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Executives

Joseph Villalta - IR, The Ruth Group

Patrick Lo - Chairman and CEO

Christine Gorjanc - CFO

Analysts

Hamed Khorsand - BWS Financial

Jeff Kvaal - Barclays Capital

Douglas Ireland - JMP Securities

Woo Jin Ho - Bank of America-Merrill Lynch

Erin Riley - Goldman Sachs

Sanjit Singh - Wedbush Securities

NETGEAR, Inc. (NTGR) Q2 2010 Earnings Call July 21, 2010 5:00 PM ET

Operator

Welcome to the NETGEAR Inc. Second Quarter 2010 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Joseph Villalta of The Ruth Group. Thank you, you may begin.

Joseph Villalta

Good afternoon and welcome to NETGEAR's second quarter 2010 financial results conference call. Joining us from the company are Mr. Patrick Lo, Chairman and Chief Executive Officer; and Ms. Christine Gorjanc, Chief Financial Officer.

The format of the call will be a brief business review by Patrick, followed by Christine providing detail on the financials. We'll then have time for any questions. If you have not yet received a copy of today's earnings release, please call The Ruth Group at 646-536-7028 or you go to NETGEAR's corporate website at www.netgear.com.

Before we begin the formal remarks, the company's attorneys advise us that today's conference call contains forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. The words anticipate, expect, believe, will, may, should, estimate, project, outlook, forecast or other similar words are used to identify such forward-looking statements. However, the absence of these words do not mean that these statements are not forward-looking.

The forward-looking statements represent NETGEAR Inc.'s expectations or beliefs concerning future events based on information, available at the time such statements were made and include statements among others regarding NETGEAR's expected revenue, earnings, gross and operating income and margins.

The effect of the global economic environment on the company's business, the market size of our new product categories, our position in the market relative to our competition, the long-term future and growth of NETGEAR's business, SMB revenue for the second half of the year, our ability to innovate anticipated new product offerings, current and future demand for the company's existing and anticipated new products, expectations of outpacing competitors and the new product introductions, the company's strategy for innovation and new products. Willingness of consumers to purchase and use the company's products, larger revenue share from service provider customers during the second half of 2010. DOCSIS 3.0 products deployment by our service provider customers, future Wi-Fi demand and the ability to increase distribution of market share for the company's products domestically and worldwide.

These statements are based on management's current expectations and are subject to certain risks and uncertainties, including, without limitation, the following: future demand of the company's products may be lower than anticipated; consumers may choose not to adopt the company's new product offerings or adopt competing products; product performance may be adversely affected by real world operating conditions; the company may be unsuccessful or experience delays in manufacturing and distributing its new and existing products; telecommunications service providers may choose to slow their deployment of the company's products or utilize competing products; the company may be unable to collect receivables as they become due; the company may fail to manage costs, including the cost of developing new products and manufacturing and distribution of its existing offerings; channel inventory information reported as estimated based on the average number of weeks of inventory on hand on the last Saturday of the quarter, as reported by certain of NETGEAR's customers; changes in the level of NETGEAR's cash resources and the company's planned usage of such resources; changes in the company's stock price and developments in the business that could increase the company's cash needs, and fluctuations in foreign exchange rates.

Further, certain forward-looking statements 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 expressed or forecast in such forward-looking statements. Further 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 section entitled "Part II - Item 1A. Risk Factors," pages 32 through 47, in the company's Quarterly Report on Form 10-Q for the quarter ended March 28, 2010, filed with the SEC on May 6, 2010.

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 occurrence of unanticipated events.

In addition, several non-GAAP financial measures will be mentioned on this call. Information relating to the corresponding GAAP measures and reconciliation of the non-GAAP and GAAP measures can be found in our press release or on our Investor Relation site at www.netgear.com.

At this time, I would now like to turn the call over to Mr. Patrick Lo. Please go ahead sir.

Patrick Lo

Thank you Joseph and thank you everyone for joining today's call. We're extremely pleased to announce a 35% year-on-year growth in revenue in the second quarter of 2010. Again, we are seeing year-over-year growth in all three regions with a very impressive 48% growth in North America.

The growth in North America was primarily due to our achieving the number one position for US retail market share in the networking category as well as significant growth in the retail market generally.

