5,000 and number one in unit share overall.

Providing cloud based features in our commercial products is key to our growth strategy for CBU. Current trends are increasingly driving voice, video and data for businesses into the cloud, both public, private and hybrid. Other than the new ReadyNAS and ready data line of network storage which provides cloud management, access and backup capabilities we introduced two more ten gig switches in the first quarter. Now we have five ten gig capable switches on the market with three of them supporting 10GbE with price points ranging from $1,000 to $5,000. These switches are ideal for implementing private and hybrid cloud as well as providing superfast access to the public cloud via wired infrastructure.

In Q1 we introduced the first wireless controller capable of supporting 200 access points which grew out of the acquisition we made last year in India. We have already gained wins in China with a five star hotel and a large scale hospital based on these controllers and associated access points. We anticipate a continuous rollout of this product line worldwide with ever increasing capacity to accommodate the BYOD trend for cloud access.

For our service provider business unit, or SPBU, net revenue came in at $96.2 million for the first quarter of 2013, down 21.1% in year over year and down 2.3% on a sequential basis. Service provider revenue has always been lumpy and the decline was expected as we highlighted during our prior earnings conference call. During quarter one 2012, the prior year comparable quarter, we enjoyed significant extra revenue from a specific service provider because a competing supplier could not supply, providing an especially tough year over year comparison for the first quarter of 2013.

On April 2, 2013 we closed the acquisition of the AirCard division of Sierra Wireless in order to enhance the mobile capabilities of our service provider business unit. Having spoken with the existing AirCard customers and worked with the exceptionally talented AirCard team for nearly a month now we are even more excited than before about the large opportunities that are on the horizon for our air PBU.

We are currently engaged in a very methodical integration of the AirCard business into the service provider business unit and the larger NETGEAR family. We are now in the process of responding to multiple RFPs from service providers for multiple different LTE products, both fixed and mobile. The one product line we are particularly excited about is the LTE WiFi gateway. Instead of depending on the wired line for internet access it uses 4G LGE wireless for wide area internet access even though distribution is still done by a WiFi. It is especially useful for rural deployment where wired infrastructure for high speed internet access is not available. It is also the only fast way to deploy high speed internet to households in the developing world where building a wired infrastructure is either technically not viable or cost prohibitive.

Additionally, we've begin further joint development between our core gateway and AirCard teams. We eagerly look forward to seeing the exciting next generation LTE data and voice access devices that the new service provider business unit will create for the future.

As always, we are focused on long term growth driven by our mission to connect everyone to the high speed internet. We see no change in the secular outlook for our core business. We continue to drive growth in each business unit by expanding our product range, opening new channels and penetrating new geographic markets. The market opportunities for each of our three business units reinforce our belief that NETGEAR is still a growth Company.

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

Thank you Patrick. I will now provide you with a summary of the financials for the first quarter of 2013.

As Patrick noted, net revenue for the first quarter ended March 31, 2013 was $293.4 million compared to $325.6 million for the first quarter ended April 1, 2012 and $310.4 million in the fourth quarter ended December 31, 2012.

We shipped a total of about 6.6 million units in the first quarter including 5.2 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 3.5 million units in the first quarter of 2013.

Moving to the product category basis, first quarter net revenue split between wireless and wired was about 68% and 32%, respectively. The first quarter net revenue split between home and business products was about 75% and 25%, respectively. Products introduced in the last 15 months constituted about 30% of our first quarter shipments while products introduced in the last 12 months constituted about 26% of our first quarter shipments.

From this point, 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 first quarter of 2013 was 30.5% compared to 31% in the year ago comparable quarter and 30% in the fourth quarter of 2012. Total non-GAAP operating expenses came in at $59.9 million for the first quarter of 2013 which is 3.8% higher than the prior quarter primarily driven by people cost.

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 Q1 was 5% of net revenue in comparison to 4.1% in the year ago period and 4.5% of net revenue during Q4. Our headcount increased by net 16 people during the quarter bringing our total headcount to 866 at the end of Q1. We expect a significant increase in the headcount during Q2 due to the AirCard transition as we also had 100% offer acceptance rate from the former Sierra Wireless employees.

