NETGEAR, Inc. (NTGR) Q3 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the NETGEAR Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Genualdi, Senior Investor Relations Manager for NETGEAR. Thank you, Mr. Genualdi. You may begin.

Thank you, operator. Good afternoon and welcome to NETGEAR’s third 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 start with a review of the financials for the third quarter provided by Christine, followed by details and commentary on the business provided by Patrick, and finish with fourth quarter guidance provided by Christine. We will then have time for any questions. If you have not received a copy of today’s release, please visit NETGEAR’s Investor Relations 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 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 today’s press release on our Investor Relations website. At this time, I would now like to turn the call over to Ms. Christine Gorjanc.

Thank you, Christopher. Before we begin, I would like to extend an invitation to everyone on this call to join us at our 2016 Financial Analyst Day in San Francisco on November the 15th where Patrick and I will be joined by several members of our executive team to discuss NETGEAR’s strategic initiatives. If you have not already received an invitation and would like to join us, please reach out to NETGEAR Investor Relations for more detail. Results for the third quarter of 2016 came in above the high-end of our guidance, driven by the back to school performance of our retail business unit as well as the service provider business exceeding revenue expectations. For the third quarter ended October 2, 2016, net revenue was $338.5 million, which is down 1% on a year-over-year basis and up 8.6% on a sequential basis. I’d like to point out that the service provider business was down approximately $42 million year-over-year and our non-carrier business grew to offset all but approximately $3.5 million of that delta. NETGEAR net revenue by geography continued to reflect our strength in North America. Net revenue for the Americas was $225.2 million, which is up 2.5% year-over-year and up 6.8% on a sequential basis. EMEA net revenue was $60 million, which is down 22.8% year-over-year and up 16.2% quarter-over-quarter. Our APAC net revenue was $53.2 million for the third quarter of 2016, which is up 19.7% from the prior year comparable quarter and up 8.3% quarter-over-quarter. For the third quarter of 2016, we shipped a total of approximately 5.6 million units, including 4.4 million nodes of wireless products. Shipments of our wired and wireless routers and gateways combined were about 2 million units for the third quarter of 2016. The net revenue split between home and business products was about 78% and 22% respectively. The net revenue split between wireless and wired products was about 76% and 24% respectively. Products introduced in the last 15 months constituted about 38% of our third quarter shipments, while products introduced in the last 12 months constituted about 29% of our third quarter shipments. From this point on, my discussion points will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today. The non-GAAP gross margin in the third quarter of 2016 was 31.3% compared to 29% in the prior year comparable quarter and 32.3% in the second quarter of 2016. The year-over-year gross margin improvement reflects the reduction in service provider revenue, which typically carries a lower gross margin. Total non-GAAP operating expenses came in at $67.2 million which is up 5.3% year-over-year and up 4% sequentially. While we always manage our operating expenses carefully, we will look to continue to invest in research and development as we add new product offerings to our portfolio. Our headcount increased by net 16 people to 944 during the quarter. We expect to continue to add additional headcount in key areas of our business during the fourth quarter. Our non-GAAP R&D expense for the third quarter was 6.2% of net revenue, as compared to 6.1% in the year ago comparable period and 6.6% of net revenue during Q2 2016. We continue to believe that investment in R&D is key to our business and we expect this expense to continue to grow in absolute dollars. Our non-GAAP tax rate was 34% in the third quarter of 2016. Looking at the bottom line for Q3, we reported non-GAAP net income of $25.9 million and non-GAAP diluted EPS of $0.76 per diluted share. Turning to the balance sheet, we ended the third quarter of 2016 with $403 million in cash, cash equivalents and short term investments. For the third quarter of 2016, we generated approximately $40.4 million in free cash flow, which is calculated as cash flows from operating activities as presented in the statement of cash flows under GAAP less capital expenditures. We continue to remain very confident in NETGEAR’s ability to generate meaningful levels of cash. During the trailing four quarters, we generated approximately $115.9 million in free cash flow. We continue to focus on optimizing the business and generating cash, providing us operational flexibility as well as the ability to strategically deploy cash to enhance shareholder value. We did not purchase stock during the third quarter, although we continue to maintain an open buyback program that we plan to use opportunistically. 1.6 million shares remain in our current share repurchase authorization. As a reminder, since the start of our repurchase activity in Q4 2013, we have repurchased approximately 9.2 million shares, and our diluted share count is lower by 13.5% as compared to the beginning of that period. The fully diluted share count is approximately 34 million shares at the end of Q3 2016. And I’d like to highlight that it has gradually trended upwards over the past four quarters, despite our buyback activity during that time period. Now turning to the results of the three business units. We are pleased to report that the retail business unit or RBU generated net revenue of $194.2 million during the quarter, which is up 18.4% on a year-over-year basis and up 13.8% sequentially. The commercial business units or CBU generated net revenue of $73.4 million for the third quarter of 2016, which is up 12.6% on a year-over-year basis and down slightly on a sequential basis. For our service provider business unit or SPBU, net revenue came in at $70.9 million for the third quarter of 2016. This is down 37.1% year-over-year or about $41.8 million from the prior year and up 5.2% on a sequential basis. Looking forward to the fourth quarter and subsequent quarters, we expect service provider to deliver approximately $55 million in revenue per quarter. I will 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 provide guidance for the fourth quarter of 2016.

