NETGEAR Inc (NTGR) 2014 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to Netgear Incorporated fourth quarter and full year 2014 earnings conference call. (Operator Instructions)It is now my pleasure to introduce your host, Mr. Christopher Genualdi. Thank you, sir,you may begin.

Thank you, Operator. Good afternoon and welcome to Netgear's fourth quarter and full year 2014 financial results conference call. Joining us from the Company are Mr. Patrick Lo, Chairman and CEO, and Ms. Christine Gorjanc, CFO. The format of the call will be a brief business review by Patrick followed by Christine providing details on the financials and other information. We'll then have time for any questions.

If you have not received a copy of today's release, please call Netgear's 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 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 related to LTE, Connected Home, and SMB Vertical Solutions.

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 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 these forward-looking statements. Potential risks are detailed in the Company's periodic filings with the SEC, including 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 a reconciliation of the non-GAAP measures and GAAP measures can be found in our press release or 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. Before we begin with the financial results and outlook for 2015, I would like to highlight the successes that we had in 2014.

During last year, we significantly increased the average selling prices for the Retail Business Unit with our Nighthawk line of routers and our entry into the cable gateway segment in US retail. We rapidly expanded our online presence, particularly at Amazon.com worldwide. We continued to excel in the switching market. We expanded our LTE footprint into new accounts and into retail. We continued to expand within the Asia Pacific region.

Plus we returned a compelling amount of capital to shareholders. We will look to build on all these successes in the year ahead. On the other hand, we're faced with stiff headwinds in the Service Provider wireline business due to the reduction of wireline investment amounts service providers. We are adjusting our strategy for the coming quarters by focusing more on the LTE side of the business as well as a limited but strategic set of wireline customers where we believe we can add the most value. We'll discuss this in more detail in a moment.

Netgear net revenue was $1.39 billion for the full year of 2014 which is up 1.7% compared to full year 2013 revenues. For the fourth quarter of 2014, Netgear net revenue was $353.2 million which is down 1% on a year-over-year base and flat on a sequential basis. Non-GAAP EPS for the full year 2014 was $2.54, non-GAAP diluted EPS for the fourth quarter of 2014 was $0.65 cents, which is up 10.2% year-over-year. For a full reconciliation of GAAP to non-GAAP financial results, please refer to the fourth quarter and full year 2014 earnings press release. During the fourth quarter, net revenue for the Americas was $194.7 million,down 7.9% year over year, and slightly up quarter over quarter.

It was a very successful holiday season for the Retail Business Unit. But the Service Provider Business Unit suffered from the overall contraction in service provided CapEx spending that we believe may persist through 2015. Europe, the Middle East and Africa, or EMEA, net revenue was $106.2 million, which is up 6.3% year over year and down 2% quarter over quarter.

While the depreciation of all European currencies created challenges for this region, we are pleased with the strength that each of the three business units demonstrated against our EMEA competition. Our Asia Pacific or APAC, net revenue was $52.3 million which is up 15.3% from the prior year's comparable quarter, and up 2.5% quarter over quarter. This was a record net revenue quarter for APAC. Our high-end router sales continued to do well in this region where we have successfully built upon our market position as the premium home networking brand available in retail.

On the commercial side, we have been successful with solution sales in all of the Asia Pacific countries. In Q4, we maintained a high level of shipments with 6.6 million units shipped. We also introduced 24 new products during the quarter. As always, sales channels development is a key focus for the Company as our sales channel remains a critical strategic asset.

By the end of the fourth quarter of 2014, our products were sold in approximately 44,000 retail outlets around the world and our number of (inaudible) sellers stands at approximately 36,000. Now, let's turn to a review of the fourth quarter results for our three business units,Retail, Commercial, and Service Provider. For the Retail Business Unit or RBU, net revenue came in at $147.9 million, which is up 8.8% on a year-over-year basis and up 12.6% sequentially.

The fourth quarter of 2014 was a record breaking quarter for the Retail Business Unit in terms of net revenue and where we are very pleased with RBUs performance during the holiday season. With the introduction of our Arlo cameras in Q1, we look forward to further growth from RBU in 2015. RBU's strength continues to be driven by our Nighthawk routers and cable gateways in Q4. The Nighthawk line of 802.11ac routers was a hit with consumers during the holiday season. Additionally, Netgear has successfully established itself as a leader in the retail cable gateway market in the United States.

