優比快 (UI) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks quarter one 2015 question and answers conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Anne Fazioli. You may begin.

Thank you, Operator, and thank you everyone for joining us today. I'm Anne Fazioli, Vice President of Investor Relations for Ubiquiti Networks. I'm here with Robert J. Pera, Founder, CEO and Chairman of the Board at Ubiquiti Networks and Craig Foster, our Chief Financial Officer. Before we get started, I'd like to review the Safe Harbor statement.

Some of the statements will make during this call constitute forward-looking statements including perspectives on our future financial results, products, market conditions and competition. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on form 10-K with the SEC and in our other SEC filings, which are available on the SEC's website at www.sec.gov. Forward-looking statements are made as of November 6, 2014, and we assume no obligation to update them.

We hope you have reviewed Management's prepared remarks, which are posted as a transcript on the events and presentation and financial information sections of our Investor Relations website at ir.UBNT.com. This call will be a Q&A-only call. Please limit yourselves to two questions and time permitting, we will allow for follow-up questions. Operator, we are now ready for questions.

(Operator Instructions) Pierre Ferragu from Bernstein.

Of course, I'd like to try to understand as much of possible your revenue dynamics. Your service providers revenue were down about 15% sequentially and I was wondering if Eastern Europe and Middle East is everything of that weakness or have you seen also revenues down in other regions, and especially in the US. How did service provider do in the US? And then in enterprise, I was wondering if your Wi-Fi growth was in line with the enterprise number you reported or if actually is there is a ramp up of all the products did contribute meaningfully to growth in the segments. Lastly, on your guidance, you're guiding for flat revenues sequentially and I was wondering if we should expect enterprise to continue to be up next quarter and therefore service provider to continue to decline or if it's more like both segments should be flat sequentially in the context of your guidance. Thanks.

Thanks, Pierre. This is Robert. Normally, I'd let the CFO handle these questions, but I think given the results of the quarter, I want to take a step back and set expectations on the Company and how you look at this Company.

First of all, I want to say Ubiquiti's service provider market is focused on the emerging markets. It's a great opportunity. I think if you look at the internet and the users, two-thirds come from these emerging markets. The penetration for fixed broadband is probably only 10% globally. So, the service provider segment, we see huge runway for this in the future and we think we're in the early innings of the game.

Now, it's no secret that it's difficult to track these emerging markets. From the inception of the Company, we haven't had very predictable, linear sales growth, although the growth has been spectacular and there's going to be ebbs and flows due to things like changing import, import tax environment, currency exchanges, there's vacation and holidays that cause some seasonality. It's very difficult to look at this Company and say, okay, well, they did such and such revenue last quarter and they're down 5% this quarter, and what will they be the next quarter? If you look at from our IPO, I think we've tripled up to this point within three years and my aim is to triple the service provider business again in the next few years. So, I want to say that about the service provider business.

Now, we know there is some unpredictability in the service provider business and one of the things we've done to mitigate that exposure is we've diversified our R&D. We've introduced UniFi, which is our enterprise solution, a few years back and that's growing very fast. We're expanding it and we think it's probably about 30% of our business right now. Long-term, we think it's going to be close to equal split between enterprise and service provider. The benefit of enterprise is it's much more predictable. Even though a lot of it is going to emerging markets, it's less prone to things like seasonality, where installers have vacation or time off and I believe it will bring most stability to predicting our future revenue growth.

Great. Thank you. More specifically on this visibility that you are seeing at the moment. When you establish your guidance on next quarter, how do you get comfort on your service provider? This situation in emerging markets, if I understand correctly, it's war in Syria, the situation in Russia, (multiple speakers) on the rebound. When do think you see things improving and getting back to the nice growth trajectory?

Well, if you look at things like our forum and the level of engagement in traffic and the new customers and evangelism, it's growing very fast. I think the total time spent in active activity on our community is doubled year over year. So, the trends I look at to evaluate the business are all positive. Now, in terms of our reported revenue, which is based on sell-in because our channel is not as complex and don't have the tools necessary to actively capture sell-through, there we're always going to err on the conservative side and by that I mean we want to make sure these operators always have a supply of products to deploy. If you look two quarters back, I think there was a, in my opinion, an overreaction to an inventory buildup. We specifically did that, because if you look at our forum and our community, there has always been complaints about operators worried about Ubiquiti not having stock and their network build outs are limited by stock availability. So I think we addressed those pretty well the past few quarters. I think, like I said, it's hard in the service provider to draw conclusions on quarter-to-quarter granularity, but if you look at from three years back to today, it's been impressive growth and I think when you look at three years in the future, and you look at today, you're going to see at least the same type of impressive growth.

