NETGEAR Q1'16 Earnings Conference Call: Full Transcript

Operator:

Greetings and welcome to the NETGEAR Inc First Quarter 2016 Earnings 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, Investor Relations Manager. Please go ahead, Sir.

Christopher Genualdi: Investor Relations Manager:

Thank you, Operator. Good afternoon and welcome to NETGEAR's firth quarter 2016 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 little different than it had been in the past. We'll lead off with a review of the financials for the first quarter provided by Christine, followed by details and commentary on the business provided by Patrick, and finish with second quarter guidance provided by Christine. We will then have time for any questions. If you've 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, 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-K. 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 www.netgear.com.

At this time, I would now like to turn the call over to Ms. Christine Gorjanc.

Christine Gorjanc: Chief Financial Officer:

Thank you, Christopher. So the result of the first quarter of 2016 came in slightly above the high end of our guidance. We are pleased that each of our three business units met or slightly exceeded our expectations for the quarter.

For the first quarter ended April 3, 2016, net revenue was $310.3 million which is slightly up on a year-over-year basis and down 14% on a sequential basis. As noted on the prior earnings call, we expected a step down in our service provider revenue run rate during Q1 and the sequential decline in revenue both reflect this as well as typical Q1 seasonality for retail and commercial.

NETGEAR net revenue by geography reflects our continued strength in North America.

Net revenue for the Americas was $193.9 million, which is up 11.5% year-over-year. On a sequential basis, the Americas revenue was down 16.4%, which reflects the aforementioned step down in service provider as well as normal seasonality for our retail and commercial businesses. EMEA net revenue was $64.5 million, which is down 27.6% year-over-year and down 25.8% quarter-over-quarter. Similar to the Americas, the drop quarter-over-quarter in EMEA reflects reduced service provider revenue and normal seasonality for our retail business. Our APAC net revenue was $51.9 million for the first quarter of 2016, which is up 12.2% from the prior year's comparable quarter and up 23% quarter-over-quarter and we saw growth in all the major countries in the APAC region during Q1.

For the first quarter of 2016, we shipped a total of approximately 5.5 million units. The net revenue split between home and business products was about 77% and 23% respectively. Products introduced in the last 15 months constituted about 43% of our first quarter shipment, while products introduced in the last 12 months constituted about 31% of our first quarter shipment.

From this point on, my discussion points will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP is detailed in our preliminary financial statements released earlier today. The non-GAAP gross margin in the first quarter of 2016 was 33.3% compared to 29.7% in the prior year comparable quarter and 30% in the fourth quarter of 2015. The year-over-year gross margin improvement reflects the reduction in service provider revenue, which typically carries a lower gross margin while the sequential improvement reflects a significant reduction in the use of air freight and leveraging our investment in inventory.

Total non-GAAP operating expenses came in at $66.5 million, which is up 4.9% year-over-year and down 3.7% sequentially. During Q116, we reduced the operating expenses in our service provider business unit to correspond with the reduced revenue outlook.

Our head count decreased by net 26 people to 937 due to the previously announced restructuring of the service provider business unit.

Our non-GAAP R&D expense for the first quarter was 6.9% of net revenue as compared to 6.3% in the year ago comparable period and 6.2% of net revenue during Q4 2015. We believe our investment in R&D is key to our business.

Our non-GAAP tax rate was 33% in the first quarter of 2016.

Looking at the bottom line for Q1, we reported non-GAAP net income of $24.6 million and non-GAAP diluted earnings per share of $0.74 per diluted share.

Turning to the balance sheet, we ended the first quarter of 2016 with $333.3 million in cash, cash equivalents, and short-term investments. For the first quarter of 2016, we generated approximately $59.8 million in free cash flow. We continue to remain very confident in NETGEAR's ability to generate meaningful levels of cash.

During the trailing four quarters, we generated approximately $162.2 million in free cash flow. We continue to be focused on optimizing the business and generating free cash flow which gives us flexibility with our operational needs as well as the ability to strategically deploy cash to enhance shareholder value.

