NETGEAR Inc (NTGR) 2015 Q4 法說會逐字稿

Greetings, and welcome to the NETGEAR, Inc. fourth-quarter and year-end 2015 conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Chris Genualdi. Please go ahead, Sir.

Thank you, operator. Good afternoon, and welcome to NETGEAR's fourth-quarter and full-year 2015 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 will then have time for any questions.

Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include, among other things, statements regarding expected revenue, operating margins, tax rates, expenses, and future business outlook. Actual results or trend could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in NETGEAR's periodic filings with the SEC, including the most recent Form 10-Q.

Any forward-looking statements that we make on this call are based on assumptions as of today, and NETGEAR undertakes no obligation to update these statements as a result of new information or future events. In addition, several non-GAAP financial measures will be mentioned on this call. A reconciliation of the non-GAAP to 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. 2015 was a very successful year for us as we entered a new growth product category, expanded our premium pricing model, and restructured our service provider business for improved profitability.

At the beginning of the year, we launched Arlo, the world's first wire-free high-definition IP camera, and in a short 12 months, we became the undisputed number one market shareholder in North America, Western Europe and Australia for the retail IP camera segment. We also released cutting edge Wi-Fi technology with our new Nighthawk X8 router, which debuted the world's first tri-band 4x4 in active antenna technologies, helping to push up the ASP of our product line-up as well as the overall industry's ASP.

On the commercial side of the business, we introduced the world's first quad mode 11 AC access point and the world's first Web-managed 28 port 10 gig switches, paving the way for success in 2016 as SMBs transition to 11 AC and 10 gig. As for the Service Provider Business Unit, we have restructured our business and improved its contribution margin percentage in the second half of 2016.

Last but not least, we returned $117.7 million to our shareholders in 2015 through our share repurchase program. We will look to build on all these successes in the year ahead.

For the full year of 2015, NETGEAR net revenue was $1.3 billion, which is down 6.7% or $92.8 million compared to full-year 2014 revenue. The entire decline was due to the resizing of our service provider business from approximately $580 million in 2014 to about $421 million in 2015. Our non-carrier business grew robustly year-over-year from approximately $814 million to over $879 million, or 8%.

Specifically, our Retail Business Unit grew an impressive 20.9% year-over-year. For the fourth quarter of 2015, NETGEAR net revenue was $360.9 million, which is up 2.2% on a year-over-year basis and up 5.5% on a sequential basis. Once again, RBU, or the Retail Business Unit, was the growth engine -- up 33.6% year-over-year as compared to Q4 of 2014.

Non-GAAP diluted EPS for the full year of 2015 was $2.23. Non-GAAP diluted EPS for the fourth quarter of 2015 was $0.83, which is up 27.7% year-over-year. For a full reconciliation of GAAP to non-GAAP financial results, please refer to the fourth-quarter and full-year 2015 earnings press release.

During the fourth quarter, net revenue for the Americas was $231.8 million, which is up 19.1% year-over-year and up 5.5% quarter-over-quarter. Holiday sales exceeded even our most ambitious target for the Retail Business Unit, driven by a successful expanded cyber week and the promotion of our Nighthawk line of premium home routers.

In addition, it was the first holiday season for our Arlo line of home security cameras. The holiday demand for this product category was significantly more than the seasonal uplift that we usually experienced in the router category.

Europe, the Middle East, and Africa, or EMEA, net revenue was $86.9 million for the fourth quarter of 2015, which is down 18.2% year-over-year and up 11.8% quarter-over-quarter. While the depreciation of European currencies continues to make year-over-year comparisons difficult, we are pleased with the sequential improvement that we saw in this region. The sequential increase was primarily driven by holiday demand for our Arlo cameras and Nighthawk routers and gateways.

Our Asia-Pacific, or APAC, net revenue was $42.2 million for the fourth quarter of 2015, which is down 19.2% from the prior-year's comparable quarter and down 5% quarter-over-quarter. Once again, the APAC region's results were challenged year-over-year due to 4X headwinds. Meanwhile, the quarter-on-quarter revenue was due to lighter service provider revenue.