Other than gaining significant share in US retail we also believe we continue to gain overall share in all regions in both the retail and VAR channels. Despite the recent financial market challenges in Europe we continue to see growth in end market demand for NETGEAR products in this region from both consumers and businesses in both local currency and US dollar basis. Thus, we are pleased to be making significant progress in our business amidst the challenging yet improving macro economic environment.

In the second quarter, we increased our unit shipments by 26% over the same period of the prior year. In quarter two, our North America net revenue was $102.5 million, while our Europe, Middle East and Africa or EMEA net revenue was $68.6 million. Our Asia Pacific or APAC net revenue was $24.9 million.

We are also especially pleased that demand for our business products grew over 60% in Q2 compared to the same quarter last year and about 7% over quarter one of this year. Our continuous growth of business products revenue in the last five quarters is a validation of the slow recovery of business demands for networking products worldwide.

In the second quarter our net revenue from service providers accounted for approximately 16% of our total net revenue compared to 30% of total net revenue in the second quarter of 2009, and 19% in the first quarter of 2010.

We expect the percentage of service provider revenue to increase in the second half of 2010 when our service provider customers worldwide begin rolling out DOCSIS 3.0 equipment. We are also pleased to have added Bell Canada, Singtel and Swisscom to our service provider customer list during the second quarter.

Our sales channels remained strong during the quarter despite the continued challenging economic environment. By the end of the second quarter 2010, our products were sold in about 27,000 retail outlets around the world, and our value-added reseller count still stand around 36,000.

From a product perspective, we introduced 18 new products in the second quarter. Notable new products include our ReadyNAS 4 bay and 12 bay rackmount network storage, our Wi-Fi adapter for TVs, our 11n Wi-Fi repeaters for connecting TVs to IP set top boxes, and our Stackable Layer 3 Managed Switches for small businesses. With all these new product introductions, we are seeing our push into new product categories paying off.

As discussed in last quarter's conference call, these five new product categories of network storage, TV Internet connectivity, DOCSIS 3.0 and VDSL, security appliances and 3G, 4G wireless broadband equipment each have the potential to reach over $1 billion in market size.

Due to our ongoing commitment to research and development, we expect our pace of new product introductions to accelerate in the third quarter of 2010, with 20 or more new products expected to be launched, further positioning us for revenue growth and market share gain worldwide in the second half of the year.

For example, we just started shipping our newest high-end consumer network storage ReadyNAS Ultra. The ReadyNAS Ultra is the first in network attached storage device that is networkable to TiVo boxes. It will enable our customers to have up to 12 terabyte, or about 2,000 hours of centralized recorded high definition TV shows, serving up to any and all TiVo boxes in a home. We also believe the push into new category of DOCSIS 3.0 gateways will result in good revenue growth in the second half of the year, when our service provider customers in the US, UK, Nordic, Spain and Australia will start mass deployment of this new technology.

We also won new DOCSIS 3.0 projects in Charter Communications and Cox Communications in the US, Virgin Cable in the UK, and ONO Cable in the Spain in Q2. With more new products scheduled in the second half of this year and beyond, we believe future revenue contribution of these new product areas will be accretive to our overall growth.

We are confident in our strategy of being the innovative leader in connecting the masses to the broadband Internet. We continue to outpace our competitors in new product introductions by seeking expansion into new product categories, new channels and new geographic markets. We believe demand for networking products will continue to be strong because of Internet usage trends and introductions of sophisticated Internet enabled consumer devices.

As Internet job searches and social networking become prevalent worldwide more people are installing Wi-Fi home networks thus increasing Wi-Fi penetration. Further with the proliferation of increasing the advanced Internet enabled devices such as iPhones, iPads, netbooks, Netflix enabled Blu-ray players and set-top boxes and Internet enabled TVs, we are seeing more and more families around the world upgrading their Internet connections and their Wi-Fi networks at home.

With our continued new product introductions, we believe we are well positioned to capitalize on the increased Internet usage trends and Internet device proliferation as customers seek more sophisticated networking products. This Wi-Fi demand will drive our market growth for the foreseeable future.

Let me now turn the call over to Christine for details on our financials.

