NETGEAR's (NTGR) CEO Patrick Lo on Q4 2015 Results - Earnings Call Transcript

About: NETGEAR, Inc. (NTGR)
by: SA Transcripts

NETGEAR, Inc. (NASDAQ:NTGR) Q4 2015 Earnings Conference Call February 4, 2016 5:00 PM ET


Christopher Genualdi - Investor Relations

Patrick Lo - Chairman and CEO

Christine Gorjanc - CFO


Nate Cunningham - Guggenheim

Tavis McCourt - Raymond James

Rohit Chopra - Buckingham Research

Hamed Khorsand - BWS Financials

Kirk Adams - Rosenblatt Securities


Greetings, and welcome to NETGEAR Inc. Fourth Quarter and Year End 2015 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Chris Genualdi. Please go ahead sir.

Christopher Genualdi

Thank you, operator. Good afternoon and welcome to NETGEAR’s fourth quarter and full year 2015 financial results conference call. Joining us from the company are Mr. Patrick Lo, Chairman and CEO and Miss. 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.

Before we begin the formal remarks, we advise you that today’s conference call contains forward-looking statements. Forward-looking statements include among other things statements regarding expected revenue, operating margins, tax rates, expenses and future business outlook.

Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in NETGEAR’s periodic filings with the SEC, including the most recent Form 10-Q.

Any forward-looking statements that we make on this call are based on assumptions as of today and NETGEAR undertakes no obligation to update these statements as a result of new information or future events.

In addition, several non-GAAP financial measures will be mentioned on this call. A reconciliation of the non-GAAP to GAAP measures can be found in our press release on the Investor Relations' website at

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

Patrick Lo

Thank you, Christopher and thank you everyone for joining today’s call. 2015 was a very successful year for us, as we entered a new growth product category, expanded our premium pricing model and restructured our service provider business for improved profitability.

At the beginning of the year we launched Arlo, the world’s first wire free high definition IP camera. And in short 12 months, we became the undisputed number one market shareholder in North America, Western Europe and Australia for the retail IP camera segment.

We also released cutting edge Wi-Fi technology with our new Nighthawk X8 router, which they built, the world’s first TriBand 4x4 an active antenna technology, helping to push of the ASP of our product line up as well as the overall industries ASP.

On the commercial side of the business, we introduced the world’s first quad-mode 11ac access points and the world’s first web managed 28 port 10-gig switches. Paving the way for success in 2016 is SMBs transition to 11ac and 10-gig.

As for the service provider business unit, we have restructured our business and improved its contribution margin percentage in the second half of 2016. Last but not least, we returned $117.7 million to our shareholders in 2015 through our share repurchase program. We will look to build on all these successes in the year ahead.

For the full year of 2015, NETGEAR net revenue was $1.3 billion, which is down 6.7% or $92.8 million compared to full year 2014 revenue. The entire decline was due to the resizing of our service provider business from approximately $580 million in 2014 to about $421 million in 2015.

Our non-carrier business grew robustly year-over-year from approximately $814 million to over $879 million or 8%. Specifically, our retail business unit grew an impressive 20.9% year-over-year.

For the fourth quarter of 2015, NETGEAR’s net revenue was $360.9 million, which is up 2.2% on a year-over-year basis and up 5.5% on a sequential basis. Once again, RBU or the retail business unit was the growth engine up 33.6% year-over-year as compared to Q4 of 2014.

Non-GAAP diluted EPS for the full year of 2015 was $2.23. Non-GAAP diluted EPS for the fourth quarter of 2015 was $0.83, which is up 27.7% year-over-year. For a full reconciliation of GAAP to non-GAAP financial results, please refer to the fourth quarter and full year 2015 earnings press release.

During the fourth quarter, net revenue for the Americas was $231.8 million which is up 19.1% year-over-year and up 5.5% quarter-over-quarter. Holiday sales exceeded even our most ambitious target for the retail business unit driven by a successful extended cyber week and the promotion of our Nighthawk line of premium home routers.

In addition, it was the first holiday season for our Arlo line of home security cameras. The holiday demand for this product category was significantly more than the seasonal uplift that we usually experienced in the router category.

