NETGEAR Inc (NTGR) 2016 Q3 法說會逐字稿

Greetings and welcome to the NETGEAR third quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Genualdi, Senior Investor Relations Manager for NETGEAR. Thank you, Mr. Genualdi, you may begin.

Thank you, Operator. Good afternoon and welcome to NETGEAR's third quarter 2016 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 start with a review of the financials for the third quarter provided by Christine followed by details and commentary on the business provided by Patrick and finish with fourth quarter guidance provided by Christine. We'll then have time for questions. If you have not received a copy of today's release, please visit NETGEAR's Investor Relations website at www.NETGEAR.com.

Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, operating margins, tax rates, expenses and future business outlook. Actual results or trends 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 files 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 today's press release on our Investor Relations website.

At this time, I would now like to turn the call over to Ms. Christine Gorjanc.

Thank you, Christopher. Before we begin, I would like to extend an invitation to everyone on this call to join us at our 2016 financial analyst day in San Francisco on November 15th where Patrick and I will be joined by several members of our executive team to discuss NETGEAR's strategic initiatives. If you have not already received an invitation and would like to join us, please reach out to NETGEAR Investor Relations for more details.

Results for the third quarter of 2016 came in above the high end of our guidance driven by the back to school performance of our retail business unit as well as the Service Provider business exceeding revenue expectations. For the third quarter ended October 2, 2016, net revenue was $338.5 million, which is down 1% on a year-over-year basis and up 8.6% on a sequential basis.

I would like to point out the Service Provider business was down approximately $42 million year-over-year and our non carrier business grew to offset all but approximately $3.5 million of that delta. NETGEAR net revenue by geography continues to reflect our strength in north America. Net revenue for the Americas was $225.2 million which is up 2.5% year-over-year and up 6.8% on a sequential basis.

EMEA net revenue was $60 million, down 22.8% year-over-year and up 16.2% quarter over quarter. Our APAC net revenue was $53.2 million for the third quarter of 2016 which is up 19.7% from the prior year comparable quarter and up 8.3% quarter over quarter.

For the third quarter of 2016, we shipped a total of approximately 5.6 million units including 4.4 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about two million units for the third quarter of 2016.

The net revenue split between home and business products was about 78% and 22% respectively. The net revenue split between wireless and wired products was about 76% and 24% respectively. Products introduced in the last 15 months constituted about 38% of our third quarter shipment while products introduced in the last 12 months constituted about 29% of our third quarter shipments.

From this point on, my discussion points will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today. The non-GAAP gross margin in the third quarter of 2016 was 31.3% compared to 29% in the prior year comparable quarter and 32.3% in the second quarter of 2016.

The year-over-year gross margin improvement reflects the reduction in Service Provider revenue which typically carries a lower gross margin. Total non-GAAP operating expenses came in at $67.2 million which is up 5.3% year-over-year and up 4% sequentially.

While we always manage our operating expenses carefully, we will look to continue to invest in research and development as we add new product offerings to our portfolio. Our head count increased by net 16 people to 944 during the quarter. We expect to continue to add additional head count in key areas of our business during the fourth quarter.

Our non-GAAP R&D expense for the third quarter was 6.2% of net revenue as compared to 6.1% in the year ago comparable period and 6.6% of revenue during Q2 2016. We continue to believe that investment in R&D is key to our business and we expect this expense to continue to grow in absolute dollars. Our non-GAAP tax rate was 34% in the third quarter of 2016.

Looking at the bottom line for Q3, we reported non-GAAP net income of $25.9 million and non-GAAP diluted EPS of $0.76 per diluted share.

Turning to the balance sheet, we ended the third quarter of 2016 with $403 million in cash, cash equivalents and short-term investments. For the third quarter of 2016, we generated approximately $40.4 million in free cash flow. Which is calculated as cash flows from operating activities as presented in the statement of cash flows under GAAP less capital expenditures.

We continue to remain very confident in NETGEAR's ability to generate meaningful levels of cash. During the trailing four quarters, we generated approximately $115.9 million in free cash flow. We continue to focus on optimizing the business and generating cash, providing its operational flexibility as well as the ability to strategically deploy cash to enhance shareholder value.