Christine Gorjanc

Thank you, Patrick. Let me now provide you with a summary of the financials for the second quarter of 2010. As Patrick noted, net revenue for the second quarter ended June 27, 2010 was $195.9 million compared to $144.7 million for the second quarter ended June 28, 2009 and $211.6 million in the first quarter ended March 28, 2010. We shipped a total of about 4.3 million units in the second quarter, including 3.3 million nodes of wireless products. Shipments of our wired and wireless routers and gateways combined in the second quarter were about 2.3 million units.

Moving to the product category basis. Second quarter net revenue split between wireless and wired was about 61% and 39% respectively. The second quarter net revenue split between home and small business products was about 63% and 37% respectively.

Products introduced in the last 15 months constituted about 39% of our second quarter shipments, while products introduced in the last 12 months constituted about 35% of our second quarter shipments.

Non-GAAP gross margin in the second quarter of 2010 was 36.3% compared to 29.6% in the year-ago comparable quarter and 35.2% in the first quarter of 2010. The increase is a result of a reduction in service provider product shipments.

Moving to non-GAAP operating expenses. Total non-GAAP operating expenses increased by about 22% compared to the prior year's same quarter, reflecting our increased revenue levels and investment in R&D. Total non-GAAP operating expenses came in at $45.5 million for the second quarter of 2010. This compares to non-GAAP operating expenses of $37.4 million in the second quarter of 2009 and $45.8 million in the first quarter of 2010.

On a GAAP basis, the company recorded net income of $10.5 million or $0.29 per diluted share for the second quarter of 2010, compared to a net loss of $3.3 million or $0.10 per diluted share for the second quarter of 2009 and net income of $13.7 million or $0.38 per diluted share in the first quarter of 2010.

On a non-GAAP basis, the company recorded net income of $13.7 million for the second quarter of 2010, as compared to a non-GAAP net loss of $522,000 for the second quarter of 2009 and non-GAAP net income of $17.1 million for the first quarter of 2010.

Non-GAAP net income was $0.38 per diluted share in the second quarter of 2010, compared to a net loss of $0.02 per diluted share in the second quarter of 2009 and net income of $0.48 per diluted share for the first quarter of 2010.

In Q2 2010, we recorded a net foreign currency gain of $132,000 compared to a net loss of $443,000 in the second quarter of 2009 and a net loss of $194,000 in the first quarter of 2010. GAAP tax expense was $10.6 million in the second quarter of 2010, compared to $4.4 million in Q2 '09 and $9.9 million in Q1 2010. Non-GAAP tax expense was $12.1 million in the second quarter of 2010, compared to $5.7 million in the second quarter of 2009 and $11.4 million in the first quarter of 2010.

Tax expenses increased from Q1 to Q2 despite overall profit decline due to the profit mix shift from Europe to the US, as we continued to invest in expanding our sales and marketing efforts in Europe. The reconciliation of GAAP to non-GAAP is detailed in our financial statements released earlier today.

We continue to maintain a strong balance sheet and in the second quarter the $231 million in cash, cash equivalents and short-term investments. Our cash receivable collections remained strong and DSOs for the second quarter was 64 days compared to 69 days in the second quarter of 2009 and 62 days in the first quarter of 2010.

Our net inventory ended at $125.7 million compared to $75 million at the end of the second quarter of 2009 and $109.9 million at the end of the first quarter 2010. Ending inventories turns were four as compared to 5.5 turns in the second quarter of 2009 and five turns in the first quarter of 2010. We are maintaining a higher inventory level in preparation for shipment growth in Q3, as well as to mitigate the longer lead time of components.

Looking forward in the third quarter of 2010, we continue to see market demand growth in all three geographic regions. Our success has been driven by innovative product introduction and we expect to outpace competitors in new product introductions for the foreseeable future. We expect to have a larger revenue share from the Service Provider channel during the second half of 2010 when DOCSIS 3.0 deployment among our customers should be well underway.

Despite the recent financial market challenges in Europe we continue to see growth in end market demand for NETGEAR products in this region from both consumers and businesses both in local currency and US dollar term.