This market has been growing very rapidly as consumers are increasingly purchasing the gateways from retail to avoid the costly monthly rental fees charged by service providersas well as to gain improved home wi-fi performance. We plan to continue to expand these two product lines in the coming quarters. If you attended our analyst day in November of last year, then you are already familiar with Arlo, our smart home brand. Arlo is Netgear's new product line for bringing the Internet (inaudible) into the home.

We have kicked off the product line with the Arlo smart home security camera,the world's first 100% wire-free, indoor and outdoor, high definition, day and night-vision IP camera for home monitoring. Unlike other home IP cameras on the market, it is battery operated and weatherproofmeaning that it can be placed anywhere inside or outside the house without being constrained by the availability of power outlets.

Our Arlo cameras are currently available on Amazon.comin the US, and in a very limited set of North American retailers. We plan to rapidly expand Arlo's distribution in North America and worldwide in the coming quarters. The Commercial Business Unit or CBU, generated net revenue of $79.4million for the fourth quarter of 2014, which is up 5.8% on a year-over-year basis and up 10.3% sequentially.

The market demand of our 10 gig and POE switches continue to be robust. With the January introduction of the M6100 series of Chassis Switch on the high end, and the revolutionary Click Switches on the low end, we believe our momentum in switching is strong, heading into 2015. The Click Switch, a simple yet innovative piece of hardware that allows for easy, flexible switch mounting and reduced wire clutter, was a star at our CES exhibition floor in January. For our Service Provider Business unit or SPBU, net revenue came in at $125.9 million for the fourth quarter of 2014. This is down 13.6% year-over-year, and down 16.1% on a sequential basis.

As stated in our prior earnings call, we have expected Service Provider revenues to decline due to CapEx spending weakness at certain major service providers in both North America and Europe. As you all know, in addition to reduced CapEx spending, the Service Provider industry is going through a period of consolidation which has affected and will likely continue to affect SPBUs performance. Looking at 2015, our Service Provider customers have indicated that purchase constraints will further deteriorate throughout the year and that this deterioration would not be temporary. We have chosen a path on certain and profitable wireline business deals that do not fit with the financial discipline that we have at Netgear.

Service providers are going through a transition. They appear to be reducing wireline investment but continuing to invest in wireless. We are adjusting our R&D and sales coverage accordingly. For our Service Provider Business Unit, we expect the revenue decline to continue in the current quarter and believe SPBU may settle at the $100 million to $105 million per quarter level for the rest of the year. Given SPBUs outlook for 2015 and to keep our costs in line with SPBU revenue, we're taking definitive steps to revise the cost structure of this business unit and concentrate the remaining resources on LTE and long-term and profitable accounts.

I would like to highlight that the 4g LTE business continues to represent our largest growth opportunity in this Service Provider Business Unit. Meanwhile, we will redeploy the cost savings and reinvest that over the next few quarters on growth opportunities for both RBU and CBU. We'll continue to add resources in these areas to maintain our technology and channel leadership. In summary, while 2015 is going to be a transition year for the Service Provider Business Unit, we believe that the Retail Business Unit and Commercial Business Unit have exciting and profitable opportunities in front of them. RBU stands to benefit from the continued introduction and wider adoption of new 802.11ac technologies as well as the accelerator penetration of home monitoring and automation products into consumer's homes.

The Commercial Business Unit, our most profitable business unit, will continue to provide unique solutions in switching, wireless LAN and storage to the under served SMB verticals,specifically health care, hospitality, and K-12 schools. I will now turn the call over to Christine for further commentary on our financials for the quarter.

Thank you, Patrick. I will now provide you with a summary of the financials for the fourth quarter of 2014. As Patrick noted, net revenue for the fourth quarter ended December 31, 2014 was $353.2 million as compared to $356.6 million for the fourth quarter ended December 31, 2013 and $353.3 million in the third quarter ended September 28, 2014.

We shipped a total of about 6.6 million units in the fourth quarter including 5.3 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 3.2 million units for the fourth quarter 2014. Moving to the product category basis, fourth quarter net revenue split between wireless and wired was about 74% and 26% respectively. The fourth quarter net revenue split between home and business products was about 77% and 23% respectively. Products introduced in the last 15 months constituted about 46% of our fourth quarter shipment while products introduced in the last 12 months constituted about 36% of our fourth quarter shipments.

