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Edited Transcript of NTGR.OQ earnings conference call or presentation 3-Feb-21 10:00pm GMT

·41 min read

Q4 2020 NETGEAR Inc Earnings Call SAN JOSE Feb 4, 2021 (Thomson StreetEvents) -- Edited Transcript of NETGEAR Inc earnings conference call or presentation Wednesday, February 3, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Bryan D. Murray NETGEAR, Inc. - CFO * C. S. Lo NETGEAR, Inc. - Co-Founder, Chairman & CEO * Erik Bylin NETGEAR, Inc. - IR Executive ================================================================================ Conference Call Participants ================================================================================ * Adam Tyler Tindle Raymond James & Associates, Inc., Research Division - Senior Research Associate * Hamed Khorsand BWS Financial Inc. - Principal & Research Analyst * Jeffrey A. Rand Deutsche Bank AG, Research Division - Research Associate * Paul Jonas Silverstein Cowen and Company, LLC, Research Division - MD & Senior Research Analyst * Woo Jin Ho Bloomberg Intelligence - Senior Technology Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by. (Operator Instructions) I would now like to turn the conference over to Erik Bylin. Please go ahead, sir. -------------------------------------------------------------------------------- Erik Bylin, NETGEAR, Inc. - IR Executive [2] -------------------------------------------------------------------------------- Thank you, David. Good afternoon, and welcome to NETGEAR's Fourth Quarter and Full Year 2020 Financial Results Conference Call. Joining us from the company are Mr. Patrick Lo, Chairman and CEO; and Mr. Bryan Murray, CFO. Format of the call will start with a review of the financials for the fourth quarter and full year provided by Bryan, followed by details and commentary on the business provided by Patrick, and finish with our first quarter of 2021 guidance provided by Bryan. We'll then have time for any questions. If you have not received a copy of today's press 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 Mr. Bryan Murray. -------------------------------------------------------------------------------- Bryan D. Murray, NETGEAR, Inc. - CFO [3] -------------------------------------------------------------------------------- Thank you, Erik, and thank you, everyone, for joining today's call. Net revenue for the fourth quarter ended December 31, 2020, was $367.1 million, up 45.1% year-over-year. And down 2.9% on a sequential basis. The strong demand for our leading WiFi 6 offerings continued in the fourth quarter, which drove exceptional growth in our CHP business. With service provider delivering on our expectations, both the retail and service provider channels of the CHP business grew in excess of 60% in the fourth quarter as compared to the prior year period. Additionally, the work we've done to focus on the right products in support of the work from home networking market, led to a strong rebound for our SMB business with 16% sequential growth and also yielding a return to year-over-year growth. For the full year 2020, NETGEAR net revenues were $1.26 billion, which is up 25.7% compared to the full year ended December 31, 2019. Our team did an exceptional job navigating the many challenges brought about by COVID-induced lockdowns to deliver strong growth in revenue, while producing leverage in the business model to drive considerable margin expansion. We continue to see the same market growth trends we discussed at our recent Analyst Day and expect 2021 revenue to grow in the mid- to high single digits off of the strong growth we experienced in 2020. Our non-GAAP operating margin for the fourth quarter came in at 11%, an improvement of 660 basis points over the fourth quarter of 2019. Full year non-GAAP operating income was $110.8 million, resulting in a non-GAAP operating margin of 8.8%. We adjusted quickly to manage through a complicated supply chain environment to deliver strong leverage on our revenue growth with non-GAAP operating profit, up by more than 70% as compared to the prior year. For the fourth quarter of 2020, net revenue for the Americas was $259.6 million, which is up 53.5% year-over-year and down 6.6% on a sequential basis. Americas again benefited from strong year-over-year growth for CSP products from both retail and service provider channels. As expected, the service provider sequential downtick from Q3's lofty levels, coupled with continued supply constraints, created a moderate sequential decline for the Americas region. EMEA net revenue was $67.5 million, which is up 33.6% year-over-year and up 5.9% quarter-over-quarter. The strength in SMB adding to the strong year-over-year growth for CHP products from both the retail and service provider channels. Our APAC net revenue was $40 million, which is up 19.9% from the prior year comparable quarter, driven by strong growth of CHP products in the retail channel and up 9.5% sequentially. For the fourth quarter of 2020, we shipped a total of approximately 4.5 million units, including 3.6 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 1.8 million units for the fourth quarter of 2020. The net revenue split between home and business products was about 81% and 19%, respectively. The net revenue split between wireless and wired products was about 74% and 26%, respectively. Products introduced in the last 15 months constituted about 34% of our fourth quarter shipments, while products introduced in the last 12 months contributed about 29% of our fourth 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 fourth quarter of 2020 was 30.6%, which is up 270 basis points compared to 27.9% in the prior year comparable quarter and up 30 basis points compared to 30.3% in the third quarter of 2020. While we continue to spend heavily on airfreight to deliver incremental profitable revenue, a combination of lower promotional activities and improved product margins from our premium WiFi systems products, combine to produce strong year-over-year gains in gross margin. Total Q4 non-GAAP operating expenses came in at $72 million, which is up 