The third quarter of 2010 has 14 weeks and ends in early October when sales have been historically slower. While the extra week will not be very accretive to our Q3 top-line revenue, we will incur a full extra week of operating expenses.

We expect net revenue in the range of approximately $215 million to $225 million, and non-GAAP operating margin to be in the range of 11% to 12%.

We expect our non-GAAP tax expense for the third quarter of 2010, to be in the range of $11 million to $13 million.

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

Question-and-Answer Session

Operator

Thank you, we will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from Hamed Khorsand of BWS Financial.

Hamed Khorsand - BWS Financial

Good afternoon, guys. Just a couple of questions here, one on the inventory, it seems like you guys took on extra load of inventory, you did explain on your general comments, but could that be a factor as far as gross margins go, I would assume that components are now getting cheaper as we are speaking of carrying of further inventory balance?

Christine Gorjanc

The growth margin is really more driven by the lower carrier mix in the first half of the year; it was 16% this quarter.

Patrick Lo

On the other hand, getting a bigger inventory also, we do this on freight cost because we don't have to use there much air freight. That has the positive effect.

Hamed Khorsand - BWS Financial

Okay, and then, could you comment on over the 16% sequential drop in EMEA. Was that just a seasonal factor, was that of mixed demand? Could you comment on that a little more?

Patrick Lo

Yes, that is a seasonal factor. Q2 is seasonally is a severe quarter for EMEA simply because there is a lot of holiday's in Q2, signed with the Easter holiday's and this just go on and on and plus there is no specific promotions in Q2, no Christmas, no New Year, and no back-to-school. So every year at the European down turning Q2 is more severe and pronounced than the rest the world.

Hamed Khorsand - BWS Financial

Okay and then my last question just on your product introductions, it sounds like you are expecting the immediate revenues from these products to being material, that hasn't been the case in the past for, I guess from your context your comments. Can you just expand on that little bit?

Patrick Lo

Because we introduced 18 new products in Q2. Even though they will not have immediate revenue impacting Q2, we have certainly believed that they were have in Q3. Then in Q3, we are going to introduce 20 plus more new products, which would definitely have revenue impact in Q4 and actually some of that might even have pretty good impact in Q3, such as the ReadyNAS Ultra.

Operator

The next question is from Jeff Kvaal of Barclays Capital.

Jeff Kvaal - Barclays Capital

On the gross margins increasing could you say, I mean obviously service provider was a bit lower. Are there other variables that are going on there that we should be thinking about affecting our margin assumptions for the second half the year?

Christine Gorjanc

I think as Patrick mentioned, also that by taking on more inventory, we did reduce our air freight cost in that. So I think that's the other bigger factor that would be in there.

Patrick Lo

The other area is, you probably see the SMB portion is a little bit higher and as we know, the SMB these days are carrying a little bit higher margin than the other two sectors.

Jeff Kvaal - Barclays Capital

Yes, okay. Then turning to inventory, it seems as though carrying a little bit more inventory is a bit of a statement of confidence in the outlook for the second half of the year, and just that you are reasonably comfortable with the trajectory in Europe. Is that a fair assessment? I would certainly love your thoughts on the European demand?

Patrick Lo

Absolutely. There are a few things going on as we mentioned in the comments that we have won a few DOCSIS 3.0 projects that we have orders in hand that we have to ship. Secondly the back-to-school starts right now, from middle of July. So we have to be ready to replenish the shelf space as well as to supply the online website sales.

So generally speaking, you were right that we are pretty bullish for Q3 and we've got some early sales going on in terms of commitment to service providers deployment as well as the back-to-school in the US and that's why we take on a bit of more inventory.

Jeff Kvaal - Barclays Capital

Okay. So that inventory suggests confidence clearly in North America where, obviously great share performance there. How about your feelings in the European business?

Patrick Lo

We actually feel pretty good in Europe. As we mentioned in the comments, that we've won a few DOCSIS 3.0 projects in Europe. One is Virgin Media which is very big in the UK and then ONO cable in Spain also is the number one cable operator in Spain. We do believe that, the recovery is on track in Spain. We do believe that, the recovery is on track in Europe and there is back to school in Europe as well and especially in the UK as well as in France and that would happen sometime in late August. So, we generally have a very positive reading of the demand of our products in all three regions.