Europe, the Middle East and Africa or EMEA net revenue was $86.9 million for the fourth quarter of 2015 which is down 18.2% year-over-year and up 11.8% quarter-over-quarter, while the depreciation of European currency continues to make year-over-year comparisons difficult we are pleased with the sequential improvement that we saw in this region.

The sequential increase was primarily driven by holiday demand for our Arlo cameras and Nighthawk routers and gateway

Our Asia-Pacific or APAC net revenue was $42.2 million for the fourth quarter of 2015, which is down 19.2% from the prior year’s comparable quarter and down 5% quarter-over-quarter. Once again, the APAC region’s results were challenged year-over-year due to the ForEx headwinds. Meanwhile the quarter-on-quarter revenue was due to lighter service provider revenue.

In Q4, we shipped 6.1 million units. We also introduced 13 new products during the quarter. As always, sales channel development is the key focus for the company as our sales channel remains a critical strategic asset.

By the end of the fourth quarter of 2015, our products were sold in approximately 27,000 retail outlets around the world and our number of value added retailers stand at approximately 31,000.

Now let’s turn to our review of the fourth quarter results for our three business units; retail, commercial and service provider. For the retail business unit or RBU, net revenue came in at $197.5 million which is up 33.6% on year-over-year basis and up 20.4% sequentially.

For the second quarter in a row, the retail business unit had a record quarter in terms of revenue, driven by the strength of our Nighthawk routers and gateways as well as our Arlo IP cameras during the holiday season.

Of note, Black Friday and Cyber Monday in North America have transformed from single day sale events into a robust, continuous two-week sale, resulting in a more pronounced holiday uplift. This year, we focus our holiday promotion on the high ASP Nighthawk routers which was a huge hit in the market enabling us to reach new high in market share and drive Q4 results beyond our expectation.

Turning to products, our Arlo revenue continues to grow and we expanded the product line during Q4, with the introduction of Arlo Q. Arlo Q is an AC-powered Wi-Fi camera with 1080p High Definition video, 2-way audio, night vision 24/7cloud video recording and 7-days of free cloud storage for uses.

Unlike the original Arlo, wire free cameras, Arlo-Q is designed specifically for continuous indoor use where users can listen in and talk back through the camera. Two years ago, the retailed business unit was a little more than one third of NETGEAR’s overall business. Now it is approaching half of the company’s revenue.

In 2016, coupled with the anticipated recovery of our CBU business our non-service provider business will be over 75% of our overall revenue. Given the greater proportion of revenue coming from RBU, increased demand that we experienced during the two weeks income passing Black Friday and Cyber Monday and the exceptional holiday uplift from IP cameras, we believe the seasonal strength of Q4 versus subsequent Q1 will be more pronounced than we typically experience as reflected in the guidance that Christine will provide in a moment.

The commercial business unit or CBU generated net revenue of $63.9 million for the fourth quarter of 2015 which is down 19.5% on a year-over-year basis and down 2% sequentially. As discussed on the prior earnings call, the year-over-year decline in CBU is primarily the result of a difficult small business market climate in Europe cost by currency headwinds.

We are also seeing continuous channel shift from traditional distribution sales to online sales of our CBU products, resulting in continuous de-stocking in the distribution channel. Since our net revenue is based on selling for the distribution channel, our CBU revenue has been negatively impacted throughout 2015. However, we expect that distributor de-stocking will normalize and should have a much smaller negative impact on CBU going forward.

For our Service Provider Business Unit, or SPBU, net revenue came in at $99.4 million for the fourth quarter of 2015. While this is down 21% year-over-year and down 11.7% on a sequential basis, it is within the formerly announced revenue range that we shared for fiscal year 2015.

More importantly SPBU turned significantly more profitable in the second half of 2015, in both absolute dollar terms and on a percentage basis, compared to the second half of 2014 and the first half of 2015.

As previously announced at our Analyst Day, we expect SPBU revenue to further decline in 2016 as we continue to shift away from low margin products and accounts. As a result, we expect the revenue level will be approximately $75 million per quarter starting in Q1 of 2016.

In order to keep cost in mind with this reduced revenue outlook and better focus our service provider team, we underwent a small restructuring exercise in January 2016 to resize the cost structure of this business unit.

We expect this will allow us to continue to drive profitability within this business unit by focusing on the delivery of premium advance technology products to our committed service provider customers. We also used this opportunity to re-deploy some R&D resources for Arlo and our broader smart home initiatives.

