Greetings and welcome to the NETGEAR Incorporated fourth quarter and full year 2012 earnings conference call. (Operator Instructions)
It is now my pleasure to introduce your host, Christopher Genualdi, Investor Relations Specialist. Thank you, Sir. You may begin.
Thank you, Operator. Good afternoon, and welcome to NETGEAR's Fourth Quarter and full year 2012 Financial Results Conference Call. Joining us from the company are Mr. Patrick Lo, Chairman and CEO and Ms. Christine Gorjanc, CFO. The format of the call will be a brief business review by Patrick, followed by Christine providing detail on the financials and other information. We will then have time for any questions. If you have not received a copy of today's release, please call NETGEAR Investor Relations or go to NETGEAR's corporate website at www.netgear.com.
Before we begin the formal remarks, the company advises that today's conference call contains forward-looking statements. Forward-looking statements include statements, among others, regarding expected revenue, earnings growth, operating income and margins, tax rates, and other projected financial results, share gains expectations, the market and market size for our products, business prospects, competition, research and development efforts, sales and marketing efforts, market trends and opportunities, service provider expectations, new product features, and our product roadmap, our growth strategy, and expectations regarding our recent AirCard acquisition announcement, and pace of new product introductions.
Forward-looking statements made during the call are being made as of today. If the call is replayed or reviewed after today, the information presented in the call may not contain current or accurate information. Further, certain forward-looking statements are subject to certain risks and uncertainties and are based on assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expected or forecast in such forward-looking statements.
Information on potential risk factors are detailed in the company's periodic filings with the SEC, including, but not limited to, those risks and uncertainties listed in the company's most recent Form 10-Q filed with the SEC. NETGEAR undertakes no obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the accuracy of unanticipated events.
In addition, several non-GAAP financial measures will be mentioned on this call. Information relating to the corresponding GAAP measures as well as a reconciliation of the non-GAAP measures and GAAP measures can be found in our press release on the Investor Relations website at www.netgear.com.
At this time, I would like to now turn the call over to Mr. Patrick Lo. Please go ahead, sir.
Thank you Christopher and thank you everyone for joining today's call.
NETGEAR revenues were up 7.7% for the full year of 2012and flat year-over-year for the fourth quarter of 2012. We're extremely pleased with the holiday season's retail performance worldwide. For the fourth quarter of 2012, we had the best fourth quarter sequential growth for retail net revenue in the last three years.
However, the challenging macro-economic environment continued to prove difficult for the commercial segment's revenue growth. We succumbed to seasonal slowdowns due to the short-lived selling period in the fourth quarter. Service provider revenue continues to be lumpy. And we saw a quarter-over-quarter decline.
Non-GAAP diluted EPS came in at $0.55 per diluted share. And was impacted by a higher than expected tax rate. Non-GAAP EPS for the full year of 2012 was $2.57. Please see the press release for a full reconciliation of GAAP to non-GAAP financial results.
During the fourth quarter, America's net revenue was $170 million up 9% year-over-year and down 4% quarter-over-quarter. A strong holiday season for retail was offset by reduced spending amount our first provider customers.
Europe, the Middle East, Africa, or EMEA net revenue was $110.5 million, down 12% year-over-year and up 6% quarter-over-quarter. Europe's economy did not show signs of worsening in the fourth quarter although it remains sluggish.
Our Asia-Pacific or APAC net revenue was $30 million, which is up 9% from the prior year's comparable quarter and down 10% sequentially. We saw a continued softness in service provider revenues in Australia.
In Q4, we maintained a high level of shipments with 6.9 million units shipped. We also introduced 32 new products during the quarter.
Sales channel development continues to be a key focus for the company as our sales channel remains a critical strategic asset. By the end of the fourth quarter of 2012, our products were sold in approximately 35,000 retail outlets around the world. And a number of very [inaudible] stands at over 41,000.
Now let's turn to a review of the fourth quarter results for our three business units, retail, commercial, and service providers. In our retail business unit or RBU, net revenue came in at $138.5 million, up 12% quarter-on-quarter and up 7% year-over-year. It was a record quarter in terms of net revenue driven by strong share gain in the U.S. and international markets. Our retail business unit experienced the best fourth quarter sequential growth in the last three years. We're very pleased with the share gain against our retail competitors worldwide.