In Q4, we shipped 6.1 million units. We also introduced 13 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 fourth-quarter of 2015, our products were sold in approximately 27,000 retail outlets around the world, and our number of value-added retailers stand at approximately 31,000.

Now let's turn to a review of the fourth-quarter results of our three business units -- Retail, Commercial, and Service Provider.

For the Retail Business Unit, or RBU, net revenue came in at $197.5 million, which is up 33.6% on a year-over-year basis and up 20.4% sequentially. For the second quarter in a row, the Retail Business Unit had a record quarter in terms of revenue, driven by the strength of our Nighthawk routers and gateways, as well as our Arlo IP cameras during the holiday season.

Of note, Black Friday and Cyber Monday in North America have transformed from single-day sale events into a robust continuous two-week sale, resulting in a more pronounced holiday uplift. This year, we've focused our holiday promotion on the high ASP Nighthawk routers, which was a huge hit in the market, enabling us to reach new highs in market share, and drive Q4 results beyond our expectations.

Turning to products, our Arlo revenue continues to grow, and we expanded the product line during Q4 with the introduction of Arlo Q. Arlo Q is an AC-powered Wi-Fi camera with 1080 P high-definition video, two-way audio, night vision, 24/7 cloud video recording, and seven days of free cloud storage for users. Unlike the original Arlo wire-free cameras, Arlo Q is designed specifically for continuous indoor use where users can listen in and talk back through the camera.

Two years ago, the Retail Business Unit was a little more than one-third of NETGEAR's overall business. Now it is approaching half of the Company's revenue. In 2016, coupled with the anticipated recovery of our CBU business, our non-service provider business will be over 75% of our overall revenue.

Given the greater proportion of revenue coming from RBU, increased demands that we experienced during the two weeks encompassing Black Friday and Cyber Monday, and the exceptional holiday uplift from IP cameras, we believe the seasonal strength of Q4 versus subsequent Q1 will be more pronounced than we typically experienced, as reflected in the guidance that Christine will provide in a moment.

The Commercial Business Unit, or CBU, generated net revenue of $63.9 million for the fourth quarter of 2015, which is down 19.5% on a year-over-year basis and down 2% sequentially. As discussed on prior earnings calls, the year-over-year decline in CBU is primarily the result of a difficult small business market climate in Europe caused by currency headwinds.

We are also seeing continuous channel shift from traditional distribution sales to online sales of our CBU products, resulting in continuous destocking in the distribution channel. Since our net revenue is based on sell-in for the distribution channel, our CBU revenue has been negatively impacted throughout 2015. However, we expect that distributed destocking will normalize and should have a much smaller negative impact on CBU going forward.

For our Service Provider Business Unit, or SPBU, net revenue came in at $99.4 million for the fourth quarter of 2015. While this is down 21% year-over-year and down 11.7% on a sequential basis, it is within the formerly announced revenue range that we shared for fiscal-year 2015. More importantly, SPBU turned significantly more profitable in the second half of 2015 in both absolute dollar terms and on a percentage basis, compared to the second half of 2014 and the first half of 2015.

As previously announced at our Analyst Day, we expect SPBU revenue to further decline in 2016 as we continue to shift away from low-margin products and accounts. As a result, we expect the revenue level will be approximately $75 million per quarter starting in Q1 of 2016.

In order to keep costs in line with this reduced revenue outlook and better focus our Service Provider team, we underwent a small restructuring exercise in January 2016 to resize the cost structure of this business unit. We expect this will allow us to continue to drive profitability within this business unit by focusing on the delivery of premium advanced technology products to our committed Service Provider customers. We also used this opportunity to redeploy some R&D resources for Arlo and our broader smart home initiatives.