From this point on, my discussion points will focus on non-GAAP numbers. As mentioned previously, the reconciliation from GAAP to non-GAAP is detailed in our preliminary financial statements released earlier today. The non-GAAP gross margin in the fourth quarter of 2014 was 29.3% compared to 29.2% in the year ago comparable quarter,and 29.9% in the third quarter of 2014.

Total non-GAAP operating expenses came in at $68 million for the fourth quarter of 2014which is up compared to the $66.2 million in the year ago comparable quarter, and flat with the prior quarter's total non-GAAP operating expenses. We will continue to closely manage operating expenses in a disciplined fashion. Our non-GAAP R&D expense for the fourth quarter was 6.2% of net revenue as compared to 6% in the year ago comparable period, and 6.2% of net revenue during Q3 2014.

We continue to spend R&D dollars carefully and strategically in the key areas that we expect will drive future growth and profitability for the Company. We remain committed to driving further optimization in our sales channel, supply chain and support functions which should result in further operating margin leverage. Our head count decreased by net nine people to 1,038 during the quarter. We expect head count will further decrease in Q1 due to the restructuring, but then it will increase over the rest of the year while we invest the savings into LTE, Nighthawk, Arlo and SMB solutions.

Our non-GAAP tax rate was 36.7% in the fourth quarter of 2014 as compared to 39.6% in the fourth quarter of 2013. and 29.4% in the third quarter of 2014. The favorable tax rate in the prior quarter was due to a catch up benefit resulting from improved profits generated from our international business. Looking at the bottom line for Q4, we reported non-GAAP net income of $22.9million, and non-GAAP diluted EPS of $0.65 per diluted share.

Our balance sheet remains strong. We ended the fourth quarter of 2014 with $257.1 million in cash, cash equivalents and short-term investments compared to $242.6 million at the end of the third quarter 2014. For the fourth quarter of 2014, we generated over $41 million in cash flow from operations. During the trailing four quarters, we generated approximately $109 million in cash flow from operations which demonstrates our continued ability to generate cash. We are very focused on optimizing the business and generating free cash flow which gives us flexibility with our business needs as well as the ability to strategically deploy cash to enhance shareholder value.

Our financial results for the fourth quarter include a non cash goodwill impairment charge of $74.2 million related to our Service Provider Business Unit. Given the weakened long-term revenue and profit outlook for this business unit, we're undergoing a restructuring to ensure that the profitability of the Service Provider Business Unit will be in line with our expectations. As a result of the restructuring, Netgear estimates that it will incur pre tax charges of approximately $7 million to $9 million consisting of severance and other one-time termination benefits, lease terminations and other associated costs.

The Company expects to record the majority of these charges and complete the restructuring by the end of the second quarter. We will redeploy the savings and continue to prudently invest in profitable growth opportunities such as LTE, Arlo, Nighthawk 11ac, cable gateways and SMB solutions. In Q4, we spent $22 million to repurchase approximately 706,000 shares of Netgear common stock at an average price of $31.18 per sharewhich resulted in a $0.01 benefit to non-GAAP diluted earnings per share for the quarter.

Since the start of our recent purchase activity in Q4 2013, we have repurchased approximately 4.8 million shares or 12.3% of the fully diluted share count at the beginning of that period. Our number of diluted shares is now pre 2010 levels. At the end of the fourth quarter of 2014, we have completed the repurchase program previously authorized by the Company's Board of Directors in October 2008. We still have three million shares of the Company's common stock or approximately 8.5% of the current fully diluted share count authorized for repurchase by the Board of Directors in October of 2014.

We continue to believe that it is important to return cash to our shareholders in excess of our operating and strategic needs and that a stock repurchase program is an effective means to accomplish this. We expect that we will continue to be opportunistic buyers of Netgear stock in 2015. DSOs for the fourth quarter of 2014 were 73 days as compared to 69 days in the fourth quarter of 2013 and 72 days in the third quarter 2014. Our fourth quarter net inventory ended at $222.9 million compared to $224.5million in the fourth quarter of 2013 and $206.5 million at the end of the third quarter of 2014.

Fourth quarter ending inventory turns were 4.5 as compared to 4.6turns in Q4 2013 and 4.9 turns in the third quarter of 2014. 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 inventory retail came in at 7.8 weeks of stock.