Operator

The next question is from Douglas Ireland with JMP Securities.

Douglas Ireland - JMP Securities

First of all, I am sorry, just a little housekeeping item. I missed the wireless versus wired node quotes.

Christine Gorjanc

Sure. Wireless versus wired is 61:39.

Douglas Ireland - JMP Securities

Sorry, on the nodes?

Christine Gorjanc

On the nodes, 3.3 million.

Douglas Ireland - JMP Securities

6.3 million.

Christine Gorjanc

3.3.

Douglas Ireland - JMP Securities

3.3 million. This is wireless?

Patrick Lo

Yes.

Christine Gorjanc

Yes.

Douglas Ireland - JMP Securities

The total?

Patrick Lo

Total is 4.3.

Douglas Ireland - JMP Securities

Great. Sorry about that and then could you talk a little bit about how the increase in the set-top box business might impact margins? Should we be modeling margins?

Patrick Lo

You mean the set-top box that we sell in retail?

Douglas Ireland - JMP Securities

No, the DOCSIS box.

Patrick Lo

Okay. Yes, DOCSIS, actually what we are focusing on is selling as gateway rather than set-top box. So, it is like a DOCSIS 3.0 Cable Modem combined with a wireless router with voice added in sometimes. That generally is a lower gross margin product because it's part of the carrier product portfolio, but from operating margin basis our aim is always to get it to the normal corporate average and certainly varies from customers to customers depending on the sophistication of the box as well as the volume.

Douglas Ireland - JMP Securities

Okay. Could you talk a little bit about how we should think about the rollouts of the various carriers? You've announced a fairly wide variety of carriers. Are we talking about sort of only going to incremental new customers that order some specific service or are they refreshing their set-top-boxes in the field? Can you give us a sense of what this is and how will this deployment will look?

Patrick Lo

Generally speaking what they would do is to really entice their install base for a upgrade so that they would generate more average revenue per user and also they would like to use that to attack the competitors to try to switch them into higher speed. So that's basically what the deployment is going to be but however, over time actually the pricing for these higher speed broadband Internet is going to come down to the point that all of the end users will have no reason not to upgrade because the beauty of DOCSIS 3.0 is, once you install the DOCSIS 3.0, then you can add a lot more services to the customers to the point that you can actually switch off the video channels and just push all the TVs through the digital channels, the IP channels, that's the ultimately Holy Grail. So there is a lot of incentive for the cable operators to switch everyone, every subscriber to DOCSIS 3.0.

Douglas Ireland - JMP Securities

Great. When you win a relationship, I don't know if you call this a design win, when you win one of these contracts are you one of the multi-vendor deployment or is this mostly if you win, you win?

Patrick Lo

Yes, generally speaking carriers will never buy from only one single source. Most of them will have a dual vendor strategy so we would be one of the two, and then certainly in most cases, we're the bigger ones.

Douglas Ireland - JMP Securities

Good. Okay. Then you mentioned on the call three, that we're shipping in Q2. I didn't know if those were DOCSIS customers or simply service provider customers. You said Bell Canada, Swisscom and one other?

Patrick Lo

Well, we have two mentioned. One is that the new customers, they are Swisscom, SingTel and Bell Canada, and as the name imply they are mostly telcos. They have nothing to do with DOCSIS 3.0. But in the comments I might have talked about DOCSIS 3.0 rolled out, we specifically talked about there are three wins, Virgin, ONO, Cox and Charter. Those are new DOCSIS 3.0 wins, which we'll deploy in the second half of the year.

Douglas Ireland - JMP Securities

Okay. Bell Canada, Swisscom and SingTel are customers of another product?

Patrick Lo

Right. They are telcos. They don't use these DOCSIS. Yes.

Douglas Ireland - JMP Securities

Could you tell me if you have customers on your Femtocell products and how that might be rolling out, because I mean there's been a lot of chatter around Femtocell, but I haven't seen much business.

Patrick Lo

Today, there is very few actual Femtocell deployment in the field. There's limited deployment in the US by AT&T, I believe, and then some limited deployment in Europe by Vodafone. We are not in those deals. Of course, we are working with some other customers, but for today, we do not have a win yet, and the worldwide deployment is very limited.