The three areas that we continue to invest in for SPBU are DOCSIS 3.0, VDSL, and LTE, as these are the technologies that are valued by our Service Provider customers. We are pleased to announce that we were one of the first vendors to receive cable-app certification for a DOCSIS 3.1 product. Additionally, during Q1, we launched the world's first 4x4 802.11ac VDSL voice gateway, with Telstar in Australia.

Lastly, during Q4, we also provided the world's first LTE advanced Category 9 mobile hotspots for deployment in Australia. This is the world's first mobile data device capable of over 500 megabits per second download speed in a live LTE advanced network. We expect to have this product deployed in other parts of the world in Q1 and throughout 2016.

In summary, we are pleased with our fourth-quarter results and believe that we are well-positioned for success in 2016. For 2016, we believe we can further increase the premium value of our Nighthawk line of Wi-Fi routers, gateways and extenders, with first-to-market proprietary hardware and software, and gain more share worldwide. Our Arlo cameras achieved over 20% market share in the North American retail channel in December 2015, and we expect to increase our share further in 2016 with the addition of new products and wider distribution throughout 2016.

We are also hoping to enter a new product category in the smart home market. For CBU, with the recent groundbreaking quad mode 11 AC wireless LAN introduction, and the successful debut of our high port count Web-managed 10 gig switch, we believe 2016 will be a growth year with many new products waiting in the wings. For SPBU, we continue to service our most valued customer who desires superior technologies and reliability, thus ensuring our profitability levels.

I will now turn the call over to Christine for further commentary on our financials for the fourth-quarter and full-year.

Thank you, Patrick. I will now provide you with a summary of the financials for the fourth-quarter and full-year of 2015. As Patrick noted, net revenue for the fourth quarter ended December 31, 2015 was $360.9 million as compared to $353.2 million for the fourth quarter ended December 31, 2014 and $341.9 million in the third quarter ended September 27, 2015.

We shipped a total of about 6.1 million units in the fourth quarter, including 4.9 million nodes of wireless products. Shipment of all wired and wireless routers and gateways combined were about 2.4 million units for the fourth quarter of 2015.

Moving to the products category basis, fourth-quarter net revenue split between wireless and wired was about 78% and 22%, respectively. The fourth-quarter net revenue split between home and business products was about 82% and 18%, respectively. Products introduced in the last 15 months constituted about 49% of our fourth-quarter shipments, while products introduced in the last 12 months constituted about 42% 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.

Non-GAAP gross margin for the fourth quarter of 2015 was 30% compared to 29.3% in the year-ago comparable quarter, and 29% in the third quarter of 2015. Total non-GAAP operating expenses came in at $69 million for the fourth quarter of 2015, which is up compared to the $68.1 million in the year-ago comparable quarter and up compared to the prior-quarter's total non-GAAP operating expenses of $63.8 million. Our non-GAAP R&D expense for the fourth quarter was 6.2% of net revenue, consistent with 6.2% in the year-ago comparable period and 6.1% of net revenue in the third quarter of 2015.

As always, we remain committed to driving further optimization in our sales channel, supply chain, and support functions, which should result in further operating margin leverage in the future. Our headcount increased by a net four people to [963] during the quarter. Our non-GAAP tax rate was 29.9% in the fourth quarter of 2015 as compared to 36.7% in the fourth quarter of 2014 and 38.2% in the third quarter of 2015.

Our fourth-quarter 2015 tax rate improved as compared to our guidance, as a result of a favorable shift in our profit mix and the renewal of the R&D tax credit. Looking at the bottom line for Q4, we reported non-GAAP net income of $27.5 million and non-GAAP diluted EPS of $0.83 per diluted share.

Our balance sheet remains strong. We ended the fourth quarter of 2015 with $278.3 million in cash, cash equivalents, and short-term investments, compared to $263.8 million at the end of the third quarter of 2015. For the fourth quarter of 2015, we used approximately $5.3 million in cash flow from operations. During the trailing four quarters, we generated approximately $110.4 million in cash flow from operations.