The non-GAAP tax rate was 34.6% in the first quarter of 2013 compared to 30.1% in the first quarter of 2012 and 39.4% in the fourth quarter of 2012. During Q1 we recorded a onetime benefit for R&D tax credit that was retroactively reinstated by Congress on January 2, 2013 for the 2012 calendar year.

Looking at the bottom line for Q1, we reported non-GAAP net income of $19.4 million and non-GAAP EPS of $0.50 per diluted share. Looking at the balance sheet, we ended the first quarter with $422.4 million in cash, cash equivalents and short term investments which was driven by approximately $45.1 million in cash flow from operations. Over the last four quarters we've generated $87.3 million in cash flow from operations. This cash balance will be reduced in the current quarter by the payment of the AirCard acquisition which amounts to approximately $140 million.

DSOs for the first quarter of 2013 were 73 days as compared to 70 days in the first quarter of 2012 and 76 days in the fourth quarter of 2012. As always, we intensely manage our collections and minimize collection risk.

Our first quarter net inventory ended at $158.6 million compared to $134.3 in the first quarter of 2012 and $174.9 million at the end of the fourth quarter 2012. First quarter ending inventory turns were 5.2 as compared to 6.7 turns in Q1 2012 and five turns in the fourth quarter of 2012.

Let's turn to our channel inventories. Our channel partners report inventory to us on a weekly basis and we use a six week trailing average to estimate weeks of stock. Our U.S. retail inventory came in at 9.9 weeks of stock. The actual staller amount of U.S. retail inventory was down quarter on quarter. Current distribution inventory levels are 8.9 weeks of stock in the U.S., 4.1 weeks of stock for distribution in EMEA, and 7.2 in APAC. The U.S. retail and distribution inventory levels are at more normal levels compared to the fourth quarter of 2012.

As Patrick highlighted, on April 2, 2013 we completed the acquisition of the AirCard business of Sierra Wireless, Inc. Onetime expenses for the acquisition which were recognized during the first quarter were approximately $700,000. The second quarter of 2013 will include a full quarter of AirCard expenses and revenues. As mentioned earlier, we are excited about the RFPs and product roadmaps that we can work on now that the deal has closed. We are aggressively investing in R&D on mobile products for our service provider customers to bring the next generation of LTE data access devices to the market ahead of our competition.

With the full quarter of AirCard revenue included we expect second quarter net revenue to be in the range of approximately $345 million to $360 million and non-GAAP operating margin to be in the range of 9.5% to 10.5%. As we've said before, achieving an operating margin range between 11% and 12% is dependent on the service provider business unit revenue constituting approximately 35% or less of our total revenue. Therefore, a return to those operating margin levels requires a higher growth rate from the other two business units going forward.

Finally, we expect our non-GAAP tax rate to be approximately 38% for the second quarter of 2013. We expect the tax rate will be in a much wider range throughout the remainder of 2013 depending on the mix of domestic and international profits.

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

Thank you. We'll now be conducting a question and answer session. (Operator Instructions)

Our first question comes from the line of Kent Schofield from Goldman Sachs.

A couple follow ups on the NAS product lineup, first off was that fully in the channel globally or are you still rolling it out and then is there any legacy inventory that needs to be worked through during the quarter?

We were too good in working the legacy inventory out the quarter but we were late in shipping the new inventory into the channel so the channel today is pretty depleted and they are stocking our new products. We started shipping our products in the last two weeks of the quarter in Q1 and now they are making their way into the channel.

Okay great and then on the AirCard side of things, I was wondering if you could talk a little bit about the LTE gateway competitive landscape. Is it different than the competitors you normally see in the SPBU and what are some of the advantages that AirCard brings to that business?