Current distribution inventory levels are 12 weeks in the US, 5.4 weeks of stock for distribution in EMEA, and 7.2 weeks in APAC. For the first quarter of 2015, we anticipate revenue will be in the range of approximately $300 million to $315 million. The decline in revenue beyond normal seasonality is due to the challenges faced by the Service Provider Business as well as the strengthening of the US dollar. Additionally, there are also six less selling days in Q1 for our Retail Business Unit as compared to Q4.

First quarter non-GAAP operating margin is expected to be in the range of 8.5% to 9.5%which includes an unfavorable impact of approximately 100 basis points that is due to the appreciation of the US dollar. Our non-GAAP tax rate is expected to be approximately 37% for the first quarter of 2015. Operator, that concludes our comments. We can now take questions.

Thank you. (Operator Instructions)Our first question comes from the line of Ryan Hutchinson with Pacific Crest Securities. Please proceed with your question.

Good afternoon. A few questions on the Service Provider segment. You know, I understand the CapEx constraints that are taking place. But could you help us understand the impact by geography, and then specifically, are you seeing anything with respect to competitive displacements or anything along those lines? Just trying to get a better understanding of the dynamics there, just outside of the commentary around the CapEx environment. And then second to that is can you help us, just remind us, Air Card, I believe the run rate was around $50 million. Is there a change in that thinking in terms of maybe what the run rate was in Q4 and what your expectations are for that business moving forward? Thanks.

First and foremost, from a CapEx spending basis we see similar reduction across both EMEA as well as North America. Less so in Asia Pacific. And you're right. The CapEx affects everybody. And as such, the market shrank. When the market shrank, some of our competitors are willing to take pretty aggressive stand in pricing which we're not willing to. So that's why we mentioned in just our script that we pass on some of those businesses. So you're right.

The competitive environment has been growing more hostile in terms of pricing because of the shrinking market. So I hope that answers your first question. Second question, in terms of the Air Card, we're not going to comment specifically on product line revenue, but suffice to say the CapEx expenditure affects across all of our customers both wireline and mobile but more so on wireline. On the other hand though, we do see that the investment is shifting to LTE. And as more rollout of 4g LTE, especially in Europe and Asia, we do believe there is a tremendous growth opportunity of our LTE business to go beyond pre acquisition level. And that's why we are focusing what the remaining, you know of our SBU resources on more on the LTE and a few of our selected wireline accounts which would believe we could add value and be profitable.

Okay. Then as part of the restructuring, I understand $7 million to $9 million charge and some of the other measures you're taking. Are you rationalizing any product lines we should be aware of?

No. We're not rationalizing the product lines because frankly, for service providers, unlike retail or commercial, there aren't that many products. They're pretty common across the board. It is more rationalizing on the accounts than how much business we want to do. Really focus on the accounts that we believe we add more value. Meaning that we're focusing in selling more of the leading edge technology products that we can command a better margin.

Okay. And then finally, Patrick, do you have any comments on [e-Ray]?I don't know you don't sell specifically into the K-12 segment but I'm assuming some of the product ends up in that product segment. So any color around the potential [e-Ray] headwinds or tailwinds as we think about 2015? That's it for me, thanks.

We traditionally do not sell that much into public school, you know, districts. We primarily sell to more private schools. So [e-Ray] really doesn't, you know, affect us that much.

Thanks, guys. Good luck.

Sure.

Thank you.

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

Hi, good afternoon. This is Spencer Geene for Mark Sue. Following up a little bit on the Service Provider segment here, I thought that you said that you may be seeing a quarterly run of approximately $100 million to $105 million for that segment in calendar year 2015.

Yes. That's what we said.

So obviously that can change. But could you give any further or do you have any further insight with regards to linearity there and then what this would imply for your outlook with regards to the other two segments of the business?

You know, as we could see at the beginning of the year talking with all of our customers and sizing up, you know, the opportunity, I think it is pretty consistent quarter to quarter in that range. There is probably up and down here and there 5%, 10%. But pretty much hovering around that $100 million maybe in some quarters, will be $110 million, maybe some quarters were $90 million. But it will be hovering around the $100 million mark. We don't see any significant changes. We're working definitely on a lot of new opportunities, especially on the LTE side that we can boost that level going into next year. Hopefully.

