NETGEAR Inc (NTGR) 2016 Q4 法說會逐字稿

Greeting and welcome to the NETGEAR Inc fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chris Genualdi, Senior IR Manager. Thank you, please begin.

Thank you, operator. Good afternoon and welcome to NETGEAR's fourth-quarter and full-year 2016 financial results conference call. Joining us from the Company are Mr. Patrick Lo Chairman and CEO and Ms. Christine Gorjanc, CFO.

The format will start with a review of the financials for the fourth quarter and full-year provided by Christine. Followed by a detailed commentary on the business provided by Patrick. Finishing with first quarter 2017 guidance provided by Christine.

We will then have time for any 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 would advise you that today's conference call contains forward-looking statements.

Forward-looking statements include statements regarding expected revenue, operating margins, tax rate, 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 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 today's 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 and thank you everyone for joining our call today. 2016 was a record-breaking year for NETGEAR. It was a record year for the Company in terms of non-GAAP operating profit and non-GAAP earnings per share.

Driven by all-time highs in revenue and contribution profits from our retail business unit. Our commercial business unit also achieved its highest contribution profit in the past five years. In addition, the service provider business unit despite a year-on-year revenue decline of 35% grew it's contribution profit by an impressive 14%.

We had not one but several hit product introductions in multiple growth categories across our product portfolio. We also gained significant share in the key markets that we serve by providing truly innovative solutions that set us apart from our competition. Finally, we exceeded all of the financial targets for the full year that we laid out at the analyst day in 2015. So, I would like to take this opportunity to thank all of our customers, suppliers, employees, and shareholders for helping to make this possible.

Turning to the financial details for the full year of 2016, NETGEAR net revenues were $1.33 billion which is up 2.1% compared to full year 2015 revenues. Our retail and commercial business revenues combined grew 19.9% year over year in 2016 nearly doubled the 10% target that we provided at our 2015 analyst day. This has more than made up for the expected revenue decline of our service provider business unit which shrank but 35% during 2016.

Non-diluted EPS for the full year 2016 was $3.10 which represents an impressive 39% year-over-year increase from 2015. This marks the first time we surpassed a $3.00 a share for a fiscal year in the Company's history. Results for the fourth quarter of 2016 came in above the high end of our guidance driven primarily by the superb performance of the retail business unit. Overall, NETGEAR net revenue for the fourth quarter end of December 31, 2016, was $367.9 million which is up 2% on a year-over-year basis and up 8.7% on a sequential basis. This is an all-time record and quarterly net revenue for the Company. The year-over-year growth was achieved despite a challenging 48.3% year-over-year decline in the service provider business revenue during Q4.

NETGEAR net revenue by geography continues to reflect our ongoing strength in North America. Net revenue for the Americas was $253.7 million which is up 9.4% year over year and up 12.6% on a sequential basis.

AMEA net revenue was $69.2 million which is down 20.3% year over year and up 15.3% quarter over quarter. Our APAC net revenue was $45.1 million for the fourth-quarter of 2016 which is up 6.8% from the prior year's comparable quarter and down to 15.3% quarter over quarter.

For the fourth-quarter of 2016 we shift a total of approximately 5.8 million units including 4.7 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 1.8 million units for the fourth-quarter of 2016. The net revenue split between home and business products was about 79% and 21%, respectively. The net revenue split between wireless and wired products was about 76% and 24%, respectively.

As I focus on the Q4 non-GAAP numbers I would like to remind everyone that the reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today. Non-GAAP gross margin in the fourth quarter of 2016 was 30.9% compared to 30% in the prior-year comparable quarter and 31.3% third-quarter of 2016.

Total non-GAAP operating expenses came in at $71.6 million which is up 3.7% year over year and up 6.6% sequentially. While we always manage our operating expenses carefully we are continuing to invest in R&D for the key areas of the business that will drive growth for the overall Company. Our headcount increased by net one person to 945 during the fourth quarter. We expect to continue to add additional headcount in key areas of our business during the first quarter of 2017.

Our non-GAAP R&D expense for the fourth quarter was 6.1% of net revenue as compared to 6.2% in the year ago comparable period and 6.2% of net revenue during Q3 2016. Our absolute dollars spent in R&D approached record levels in Q4 2016 and we expect to continue at this elevated level as we attempt to distance ourselves from our competition from both hardware and software differentiation.

Our non-GAAP tax rate was 30.2% in the fourth quarter of 2016. The Q4 tax rate was lower than expected due to a favorable trueup reconciliation for the full year.