Thanks.

Erik Suppiger from JMP.

First of, just be curious what regions, specifically, were challenging? You had noted Iraq, at the -- on the last earnings call was likely to shutdown. You had mentioned during the quarter that Russia/Ukraine was problematic. This seems to be a lot more pervasive. Where are you seeing the stability issues?

Again, it's hard to draw conclusions based on quarter-to-quarter granularity and specific country issues. You have a mix of issues happening. You have a situation where, maybe in Europe, in July and August, they take heavy vacation days which affect the rate of installations. In South America, you have a changing logistics environment and an import tax environment. So, that could affect the timing of the orders. You have currency exchange rates in different countries where people -- that could affect the timing of the orders.

Finally, we are constantly introducing new products through R&D. These aren't like consumer products where people just go and buy and from day one, there's a takeoff in revenue. In our case, a lot of the operators, they need a period where they adopt the products, they qualify them on the networks, they get comfortable with them and you will see a surge of orders. There's multiple dynamics going on. To look at one thing or one specific country to try to explain a small granularity and quarter-to-quarter numbers, I think is a recipe for drawing false conclusions on the business.

I'm going to consistently say, you have to look at -- especially with the service provider business, you have to look at long-term trends in drawing conclusions and I think the long-term trends have been very good in the past and there's no reason, I believe, they won't continue to be very good in the future.

So what is the relatively flat outlook based on? Is your visibility low right now and you are just assuming a fairly flat regression from here?

Yes. I would say, we've been conservative. When you look at the 1.5 years or 6, 7 quarters, we always beat -- I think for run, we beat expectations. So yes, we want to be as conservative as possible, but I expect in the long-term, which is several quarters or in the next several years, I'm always thinking about how to get this Company from hundreds of millions in revenues to billions and ultimately tens of billions. You can't do that by putting your resources around financially engineering quarter-to-quarter numbers in reported revenue. You do that by -- you've got to really concentrate on R&D and make bets and big bets in R&D and have vision and look at long-term results. That is what this Company is focused on.

Do you feel like there's been any change from a competitive landscape perspective? If not, what gives you confidence that's not one of the factors at hand here?

Competitive landscape? I think in both our markets, in the service provider, we're dominant and in the enterprise, UniFi is growing very fast, faster than any of the players I know of in that space. I think what gives me confidence is we're very much a R&D-driven Company. I'm a product CEO, I'm not a sales CEO or a business CEO. I believe in this age of information transparency and where the most compelling products win with the best value, I think we are positioned to win.

Okay. Then, Craig, your inventory was down significantly. Can you explain what -- we were assuming that it was going to be staying in the same range and on a weeks of sales --

I'll handle this. In terms of inventory, our goal is to make sure our service providers and operators are never supply constrained, so we're always going to err on the side of being conservative to make sure there's never a supply shortage for operators.

I would assume being conservative means that you keep a generous balance and your balance came down rather significantly this quarter.

Yes. Well, we look at our total sell-through. We look at channel inventory numbers and we look at upcoming months and deployments and we make a decision on what inventory, how much is healthy.

Okay. I'll pass it on to the next person. Thank you.

Jess Lubert from Wells Fargo.

This is Mike Kerlan for Jess. Thanks for taking the question. We recently attended WISPAPALOOZA which we walked away from with a sense that WISP operators they try to meet requirements as their businesses continue to grow. Given this backdrop, can you talk a little bit about your expectations for airMax ac, particularly as the point, the multi-point solution begins to shift. How are you thinking about the refresh cycle? Should we expect sales to ramp fairly quickly or more of a gradual ramp?

We introduced as a backdrop, I'll tell you, we introduced airMax in 2010. It was probably six or seven times a performance increase over the previous technology. So, it brought a lot of point-to-point links in 20 to 30 megabits per second all the way up to 150 megabits per second plus. So, there was an immediate mass adoption to airMax. Now we are entering airMax ac and we don't see a seven times performance improvement but it's better, it's actually significant. We are seeing probably a 50% performance improvement. In multi-point networks, on a narrow channel, most of our operators use a 20 megabits narrow channel, we are seeing well over 100 megabits per second. The scalability and the performance and latencies are all improving.