From the RBU and CBU side, clearly, especially for RBU, the growth opportunity would continue to be the Nighthawk line of products. Last year, we introduced the 11ac6 which is basically a tri-band three by three. This year, there will be a lot more new introductions, for example, as you probably know, the Wave-2 coming. There's tri-band four by four coming. So there's a lot of exciting, new products on the 11ac front.

And then Arlo is clearly a platform that we're very excited about. The introduction was very well-received in November. And the pre orders, you know, was very encouraging. And so far, I mean we only have it sold in the US on Amazon.comand just one other retail outlet,but so far, it is doing very well.

And once we expand the distribution into the whole retail channel, the 44,000 retail outlets around the world, we think that it will be very exciting for us. And we're definitely going to go beyond the one camera on this line so those are the opportunities that we see in RBU. On the CBU side, we continue to win on switching which is the core competency of Netgear. And we have been, you know, kind of the leaders in introducing breakthrough technology to the SMBs,years ago with gigabit and then 10 gigabit. We're really excited with the two new break through, the Click Switches and the Chassis Switch.

The Chassis Switch is the first, industry's first of $8,000 chassis. Then the Clicks Switch, is completely revolutionary wiring and mounting design. So even though it is at the low end, it is offering a significant value to our customers so we can command a 50% first or 100% premium on assuming on managed switches, 8 port,16 port. So clearly, those are the opportunities on the CBU side. It will continue to focus on.

Okay. And just very briefly, if I might, you guys are buying back a pretty good chunk of stock. Returning cash to shareholders. You have about -- it looks like about $250 plus million in cash, no debt, on the balance sheet. Has there been any thought or thinking surrounding further optimization of the balance sheet? Possibly a prudent amount of debt and/or some kind of ASR in addition to your regular buybacks?

Yes, sure. We review that pretty regularly. And we have, over, say, the last five quarters, you know, repurchased again like I mentioned about 4.8 million shares. $153 million which really would have been equivalent to an ASR. We do continue to review what is the optimum vehicle to do that and we'll continue to look at that.

Great. Thanks very much. Good luck.

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

Yes. Thank you very much for taking the question. I have a few keyed up here. I think first could we dial in a little bit more to what your plans are in terms of OpEx spending? Is the incremental savings that you plan to get out of the SBU going to replace spending that you would have grown in the other segments anyway? Or is your net OpEx at this time next year going to be lower than it would have been without these changes? If you see -- do you see what I'm driving at here?

Right. You know, I think we'll continue to drive CBU and RBU and OpEx like we would as revenue grows, we'll make investments for new products. I think where you'll see us -- I guess what I would say right size it is within the Service Provider Business, given the drop in the revenue. We will then reduce those operating expensescontinuing to invest in LTEOverall, I don't expect a drop in OpEx for the Company. Definitely we're shifting that spend from one business unit to the other.

Okay. So the idea isn't to over invest relative to historical norms in the other two units while ratcheting back in--

Oh, no. Absolutely not.

Okay. All right. Okay. That's good. Okay. Secondly, in parsing your guidance and I understand there is a decent amount of wiggle room here, if one goes right to the $100 million and $105 million for March, then it seems as though you're anticipating a seasonal or slightly below seasonal quarter for retail. I'm not entirely sure that's the intention that you're trying to signal so please help us with that, if you could.

We'll have normal seasonality. I think the thing we mentioned in the script is we have for retail six less selling days in Q1 than Q4. We had a little bit of OpEx headwinds in that. Overall, normal seasonality,but we have a few other headwinds which is a little bit of OpEx on the revenue side and clearly less selling days in retail when every day counts.

In that case, when should we start thinking about a contribution from Arlo?

You know, so Arlo is starting to roll out this quarter. But I think a meaningful contribution to that will be a little more in the back half of the year. Absolutely rolling it out as we speak.

Okay. And what kind of unit growth are you planning into the assumptions? Like annual unit growth in the retail business?

We haven't really disclosed that. But I would say more of we want to expand it into both -- obviously we're already online into the brick and mortar, into Europe. And it has a good ASP with that also.

And then last question is Ruckus brought out the X-Claim product line pretty recently. I'm not sure if you've seen that showing up in some of your CBU engagements or what we should make of that.

