NETGEAR Inc (NTGR) 2014 Q1 法說會逐字稿

Greetings ladies and gentlemen and welcome to the NETGEAR Incorporated first quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

I would now like to turn the conference over to your host Mr. Christopher Genualdi, Investor Relations Manager for NETGEAR Incorporated. Mr. Genualdi, please begin.

Thank you, Operator. Good afternoon and welcome to NETGEAR's first quarter 2014 financial results conference call. Joining us from the Company are Mr. Patrick Lo, Chairman and CEO, and Christine Gorjanc CFO. The format of the call will be a brief visit by Patrick, followed by Christine providing details on the financials and other information. We will then have time for any questions. If you have not received a copy today's release, please call NETGEAR Investor Relations or go to www.NETGEAR.com.

Before I begin the formal remarks conveyed by today's conference contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, operating margins, tax rates, cash generation and other projected financial results, expected market share, market trends and opportunities, competition, research and development efforts, sales and marketing efforts, new product introductions and our growth strategy.

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, forward-looking statements are subject to certain risks and uncertainties and are based on assumptions and future events that may not prove to be accurate.

Therefore, actual outcomes and results may differ materially from what is expected or forecast in these forward-looking statements. Potential risks are detailed in the Company's periodic fillings with SEC including those risks and uncertainties listed in the Company's most recent 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 a reconciliation of the non-GAAP measures and GAAP measures can be found in our press release or 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 net revenue for the first quarter of 2014 was $349.4 million, which is up 19.1% on a year-over basis and down 2% on a sequential basis. Just as a reminder, the sequential result comparisons presented today, include full quarters of the AirCard acquisition which closed in April 2013, but the year-over-year results comparisons do not.

Non-GAAP diluted EPS for the first quarter of 2014, was $0.59, up 18% year-over-year. Please see the first quarter 2014 earnings press release for a full reconciliation of GAAP to non-GAAP financial results. During the first quarter, net revenue for the Americas was $194.8 million, up 24.3% year-over-year and down 7.8% quarter-over-quarter.

As we indicated in our prior guidance, we experienced destocking in absolute dollar terms among our North American retailers in anticipation of a seasonally slower Q2. Europe, the Middle East and Africa, or EMEA, net revenue was $106.8 million, which is flat year-over-year and up 6.8% quarter-over-quarter, as we anticipated. We have seen a meaningful uptick in service provider purchases after the new year in Europe.

Our Asia Pacific, or APAC, net revenue was $47.8 million, which is up 61.6% from the prior year comparable quarter and up 5.5% quarter-over-quarter. We are very pleased with our continued share gains in all Asia Pacific markets, particularly in Japan, China, India and Australia. In Q1, we maintained a high-level of shipments with 6.8 million units shipped. We also introduced 16 new products during the quarter.

As always, sales channel development is a key focus for the Company as our sales channel remains a critical strategic asset. By the end of the quarter of 2014, our products were sold in approximately 49,000 retail outlets around the world and our number of value added resalers stands at approximately 39,000.

Now let's turn to a review of the first quarter results for our three business units. Retail, commercial and service provider. For the retail business unit or RBU, net revenue came in at $118.2 million, down 6.4% year-over-year and down 13% sequentially. As we alluded to in our previously provided guidance, our Q1 performance for RBU was negatively impacted by channel destocking by our channel partners in all three geographies.

During the first quarter, we added two new cable modem to our growing family of cable products. The M600 dual band Wi-Fi cable modem router and M300 Wi-Fi cable modem router. These cable modem routers are for the growing number of North American consumers looking to improve their home network performance and avoid modem rental fees by purchasing their own cable modem routers through retail. The initial reception from the market has been very encouraging.

We now have four DOT3.0 cable modem products available in retail in North America and expect to add an A02.11ac cable modem router to the line up during the current quarter. We also introduced two 11ac Wi-Fi extenders towards the end of Q1. One, for the speed of 750 megabits per second and one for 1200 megabits per second.

Both have proven to be very popular with our customers worldwide. Again, we're first to market with 11ac technology for wall plugged Wi-Fi extenders. These two new product service solidify worldwide leadership in this fast-growing category.

With the market moving more towards 11ac routers and Wi-Fi cable modem routers in the US and DSL modem routers in the national market, we are seeing a worldwide market trend towards higher ASC products in the retail home networking category.