Thank you, Christine and thank you everyone for joining today’s call. We’re very pleased with our third quarter results, which reinforce our belief that we are managing our business effectively and taking advantage of the notable opportunities that exists in the markets we serve. Our retail business unit clearly had another strong quarter, driven by our Nighthawk routers, cable gateways and Arlo cameras. Demand for each of these premium product lines remains robust. Furthermore, during the last three months, we have announced three new additions to our premium product lineup. I’d like to use this opportunity to tell you a bit about each of these exciting new products which we believe will be important drivers of our future growth. First off in August, we announce Orbi, the world’s first tri-band WiFi match systems that provides blazing fast WiFi coverage to every inch of your home including your yards. It’s the perfect solution for defeating those dead spots that a traditional router may not reach. A standard Orbi Kit includes one Orbi router, which hooks up wherever your internet connection comes into your home and an additional satellite unit that could be placed elsewhere in your home to extend coverage. Together, they can cover an impressive 4,000 square feet. Unlike a traditional WiFi expander solution which creates an additional SSID for expanding coverage. All these router and satellite work together on a single SSID. This allows for a seamless connected experience as you work from the front yard to home office, to the pool, without compromising your WiFi speed. I’d like to quickly highlight all these unique tri-band WiFi architectures. While there are several other WiFi matched systems currently on the markets, the all use dual-band WiFi. Orbi is the only tri-band solution. Tri-band WiFi provides a 2.4 gigahertz, and 5 gigahertz band for prime devices as well as an additional 5 gigahertz band that is dedicated solely to communication between the router and the link. This allows Orbi’s network intelligence to operate separately from your regular home network traffic, which means the greater overall performance than all of the competing dual-band systems currently on the market. A standard Orbi kit with a router and one satellite retails for $399, and is currently available at most major retailers in the U.S. It will be rolling out to international markets later this quarter. Our second exciting new product release is the Arlo Pro security camera which is the next generation of award winning wire free Arlo cameras. Among many exciting upgrades, Arlo Pro has rechargeable batteries and two-way audio. A single Arlo Pro battery charge can typically last for a full six months under normal usage. Two-way audio enables Arlo Pro users to hear what’s going on in the area where the camera is situated, and to talk to the people there. With Arlo Pro, we have improved our motion detection technology and increased our camera’s view to 130 degrees, so that nothing goes unnoticed when Arlo is at home. We have also added a high decibel siren to the base station to scare away unwanted visitors. A two-camera Arlo Pro kit sales for $419 and is currently rolling out at major retailers in North America. We expect it to be available overseas sometime in Q1. Finally, just last week, we announced the latest edition to our premium line of Nighthawk routers, the Nighthawk X10. It’s the world’s fastest router, achieving combined wireless speed up to an incredible 7.2 gigabits per second. It features next generation high speed 802.11ad WiFi, which allows instant downloads, file transfer and backup over wireless with devices that are within the line of sight. 802.11ad is also perfect for gaming and streaming, as it has about one-tenth the latency as compared to 802.11ac. Additionally, the X10 is the industry’s first router that features a superfast quad-core CPU and double as the Plex Media Server. The Plex Media Server beautifully organizes your video, audio and photo contents, so that it can be easily accessed from the locally connected storage device. The X10 also supports transcoding of this content for remote devices, so that it could be accessed by any remote client device as the quality of that level that best suits that device. Compared to storing content on a PC, your Plex Media Server on the Nighthawk X10 is easier to set up and is always on, which means your content is always available. The Nighthawk X10 sells for $499 and is currently rolling out at the select retailers in North America. We expect it to be available overseas in 2017. Turning to commercial business unit, we are once again very pleased with the year-over-year growth generated by CBU during Q3. U.S. distribution inventory levels which were a headwind during 2015, continued about to hold at healthy levels. From a product perspective, our SMB 10-gigabit switches standout in particular as a performance driver during the quarter. We expect to continue the benefit from SMB upgrades to multi-gig and 10-gig switching in the quarters to come. The service provider business unit delivered $5 million revenue above the $65 million that we expected for the third quarter due to pulling [ph] from some of our customers. We continue to effectively manage this business unit, protecting our margin rather than chasing commoditized business at top line. To summarize, the third quarter exceeded our expectations and we continue to gain share in home WiFi, home security cameras, and switching. I will now turn the call back over to Christine for our Q4 guidance.