Once again, we were a double honoree at the 2013 CEF Innovation Design and Engineering Awards Competition, the industry's highest accolade. The views on Night Vision Camera and Neo TV Mac Streaming Player both received awards at the event. The views on add-on Night Vision Camera is the only wire free night vision camera that lets you see in the dark. Our Neo TV Mac Streaming Player allows viewers to steal hundreds of HD channels on their TV including Netflix, Hulu Plus, and many more.
At CEF, we also unveiled our new Neo TV Prime with Google TV streaming player. We also announced at CEF that all of our Neo TV products are now compatible with Sling Media SlingPlayer, which enables viewers to expand their live TV experience to any other television that is connected to one of our Neo TV players. We view the multi-media streaming player market as a rapid growth opportunity for our retail business unit in the years to come.
On top of the multi-media streaming player, we also expect to maintain our success in retail with 11 AC devices, views on cameras, and Wi-Fi repeaters, all part of the solutions for the Smart Home. As we have said before, we believe Smart Home products and services represent a rapidly growing market with a 28% compound annual growth rate that will be over $25 billion in size by 2017.
Turing to our commercial business unit or CBU, net revenue came in at $73.4 million for the fourth quarter of 2012. That's down 7% on a sequential basis and down 12% year-over-year. The sequential decline is typical for Q4 as there is shortened selling period due to the holidays. The year-over-year decline is reflective of the economic uncertainty in Europe throughout the year, which continued to curtail IT budget spending by businesses.
Additionally, the fiscal cliff threat in the United States caused a further budget tightening in the private sector during the fourth quarter in North America. Despite this difficult business climate, we see growth in 2013 for our commercial business unit driven by new products in 10 gigabit Ethernet switching, unified storage, and campus wireless links.
As we highlighted on our analyst day in November, 2012, while the core net moved into the cloud, we plan to be a leader in providing access network solutions to all small and medium enterprises. We are also rapidly expanding our footprint in the emerging markets, which are growing very fast in commercial network products.
For our first provider business unit or FPBU, net revenue came in at $98.5 million for the fourth quarter of 2012, down 12% sequentially and up 3% on a year-over-year basis. As we highlighted on our previous earnings call, the sequential decline in FPBU revenues were expected. Service provider customer spending continues to be lumpy. And we expect to see reduced spending in the first half of 2013 among our existing NETGEAR service provider customers.
Three years ago, we introduced the five key product categories we would be targeting for growth, TV Tablet video connectors products with simple installation and high performance, network storage with easy to use interface, high capacity and resilience, security appliances that carry superior ability to block unwanted internet intrusions, DOCSIS 3.0 gateways with more integrated functions, and finally the 4G LTE related repeaters in gateways.
Since 2010, we have addressing each of these estimated $1 billion market opportunities with innovative solutions, consumers, and businesses. Our recently announced agreement acquired at Sierra Wireless AirCard business is another step forward in pursuing this vision specifically for the 4G LTE gateway market.
The aspect of the AirCard business that we are acquiring includes a team of world class engineers with expertise in developing LTE access devices, over 200 worldwide patents and active patent applications, and an existing customer base of wireless carriers. As we highlighted in our conference call announcing the acquisition, the AirCard business had approximately $247 million in trailing 12 month revenues through December, 2012. Specifically in the fourth quarter of 2012, the AirCard business generated $54 million of net revenue. We planned to use NETGEAR's superior global distribution channel to expand the existing AirCard business. We believe that as LTE service providers continue to upgrade to newer versions, such as LTE Advance and LTE Carrier Aggregation, we can continue to see growth in the existing AirCard business.
As we have explained before, we believe that Safe Mobile broadband gateways will the access device of choice while the estimated 4.5 billion people currently not connected to high speed broadband internet. Based on industry reports and our estimates, the market for fixed mobile gateways will grow from less than $100 million in 2012 to over $1.5 billion in 2017. We plan to capture this market by combining the 4G LTE expertise of the AirCard team with the Wi-Fi expertise of our existing NETGEAR team to produce market leading six mobile data, voice, and media gateways.
Last week, we announced that we are providing the NETGEAR 4G LTE turbo hub gateway to Bell Mobility, operator of Canada's largest 4G LTE network. The 4G LTE turbo hub gateway will play a key role in delivering high speed broadband services to Bell Mobility especially in smaller rural and remote communities.