We did not purchase stock during the third quarter although we continue to maintain an open buy back program we plan to use opportunistically. $1.6 million shares remain in our current share repurchase authorization. As a reminder, since the start of our repurchase activity in Q4 2013, we have repurchased approximately 9.2 million shares and our diluted share count is lower by 13.5% as compared to the beginning of that period.

The fully diluted share count is approximately 34 million shares at the end of Q3 2016 and I would like to highlight it has gradually trended upwards over the past four quarters despite our buy back activities during that time period. Now, turning to the results of the three business units, we are pleased to report that the Retail Business Unit, or RBU, generated net revenue of $194.2 million during the quarter which is up 18.4% on a year-over-year basis and up 13.8% sequentially.

The Commercial Business Unit, or CBU, generated net revenue of $73.4 million for the third quarter of 2016 which is up 12.6% on a year-over-year basis and down slightly on a sequential basis. For our Service Provider Business Unit, or SPBU, net revenue came in at $70.9 million for the third quarter of 2016. This is down 37.1% year-over-year or about $41.8 million from the prior year and up 5.2% on a sequential basis.

Looking forward to the fourth quarter and subsequent quarters, we expect Service Providers to deliver approximately $55 million in revenue per quarter.

I'll now turn the call over to Patrick for his commentary on the results of the three business units as well as the overall business. After which I'll provide guidance for the fourth quarter of 2016.

Thank you, Christine. Thank you, everyone, for joining today's call. We're very pleased with our third quarter results which reinforce our belief that we are managing our business effectively and taking advantage of the multiple opportunities that exist in the markets we serve.

Our Retail Business Unit clearly had another strong quarter driven by our Nighthawk routers, cable gateways and cameras. Demand for each of these premium product lines remains robust. Furthermore, during the last three months, we have announced three new additions to our premium product lineup. I would like to use this opportunity to tell you a bit about each of these exciting new products which we believe will be important drivers of our future growth.

First off in August, we announced Orbi, the world's first tri band Wi-Fi mesh system that provides blazing fast Wi-Fi coverage to every inch of your home including your yard. It is the perfect solution for defeating those dead spots that a traditional router might not reach. A standard Orbi kit includes one Orbi router which hooks up wherever your internet connection comes into your home and an additional satellite unit that could be placed elsewhere in your home to extend coverage. Together they can cover an impressive 4,000 square feet.

Unlike a traditional Wi-Fi expanded solution which creates an additional SSID for expanding coverage, Orbi's router and satellite work together on a single SSID. This allows for a seamless connected experience as you work from the front yard, to the home office, to the pool without compromising your Wi-Fi speeds.

I would like to quickly highlight Orbi's unique tri band Wi-Fi architecture. While there are several other Wi-Fi mesh systems currently on the market, they use dual band Wi-Fi. Orbi is the only tri band solution. Tri band Wi-Fi provides a 2.4GHx and 5GHz band for client devices as well as an additional 5GHz band that's dedicated solely to communication between the router and the satellite. This allows Orbi's network intelligence to operate separately from your regular home network traffic. Which leads to greater overall performance than all of the competing dual band systems currently on the market.

A standard Orbi kit with a router and one satellite retails for $399 and is currently available at most major retailers in the US. It will be rolling out to international markets later this quarter. Our second exciting new product release is the Arlo Pro security camera which is the next generation of our award winning wire-free Arlo cameras. Among many exciting upgrades, Arlo Pro has rechargeable batteries and two-way audio.

A single Arlo Pro battery charge can typically last for a full six months under normal usage. Two way audio enables Arlo Pro users to hear what's going on in the area where the camera is situated. And to talk to the people or pets there.

With Arlo Pro, we have improved our motion detection technology and increased our camera's view to 130-degrees so that nothing goes unnoticed when Arlo is at home. We have also added a high decibel siren to the base station to scare away unwanted visitors. A two camera Arlo Pro kit sells for $419 and is currently rolling out in major retailers in north America. We expect it to be available overseas sometime in Q1.

Finally, just last week, we announced the latest addition to our premium line of Nighthawk routers, the Nighthawk x10. It is the world's fastest router, achieving combined wireless speeds up to an incredible 7.2 gigabit's per second. It features next generation high speed 802.11ad Wi-Fi which allows for instant downloads, file transfers and back-up over wireless for devices that are within line of sight. 802.11ad is also perfect for gaming and streaming as it has about one-tenth the latency as compared to 802.11ac.

