NETGEAR, Inc. (NTGR) Q1 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the NETGEAR, Inc. First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christopher Genualdi, Investor Relations Specialist. Thank you. Mr. Genualdi, you may now begin.

Thank you, operator. Good afternoon, and welcome to NETGEAR's First Quarter 2013 Financial Results Conference Call. Joining us from the company are Mr. Patrick Lo, Chairman and CEO; and Ms. Christine Gorjanc, CFO. The format of the call will be a brief business review by Patrick, followed by Christine providing the detail on financials and other information. We will then have time for any questions. If you have not received a copy of today's release, please call NETGEAR Investor Relations or go to the NETGEAR corporate website at www.netgear.com. Before we begin the formal remarks, the company advises that today's conference call contains forward-looking statements. Forward-looking statements include statements among others regarding expectation for the 802.11ac product market, the TV connectivity market and the range extender market, growth in emerging markets for our retail products, expectations for our commercial business unit products, including cloud-based features and wireless controllers, expectations regarding the AirCard business integration, LTE, WiFi and gateway business developments, our focus on growth, investment in research and development, expected revenue, earnings, operating income and margins, tax rates and other projected financial results. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented in the call may not contain current or accurate information. Further, certain forward-looking statements are subject to certain risks and uncertainties, and are based on assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expected or forecast in such forward-looking statements. Information on potential risk factors are detailed in the company's periodic filings with the SEC, including, but not limited to, those risks and uncertainties listed in the company's most recent Form 10-K filed with the SEC. NETGEAR undertakes no obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the accuracy of unanticipated events. In addition, several non-GAAP financial measures will be mentioned on this call. Information relating to the corresponding GAAP measures, as well as reconciliation of the non-GAAP measures and GAAP measures, can be found in our press release on the Investor Relations website at www.netgear.com. At this time, I would now like to turn the call over to Mr. Patrick Lo. Please go ahead, sir.