We are also starting to sell 4G LTE fixed mobile gateways that work on the Verizon mobile network in U.S. retail. We are scaling the [inaudible] stages of rolling our fixed mobile broadband gateways with LTE capabilities. And look forward to adding more customers worldwide as service providers continue to expand the LTE coverage.
We firmly believe that Smart Homes will be commonplace in the not too distant future. Industry research group strategy analytics predicts that the demand for small Smart Home products would double from $10 billion this year to almost $20 billion in 2017. We believe we are perfectly positioned to take advantage of this market opportunity with our industry leading Wi-Fi connectivity routers and repeaters, audio and video streaming players, home storage, monitoring cameras, and mobile platform management software [inaudible].
In addition, the arrival of cloud computing, BYOD, multi-media networks for voice, video conferencing, and video surveillance enables us to once again by the technology revolution among small and medium sized enterprises by providing the most advanced access network equipment. Our high performance commercial products not only include industry leading features while maintaining simplicity in operation, but also keep FMD IT spending within tight customer budgets.
Our innovative [inaudible] switches, POE switches, cloud capable unified storage, and easy to administer camera's wireless plan are capitalizing on the new era of the 21st century SMB networks.
Last but not least, we are very excited about the acquisition of the Sierra wireless AirCard business. Upon completion of the acquisition, we expect to be ideally positioned to target a brand new 4G LTE fixed mobile data, voice, and media gateway market, which is expected to grow from less than $100 million last year to over $1.5 billion in five years.
While we are currently affected by economic slowdown in the developed countries, we never lose sight of the big potential each market that we are pursuing. NETGEAR continues to be focused on long-term growth driven by our mission to connect everyone to the high speed internet. We are fully committed to this mission and being the market leader. We are excited about the growth opportunities for our business.
I will now turn the call over to Christine for further details on our financials for the past quarter and 2012.
Christine M. Gorjanc
Thank you, Patrick. I will now provide you with a summary of the financials for the fourth quarter of 2012. As Patrick noted, net revenue for the fourth quarter ended December 31, 2012, was $310.4 million compared to $309.2 million for the fourth quarter ended December 31, 2011, and $315.2 million in the third quarter ended September 30, 2012.
We shipped a total of about 6.79million units in the fourth quarter, including 5.8 million nodes of wireless products. Shipments of our wired and wireless routers and gateways combined were about 3.8 million units in the fourth quarter of 2012.
Moving to the product category basis, fourth quarter net revenue split between wireless and wired was about 72% and 2%, respectively. The fourth quarter net revenue split between home and business products was about 76% and 24%, respectively.
Products introduced in the last 15 months constituted about 30% of our fourth quarter shipments. While products introduced in the last 12 months constituted about 24% of our fourth quarter shipments.
From this point on, my discussion points will focus on non-GAAP numbers. As mentioned previously, the reconciliation from GAAP to non-GAAP is detailed in our preliminary financial statements released earlier today.
Non-GAAP gross margin in the fourth quarter of 2012 was 30% compared to 31.1% in the year-ago comparable quarter and 31.6% in the third quarter of 2012. Total non-GAAP operating expenses came in at $57.7 million for the fourth quarter of 2012.
Note, that Q4 operating expenses were uncharacteristically low because the cost of our incentive compensation programs were greatly reduced from previous estimates. We expect our operating expense to be in the normal quarterly range as we enter Q1, 2013.
We continue to invest in research and development in order to drive innovation in all three business units. Our non-GAAP R&D expense in Q4 was 4.5% of net revenue in comparison to 4.2% in the year ago period and 5.3% net revenue during Q3.
With the current weakened market demand in Europe, we have been shifting our sales and marketing resources to the emerging markets where we believe there is growth to achieve and more market share to be gained. We will continue to spend wisely and streamline our operations to achieve more efficiency.
Our net headcount decreased by net four people during the quarter, bringing our total headcount to 850 at the end of Q4. We expect a significant increase in headcount upon the closing of the Sierra wireless AirCard business acquisition. And we will provide additional details on this at our next earning call in April.
The non-GAAP tax rate was 39.4% in the fourth quarter of 2012 compared to 30.5% in the fourth quarter of 2011 and 30.3% in the third quarter of 2012. Please note that the higher tax rate is reflective of a shift in geographic mix of revenues and corresponding profits towards the Americas.