The three areas that we continue to invest in for SPBU are DocSys 3.1, VDSL and LTE as these are the technologies that are valued by our service provider customers. We are pleased to announce that we were one of the first vendors to receive Cablelab certification for DocSys 3.1 product.

Additionally in Q1, we launched the World’s First 4x4 802.11ac vDSL Voice Gateway with Telstra in Australia. Lastly, during Q4 we also provided the World’s First LTE Advanced Category 9 mobile hotspots for deployment in Australia. This is the world’s first mobile data device capable of over 500 megabits per segment download speed in a live LTE Advanced network.

We expect to have this product deployed in other parts of the world in Q1 and throughout 2016. In summary, we are pleased with our fourth quarter results and believe that we are well positioned for success in 2016.

For 2016, we believe we can further increase the premium value of our Nighthawk line of Wi-Fi routers, gateways and extenders [ph] with first to market proprietary hardware [ph] and software and gain more share worldwide.

Our Arlo cameras achieved over 20% market share in the North America retail channel in December 2015 and we expect to increase our share further in 2016 with the addition of new products and wider distribution throughout 2016. We are also hoping to enter a new product category in the smart home market.

For CBU with the recent ground breaking Quadmode 11ac wireless line introduction and the successful debut of our high port [ph] count web managed 10-gig switch. We believe 2016 will be a growth year with many new products waiting in the wings.

For SPBU we continue to service our most valued customer who desires superior technologies and reliability thus ensuring our profitability levels. I will now turn the call over to Christine for further commentary on our financials for the fourth quarter and full year.

Christine Gorjanc

Thank you, Patrick. I will now provide you with a summary of the financials for the fourth quarter and full year of 2015. As Patrick noted, net revenue for the fourth quarter ended December 31, 2015 was $360.9 million as compared to $353.2 million for the fourth quarter ended December 31, 2014 and $341.9 million in the third quarter ended September 27, 2015.

We shipped a total of about 6.1 million units in the fourth quarter, including 4.9 million nodes of wireless products. Shipments of our wired and wireless routers and gateways combined were about 2.4 million units for the fourth quarter of 2015.

Moving to the product category basis, fourth quarter net revenue split between wireless and wired was about 78% and 22%, respectively. The fourth quarter net revenue split between home and business products was about 82% and 18%, respectively.

Products introduced in the last 15 months constituted about 49% of our fourth quarter shipments, while products introduced in the last 12 months constituted about 42% 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 stated released earlier today.

The non-GAAP gross margin for the fourth quarter of 2015 was 30%, compared to 29.3% in the year ago comparable quarter, and 29% in the third quarter of 2015.

Total non-GAAP operating expenses came in at $69 million for the fourth quarter of 2015, which is up compared to the $68.1 million in the year ago comparable quarter, and up compared to the prior quarter's total non-GAAP operating expenses of $63.8 million.

Our non-GAAP R&D expense for the fourth quarter was 6.2% of net revenue, consistent with 6.2% in the year ago comparable period, and 6.1% of net revenue in the third quarter of 2015.

As always, we remain committed to driving further optimization in our sales channel, supply chain, and support functions, which should result in further operating margin leverage in the future.

Our headcount decreased by net 4 people to 963 during the quarter.

Our non-GAAP tax rate was 29.9% in the fourth quarter of 2015, as compared to 36.7% in the fourth quarter of 2014, and 38.2% in the third quarter of 2015.

Our fourth quarter 2015 tax rate improved as compared to our guidance, as a result of a favorable shift in our profit mix and the renewal of the R&D tax credit.

Looking at the bottom line for Q4, we reported non-GAAP net income of $27.5 million and non-GAAP diluted EPS of $0.83 per diluted share.

Our balance sheet remained strong. We ended the fourth quarter of 2015 with $278.3 million in cash, cash equivalents, and short-term investments, compared to $263.8 million at the end of the third quarter of 2015.

For the fourth quarter of 2015, we used approximately $5.3 million in cash flow from operations. During the trailing four quarters, we generated approximately $110.4 million in cash flow from operation. We are very focused on optimizing the business and generating free cash flow which gives us flexibility with our business needs as well as the ability to strategically deploy cash to enhance shareholder value.