We believe the same will be true for home monitoring cameras moving from standard definition to high definition. Higher ASPs will ultimately help expand the market size of retail home networking in the developed market.

The commercial business unit or CBU generated net revenue of $78.9 million for the first quarter of 2014. That's up 11.3% on a year-over-year basis and up 5.1% sequentially. We are pleased with the year-over-year and sequential growth that the commercial business unit showed during the quarter.

We continue to leverage our strength in switching to increase our presence among SMB channels worldwide. Our ten gigabits power [LTE] net switches continue to be very popular among end customers and resalers. We have seen increased interest in our storage and wireless solutions from our SMB channel resalers as well. We were also pleased with a quarter-over-quarter and year-over-year increase in revenue from our storage solutions.

For our first provider business unit or FPBU net revenue came in at $152.3 million for the first quarter of 2014, up 58.3% year-over-year and up 4.5% on a sequential basis. Our service provider business unit had a solid first quarter driven marginally by revenue growth from the EMEA region. We are excited to announce that US cellular has become our newest LTE Gateway customers in Q2.

This win comes on the heels of our announcement that Sprint is deploying the NETGEAR LTE Gateway 6100D with their business customers nationwide in the US. We firmly believe that these LTE fixed mobile Gateway offerings will be a popular alternative to wired broadband Gateways in many geographies and for many different use cases.

We expect the LTE Gateway, together with home monitoring and automation devices will drive FPBU's future revenue growth. US cellular and Sprint are important wins for the service provider business unit and proof that the LTE Gateway market opportunity is real and gaining momentum.

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

Thank you, Patrick. I will now provide you with a summary of the financials for the first quarter of 2014.

As Patrick noted, net revenue for the first quarter ended March 30, 2014, was $349.4 million, as compared to $293.4 million for the first quarter ended March 31, 2013, and $356.6 million in the fourth quarter ended December 31, 2013.

We shipped a total of about 6.8 million units in the first quarter, including 5.3 million nodes of wireless products. Shipments of our wired and wireless routers and Gateways combined were about 3.3 million units for the first quarter of 2014.

Moving to the product category basis, first quarter net revenue split between wireless and wired with about 71% and 29%, respectively. The first quarter net revenue split between home and business products which was about 77% and 23%, respectively. Products introduced in the last 15 months constituted about 56% of our first quarter shipment, while products introduced in the last 12 months constituted about 42% of our first 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 for the first quarter 2014 was 28.9%, compared to 30.5% in the year ago comparable quarter and 29.2% in the fourth quarter of 2013. The year-over-year margin decrease is primarily due to the higher mix of service provider revenue for the quarter. Total non-GAAP operating expenses came in at $67 million for the first quarter of 2014.

We continue to invest in R&D to drive innovation for all three business units. Our non-GAAP R&D expense for the first quarter was 5.9% of net revenue as compared to 5% in the year ago comparable period, and 6% of net revenue during Q4, 2013. We continue to spend R&D dollars strategically in the key areas that we expect will drive future growth for the Company.

Our head count decreased by net six people to 1,023 during the quarter. We do expect additional head count will be added in the current and future quarters.

Our non-GAAP tax rate was 35.2% in the first quarter 2014, as compared to 34.6% in the first quarter of 2013 and 39.6% in the fourth quarter 2013. Looking at the bottom line for Q1, we reported non-GAAP net income of $22 million and non-GAAP diluted EPS as $0.59 per diluted share.

Looking at the balance sheet, we ended the first quarter of 2014 with $240.3 million in cash, cash equivalents and short-term investments compared to $248.2 million at the end of the fourth quarter 2013. Our balance sheet and our ability to generate cash remains strong.

During the first quarter of 2014, we generated approximately $5.6 million in cash flow from operations. During the trailing four quarters, we generated $47.4 million in cash flow from operations.

In Q1, we spent $15.9 million to repurchase approximately 495,000 shares of NETGEAR common stock at an average price of $32.09 per share, which resulted in a $0.01 share per benefit to non-GAAP diluted earnings per share in Q1. This leaves approximately 2.3 million shares remaining in our open buy back program under which we are continuing to opportunistically repurchase NETGEAR common stock.