Additionally, the x10 is the industry's first router that features a super fast (inaudible) core CPU, and doubles as a plex media server. The plex media server beautifully organizes your video, audio and photo content so that it can be easily accessed from a locally connected storage device.

The x10 also supports trans coding of this content for remote devices so that it could be accessed by any remote client device at the quality level that best suits that device. Compared to storing content on a PC, your plex media server on the Nighthawk x10 is easier to set up and is always on which means your content is always available.

The Nighthawk x10 sells for $499 and is currently rolling out to select retailers in north America. We expect it to be available overseas in 2017.

Turning to Commercial Business Unit, we're once again very pleased with the year-over-year growth generated by CBU during Q3. US distribution inventory levels which were a headwind during 2015 continue to hold at trophy levels. From a product perspective, our SMB 10 gigabit switches stand out in particular as a performance driver during the quarter.

We expect to continue to benefit from SMB upgrades to multi-gig and 10 gig switching in the quarters to come. The Service Provider Business Unit delivered $5 million revenue about the $65 million that we expected. For the third quarter (inaudible) from of some our customers. We continued effectively manage this business unit, protecting our margins rather than chasing commoditized business the top line.

To summarize, the third quarter exceeded our expectation and we continue to gain shares in home Wi-Fi, home security cameras and switching. I would now turn the call back to Christine for our Q4 guidance.

Thank you, Patrick. For the fourth quarter of 2016, we anticipate revenue will be in the range of approximately $340 million to $355 million. As previously mentioned, we expect Service Provider revenue to be approximately $55 million for the fourth quarter and to continue at that run rate in subsequent quarters.

Fourth quarter GAAP operating margin is expected to be in the range of 7.9% to 8.9% and non-GAAP operating margin in the range of 10.5% to 11.5%. Our GAAP tax rate is expected to be approximately 37% and the non-GAAP tax rate is expected to be approximately 34%. For the fourth quarter of 2016.

Operator, that concludes our comments. We can now take questions.

Thank you. (Operator Instructions). One moment, please while we poll for questions. Our first question comes from the line of Matt Robinson, with Wunderlich. Please, proceed with your question.

Yes, I was wondering if you could talk a little bit about contribution margin last year, third quarter last year that was a pretty good quarter for Service Provider, if I remember right. Curious how it compared on the lower sales this year and how you think that's going to go at the decreased level that you're talking about in coming quarters.

Matt, we typically don't, we put that in the 10-Q that will be filed shortly, probably in about ten days. So we have that. The contribution margin and Service Provider was 13.2. By the back half of last year, we had achieved our double digit contribution margin and we said we would maintain that. So we definitely have done that. We'll file the exact numbers in the 10-Q.

How do you feel about the seasonality for commercial in the second, third and fourth quarter? Just so we can get a little bit of a flavor for how that might have impacted things.

You know, the seasonality on the commercial side for Q4 is typically relatively flat because there's not a lot of selling in the last ten days of December. So I would say it is a bit of a shorter selling time. So you know, year-over-year, we're still looking at growth but we think that will be relatively flat when we look Q3 to Q4.

Retail Business Unit naturally, the seasonality is in favor because of Christmas, black Friday and all of that. So we do expect that typically on the Retail Business Unit, the quarter on quarter growth is anywhere between 5% and 15%.

Okay. And what's the normal seasonality for the third quarter? Is it also flat sequentially? Or is it typically down?

For the commercial? Commercial is typically, it's flat, as you saw this quarter, we had Q2 to Q3 was relatively flat because Q2 was up quite a bit. Had Q2 not been up quite a bit, we would have seen Q3 up a little bit as we went into Q3.

Any commentary on the mix effect of the Pro and Orbi, or is it too soon to tell?

Pro was really just announced in October. And just now shipping. Orbi was just barely shipping at the end of the quarter. So we're excited to see that during Q4.

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

Sure.

Thank you. Our next question comes from the line of Ryan Hutchinson, with Guggenheim Investments.

A couple of questions. So my main question really is around this Service Provider Business. As you step back and look over the last couple of years, following the acquisition, it has continued to drift lower and obviously for the right reasons as you back away from some of those unprofitable business opportunities.