I see it like this. I think the sophisticated operators, which is probably the top 30%, top 40% are going to move very quickly to airMax ac. So there will be a combination of replacement revenue and new opportunities. The lower market, the bottom 50%, 60% will be slower move over to airMax ac just because the current airMax technology provides their bandwidth needs.

On the enterprise portfolio, it was pretty strong there. Can you talk about the mix within that business? Was it mostly upgrades to ac and more ac deployment? How is the early traction been for the new Switch product and some of the phones?

UniFi's growth is impressive. I was looking at about a year ago we announced our 1 millionth UniFi AP being sold. Now, I'm looking at data that suggests we are close to a 2 million per year rate of AP sales. That's growing very fast and all kinds of applications, if you look in our community, from small, medium businesses, to schools, to hotels, to city Wi-Fi projects. As for the new product lines, the switches and phones, we are cautious in rolling those out to the market because if we want them to be top-notch and robust in performance. Early indications are the switches and the phones, the customers really like them. I expect them to be significantly material to the UniFi line next year.

Just the last one touching on the international markets one last time. If you were to back out some of the troubled regions like Russia, Iraq, Syria, et cetera, how did the business internationally perform outside of those more troubled markets? How big a percent of the business are those regions where it's particularly hot right now?

I see the emerging markets, South America and Eastern Europe and Middle East. And then we have Africa has been ticking up, South Africa, places like Indonesia. They're all going -- the variables are all dynamic. They're always going to be changing. If one country is the regulatory issues or maybe the import or currency issues or political environment has challenges, then maybe another country, it's a better environment.

There's so many of them. I don't think you could just point at one of them and draw conclusions on the overall business. You've just got to accept the emerging markets, it's a great place to play. Like I said before, two-thirds of internet users are from these emerging markets and there is huge growth ahead. It's not going to be as stable or visible as the developing markets are. You've just got to accept that.

Thanks.

(Operator Instructions) James Faucette from Morgan Stanley.

Wanted to ask a couple -- one follow-up question. Recognizing that there was a lot of dynamics market to market, I'm just wondering, though, the US dollar has appreciated versus most other currencies. I know that it's kind of hard to tell, but just wondering if you've seen any indications or what your expectations would for impact to demand from the stronger US dollar? If you've got any idea on price elasticity and that kind of thing, at least in different markets. That's my first question.

My second question is more specific and that is, you recently announced a deal with ECS as a distributor relationship. I'm just wondering if that's going to be additive, do you think, to Asia revenue? Or, is this simply a reorganization of Asian operations to hopefully reduce the risks in that geography, particularly in light of some of the counterfeiting things that have gone on in the past? Thank you very much.

Currency exchange. I think if you look at Ubiquiti sales, I strongly believe it's a pull type of business, where we have strong demand from our community of operators and system integrators and they always want products. Where the currency exchange comes into play is when the distribution channel needs to place orders to feed this end-customer demand. They are more hesitant to place larger orders when the US dollar is unfavorable to them, the exchange. They're more aggressive when the US dollar is more favorable to them.

So we do see that and I think we've done a really good job in the past year of improving our interaction with the channel in terms of collecting sell-through data, monitoring DSOs and the inventory in the channel and really assisting them in doing everything we can to make sure the end-user demand is always, is met. You're second question, I'm sorry?

I was just asking, I'm sorry, on the new ECS distributor relationship. I was just wondering if you expect that to be additive to your Asia revenue? Or is this an opportunity to reorganize your operations in Asia to reduce the risk there, particularly in the light of some counterfeiting issues, et cetera.

I think one of the great things about diversifying our product line into the enterprise side is now we have new opportunities to expand our channel. I think we've done this with guys like Ingram and ScanSource and Redington and ECS. Early indications, so far, it looks like we're getting very promising additive revenue. I think those distributors will show material additive revenue in the next year.

Awesome. Thanks.

Matt Robison from Wunderlich Securities.

I should congratulate you on the enterprise gross margin and balance sheet performance. Related to gross margin, we didn't see much of an absorption hit from the new manufacturing facilities. My first question is, should we expect a decline in gross margin later this year from that? And then my second --

Maybe I will answer that first. Like we said on the call last quarter, we do have a China factory purely to accelerate our new product introduction. We use big manufacturers overseas, but it's very hard for them to interrupt their production lines to support prototype development. Because one of Ubiquiti's advantages is rapid innovation and getting new innovations to market quickly, it's more than worth the cost to have our own manufacturing facility to speed up product time to market. I don't think that the cost of running that new product introduction factory would be material to our margins in the long term.