In Q4, we spent $12.5 million to repurchase approximately 394,000 shares of NETGEAR common stock at an average price of $31.72 per share, which resulted in a benefit of $0.01 to non-GAAP diluted earnings per share for the quarter.

Since the start of our recent repurchase activity in Q4 2013, we have repurchased approximately 8.6 million shares, and our diluted share count is now lower by 15.5% as compared to the beginning of that period.

DSOs for the fourth quarter of 2015 were 77 days, as compared to 73 days in the fourth quarter of 2014, and the third quarter of 2015.

Our net inventory in the fourth quarter of 2015 ended at $213.1 million, compared to $222.9 million in the fourth quarter of 2014, and $170 million at the end of the third quarter of 2015. Fourth quarter ending inventory turns were 4.8, as compared to 4.5 turns in the fourth quarter of 2014, and 5.8 turns in the third quarter of 2015.

Let's turn to our channel inventories. 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 8.4 weeks of stock. Current distribution inventory levels are 5.7 weeks in the U.S., 4.6 weeks of stock for distribution in EMEA, and 7 weeks in APAC.

As a result of the SPBU restructuring NETGEAR estimates that it will incur pre-tax charges of approximately $1.5 million to $2.5 million consisting of severance and other onetime termination benefit as well as other associated cost.

The company expects to record the majority of these charges and complete the restructuring by the end of the first quarter.

During our analyst day, we guided that our SPBU revenue would decline for 2016. We believe that the service provider revenue runway, run rate will be approximately $75 million per quarter. We also continue to believe that our non-carrier business composed of RBU and CBU can grow approximately 10% combined. While this will equate to slightly down revenues on a year-over-year basis, we would like to reiterate that we fully expect to grow profit dollars and expand operating margins year-over-year in 2016.

For the first quarter of 2016, we anticipate revenue will be in the range of approximately $290 million to $305 million. As previously mentioned, service provider revenue was stepping down to approximately $75 million per quarter run rate for 2016.

Additionally, as typically occurs with retail seasonality, Q1 retail sales will be seasonally down from our Q4 quarter. This seasonality will have a larger impact on our business sin 2016 as retail has become over half of NETGEAR’s overall business in the completed fourth quarter.

First quarter non-GAAP operating margin is expected to be in the range of 9.5% to 10.5%, which reflects NETGEAR’s shift toward non-carrier business. Our non-GAAP tax rate is expected to be approximately 34% for the first quarter of 2016.

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

Question-and-Answer Session


Thank you. And I’ll be conducting your question-and-answer session [Operator Instructions] Our first question today is coming from Ryan Hutchinson from Guggenheim. Please proceed with your question.

Nate Cunningham

Hey, guys. This is Nate Cunningham on for Ryan, couple of quick questions. So, how much of sales in the quarter with new products? And can you give us a flavor for how much of your retail business in the quarter was on the high end?

Christine Gorjanc

What we basically said was products introduced in the last 15 months were 49% and products introduced in the last 12 months were 42%. And those are the statistics that we gave every quarter.

Patrick Lo

And regarding retail, clearly the star performers are the Nighthawk line as well as the Arlo line during the Christmas season.

Nate Cunningham

Okay. And Patrick; is it fair to assume that we should expect a new release of the wireless Arlo than has some of the upgraded features from the Q?

Patrick Lo

You mean the wire free Arlo.

Nate Cunningham


Patrick Lo

That would have the Arlo Q features.

Nate Cunningham

It’s 1080p stuff like that?

Patrick Lo

Okay. But clearly we definitely will continue to upgrade the features of all our product lines, but I’m not in any position to disclosed future products or the benefit of our competitors who are probably listening in as well.

Nate Cunningham

Sure. Thanks.


Thank you. Our next question today is coming from Tavis McCourt from Raymond James. Please proceed with your question.

Tavis McCourt

Hey. Thanks for taking my question. Patrick, I think we had a couple on the commercial side first for move toward Arlo.

Patrick Lo


Tavis McCourt

From the weeks inventory obviously it looks like you shop a lot of wood in the back half of the year or two to get these channel inventories down. I assume that’s complete and that’s kind of raises your confidence level on expecting growth in CBU in 2016, is that right way to think about it?