So now we're down to I believe a run rate of $55 million. Wanted to just get a sense of how much of that is related to further action moving away from some of those unprofitable opportunities versus maybe what you're seeing with respect to consolidation in the marketplace and you're just taking proactive measures to be cautious in front of potentially some spending freezes, et cetera. And just wanted to see then finally if you think that this is sort of the bottom. This is the end in terms of where that business finally settles out? That's my first question.

Yes. Answer to the first question is yes. We proactively would choose not to bid for the continuation of business which is not profitable to our standards, to our margin standards. Typically, those are more commoditized products such as DOCSIS 3.0, Gateway or a low end 11 AC routers or (inaudible) and below mobile hot spots.

So when those contracts come up for a rebid for continuation, we basically would walk away. So if you look at our latest corporate presentation that we just posted online versus the previous ones, you could find out which account we walk away from. But then on the other hand, we are absolutely going to continue to be in what we call the technology forefront such as DOCSIS 3.1 such as Cat-9 Mobile Hot Spot and of course, we'll push really hard our proprietary technology such as Orbi and Arlo into the Service Provider revenue.

Now, as far as the $55 million, we believe that's good business and that's why we believe that $55 million level would last through our next year. Now whether after that is going to go down further or is going to go up, it really depends on how fast, you know, our Service Provider customers are going to adopt a new technology that we're pushing. We would love the whole world to adopt to the Cat 15 that we demonstrated two weeks ago in Hong Kong that shows one gigabit download over the air wirelessly over 4g (inaudible). We would love the world adopt on Arlo and Orbi.

If that's the case, we expect that, we could step up again on Service Provider revenue. But of course, if the adoption of those leading edge technology is delayed, then there's a possibility that it would step down further. However, the good news is that you know, our (inaudible) carrier business has been growing very strong and we've already stepped down from about $150 million a quarter to a $55 million quarter, and we've been able to offset that by carrier. I don't believe we'll step down from $55 to $0.

I think we're pretty confident that we would be able to manage this piece of the business as was the overall business, very effectively going forward.

Okay and then a follow-up. It is more just from personal experience. I'm trying to get a better understanding of the overall home automation market and specifically as it relates to some of the announcements by Apple with Home Kit. Correct me if I'm wrong but Arlo's not participating in that to date, is that correct?

Correct. Because it takes time to integrate into every single platform because there are so many competing platforms out there. Today we have integrated into smart link, we have integrated into IP. We have integrated into Xfinity. There are so many of them. We will eventually to all of them but one at a time. We have committed openly that we'll integrate to Home Kit to the other platform as well.

I guess my question is more broader in nature in the sense that as you look at that market, is that the strategy that you guys will play just integrate with all of them and then as standards progress, you know, maybe there will be one that dominates over time?

Absolutely right. Absolutely right. It is so early, we don't even know who's actually going to win. For example, you still have Amazon which is trying to push the Alexa and then you have Google. There are so many people in contention. We just do not want to recruit anybody.

Okay. And then just on pricing, it seems like pricing on Arlo has been pretty stable. Any sense on how we should think about the camera opportunity over the next 12 months?

As we introduce newer camera, for example, the Arlo Pro which is about I would say a 30% to 40% premium over the existing Arlo. You definitely should see an ASP increase on the camera side over the next 12 months.

And, you bet, we won't stop at Arlo Pro. We will have more.

Okay. Let me squeeze one more in. ASPs, one of the key parts of the story is ASPs have improved in a market you wouldn't think that you would see ASP improvement. Where are we with respect to 12 maybe months ago?

Well if you look at simple thing as you divide the number of units we ship over the revenue we report, our ASP has grown roughly about 8% year-over-year. Of course our objective is to continue that path.

Okay. Great. Thank you.

Sure.

Thank you. Our next question comes from the line of Tavis McCourt with Raymond James. Please, proceed with your question.

Hey, thanks for taking my question. First, a couple of housekeeping for you, Christine, then further ones for you, Patrick. Christine, can you just give the components of free cash flow, the cash flow from ops and the CapEX in the quarter?

Cash flow from operations is $42.4 and CapEX for the quarter is $1.9 million.

Great. To give us a sense of the mix in the retail business at this point because there's been a lot of growth in Nighthawk and Arlo the last couple of years, are we to the point on a revenue basis in Q4 where if you want to say kind of your newer brands, Nighthawk, Arlo, whatever little Orbi will contribute, thank is that over 50% of retail now?