We believe it is important to return cash to our shareholders in excess of our operating and strategic needs and a stock repurchase program is an effective means to accomplish this. Furthermore, we believe in our long-term growth prospects and our cash flow generation capabilities.

DSOs for the first quarter of 2014 were 74 days, as compared to 73 days in the first quarter 2013 and 69 days in the fourth quarter of 2013. As always, we closely manage our collections and try to effectively mitigate collection risk.

Our first quarter net inventory ended at $201.6 million, compared to $158.6 million in the first quarter of 2013 and $224.5 million at the end of the fourth quarter of 2013. First quarter ending inventory turns were five, as compared to 5.2 turns in Q1, 2013 and 4.6 turns in the fourth quarter of 2013.

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 US retail inventory came in at 9.7 weeks of stock.

As a reminder, we are now including our online retail resalers in this figure and in our earnings release we have conformed historical periods to include these as well. Current distribution inventory levels are 9.8 weeks in the US, 4.1 weeks of stocks for distribution in EMEA and 7.1 in APAC.

For the second quarter of 2014, we anticipate revenue will be in the range of approximately $335 million to $350 million. Second quarter, non-GAAP operating margin is expected to be in the range of 9% to 10%. Our non-GAAP tax rate is expected to be approximately 37% for the second quarter of 2014.

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

Thank you.

(Operator Instructions)

Our first question comes from the line of Tavis McCourt with Raymond James. Please proceed with your question.

Yes, thanks. How cute that I'm first. Did you say that cash flow from operations was $5.6 million?

Yes.

And what was CapEx?

CapEx was about $3 million, approximately, rounded.

All right.

I was wondering if you could give us a little more background on the progress of LTE Gateways, any developments you could talk about?

As we mentioned in Q1, we added two customers on the LTE Gateway side. Sprint announced LTE Gateway based on our LG6100D in CES, and they're starting to deploy them now. US Cellular also started deploying our LTE Gateway, both live and introducing to their customer base nationwide in the US.

We certainly continue to enhance our offering, and we intend to take these products to more operators around the world, as well as to other channels. For example, the LTE Gateways that we had been able to make work in the Verizon open band. We definitely will introduce those LTE Gateways in the commercial, as well as in the retail channel. And we expect similar channel instruction in Europe as well as in Asia Pacific.

So certainly you're seeing accelerated activities in all three channels for the LTE Gateways going forward for the rest of the year.

Okay.

And if I could ask a follow up. Do you expect anymore channel inventory declines in the retail business in the current quarter?

We do believe that the channel inventory from the absolute dollar basis in retail actually is going to go up at the end of Q2 because it's in preparation for back to school. But then in terms of number of weeks, they'll probably stay the same. So that's how we see the retail inventory. Now, that's the normal.

But as you take a longer-term perspective, as more and more sales have shifted towards online, then you should see the gradual decline of channel inventory for retail overall.

All right. Thank you very much.

Sure.

Thank you. Our next question comes from the line of Hamed Khorsand. Please proceed with your question.

Hi. Just a quick question here.

You said that you introduced 16 new products. In the past, the amount of new products you've been introducing has been more in the 20s the last couple of years.

So why the decline? And does that foreshadow maybe revenue growth slowing down?

Well as a matter of fact, product introduction is focused both on quantity as well as quality. I think the products that we are introducing are more impactful and contain a lot more sophistication in terms of software as well as hardware. If you look at the revenue generated from new products introduced in the last 12 to 15 months, we were at an all-time high.

So I think from the 15 months, we're up to 56% of our revenue. So that indicates that the R&D is paying off in more impactful products, and we continue to really focus both on the quantity as well as the quality of new product introductions.

Clearly, the LTE Gateway, the Nighthawk router, the RAIDiator high-end, enterprise-class SMB storage -- these are not the trivial 5-port and managed switch or 8-port and managed switch. They're not of the same class.

Why hasn't it -- these new products, since they're becoming more and more of your revenue base, it's not trickling down to the profit margin line?

Well, again, if you look at the profit margin, it's very much impacted by the mix of the business. In Q1, as a matter of fact, the service provider mix is at an all-time high.

So you know, needless to say, the service provider business is a lower-margin business. When that portion of the business is going up, it kind of impacts the overall margin.

But the important thing is that as we continue to beef up the new products, our aim is to increase the margin of all three business units going forward -- no doubt about it. But it's very much affected by the mix.