Thank you, Patrick. For the fourth quarter of 2016, we anticipate revenue will be in the range of approximately $340 million to $355 million. As previously mentioned, we expect service provider revenue to be approximately $55 million for the fourth quarter and to continue at that run rate in subsequent quarters. Fourth quarter GAAP operating margin is expected to be in the range of 7.9% to 8.9%, and non-GAAP operating margin in the range of 10.5% to 11.5%. Our GAAP tax rate is expected to be approximately 37% and the non-GAAP tax rate is expected to be approximately 34% for the fourth quarter of 2016. Operator, that concludes our comments and we can now take questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Robison with Wunderlich. Please proceed with your question.

Yes, I was wondering if you could talk a little bit about contribution margin last year -- third quarter last year that was a pretty good quarter for service provider if I remember right. And curious how it compared on the lower sales this year and how you think that’s going to go at the decreased level that you’re talking about next -- in coming quarters?

Yes. Matt, we typically don’t -- we put that in the 10-Q that will be filed shortly, probably in about 10 days. So, we have that. I think contribution margin at service provider was 13.2. So by the back half of last year, we had achieved our double-digit contribution margin and we said we would maintain that. So, we definitely have done that and we’ll file the exact numbers in the 10-Q.

How do you feel about the seasonality for commercial in the second, third and fourth quarter, so we can get a little bit of a flavor for how that might have impacted things?

The seasonality on the commercial side for Q4 is typically relatively flat, because there is not a lot of selling in the last 10 days of December. So, I’d say it’s a bit of a shorter selling time. So year-over-year, we’re still looking at growing that business but we think that will be relatively flat, when we look Q3 to Q4.

Okay.

Yes, the retail business unit, naturally the seasonality is in favor because of Christmas, Black Friday and all that. So, we do expect that typically on retail business unit the quarter-on-quarter growth is anywhere between 5% to 15%.

Okay. And what’s the normal seasonality for the third quarter; is it also flat sequentially or is it typically down?

For the commercial? Commercial is typically -- it’s flat; as you saw this quarter, we had Q2 to Q3 was relatively flat, because Q2 was up quite a bit. Had Q2 not been up quite a bit, we would have seen Q3 up a little bit as we went into Q3.

And any commentary on the mix effect of the Pro and Orbi or it’s just too soon to tell?

Pro is really just announced in October and just now shipping, and Orbi was just barely shipping at the end of the quarter. So, we are excited to see that during Q4.

Thank you. Our next question comes from the line of Ryan Hutchinson with Guggenheim Investments. Please proceed with your question.

Couple of questions. So, my main question really is around this service provider business. As you step back and look over the last couple of years, it’s -- following the acquisition, it’s continued to drift lower and obviously for the right reasons, as you back away from some of those unprofitable business opportunities. So, now, we are down to I believe a run rate of $55 million. I wanted to just get a sense of how much of that is related to further action moving away from some of those unprofitable opportunities versus maybe what you are seeing with respect to consolidation in the marketplace and you’re just taking proactive measures to be cautious in front of potentially some spending freezes et cetera? And just wanted to see then finally, if you think that this is sort of the bottom, this is the end in terms of where that business finally settles out? That’s my first question.