Absolutely. If you add up all of the Nighthawk plus Orbi plus Arlo is absolutely the majority of the retail sales.

Got you. And then a follow-up on the Service Provider Business. You said the contribution margin was low teens this quarter, Christine. Can you keep it at that at the $55 million level or will that take a step down?

No, absolutely. We're going to keep it there and make that as profitable as we can.

Got you.

And we've kept it there for five quarters in a row.

Yes. The Q4 guidance, does it include any revenues from unannounced products and should we still expect a new product category launch or announcement later this year?

The big announcement of product that we have scheduled will not have significant impact because I mean there's very few selling days after the announcement. But the three products I specifically discussed just now would certainly have big impacts on Q4 revenue which we have taken into account.

Got it. And then last question I think, EMEA is down quite a bit year-over-year the last three quarters but obviously there's some Service Provider issues going on there. If you were to look just at retail and commercial, does the EMEA business more closely match the Americas or is it challenged even in retail and commercial?

They match pretty closely to America if you take the carrier business. Europe is a very strange place for carriers because they pay so much for spectrums. They are strapped for cash. So they're not the technology adopters. They are the technology laagers. And because of that, they only buy commodity products and as you see, the struggle of (inaudible), Ericsson. The Service Provider Business is just not there. We practically checked out almost all of the Service Provider Business in Europe.

Okay. So we look at the product drivers of your growth products overall, they're working as well in Europe as they are in America.

Absolutely. Europe is fantastic. The Arlo has took the market by storm in Europe.

Good deal. Thanks a lot.

Sure.

Sure.

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

Hi. Thanks for taking the questions. Could you talk about the product mix here because I'm looking at how you guys performed in Q2. I'm looking at Q3 and what the deltas were in the different segments. To me, it almost looks like there was some either promotions or some sort of pricing mix change between the two quarters because of where operating margins and gross margins ended up.

What's the question?

That was the question. Could you explain if you're promoting heavily more? It seems like there is a pricing mix that occurred to a negative factor in Q3 versus Q2.

You mean from what angle you see gross margin is less? What do you mean?

Well, yes, so if i look at what you reported, your 100 basis points lower sequentially on gross margin.

Oh, okay. So, if you're talking about gross margin, primarily Q3 is a more heavily promoted season. So you have the back to school promotion and that affects the gross margin.

Then also really looking at the bottom line, Hamed, when you look at the growth in retail Q3 over Q2 and commercial was relatively flat. Retail is a bigger piece of the pie there and then as you get to the bottom line, you know commercial business is more profitable.

Correct.

That's probably what you're looking at.

Yes. And then I'm just trying to lead into the Q4 guidance. Are you going to plan the same kind of level of promotion?

Q3 and Q4 are both heavily promotional quarters. You have black Friday, cyber Monday and the two weeks that surround that. It will be as promotional as Q3.

Actually even more.

Maybe a little bit more. As we kind of mentioned earlier, commercial has less selling days because nobody buys much on the commercial side between Christmas and New Year's.

Okay. My other question is as far as Q4 goes, sequential growth in retail, 15% growth, is that all coming from Nighthawk and Arlo or is there a particular product you're counting on for the quarter?

Well actually beyond Arlo and Nighthawk, there's Orbi as well. One more weapon, Orbi.

Do you have the orders in hand from retailers that give you confidence it's going to move the needle from a factor standpoint?

Orbi has been on the market. We've been watching the POS on a weekly basis so we know how it does.

And then my other question is as far as the Commercial Business Unit goes, you've been talking positively about it and it sounds like everything has traction but it is not showing up in revenue. Is there a reason why that's happening?

I think our revenue is growing more than 10% year-over-year on the CBU side.

Sequential, nothing is really happening though.

It is not sequential. You have to compare quarter-to-quarter because the main growth is in one quarter in Q1 and then you go from there. But it doesn't measure on a sequential basis. It is more on year-over-year basis.

But year-over-year last year you guys were struggling. There was a lot of restructuring going on. This year, it should be higher anyways because everything is in place.

Yes. That's why it has grown double digits. I don't think any of our commercial competitors, look at Cisco or Juniper, are growing that kind of rate.

Okay. All right. Thank you.

Sure.