It's a very brand new product combining the LTE wide area access to the WiFi local area access so you're right in that we have yet to see significant competitors emerging from it because of traditional WiFi router competitors such as Linksys, VLink and Belkin, they don't participate in the LTE well but then the traditional AirCard competitors such as Novatel and [Waway] and ZTE have not come up with those mobile gateway so we say we're first to market and we've seen a lot of RFPs on it and I do believe that going forward, all those competitors from the WiFi side or from the AirCard side, probably half of them would jump into this particular new category. By being first to the market, clearly we have the first move advantage and by also being the number one WiFi market share leader we certainly know more about in-home distribution than any of these competitors. And also by being a leader in LTE technology such as LT Advanced we feel very good going forward but we certainly see the traditional competitors from both will jump into the fray later on.

Our next question comes from Hamed Khorsand from BWS Financial.

First off, do you think that there is a time shift in any revenue related to your NAS product line?

Unfortunately, a lot of the ReadyNAS that we sell in volume for the low end, small business and what we call, prosumers, and when you are out of stock they just buy competitors so we clearly lost quite a bit of share towards the last few weeks of the quarter, of Q1, but we are committed to make it up in Q2 and we are working very feverishly to try to push our products into the channel as quickly as possible. We're shipping in high volume right now. We just have to get the logistics to get them in the hands of our channel partners worldwide.

Okay, is that going to increase any cost associated with this?

No, we don't believe so. We certainly are planning every quarter for new product introductions that will involve air freight. That is part of the plan and it's baked into our guidance in Q2.

Is there any kind of timeline as far as the full integration of the AirCard business and just getting operating margins to be at least a little bit higher because the margins of that business are quite low compared to the rest of the business?

The service provider business unit margin will always be lower than the other two business units. From an integration standpoint I'm pretty happy to say that the two teams are pretty well integrated and we're all working as a team right now and most of the systems are integrated. There are only a few systems that have yet to be integrated but we expect that to be done within six months so I would say comfortably by the end of the year at the latest, in Q4, we should be fully integrated from systems, from people, location, facility standpoint and from a margin standpoint, as we mentioned before, the AirCard business margins from the contribution standpoint is pretty similar to the rest of the service provider business unit. There is a slight variation that they are a little bit higher in R&D but then they are a little bit less in sales and marketing but then overall contribution margin is pretty much the same as the rest of the service provider business unit so the key for us to get back into the overall 11% to 12% operating margin for the Company is for RBU and CBU to grow so that the proportion of service provider business unit revenue is back to the more normal range of 35% or below. Once that happens then we'll see the overall Company operating margin to be in the 11% to 12% range.

Okay and my last question is associated with the guidance you provided. If I just back out the AirCard business would you have expected the old NETGEAR revenue to be higher sequentially?

Basically, what we believe is that the retail business will continue to be following the seasonal trend which is Q2 is usually a down quarter from Q1 because there is just nothing to celebrate in Q2 while in Q1 you have the new year so that probably is going to be down but the commercial business unit because, in Q1 be exceptionally bad because of the delay in shipment already now so we do believe the commercial business unit will be up quarter on quarter.

The service provider business unit, if you back out AirCard we do believe that it will continue to be in the usual range that we talked about, between $95 million and $105 million, within that range. It depends whether we get new orders, whether we can have extra inventory to ship and so on and so forth so that is pretty much where the overall business is going to be and just for reference, in Q4 of last year the AirCard business was reported by Sierra Wireless to be roughly around $54 million.

Our next question comes from the line of Mark Sue from RBC Capital Markets.

Patrick, the sharp decline in the service provider segment, down almost (inaudible) percent year over year, we understand that the business is lumpy and the comps are tough because of the big growth that you had last year but there is also some thought that a lot of your key customers have purchased and your penetration is quite high and if that is the case, any thoughts of how we should be thinking about the business? Should we see a return to growth this year? What is kind of a normalized rate of growth do you think for the service provider business?

Sure, I mean if you -- you're talking about backing out the AirCard side, right?

Yes, just your traditional NETGEAR service provider business.

Right, the traditional NETGEAR service provider business last year in Q1 as we talked about was benefitted by one of our competitors failed to ship so one of our specific customers turned to us, instead of 50%, you get 100% of the revenue. Will you be able to deliver? And our operations department rose up heroically to actually deliver, actually both in Q1 and Q2 and that really is an anomaly but since then, unfortunately our competitors came back so anyway, we believe that as we talked previously, that we're going to continue to stay in that tight range of $95 million to $105 million for our traditional service provider business unit until we win a new customer or extra new projects.