Yes, the answer to the first question is yes, we proactively would choose not to bid for the continuation of business which is not profitable through our standard, through our margin standard. And typically those are more commoditized products such as the DOCSIS 3.0 gateway or a low end 11ac routers or a Cat 6 [ph] and below mobile hotspot. So, when those contracts come up for a rebid, for continuation, we basically would walk away. So, if you look at our latest corporate presentation that we just posted online versus the previous one, you could find out which account that we walk away from. But then on the other hand, we are absolutely going to continue to be in what we call the technology forefront such as DOCSIS 3.1, such as Cat 9 [ph] mobile hotspot, and of course we will push really hard our proprietary technology such as Orbi, such as Arlo into the service provider revenue. Now as far as the $55 million, we believe that those are really good business and that’s why we believe that $55 million level will last through our next year. Now, whether after that it’s going to go down further or it’s going to go up, it really depends on how fast our service provider customers are going to adopt the new technology that we are pushing. And we will love the whole world to adopt Cat 15 [ph] that we demonstrated to weeks in Hong-Kong that shows 1 gigabit download over the air wirelessly over the 4G LTE Cat 15. [Ph] We will love the world adapt on Arlo and on Orbi. So if that’s that the case we expect that we could actually step up again on service provider revenue. But of course if the adoption of those leading-edge technology is delayed, then there is a possibility that it would step down further. However, the good news is that our non-carrier business has been growing very strong and we’ve already stepped down from about $150 million a quarter to $55 million a quarter and we have been able to offset that by non-carrier. Now I just don’t believe we’ll step down from 55 to 0. So, I think we are pretty confident that we will be able to manage this piece of the business as well as the overall business very effectively going forward.

Okay. And then a follow-up and it’s more just from personal experience. I’m trying to get a better understanding of just the overall home automation market and specifically as it relates to some of the announcements by Apple with HomeKit and correct me if I’m wrong but Arlo’s not participating in that to-date; is that correct?

Correct, because it takes time to integrate into every single platform because they are so many competing platforms out there. Today, we have integrated into smart things, we have integrated into SmartLinx; we have integrated into IP; we have integrated into Xfinity, [ph] there are so many of them but will eventually hit to all of them but one at a time. We have committed openly that we will integrate the HomeKit and to the other platform as well.

I guess my question is more broader in nature in the sense that as you look at that market, is that the strategy that you guys will play just integrate with all of them, and then as standards progress, maybe there will be one that dominates over time, is that...?

Absolutely right. I mean, it is so early, we don’t even know who is actually going to win. For example you see at Amazon, which is just trying to put the Alexa and you see at Google and there are so many people in -- we just do not want to preclude anybody.

And then just on pricing, it seems like pricing on Arlo has been pretty stable, any sense on how we should think about the camera opportunity over the next 12 months?

As we introduced newer camera, for example Arlo Pro, which is about I would say a 30% to 40% premium over the existing Arlo, you definitely should see ASP increase on the camera side over the next 12 months. And you bet, we’re not going to stop at Arlo Pro, we will have more.

I guess let me just squeeze one more in. ASPs, one of the key parts of the story is ASPs have improved in a market you wouldn’t think that you would see ASP improvement. So, where are we with respect to maybe 12 months ago?

I mean, if you look at it, simple thing, as you divide a number of unit we ship over the revenue we report, our ASP has grown roughly about 8% year-over-year. And of course our objective is continuing that path.

Thank you. Our next question comes from the line of Tavis McCourt with Raymond James. Please proceed with your question.

First, a couple of hose keepings for you Christine and then some further ones, for you Patrick. Christine, can you just give the components of free cash flow, the cash flow from ops and the CapEx in the quarter?

Sure. Cash flow from operations is $42.4 million and CapEx for the quarter, $1.9 million.

And when -- to give us a sense of the mix in the retail business at this point because there has been a lot of growth in Nighthawk and Arlo the last couple of years. Are we to the point on a revenue basis in Q4 where if you want to say kind of your newer brands, Nighthawk, Arlo, whatever little Orbi will contribute, is that over 50% of retail now?

Absolutely. If you add up all the Nighthawk, Orbi plus Arlo, it’s absolutely the majority of the retail sales.

And then, a follow-up on the service provider business. You said the contribution margin was low teens this quarter, Christine. Can you keep it at that at the $55 million level or will that take a step down?