We don't really compete with either Ubiquity or Ruckus in that space because they are selling primarily into what they call a do-it-yourself community support market. While we're selling primarily into what we call a solution market, pretty much packaged by a reseller with a lot of services to go with it. So we don't see them that much. We're quite separate.

Okay. Thank you all very much.

Sure.

Thanks, Jeff.

Thank you.

Our next question comes from the line of Rohit Chopra with Buckingham Research Group. Please proceed with your question.

Hi. This is Ryan Flanagan on for Rohit. I had a question on the Commercial Business unit, a little bit of a bounce back there. I wanted to parse the strength. I know Patrick, you mentioned some new switching products there. In the quarter, was the strength driven more by switching, or storage, or wireless LAN? And a follow-up there, if you could talk about growth in the segment, if you think it's sustainable. Thanks.

Yes, it is pretty clear that in Q4, the strength is primarily in switching and a little bit of the storage side, on the high end storage especially ready data. We believe that, you know, the switching is our core competency. We actually, when we first established Netgear, we're basically a two-headed horse. Routers and switching.

We believe that we will continue to lead in the switching side because we invented a lot of the switches. We invented dual speed switch. We invented the gigabit, 10 gigabit and the Smart Switch, then Plus Switch. Now we invented the Click Switch. So we believe that by always shaping the future yourself, you'll be able to lead.

So I think we were very confident. We'll continue to grow on the switching side. And on the storage side, clearly, I mean we would need to capitalize on the strength of ready data. Which is more solution selling. So as solution selling is not a do-it-yourself thing. So we need to recruit resellers to be able to package and deliver those solutions. So our success in 2015 on a storage side is really dependent on how successful we are going to continue to recruit and train enough of these solution system integrators to deliver that solution to our customers.

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

Hi. Just want to start off -- can you explain, you know, the drop-off in ARPU? There was a considerable drop-offeven though your commentary is saying you're selling more high end products, the ARPU did decline this quarter.

It depends on how you look at it. On the Retail Business Unitwe definitely are increasing our [every] selling price. But you're right, overall we're dropping because the environment in Service Provider is getting hostile and it is very difficult. That's why we have to make some strategic changes.

On the Service Provider end, is that more than the shift to DOSYS 3.1 for next year?

Clearly as I mentioned previously, that is the pricing pressure. When you have a shrinking market, everybody is lowering their prices, and which causes a drop-off in ASP. And that's why we have to make some strategic decisions, which we made.

No, I was referring to just service providers not trying to taking inventory of new -- any routers, because they're moving to 3.1 next year, they wouldn't want these older routers, right?Is it more inventory controls or is it something else?

No, we do not see that. As we mentioned on the Service Provider side, there are two things. One, I mean there is a reduction in the CapEx spend, all right? Which makes the market smaller. Second, when the competitors are more aggressive in price so the average selling price is getting lower. So you basically have to sell more units to get to the same amount. That's what's happening in the market today.

Okay. Just two more for me. One is your commentary on the retail unit with the six fewer days in the quarter. Does that mean that we'll see some sort of catch up in Q2 on the retail end?

Well, I mean there probably is a few more days but Q2 seasonally is our little bit down from Q1. Maybe it is a little bit down less than normal but it is still seasonally the most down quarter of the four.

Okay. My last one is given where you guys are guiding to with operating margins and the 4x impact, are you moving away from your commentary from analyst day where you said you're trying to get to 12% operating margin this year?

I would say we're always trying to make a higher operating margin. The drop in the currencies was so quick and in all the currencies that you know, we really can't make that up that quickly. We'll obviously work on product costs and everything we can, pricing on new products potentially. But it was so quick that, you know, we have to take a little time to make that up.

But our strategic objective is still to get back to 11% to 12%.

Okay. Thank you.

Thank you. At this time, there are no further questions. I would like to turn the floor back to management for any closing comments.

Yes, I mean the market is definitely in a transition for technologies in the Retail Business Unit. And for the CapEx spending and the shift from wireline to wireless in the Service Provider Business Unit. We believe that we if could capitalize on this transition and make our investment accordingly and leading with innovative products, we would be able to prevail and win after this transition is over. So we're excited about the opportunities of LTE, of Arlo, of Nighthawk, and SMB solutions in 2015. And we'll focus on that and we'll talk to you on our progress next time when we have an earnings call in April. Thank you, everyone.

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