In Q1, we spent $10 million to repurchase approximately 280,000 shares of NETGEAR common stock at an average price of $35.70 per share which resulted in no benefit to non-GAAP diluted earnings per share for the quarter. Since the start our repurchase activity in Q4, 2013, we have repurchased approximately 8.9 million shares and our diluted share count is lower by 15.1% as compared to the beginning of that period.

Now, turning to the results of our three business units; the Retail Business Unit or RBU generated net revenue of $157.5 million during the quarter which is up 30.2% on a year-over-year basis and down 20.2% sequentially. The Commercial Business Unit or CBU generated net revenue of $68.4 million for the first quarter of 2016, which is down 5.9% on a year-over-year basis and up 7.1% sequentially.

I'd like to highlight that weeks of stock for our US distribution channel stabilized during Q1 at 5.6 weeks, which is relatively flat with the prior quarter of 5.7 weeks. We believe the channel inventory levels for CBU are now better aligned with market demand.

For our Service Provider Business Unit or SPBU, net revenue came in at $84.3 million for the first quarter of 2016. This is down 27% year-over-year and down 15.2% on a sequential basis. We delivered revenue above our Q1 forecast largely due to the fulfillment of upside demand from one of our international service provider customers. This fulfillment of upside demand coupled with the completion of restructuring activities that we undertook early in the quarter, increased the business unit's profitability for Q1. As we have mentioned, we continue to closely manage the service provider business unit with a focus on profitability and we continue to expect that our service provider business will generate approximately $75 million in revenue per quarter for the remainder of 2016.

I’ll now turn the call over to Patrick for his commentary on the results of the three business units as well as the overall business, after which I will then provide guidance for the second quarter of 2016.

Patrick Lo: Chairman & Chief Executive Officer:

Thank you, Christine and thank you everyone for joining today's call. I'd like to use this opportunity to discuss a few key topics, which are; the evolution of the Home Wi-Fi market, our continued success with Arlo, the dynamics of our commercial business unit, and Q1 highlights for the Service Provider Business Unit.

As the numbers show, our Retail Business Unit continues to demonstrate impressive year-over-year growth driven by our focus on providing premium home Wi-Fi solutions and unique innovation for the smart home. The proliferation of connected devices and streaming media in the home continues to drive our home Wi-Fi business. According to our market study, there are about dozen connected devices in the average home today in North America and we expect that number will only continue to grow.

As we have spoken about several times on prior calls, we view Wi-Fi as the backbone of home connectivity. While the 802.11ac Wi-Fi standard has been available to consumers for some time now, we believe that it is still early in its adoption. Our estimate suggests that 802.11ac is installed in less than 30% of homes with broadband in the United States, which highlights just how much runway we have ahead of us in this upgrade cycle.

For the last two years, our original Nighthawk router has dominated the market for home Wi-Fi. We put a significant amount of R&D into not only the original Nighthawk, but also the subsequent Nighthawk products released with the belief that consumers would be willing to pay a premium for a better home Wi-Fi experience. This effort has paid off as our Wi-Fi router average selling price has increased approximately 50% during the last two years. We have witnessed a paradigm shift as home Wi-Fi has been elevated beyond utilitarian connectivity. It's about innovation not only in speed and range, but Wi-Fi stability, data traffic segmentation, ease of setup and use, and overall user experience.

We've stayed ahead of our competition by being first to market with key technologies such as Active Antennas and Tri-Band, both of which are features in our highest-end Nighthawk, the X8. Rest assured, we will continue to innovate and stay ahead in home Wi-Fi, as we have done for over 20 years.