Douglas Ireland - JMP Securities

Okay, so that's still something in gestation?

Patrick Lo

Correct.

Douglas Ireland - JMP Securities

Now, my understanding is your target operating margin is around 12%, and when you go over that like this quarter, it's usually your intention is to spend the overflow on expansion into India and China, et cetera. Does that mean that there was a surprise at the end of the quarter that increased your operating margin this quarter?

Patrick Lo

Generally speaking, most of our expenses are in people. I mean if you look at it, our single biggest line item is labor, and we find that we are not hiring fast enough and that's why we are coming under in expenses, so, I think that's basically what is helping us out.

Certainly, I think in Q2, the shipment of the service provider is actually a little bit below what we expected slightly, because of the delay of the deployment of the DOCSIS 3.0, so the combination of those get our operating margin a little bit higher.

Douglas Ireland - JMP Securities

I see, so if you had to ship those, they would have had slightly lower gross margins. They would have brought operating margin in line with the corporate average?

Patrick Lo

Right. When we started the deployment, we actually would expand more with more expenses will come in especially in initial deployment in testing and certification, in on-site, people help and things like that.

Douglas Ireland - JMP Securities

Okay, great. There is a lot of attention of the DOCSIS business that there's going to be a big impact and I want to make sure that I understand it clearly. Thank you for answering the questions.

Operator

The next question is from Woo Jin Ho with Bank of America-Merrill Lynch.

Woo Jin Ho - Bank of America-Merrill Lynch

Patrick, can you just discuss the composition of the inventory qualitatively? I believe you said during the Q&A that there was a build up due to service provider, but if you strip out service provider, how is the level inventory for your retail and your SMB segments?

Patrick Lo

Well, we feel pretty good actually. Yes, there is certainly some initial shipments requirement in July for service provider, but we also have pretty strong shipment requirement for retail in the US for back-to-school as well. SMB is actually on a pretty good track, so I will say the inventory is well distributed across all three areas, service provider, retail US as well as the SMB worldwide.

Woo Jin Ho - Bank of America-Merrill Lynch

Seasonally speaking, would you say that it's for the SMB as well as retail higher than in prior years, because of new products, or is it essentially similar to prior years?

Patrick Lo

From the SMB standpoint, certainly, this is much better than last year. Last year Q2 was a significant downdraft from Q1, but this year actually we went up 7%. And even if you look at Q2 of 2008 right before the blow up of the financial market, the up-tick in SMB from Q1 to Q2 is not as pronounced as this time, so that's why it's pretty clear that SMB is on the mend, the recovery is pretty encouraging and we are seeing the trend continue on into the second half of this year.

Retail especially in US is recovering very strongly. As I mentioned in the comments, over the last 12 months, I think probably the number of Facebook users have doubled with the proliferation of the iPad, the strain on the Wi-Fi home network is pretty high, so we are seeing a lot of upgrades, we are seeing a lot of families who do not have Wi-Fi networks before, now getting into Wi-Fi networks.

That is really driving the growth of the retail market, so according to NPD, the US retail market actually grew roughly about 12% in the first quarter and then accelerated into close to 15% towards the end of the second quarter.

We will analyze the data. It's pretty clear that the penetration of Wi-Fi at homes in US is accelerating, and the upgrade of the home network from 11G to 11N and higher end of the 11N is accelerating as well, and that's pretty much what's driving the overall market situation.

Woo Jin Ho - Bank of America-Merrill Lynch

Got it. In terms of the service provider market that service providers typically give you fairly long lead times and I am not asking for fourth quarter guidance, but qualitatively what can you say about the order commitments for service provider? You have been fairly bullish for the third quarter clearly, and how should we think about order commitments are going past the third quarter?

Patrick Lo

Clearly, we see Q3 will be significantly better than Q2 and the trend stands that Q4 done even better than Q3 that's how we see the trends going.

Woo Jin Ho - Bank of America-Merrill Lynch

Okay, and lastly in terms of the guidance, how should we think about ASP versus volume going into the third quarter in terms of the ASP lift relative to the shift from G to N as well as the ASP lift from the newer product especially given that you are coming out with new higher end products in the SMB, especially?