Patrick Lo

Absolutely, I think we’ve taken the opportunities of a good end market demand to really deplete the distribution channel inventory. And we are very pleased with the progress. We do believe that the destocking negative impact on revenue will be diminished in the coming year and that’s why we’re confident that the increased in end user demand will actually will be reflected positively in the net revenue going forward.

Tavis McCourt

Got you. And then, as [Indiscernible] would say you guys have always been quite good and ease in a switching market and expansion beyond that has been hit and miss and frankly probably more miss than hit. So, I guess, give us your expectations for this new Wireless LAN product which I guess is NETGEAR’s 2.0 or 3.0 or attempted Wireless LAN, what’s different this time and kind of what are your expectations for that business?

Patrick Lo

You know, you got it right, I mean, there is no doubt, I mean, on the commercial side our switch business is unfortunately big compared to the other product lines. I think our strategy is always the same. For those customers who have been our loyal switch customers and they would like that expand that beyond that into Wireless LAN we want to get them in the fold, and now with the 11ac addition that we are in a better position to retain them, because the world is definitely is moving to 11ac.

So our objective is very simple off of the current base of Wireless LAN, we would like to grow it double digit, but even growing double digit of course its size is still be dwarf by our switch revenue, which will still be our growth engine. That’s why the 10-gig switch that would put so much emphasis behind is pivotal and critical to our continuous success in the commercial channel.

Tavis McCourt

And then the question on Arlo, you mentioned in your prepared remarks a new product category within Arlo I think within 2016 and I think up until now you always kind of framed it as we’re partner, we may make some new products, new product categories, but we haven’t made any decisions yet.

So, is this the first quarter where you kind of made a firm decision that you have an idea of what you want to develop and how to bring it to market and so forth. And I want to clarify, when you’re say new product category would you consider a move from outdoor camera like Arlo Indoor camera, Arlo Q as a new product category or we’re talking something beyond cameras?

Patrick Lo

Yes. We’re talking about something beyond cameras because it clearly you would see a lot of more cameras from us this year. And now in the Analyst Day that we had in November last year we put them a chart to show the various Smart Home devices that are popular in the market today, of course, by far the biggest category is still camera. And then the second category following camera are thermostats, and then after that is door lock and then after door locks and everything kind of trails off a little bit, but you still have the whole bunch of other smart home devices such as sensors, such as garage to open – as a matter of fact, garage door open is up there, is one of the big four. And then you have sprinklers, you have light bulbs, so there are many Smart Home categories, there is no way, we’re going to participate in every single of those categories.

So, we’re going to partner with other people who make good door locks or whatever, but yes at that point in time we already said that we would definitely go into another category beyond cameras, so it’s not something we just announced. We announced that in the Analyst Day last year, but of course for competitive reasons we cannot tell you which category that we’re going into. But one thing for sure, as we said last time on the Analyst Day, if they build a new category, it has to differentiated, it has to be relevant to our customers, it has to be something that our customer has been looking but have not been able to be met by the market.

Tavis McCourt

Great. Thanks a lot Patrick and congratulations on the strong quarter.

Patrick Lo

Thank you.


Thank you. Our next question is coming from Rohit Chopra from Buckingham Research. Please proceed with your question.

Rohit Chopra

Thanks. Hi, guys, how are you?

Patrick Lo


Rohit Chopra

I had a question first on the – I just want to clarify some numbers if you don’t mind. I saw inventory returns are down sequentially, inventory is up sequentially, DSOs are up sequentially and I just want to make sure and I think I’m going to be correct on this, but is that all due to destocking or is there some other reason for that, Christy?

Christine Gorjanc

You know, I’d say inventory returns were down because as you notice the inventory we had a little bit higher inventory at the end of the quarter and that’s definitely always the balance we do between air freight and sea freight. And as you can see our customers took a lot of inventory this quarter, so we want to make sure we have it on hand. In addition on the DSO, that’s really more of some of our customers get seasonal dating terms in Q4 and that really drives that, it sort of at the higher end of our range, but it’s absolutely within a range we’ve seen before.

Rohit Chopra

And then, I want to come back to this CBU if you don’t mind, its four quarters of declines, I know there is some – there is discussion about destocking and then it will be next of the drag next year. You got a couple of new products, but there have also been new products and the past and I’m coming back a little bit Tavis’s question is, I’m trying to understand how you can move more of that product. It seems like it’s a very competitive state, which is call the SMB spaces for switching and Wi-Fi and it seems that still that category of the customers is trying to push a little bit more into the cloud, I mean, it’s not – there shouldn’t be anything new to understand, but I’m still unclear as to how you get growth out of the CBU which just by introducing new products that you already had.