Looking at the bottom line for Q4 we reported non-GAAP net income of $29.9 million in non-GAAP diluted earnings per share of $0.88 per diluted share with the latter being a new record for the Company.

Turning to the balance sheet we ended the fourth-quarter of 2016 with $366 million in cash. For the fourth-quarter of 2016 we used approximately $19.8 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 full year we generated approximately $104.2 million in free cash flow.

We continue to focus on optimizing the business and generating cash providing operational flexibility, the ability to make strategic acquisitions, as well as the capacity to opportunistically deploy cash to enhance shareholder value. In Q4 we spent $15 million to repurchase approximately 299,000 shares of NETGEAR common stock at an average price of $50.17 per share. Which resulted in no benefit to non-GAAP diluted earnings per share for the quarter.

Since the start of our repurchase activity in Q4 2013 we have repurchased approximately 9.5 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 33.9 million shares at the end of Q4 2016. 2.5% higher than the 33.1 million share count in the fourth-quarter of 2015. We have approximately 1.3 million shares left in our authorized buyback program and we will remain opportunistic buyers of our common stock. During the quarter we made a very strategic acquisition to strengthen our internal capabilities in image analytics and machine learning, which is critical to maintaining our lead over our competition in the smart devices category.

Turning to the results our three business units, we are very pleased to report that the retail business unit for RBU generated an all-time record net revenue $241.2 million during the quarter which is up an impressive 22.1% on a year-over-year basis and up 24.2% sequentially. The commercial business unit or CBU also had a very strong quarter generating net revenue of $75.3 million for the fourth-quarter 2016 which is up 17.9% on a year-over-year basis and up 2.6% sequentially.

For our service provider business unit or STBU net revenue came in at $51.4 million for the fourth-quarter of 2016. This is down 48.3% year over year or about $48 million from the prior-year and down 27.4% on a sequential basis. I'll now turn the call over to Patrick for his commentary after which I will provide guidance for the first quarter of 2017.

Thank you, Christine. Hello, everyone. Thank you all for joining us today.

Our fourth quarter of 2016 results mark a very strong finish to what has been another successful year for NETGEAR. We generated the highest quarterly net revenue in Company history driven primarily by the success of our retail business unit.

On a full-year basis the retail business unit hosted its highest annual revenue and contribution profit in Company history. Additionally, the commercial business unit delivered its most profitable year in the past five years.

The product directions that we have been taking in the past two years both in smart devices and in whole home Wi-Fi coverage are starting to pay off. We continue to stay ahead of the competition in whole home Wi-Fi coverage by consistently providing the best Wi-Fi router on the market with our Nighthawk line. The Nighthawk brand has played a critical role in helping the Wi-Fi router industry grow ASPs over the last four years. With the introduction of the Nighthawk X10 in Q4 2016 we are taking ASPs up to $499, our first for the industry.

The X10 has been embraced by gaming and streaming enthusiasts because all the software features and hardware (inaudible) are packed inside of it. We are the undisputed number one Wi-Fi router provider in the North America retail market and we continue to gain share. We followed up that success in the late Q3 of 2016 with the introduction of Orbi, the Wi-Fi high band mass system for homes.

Orbi helps customers enjoy super high-speed Wi-Fi in every corner, in every floor of their house as well as their front and back yards. It has been reviewed by numerous technical experts in media and has been rated as the best in speed and coverage over any other offerings in the market. In the short five months since its introduction, Orbi has achieved the number one market share position in the home Wi-Fi mass category despite fierce competition.

For the smart device market our Arlo Pro camera which was introduced in Q4 2016 redefines the game for home security cameras. With a one camera kit starting at $250, a new high for single camera ASP, it provides unparalleled ease of indoor and outdoor deployment with completely wire free operations coupled with super high quality video and two-way audio. Best of all, it is now powered by rechargeable batteries significantly reducing the cost of ownership. With Arlo Pro we have been able to distance ourselves from the competition.

As of December 2016 we had more share than the next two largest competitors combined in the US IP camera market. Demand for all three new products Orbi, Arlo Pro, and Nighthawk X10 exceeded our expectations during the 2016 holiday season. Combined they drove our Q4 revenue about the high end of our guidance and set the foundation for further success in 2017.

Turning to commercial, we saw a strong Q4 performance across our SMB portfolio specifically with our 10 gigabit switches and our [RecMan] new storage. We were able to achieve historically new high watermarks in, inmarket sales of over all switches and specifically well managed switches during the quarter.