As you all know, NETGEAR is no longer solely a networking company. Last year, we entered the smarthome market with a product that fundamentally changed what was possible in home security. The ability to put our wire-free Arlo cameras outside of the home un-tethered from power outlets made a true home security system something that the average consumer could afford. We expanded that line with the release of Arlo Q in January, and just this month, we announced the release of the third member of the family, Arlo Q Plus. Arlo Q Plus provides Power over Ethernet and local recording backup in addition to 1080p high definition video, two-way audio, night vision, and free rolling seven-day video cloud storage. It can be connected and powered over existing network infrastructure using a single Ethernet cable, making it the ideal solution for shops and small offices. I'd like to especially thank our tight knit Arlo team which has been working tirelessly to make Arlo the number one do-it-yourself IP camera in both the North American and European retail markets.

Next, I'd like to provide a few words on the Commercial Business Unit. We are pleased with the 7.1% sequential growth generated by CBU, as Christine has pointed out. We believe the US distribution channel has stabilized and destocking is essentially completed.

Looking at the big picture, while large enterprises are making the shift to 40 gig and a 100 gig switching, small and medium businesses are upgrading to multi-gig and 10 gig switching. Here at NETGEAR, we are focused on providing these SMBs with the equipment they need to make this upgrade as easy and affordable as possible. As I alluded to you on our prior call, switching currently makes up the bulk of our commercial business. We recently released two new series of switches for SMBs, one of which, the multi-gig switch, is specifically designed for the latest in Wave 2 wireless AC deployments. With more new products to come for the rest of the year, we are looking forward to a successful 2016 for the Commercial Business Unit.

Last but not least, we were extremely pleased with the performance of our Service Provider Business Unit or SPBU during the quarter. SPBU's revenue benefited from unexpected upside demand during Q1, while we continued to focus on generating increased profitability within the business unit. I would like to highlight that during the quarter, we launched the world's first VDSL Wave 2 Wi-Fi Gateway for small businesses with Telstra. We also launched the Unite Explore with AT&T which is the blazing fast LTE-advanced mobile hotspot that is ruggedized for the outdoors. Both of these products are hits with our customers. Also, both are designed with the latest and greatest in wireless technology, LTE or Wi-Fi, which allows us to set ourselves apart from other vendors in the service provider space. As I have said on prior earnings calls; our Service Provider Business unit is focused on high value add cutting edge technologies such as LTE Advanced, DOCSIS 3.1, and VDSL, rather than low margin commodity technology.

To summarize, we have all three business units performing to or above our expectations and we continue gaining share in home Wi-Fi, home security cameras, and switching.

I will now turn the call back to Christine for our Q2 guidance.

Christine Gorjanc:

For the second quarter of 2016, we anticipate revenue will be in the range of approximately $290 million to $305 million. Second quarter's non-GAAP operating margin is expected to be in the range of 9.5% to 10.5%. Our non-GAAP tax rate is expected to be approximately 34% for the second quarter of 2016.

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

Question & Answer

Operator:

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Your first question will be from Tavis McCourt of Raymond James. Please go ahead.

Tavis McCourt: Raymond James:

Hey, thanks for taking my question. I've got a couple of them. First, on the financials this quarter, the gross margin was obviously much higher than we had in our model and especially considering the outperformance in the Service Provider business, a bit surprising. You mentioned specifically less air freight this quarter. Was there anything artificial or one time in those gross margin levels as well though where should we expect those to level out as the year progresses?

Christine Gorjanc:

You know I think it's really related to just supply chain efficiencies in mainly freight in Q1 which was lower than we would expect it to be going forward and you can see that in the inventory totals on the balance sheet.

Tavis McCourt:

Yep, yep, and then a couple of product questions Patrick.

Patrick Lo:

Sure.

Tavis McCourt:

On the DOCSIS 3.1 on the slide and the presentation, it indicates you're working with a large cable provider to make your 3.1 available at retail, but are you also pursuing service provider channel distribution for that or will you be solely at retail with that product? And then Arlo Q, I guess is more targeted to the commercial channel. I guess talk a little bit about the distribution strategy for that product and if you have any insight into the size of the commercial market for security cameras versus the consumer market where you've been in previously? Thanks.