But if service provider is going up, doesn't that just mean that overall operating margin should be going up as well? We're still not seeing any leverage on that line.

No. Actually the operating margin is affected by the mix.

I think the most important thing is how much overall operating margin dollars that we are generating. And then from that perspective, we see a pretty good uptick on a year-over-year basis when you compare off the same quarter.

I think that's the direction that we're going to focus on because the percentage is pretty much affected by the mix of the three businesses. I think the most important thing is what is the absolute dollars of profit that we are generating. And we absolutely are very laser focus on making sure that is growing.

Last question is on the service provider side, specifically in Europe.

Do you think this is just purely restocking because inventory's been dragged down to lows because of the whole M&A activity over there? Or is this going to be sustainable purchasing activity for you?

I mean, we don't have a crystal ball. As we mentioned many times, we really do not have the insight into their warehouse, unlike retail and commercial that they report inventory as well as self through to us. The service providers do not.

But we certainly see that into the new year, they are actually more active in promoting their services. And as we've said many a time, we have this ability of 13 weeks, one quarter at a time; and we do see that in Q2, the service provider business will be of similar magnitude to Q1.

Okay. Thank you.

Sure.

Thank you. Our next question comes from the line of Jeff Kvaal with Northland. Please proceed with your question.

Yes, thank you very much. I have a couple questions. I think first I would like to follow up on the prior question about the margin outlook.

Should we be expecting then the margins to hold in this 9% to 10% range? Are there reasons to think that things would be better in the second half of the year? That could be storage or what have you driving that.

And then I have a few follow ups as well.

So I would like to answer the questions again from the two angles. The first one is what we would like to do. If you look at individual business unit basis to improve the margin of each one of them individually, that means all the new products we are going, all the leverage that we are going to use. So we would like to see, for example, retail business unit margin going up; commercial business unit margin going up; and service provider business unit going up. That's our objective quarter after quarter.

But then the overall margin really depends on the mix. Let's say the SBU grows faster than the other two BUs. Then clearly, their margin will be range bound at 9% to 10%.

But then if we see that the RBU and CBU are going faster than the SBU, then we will see a faster path of getting back into higher margin range.

But clearly, I mean, our objective is to increase profitability of every single business unit. And we are very laser focused on improving the absolute profit dollars that we're generating, overall business-wise. And that's the ultimate aim, is to really improve on the growth of EBS.

Okay. So I guess that then begs the question of what you see happening in the various business units over the course of the year. Do you think that the mix should shift back towards, say, commercial as storage recovers?

Should we think that the ASB uplift you were talking about would shift the mix back toward retail? What should we be thinking within those units?

Well, we don't have a crystal ball. We're going to review profitable business from any business unit.

Our ultimate objective is to really grow the profit dollars and EPS as fast as we can for the overall company. If we could achieve it through all three business units equally, that's fine.

If we could achieve it through all three business units but with a skew towards one or two of the businesses, that's fine. The most important thing for us is to grow, you know, as much as possible in the overall profit margin dollars.

And you know clearly, there is more predictability in terms of the RBU and the CBU because we have all the channels covered.

It's kind of run-rate business. We have all the product pipelines that we have planned for the rest of the year. We do expect those two business units to grow steadily in terms of top line and bottom line.

And CBU is a very big account and big-project oriented. So if we have a big project, a big account coming in, we're not going to refuse it. We're going to take it.

But if that's the case, even though our overall profit margin dollars will increase because of the skewed of the heavy onto SBU, you can see that the profit margin percentage is going to be in the same range of 9% to 10%, all right?

But ultimately, we're not going to refuse any good business. And our objective is to grow as fast as possible, the EPS as well as the overall, absolute profit margin dollars for the business.

Okay. Alright. I'll pass it on. Thank you, Patrick.

Alright. Sure.

Thank you.

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

Thank you.

Patrick, the flattest trends in Europe is actually encouraging since we've been in a lull in that region for quite sometime. Is it a specific project, or is it a broad range of customers that's driving the rebound in Europe?

And recognizing that when it's working well you can see strong growth in the region, and that cycle is maybe three or four years ago, are we now at a point where we could actually start seeing good growth coming out of Europe?