Patrick Lo

The ASP has been growing over the last several quarters and we do see this trend continue. By how much is very difficult to say, because it really depends on how the market pricing is, but we're generally confident that the ASP will grow for the rest of the year.

Operator

The next question is from Erin Riley of Goldman Sachs on behalf of Min Park.

Erin Riley - Goldman Sachs

Hi, this is Erin, and I have two quick questions for you. What's the pull you are seeing for back-to-school, specifically? Where it is versus normal levels, and secondly based on some of the softness we are hearing about in the PC supply chain to what extend might that translate into softer retail sales?

Patrick Lo

Well, I mean as we look at it actually because Wi-Fi network is servicing primarily the mobile applications. If you have desktops, you don't probably need a Wi-Fi network. When we see a lot of iPad sales a lot of iPhone sales, that's very good for us. Those things kill the Wi-Fi network, so they need to upgrade. I see as long as the iPad and iPhone continues to sell I think we do well.

Erin Riley - Goldman Sachs

Okay. One last quick question. What was the G versus N split in the quarter?

Patrick Lo

The split from a revenue base is 2:1 in favor of N

Operator

The next question is from Sanjit Singh with Wedbush Securities. Please go ahead with your question.

Sanjit Singh - Wedbush Securities

Hi, Patrick. One of the questions I wanted to ask was regarding some of your competitors, Linksys and D-Link. It seems like they have been dropping out of the market. What are you seeing in the competitive environment in the US and maybe in Asia and Europe?

Patrick Lo

It's pretty clear that the US is probably moving faster than the rest of the world, in terms in consolidation, and to what we call the marketing one-o-one theory, you're finally down to two players and it's pretty clear that in the US is consolidating into us and CISCO's Linksys and us being the number one vendor now.

Q2 was that first quarter that we finally get to the number one position in the US we are very glad about that. We believe that trend will always be true in any market, but the US is ahead of Europe. In Europe actually in certain material market like in Nordic as well as in the UK, is happening that way as well, again us being the top brand. So that was going on, but in some other markets like the Germany, France, Italy it will take a little bit longer to get there.

Sanjit Singh - Wedbush Securities

You mentioned ramping R&D investments next quarter I guess for the rest of the year. Christine, what was the OpEx impact would be on the R&D line, looking into Q3 and beyond?

Christine Gorjanc

Well, we are always sitting somewhere slightly up or down of 4% of net revenue, but we would expect in absolute dollars is going to continue to grow.

Sanjit Singh - Wedbush Securities

In absolute dollars?

Christine Gorjanc

As far as that will be in R&D and then sales and marketing.

Sanjit Singh - Wedbush Securities

Right and could you quantify the Fx impact this quarter. Well, was it a net negative and what is your expectation get going into next quarter?

Christine Gorjanc

Well, really what we do again is we hedge every quarter, somewhere at the beginning of the quarter, actually prior to giving guidance. So, we were really not affected based on the guidance we gave during the quarter and then every quarter we reset the hedge to which we have done for Q3.

Sanjit Singh - Wedbush Securities

Got it.

Christine Gorjanc

If you recall actually during Q2, the rates didn't really drop till the end of the quarter anyway.

Sanjit Singh - Wedbush Securities

Right. My last question is coming back to Europe, the 15% sequential decline seems a little bit more than just seasonal. Do we not see any effects of some of the macro weakness in the regions, whether what to the strength in some of the stronger countries offsets in the weakness of the other countries. I thought the 15% was a little bit more than seasonal.

Patrick Lo

Well, it's basically mostly due to slowing down of the service provider shipment has very little to do with the market demand other than seasonality.

Operator

(Operator Instruction) I'm showing no further questions in queue. I'd like to turn the call back to management for closing remarks.

Patrick Lo

Sure and thank you once again for everybody joining our call. We are very excited about our momentum in the market, especially our product momentum and we believe that with the ever increasing in pace of product introduction we will continue to outdistance our competitors to be even further number one in all the markets that we compete and look forward to talking to you again in the next earnings call after our Q3 results. Thank you.

Operator

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

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Source: NETGEAR, Inc Q2 2010 Earnings Call Transcript
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