21.1% year-over-year, and down 1.6% sequentially. Our team again navigated a challenging operating environment while adding proportionately less incremental spend to deliver considerable leverage on our 45% revenue growth, allowing for a more than 250% increase in our operating profit year-over-year. As always, we manage our expenses prudently. While also ensuring we adequately fund the growth portions of our business so that they have the resources they need to succeed. Our headcount was 818 as of the end of the quarter. We continue to manage our headcount, but we'll add resources to invest in areas that we believe will deliver future growth. Our non-GAAP R&D expense for the fourth quarter was 6% of net revenue. as compared to 7.2% of net revenue in the prior year comparable period and 6.2% of net revenue in the third quarter of 2020. To continue our technology and subscription services with leadership, we are committed to continued investment in R&D. Our non-GAAP tax rate was 24% in the fourth quarter of 2020. Looking at the bottom line for Q4, we reported non-GAAP net income of $31 million and non-GAAP diluted EPS of $0.99, each coming in at roughly 3x what we delivered in the prior year comparable period. Non-GAAP diluted earnings per share for the full year of 2020 was $2.88, up 54% from 2019. Turning to the balance sheet. We ended the fourth quarter of 2020 with $353.3 million in cash and short-term investments, up $46.5 million from the prior year quarter and up $157.6 million from the beginning of the year. We were also able to strengthen our inventory position. incrementally in the quarter, adding $27.8 million of our stock. However, we remain supply-constrained in the quarter across both businesses. We also believe that within the first 3 quarters of 2021, we will be able to return to normalized historical inventory levels. During the quarter, we generated $46.1 million in cash flow from operations. which brings our total cash provided from operations over the trailing 12 months to $181.2 million. We used $4.2 million in purchases of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $10.3 million. These efforts yielded an impressive free cash flow for the year of $170.9 million, equivalent to 193% of our non-GAAP net income. As we move into 2021, where we plan to reestablish normal carrying levels of our own inventory, we expect to be below our normal conversion ratio of 85% to 100% of non-GAAP net income by a fair amount, but we remain confident in our ability to continue to generate cash on a full year basis. Now turning to the fourth quarter results for our product segments. The Connected Home segment, which includes the industry-leading Nighthawk, Orbi, Nighthawk Pro Gaming and MIMO brands, generated net revenue of $296.1 million in the quarter, which is up 61.1% on a year-over-year basis and down 6.5% sequentially. We, again, saw strong year-over-year growth driven by heightened demand across both service provider and retail channels. In the fourth quarter, despite supply headwinds for our WiFi 6 products, we again held a strong leadership position in U.S. market share in consumer WiFi, coming in at 41%. And we fully expect we can grow our share once again once we overcome the WiFi 6 supply constraints in the coming quarters. The SMB segment continued its recovery with another strong sequential increase. and generated net revenue of $70.9 million for the fourth quarter of 2020, which is up 2.7% on a year-over-year basis and up 15.6% sequentially. Our efforts to shift channel and product mix is paying dividends with revenue and profitability improvements. On the product front, our SMB wireless products and PoE switches continue to perform well in the market. Our market share in switches sold through the U.S. retail channel came in at 55% in Q4. I'll now turn the call over to Patrick for his commentary, after which, I will provide guidance for the first quarter of 2021. -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [4] -------------------------------------------------------------------------------- Thank you, Bryan, and hello, everyone. 2020 was an unprecedented year in many ways, that we changed the way we live and work forever. Born on necessity, virtual communication quickly became the norm and people suddenly conducted the vast majority of the interactions digitally. Online has supplanted in person for many activities such as watching movies and exercising. Work from home is here to stay for many professionals for at least 2, 3 days a week or even more, post pandemic. These trends have driven an unprecedented requirement for expansive, premium, ever higher performance WiFi throughout the world. Our team has done an outstanding job to fulfill the explosive demand that fueled our impressive revenue and profit growth in 2020. In the face of significant supply chain challenges, the team at NETGEAR maneuvered through most obstacles to surpass what we thought was achievable while still remaining efficient. As a result, NETGEAR revenue grew 26% to more than $1.26 billion. And through diligence and discipline, non-GAAP operating profit grew more than 70% to over $110 million. There is a portion of the population that clearly demands more from their WiFi connection. In these homes, everyone in the family is consuming high bandwidth through the likes of Zoom or 4K video streaming, and they're connected at the same time from the farmers, riches of the home. To compound this, the number of connected devices from phone sets to security, to lighting, electrical vehicles is growing exponentially. This has driven a new segment in WiFi systems, the premium segment that is defined by products comprised of WiFi 6 standard, a mesh configuration and tri-band architecture. Only these premium WiFi systems can meet the demands of families that are now doing so much more from home. By pushing the leading edge of WiFi forward, NETGEAR pioneered this category and coming into 2021, we retain a commanding share of this segment of the market. This segment represented 25% of the WiFi mesh North America market in Q4, rising from 16% in Q3 and almost none in the