Yes. Put it this way, we were negatively impacted last year, especially in the second half, of all the M&A activities on the service provider side of the business in Europe.

I think that has quieted down a little bit. A lot of the dust has been settled, and pretty much all the merger targets has been announced and have been consummated.

Europe is now pretty much concentrating on three big players, which are Liberty Global, Vodafone and Altice. So I think that is going to offer a more stable environment for the rest of the year. So we hope this is the basis for us to grow our service provider business over there.

And looking at commercial business unit, there are pockets of increased commercial confidence, especially in Germany as well as in the UK. Clearly, we're seeing business confidence returning; and we're seeing more CapEx in buying hardware, networking, and all that. So we're encouraged with those.

On the retail side, we're still not seeing the trend as we saw in the US, as well as in Asia, which is moving into 11.ac. The movement of 11.ac in Europe has still been pretty slow compared to the other two regions. It might be because that the broadband speed in Europe is just not as fast as in Asia, as well as in the US. So there is less of a desire to really move up in the Wi-Fi speed.

However, I understand, based on our customers talking in certain markets, such as in the UK, there is a movement of the Telcos moving into Mediatel.

And also in Benelux and in France, and to a less extent in Germany, the cable companies are also moving into what we call 16x4, 24x8 cable DOCSIS speed, which is approaching 100 megabits plus. And all these speeds kick in for the second half of this year, and hopefully that would kind of spur the retail channel for customers to upgrade from 11n to 11ac.

So overall, we think the climate in Europe is definitely better for SBU and CBU, especially in the two major economies of the UK and Germany.

However, on the retail front, I think we're still seeing a lag of people moving onto 11ac, as compared to Asia and North America.

Okay. Got it.

Within the service providers side with the clustering around the three major service providers in Europe, Patrick, can you give us a sense of your market share within these big three accounts now that we're kind of consolidated? And what their approach is to dual-source or even multi-source -- just how you feel about your positioning with these three accounts

Unfortunately, there is no public data that we could access to really gauge our market share for those accounts that we're not in. They're pretty confidential. We won't be able to get those data.

But clearly, I can tell you where we are. We are in Virgin Media, which is the only cable operator in the UK. You know, we have 100% of the share over there.

And in Spain within ONO, we are about 30% to 50% share over there. And in France we are in Numericable; and then in Beluxe, then in we are in Telenet; and in Nordic, we are in Com Hem. We are in UC.

So in all those accounts we are anywhere between 30% to 50% share. But then of course we are not in UPC. We're not in Kabel Deutschland. We're not in any of the major national Telecos., such as BT, such as Orange, such as Swisscomm. So that's the landscape we have in Europe.

Okay. That's helpful.

Patrick, if I look at the wireless cycle, we've gone from n to ac. But along the way, the number of devices have actually multiplied per individual.

Are we at a point where we might be actually seeing a residential router Gateway upgrade cycle from your customers because of the number of devices -- not just the speeds that are increasing? Maybe your kind of qualitative thoughts of what you are seeing from customer point of view.

Absolutely. If you notice that we made joint press releases with the two leading Wi-Fi technology providers, Qualcom and Broadcom in the last month, introducing a brand new technology, what we call multiuser MIMO WiFi. It's a mouthful.

What it is is today, WiFi is a Roundrobin technology. That means the router can only talk to one device at a time.

And the slowest device is just basically going to hold down the network to hostage. And we're trying to alleviate that by adding our proprietary technology for air time fairness, which is trying to make it into a TDD, time division multiplexing.

However, a better deal is because the number of devices in the house that wants to talk WiFi is proliferating from two to three devices into six to ten. And we anticipate next year, it will be up to 15 to 20 devices that we're working with all these technology providers to what we call multiuser WiFi.

That means at any one point in time, we can talk to multiple groups of devices rather than one device at a time. The technology that we've just announced, together with Broadcom and with Qualcom, is to basically be able to simultaneously talk to three groups of devices.

So instead of waiting for your turn forever, I mean, you will get your turn coming back rather quickly. So that's pretty much we expect the next wave of upgrades. Today people are just upgrading to faster and faster groups for speed.

The next wave of upgrades is to get into multiuser environment, multi-device environment. And we expect that upgrade cycle to start middle of next year.

Middle of next year. Okay. That's helpful.

Lastly, Christine, just in the increase in inventories. Anything to look at on your balance sheet?