Thank you, Christopher, and thank you, everyone, for joining today's call. For the first quarter of 2013, NETGEAR net revenues were $293.4 million, which is down 9.9% on a year-over-year basis, and down 5.5% sequentially. Non-GAAP diluted EPS came in at $0.50 per diluted share. Please see the first quarter 2013 earnings press release for a full reconciliation of GAAP to non-GAAP financial results. Net revenue for the first quarter of 2013 came in at the lower end of our original guidance range of $290 million to $305 million. We are very disappointed with the non-GAAP operating margin of 10% for the quarter, which is lower than our original guidance of 11% to 12%. This lower-than-expected non-GAAP operating margin was driven by product mix, primarily due to difficulties in the transition to our new ReadyNAS line of products. The new ReadyNAS product transition occurred late in the quarter and we experienced difficulty securing components coupled with some last-minute bug fixes, which led to unanticipated delays. This marked the first time we completely replaced an entire line of products, which involved obsoleting 10 models and replacing them with 7 brand-new models. The execution was much harder than anticipated and we learned a valuable lesson in engineering and manufacturing planning. The good news is that our supply is now in full swing and customer feedback on the new product line has been very positive thus far. In addition to the ReadyNAS transition delay, our total revenue had a slightly stronger weighting than anticipated towards Service Provider. The combination of these 2 factors caused our operating margin to be lower than planned. During the first quarter, the Americas net revenue was $156.7 million, down 6.9% year-over-year and down 7.8% quarter-over-quarter. The year-over-year decline is primarily driven by lower revenue from the Service Provider Business Unit. The quarter-over-quarter decline is primarily driven by lower sales into retail stores as they prepared for a seasonally slower Q2, as well as the short shipment in the new ReadyNAS. Europe, the Middle East and Africa or EMEA net revenue was $107.1 million, down 14.4% year-over-year and down 3% quarter-over-quarter. While the economic situation in Europe has been challenging for the past year, we see the decline in market demand starting to stabilize. Our Asia Pacific or APAC net revenue was $29.6 million, which is down 8% from the prior year's comparable quarter and down 1.3% sequentially. The year-over-year decline was primarily driven by lower revenue from the Service Provider Business Unit, and the slight quarter-over-quarter decline was driven by the Chinese New Year holiday. While we saw a year-over-year decline in revenue in Australia and Japan, we are seeing good growth in China. In Q1, we maintained the high level of shipments with 6.6 million units shipped. We also introduced 19 new products during the quarter. By the end of the first quarter of 2013, our products were sold in approximately 36,000 retail outlets around the world and our number of value-added resellers stands at approximately 43,000. In particular, we are excited about adding the Lenovo stores in China, as our retail partners during the last quarter. Now let's turn to a review of the first quarter results for our 3 business units: Retail, Commercial and Service Provider. In our Retail Business Unit or RBU, net revenue came in at $126.3 million, down 2.1% year-over-year and down 8.8% sequentially. This quarter-over-quarter decline was reflected in our comments during our last earnings call. It was due to 2 factors: 2 less selling days in Q1 this year versus Q4 last year; and also reduced purchases from our North American Retail channel customers in preparation for a seasonally slower second quarter. On a positive note, based on the end market sales report, we continue to gain share in Retail channels in all 3 regions, and we look for this trend to continue. The 802.11ac product cycle continues to gain momentum, as an increasing number of client advisers with .11ac compatibility are released each quarter. More and more new smartphones and tablets are supporting 11ac WiFi, and we expect that will drive more 11ac upgrades in the coming quarters worldwide. As the market share leader in 11ac products, we further distanced ourselves from competitors in technology by announcing beam-forming plus support for our 802.11ac products this week, which improves WiFi performance in range. We also continue to gain traction with our NeoTV Internet video streaming device. Having entered Target stores in the fourth quarter of last year, we've recently expanded distribution of this line of products into Wal-Mart this month. We are also excited about our new Push2TV products that support Miracast, which transposes the screens of Android, smartphones and tablets onto the larger screens of TV. With the next version of Microsoft Windows supporting Miracast as well, we believe our Push2TV product will be a significant tool for the smartphone, tablet and PC users to enjoy video streaming at home. We continue to see the proliferation of WiFi range extenders into more households in the developed world. As more and more mobile devices are used in homes for video streaming, WiFi range extenders are being widely used in homes to extend WiFi coverage to every corner of the house. As the undisputed market leader in this category, we continue to outperform our competitors with a lineup of 5 products in the market. We are seeing attachment rates of WiFi range extenders rising to 1 in 5 routers sold, and we believe that this positive trend will continue. With Lenovo China as a retail partner, we are anticipating strong growth in China for our Retail Business Unit. We also expect growth in India and Russia to accelerate as we start to introduce specific products for the expanding middle class consumers in those 2 markets. Turning to our Commercial Business Unit or CBU. Net revenue came in at $70.9 million for the first quarter of 2013, which was lower than expected. That's down 5.1% on a year-over-year basis, and down 3.5% sequentially. We have already discussed the ReadyNAS transition delay which cost us valuable revenue and margin during the first quarter. Nevertheless, we are pleased with the latest Gartner Group report on storage market share for 2012, which again ranked NETGEAR as the #1 revenue share leader in network storage for under $5,000, and #1 in unit share overall. Providing cloud-based features in our Commercial products is key to our growth strategy for CBU. Current trends are increasingly driving voice, video and data for businesses into the cloud, both public, private and hybrid. Other than the new ReadyNAS and ReadyDATA line of network storage which provides cloud management, access and backup capabilities. We introduced 2 more 10Gig switches in the first quarter. Now we have 5 10Gig-capable switches on the market, with 3 of them supporting 10GBaseT, with price points ranging from $1,000 to $5,000. These switches are ideal for implementing private and hybrid cloud, as well as providing superfast access to the public cloud via wired infrastructure. In Q1, we introduced the first wireless controller capable of supporting 200 access points, which grew out of the acquisition we made last year in India. We have already gained wins in China, with a 5-star hotel and a large-scale hospital, based on these controllers and associated access points. We anticipate a continuous rollout of this product line worldwide, with ever-increasing capacity to accommodate the BYOD trend for cloud access. For our Service Provider Business Unit or SPBU, net revenue came in at $96.2 million for the first quarter of 2013, down 21.1% year-over-year and down 2.3% on a sequential basis. Service Provider revenue has always been lumpy, and the decline was expected as we highlighted during our prior earnings conference call. During Quarter 1 2012, the prior year comparable quarter, we enjoyed significant extra revenue from a specific service provider because a competing supplier could not supply, providing an especially tough year-over-year comparison for the first quarter of 2013. On April 2, 2013, we closed the acquisition of the AirCard division of Sierra Wireless in order to enhance the mobile capabilities of our Service Provider Business Unit. Having spoken with the existing AirCard customers and worked with the exceptionally talented AirCard team for nearly a month now, we are even more excited than before about the large opportunities that are on the horizon for our SPBU. We are currently engaged in a very methodical integration of the AirCard business into the Service Provider Business Unit and the larger NETGEAR family. We are now in the process of responding to multiple RFPs from service providers for multiple different LTE products, both fixed and mobile. The 1 product line we are particularly excited about is the LTE-WiFi gateway. Instead of depending on the wired line for Internet access, it uses 4G LTE wireless for wide area Internet access. In-home distribution is still done by our WiFi. It is especially useful for rural deployment where wired infrastructure for high-speed Internet access is not available. It is also the only fast way to deploy high-speed Internet to households in the developing world, where building a wired infrastructure is either technically not viable or cost-prohibitive. Additionally, we've begun to further joint development between our core gateway and AirCard teams. We eagerly look forward to seeing the exciting next-generation LTE data and voice access devices that the new Service Provider Business Unit will create for the future. As always, we are focused on long-term growth, driven by our mission to connect everyone to the high-speed Internet. We see no change in the secular outlook for our core business. We continue to drive growth in each business unit by expanding our product range, opening new channels and penetrating new geographic markets. The market opportunities for each of our 3 business units reinforce our belief that NETGEAR is still a growth company. I will now turn the call over to Christine for further details on our financials for the past quarter.