Looking at the bottom line for Q4, we reported non-GAAP net income of $21.5 million and non-GAAP EPS at $0.5 per diluted share. As always, we tightly manage our expenses, receivables, inventory and cash. This results in our balance sheet remaining strong. We ended the fourth quarter with $376.9 million in cash, cash equivalents and short-term investments, which was driven by approximately $17.5 million in cash flow from operations during the quarter.
DSOs for the fourth quarter 2012 were 76 days as compared to 67days in the fourth quarter of 2011 and 72 days in the third quarter of 2012. As always, we closely manage our collections and try to effectively mitigate collection risk.
Our fourth quarter net inventory ended at $174.9 million compared to $163.7 million at the end of the fourth quarter of 2011 and $178.9million at the end of the third quarter, 2012. Fourth quarter ending inventory turns were 5 as compared to 5.2 turns in Q4, 2011 and 54.9 turns in the third quarter of 2012.
Let's turn to our channel inventory. Our channel partners report inventory to us on a weekly basis. And we use a six week trailing average to estimate weeks of stock. Our U.S. retail inventory came in at 8.8 weeks of stock. Current distribution inventory levels are 10.2 weeks in the U.S., 4.4 weeks of stock for distribution in EMEA and 7.2 in APAC. The U.S. distribution inventory is on the high side while retail inventory is on the low side. We expect to normalize inventory levels in subsequent quarters closer to six to eight weeks for distribution, and ten to twelve weeks for retail.
With regard to the first quarter 2013, we intend to roll out approximately 20 new products. We anticipate further reduced spending among our existing service provider customers in the first half of 2013 while we see growth in our commercial business unit driven by new products in ten gigabit Ethernet switching, unified storage, and campus wireless land. We expect that our retail business unit will follow the seasonal pattern with the slow first half followed by growth in the second half of the year.
We expect first quarter net revenue to be in the range of approximately $290 million to $305 million. And non-GAAP operating margins to be in the range of 11% to 12%. For 2013, our annualized non-GAAP tax rate is expected to be approximately 33%.
Operator, that concludes our comments, and we can now take questions.
(Operator instructions). Our first question comes from the line of Ryan Hutchinson with Lazard Capital Markets. Please proceed with your question.
Ryan Hutchinson – Lazard Capital
Hey, good afternoon, guys. So a couple quick questions here. Just on guidance, going back to, gosh, even early 2000s, I think, you’ve never had a sequential decline from Q4 to Q1. Q2 is always been your seasonally weakest quarter and obviously, service provider contribution is far greater, so we’re dealing with those dynamics. But how should we think about NETGEAR’s new seasonality both on an organic basis and then following the close of AirCard, how do we think of that? So that’s question number one.
And then number two is just on AirCard’s operating margins. Where were they on a historical basis and as we close the acquisition, how do we think about NETGEAR’s overall operating margins and how long did it take to get back to the 11 to 12% because clearly that seems to be an area of [inaudible]. Thanks.
C. S. Lo
Yeah, first on the seasonality, we understand it as the service provider business can be a bigger portion of our revenue, it will basically disrupt our easy-to-predict seasonality and that’s why we started segment reporting about two years ago. And so going forward from the modeling perspective, if you look at the CBU/RBU combined, then it will follow the same seasonality that we have had for years, which is basically a flat Q1 versus Q4 and then a down Q2 and then big jump in Q3 and then a further jump in Q4 for that part of the business. And then specifically on the service provider segment, as we mention all the time, we only have visibility of 12 weeks out and that’s why we would be able to provide pretty good idea of the current [inaudible] guidance on the service provider. So that remains to be lumpy, some quarters it will be really big and some quarters would be low, but overall, we believe that on the year-over-year basis it will maintain growth. I mean, it’s like last year we had tremendous growth in the first half because of the lumpiness, they decided to spend a lot of money in the first half but then it retracted in the second half. But if you look at the overall year-over-year basis, the first line of business unit grew pretty well, like up in the 20%, 25% range for the full year. So that is the new seasonality that we have to be going through.
Now, regarding the operating margin, and certainly, last week, Sierra Wireless, you know, disclosed the operating margin of that particular discontinued business or certainly we would not be able to comment on how they calculated and what their way of doing it. However, we did extensive modeling and study in the due diligence phase and believe that the business that we are acquiring is pretty much along the same lines of the rest of our service provider business. And if you look at our segment reporting, our service provider business is doing contribution margins of anywhere between 8 and 9% over the years, versus our commercial business unit which is roughly around 22 and our retail business unit which is roughly about 17 so you know, the AirCard business, you fold it in, it really depends on how the other two business units are going to come into the mix.
