Q3 2019 Earnings Call
I'd now like to turn the conference over to Eric Bilin. Please go ahead Sir.
Thank you Angela good afternoon, and welcome to Deckchairs third quarter of 2019 financial results Conference call.
Joining us from the company or Mr., Patrick low chairman and CEO .
Mr., Brian Murray CFO .
The format of the call, we'll start with reviews the financials for the third quarter provided by Brian .
Followed by details any commentary on the business provided by Patrick and finish with fourth quarter 2019 guidance provided by Brian .
They have time for questions.
If you have not received a copy of today's press release. Please visit.
Gears Investor Relations website under Investor Netgear Dotcom.
Before we begin the four remarks, we advise you that todays conference call contain forward looking statements.
Forward looking statements include statements regarding expected revenue operating margin 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 that gears periodic filings with the FCC, including the most recent Form 10-Q .
Any forward looking statements that we make on this call are based on the assumptions as of today.
Netgear undertakes no obligation to update these famous 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 non-GAAP . She got 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., Brian Marie.
Thank you Eric Thank you everyone for joining todays call.
The third quarter presented us with some unexpected challenges.
And during September when we typically see increased demand in Europe after the normal summer recess.
We instead, so heightened uncertainty due to Brexit.
And the possible starts of a German recession.
Because of this September sales in Europe came in below our expectations.
In addition.
He pack was hampered by a sudden economic downturn in the China, Hong Kong region due to the escalating trade war.
And the unstable social political situation in Hong Kong.
However on the domestic front.
The home widebody markets in North America appears to have stabilized.
Well the indications that the market was down year over year about the same level, we saw in Q2.
4.5%.
At the same time, we continue to execute on a robust pipeline of new products to extend our market leadership in introducing white Fysixteen technologies in Q3.
Entering the quarter, we had three products containing wife Isix technology.
We ended the quarter was seven.
Including the all important wife, I'd say for rematch the world only wife Isix mesh system.
Overall netgear net revenue for the third quarter ended September 29, 2019 was $265.9 million.
Which came in at the low end of our guidance range.
Down 1.3% on a year over year basis.
15.2% on a sequential basis.
With revenue coming in at the low Winterburn guidance or non-GAAP operating margin came in at 7.8%.
The lower guidance range.
However, as a result of onetime beneficial revisions to prior period domestic and international tax liabilities.
You were able to deliver non-GAAP net income of 65 cents per diluted share in earnings.
Net revenue for the Americas was $178.7 million.
Which is up 1.6% year over year.
And a 13.7% for the sequential basis.
EMEA net revenue was $49.6 million, which is down 6.8% year over year, and a 15% quarter over quarter.
Oh Repack net revenue was $37.6 million for the third quarter, 2019, which was down 6.7% from the prior year comparable quarter.
I'm, 23% sequentially.
Because the third quarter 2019, we shipped a total of approximately 3.8 million units.
Including 2.7 million knows a wireless products.
Shipments of all wired and wireless routers and gateways combined.
About 1.6 million units for the third quarter 2018.
The net revenue split between home business products was about 72% in 28% respectively.
Net revenue split between wireless and wired products was about 68% and 32% respectively.
Products introduced in the last 15 months constituted about 26% of or third quarter shipments.
<unk> products introduced last 12 months contributed about 23% for third quarter shipments.
From this point on what discussion points will focus on non-GAAP numbers.
The reconciliation from GAAP to non-GAAP Vito your earnings release distributed earlier today.
The non-GAAP gross margins in the third quarter of 2019 was 29.4%.
Which is down 590 basis points as compared to 35.3% in the prior year comparable quarter.
And up 60 basis points compared 28.8% in the second quarter 2018.
Total non-GAAP operating expenses came in at $57.3 million.
Which is down 14.4% year over year and up 1.7% sequentially.
As always we manage our expenses prudently, while also making sure that the great portions of our business have the resources that they need to succeed.
Or headcount decreased by a net of 22 people to 802 heads as it ended the quarter.
Our non-GAAP R&D expense for the third quarter was 6.8% of net revenue.
As compared to what 7.1 person of net revenue in the prior year comparable period.
7.6% of net revenue in the second quarter 2019.
R&D investment remains critical to the future success of our business.
And we will continue to invest here in the quarters to come.
Our non-GAAP tax rate was 2.3% in the third quarter 2019.
In the quarter, we benefited from favorable onetime adjustments to both domestic and foreign tax liabilities.
This contributed approximately 13 cents toward non-GAAP diluted EPS.
Looking at the bottom line for Q3, we reported non-GAAP net income of $20.7 million and non-GAAP diluted EPS of 65 cents a share.
Turning to the balance sheet, we ended the third quarter of 29 team with $171.9 million in cash.
During the quarter, we used $26.1 million in cash flow from continuing operations.
Which brings our total cash used in continuing operations over the trailing 12 months to $93.8 billion.
We used $2.4 million and purchases of property and equipment during the quarter, which brings our total cash used for capital expenditures on a trailing 12 months to $15.1 million.