Thank you, Patrick. I will now provide you with a summary of the financials for the first quarter of 2013. As Patrick noted, net revenue for the first quarter ended March 31, 2013, was $293.4 million, compared to $325.6 million for the first quarter ended April 1, 2012, and $310.4 million in the fourth quarter ended December 31, 2012. We shipped a total of about 6.6 million units in the first quarter, including 5.2 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 3.5 million units in the first quarter of 2013. Moving to the product category basis. First quarter net revenue split between wireless and wired was about 68% and 32%, respectively. The first quarter net revenue split between home and business products was about 75% and 25%, respectively. Products introduced in the last 15 months constituted about 30% of our first quarter shipments, while products introduced in the last 12 months constituted about 26% of our first quarter shipments. From this point on, my discussion points will focus on non-GAAP numbers. As mentioned previously, the reconciliation from GAAP to non-GAAP is detailed in our preliminary financial statements released earlier today. Non-GAAP gross margin in the first quarter of 2013 was 30.5% compared to 31% in the year-ago comparable quarter and 30% in the fourth quarter of 2012. Total non-GAAP operating expenses came in at $59.9 million for the first quarter of 2013, which is 3.8% higher than the prior quarter, primarily driven by people costs. We continue to invest in research and development in order to drive innovation in all 3 business units. Our non-GAAP R&D expense in Q1 was 5% of net revenue and compares to the 4.1% in the year-ago period and 4.5% of net revenue during Q4. Our headcount increased by net 16 people during the quarter, bringing our total headcount to 866 at the end of Q1. We expect a significant increase in the headcount during Q2 due to the AirCard transition, as we also had 100% offer acceptance rate from the former Sierra Wireless employees. The non-GAAP tax rate was 34.6% in the first quarter of 2013, compared to 30.1% in the first quarter of 2012, and 39.4% in the fourth quarter of 2012. During Q1, we recorded a onetime benefit for R&D tax credit that was retroactively reinstated by Congress on January 2, 2013, for the 2012 calendar year. Looking at the bottom line for Q1, we reported non-GAAP net income of $19.4 million and non-GAAP EPS of $0.50 per diluted share. Looking at the balance sheet, we ended the first quarter with $422.4 million in cash, cash equivalents and short-term investments, which was driven by approximately $45.1 million in cash flow from operations. Over the last 4 quarters, we've generated $87.3 million in cash flow from operations. This cash balance will be reduced in the current quarter by the payment of the AirCard acquisition, which amounts to approximately $140 million. DSOs for the first quarter of 2013 were 73 days, as compared to 70 days in the first quarter of 2012, and 76 days in the fourth quarter of 2012. As always, we intensely manage our collections and minimize collection risk. Our first quarter net inventory ended at $158.6 million, compared to $134.3 million in the first quarter of 2012, and $174.9 million at the end of the fourth quarter 2012. First quarter ending inventory turns were 5.2, as compared to 6.7 turns in Q1 2012 and 5 turns in the fourth quarter of 2012. Let's turn to our channel inventories. Our channel partners report inventory to us on a weekly basis and we use a 6-week trailing average to estimate weeks of stock. Our U.S. Retail inventories came in at 9.9 weeks of stock. The actual dollar amount of U.S. Retail inventory was down quarter-on-quarter. Current distribution inventory levels are 8.9 weeks of stock in the U.S., 4.1 weeks of stock for distribution in EMEA, and 7.2 in APAC. The U.S. Retail and distribution inventory levels are at more normal levels compared to the first quarter of 2012. As Patrick highlighted, on April 2, 2013, we completed the acquisition of the AirCard business of Sierra Wireless, Inc. Onetime expenses for the acquisition, which were recognized during the first quarter, were approximately $700,000. The second quarter of 2013 will include a full quarter of AirCard expenses and revenues. As mentioned earlier, we are excited about the RFPs and product roadmaps that we can work on, now that the deal has closed. We are aggressively investing in R&D on mobile products for our Service Provider customers, to bring the next generation of LTE data-access devices to the market ahead of our competition. With a full quarter of AirCard revenue included, we expect second quarter net revenue to be in the range of approximately $345 million to $360 million, and non-GAAP operating margin to be in the range of 9.5% to 10.5%. As we've said before, achieving an operating margin range between 11% and 12% is dependent on the Service Provider Business Unit revenue, constituting approximately 35% or less of our total revenues. Therefore, a return to those operating margin levels requires a higher growth rate from the other 2 business units going forward. Finally, we expect our non-GAAP tax rate to be approximately 38% for the second quarter of 2013. We expect the tax rate will be in a much wider range throughout the remainder of 2013, depending on the mix of domestic and international profit. Operator, that concludes our comments, and we can now take questions.