Patrick Lo:

Sure. On the first one, definitely we are doing the DOCSIS 3.1 on all channels, not only in the retail channel. Clearly, we see ourselves have opportunities shipping that to operators, cable operators around the world. Secondly, regarding the commercial side of the camera, I mean as a matter of fact, the commercial side of video surveillance with security is many times bigger than home security. And clearly, the channels that are very, very important for this is the security installers, people who traditionally install security alarms, sensors, and cameras, outdoor cameras, those are very, very important to us. And as a matter of fact, that's why we participate in those specific tradeshows.

We just participated OneCore ICS West you know just a few weeks ago and there is a lot of interest in our Arlo Q and you're exactly right, we intend to use Arlo Q to really break into the small and medium business commercial segment and we do believe we have a lot of advantages in our Arlo Q and Arlo Q Plus over our competition and it's applicable worldwide. We're looking forward to a really good ramp of this product on top of the Arlo wire-free.

Tavis McCourt:

Thanks Patrick and good start for the year.

Patrick Lo:

Thank you.

Christine Gorjanc:

Thank you.

Operator:

The next question will come from Ryan Hutchinson of Guggenheim. Please go ahead.

Ryan Hutchinson: Guggenheim:

Okay, great. Good afternoon, guys.

Patrick Lo:

Hi.

Ryan Hutchinson:

I guess sort of a follow-up to the last question. Gross margins, obviously they are the best they've been since 2010 and Service Provider drove the bulk of the upside this quarter, plus you had the air freight you talked about. But -- and I understand you guide the business to operating margins, but is it fair to assume that these gross margins are sort of the new norm as we think about the business with the lower contribution from service provider?

Christine Gorjanc:

No, I really think we received the air freight and a few other supply chain efficiencies in there. It was very efficient in Q1. We brought in a lot of inventory at the end of Q4 in that. I believe that it is not going to maintain that 33%.

Ryan Hutchinson:

Okay and just I guess some sort of guidance, is it more back towards where we were last year? As you would assume…

Christine Gorjanc:

Yes, more towards Q4 last year, more towards the Q4 in last year.

Ryan Hutchinson:

Okay, okay. And then just as far as this new mix in revenue, as we think about the business overall versus historical seasonality, has anything changed or are we still operating with the assumption that this is going to be your weakest quarter followed by the back half being the strongest and so on and so forth or is there a modest adjustment to seasonality given the new level with regard to service provider or not?

Christine Gorjanc:

No. I think actually seasonality is a little more, a little higher when you look at the Q1 and Q2, as it -- it's 50% of the business RBU, but we still expect the back half of the year to be better than the first half and Q2 are toughest quarters. You can see the guidance there and that's always a tougher quarter because retail seasonality goes down in Q2.

Ryan Hutchinson:

Okay. I'll get back in the queue and I got a couple more. Thanks.

Operator:

Our next question will come from Hamed Khorsand of BWS Financial. Please go ahead.

Hamed Khorsand: BWS Financial:

Hi, I just wanted to first start off with a number. I think I didn't hear or you didn't say it, how many units were shipped during the quarter?

Christine Gorjanc:

I believe its 5.5 million units.

Hamed Khorsand:

Okay and then my other question was, can you talk about Europe and the step down in revenue? In your commentary there was an international service provider so I am assuming the retail segment in Europe was significantly weak in the quarter. I am just trying to get a gauge as to what's going on there.

Christine Gorjanc:

I'd say when I look at the step down in revenue on the EMEA side, it's probably bringing down half service provider and then normal seasonality. So we really saw normal seasonality in Europe also in Q1 and then step down in service provider.

Hamed Khorsand:

Okay and as far as the ac units that were going, 11ac, are you able to provide any color as to, if you're seeing anymore uptick in demand from the higher price point versus the lower price point in Nighthawk?