Now, the DOCSIS 3.0 penetration is still actually relatively low especially given the fact that the DOCSIS 3.0 is like WiFi. It is not a single standard. It goes through multiple iterations. The first generation DOCSIS 3.0 is only four-by-four as we call it, four channel binding upstream, four channel binding downstream but then it would go up to eight-by-four. It would go to 16-by-four. It would go to 16-by-eight so the upgrade cycle would just continue to move forward so we do not see there is any quote, unquote saturation as long as people are being enticed to go up to higher and higher speed.

Also, there is also a movement in the marketplace as you probably know. It's to make these gateways to be more intelligent, that is distributing channel to video into IP devices in the industry's name. It's called the headless gateway or the media gateway so the key for us is to go forward, to win new projects on these new higher speed DOCSIS 3.0 cable, DOCSIS gateway such as 16-by-eight, 16-by-four or to win some of these new media gateway projects so those are the things that we're focusing on.

So it does sound for that business, service providers, to grow you need a new cable customer which is the likely candidate. When you move into this realm, Patrick, a lot of entrenched incumbents out there which offer similar products. Will price stimulation be required for you to win market share there?

Yes, but every time there is a new technology disruption then there is a new project. Then we will be able to win over an entrenched incumbent. For example, if an incumbent has been supplying a DOCSIS eight-by-four data gateway and the customers want to go to a media gateway, that opens up an opportunity for us to go and snatch that project away from our competitors.

Think similarly on the Telco side. If a customer wants to move from a traditional DSL infrastructure into a VDSL or into a fiber-to-the-home infrastructure, those new projects open up an opportunity for us to go in and displace the incumbent so every new technology disruption is an opportunity for us to gain share and as I just said, these technology disruptions continue to come around.

Patrick, if I switch to the potential synergies and the combination of that and also the higher RFPs that you're seeing in LTE and WiFi, operationally, longer term as you combine these assets, will there be potentially better margins or is it just putting two separate technologies together, that you don't really charge a premium or get margin improvements? I'm just thinking much longer term as you respond to the higher RFPs what it means for your business as you combine the assets together.

As a matter of fact, we are acquiring a very minimal team. A lot of the infrastructure that is required to support that business did not come over. We actually have to build it up so from the synergy standpoint there is very little over there. As we mentioned, right now we're modeling our business, that the entire service provider business unit's contribution margin is not going to improve with the acquisition of the AirCard but certainly it is not that we are not continuing to work on it, alright? As an overall business we will continue to work on overall improvement in margin in individual business units as well as in the overall but we would like to point out the most immediate impact that we could have is by growing the other two business units faster so that the mix is more balanced and that will affect them the fastest way to get into a higher margin, get back into an 11%, 12% range.

Okay, but this year we shouldn't really think about 11% or 12%?

We're not modeling that but we're trying to work very hard.

Okay, that's helpful. Thank you and good luck.

Our next question comes from Ryan Hutchinson from Lazard Capital Markets.

A clarification and a couple questions, on the AirCard contribution for the June quarter, can you just provide what we should model with respect to revenues? And then -- go ahead.

As we mentioned specifically, they reported $54 million of revenue in Q4 of last year and that would be the basis for our taking on the business and clearly we work very hard to grow that base as we move forward.

Okay, so at a minimum you're thinking flattish revenues for the next couple quarters based on the commentary from the fourth quarter?

Yes, you could safely say that. We said that we will continue to try to improve on it.

Okay and then maybe just diving a little bit deeper into the revenue shortfall. I'm just having a tough time reconciling the operating margin shortfall as well. So you referred to two drivers, the ReadyNAS transition and the increase in service provider revenue mix so perhaps if you could quantify the impact each had to both revenues and gross margins and then, based on my calculation I assume ReadyNAS shortfall of roughly $5 million at, we'll call it better than corporate gross margins, implies roughly a 20 basis point positive impact on gross margins so is the difference the increased service provider mix and then along that same line of questioning, did operating expenses come in higher than you expected and if so, why?