[Operator Instructions] Our first question comes from the line of Kent Schofield from Goldman Sachs.

A couple follow-ups on the NAS product lineup. First off, so is that fully in the channel globally? Are you still rolling it out? And then is there any legacy inventory that needs to be worked through during the quarter?

We were too good in working the legacy inventory out of the quarter and -- but we were late in shipping the new inventory into the channel. So the channel today is pretty depleted, and they are stocking our new products. We started shipping our products in the last 2 weeks of the quarter in Q1, and now they're making their way into the channel.

Okay, great. And then on the AirCard side of things, I was wondering if you could talk a little bit about the LTE gateway competitive landscape. Is it different than the competitors you normally see in the SPBU? And what are some of the advantages that AirCard brings to that business?

Yes. I mean, it's a very brand-new product, combining the LTE wide-area access to the WiFi local-area access. So you're right, and we have yet to see significant competitors emerging from it because of traditional WiFi router competitors such as Linksys, D-Link and Belkin. They don't participate in the LTE well. But then the traditional AirCard competitors such as Novatel and Huawei and ZTE have not come up with those mobile gateway. So we say, we are first to market and we've seen a lot of RFPs on it. And I do believe that, going forward, all those competitors from the WiFi side or from the AirCard side, probably, half of them would jump into this particular new category. By being first to the market, clearly, we have the first-move advantage, and by also being the #1 WiFi market share leader, we certainly know more about in-home distribution than any of these competitors. And also by being a leader in LTE technology such as LTE-Advanced, we feel very good going forward. But we certainly see the traditional competitors from both, well, would jump into the fray later on.

Our next question comes from Hamed Khorsand from BWS Financial.

First off, do you think that there is a time shift in a revenue related to your NAS product line?