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. In Q4, we spent $12.5 million to repurchase approximately 394,000 shares of NETGEAR common stock at an average price of $31.72 per-share, which resulted in a benefit of $0.01 to non-GAAP diluted earnings per share for the quarter. Since the start of our recent repurchase activity in Q4 2013, we have repurchased approximately 8.6 million shares and our diluted share count is now lower by 15.5% as compared to the beginning of that period.

DSOs for the fourth quarter of 2015 were 77 days as compared to 73 days in the fourth quarter of 2014 and the third quarter of 2015. Our net inventory in the fourth quarter of 2015 ended at $213.1 million compared to $222.9 million in the fourth quarter of 2014 and $170 million at the end of the third quarter of 2015. Fourth-quarter ending inventory turns were 4.8 as compared to 4.5 turns in the fourth quarter of 2014 and 5.8 turns in the third quarter of 2015.

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 8.4 weeks of stock. Current distribution inventory levels are 5.7 weeks in the US, 4.6 weeks of stock for distribution in EMEA, and seven weeks in APAC.

As a result of the SPBU restructuring, NETGEAR estimates that it will incur pretax charges of approximately $1.5 million to $2.5 million, consisting of severance and other one-time termination benefits, as well as other associated costs. The Company expects to record the majority of these charges and complete the restructuring by the end of the first quarter.

During our Analyst Day, we guided that our SPBU revenue would decline for 2016. We believe that the Service Provider revenue run rate will be approximately $75 million per quarter. We also continue to believe that our non-carrier business, composed of RBU and CBU, can grow approximately 10% combined. While this will equate to slightly down revenues on a year-over-year basis, we would like to reiterate that we fully expect to grow profit dollars and expand operating margins year-over-year in 2016.

For the first quarter of 2016, we anticipate revenue will be in the range of approximately $290 million to $305 million. As previously mentioned, Service Provider revenue is stepping down to approximately $75 million per quarter run rate for 2016. Additionally, as typically occurs with retail seasonality, Q1 retail sales will be seasonally down from our Q4 quarter. This seasonality will have a larger impact on our business in 2016, as retail has become over half of NETGEAR's overall business in the completed fourth quarter.

First-quarter non-GAAP operating margin is expected to be in the range of 9.5% to 10.5%, which reflects NETGEAR's shift towards non-carrier business. Our non-GAAP tax rate is expected to be approximately 34% for the first quarter of 2016.

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

(Operator Instructions) Ryan Hutchinson, Guggenheim.

This is Nate Cunningham on for Ryan. A couple of quick questions. So, how much of sales in the quarter were new products? And can you give us a flavor for how much of your retail business in the quarter was on the high-end?

What we basically said was products introduced in the last 15 months were 49%, and products introduced in the last 12 months were 42%. And those are statistics that we give every quarter.

And regarding retail, clearly, the star performers are the Nighthawk line as well as the Arlo line during the Christmas season.

Okay. And Patrick, is it fair to assume that we should expect a new release of the wireless Arlo that had some of the upgraded features from the Q?

Oh, you mean the wire-free Arlo that would have the Arlo Q features?

Just the 1080 P, stuff like that?

Okay. Clearly, we definitely will continue to upgrade the features of all our product lines but we are not in any position to disclose future products for the benefit of our competitors who are probably listening in as well.

Sure. Thanks.

Tavis McCourt, Raymond James.

Thanks for taking my question, Patrick. Actually I had a couple on the commercial side first before I move over to Arlo.

Sure.

From the weeks of inventory, obviously it looks like you chopped a lot of wood in the back half of the year to get these channel inventories down. I assume that's complete and that kind of raises your confidence level on expecting growth in CBU in 2016? Is that the right way to think about it?

Absolutely. I think we've taken the opportunities of a good end-market demand to really deplete the distribution channel inventory. And we are very pleased with the progress. We do believe that the destocking negative impact on revenue will be diminished in the coming year. And that's why we are confident that the increase in end-user demand will actually be reflected positively in the net revenue going forward.