No, absolutely, we are going to keep it there and make that as profitable as we can.

The Q4 guidance, does it include any revenues from unannounced products and should we still expect a new product category launch or announcement later this year?

I think the big announcement of product that we have scheduled would not have significant impact because I mean there is very -- a few selling days after the announcement, but the three products I specifically discussed just now will certainly have big impact on Q4 revenue, which we have taken into a gap.

And then last question I think, EMEA is actually -- is down quite a bit year-over-year last three quarters, but obviously there is some service provider issues going on there. If you were to look just at retail and commercial, does the EMEA business more closely match the Americas or that challenged even in retail and commercial?

They match pretty closely to Americas, if you take the carrier business. I mean Europe is a very strength place for carriers because they so much for spectrum, it all straps for cash. So, they are not the technology adopters, they are the technology laggers. And because of that, they only buy commodity products. And as you see the struggling of Alcatel-Lucent, Ericsson, and the service provider business is just not there. And we practically checked out almost all of the service provider business in Europe.

Okay. So, if we look at that the product drivers of your growth products overall, they’re working as well in Europe as they are in North America?

[Multiple speakers] Arlo took the market by storm.

Thank you. Our next question comes from the line of Hamed Khorsand with BWS Financials. Please proceed with your question.

Could you talk about the product mix here? Because I’m looking at how you guys performed in Q2? I’m looking at Q3 and what the deltas were in different segments. And to me, almost, it looks like there were some either promotions or sort of pricing mix change between the two quarters, because of where operating margins or gross margins ended up?

What is the question?

Well that was the question. Could you just explain if you’re seeing any -- if you’re promoting heavily more. It seems like there is a pricing mix that occurred to negative factor in Q3 versus Q2.

Do you mean -- from what angle, you see the gross margin is less or what do you mean?

Well, yes, if I look at what you reported, you’re 100 basis points lower sequentially on gross margin.

So, if you talk about gross margin, primarily Q3 is a more heavily promoted season. So you have the back-to-school promotion and all that and that affects the gross margin.

And then also really looking at the bottom line, Hamed, when you look at the growth in retail Q2 -- Q3 over Q2 and commercial was relatively; retail is a bigger piece of the pie there. And then as you get to the bottom line, you know commercial business is more profitable.

Correct.

That’s probably what you’re looking at.

Yes. And then, I’m just trying to lead it into the Q4 guidance. Are you going through a plan, the same kind of level of promotion?

Q4 is actually -- well Q3 and Q4 are both heavily promotional quarters. I mean, you’ve got Black Friday; Cyber Monday and the two weeks that surround that. So, it will absolutely be as promotional as Q3.

Actually even more.

Yes, and maybe a little bit more. And then as we kind of mentioned earlier, commercial has less selling days, because nobody buys much on the commercial side between Christmas and new years.

My other question is as far as Q4 goes, sequential growth in retail at 15% growth. Is that all coming from Nighthawk and Arlo or is there particular profit or accounting on for the quarter?

Well, actually beyond Arlo and Nighthawk, there is Orbi as well. This time, I’ve got one more weapon, Orbi.

Do you have the orders in hand from retailers that give you confidence. So, it’s going to be move the needle from factor standpoint?

Yes,. Orbi has been on the market and we have been watching the POS on a weekly basis, so we know how it does.

Okay. And then my other question is as far as the commercial business unit goes, you’ve been talking positively about it and it sounds like everything there has traction but it’s not showing up in revenue. Is there a reason why that’s happening?

I think our revenue is growing more than 10% year-over-year in the CBU side.

Okay. But sequentially nothing is really happening now?

Yes. I mean it’s not sequential. I mean you have to compare quarter-over-quarter, alright, because the growth is in one quarter in Q1 and then you go from there. But it doesn’t matter on a sequential basis; it’s more on year-over-year basis.

But year-over-year last year you guys were struggling. There was a lot of restructuring going on; this year should be higher anyways because everything is in place?

Yes. So that’s why it’s growing double-digit. And I don’t think any of our commercial competitors look at Cisco or Juniper are growing that kind of rate.

Thank you. Our next question comes from the line of Ryan Flanagan with The Buckingham Research Group. Please proceed with your question.

First, I want to ask about competition, we saw some entrants in the space and your typical vendors out there on the routing side, are there any changes in the landscape?