Well, unfortunately, a lot of the ReadyNAS that we sell in volume for the low-end small business and what we call prosumers, and when you are out of stock, I mean, they just buy competitors. So we clearly lost quite a bit of share towards the last few weeks of the quarter of Q1. But we committed to make it up in Q2, and we're working very feverishly to try to push our product into the channel as quickly as possible. We're shipping in high-volume right now, we just have to get the logistics, get them into the hands of our channel partners worldwide.

Okay, is that going to increase any costs associated with this?

No, we don't believe so. I mean, we certainly are planning every quarter for new product introductions that will involve airfreights. That's part of the plan, and it's baked into our guidance in Q2.

Okay. And is there any kind of timeline as far as the full integration of the AirCard business, and just getting operating margins to be at least a little bit higher, because the margins of that business are quite low, compared to the rest of the business?

Well, the Service Provider Business Unit margin will always be lower than the other 2 business units. From an integration standpoint, I'm pretty happy to say that the 2 teams are pretty well-integrated, and we are all working as a team right now. And most of the systems are integrated. There is only a few systems that had yet to be integrated. But we expect that to be done within 6 months. So I would say, comfortably, by the end of the year, latest, in Q4, we should be fully integrated from systems, from people, locations, facility standpoint. And from a margin standpoint, as we mentioned before, the AirCard business margin from a contribution standpoint is pretty similar to the rest of the Service Provider Business Unit. There is a slight variation that they are little bit higher in R&D, but then they're a little bit less in sales and marketing. But then, overall, the contribution margin's pretty much the same as the rest of the Service Provider Business Unit. So the key for us to get back into the overall 11% to 12% operating margin for the company is for RBU and CBU to grow, so that the proportion of the Service Provider Business Unit revenue is back to the more normal range of 35% or below. Once that happens, then we'll see the overall company operating margin to be in the 11%, 12% range.

Okay, and my last question is associated with the guidance you provided. If I just back out the AirCard business, would you have expected that your -- the old NETGEAR revenue to be higher sequentially?

Well, I mean, so basically what we believe that, is the Retail Business Unit will continue to be following the seasonal trend, which is Q2 is usually a down quarter from Q1 because there is just nothing to celebrate in Q2, while in Q1, you have New Year. So that's definitely going to be down. But the Commercial Business Unit, because -- I mean, in Q1, we're exceptionally bad because of the delay in shipment of ReadyNAS. So we do believe the Commercial Business Unit will be up quarter-on-quarter. The Service Provider Business Unit on the -- if you back out AirCard, all right, we do believe that it will continue to be in the usual range that we talked about, anywhere between $95 million to $105 million. Within that range, it depends whether we get the new orders, whether we get extra inventory to ship, and so on and so forth. So that's pretty much where the overall business is going to be. And just for reference, and in Q4 of last year, the AirCard business was reported by Sierra Wireless to be roughly around $54 million.

Our next question comes from the line of Mark Sue from RBC Capital Markets.

Patrick, the sharp decline in the Service Provider segment down almost 22% year-over-year. We understand that the business is lumpy and the comps are tough because of the big growth you had last year. But there's also some thought that a lot of your key customers have purchased and the penetration is quite high. And if that's the case, any thoughts on how we should be thinking about the business? Should we see a return to growth this year? What's kind of a normalized rate of growth do you think for the Service Provider business?

Sure. I mean, if you -- you're talking about backing out the AirCard side, right?

Yes, your -- just your key traditional NETGEAR Service Provider business.

Right. The traditional NETGEAR Service Provider business, last year in Q1 as we talked about, was benefited by one of our competitors, just failed to ship. So one of our specific customers turned to us, instead of 50%, you get 100% of the revenue, would you be able to deliver? And our operations department rose up heroically to actually deliver, actually both in Q1 and Q2. And that really is an anomaly. And -- but since then, I mean -- unfortunately, our competitors came back. So anyway -- so we believe that, as we talked previously, that we're going to continue to stay in that tight range of $95 million to $105 million for our traditional Service Provider Business Unit, until we win a new customer or a new extra new project. Now the DOCSIS 3 penetration is still actually relatively low, especially given the fact that the DOCSIS 3 is like WiFi. It is not a single standard, it goes through multiple iterations. The first generation DOCSIS 3 is only 4X4, as we call it, 4-channel bonding upstream, 4-channel bonding downstream. But then it will go up to 8X4, it will go to 16X4, it will go to 16X8. So the upgrade cycle will just continue to move forward, so we do not see that there is any "saturation", as long as people are being enticed to go up to higher and higher speed. Also, there is a -- there is also a movement in the marketplace, as you probably know, is to make these gateways to be more intelligent. That is distributing channel to video into IP devices. And the industry's name is called the headless gateway or the media gateway. So the key for us is to go forward, all right, to win new projects on these new higher-speed DOCSIS 3 cable, DOCSIS gateway such as 16X8, 16X4, or to win some of these new media gateway projects. So those are the things that we're focusing, yes.