beginning of 2020. Even though we remain supply constrained, our sales in the premium category were up 42% sequentially in the fourth quarter. Not only is this category growing quickly, it garners the highest crisis used the healthiest margins and has the highest prospects of attaching our value-added services, which we are already clearly seeing the benefits of in our Q4 performance. These are the customers who demand the fastest speed available. With Samsung including WiFi 6E in the latest Galaxy S1 Ultra phone and Apple reemerged to follow suit with their annual release later this year. It is clear the market is ready for the speed of WiFi 6E, the next WiFi standard, which can almost double that of WiFi 6. To cater to this ultra-premium set of customers, we recently announced the world's first all-purpose WiFi 6E router, a Nighthawk RAAC 500 tri-band router, which will debut in the market next month at a price of $599. With speeds of 2 gigabit available from cable operators in the U.S. now, 6E products harness the ability of high-quality video downloads and updos and AK gaming. We will look to expand our product portfolio with WiFi 6E technology with releases of additional routers, mass systems, cable gateways and mobile gateways for the rest of this year. And importantly, I'm proud to share we won a CES Innovation Award for our service, smart parental control, which is our first such award for software. This is an incredible validation not only for our offering, but for the importance of managing how WiFi is used in the house. Our success in the premium market and validation with CES works both bode well for our subscription business. And we again produced outstanding results in growing our recurring revenue stream. In the fourth quarter, we added 68,000 subscribers to end the year with 437,000 paid subscribers, more than 80,000 above our goal for the year. We have our sights set on getting to 650,000 subscribers by the end of this year and keeping pace towards our long-term goal of acquiring 2 million subscribers. One of the many ways we plan to achieve our target this year is to introduce new services. The recent strong reception of our new XL 1,000 WiFi 6 gaming router introduced at the end of Q3 2020, clearly validates that the gaming specific features it offers of value to the many gamers out there. Accordingly, we plan to bring these features to the market in the form of a subscription service offering in the second half of this year for those online-game-loving customers of our premium WiFi 6 tri-band Orbi system. On the SMB front in Q4, we continue to see the driving forces of working from home and running a small business from home. This resulted in strong sequential revenue growth of 16% in business that does not normally grow Q3 to Q4. This is evidence that our strong brand recognition for both consumers and small businesses, coupled with the ideal products needed to segregate networks in homes between business and personal use is gaining traction. As many of you are probably experiencing a single office with 20 employees has become 20 offices, each with a single employee. The need to secure the home office connection has never been more imperative. While their styles and kits have to share the same pipe, the work at home professional demands an always-on separate and secured connection unlike ever before. Our Orbi Tri with VLAN Management, all our access points coupled to plug-and-play VLAN switches are probably the easiest and most cost-effective solutions in the market. As a result, we saw 15% year-on-year growth in low end switches and 36% growth in our SMB wireless offerings. In the quarter, we have success with several marquee organizations in the health, personal fitness and sports industry as a deployed next-generation AV systems that transport audio and video signals over Ethernet. Despite installation of big projects being hampered by the limitations put on us due to the dynamic we saw year-over-year growth in our Pro AV business. With an ongoing transition from 1080p to 4K to 8K video and broadcast moving towards multi CAS streaming, we expect Pro AV to continue to be a growth driver for our SMB business for 2021 and beyond. We plan to seize the opportunity to innovate and meet in the work from home network market. With our PoE VLAN switches as well as our Orbi Pro and wireless access points, coupled with paving the way for the transition from HDMI networks to AV over Ethernet with a Pro AV lines of products, we believe our SMB business is poised for double-digit growth this year. I will now turn the call back to Bryan for first quarter guidance. -------------------------------------------------------------------------------- Bryan D. Murray, NETGEAR, Inc. - CFO [5] -------------------------------------------------------------------------------- Thank you, Patrick. As supply is expected to remain constrained and with an anticipated sequential step down in sales to service providers, our net revenue for the first quarter is expected to be in the range of $300 million to $315 million. GAAP operating margin is expected to be in the range of 4.5% to 5.5%. And non-GAAP operating margin is expected to be in the range of 8% to 9%. Our GAAP tax rate is expected to be approximately 28%, and our non-GAAP tax rate is expected to be 24.5% for the first quarter of 2021. While we are confident in our ability to provide guidance at this time, we do so with the caveat that considerable uncertainty remains in the market due to the COVID-19 endemic. And should unforeseen events occur, in particular, related to transportation delays in Southern California, where our main distribution centers located or actual results could differ from the foregoing guidance. We would now like to answer any questions from the audience. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Adam Tindle with Raymond James. -------------------------------------------------------------------------------- Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2] -------------------------------------------------------------------------------- Okay. Congrats on a strong Q4. I think you also said that you still expect mid- to high single-digit growth in fiscal '21 off of this higher number. And I wanted to touch on that because, Bryan, the Q1 guidance that you just went over is starting a little bit below, I think, what you thought from the Analyst Day, it was supposed to be down 10% sequentially, now down a little over 15% sequentially. U.S. channel inventory at retail and distribution increased for the first time all year. So a couple of data points that suggest that things are cooling a little bit. I guess the question is why maintain or really rated that 2021 year guidance, while guiding down Q1 given everything around you? -------------------------------------------------------------------------------- Bryan D. Murray, NETGEAR, Inc. - CFO [3] -------------------------------------------------------------------------------- Yes. And in terms of the guidance that we gave with regards to Q1 and this year for 2021 at the Analyst Day, I think we did not quite realize how well we would do in Q4, right? So that was expected lower revenue in Q4, and we were doubling off that number. But obviously, with the outperformance in Q4, largely driven by the success that we saw in the SMB business, I think we had originally thought that we would be flat in terms of CHP ex service provider. I think we did a little bit better than that, maybe 2% growth there. I think we outperformed under the core side. So naturally, I think Q1 is going to be a little bit off as we've been saying for the last several quarters, we are supply constrained, right? So we're doing everything we can to accelerate that. But based on the visibility we have today, we are supply-constrained continuing going forward on the CHP side. And to some extent on some of the SMB products. So that would be with regards to keeping Q1 here. And as I said earlier, we do think that the trends in the market are still pointing us towards that mid- to high single-digit growth for the full year of 2021. -------------------------------------------------------------------------------- Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Senior Research Associate [4] -------------------------------------------------------------------------------- Okay. And I think you also alluded to some inventory build that will occur during the year that should likely help you out a little bit. Can you maybe help us quantify that? Does the channel inventory get back to, you said, normalized levels? Is that 10-plus days at U.S. retail? Or maybe some color around how much inventory build benefit there should be during the year? -------------------------------------------------------------------------------- Bryan D. Murray, NETGEAR, Inc. - CFO [5] -------------------------------------------------------------------------------- Yes. It's really twofold, starting with the channel you were just mentioning. We think that the channel not only has to get back to where it's historically, but maybe even beyond to be able to support a growth market at the pace that we're seeing today. So historically, retail had operated in that 8% to 10% level, and we think they needed to go even higher. So we'll be working to build that back up. We're not there, obviously, right now. But also our own inventory. We want to get out of the business of having to airfreight a significant portion of our inbound supply and the visibility that we have today, we think that's going to take us probably into the third quarter to be established our normal carrying level of inventory, which is typically about 3 months. -------------------------------------------------------------------------------- Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Senior Research Associate [6] -------------------------------------------------------------------------------- Okay. That's helpful. Maybe just one for Patrick on the market share dynamic in consumer WiFi. Obviously, still very healthy, but it's been in decline throughout the year. You were an early mover on WiFi 6, so would have thought the opposite. So maybe just speak to the competitive landscape and why there seems to be a disconnect between your innovation or tech leadership and the market share trends coming down over the year? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [7] -------------------------------------------------------------------------------- Well, I mean, clearly, our technology push is faster than what the foundries could produce from a chip perspective. I think I mentioned it last time in our call as well as on the Analyst Day, WiFi 6 and now WiFi 6E requires a more advanced fabrication technology for the chips. So while we are the most aggressive in moving towards WiFi 6, we are the biggest sufferer of supply constraint. So that's why, I mean, while a lot of our competitors are still selling the older WiFi 5 technology at a very low price with heavy promotion, we decided to push all in for WiFi 6. So that's why you see -- if we are losing share, that means the market is growing faster than if we got more supply then clearly, we'll be able to gain that more share, and that's why we're bullish about the share because the market indeed is growing really fast. And people want WiFi 6, except that we cannot supply them, and then if they don't get WiFi 6, you'll get whatever is available in the market. So we believe that our early innovation helps us and position ourselves into the future, hurt us a little bit for the time being, because of supply constraint. But as always, you look at it, the glass is half full. And when the glass is half full, you're going to save that up as the year goes side. -------------------------------------------------------------------------------- Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Senior Research Associate [8] -------------------------------------------------------------------------------- Okay. Just 1 last one for me. Cash continues to build. Net cash per share is over $10. I understand that there's going to be some dip, but it sounds like still positive cash generation on a full year basis in 2021. Correct me if I'm wrong. So if