Our switched leadership is premised on 10 gigabit power over ethernet and flexible management and deployment. The introduction of easy mount [half] with double power budget power over ethernet switches in 2016 has laid the foundation for future success in this category. Groundbreaking products propelled NETGEAR to a blockbuster 2016. We are keeping up the momentum in 2017 with a robust product pipeline.

To summarize, NETGEAR has been reaching new heights. All business units are delivering compelling contribution profit dollars. The fourth quarter greatly exceeded our expectations. We continue to gain share in the key markets that we serve and we had a stellar 2016.

Looking into 2017, we continue to feel confident about the targets that we set back in November 2016 at our analyst day. We believe that we can grow the combined RBU and SPBU revenue by 10% in 2017 while maintaining SPBU revenue in an approximately $55 million per quarter run rate. As such, we will be able to grow our top and bottom lines again in 2017. While we are now enjoying the momentum of Orbi, Arlo Pro, and Nighthawk X10 for RBU, we believe that the new products we have just announced or products we will introduce will propel us and the Wi-Fi and smart devices market to new heights in the second half of 2017.

As we mentioned, at our analyst day, we have always experienced a seasonally weaker first half of the year and this is even more pronounced given retails dominance in revenue as well as our unparalleled success in the fourth quarter. We believe that the North America home Wi-Fi market will continue to grow in the high single digits for 2017 while the North America smart devices market will continue to grow North of 40%. We also believe that we will continue to hold or gain shares in both markets in 2017.

A few key products announced will they the foundation for our success in 2017. This new set of products include the Docsis 3.1, Nighthawk cable modem; the M1 gigabit Nighthawk 4G LTE mobile router; the Arlo Baby; Arlo Go; and the NightHawk AC 2300 router. Beyond these there are even more new products not yet announced for the Nighthawk and Orbi families coming in the months ahead and in the second half of the year. On top of that you can expect a new Arlo category to be introduced in 2017 that is distinct from cameras.

On the commercial product front we will continue to innovate in form factor, web management, speed and user experience. The unveiling of the Nighthawk switch at CES in January garnered a lot of interest from gamers and media enthusiasts. The new experience managing the Nighthawk switch from your mobile phone is the first in the industry. We will follow up with many new introductions catering both to home and business users throughout the year with enhanced mobile experience.

As the early success of our two new 12 bay rackmount storage products show, we can continue to excel in business storage solutions by focusing on high-capacity, robust multilevel data protection solutions. Overall, while we are going through the seasonally slower first half we are confident that we will again reach new heights in quarterly revenue and profit in the second half of 2017 and in doing so accomplished our annual financial target. I will now turn the call back over to Christine for our first-quarter guidance.

Thank you, Patrick. As Patrick has said our RBU revenue is growing faster than the rest of the business thus making our seasonality more pronounced than before when CBU and SPBU combined presented a larger portion of our revenue. Additionally, the seasonality for Arlo IT cameras is more pronounced than it is for our home networking products.

This seasonality results in a sizable sequential decline in retail revenue from Q4 to Q1 which we also saw last year. I would like to make it clear that the seasonal decline does not indicate weakness in the retail business for the full year which is stronger than ever as evidenced by RBU's record 2016 fourth-quarter results. To ensure our continued market leadership we are not going to slow down our R&D in the first half of the year despite the seasonal downtick in revenue.

We believe that differentiated new products continue to be the foundation for our financial success.

For the first quarter of 2017 we anticipate revenue will be in the range of approximately $300 million to $315 million. First quarter GAAP operating margin is expected to be in the range of 6.3% to 7.3% and non-GAAP operating margin in the range of 9.5% to 10.5%, our GAAP tax rate is expected to be approximately 37% and the non-GAAP tax rate is expected to be approximately 34% for the first quarter of 2017.

Lastly, I would like to reiterate our guidance for the full year 2017 that we expect to grow revenue for the combined retail and commercial business units 10% year over year. We expect to achieve an operating margin of 11% to 12% for the full year of 2017 and expect to deliver year-over-year EPS growth for our shareholders. Operator, that concludes our comments and we can now take questions.

(Operator Instructions)

One moment please while we poll for questions. Thank you. Our first question comes from the line of Matt Robison with Wunderlich, please proceed.