Okay, so it does sound, for that business, the Service Providers to grow, you need a new cable customer which is the likely candidate. When you move into this realm, Patrick, a lot of entrenched incumbents out there, which offer similar products, what price stimulation do you require to win market share there?

Yes. But every time there is a new technology disruption, then there is a new project, then we will be able to win over any entrenched incumbent. For example, if an incumbent has been supplying a DOCSIS 8X4 data gateway and the customers want to go to a media gateway, that opens up an opportunity for us to go and snap that project away from our competitors. Similarly, on the telco side, if a customer wants to move from a traditional DSL infrastructure into a vDSL or into a fiber-to-the-home infrastructure, those new projects open up an opportunity for us to go in and displace the incumbent. So every new technology disruption is an opportunity for us to gain share. And as I just said, that these technology disruption continues to come around.

Okay, helpful. Patrick, if I switch to the potential synergies and the combination of that, and also the higher RFPs you're seeing in LTE and WiFi, operationally, longer-term, as you combine these assets, will there be potentially better margins? Or is it just putting 2 separate technologies together, but you don't really charge a premium or get margin improvements? I'm just thinking much longer-term, as you respond to the higher RFPs, what it means for your business as you combine the assets together?

Yes. The -- as a matter of fact, I mean, we are acquiring a very minimal team. A lot of the infrastructure that's required to support that business did not come over. We actually have to build it up. So from a synergy standpoint, there is very little over there. As we mentioned, that right now we're modeling our business, that the entire Service Provider Business Unit's contribution margin is not going to improve with the acquisition of the AirCard. But certainly, I mean, it is not that we are not continuing to work on it, all right? As an overall business, we will continue to work on overall improvement in margin in individual business units, as well as in the overall. But we would like to point out the most immediate impact that we could have is by growing the additive business unit faster, so that the mix is more balanced. And that's what in fact the fastest way to get into a higher-margin, get back into an 11% to 12% range.

Okay. This year, we shouldn't really think about 11% to 12%?

We're not modeling that, but we're trying to work very hard.

Our next question comes from Ryan Hutchinson from Lazard Capital Markets.

So clarification on a couple of questions. On the AirCard contribution for the June quarter, can you just provide what were -- what was your model with respect to revenues? And then -- yes, go ahead.

Well, as we mentioned, specifically, they reported $54 million of revenue in Q4 of last year, and that will be the basis for our -- taking on the business. And clearly, I mean, we'll work very hard to grow that base as we move forward.

Okay. So at a minimum, you're thinking flattish revenues for the next couple of quarters based on the commentary from the fourth quarter?

Yes, you can safely say that. But we -- as we said that, we will continue to try and improve on it.

Okay. And then, maybe just diving a little bit deeper into the revenue shortfall, I'm just having a tough time reconciling the operating margin shortfall as well. So you referred to 2 drivers to ReadyNAS transition and the increase in Service Provider revenue mix. So perhaps, if you can quantify the impact each had to both revenues and gross margins? And then I just -- based on my calculation, I assume ReadyNAS shortfall of roughly $5 million at -- we'll call it better-than-corporate-gross-margins, implies roughly at 20 basis-point in positive impact to gross margin. So is the difference the increased Service Provider mix? And then along that same line of questioning, did operating expenses come in higher than you expected, and if so, why?