Patrick Lo

I think the most important is we’re introducing products that we tested, the market and its definitely getting a lot of good reception. So, as I mentioned actually in the earlier comments that we tested with the product which is a Web Managed 10-gig high port count switch back in Q4, we’ve introduced it and it was a hit. So, that we know that is really well received by the market. So, we do believe that as we continue to produce more products along that category that would be helpful.

And all long we know our PoE switch is been very, very popular. So, we’re going to generate PoE switches of this 10-gig of this higher speed. So, we feel pretty confident because we see the reception of these switches are very strong. Yes, definitely I mean the most important thing is proof, right. So I think it’s important for us to prove that we can move the needle, so our revenue would go up.

Now, the one thing that give us confidence is that because even though our revenue is counted as the sell in to the distribution channel, we actually monitor, actual sales out very tightly, all right, sales out from, sales out from CDAW, sales out from mobiles -- and actually it has been growing for the sales out.

So, for that they give us the confidence that once we digest all the channel inventory and if you look at the channel inventory for example like North America, we have been debating the channel inventory from as high end almost like 12 weeks right now to less than six weeks. Yes, I mean, theoretically it could destock forward to further to three weeks let’s say, but that would be very extreme

So, based on the product test we had in Q4 that is encouraging on the switching side, based on the actual sales out is actually increasing quarter after quarter, and based on now the channel distribution channel inventory has depleted putting much to the level that is we can’t go any further that gives us the confidence that 2016 is the year that we can turnaround the net revenue line.

Rohit Chopra

All right. One last question, it was just on SPBU, you mentioned some of kind of interesting things about DOCSIS 3.1, it sounds us if that doesn’t assume it has a lot more leverage in it, right. Do you feel not got a lot of cost, so is there any sense carriers deploying this? It sounds if everybody is trying to do something, they’re facing pressure from Google, Fiber, all the cable companies, but is there any time line you can give us, is there a second half of the year kind of time frame now that you have the cable app certification, is it 2017 where you think that we’ll see greater speeds or cable companies look to DOCSIS 3.1 anything would be helpful Patrick.

Patrick Lo

Based on our relationship with the various operators around the world it is pretty clear to us that the people leading the charge will be in North America as well as in Japan, and you will see some test markets by the end of this year and big deployment, mass deployment is going to happen in 2017.

So there are few big operators already in the testing phase of these products and the network.

Rohit Chopra

That’s going to be really helpful. Appreciate it. Thank you.


And your next question is coming from Hamed Khorsand from BWS Financials. Please proceed with your question.

Hamed Khorsand

Hi, just -- first question I’ll start off with, what changed in your process as far as restructuring the service provider business that you’re actually guiding the reduction down further, its 75 million and in Analyst Day, we were saying $80 million to $85 million?

Christine Gorjanc

Sure. The difference really as we look at the business coming into the New Year, we have decided to exit from another customer based on the profitability and some other financial concerns.

Hamed Khorsand

And what does this have as far as an impact or a benefit as to your expectations for ending the year with operating margin above 11%?

Christine Gorjanc

No, we haven’t change on that. I think we said we still – we ended this quarter -- Q4 10.8 and we’re very focused on profitable year-over-year growth.

Patrick Lo

We’re still confident that we will grow operating margin dollars year-over-year and achieve 11% plus operating margin by the end of the year.

Hamed Khorsand

Okay. And switching gears to the retail side, what kind of mix are you expecting as far as Nighthawk taking over as far as the units shipped?

Patrick Lo

Oh, the Nighthawk units shipped, I mean, it would still be smaller than the Nighthawk, but revenue wise it’s definitely much bigger. But I think by the end of this year, the Nighthawk even units will be bigger than a non Nighthawk products.

Hamed Khorsand

And is the price trajectory staying same at the 1.80 all way up to $300 level?

Patrick Lo

Yes, our cheapest Nighthawk today is 199, that’s our recommended price and I think you could buy some on Amazon a little bit cheaper than that, probably 10 bucks cheaper than that, but that generally is the starting point and our highest Nighthawk today is running at 399, and so that’s the price range but we’ll continue to test higher price points.