Thanks for taking the question. Christine, should we expect DSO and channel inventory to decrease in the first quarter given your guidance? And also, in your department maybe if you could comment on how much you paid for the acquisition and how much remains to be paid. And then I've got some follow-up questions for Patrick.

Sure. DSOs, if you look back in history, they always pick up in Q4 and we do give some of our large customer seasonal dating terms, I believe you'll see that come back into the normal range as we go to Q2, Q1 forward.

Secondly on the channel inventory I think we think that's healthy on both sides. Those numbers go up and down a little bit depending -- we calculate them on the last six weeks of sell through and we feel like, from both our inventory standpoint and in the channel, inventory is in a good spot. To be honest the more we have the more we can take advantage of some of the opportunistic sales that come along.

I would like to add that because of the continuous pipeline with new products that generally enhances the channel inventory because most of our channel partners do not want to lose out because of stock [out] of the new products which is proven right in Q4. The acceptance of both our Arlo Pro and Orbi and Nighthawk X10 was actually much bigger than originally anticipated. For example, Nighthawk X10 was supposed to be limited distribution but after a few weeks it became nationwide distribution.

Regarding the (inaudible) acquisition we would rather not give specifics for competitive reasons. We are still on the lookout for many other similar strategic small tuck-in acquisitions and we would rather keep it confidential.

I was trying to square the cash flow a little more but I can take that off-line. I was looking at US distribution channel inventory, it went up in weeks, for the first time in a while and I guess any comment on contribution margins on the different segments, also?

I think we basically said in the script that retail had the best contribution process for the year. CBU for the year was kind of their five times -- five-year high. Service providers definitely -- the percentage in that has been in line with where we've been at for years so we feel like that helped us grow that profit significantly over 2015.

Patrick, what kind of things should we be looking for in terms of commercial products coming out? You had a ton of multi-gig and 10 gig products come out last year. What's the market looking for now in addition to what you've already done?

Well, clearly from those that are already known entities, the innovation that we did last year was 10 gig, double budget POE, as well as what we call the half-width switches, as well as the easy mount and the click switches. They are already out in the market. It will continue to strengthen our offerings in those various aspects.

We do expect that our competitors probably will come up with products to chase us on those areas. However, what we have introduced in CEF is a new thing in the market and we are going to really accelerate the introduction of that kind of switches, which is a switch that you could manage from your mobile phone. The Nighthawk switch is the first in that series and you'll see more of that and that's a first in the industry.

We set the industry in multiple ways in the last 10 years. First by introducing web managed smart switches. Then by introducing lightly [web] managed plus switches. Now we are introducing this mobile experience switches which will be another new driver of growth. That clearly will be a significant new category of switches that we would like to introduce to the market and expand it.

Thanks.

Thank you, Our next question comes from the line of Rob Cihra with Guggenheim Partners. Please proceed.

Hi, thanks very much. One Q4 question and one for the full year guide, if I could.

For Q4 retail obviously, revenue growth was strong and you highlighted Nighthawk, Arlo, and Orbi. Is there any way of getting a little more detail in terms of contribution from Arlo Pro, is it in full swing?

Orbi contribution in Q4 and then also Arlo Go, any update in terms of readying that timing, channels, that sort of thing? And I have a follow-up.

Yes, Arlo Pro is definitely a hot product. For competitive reasons we are not likely to give a proportion of Arlo Pro versus Arlo but you could easily go to Amazon and check on the sales ranking of Arlo Pro versus Arlo and you could probably see the relative performance. Given Arlo Pro is a higher ASP the more Arlo Pro we sell, we will definitely enhance the top line of Arlo overall.

With Orbi, we introduced Orbi toward the tail end, probably the last week of Q3. Q4 was the first full quarter of our revenue for Orbi. Clearly we are very encouraged by the results. Now, I mean we are not the first in the market and there were a few other small players such as Euro and Luma, plus a whole bunch of others like Luma ahead of us.

On the other hand, in the short five months, actually four months plus a little, we have already surpassed all of those and despite that Google coming into the market very strong with Google Wi-Fi which is in the same category, we have achieved number one market share. Now, clearly, as we mentioned the market of Wi-Fi will continue to grow in the high single digits that includes the normal Wi-Fi router, Wi-Fi cable gateways, as well as this Wi-Fi mash.

We are pretty confident that we will continue to hold share if not gain share. So, that's how we look at it. Orbi definitely helped us to significantly be a strong participant in the overall Wi-Fi market and continue to be the leader over there.