Got you. And then a skeptic would say you guys have always been quite good in using that switching market, and expansion beyond that has been hit and miss, and frankly, probably more miss than hit. So, I guess give us your expectations for this new wireless LAN product, which I guess is NETGEAR's 2.0 or 3.0 attempt at wireless LAN. What's different this time? And kind of what are your expectations for that business?

You know, you've got it right -- I mean, there's no doubt -- I mean, on the Commercial side, our switch business is unproportionally big compared to the other product lines. I think our strategy is always the same. For those customers who have been our loyal switch customers and they would like to expand beyond that into the wireless LAN, we want to get them in the fold. And now, with the 11 AC addition, that we are in a better position to retain them, because the world is definitely moving to 11 AC.

So our objective is very simple. Off of the current base of wireless LAN, we would like to grow it double-digit. But even growing double-digit, of course, its size will still be dwarfed by our switched revenue, and -- which will still be our growth engine. That's why the 10 gig switch that would put so much emphasis behind is pivotal and critical to our continuous success in the Commercial channel.

And then a question on Arlo. You mentioned in your prepared remarks a new product category within Arlo, I think, within 2016. And I think up until now, you've always kind of framed it as, we will partner -- we may make some new products or new product categories, but we haven't made any decisions yet.

So is this the first quarter where you kind of made a firm decision that you have an idea what you want to develop and how to bring it to market and so forth? And I want to clarify when you say new product category, would you consider a move from an outdoor camera like Arlo to indoor camera Arlo Q as a new product category? Or are we talking something beyond cameras?

Yes, we are talking about something beyond cameras. Because, clearly, you will see a lot more cameras from us this year. And now, in the Analyst Day that we had in November last year, we put up a chart to show the various smart home devices that are popular in the market today. Of course, by far, the biggest category is still camera. And them the second category following camera, thermostats. And then after that is door locks.

And then after door locks, I mean, everything kind of trails off a little bit, but you still have a whole bunch of other smart home devices such as sensors, such as garage door openers. Oh, as a matter of fact, garage door opener is up there as one of the big four. And then you have sprinklers, you have light bulbs. All right?

So there are many smart home categories. There is no way we are going to participate in every single of those categories, so we are going to partner with other people who make good door locks or whatever. But yes, at that point in time, we already said that we would definitely go into another category beyond cameras.

So it's not something we just announced. We announced that in the Analyst Day last year. But, of course, for competitive reasons, we cannot tell you which categories that we are going into. But one thing for sure, as we said last time on the Analyst Day, if we debut a new category, it has to be differentiated. It has to be relevant to our customer. It has to be something that our customer has been looking for but have not been able to be met by the market.

Great. Thanks a lot, Patrick, and congratulations on the strong quarter.

Thank you.

Rohit Chopra, Buckingham Research.

I had a question first on the -- I just want to clarify some numbers, if you don't mind. I saw inventory turns were down sequentially, inventories up sequentially, DSOs are up sequentially. And I just want to make sure -- I think I'm going to be correct on this one, but is that all due to destocking? Or is there some other reason for that, Christy?

You know, I'd say inventory turns are down. Because, as you noticed the inventory -- we had a little bit higher inventory at the end of the quarter. And that's definitely always a balance we do between air freight and sea freight. And as you can see, our customers took a lot of inventory this quarter, so we want to make sure we had it on-hand.

In addition, on the DSO, that's really more of -- some of our customers get seasonal dating terms in Q4 and that really drives that. It's sort of at the higher end of our range, but it's absolutely within a range we've seen before.

Okay. And then I want to come back to this CBU, if you don't mind, those four quarters of declines. I know there's some discussion about destocking and then it will be less of a drag next year. You've got a couple of new products. But there have also been new products in the past.

And I'm coming back a little bit to Tavis's question, is -- I'm trying to understand how you can move more of that product? It seems like it's a very competitive space in the -- let's just call it the SMB space as far as switching and Wi-Fi. And it seems as though that category of customers is trying to push a little bit more into the cloud. I mean it's not -- that shouldn't be anything new to understand. But I'm still unclear as to how you get growth out of the CBU just by introducing new products that you already had.