Patrick Lo:

Well, as a matter of fact, I mean, thanks to the concerted effort of the channel and as well as our competitors as well, the unit and the revenue has shifted more to 11ac. And band 11n as a matter of fact, more than half the market is shifted towards products that are over $100. So we definitely see the market shifting. It's just like what I've been saying before when smartphone was introduced then the whole market shifted to higher-priced smartphone away from the cheap dumb phone and I believe that the same is true now for routers that people are shifting to these multi-band 11ac routers instead of the single band dumb n routers.

Hamed Khorsand:

Not that. Patrick, I was referring to if you could provide some sort of depth to the mix as far as the consumers are, if consumers are shifting away from buying your $200 Nighthawk routers versus your $300 Nighthawk router.

Patrick Lo:

I just said that now more than half of the market is shifting to buying routers which are over $100 than before. So, clearly the market’s shifting to the higher-priced products.

Hamed Khorsand:

Got it, alright and then my last question is, are you going to see any kind of a benefit from commercial side as far as the readjustments that you've done? Is it going to be on an ongoing basis now after given what you saw in Q1?

Patrick Lo:

Well, I mean, we're certainly pleased with the sequential growth from Q4 to Q1 and given the fact that there is no additional destocking, alright, so there is no increase in inventory level. So that means the growth from Q4 to Q1 is truly reflective of what's in markets there. So we are very encouraged with that and clearly we announced quite a few of new products just recently. For example, our whole bunch of 10-gig switches and PoE switches were announced just recently. Some of them are really groundbreaking, like the multi-gig switch we just announced and it's groundbreaking. So we do believe new products from CBU and the pipeline of new products for the rest of the year will continue to enhance our chance of having a successful year for CBU.

Christine Gorjanc:

Right and Hamed, just to reiterate, we had said prior to this call that we believe that RBU and CBU combined would grow 10% during 2016 and obviously CBU is a part of that.

Hamed Khorsand:

Okay, great. Thank you.

Patrick Lo:

Sure.

Operator:

And the next question will be from Rohit Chopra of Buckingham Research. Please go ahead.

Rohit Chopra: Buckingham Research:

Thank you. Christine, housekeeping question, wireless node, didn't give that number. Do you have that?

Christine Gorjanc:

I will get that for you. I don't have it in front of me right now, I'll get it and I will get back to you.

Rohit Chopra:

You I always add that one and then the…

Patrick Lo:

4.2, Rohit, it is 4.2.

Rohit Chopra:

4.2 wireless, okay, that's great.

Patrick Lo:

Yes.

Rohit Chopra:

I appreciate that and then the question I had was on competition in retail and these new players that are coming out with home mesh networks, so everybody seems to be following your strategy of trying to push for higher ASPs in the retail market. Can you tell us your strategy with these home-mesh networks and if you're seeing that competition at all eat into your numbers in certain areas?

Patrick Lo:

So, first and foremost, we welcome new entrants into the market especially at even higher ASP. So that's good. So that again, I mean, as you say it validates our strategy. I mean nothing is better from a flattery standpoint on somebody copying your model. We do believe that providing whole home Wi-Fi coverage eliminating dead spot is the way to go and this mesh network concept, we introduced it last year with our Dead Spot Terminator SKU under the joint branding of Best Buy Geek Squad and NETGEAR and has been very successful. I guess that prompted our competitions to copycat it and we will welcome any copycat because that validates our strategy. So we will continue to do, I mean, on a single router, expand the coverage with the Nighthawk series and then of course, we will continue to develop our mesh network along the line of the Dead Spot Terminator where you have multiple units to cover the house.

So and as far as competition is concerned, we actually saw our market share ticked up in Q1 both in North America as well as in Europe. So I think the new entrants heard the old competitors more than us.

Rohit Chopra:

Thank you, Patrick.

Patrick Lo:

Sure.

Operator:

And the next question will come from Kirk Adams of Rosenblatt Securities. Please go ahead.

Kirk Adams: Rosenblatt Securities:

Hello Christine. Hello Patrick.

Patrick Lo:

Hello.

Kirk Adams:

Great. I'd love to hear more about APAC and you are always successful there and do you expect that? And then also can you talk about foreign exchange and what the impact of that is in the quarter and going forward?