No. In fact, inventory in total decreased quarter on quarter -- in total on our balance sheet.

So, no, I think our turns improved slightly. So obviously we always balance the need for air freight with the inventory we take on, but we feel like we are in a good position.

Okay. That's helpful. Thank you and good luck.

Thank you.

Thank you.

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

Hi. This is Justin Jordan filling in for Kent.

Can you talk about the network attached storage business and how that is doing? Has the competitive landscape changed? Are you still seeing pricing pressure at the low end?

Yes, clearly this is a very dynamic market. As we mentioned just now, we were very pleased that we see both sequential and year-over-year increase in the revenue of storage solutions. So we would like to make that steady progress every quarter.

Clearly, the high end of the spectrum is pretty stable. Our high end right now storage has been primarily competing against the established storage vendors, such as the low-end of EMC, the low end of NetApps, and the high end of the servers from HP, and also certain low end from Dell.

But then the low end of the market which is very, what we call consumer-focused, we have traditionally been competing primarily against Taiwanese vendors such as Synology and QNAP. And prior to that, it was primarily against a Japanese vendor called Buffalo.

But over the last six months, Western Digital has been coming on very strong with a new low price point in the US.

And so I would say, they are taking the place, clearly, of some of the Taiwanese vendors. But then so there is a change of dynamic over there.

Our focus is still on the high end of the market. It doesn't matter whether it's the pure SMB or the pure (inaudible)

Our differentiation is purely cloud capability, as well as data protection. So we have two very unique capabilities that allow us to command premium against our competitors, primarily from Taiwan or from Japan or from Western Digital.

One, is our ready cloud technology that enables a drop box-like of user experience but in a private setting from your own NAS.

The second one is the data protection that we're the only ones offering what we call unlimited snapshot of data protection, so that you can mix unlimited number of copies at any one snapshot in time; and you can restore back to that particular snapshot.

So those are two very unique technologies appreciated by the higher end of the market segment. And we'll continue to enhance our capabilities in those two regards.

Thanks. That was helpful. Just one more follow-up question.

You mention that you expect the service provider business unit to be of a similar magnitude in Q2 as it was in Q1. I just wanted to get a little clarity. Is that similar Q-on-Q growth?

No, we're just saying that the absolute dollar-wise. If you look at our press release, we have the segment Reporting. The service provide revenue in Q1 is roughly about $152 million, so we expect that it's going to be roughly the same, up and down a little bit -- hopefully up -- in the Q2.

Thank you.

Sure.

Thank you.

(Operator Instructions)

There are no further questions at this time.

I'd like to turn the floor back over to management for closing comments.

Sure.

Thank you, everyone, for joining our call.

I would like to specifically highlight a point that I made about the increase in ASP. Even though when I talked about it, it was related primarily to the retail area, actually we're very encouraged not only in retail.

As we mentioned, in retail when people move up to 11ac, when people move up from pure router to Gateway which is a combination of a modem and a router, and when people move from standard definition cameras to high-definition cameras.

And next year, when people move from what we call the single-user mode WiFi to multiuser MIMO WiFi, all these are forces to drive the increase in ASP.

What's encouraging to us is that, as a matter of fact, the proportion of the high ASP products are actually bigger than the low ASP product as we see it. So that clearly is encouraging trend that helps continue us to expand the market from a dollar market size standpoint.

The same thing we're seeing also in commercial business unit because, like in switching, we are seeing the trend of people buying up from pure 100 megabit or gigabit switches, into 10 gig switches with power with ethernet capability again in reaching the ASP.

Same thing on the network storage side. We're seeing more and more customers buying not just the rack-mount ReadyNAS. They are actually moving up to buy the rack-mount, what we call the high-end line, called ReadyDATA, which offers higher capacity, more data protection.

So all those are encouraging signs that our strategy over the last two years, which we cultivated so hard to really push up the ASP of every single business unit, is starting to materialize and getting the buy-in from our channel partners as well as our end customers. That's a very encouraging sign, and we would love to continue to see that progressing.

That will certainly help our growth of our business on dollar terms, as well as our margins going forward. And we will definitely continue to report on the progress of this effort over the next few quarters.

And I look forward to talking to you all again in three months' time. Thank you very much, once again, for joining us today. Have a great day.

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