I think the most important thing is we are introducing products that we tested, the market and is definitely getting a lot of good receptions. So I -- as I mentioned actually in the earlier comment, that we tested with a product, which is a Web-managed 10 gig high port count switch, back in Q4, we introduced it. And it was a hit.

So, we know that is really well-received by the market. So, we do believe that, as we continue to produce more products along that category, that will be helpful. And all along, we know our POE switch has been very, very popular. So we're going to generate more POE switches of this 10 gig -- of these higher speeds.

So, we feel pretty confident because we see the reception of these switches are very strong. Yes, definitely, I mean, the most important thing is proof, right? (laughter) So I think it's important for us to prove that we can move the needle so our revenue will go up.

Now, the one thing that gives us confidence is that, because even though our revenue is counted as the sell-in to the distribution channel, we actually monitor actual sales out very tightly. All right? Sales out from Amazon.com, sales out from CBW, sales out from mobile VARs. And actually it has been growing for the sales out.

So, for that, that gives us the confidence that once we digest all the channel inventory -- and if you look at the channel inventory, for example, like North America, we have been depleting the channel inventory from as high as almost like 12 weeks right now to less than six weeks.

Yes, I mean, theoretically, it could destock further to three weeks, let's say, but that would be very extreme. So based on the product tests that we had in Q4 that is encouraging on the switching side, based on actual sales out is actually increasing quarter-after-quarter. And based on now, the channel distribution channel inventory has depleted for the -- much to the level that is, it can't go any further, that gives us the confidence that 2016 is the year that we can turn around the net revenue line.

All right. One last question. It was just on the SPBU. You mentioned some kind of interesting things about DOCSIS 3.1. It sounds as if that business unit has a lot more leverage in it, right? You have knocked out a lot of cost.

So is there any sense of carriers deploying this? It sounds as if everybody is trying to do something -- they are facing pressure from Google Fiber, all the cable companies. But is there any timeline that you can give us? Is there a second half of the year kind of timeframe now that you have the cable lab certification. Is it 2017 where you think that we will see greater speeds or cable companies look to DOCSIS 3.1? Anything would be helpful, Patrick.

Based on our relationship with the various operators around the world, it is pretty clear to us that the people leading the charge will be in North America as well as in Japan. And you will see some test markets by the end of this year, and big deployment -- mass deployment is going to happen in 2017. So there are a few big operators already in the testing phase of these products and the networks.

That's actually really helpful. I appreciate it. Thank you.

Hamed Khorsand, BWS Financial.

Just the first question I want to start off with -- what changed in your process as far as restructuring the Service Provider business that you are actually guiding the reduction down further at $75 million? And on Analyst Day, you were saying $80 million to $85 million?

Sure. The difference really is as we look at the business coming into the new year, we've decided to exit from another customer, based on the profitability and some other financial concerns.

And what does this have as far as an impact or a benefit as to what your expectations for ending the year with an operating margin above 11%?

We haven't changed anything on that. I mean, I think we said we still -- we ended this quarter -- Q4 at 10.8%, and we are very focused on profitable year-over-year growth.

And --

We're still confident that we will grow operating margin dollars year-over-year and achieve 11%-plus operating margin by the end of the year.

Okay. And switching gears to the retail side, what kind of mix are you expecting as far as Nighthawk taking over as far as the units shipped?

Oh, the Nighthawk units shipped would still be smaller than the new Nighthawk. But revenue-wise, it's definitely much bigger. But I think by the end of this year, the Nighthawk, even units, will be bigger than the new Nighthawk products.

Is the price trajectory staying the same, at the $180 all the way up to the $300 level?

Yes. Our cheapest Nighthawk today is $199, all right? That's our recommended price. And I think you can buy some on Amazon a little bit cheaper than that; probably $10 cheaper than that. But that generally is the starting point.

And our highest Nighthawk today is starting at $399. And so that's the price range, but we'll continue to test higher price points.