that's the case with such a clean balance sheet and so much liquidity, maybe, Bryan, can you just update us on thoughts on uses for cash? -------------------------------------------------------------------------------- Bryan D. Murray, NETGEAR, Inc. - CFO [9] -------------------------------------------------------------------------------- Sure. Maybe just to kind of frame and kind of go a little bit deeper on what I've said with regards to the generation in 2021. And I think I mentioned this last quarter that we're going to have to reestablish our carrying levels of inventory, and we think we'll use roughly $100 million in the first half of the year. Normally, we're used to converting cash at a rate of, call it, 85% to 100% of non-GAAP net income. Obviously, 2020 was a phenomenal year at 193%. I think we're probably steering to something like 25% for this year. So operationally, we're going to have to use some cash in the first half of the year to reestablish inventory. Beyond that, we continue to evaluate other strategic uses, we continue to evaluate M&A, and we'll continue to discuss stock repurchase as we move forward. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Our next question comes from the line of Hamed Khorsand with BWS Financial. -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [11] -------------------------------------------------------------------------------- So first off, could you just talk about are you seeing other component shortages beyond WiFi 6? I mean, you've been pushing out normalization period, now it's Q3. Are you suggesting that it's the industry growing faster that you're preparing for? Or is it just lead times just expanding greater than you thought? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [12] -------------------------------------------------------------------------------- The 2 unrelated is pretty clear that because everybody is moving towards online. So -- and also people who are driving more EV and even for the old cars, there are more electronics in that. The overall market again for chips have gone way up, but the supply actually has come down because you probably know, I mean, some of the lower in foundries have been taken out of commission because of stations. And so the new fabrication, foundries are not going to be online. Next one is from TSMC in Arizona is probably in 2024. So the chip supply is going to continue to be constrained, while the demand has continued to ramp up. So the lead times lengthen because supply is strong, the demand is high. So you're right, chip supply has gone to almost like 50 weeks now. Obviously a spillover to the other things, well, whenever it's shipped of, yes, for example, there's tremendous tightness on memory as well. So that again is also in a Tyson pipe. The other ones are not so much, I mean, it seems that like from the big factories of China, PCB is not a problem, capacitors, consistors, not a problem. But then for some of the WiFi 6E special antennas and users, we do see a constraint there as well. -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [13] -------------------------------------------------------------------------------- Okay. And then you just mentioned 50 weeks here. Are you okay for the year as far as meeting the annual guidance? Have you been able to get allocation? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [14] -------------------------------------------------------------------------------- That's a good question. As a matter of fact, I mean, the reason why that we guide for the overall year of mid- to high single-digit growth is because you're right, we secured. The supply, right? And we still believe that, I mean, given the fact that we have a lot of market share to gain when they get more supply, this year is also supply down. I mean if we could somehow put out the tricks to get more supply will be better. But of course, if there is some more disruptions in supply then we'll be disappointed. But from a demand and from a supply planning standpoint, we're pretty confident on our full year guidance. -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [15] -------------------------------------------------------------------------------- Okay. And then just last question is just how are you internally managing the allocation of chips between different price points? Is there a particular models that you're more focused on with the tight supply constraints? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [16] -------------------------------------------------------------------------------- Clearly I mean, we are favoring chips. I mean, as chips is a chip is a chip, right? So we definitely favor chips that give us a higher price point. So Belie WiFi 6, all right? It's all under constraint. Of course, we will favor those that would be tri-band, higher speed versus the dual band, lower speed lower price point. That's for sure. And so as we discussed already, our major ads from our chip suppliers are primarily on the WiFi 6 side, and thus we have lesser allocation on the 11ac side, but that's by design. -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [17] -------------------------------------------------------------------------------- Patrick, excuse me. I think you misunderstood me. I talked mistakenly is that I was referring to your own router models, where those WiFi chip -- 6E chips would end up and the WiFi 6 chips would end up within your own models, not the IRE understood that it's the same chips. -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [18] -------------------------------------------------------------------------------- No, I don't quite exactly understand what... -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [19] -------------------------------------------------------------------------------- Sure. Are you just going towards the high end of your ecosystem as far as routers go? Are you putting more emphasis on getting as much WiFi 6 chips to the Orbi tri-band? Or are you evenly allocating your WiFi 6 chips between all your router models? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [20] -------------------------------------------------------------------------------- Well, that's what I just said. I mean, within the complete supply of WiFi 6 chipsets, all right, we would allocate more to the higher end models. It doesn't matter whether it is Orbi or it's routers or cable gateways. That's what I meant. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question comes from the line of Jeffrey Rand with Deutsche Bank. -------------------------------------------------------------------------------- Jeffrey A. Rand, Deutsche Bank AG, Research Division - Research Associate [22] -------------------------------------------------------------------------------- So good quarter. You're guiding your operating margins down sequentially in 1Q. Is that mostly from lower revenue levels? Or are there other dynamics we should be aware of? -------------------------------------------------------------------------------- Bryan D. Murray, NETGEAR, Inc. - CFO [23] -------------------------------------------------------------------------------- No, that's right. It's primarily coming from top line leverage. And just adding to, and I shared some of this with regards to Adam's earlier question, obviously, or supply contain on the CHP side, but service driver is expected to take a step down. We knew it was going to be elevated in the back half of 2020. We saw a phenomenal result in Q3 followed on strong results in Q4 for service provider. But as we've been guiding for 2021, we said it would have return to an average $35 million a quarter. We know that business is very lumpy. It so happens that first quarter is going to be a slightly down quarter. We see that steering towards $25 million. But to your question in terms of the operating margin, the step down is all driven by top line leverage. -------------------------------------------------------------------------------- Jeffrey A. Rand, Deutsche Bank AG, Research Division - Research Associate [24] -------------------------------------------------------------------------------- Great. And then, obviously, you've done very well with adding paid subscribers. Have you noticed any change in trends with new subscribers as we go through the pandemic? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [25] -------------------------------------------------------------------------------- No. Actually, as a matter of fact, it's pretty consistent. And generally, the most popular services are those that are doing control such as cyber protection and parental control. And they generally skew towards the high end models. The more expensive the product is, the higher propensity of those buyers going to subscribe to the services. So that trend hasn't really changed much. And then the recent introduction of our high-end WiFi 6 gaming router gives us a hint that gaming service will be really popular with these high-end models of mesh as well as we introduced in the second half of this year. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from the line of Paul Silverstein with Cowen. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [27] -------------------------------------------------------------------------------- Patrick, Bryan. I'm going to apologize upfront if asked you to repeat, I think you said in the call, I haven't been paying attention, but perhaps I missed some of the numbers. And I'm going to apologize that I'm going to ask you to speculate on one particular question. So for the questions, Patrick, if I recall, I think you cited 24 to 30 week lead time, 90 days ago, up from historical norm of 8 to 13 weeks, and you're now siting 50 weeks. So I have those numbers accurate? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [28] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [29] -------------------------------------------------------------------------------- Has there been a (inaudible) about just 26 weeks from the last 90 days? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [30] -------------------------------------------------------------------------------- No, you have a fantastic memory. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [31] -------------------------------------------------------------------------------- Okay. And do you feel that you've secured enough supply over the course of this year to drive the 5% to 10%, you're hoping that the supply constraints be understood used by the fourth quarter, but how much confidence do you have as the supply constraints using that time frame either for those supply constraints to use faster and more or alternatively to persist longer and worse? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [32] -------------------------------------------------------------------------------- Well, I mean, we don't think that it would actually ease until, as I just mentioned, the new factories in Arizona come online. I just don't see the demand for Internet connection to go down. I don't see the demand for electric vehicles to go down. Right now, we just have to have a much longer planning horizon so we plan out the whole year, 52 weeks. And we've got commitment from chip suppliers to provide that kind of planning elision that needs to face appeals already they committed to the live already. If they continue to stick to their delivery schedule, all right, then our revenue plan will materialize. And if there is any disruption, the unforeseen disruption in the chip manufacturing, then of course, all bets odd. And then at the same time, we're really planning for next year because we think that next year, the lead time will continue to be the same, if not longer. So we're starting the plan for next year. And then as the same goes, right, there's no way to predict the future, unless you make the future. And that's what we're going to. And that's why we're pushing all in for newer technology, we're going to meet the future. So we got it right. I mean, people want WiFi 6, now we're going to do it again. We believe that people will want WiFi 6E, and we're planning for it for 2022. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [33] -------------------------------------------------------------------------------- All right. Let me shift to market share on demand. I think Safepay said your share of consumer WiFi this quarter was 44%. Did I hear that correctly? Or was that concerned? I'm sorry? What was the share of consumer WiFi, Patrick, Bryan? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [34] -------------------------------------------------------------------------------- 41%. -------------------------------------------------------------------------------- Bryan D. Murray, NETGEAR, Inc. - CFO [35] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [36] -------------------------------------------------------------------------------- 41%. That's down from 44% last quarter. Is that right? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [37] -------------------------------------------------------------------------------- That's correct. So you can see pretty clearly, I mean, while we are doing sequential growth, all right. In the non-carrier channel, almost like 60% quarter-over-quarter, we see below the market growth. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [38] -------------------------------------------------------------------------------- So Patrick, you and Bryan have emphasized that you're focused on the premium end of the market for obvious reasons. Within WiFi 6, what is your share? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [39] -------------------------------------------------------------------------------- Within WiFi 6 including all price points, in trying to estimate be over 50% share. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [40] -------------------------------------------------------------------------------- Over 50%? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [41] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [42] -------------------------------------------------------------------------------- And do you think that went up or down over the last many days. I appreciate that you're early to market, relatively speaking, you have a broader lineup you made the point last quarter that Amazon, their Aero 6 entry is only to band. Are you seeing them -- it's Amazon, nose is always will be in are you seeing them having an incremental impact? I know there's not a ton of time since they launched, but how much of an impact do they have in between it? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [43] -------------------------------------------------------------------------------- Oh, they certainly have a significant impact, for example, the market of this high-end WiFi 6 tri-band has expanded from 16% of the market to 25% of the market. So clearly, they've helped to expand the market. Secondly, whenever you introduce something, even you sell 1 piece, you're going to get the market share, right? Because you have gone from 0 to 1. So they clearly are taking some market share in that market. But at the same time, enlarging the pie, for us as well. We just don't have enough supply to enjoy this tremendous growth of the buy. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [44] -------------------------------------------------------------------------------- All right. Well, that leads to the question you are asking is speculate and maybe you have insight, I suspect the speculation. But 2 points here. One, to the extent that you're supply-constrained cannot satisfy high and demand because you don't have the products. I suspect that many of those customers are going to buy what's available, which is WiFi 5 or lower in WiFi 6, what it on year or someone else. What gives you confidence that those customers are going to wait for the higher in WiFi 6 to be available? And the other question is, I appreciate when we're talking about high end, we're talking about relatively more sophisticated customers that want the performance with the throughput, reach, et cetera. And so they very well may appreciate, you're aware of and appreciate the differences between tri-band and dual band. That said, I suspect there are as many or more customers that they see WiFi 6, they see the throughput, and they really don't want to appreciate. They're neither aware of nor appreciate the difference between tri-band and dual band. And so Amazon Aero 6 or Google eventually coming into the market or yourself, WiFi 6 dual band? Awesome. I'm buying it. And they said, no, I don't have to wait for tri-band from NETGEAR or somebody else. Any insight you could share on those 2 issues? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [45] -------------------------------------------------------------------------------- Yes, definitely. Okay. The first, you're absolutely right. People need WiFi upgrade, no matter what. So if they cannot find WiFi 6. Well, they set up a WiFi 5. No doubt about it. No, but you have to understand, all the discussions we have been in the last 20 minutes, we say we ensure there is enough supply on the high end, right? So those people who are willing to pay about a dollar. Do you have it? They definitely would have it. They would not have been at some point that they'll buy it and take it home. But for those people who would look to buy a $200 WiFi 6 or even $300 WiFi 6. if I, I mean, to that. We just don't have enough supply. And then for them, they only pay, end of story. They don't have to worry about always a high electric motor versus a V8 engine or a (inaudible), same thing. Everybody knows on their phone to use Ookla speed test to see how fast the download speed is. I mean anybody do that in China, they do it all day long. And it doesn't matter with dual band or tri-band. Of course tri is going to be better than dual, but let's do it with the Ookla speed test. It's not even comparable. If you do a Ookla speed test on our $1,000 system versus a $200 system from Europe, my God, I mean, it's not even close. And that everybody could understand that. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [46] -------------------------------------------------------------------------------- Okay. 2 other quick questions from me. One -- and again, I apologize if you already said this. But WiFi 6 as a percentage of your total WiFi sales versus many days ago? What's the percentage? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [47] -------------------------------------------------------------------------------- Oh, yes. I mean, for our sales, if you look at systems and at mesh and routers and our WiFi 6 sales is almost like 60%. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [48] -------------------------------------------------------------------------------- Where do you think it will be 90 days from now or at the end of the year? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [49] -------------------------------------------------------------------------------- It really depends on supply. I would love it to be 100%. -------------------------------------------------------------------------------- Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [50] -------------------------------------------------------------------------------- All right. And one last question. Google with their Nest WiFi 6 product, any insight on when that's going to hit the market? Or any thoughts on that? I assume it's the same as Amazon that your focus is on the high end and you're relatively on concern, but let me let you respond. -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [51] -------------------------------------------------------------------------------- We don't have the G 2 as yet. But for one thing, for sure, Google introduced Nest WiFi and after 6 months. They actually (inaudible) it, they retired it because it did not sell. So they went back to the very regional Google WiFi, and this sounded they held out of it. I don't know when they're going to come up with the Nest WiFi or would they ever come out with Nest WiFi again. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- Your next question comes from the line of Woo Jin Ho with Bloomberg Intelligence. -------------------------------------------------------------------------------- Woo Jin Ho, Bloomberg Intelligence - Senior Technology Analyst [53] -------------------------------------------------------------------------------- Patrick, so can you just talk a little bit about the WiFi 6E allocations. You were early on WiFi 6 and getting the WiFi chip supply. And I'm just curious how you're thinking about the WiFi 6 availability, especially given with the iPhone 13 rumored to have a WiFi 6E launch earlier this year? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [54] -------------------------------------------------------------------------------- Right. I mean, the Samsung S21 Ultra is already 6E, and we tested it, and the speed is just amazing, it's incredible. So I think people will be wowed with it, especially now you do have 2 big internet speed from Comcast and both upload and download can be symmetric, which is great. I mean so you need those cells and you need our WiFi key products to really enjoy that speed. And of course, the chip allocations to very, very tight and being the first in the market. Of course, we have the most unfair share of that allocation. And then we'll continue to push for it. Yes, so I would say -- but still, the overall allocation into WiFi 6E this year is going to be very limited. We don't expect that it will be more than 10% of the total chip supply. -------------------------------------------------------------------------------- Woo Jin Ho, Bloomberg Intelligence - Senior Technology Analyst [55] -------------------------------------------------------------------------------- Got it. And then typically, when you launch a new product, I mean, you've got the Nighthawk WiFi 6E out first to market. But it usually takes about 2, 3 quarters of really markets gain. We're all waiting for the Orbi WiFi 6E product. I don't know when that's going to be announced, let's just say it's in the third quarter. I mean, how should we think about how aggressive you are with that particular product, Especially given that you're trying to drive ASPs upwards? -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [56] -------------------------------------------------------------------------------- Well, this time, it's actually different than previously. When we first introduced WiFi 6, there was no client on the market. So we're selling on the premise for future-proof. And the clients would come. And as a matter of fact, the Samsung phone that carries WiFi 6 came almost like 6 and 9 months behind our first WiFi 6 router. This time it's different. They are actually a month ahead of us. They are shifting the S21 Ultra phone with WiFi 6E already, and we're only going to ship our first WiFi 6E router a month from now. So this is a very different plan, and I'm not going to speculate, but I'm just using your words, right? You said that our Orbi will be 2, 3 quarters behind us. Well, by then, the iPhone 13 with WiFi 6E will be there, too. So this time will be different. This time, again, I'm absolutely confident. Once again, it's purely supply on schedule. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- There are no further questions at this time. Mr. Lo, I turn the call back over to you. -------------------------------------------------------------------------------- C. S. Lo, NETGEAR, Inc. - Co-Founder, Chairman & CEO [58] -------------------------------------------------------------------------------- Thank you. Thanks, everyone, for joining us. I'm really proud of what the team at NETGEAR was able to accomplish in 2020. Of course, this is a new year, and this market is very exciting. The market is changing very rapidly, and the customers have responding very quickly to new technology, which drive considerable growth in the market and help us to increase our revenue as well as our margin. We're excited to continue to lead the market with our innovation in multiple fronts and deliver another year of growth in 2021. Again, thank you once again for joining us today, and we look forward to sharing more with you throughout the year. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- This concludes today's conference call. You may now disconnect.