Patrick Lo:

I'll let that Christine talk about foreign exchange first because I don't know much about it.

Christine Gorjanc:

Sure. The FX impact was not a lot from Q4 to Q1. I mean, so really year-over-year it's not a lot. So we're just really not talking about it.

Patrick Lo:

And for Asia Pacific, I mean, as you can see, the percentage of revenue derived from Asia Pacific market is perking up year-after-year and we're very pleased that in Q1 it culminates to 17%. I remember many years ago I talked about that eventually Asia will represent 20% to 25% of our total sales and we are clearly marching towards that goal. Clearly, if you look at the pure economy, I mean, Asia is the biggest. If you combine Japan and China and India, it's definitely bigger than Europe, bigger than the US, and population is not even comparable. So naturally that should be a very lucrative market and also unlike Europe and the US, where the economy is kind of growing at a very snail pace, Asia Pacific economy, if you look at China and India, they're still growing at 6%, 7%. We talk about recession, but for 6% and 7%, we'll take it any day.

So and also, the most important thing both in these markets of China, India, is that the middle class is growing rapidly and more and more affluent people are servicing. I mean, as a matter of fact, the last report I read is that there are more billionaires in China than in the US now. So that all bodes well for us because we're not selling cheap stuff, we're selling the most expensive high-end aspirational products. So all of those elements benefit us and we believe that our Nighthawk routers, our Dead Spot Terminators, our Arlo security cameras, will play really well into the Asian market and we expect that we will continue to take share away from our competitors both from the US as well as from the local Asian vendors.

Kirk Adams:

Thanks very much.

Patrick Lo:

Sure.

Operator:

And the next question will come from Rob Cihra of Sterne Agee CRT. Please go ahead.

Rob Cihra: Sterne Agee CRT:

Hi. Thanks very much. I have two questions if I could. One on service provider, it may sound silly, but if you look at the leverage you got this quarter with the upside off with the lower cost structure you now have, I mean, is there any chance you look at that and you say, hey, maybe we can actually go after lower price business and we would have otherwise because we now have this lower cost structure or was this just a one-time boost and that's too optimistic? And then separately if I could, just with Arlo now anniversarying the cameras from, your cameras last year, can you tell us anything in terms of your, maybe telling us your next category that you would get into, but maybe what you learnt from Arlo in terms of giving a direction on your next category? Thanks.

Patrick Lo:

Yes. I mean, for the service provider, definitely, if you have a fixed cost structure and on your existing product line, especially on the leading edge pipeline, all of a sudden you get a bluebird order, that's very very high leverage, because you have no additional cost but it is at the front end of the margin and you get extra revenue. I mean, we'll take it any day. Now, but those opportunities are far and few in between. The reason that we could take care of it is because our competitors just do not have that kind of logistics excellence that we could do. Absolutely, if there is such a bluebird coming in every quarter, we'll be more than happy to take it. But on the other hand, I am not going to lower our margin to try to catch this type of business. But the good thing is, the product that we are shipping are at the leading edge, so the margin is good.

But you are right, definitely our objective is now after we pair down the product line for service provider and really leave it just to the high value add differentiated high margin product, we absolutely will look for opportunities everywhere and if we could grow that business, of course we would do that, alright.

And then in terms of Arlo, yes, I mean clearly Arlo fits right into our channel, the strength of our channel. We are very strong in retail, we have a fantastic brand around the world. We have a very strong broad base, alright, so that's why when we create Arlo wire-free and then Arlo Q, we just inject them into the channel and the channel would take it from there. As long as our products are differentiated, leading-edge, and provide real value to our customers, our channel will be able to take it as far as we can. We will use that same experience to develop our next category of products in the smarthome or in the smartoffice.

As I said in the prior two earnings calls, we are really focused on a product category that we see are already growing but we would be able to provide a highly differentiated product that would add significant value and fulfill a significant unmet need from our customers in that category. That would just command a premium and is a high ASP. So we are scanning many, many of the categories and there are a few that we are putting our eyes on and we would come out with new products but we cannot disclose what it is until it is out.