Well, yes, I think -- let me go on. The ReadyNAS, as of today, is a very software-intensive product. If you look at the features that we are touting for our ReadyNAS line, it provides unlimited snapshots, it provides thin provisioning, it provides cloud replicating -- I mean, all these are really, really software-intensive. So you can always -- almost imagine this is a piece of software product rather than hardware product. So the gross margin or the standup margin is significantly higher than a corporate average. And when the quarter is towards the end, all the cost is sunk -- every single piece cost is sunk. So that's why the standard margin dollar shortfall is -- almost impacts our final operating margin on a dollar-by-dollar basis. So I mean, if you can imagine a $3 million difference in operating margin dollar is separating us from what it is today and what will be in the range, then you could imagine a very high gross margin products impact.

So that was the vast majority?

Correct. It's the vast majority of that. I mean, just take it to an extreme case. I'm not going to disclose in specific. You take the extreme case. Let's say, if our shortfall is actually $10 million and at 50% gross margin, that's a $5 million difference. I'm not saying that's the exact number, but I'm just giving you some example.

Okay, that's helpful. And then in -- any update on the VueZone product line would be helpful, and inroads you're making with the service providers and then the expectations for potential wins there as they roll out some of their home security initiatives.

Yes. Right now, the VueZone camera is continuing expansion into distribution. We just expanded its distribution in the Best Buy, and we're seeing good positive results, and we're continuing to see of the trending up of the VueZone acceptance. Now on the Service Provider side, they have shown quite a bit of interest. But we still have some R&D to work. As today, the VueZone camera is very handy, it's wire-free, it's battery-operated. That's the plus side, it's very tiny. The downside is, because of that, the resolution is really not that high, and the frame rate is also not that high. So we're working very feverishly for the next generation of the cameras to improve on that before we believe we have a serious run on the Service Provider channel.

Our next question comes from Rohit Chopra from Wedbush Securities.

A couple of questions, Patrick and Christine. Patrick, you mentioned last quarter, and you mentioned in a response to Mark Sue's question, that you didn't -- it doesn't sound as if you got everything you needed when AirCard came over. So as far as resources, is there the potential that you need to hire a lot of resources as you go through the next 2 or 3 quarters and could the operating margin go below the range that you are after?

Sure, Rohit. Yes, Rohit, this is Christine. So we do need to backfill some ops positions and some of the mainly ops, IT a little bit. We'll take care of that this quarter, and we have factored that into our guidance and we actually factored it into the modeling we even did for the purchase. So the business will still run within the Service Provider range, so I don't expect anything below that, just because of that.

Okay. So nothing below that range. And then I just wanted to ask you, Patrick, about the RFPs you talked about, since you did mention them. Are these for fulfillment -- are these carriers looking for fulfillment in '13? Or are they looking for their fulfillment in '14?

Yes, the RFPs, of course, is pretty long range. You know, Service Providers, I mean, from RFP to actual deployment, it's multi-quarters. We're encouraged by all the opportunities, but we're not counting on any one of them immediately helping us. But before the close, I mean, they have worked on RFPs as well, and before the close, we jointly have worked on some RFP as well. And if we win anyone of those in the next few quarters, then it will benefit us.

Thank you. I'll now turn the floor back over to our speakers for any closing comments.

Yes. And we are very excited about this new team that we put together with the AirCard joining us, and which opens up an entirely new technology front. We have, traditionally, in all 3 business units depending on the Internet wide-area net access on either cable or a telco's DSL line, but now we opened it up for a third one. So not only does technology will enable our Service Provider Business Unit to get into new opportunity, it will also provide new product capabilities for both our Retail products, as well as for our Commercial products. And that's why we believe that we have rounded out all the technology needed, that we would be able to implement our vision of connecting everyone to the high-speed broadband Internet, both wired and wirelessly. And the -- we believe the secular strong demand from everyone around the world to connect to ever-highest speed of Internet is not going to fade anytime soon. So as long as we continue to keep up with the technology and produce products ahead of our competition, we will continue to be able to benefit from this secular trend in order to grow the company. So we are very confident for the growth potential, and right now, we have all the plans in place. It's just about execution. And if we could execute our plans according to what we designed as flawlessly as possible, we would be able to grow our revenue in the coming quarters. So that's why execution is key and we understand that and we will -- the entire management team focus on that, and I look forward to report back to you on our progress in the next earnings call. Thank you, everybody, for joining us today.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.