I understand the long term, for sure. My second question is, when should we expect you to have your distributors trained on UniFi Video and UniFi VoIP? I'm going to cheat and ask a third question, just ask to see if Craig is on the call, too.

I'm here.

Good.

Training for UniFi Video, UniFi Voice over IP. We do have training for airMax and UniFi today. We have a training network of many certified features and it is doing really well. We are the process of integrating support for new UniFi functionality in that next generation of training.

That doesn't answer the question, though.

Can you clarify the question, Matt?

I was wondering when the channel is going to be trained on UniFi Video and UniFi VoIP?

Yes. We are in the process of integrating UniFi Voice over IP and video training into the next generation of our current UniFi certified training program.

You don't know when --

When that happens we will pass on to the channel and instructors and they will go through that training.

So you don't know when you are going to train your channel on those products, then?

I would say in the short-term future. It's going to happen.

Okay. That will be great. Thanks.

Rajesh Ghai from Macquarie.

I wanted to understand the strength that you've seen in the enterprise segment. How much was that in North America versus other geographies? How much of that was -- can be attributed to the sell-in of the channel fill of UniFi Video versus true demand?

I think our UniFi sales follows our service provider sales pretty closely, in terms of geography. Roughly, I think 30% is sold through the US but US distributors also export to other countries in Canada and Mexico and Australia and in some cases other countries. So I would estimate deployments are 20% in the US, 80% internationally. UniFi Video still has a long ways to grow. We have high expectations in the next year. I think UniFi Video follows the same distribution, roughly 20% deployments in the US, 80% international.

Right. Recognizing that most of the cash is overseas, but given that the stocks are going to be down and given your confidence in the long-term prospects of the business, would you consider a buyback at these levels?

To be honest, I haven't checked the stock. I'm in this for the long term. By this week or next week I'll check it and definitely if it's attractive, yes, we've got to buy it back.

One last question, if I could. When did you come to know that this quarter was going to be weak? And once the quarter's over, why didn't you preannounce, given the magnitude of the miss.

I think we want to always get as much information as possible, so we are constantly checking the activity of the channel and the sell-through of the channel before we made a final conclusion, especially on guidance.

Thank you.

Tim Long from BMO Capital Markets.

Two questions for me, if I could. Back to the new distributor relationships, it sounds like some of the ones that have been signed over the last few quarters are starting to impact. Just curious about India and China, ones that we're hearing about today. Maybe just give us a sense how big you think those can be as far as market expansion and is that something we should expect to see maybe through the first half of calendar 2015?

Second, understanding the service provider issues in the emerging markets, but maybe could you talk a little about what happened with airMax in the US? What are the dynamics there and are you expecting a little bit more rapid upgrade to ac in the North American market? Thank you.

I think India and China are huge opportunities for us and we haven't captured much of it yet. One of the challenges we have in India and China is there is more of a -- in areas like US and South America, there's a lot of information transparency. The best product wins out. In China and India, there's more, I'd say, political barriers to entry, in terms of finding partners and there's more of a traditional business model. But it's changing. I think you've seen even in China, like Alibaba and Xiaomi are great examples of companies that have breaking the traditional business model apart in China, where Xiaomi has evangelized their brand and sold direct.

I think we have to apply ourselves a lot better in creating localized communities in a lot of these areas of the world, especially China and India, and evangelizing our brand. That's definitely one of our priorities right now. We're putting in investment into a strategy for those markets.

The US and airMax and the quarter-to-quarter trends, you could look at what I said about the emerging markets, where you have some seasonality due to vacations. We have new product introductions that sometimes takes time to qualify and it's just very difficult in the service provider market to draw conclusions from quarter-to-quarter granularity. If we were a traditional company with the massive sales force and constantly looking at how to engineer revenue recognition timing on a quarter-to-quarter basis, maybe our results would look smoother. But, quite frankly, I think our resources are better served looking at how to get this Company to the next level of billions of dollars in revenue. You've got to look at long-term investments on the R&D side, rather than short term.

Okay. Thank you.

Tim Quillin from Stephens, Inc.

Two quick questions. One, if you could talk about the changes you made on the chip supplier and what the benefits are there of the new chipset? Second, I think to your success in the Wi-Fi market, is attracting new competition. I think Cisco has talked about putting together a business group to target that small business market, Ruckus recently announced a new brand to target that market. Are you seeing any evidence of competition in there yet? What's your overall view of new competition coming into that market? Thank you.