Given the fact that the market is expanding, or expanding because of Wi-Fi mash and we are not a number one shareholder in Wi-Fi mash, we will be losing share overall. The fact that we continue to be number one, even in the new category helped us to hold share. That's how we view that.

So, Arlo Go is a little bit more complicated because it involves LTE networks so it needs to get certified by the operators. We expect the certification in North America both from Verizon and from AT&T. It should be completed at the end of Q1. So, you should be able to see sales of that in Q2 onwards.

Great, thank you.

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

Hey, guys. Thanks for taking my question.

Let me apologize in advance because a lot of this you've probably answered already. I wasn't be able to be on the prepared comments.

It looked like in the quarter to quarter your deferred revenues went up quite a bit. Was there something specific that was related to?

Normally in Q4 based on normal delivery terms and that, it's up a little higher because some stuff shuts off. And then there's some stuff in transit.

So we actually did a [proof of] delivery, and then Arlo service we carved out a little bit of that and it is taking over a routable period. And that's going a little bit too.

Okay, but if I look at last year's Q4 is pretty flat, this year's Q4 deferred revenues are up $11 million. How much of that is the service related to Arlo related versus the timing of shipments?

We don't break it out but I'd say Arlo's starting to grow a little bit and we will look into the future on that, but a lot of that is shipments when it comes to Q4.

And you probably addressed this before but for my edification, what should we think of as the run rate for service provider in 2017?

We talked about it, it should around $55 million a quarter but then again, of course, it's a lumpy business. So some quarters will be lower than that and some quarters will be higher than that. Overall the year we expect it to be somewhere around that $220 million plus or minus.

Okay, got it. On gross margins, they're up year-over-year 90 basis points on a non-GAAP basis.

But, retail is up a lot as a percentage of the mix and if you told me retail was going to be so strong I probably would have said gross margins would be a little bit higher. Is there anything holding gross margins back this quarter or is that still the impact of seasonal price discounting on some of the older product line?

To be honest, I think it's seasonal price discounting on the retail business in general and also there's a lot of marketing. We have a lot of new entrants in competition, big companies, big US companies. We're doing a lot of very specific marketing, social media, radio ads and that -- add words, everything. Really, the marketing is our most promotional quarter and to get a lot of that revenue that comes with a high promotion especially looking at the whole black Friday, cyber Monday week. There is a lot of promotion going on there.

Is a lot of that a contra revenue, is that why it hit gross margin?

Yes.

A lot of the channels [manned], like putting up a (inaudible) in Best Buy or Costco, running search ads inside Amazon; all those are contra revenue.

Last question. As we look toward Q1, I can look back at last year's Q1 and see that something unusual must have happened positively to the gross margin level. Can you remind us why gross margins were so high in the year ago period?

A year ago if you look at the detail into the 10-Q you will see.

We were very profitable in SPD in Q1. It was a sweetheart deal that we shipped. We don't think that's repeatable. Somebody wants something really bad and we somehow capitalized on the market.

I remember you mentioning it at the time I just hadn't written it down. Thanks. I appreciate it.

Thank you.

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

I wanted to get more granularity on the guidance. On your remarks you said about the retail business unit declining sequentially. If I look historically it has been usually around 80% or 20% decline from the Q4 period. But if I take that into your commentary, what are you expecting for the other business units because your guidance range is still higher than what it would seem like it should be?

Couple of comments I would make on that. Retail is mainly cameras add a little bit, too, potentially to 20%. So, cameras are a little bit more seasonal from a Q4 to Q1.

You notice, I believe, last year the CBU business went up. The year before it went down. So it's usually a few points down normally on a seasonality basis and then service provider's lumpy, as we've always said.

Approximately $55 million, if you can see it wasn't quite $55 million this quarter and that moves around. Basically we are guiding with what we see in front of us but the big differential is in revenue coming down all driven by the retail -- just the normal seasonality and then added a little bit by the cameras.

Yes cameras, especially, is very seasonal. Camera sales over the holiday season is super high and then come into Q1 it drops off pretty quickly. Like it or not, the thing is, when we calculate revenue we have to take into account returns. Right?

People by a lot of cameras over Christmas, some of them get returned. They become negative in Q1. That's why you get a higher camera business you actually have a more pronounced drop off from Q4 to Q1.

To follow up on the camera comment, are you seeing an increase or any kind of momentum as far as customers rolling on with more cameras going into Q1?