Right now, we don’t have clear visibility as of yet for Q2 so we would not have a good estimate on what that overall company operating margin is going to end up and certainly clearly we – you could do some modeling on how big the CBU and RBU business has to be to balance the increased AirCard business in order to maintain our 11 to 12% of operating margin overall but we do expect that. Our focus right now with the absence of AirCard is that focus on the growth [inaudible] for the smartphones for the RBU, retail business unit and focus on the move to the iBrick Cloud Access Network architecture on the commercial business unit so that they will grow much faster than the previous 12 months so that they will be able to balance the increased weight of the service provider business unit.
Our aim, eventually, is to maintain 11 to 12% operating margin in a steady fix.
Our next question comes from the line of Mark Sue with RBC Capital Markets. Please proceed with your question.
Mark Sue – RBC Capital Markets, LLC
Thank you. It’s Mark Sue, RBC. Patrick, if I look at your business for the full year, if I excluded the AirCard business. Doesn’t feel as the business, the big business, might actually grow, or should we think about it [inaudible] over year, the guidance in your term. I’m not sure if it’s just a change in seasonality, but rather some fundamental declines in the business. I’m just wondering what might be causing that? Is it maturation, is it penetration or is it the Service Providers who have [inaudible] to digest a lot of the purchasing that they did last year?
I mean, clearly without a doubt over the last 12 months, the one that suffered the most from a growth perspective is the Commercial Business Unit. And there are two reasons for that. One is the general economic climate, that is really causing the small business tightening up the IP budget. It did not really help even in Q4 that we had intense discussions and fiscal cliff in the United States, would certainly affect our sales in North America for Commercial Business Unit.
The other thing was is well documented, is because of the [inaudible] in 2012. Now, unlike our competitors we refused to absorb that shock and we pass on the prices increases to our end-customers. And as such, it really – number one, reduced the market demands. Number two, I mean, we admitted that we loss some share to our competitor who are willing to swallow. But things are going to change in 2013 all right. The [inaudible] drive is finally getting normalized, and our inventory is being cleared out, and so we are no more in a price disadvantage against our competition. And so – and also we are refreshing our line with the beginning of the ReadyDATA instruction, we are showing great success in the marketplace, and you’ll continue to see throughout this year that we’ll continue refresh our [inaudible] line as well as infusing more ReadyDATA. And with more competitive pricing and completely refresh of the [inaudible] line, we feel very confident that the temporary setback in 2012 will not be repeated.
Our fundamental core of the Commercial Business Unit is still very, very sound. Because frankly if you look at going into the hybrid (cloud) and access architecture, there is nobody who has more suitable products than we do with the [inaudible] which is, that with the recent introduction of more [inaudible] switches recovering and use the customers from an entry price point of below $1,000 to about $8,000. And certainly we have more POE switches than anybody else on the market today that would cover the extensive use of multimedia in the office to support video conference, video surveillance, voiceover IP, as well as bring your own device and all that.
And needless to say, we have been the leader in Wi-Fi. So especially among the small businesses. So with the acquisition of the [inaudible] wireless control [inaudible] last year and ReadyDATA products coming out by second quarter of this year, then we believe that we should be able to enjoy a significant boost in that particular area.
So from a product standpoint, from a market standpoint, in technology disruption evolution standpoint, we feel very good about our Commercial Business Unit.
And then on the retail front, I mean, needless to say, we have been gaining a lot of shares against our competitors in the developed world. Clearly, you know, in the U.S. we are by far number one, even with the recent possible announcement of the merger of [inaudible] and they are combined still a distant second to NETGEAR. Our momentum is continued to be there, we were ahead of any of our major competitors in [inaudible] introduction in the U.S. at least by three months. And frankly in Europe we’re the only game in town. We’re the only player in 11ac. So 11ac will continue to give us a lot of momentum.
Now granted last year, we only grew our RBU business, you know single digits due to some of the product transition, as well as the depressed economic situation. However, as we have seen in the U.S. in Q4 in particular, the return of retail is pretty significant, and we saw the tremendous car sales numbers, as well as, you know some of the apparel chains. So we feel pretty confident that the consumers are back in North America. Yeah, granted Europe is going to continue to have the hesitance, however, that’s why we did a restructuring. Moving a lot of our sales and marketing resources in Europe in Q4 into the developed countries such as China, India, and Japan, which are still growing pretty extensively for the RBU of the later products. Where we have [inaudible] small market share in China against the local vendors.