Nevertheless, we remain confident in our ability to generate meaningful levels of cash.
With the move of our manufacturing sites out of China behind US, we will be able to work down or buffered inventory levels.
Can we expect to generate positive cash flow going forward.
In Q3, we split $22 million into repurchase approximately 679000 shares of Nick your common stock.
At an average price of $32.34 per share.
Since the start of a repurchase activity in Q4 2013, we've spent approximately $506.7 million to repurchase approximately 14 million shares.
Our fully diluted share count is approximately 31.8 million shares as of the ended the third quarter.
We plan to continue to opportunistically repurchase our stocks in the quarters to come.
Now turning to the results of our product segments.
The connected home segment, which includes the industry leading nighthawk.
Orbi Nighthawk for gaming and mural brands generated net revenue of $190.7 million during the quarter.
Which is down 2.1% on a year over year basis and up 13.8% sequentially.
The year over year decline is primarily due to reduced revenue in the EMEA and APAC regions as a result of the aforementioned factors.
We also continue to see the U.S. by say market declining year over year.
However, we believe the decline to stabilize impart due to our introduction of white, Vice it's Ron or products.
For us market share in consumer wife, I remain strong at 51% for the third quarter.
The SMB segment generated a net revenue was $75.2 million for the third quarter 2019, which is a 0.6% on a year over year basis and up 18.7% sequentially.
Oh purely plus employee switching lines continue to perform well.
Our market share in switches sold through the retail channel was also strong at 53% for the third quarter.
I'll now turn the call over to Patrick for his commentary after which I will provide guidance for the fourth quarter 2019.
Thank you, Brian Hello, everyone, while the third quarter of 29 came was challenging on both the top and bottom line. We are confident in our strategy of capitalizing on technology inflections.
Doing recurring service revenue and expanding into new adjacent markets.
We're also excited by the execution of our Wi Fi six program.
Where we have a substantial lead over our competition.
During the quarter, we announced multiple new Wi Fi six products for the connected home.
Including the Orbi Wi Fi six mashed system. The 600, all Nighthawk 12 stream Wi Fi six eight rigs 11000 route.
And the Nighthawk why Fivesix mash extend.
We now have seven products with Wi Fi six technology, while our top three competitors do have not released a single Wi Fi six product.
Additionally, we have the product introductions pipeline to more than doubled account of our Wi Fi six products over the next six months.
While the year over year decline of North America retail Wi Fi marketing Q3 remained constant relative to Q2 and about 4.5% the product composition is very different.
With our strong wide by six route to line up our route to end market sales actually grew strongly in Q3.
However, we saw an overall decline in managed Wi Fi sales in North America due to the absence of why five six mashed products.
However, we believe the September release, all the iPhone 11 embedded with Wi Fi six was consumers to take advantage of this increased speed by connecting with Wi Fi six routers and Nash products.
Aggressively introduced more wind fivesix mesh products in the coming quarters, and we believe that were unable to North America Wi Fi retail market to return to growth in 2020.
As for adjacent market would believe with the introduction of Miro campus to we're expanding the reach of our digital art, Kansas market to a wider audience with the smaller form factor of 20 point 21.5 inches and.
And the retail price starting at just 399.
We will also be adding exciting new content from HBIO is incredibly popular game of Thrones series to our miro streaming subscription membership as well as for purchase through the marketplace with more to come.
Turning to the SMB segment during Q3, we announced the industry's first cloud Configurable commercial grade mesh network.
The latest updates to the next year insights solution enabled the deployment of fully Configurable mesh networks to support wireless point extended the then mapping across the match in Huston discovery and many other feature and hence.
The net get inside cloud management solution now in its third year has proven to be a powerful tool for small businesses to manage the networks remotely all four managed service providers to better keep tabs on the health of the client networks.
The insight platform office support what 22 different switches access points Nash satellite and security devices managed by way of a mobile application assessable on both iOS and Android as well as browser based test desktop solutions popular among.
If you net wealth managers and managed service providers.
We believe we at the forefront in the industry's technology pivot to match wireless Lan and cloud management environmental devices.
At the Nick Another example of expanding into adjacent markets. We're extremely excited about the inroads, we are making into to pro AB switching market.
We introduced three new groundbreaking models ideal deployment of Avi over IP solutions. The compact 60 import all cuppa with PEO heat and a 24 port and 48.5 and launches for the end 4300 series of our modulus, which.
Furthermore, we just announced a strategic three weight joint marketing initiative with broad data, a leading pro AB equipment manufacturer and Avianca by one of the top five pro Avi integrators in North America.
With avionics systems as the integrator. This partnership will provide next generation pro ABTS systems based on IP technology with unprecedented levels of performance scale in cost efficiency for customers looking to deploy IP based audiovisual systems.
Finally, we continue to make progress with initiative to build recurring revenue stream.
This is expression we import.