Absolutely. On a year-over-year basis, definitely but not on a sequential basis because a lot more people buying cameras over the Christmas holiday season and then it [quiets] off in Q1. That drop off is more pronounced than the normal home networking.

Last year as you rightfully pointed out when home networking is dominant versus Arlo -- the drop off in Q4 to Q1 is more like 20% and this year is more pronounced than that because Arlo is definitely a bigger portion of the RBU revenue. So, that's why you see a more severe drop off from Q4 to Q1. However, the seasonality for cameras after the drop off in Q1, then it will start to grow again from Q2 all the way back into Q4 again.

Changing topics here, what is the risk of R&D spending here? I know you like to invest in the business, but if you keep investing more and more your operating margin goal might become a little more difficult. How are you going to manage that in the second half of the year if you are already at a starting point now from the operating standpoint?

One thing we are pretty good out is managing expenses at this point. With that the seasonality we believe that we have plans to manage this and to achieve our goals and we will stick to that and if different things happen we could just as easily make more revenue and have less. We will make the appropriate adjustments as necessary.

Okay. Last question, as I know the CPU is a small business compared to the rest of the business here, but Patrick, any plans to grow that business substantially? It seems like it's a drop in the bucket compared to the entire market you could size.

Well, I mean, if you look at CBU from a pure topline perspective it might be a drop in the bucket. However, if you look at the bottom line perspective it's pretty sizable, all right. It is certainly not a business to be sniffed at. But you're right.

Growing that business would help our bottom line significantly and clearly we are working very diligently to grow that segment. Now, unfortunately over the last two or three years we have been dragged down by the continuous decline of the storage market. Everybody knows that.

Most people are now using drop box and Google photos and all that. So, the entire storage market is shrinking. So, that really doesn't help us.

Even though our switch is growing pretty nicely every year we still have to counteract the decline in storage. On the wireless [land] side, the same thing. We have not been really growing much because of the competitive nature of the market with a lot of strong competitors such as Ubiquity and Rutgers and to a lesser extent, Aruba.

However, we do believe that going forward while the switch business is becoming a much bigger portion versus storage and wireless land, we do have the ability to grow the overall SNB business. Now clearly, from a full-year 2015 to 2016 we grew nicely on the CBU business, but of course, it's an easy comp, right? But going forward we could continue to grow the CBU business even in a high single-digit or 10%-ish profitability contribution would be pretty significant.

I appreciate it.

Sure.

(Operator Instructions)

Our next question comes from the line of Wooxin Ho of Bloomberg, please proceed.

Thanks. A question on seasonality. I understand the sequential down tick in the first quarter any commentary on the second quarter seasonality especially in retail? Retail has been up 8% in 2016 and 9% in 2015. Should we expect typical seasonal factors or is that the new norm in retail?

What I would say when we look toward Q2, I would say, it could be flat to slightly up. That will just depend on how fast the new products get out of the gate. I would expect flat to slightly up.

Okay. In terms of the full year guide I want to reconcile a couple of things. You guys said 10% for the combined retail and commercial markets.

Patrick, you mentioned that you expect Wi-Fi to be up in the high single digits with the scope of potentially taking share. Plus you have higher ASP's with Arlo and potentially a new product line within Arlo.

Number one, is there something offsetting a better retail growth, I understand the comps are tough. Number two, why can't retail the better than 10% for 2017?

Okay. It is a (inaudible) of mathematics. As you probably know, in our [out of state] presentation our router share is closer to 45% to 50%.

Our hope is to hold or increase shares in that segment as I just commented. However, when the market shifts from router to Wi-Fi mash, even though we're the leader in Wi-Fi mash, we are nowhere near the 45% to 50% market share. So, if you think of the [hot] math we have to deal with, if the market shifts from router to mash, even though we're number one in both cases we could end up losing share overall and we don't quickly get our mash market share through the 45% to 50%. That's the head that we are working against.

We believe that we would be up to the challenge. That's why by going up to the challenge we believe that we can grow the RBU about 10% combined with CBU. Now, given the fact that we say that CBU would be in the high single digits that means implied Orbi has to grow 10% anyway for the year.

We have no further questions at this time. I would like to hand the floor back over to management for closing remarks.

Thank you all for joining today's call. 2016 was a phenomenal year for our employees as well as our shareholders. We entered multiple new product categories, delivered unique solutions to our customers, developed a new exciting stock brands and delivered significant returns for our shareholders with many new and exciting products on the horizon.

We will look to continue our momentum into 2017 and I look forward to updating all of you in April. Thank you.

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