I think in the case of UniFi, the reason why it's been so successful is because it was truly a disruptive product. It was disruptive in terms of the presentation, the hardware design, industrial design, the user experience, the ease of use. And the performance has gotten really good as we evolved it through the years. Then, the other aspect of the disruption was the price. It was one-tenth the price of competing products. You could buy a UniFi ac as low, I think, in the channel as $60, $70. You basically have a centralized, scalable Wi-Fi system at a one-time price of $60.

Most vendors in that space, they'll charge you $500, $600 for ac and they'll charge you hundreds of dollars a year in licensing and servicing fees so it could end up being a thousands of dollars proposition. Because we were disruptive, we've built up this powerful brand evangelism and fanatical user base for that UniFi product. I think it's difficult for somebody to take that UniFi market share unless they were really disruptive. But I don't consider a company making a scaled-down light version of their technology, taking out features at a similar or higher price-point as disruptive. I don't see -- and I've seen this movie play out again. I just don't consider that strategy to a threat like something like UniFi.

And your chip supplier?

We're pretty diversified, now. We make wireless access points, switchers, switching, routing, video cameras, a bunch of IoT equipment, Voice over IP phones. We use chipsets from all the big guys in the game. What are you referring to, specifically?

Oh, okay. There was a write-down for excess or canceled material. That relates to our service provider business. One of the materials was end-of-lifed and we placed a big order and to move to the new material was significant software development. We didn't think we would be done with the software development as early as we did and the cost delta between the new chip and the end-of-life chip was more than the cancellation charge of the old material. So, even though it looks like it's a one-time loss, on a per-unit basis it's a net margin benefit.

Thank you.

Tavis McCourt from Raymond James.

A couple for you, Robert. First on airMax ac, you were talking previously about getting up to 100 megabits throughput on a narrow channel. If I just look at the white papers or PowerPoint slide that a Cambium or Mimosa puts out, they're suggesting much higher throughput. We don't have to go through all the technicalities, but in general, do you expect airMAX ac to be a better price performance than from your competitive vendors in this space?

Yes. Absolutely. I think you could go into an anechoic chamber with zero interference and set up a link and if you are just testing for speed, I'm sure you could optimize your product to beat others in that test. But when you're dealing in outdoor space where you have a lot of interference and you want to scale to support hundreds of clients, and you have all kinds of different link ranges and changing environmental factors, this is what we do. We've put several, many years into constantly refining our software, our mechanical design, our product offering to make it work better and better in outdoor environments.

You can go through our community. We have hundreds of posts a day and we have constant interaction between our developers. This is been going on for many, many years. We have hundreds of thousands of hours into driver development and refinement to handle all kinds of situations outdoors. I think we have tens of millions of airMAX devices, radios deployed in all kinds of different environmental conditions. I think it's a little early, if you point to a company that maybe hasn't shipped products yet that's also based on a Wi-Fi chipset. And a company like Cambium, as far as I know, I don't know what they've sold, but we haven't really seen significant competition from them.

Got it. My follow-up question, Robert, was on the UniFi 4.0 software. Is that generally available yet? If not, when? As you launch that, it would seem one of -- although you kind of entered the Wireless LAN space as a price disruptor, this allows you to be reasonably disruptive on a breadth of product standpoint by unifying the switches and the phone systems on a single management layer.

As you think about doing that, are there changes to your business model that you think you may do to accelerate that, whether it's more sales and marketing to advertise the fact or more training or things like that? Or do you to expect your community to basically evangelize this?

That's a good question. Our community is evangelizing it, or has, pretty well. We have a big presence on an IP website called Spiceworks. I think we're picking popularity fast there. The new channels and distribution definitely help.

I think you're right, as that UniFi platform becomes more compelling, we're going to have to become much more aggressive in expanding the channels. In the case of our service provider, we've never really called up someone to carry the product before. We've been spoiled. We are inundated with constant requests to carry the product. On the UniFi side, I think we have to be more proactive in that. We were off to a good start if you look at the channel or the new distributors we've signed on. I think that's a great start for expanding the UniFi channel.

And in terms of timing of the 4.0 general availability?

It should be within the coming -- hopefully, the coming weeks, maybe the coming months. It should coincide with once we have a bigger volume of switches and our phones. We should have official release time on 4.0. Right now it's in public beta.

Thanks.

Ryan Hutchison from Pacific Crest Securities.