Well, clearly, as you just mentioned with some new entrants in the market especially on the home WiFi match, there were some set ups by Eero and Luma, there is some established player such as Ubiquiti, but then you also have the pretty big coming into the market are like Google with the Google WiFi. So clearly in Q4, we will have a more competitive market. So far just on -- based on the existing set of competitors of Eero, Luma, Ubiquiti, we’ve got validation from end users who are actually loading reviews and Amazon and BestBuy, as well as some technical review [indiscernible] such as PC Magazine which all gave us thumps up, which all said as we are miles ahead of our competition as a manufacturers yesterday PC Magazine gave us the editors choice among all the Wi-Fi managed systems and we feel pretty good.

And then I want to ask about Arlo lapping a tough compare there as you anniversary things here in the holiday season. Do you expect the Arlo Pro to offset some of that or just any early read on demand would be great.

Well, absolutely on Arlo Pro, we have to continue that growth path. Clearly, you cannot have a product that would just last forever and Arlo has been on the market for six quarters. So, it’s time for something new to help them out. And Arlo Pro is a very welcoming edition. The upgrade is -- it’s tremendous, much bigger angel view, angle, view, two-way audio, rechargeable battery and significantly faster motion detection. All these are significant upgrades and we do believe with just 40% premium, customers will fall off to it. And also it will help us to attract some newer customers, because there are a bunch of customers who really want two-way audio, who really want rechargeable batteries that they just don’t want to buy batteries anymore. And those are new customers would believe that we would be able to capture. So, we are very confident that with Arlo Pro joining the lineup will continue the growth path of Arlo.

Now, last one for me is just on the buyback. No repurchases in the quarter; I know a lot of this your hands up to the Board. Is this an effect of the stock price or perhaps you use of cash, any details around that would be great?

I would just say we have always said we are opportunistic on our buyback and we met with the Board and that we just didn’t buy any stock back in Q3 but we do have that 1.9 million on an open buyback and we’ll continue to be opportunistic. And we are very much looking for some other ways also to spend our money to strategically deploy that cash to help the business grow via buying some technology or buying smaller company or something. So, we are looking on both fronts.

Thank you. Our next question comes from the line of Kirk Adams with Rosenblatt Securities. Please proceed with your question.

Thanks very much, a lot of the questions have been answered but just two product questions. First on Orbi, I might have missed it, but is the worldwide distribution already on Orbi or just in the states?

It’s currently just in the states. We just introduced it, announced it in China this week. And we will have it available in China soon and then the rest of the world will be towards the end of this quarter.

Excellent. And is there -- when it first started coming out, it seemed like there was a lot of the stores that I called and things had one at a time and it has -- have they -- the amount of Orbi that they are getting into the stores and things increased over the last couple of weeks?

Yes, I mean we are ramping as fast as we can in production. We just cannot satisfy everybody. You expect to see much better availability as the weeks pass by.

And then secondly on Nighthawk 10X and 802.11ad, its interesting, positioning at what the media server part of it and everything, what other devices? I mean, when you perceive a transition from AC to AD? What’s the timeframe for that -- you guys have always kind of been out on the edge of this and when does everything come to you?

As the matter of fact 11ad is serving a special purpose. The [indiscernible] committee actually have AA, AB, AC, AD, AE and so on and so forth. So AD is specifically for line of sight, really high speed transmission. So, it’s not for generic use. So, 11ad is the line of sight streaming, particularly for uploading cell phone 4K video over to let’s say Amazon cloud or VR gaming because you really don’t want to do VR gaming with credit. [Ph] However, you cannot use 11ac there because of latency will make it feel not yet. [Ph] So, VR gaming using 11ad and line of sight is great, all right. But for general ordinary people who just would like to have a big Netflix download, not in line of sight but in the bedroom, the next generation is actually 11ax. So, you see, why you skip, go straight on 11ac that eliminates -- actually they have used up all the alphabets in between with various purposes, but 11ax is the next big thing in WiFi which we will expect to start to hit the market sometime in the second half of next year that would create another upgrade cycle for WiFi.

Great. I guess I haven’t kept up with my engineering [Multiple speakers].

11ax is the next one, 11ax, they will start with b, ba, bb, bc.

Great. Thank you, Patrick.