Rob Cihra:

Great, thank you.

Operator:

And the next question will be a follow up from Tavis McCourt of Raymond James. Please go ahead.

Tavis McCourt: Raymond James:

Hey, just had a couple of more as I look through the results little more. Christine, the DSOs were down quite significantly in the quarter and I think they are about as low as they've been since about 2011 in my model. So if there is any specific reason for that and any kind of guidance going forward that would be appreciated. And then Patrick, on a business that we don't talk about too much, the LTE business, I am not sure the market for LTE gateways really took off like you would anticipate it but we are hearing from a lot more carriers talking about 5G as a potential fixed wireless solution and I know it's years ahead but I guess what is your viewpoint on I guess first of all, LTE gateways still as a viable market and then if the carriers wait till 5G, is that something that you're willing to spend on ahead of the market to stay involved in fixed wireless? Thanks.

Christine Gorjanc:

Tavis, I’d answer DSO quickly. Two things on that, the lower the service provider usually the better the DSO. And secondly when we look at our retail quarter, we do give holiday payment terms to some of the large retailers and most of that money then comes in Q1. So they get extended terms once a year. So I'd say our range is still 65 to 75 and you can see that if you look over history, we happen to be at the low end of the range this quarter.

Patrick Lo:

Yes, as far as LTE, I mean, clearly our expertise actually in wireless, be it in the license, the band for LTE Advanced or the unlicensed band for Wi-Fi and 5G is being talked about and the standards is not really finalized and the format is not finalized but no matter what, we believe that we will be at the leading edge because frankly there is not a single competitor in our space who knows more about both the license and the unlicensed band wireless as much as we do. And we have very close relationship with all the chip vendors that provide wireless technology in these areas, namely Broadcom and Qualcomm, and we believe that we will be at the forefront of the technology and you bet and we will be very focused on making sure we are a leader in the 5G technology.

And you are right, LTE gateway in the developed markets did not pan out as what we would have liked and the emerging market is still pretty mired in the old 3G technology which is very low margin, which will not be open for us to go in. But you're hitting on the head with the new LTE technology, not only in 5G, but even in 4G, I mean the LTE Advanced continue to progress. I mean, the next milestone is the gigabit of Cat 15 and then also there is this Cat M, M1 and M2 coming along pretty soon which will open up tremendous opportunity in what we call the mobile IOT area.

Again, I mean, nobody could compete with us. If you look at on the low power wireless technology, I mean, we had it all. We've been doing years in the mobile hotspot and now with Arlo wire-free, all these are very tricky, low power wireless technology. I don't think any of our competitors have any parallel to our expertise over there. So we look at LTE as a tremendous opportunity in all three areas. The existing LTE advanced, the incoming LTE 4G in Cat M and then the upcoming 5G, so it's a tremendous opportunity for us to branch out and capitalize on all these new found opportunities in the future.

Tavis McCourt:

Okay, thanks Patrick.

Patrick Lo:

Sure.

Operator:

[Operator Instructions] I am showing no additional questions at this time. I would like to hand the floor back over to Patrick Lo for any closing thoughts.

Patrick Lo:

Yes, thank you everyone today and I think we're all very excited about our Q1 performance as well as more importantly, the strength of our channel and the strength of our new products, which validate our strategy in really focusing on what we do the best, which is wireless and switching in the leading-edge category and use that opportunity to branch out into new product category, but utilizing our existing strength in both brand and channel, which we are happy to see that is not only resonating in our traditional market in North America and Europe, but it's clearly now resonating in Asia as well and in the emerging markets. So, we are very pleased and we will continue to follow this path and in the next earnings call, we will talk more about more new, exciting new products and expansion of channels. Thank you very much and look forward to talking to you again in July.

Operator:

Thank you, Sir. Ladies and gentlemen, the conference has concluded. We thank you for participating in today's event. You may now disconnect your line.