Okay, great. Most of my questions have been answered but I've two small ones. First, I know you guys are making a big push on the enterprise and part of that, I just want to understand the dynamics as you go after the education vertical, where you guys are to date and as you look to calendar year 2015, the views, if any, on the potential for e-Rate having an impact on the business. The second question is, as you think about ac Wave 1 to Wave 2, there's been a lot of talk in the marketplace around whether or not we're going to see a meaningful premium or not. Any thoughts there would be helpful. Thanks.

Okay. I think education, UniFi is doing great in educational vertical. We have next generation UniFi wireless hardware in development. Were putting specific features in those products for the educational market and I think they will be a big hit. What was the second question?

Just on Wave 1 to Wave 2. Any sense on (multiple speakers) price premium or not? Because when you went from --

It's hard to say. I remember when 802.11n sold -- came out in 2009, 2010, which was five years ago, everybody was touting bean forming and how it was this big future. The big chipset vendors never really got it working. We're kind of waiting on the sidelines. We'll have Wave 2 multiuser MIMO products, but it's hard to say how well they'll work in the field. If it works well and we'll be ready and we will try to have it first before anybody else.

Okay. You touched on Exclaim a little bit. I just want to dive in that and I will leave it there. Could you flesh that out for us in terms of how you're thinking about Ruckus' opportunity there and whether or not they could potentially have an impact on your business? I understand some of the pricing dynamics, et cetera, but really trying to get a grasp on that. That's it for me. Thanks.

Okay. So, I would say our advantages in UniFi is we've had an early start in terms of disruption. It's been around for a few years at these great price points. We are shipping at a rate of about 2 million access points per year. We have a very phenomenal, energetic, active community that's evangelizing the brand. We significantly upgraded our R&D team and we're quickly adding advanced features and expanding the product line.

I think for an incumbent to come in and compete against us, they're going to have to be all in and they are going to have to find some way to disrupt us. I look at disruption as, you need incredible price and you need incredible performance. Pricewise I don't think we leave too much on the table. It's very hard for a traditional company to compete with our margins and our operating structure.

Then, if they want to compete on performance, we're going after these companies and we want to be the best performer in the space, not just look at as a low-cost solution. We want to be -- yes, we are a low-cost solution but we want to be there best product in this space. For a company to have a side project and feature limits and not put their best stuff out under a separate brand name, I don't know if they can be effective at this point in time against something like UniFi.

Thanks.

Georgios Georgios Kyriakopoulos.

Going back to the US dollar cash exchange, not sure if you have a way to quantify this, but based on your discussions with distributors, do have a sense on how much of a decline is attributed to weakness in demand versus a stronger dollar?

I'll repeat what I said at the beginning of the call. We're dealing with the emerging markets it's a great place to play. Two-thirds of the internet uses come from emerging markets. Only 10%, overall global fixed broadband coverage. We're playing in the right place.

You're just going to have to -- we are going to have to deal with the quarter-to-quarter ebbs and flows due to difficulties with things like fluctuating currency exchange rates, logistics issues, political maybe uncertainty in the fact that we have a new product adoption and qualification cycle in the service provider market. So, like I said, quarter-to-quarter granularity, it is very hard to get to the bottom of what exactly is causing it, especially when you're talking about very small percentage points on a sequential basis. But if you look at the overall long-term trends, in the history of the Company, they've been positive and I believe the next few years ahead they'll be the most impressive, yet.

Okay. Then, on the new distribution agreement with Redington and ECS, as you said can be quite political in India and China, so given that your solutions are much cheaper than your competitors, how do you align incentives so these distributors do not promote competitor solutions that potentially come with higher commissions?

Yes. That's a traditional business way of thinking. The way I think is, you have to evangelize the brand through things like fostering a community, which we've done really well in the US and parts of the world. I think we've got to go deeper and we've got to create localized needs in areas like India and China and do a much better job of evangelizing the brand, and then expanding your channel makes your product more available. But everything we're going to do is going to be focused on pull and brand evangelism.

Okay. Last question for Craig. You guided a tax rate of 10.5%, but with all the noise around international tax evasion, how do you think about your tax rate over the longer-term?

Think our tax rate is more subject to the fluctuation of the US versus international sales. At the beginning of the year, we kind of walked into things thinking we were going to have about 11% tax rate. We are marching that up a little bit, so somewhere between 11.5% and 12% the full year.

Okay. Thank you.

Ladies and gentlemen, that is all the time we have today for our question and answer. This concludes our program. You may all disconnect. Everyone have a great day.