Thank you. Our next question comes from the line of Ryan Flanagan with the Buckingham Research Group. Please, proceed with your question.

Hi, guys, thanks for taking my questions. I want to ask about competition. We saw new entrance in the mesh space and your typical vendors on the routing side. Any changes you've seen in the landscape?

Clearly as you mentioned with some new entrants in the market especially on the home Wi-Fi mesh, there are setups by Euro and Luma. There are some established players such as Ubiquity. Then you have (inaudible) coming into the market like Google with the Google Wi-Fi.

So clearly in Q4, we'll have a more competitive market. So far, just based on the existing set of competitors of Euro, Luma, Ubiquity, we've got validation from end users who actually wrote reviews on Amazon and on Best Buy as well as from technical review such as (inaudible) such as PC Magazine which all gave us thumbs up which all said that we are miles ahead of our competition.

As a matter of fact, just yesterday, PC Magazine gave us the Editor's Choice among all of the Wi-Fi mesh systems. We feel pretty good.

That's a good early read. I wanted to ask about Arlo. Lapping a tough compare there. As you anniversary things here in the holiday season. Do you expect the Arlo Pro to offset some of that or any read on demand would be great.

Absolutely Arlo Pro will help to continue the growth path. Clearly you cannot have a product that would just last forever and Arlo has been on the market for six quarters. So it's time for something new to help him out and Arlo Pro is a very welcoming addition. The upgrade is just humongous. Much bigger angle view, two-way audio, rechargeable battery, and significantly faster motion detection.

All of these are significant upgrades and we do believe with just a 40% premium, customers will flock to it. Also it will help us to attract some newer customers because there are a bunch of customers who want two-way audio, who want rechargeable batteries. They don't want to buy batteries anymore. Those are new customers we believe we would be able to capture. So we are very confident that with Arlo Pro joining the lineup, we'll continue the growth path of Arlo.

Got it. Okay. The last one for me is just on the buy back. No repurchases in the quarter. A lot of this is out of your hands, up to the Board. Is this in effect to the stock price or another use of cash? Any details around that would be great.

I would just say we've always said we're opportunist, on our buy back and you know, we met with the Board. We just didn't buy any stock back in Q3. But we do have that $1.9 million on an open buy back and we'll continue to be opportunistic. We're very much looking for some other ways also to spend our money to strategically deploy that cash to help the business grow, be it buying some technology or buying a smaller company or something. So we're looking on both fronts.

Thanks a lot.

Thank you. Our next question comes from the line of Kirk Adams, with Rosenblatt Securities. Please, proceed with your question.

Hey, thanks very much. A lot of the questions have been answered but just two product questions. First on Orbi, I might have missed it but is it worldwide distribution already on Orbi or just in the states?

It is currently just in the states. We just introduced it and announced it in China this week. And we'll have it available in China soon and then the rest of the world will be toward the end of this quarter.

Excellent. When it first started coming out, it seemed like there was a lot of the stores that I called, one at a time. Has the amount of Orbi they're getting into the stores and things increased over the last couple of weeks?

Yes. We're ramping as fast as we can in production. We just cannot satisfy everybody. You expect to see much better availability as the weeks pass by.

Great. Secondly on Nighthawk 10x, and 802.11ad. It is interesting positioning it with the media server part of it and everything. But what other devices? When do you perceive a transition from ac to ad? What's the time frame for that where you guys have always kind of been out on the edge of this. And when does everything come to you?

As a matter of fact, 11ad is serving a special purpose. The (inaudible) committee actually have aa, ab, ac, ad, ae and so on and so forth. So ad is specifically for line of sight. Really high-speed transmission. So it is not for generic use. 11ad is for line of sight streaming particularly for uploading cell phone 4k video over to let's say Amazon cloud or doing video gaming because you really don't want to do video gaming with tethered. However, you cannot use 11ac either because latency will make you feel nauseous.

We're gaming using 11ad in line of sight is great. But for general, ordinary people who just would like to have a big Netflix download, not in line of sight but in the bedroom, the next generation is actually 11ax. So you ask why you skip go straight from 11ac to 11ax. Actually they have used up all of the alphabets in between with various purposes but 11ax is the next big thing in Wi-Fi which we will expect to start to hit the market sometime in the second half of next year. That would create another upgrade cycle for Wi-Fi.