Yes, I think, let me go on -- the ReadyNAS today is a very software intensive product. If you look at the features that we are touting for our ReadyNAS line it provides unlimited snapshots. It provides thin provisioning. If provides cloud replicating. All of these are really, really software intensive so you could almost imagine this is a piece of software product rather than a hardware product. The gross margin or the standup margin is significantly higher than the corporate average and when the quarter is toward the end, all the cost is sunk. Every single piece costs us something so that's why the standard margin dollar shortfall always impacts our final operating margin on a dollar by dollar basis. If you can imagine, a $3 million difference in operating margin dollar is separating us from what it is today and what it will be in the range, then you can imagine a very high gross margin products impact.

So that was the vast majority?

Correct. It's the vast majority of that. Just to take it to an extreme case, I'm not going to disclose anything specific. Take the extreme case, let's say our shortfall is actually $10 million and at 50% gross margin that's a $5 million difference. I don't think that's the exact number but I'm just giving you some example.

Okay, that's helpful and then any update on the views on product line would be helpful and inroads you're making with the service providers and any expectations for potential wins there as they roll out some of their home security initiatives, thanks.

Right now the views on camera is continuing expansion into distribution. We just expanded its distribution into Best Buy and we've seen good positive results and we continue to see the trending up of the views of acceptance.

Now on the service provider side they have shown quite a bit of interest but we still have some R&D to work. Today, the views on cameras is very handy. It's wire-free, it's battery operated. That is the plus side. It's very tiny. The downside is because of that, the resolution is really not that high and the frame rate is also not that high so we're working very feverishly for the next generation of the cameras to improve on that before we believe we have a serious run on the service provider channel.

Our next question comes from Rohib Chopra from Wedbush Securities.

A couple questions, Patrick and Christy. Patrick, you mentioned last quarter and you mentioned in response to Mark Sue's question that it doesn't sound as if you got everything you needed when AirCard came over as far as resources. Is there the potential that you need to hire a lot of resources as you go through the next two or three quarters and could the operating margin go below the range?

We do need to backfill some Ops positions and some of the, mainly Ops, IT a little bit. We'll take care of that this quarter and we have factored that into our guidance and we actually factored it into the modeling we even did for the purchase so the business will still run within the service provider range so I don't expect anything below that just because of that.

Okay, so nothing below that range. And then I just wanted to ask you, Patrick, about the RFPs you talked about. Since you did mention them, are these for fulfillment, are these carriers looking for fulfillment in '13 or are they looking for their fulfillment in '14?

The RFPs of course are pretty long range and you know service providers, right? From RFP to actual deployment is multi quarters. We are encouraged by all the opportunities but we're not counting on any one of them immediately helping us but before the close, they have worked on RFPs as well and before the close we jointly had worked on some RFPs as well and if we win any one of those in the next few quarters then it will benefit us.

Thank you. I'll now turn the floor back over to our speakers for any closing comments.

We are very excited about this new team that we put together with AirCard joining us which opens up an entirely new technology front. We have traditionally in all three business units depending on the internet wide area access on either cable or Telco's DSL line but now we open it up for a third one so not only does technology enable our service provider business unit to get into new opportunity, it will also provide new product capabilities for both our retail products as well as for our commercial products and that's why we believe that we have rounded out all the technology needed that we will be able to implement our vision of connecting everyone to the high-speed broadband internet both wired and wirelessly and we believe the secular, strong demand from everyone around the world to connect to ever higher speed of internet is not going to fade anytime soon so as long as we continue to keep up with the technology and produce prior, ahead of our competition, we will continue to be able to benefit from this secular trend in order to grow the Company.

We are very confident for the growth potential and right now we have all the plans in place. It's just about execution and if we could execute our plans according to what we designed, as flawlessly as possible, we will be able to grow our revenue in the coming quarters so that's why execution is key and we understand that and the entire Management Team is focused on that and I look forward to report back to you on our progress in the next earnings call. Thank you everybody for joining us today.

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