We’re making great [inaudible] over there. So the core business of connecting consumers to the internet is still pointing to growth and significant growth. And we’re well positioned to capitalize on that growth both in the developed world, as well as in the developing world.
Service Provider, yes, it has been lumpy, but as we said, we grew 25% year-over-year in 2012. In 2013 with the combination of the AirCard team. And in closing, I mean we dare say that we are the best team in providing fixed mobile gateway, because we’re combining the best talent in 4G LTE engineering, and the best talent of Wi-Fi engineering to come together to provide a fixed mobile gateway based on LTE and wireless land access and Wi-Fi to the local area network distribution.
So, our fundamental core is still there, and we believe that we can capitalize on it. And 2012, I mean, basically is the year of a temporary slowdown for all kinds of economics, macroeconomic environment, as well as some you know [inaudible] situation. But looking beyond that in 2013, and the years after that, we feel very, very good about our core business.
Mark Sue – RBC Capital Markets, LLC
Patrick, combining all your comments, will you – the revenues imply that you’d have to really accelerate in the back half of the year. Is 1.27 billion is what you did in 2012, we should grow that base business and show [inaudible] in the back half? Is there some comfort there with all the commentary.
Well I mean – that’s what I mean, we continue to see growth in the core business excluding the Service Provider. We do believe that in the second half when all these seasonality, as well as the new products helping us out, why the adoption of 11ac, why the adoption of the hybrid [inaudible] access architecture, will certainly help us. And we’re planning for that.
On top of that the Service Provider Business Unit will be augmented by the AirCard team for us to go into a brand new market. Not only that we’re committed to continue the growth existing AirCard products of all the hot spots, and 4G USB [inaudible]. The most important thing is combining the two teams, we’ll be able to attack the brand new market called the fixed mobile gateway, which we already talked about that Dell mobility in Canada is deploying and Verizon is starting that. And we believe that according to the strategic – the [inaudible] reports internal estimate that market is going to balloon from almost nothing last year to $1.5 billion in five years.
So, in all three BU’s, we feel pretty good that we have significant growth opportunity in front of us and that we’re definitely going to maximize the opportunity and get to $2 billion next year.
Mark Sue - RBC Capital Markets, LLC
Patrick, just the $2 billion, that seems – I mean, just really heroic. I don’t even know if it’s possible with that meaningful acquisition, so is that just a target where we just have to make acqusitions by companies to catch that kind of rumber?
C. S. Lo
Well, I mean, we – we have been buying companies ever year for the last three years, so we’re not going to say that we’re not going to buy a company and you will continue to see us to buy companies this year and next year and that is definitely in the works. But you know, buying companies , sometimes we buy the technology that will drive revenue with our existing channels, sometimes we buy revenue together with the technology. We would not predict what it is going to be like but clearly with all these and a new shift in technology such as shifting from 3G to 4G LTE, shifting from 11m to 11ac, shifting traditionally from the data center networking into the cloud access architecture networking, we believe that 2014 will be able to provide us with, you know really healthy double digit growth across all three business units and that would be able to take us to the $2 billion mark.
Mark Sue - RBC Capital Markets, LLC
Okay, thank you.
Our next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.
Hamed Khorsand - BWS Financial Inc.
Hey, thanks for taking the call and excuse the background noise, but essentially, my main question is it seems as though ac is getting embedded into smartphones at a faster rate than m was, so would that essentially mean that we could see a larger and quicker growth curve compared to m or do you think, you know, consumers are still getting adjusted to the 802.11m?
C. S. Lo
Well, we’ve seen a 50% quarter-on-quarter growth on unit sales of 11ac during the holiday season. And you’re right, Hamed pointed out that more and more smartphones are incorporating 11ac for the speed as well as for the lower power consumption so that would drive more people moving onto 11ac and clearly that is part of our equation of our growth, the 2013 and 2014. We believe that with the ratification of 11ac by [inaudible] later this year, even amount the SMB, the move to 11ac will be fast and furious and that’s why we bought that [inaudible] Wireless LAN team that we would be quickly moving our wireless campusland from 11m to 11ac when that happens. So all that points to 11ac to be a significant driver of revenue growth in the next two years.