Okay. And the last question here is -- as far as the -- obviously total amount of units shipped, that's going to decline. Any guidance as to what you are expecting as far as the units shipped number should be?

No. I mean, it's coming down because of Service Provider -- while we had basically think about is we have resized the business from $580 million to $300 million this year. I mean, you could roughly say, I mean, that is probably half. If you take an average selling price of even $100, then you could see quite a bit of reduction in units.

So, that, of course, is being made up by retail. I mean, retail is growing very fast. But we don't expect that will be completely made up. The ASP in retail is higher. So we believe, over time, we will make it up, but immediately, within the next 12 months, we won't be able to make it up.

Okay. That's it for me. Thank you.

Sure.

Kirk Adams, Rosenblatt Securities.

I just have a couple of things. First off, what's the pricing environment like, taking 4x out of the equation across the country on the retail side? Are you still seeing pretty solid pricing environment out there?

In North America, definitely we've seen very solid pricing. In -- there is no crazy people, heavy discounting in North America, especially on the high-end. Because, I mean, frankly, we are the only game -- we are the only player in that really high-end.

And internationally, in Europe, there is significant price pressure on the low end, which we basically do not play that much any more. But in the high-end, even in Europe, it's stabilizing. It's stabilizing; it's not as crazy as before.

The surprising thing is actually in Asia -- on the high-end, it's very firm. And actually even in the mid to low-end, I mean it hasn't really moved much. I think the reason is pretty much the market has stabilized into a few key players, and there's not much movement in terms of market share in terms of routers. I mean, the bigger ones are getting bigger -- I mean, like us -- continue to gain share in North America. And so that's the situation.

Great. And just a follow-on there, macro conditions across the world -- with everything going on in the market the last month and stuff, you hear a lot of crazy stories. But are you guys seeing any big changes in the macro environments that you deal in?

We really haven't seen much change in terms of the market demand. And we continue to see the normal seasonal behavior of -- in all three markets, be it Asia, US, as well as Europe. I mean, generally, the holiday season, which lasts end of November to end of December, is crazy. I mean, there's no doubt about it.

But then in January, it's still pretty good because people get a lot of gift cards, cash and they buy it. And then it will step down in February, and then will step further down in March. That behavior hasn't changed. That change of -- that move of seasonality hasn't been more pronounced this year than previous year. And we do not see any significant change in the macro environment.

Excellent. Lastly, just a quick one on foreign exchange. I mean, your expectations for foreign exchange impact going forward here in 2016?

I mean, clearly, if I know it (laughter), I wouldn't be doing this job any more. I'll be a trader. But, you know, to us, we want to manage our business very conservatively. So naturally, in all our financial planning, we've prepared for a worse-than-normal scenario going forward.

So, I mean that's our provision. But in case the foreign exchange behaves better than what we anticipate, that will be gravy then. That will be better to our operating profit line. Today, as you probably saw, 68% of our business is in North America; 65%, call it, is all US dollar-based. So that kind of shield us off a little bit from the foreign exchange fluctuation.

But of course, the other 35%, it goes up and down, 10% is still pretty big, all right? And that's why, in our planning, I mean, we have to be very conservative in terms of the other 35% of the business. But I think one thing that we have learned over the last 18 months to shield us off from all these fluctuations is rapidly introducing new products.

All right? Because the old products, you cannot raise prices; you just can't. All right? Because the customers would just get frustrated if you increase prices. But when you introduce new products, then you set new price points, it's different.

So, to counteract any foreign exchange fluctuation, the best move is to continue to introduce new products. That's why we're so focused on making sure we introduce many new products every quarter, and relevant, innovative new products every quarter that we can set our pricing.

Great. Thank you very much.

Sure.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well, thank you, everyone, for joining us today on today's call. As you can tell, we are very excited about what we have accomplished in 2015, as well as what we have in store for the year ahead. We expect that 2016 will be an even more exciting and profitable year than the prior. So, thank you. And we'll talk to all of you again in April.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.