Great. I guess I haven't kept up with my electrical engineering classes. Sorry about that.

11ax is the next one. Next they will start with b. Ba, bb, bc...

Great. Thank you, Patrick.

Sure.

Thank you. Our next question is a follow-up question from the line of Matt Robinson, with Wunderlich Securities. Please, proceed with your question.

Thanks. A little bit more on the commercial. Christine, you suggested you might have had a little bit more than a normal quarter of volume in the second quarter yet distribution inventory was down a bit sequentially, down further this quarter. Was it because of all of the products that were released in April around the time inter route? Is that part of why the strength was so great in the second quarter? It seemed like that wouldn't have happened quite that quick given that you're part way in there when those products went out.

How should we look at the dynamics there especially with the channel inventory coming down? Is it proper to assume that Amazon is entirely in the retail or do you cut out the commercial part of Amazon and put it into the us distribution?

No. Amazon is all in the retail side and we are selling more and more products on the retail side. And you will see that distribution go up and down a week really easily from week to week. We measure it at one point of time every quarter.

It definitely moves around during the quarter and as you can see, at quarter end. I just think the strength on commercial side is we have a little bit of flat sales really between Q3 and Q4. There is a lot more pushing into the channel. We're very much pushing hard online to continue to sell that. Looking at year-to-date growth, I think we're 7% over the prior year and quarter on quarter, I think it is up close to 15% when I look at that number.

Patrick, when you think about Orbi and Nighthawk, in the past, we talked about larger homes for the Orbi type of thing, what's your sense on how they might cannibalize each other?

No. I think they complement each other. It depends on your applications. Let's say if you have a gamer, you're a media enthusiast or you live in a smaller home such as a condo or an apartment, clearly the Nighthawk is more than enough to cover the entire space and will offer you the extra advantage of super high speed when you are closer to the router, especially to do the gaming, you want to really upload 4k video from your laptop or from your iPad or whatever.

So I would say for those people, they would still continue to prefer Nighthawk. However, if you are just an ordinary user, Wi-Fi to do Netflix or to do Facebook, Instagram and all of that but you want to be able to do it anywhere in your house and your house is over 2,000 square foot and you actually even want to do it in the front yard or the backyard, you want to sit in the pool and be able to stream Netflix while you watch your kids swimming in the pool, you absolutely want Orbi.

Of course, you have enough money, you could buy both, you know. You could buy Nighthawk x10 as your key router and plug an Orbi system into that router, then you have the best of both worlds. Now, that's a $1,000 proposition. We love it.

Sure. It sounds like then there might be a little bit of an opportunity for an ASP uptick with Orbi taking some of those largest installations. What's your sense on the ability to distinguish your tri band versus the dual band when you have Ubiquity coming in at a significantly lower price with the dual band product?

It is pretty simple. Basically, what we see is that when you have a tri band is like you have a three lane router where you have one lane is for what we call the bus lane then you have the two lanes which will be one is going up, one is coming down. That's a tri band.

So the ordinary cars could flow easily without affecting the bus traffic. However if you have a dual band, you just have a two-lane road where the bus is going to be mixed up with the cars so of course your bus traffic will be very slow. So are the cars. That's pretty much the difference. We measured it, we beat, hands down, anybody our there on dual band, especially when multiple devices are involved. It is not even close.

So you think the retailers can sort that metaphor out?

Oh, yes.

You've seen that already?

We have always been touting the tri band technology. It is verified by all of the Editor's Choice and all of that kind of thing. People look for that.

Yes, understood. Christine, can you tell me what depreciation was, third quarter depreciation?

I would say depreciation and amortization combined are around approximately $8 million.

I was looking for depreciation stand alone. I'll follow up with it later.

More or less half of that. I can get that number for you later.

Thank you.

Okay.

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

Thank you all for joining today's call. We hope that you can all join us in San Francisco for our 2016 financial analyst day where Christine and I will be joined by Executives of our various businesses to present NETGEAR's strategic initiatives. At the event, we will also announce our next exciting new Arlo product category. If you have not already received an invitation and would like to join us, please reach out to NETGEAR investor relations for more details. In closing, we have lots of new products hitting the market as we speak that we are very excited about. And it has certainly been an exciting 2016 thus far for the Company and we look forward to a strong finish to the year. Thank you, everyone. Talk to you all in February 2017.

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