Hamed Khorsand - BWS Financial Inc.
All right. Thank you.
Our next question comes from the line of Kent Schofield with Goldman Sachs. Please proceed with your question.
Kent Schofield - Goldman Sachs
Great. Thank you. On the commentary on 1Q13, [inaudible] guidance, can you reiterate as to what you were referring to there again, and then how should we think about the 11 to 12% and the fact that typically you think kind of high end of revenues maybe you can get to the higher end of that range but does that – does the OpEx inhibit that from happening?
C. S. Lo
No, we will manage it for you well. As we said, the OpEx will go back to the normal level and we’re very prudent, right, as you just saw, I mean, Q4 as we saw the progression of the quarter is going to be within our guidance. We are not taking on new people. As a matter of face, we have a net decrease of four headcount and also, we know that, I mean, we are not going to have tremendous growth here over in 2012, so we significantly reduce our incentive compensation. So we use a lot of tools to help us ensure our operating expense is in line with our growth or profit. So in Q1, as we mentioned in our discussion during the opening of this call, is that we see continued depressed service providers spending in the first quarter.
So that is going to drive, you know, the – even though that, you know, for the other two business units we will see quite a significant – a sequential growth, it’s not going to be enough to offset the decrease in the service provider business unit, our revenue in Q1.
As such, [inaudible] with this, of course, we’ll manage operating expenses very carefully so that we will stay at 11 to 12%.
Kent Schofield - Goldman Sachs
Okay. And when we think about, you talked about the service provider side of things being weak in 1Q and the first half of this year, on the organic side of your business, what kind of gives you confidence in the back half of this year that we should look for better service provider spending?
Well, you know, as we said many times, service providers, we have very little visibility beyond 12 weeks, but with the acquisition of AirCard, with the development of the fixed mobile gateway market with the launch of the fixed mobile gateway business with Bell Mobility as well as going into the Verizon Wireless open band, now, you know, those are things that we are banking on that in the second half of this year will have better growth.
Kent Schofield - Goldman Sachs
(Operator Instructions). Our next question comes from the line of Rohit Chopra with Wedbush Seucrities Please proceed with your question.
Rohit N. Chopra - Wedbush Securities Inc
Thanks very much. Patrick, I just wanted to clarify something. When Ryan asked you a question up front, you gave a combined target of 11 to 12% for the combined company. That’s where you’d like to be. Is there a timeframe for that, or are you thinking that in 2012 you’d be there? Obviously, it can’t be like that right off the bat, but is there a time limit?
C. S. Lo
Well, it really depends on how fast the CBU and RBU can grow. I mean, just a rule of thumb, right? We have been 11 to 12% when service provider business unit is as high as 38% of our total revenue. So when you see that our service provider revenue is lower than – equal to lower than 38% and our RBU and CBU business is, you know, equal or higher than 62%, maybe that’s when we will be able to comfortable stay in the 11 to 12% range.
Now, of course, if the service provider revenue is becoming 50%, then we can’t do that. So but – as we just said, we would not be able to gage that until we finished and the only company, as well as understand what Q2, Q3, Q4 RBU and CBU is going to be and then we’ll be able to give you a better idea.
Rohit N. Chopra - Wedbush Securities Inc
Okay, and then I just want to get a sense also on new products in this category. I know you have some, but to have a combined product, what’s the product cycle time on that? Is that a 12-month timeframe before you’re able to have some new LTE gateway products that use the new technologies?
That’s the beauty of this acquisition. We have been working with this team as the supplier to produce those products. So that’s why we already have those products on the market. We already have customers, Bell Mobility is a customer that deploying those fixed mobile gateway using LTE circuitry-using modules from back [inaudible] that we are acquiring. So practically from day one, we have the product except that now we keep all the profit and we also can direct those engineers to cater to our customers rather than their old boss’s customers. So we will be more adaptive and nimble to our customers going forward and we’ll be able to target even more customers.
Rohit N. Chopra - Wedbush Securities Inc
I have two other really quick financial questions. One, just on the gross margin, Christie, down just a little bit, but the – you had lower service providers so what’s the other dynamic that’s driving the gross margin down if you have less service providers?
Yes, Rohit, I really think it’s also the CBU business unit, the revenue coming down in the CBU. So it is a mix but it’s not [inaudible].