Thank you. Our next question is a follow-up question from the line of Matt Robison with Wunderlich Securities. Please proceed with your question.

Thanks. So, a little bit more on the commercial -- you had -- Christine you suggested, you might have a little bit more than normal course worth of volume from commercial in the second quarter. Yet distribution inventory was down, and sequentially it’s down further this quarter. Did the reason -- was it because all the products that were released in April around the time [Indiscernible] is that part of why the strength was so great in the second quarter? It would have seemed like that wouldn’t have happened quite that quick, given that you’re partway in there when those products were announced. How should we look at the dynamics there, especially with the channel inventory coming down? And is it proper to assume that Amazon is entirely in the retail or do you take the commercial -- the commercial part of Amazon and put into the distribution?

No, Amazon is all in the retail side and we are selling more and more products on the retail side. And you will see that distribution go up and down a week really easily from week-to-week. So we are measuring it one point of time every quarter, but it definitely moves around during the quarter and as you can see at quarter-end. I just think that strength on commercial side is we had little bit flat sales really between Q3 and Q4, there is a lot more pushing into the channel and very much pushing hard online to continue to sell that. Looking at year-to-date growth, I think we’re 7% over the prior year and quarter-on-quarter I think it’s up close to 15% when I look at that number.

Patrick when you think about Orbi and Nighthawk, we talked in the past, we talked about larger homes for the Orbi types of thing; what’s your sense on how they might cannibalize each other?

No, I think, they complement each other. It depends on your applications. Let’s say, if you’re a gamer, you’re a media enthusiast or you live in a smaller home such as condo or an apartment, clearly the Nighthawk is more than enough to cover the entire space and will offer you the extra advantage of super high speed when you’re closer to the router, except you want to do VR gaming, you want to really upload 4k video from your laptop or from your iPad or whatever. So, I would say for those people, they would still continue to prefer Nighthawk. However, if you are a just ordinary user of WiFi to do Netflix or to do Facebook, Instagram and all that but you want to basically do it anyway and your house is over 2,000 square foot and you actually even want to do it in the front yard or in the back yard and you want to be sit at the pool and you still be able to stream Netflix while you watch your kids swimming in the pool, you actually want Orbi. Now of course you have enough money, you could buy both; you could buy a Nighthawk X10 as your key router and plus an Orbi system into that router, there you have the best of both world. Now that’s the $1,000 proposition, we love it.

Sure. It sounds like then there might be a little bit of an opportunity for an ASP uptick with Orbi taking some of those larger installations. What’s your sense on the ability to distinguish your tri-band versus the dual-band when you get Ubiquity coming in at a significantly lower price with the dual-band product?

I mean, it’s pretty simple. Basically what we see is that I mean when you have tri-band, it’s like that you have a three lane row [ph] where you have one lane is for what we call the bus lane and then you have the two lanes which will be one is going up, one is coming down that’s a tri-band. So, the ordinary cars could flow easily without effecting the bus traffic. However if you have a dual-band you just have the two lane row where the bus are going to be mix up with the cars. So, of course your bus traffic will be very slow, so are the cars. So, that’s pretty the much the difference. And we measure it, we beat hands down anybody out there on dual-band especially when multiple devices are involved; it’s not even close.

So, you think the retailers can sort that metaphor up?

Yes, we have always been helping the tri-band technology. Alright and it’s verified by all these editors’ choice and all that kind of thing; people look for that.

Yes, understood. Christine, can you tell me what depreciation was, third quarter depreciation?

I think depreciation and amortization combined are around approximately $8 million.

I was looking for depreciation standalone; hope a bit later I guess.

More or less half of that but we will put that -- I can get that number for you later.

There are no further questions at this time. I’d like to turn the floor back over to management for closing comments.

Thank you all for joining today’s call. We hope that you can all join us in San Francisco for our 2016 Financial Analyst Day where Christine and I will be joined by executives of our various businesses to present NETGEAR’s strategic initiatives, at the event where we will also announce a mixed exciting new Arlo product categories. If you have not already received an invitation and would like to join us, please reach out to the NETGEAR Investor Relations for more details. In closing, we have lots of new products hitting the market as we speak that we are very excited about and it’s certainly been exciting 2016 thus far for the Company and we look forward to a strong finish to the year. Thank you everyone. Talk to you all in February 2017.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.