Hamed Khorsand

Okay. Last question here as far as obviously total amount of units shipped, that’s going to decline, any guidance as to what you’re expecting as far as that the unit shipped number would be?

Patrick Lo

No, I mean, this coming down because of service provider, while we have basically think about this, we have resized the business from $580 million to $300 million this year, you could roughly say, that is probably half – if you take an average selling price of even a $100 there you could see quite a bit of reduction in units. So that of course is being made by retail, I mean retail is growing very fast, but we don’t expect that will be completely made up. The ASP and retail is higher, so we believe over time we will make it up, but immediately within the next 12 months we won’t be able to make it up.

Hamed Khorsand

Okay. That’s it from me. Thank you.

Patrick Lo



Thank you. Our next question today is coming from Kirk Adams from Rosenblatt Securities. Please proceed with your question.

Kirk Adams

Hey, thanks very much. I just have a couple of things. First off, what’s the pricing environment like taking 4x out of the equation across the country on the retail side, are you still seeing pretty solid pricing environment out there?

Patrick Lo

In North America definitely we’re seeing very solid pricing in – there are no crazy people, heavy discounting in North America especially on the high end because, I mean, frankly, we’re the only game. We were the only player in that really high end. And internationally in Europe there is significant price pressure on the low end which we basically do not play that much anymore. But in the high end even in Europe it’s stabilizing, it’s stabilizing; it’s not as crazy as before.

The surprising thing is actually in Asia, on the high end is very firm and actually even in the mid to low end, I mean, it hasn’t really moved much. I think the reason is pretty much the market is stabilized into a few key players and there is not much movement in terms of market share, in terms of routers, I mean, the bigger ones are getting bigger, I mean like us continue to gain share in North America, so that’s the situation.

Kirk Adams

Great. And just a follow on there, macro conditions across the world with everything going on in the market the last month and stuff, you hear lot of crazy stories, but are you guys seeing any big changes in the macro environment that you’re dealing?

Patrick Lo

We really haven’t seen much change in terms of the market demand. And we continue to see the normal seasonal behavior of in all three markets be it Asia, U.S. as well as Europe. I mean generally the Holiday Season which last from end of November to end of December is crazy, I mean, it’s no doubt about it. But then in January it’s still pretty good, because get a lot of gift cards, cash and they buy it. And then it will step down in February and then we’ll step further down in March. That behavior hasn’t change. That change of – that move of seasonality hasn’t been more pronounced this year than previous year. And we do not see any significant change in the macro environment

Kirk Adams

Excellent. Lastly just a quick one on foreign exchange, I mean, your expectations in foreign exchange impact going forward during 2016?

Patrick Lo

Too early, if I know it, I won’t be doing this job any more. We are trader. But to us we want to manage our business very conservatively, so naturally in our financial planning we prepare for a worst than normal scenario going forward. So, I mean, that’s our provision. But if in case the foreign exchange behaved better than what we anticipate that would be great, that would be better to our operating profit line. Now today as you probably saw 68% of our business is in North America, 65% call it is all U.S. dollar based, so that kind shield us off a little bit from the foreign exchange fluctuation, but of course other 35% it goes up and down 10% is beautifully baked all right. And that’s why in our planning we have to be very conservative in terms of the other 35% of the business.

But I think one thing that we have learned over the last 18 months to shield us off from all these fluctuations is to rapidly introducing new products. All right, because the old product you cannot raise prices, you just can’t, all right. The customers would just get frustrated if you increase prices.

When we introduced new products, then you set new price point is different, so to counter that any foreign exchange fluctuation the best move is to continue to introduce new products that’s why we are so focused on making sure we introduce many new products every quarter and relevant, innovative new products every quarter that we can set our pricing.

Kirk Adams

Great. Thank you very much.


Thank you. We’ve reached the end of our question and answer session. I’d like to turn the floor back over to management for any further or closing comments.

Patrick Lo

Thank you very one for joining us on today’s call. As you can tell we’re very excited about what we have accomplished in 2015 as well as what we have in store for the year ahead. We expect that 2016 will be an even more exciting and profitable year than the prior. So thank you and we’ll talk to all of you again in April.


Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.