Rohit N. Chopra - Wedbush Securities Inc
Okay, and then just the last one, just on taxes. You mentioned for the full year ’13 where you’d like to be. Does that mean that it still could be a little bit higher in the first quarter and that’s why you didn’t give that number? And what does it look like on a combined basis?
On a combined basis, again, we’ll give numbers when we – when we acquire the company. It is a predominately U.S. company, probably 2/3s of that business. But the guidance is 33% for the year baring any discrete items that come through so you know, that’s going to be up and down during the quarters, but continue to average at around 33.
Rohit N. Chopra - Wedbush Securities Inc
Okay. Thanks very much. I appreciate it.
Our next question comes from the line of Shaw Wu with Sterne Agee. Please proceed with your question.
Shaw Wu – Sterne Agee
Okay, thanks. First question, just on Linksys in terms of that being sold to Belk. Any benefit you’re seeing from that now? I guess, did it help out your retail business? And also kind of your, Patrick, your thoughts on how – what that means kind of going forward in terms of competitive dynamics. Thanks.
C. S. Lo
Well, basically, you know, in one fine swoop you eliminated one competitor without having to pay anything. So I mean, that’s a positive for us. And right now, I mean, basically, you know, when we go to a retailer, we are fighting just one competitor rather than fighting two, so we like that. And also, I think it really depends on what they’re going to do and whether they’re going to keep two distinct product lines with two distinct R&D teams with very distinct products or they’re going to, you know, mix them together and just have two – one line of products with two different packaging and two different price plans. It really depends on which strategy that they’re going to take and then we’ll see, you know, how we’re going to respond to that. But overall, when you have one less competitor in the market, it’s always a good thing.
Shaw Wu – Sterne Agee
Okay. And then does this impact any – does it impact one of your business units more than the others or would it benefit all three?
Well, clearly, it is primarily retail because over the last ten years after Cisco bought them, they basically have already restricted the Linksys brand just to retail. All right, they retreated from commercial giving that back to Cisco’s [inaudible] and they have retreated from service provider [inaudible] so frankly, this is all about retail. And what’s even more interesting, it’s more retail in North America because over the last four or five years, the Linksys brand has pretty much vanished from international markets. So I mean, to be fair, we only eliminate one competitor in North America because their presence outside the U.S. has practically been non-existent.
Shaw Wu – Sterne Agee
Okay, thanks. And then just on – just a question on – I notice you’re headcount was about flat sequentially, even adding quite a bit. I guess, I question, I guess this is I guess in terms of reducing costs or I guess it’s – or is this ahead of the acquisition of Sierra Wireless DataCard business? Just a little more color there.
Well, clearly, I mean, we manage our operating expenses very tightly so when we see that, you know, the quarter is actually going to be, you know, sequentially less and then we aren’t going to control our expenses. And everybody know in a tech company the biggest expense is headcount and that’s why we purposely control the headcount and actually make it – actually reduce four headcount net over the quarter.
So not until we see an uptick in our overall business, all right, we’re not going to increase headcount. And clearly, we’re going to naturally increase headcount with the acquisition of [inaudible] because we’re hurting a bunch of their people as well as hiring more people to support that business because we’re not getting everyone we want from Sierra so a lot of the people they’re retaining so we have to replace those for our own business. So not only are we acquiring a bunch from them, we’re also hiring a bunch to support the business going forward.
Shaw Wu – Sterne Agee
There are no further questions at this time. I would like to turn the floor back over to management for closing comments.
C. S. Lo
Thank you. Clearly, as I mentioned that we’re very bullish about the long-term growth of each market that we pursue. The smartphone market, which according to industry analysts, just the product revenue alone is going to double in the next five years. And same thing for the 4G LTE fixed mobile gateway. You know, according to industry and estimate and our own internal estimate, it’s going to be a $1.5 billion market within five years from nothing. And then we with the commercial business unit, I think there is tremendous gain for us to be had while the world is moving towards cloud computing, BYOD, multi-media and all that. So all that will enable us to continue leading in that’s space. In all three business units we’re seeing tremendous growth opportunity over there. We’re certainly not saved by the temporary slowdown that we experienced in 2012 and we continue to focus on providing the best products, leading edge technology in the market, continue to be the market leader and continue to grow faster than the market and we look forward to a very bright 2013 and 2014.
Thank you, everyone and I will talk to you in about a few months.
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!