As we expect that it will have a significant impact on both our bottom line and the stability of the figures earnings in the future.
As of the end of the third quarter, we have approximately 12 million registered users.
Reduces and use account has grown to $3.6 million, which represented approximately 29% sequential user growth over Q2 2019, we remain very excited about that transmit transformative value creation opportunity of this initiative.
At the start of October we also started a very strategic service offering with best Buy's Geek squad.
About $400 year customers will receive and Orbi mashed network with two nodes.
Food technical installation is support services from Geek squad and a variety of value added subscription services, including Netgear Amo and parental controls.
During Q3, we also experimented with a 30 day free trial for net Ahmad surfaces and are seeing up to a 9% conversion rate from free trial paid subscription on some of our customer engagement campaign.
We are learning as we go and I'm confident we will continue to improve our ability to grow our service customer revenue.
Last but not least I would like to invite our investors and analysts to join US on November 20, yet at the NASDAQ market site in New York for the 2019 net gear financial Analyst day.
During which will provide more detail around about why fivesix product rollout plan pro Avi market penetration progress.
Success in acquiring service subscribers and our margin improvement plan for 2020 Nvme.
I hope that all of you can join us.
You would like to 10, please reach out to netgear investor relation add investors at net year Dot com, our visit our Investor Relations website for more details.
In summary, while geopolitical headwinds presented Leah termed setbacks to our progress towards double digit operating margin and mid single digit annual revenue growth, we remain confident in our strategy heading into the fourth quarter and 2020.
I will now turn the call back the Brian for fourth quarter guidance.
Thank you Patrick.
Our fourth quarter revenues will be impacted by the trends, we have seen in core markets within EMEA and APAC.
While we expect to see softer end user demand there will be an additional effect on our revenue as the channel reduces inventories for these new conditions.
In North America, we're also taking proactive steps to reduce channel inventories to prepare for an accelerated shift towards wide by six within the us in 2020 after CES in early January .
In response to our lower topline expectations in Europe in China.
We are taking actions to further re size our cost base in those regions to enable us to redeploy resources, where we see greater opportunities such as North America in Japan.
We are going to shrink sales head count in China, and Europe , where appropriate and reduce our office footprint in those markets.
In consideration to the foregoing our net revenue for the fourth quarter is expected to be in the range of $240 million to $255 million.
GAAP operating margin is expected to be in the range of 0.1% to 1.1%.
And our non-GAAP operating margin is expected to be the range of 4.5% to 5.5%.
Our GAAP tax rate is expected to be approximately 33.5%.
And our non-GAAP tax rate is expected to be 23% for the fourth quarter 2019.
Operator that concludes our comments and we can now take questions.
And at this time, if you have a question you would need to press star one on your Touchtone phone again best Star one to ask your question.
And your first question comes from the line of Adam Tindle with Raymond James. Please go ahead.
Okay. Thanks, and good afternoon I just wanted to start on the inventory you talked about the initiative to reduce channel inventory. The weeks Didnt look significantly out of line I think you called it proactive so.
On a two part hoping that you can help aside the adjustment that's needed how much of this is going to hit Contra revenue and secondly help us with the timing of this to continue into 2020 or is it all in Q4 guidance and then thereafter into 2020, we can look forward to life by six and the up with that.
It's it's all implied in our guidance for Q4.
In terms of the sizing I would say if you looked at normal seasonality.
We typically see us lift on the non service read a portion of CHP in that 12% range.
So I would say probably two thirds of this correction is coming from from the Americas to anticipate the wide by six rollout.
And the remaining one third is really being weighed down by the international headwinds that we're facing.
And we don't does it continue into Q.
We don't expect further channel inventory reduction go forward Thats right.
Okay, and then maybe just a big picture operational question at the Analyst Day last year, you made a point to show how margin fundamentals were intact XR low double digits, you were targeting the 10% to 11% non-GAAP operating margin for 2019 based on the mid single digit revenue growth.
Now that we're looking at a full picture 2019, I understand revenues going to be down mid single digits instead of growing but operating profit dollars are gonna be down like more than 30% and you're going to be finishing the year at half of the original operating margin target based on what we learn today I think we're just not surprised that the amount of negative leverage that we're seeing here. So can you maybe just touch.
Sean a little bit deeper what you're doing operationally in house to start reversing this trend and where do you think operating margins can sustain with just the internal initiatives and no assumption from market growth.
Six or 7% that we're looking at for the year the right way to think about this business.
Yes, I mean, there's no doubt we faced a number of challenges this year.
Starting with the Us Wi Fi markets.
We see has stabilized in Q3, but it's still down year over year, 4.5%.
And started the year off down 8% in Q1.
So certainly that's that's provided some challenges.
These factors I mentioned, both in EMEA and.
Asia Pacific, specifically, China Hong Kong.
Really accelerated in the September timeframe.
So it's certainly.
Came late.
And not much time to course correct there.
We don't see those things necessarily.
Correcting themselves in the short term.
But we do think that our strategies here, specifically on the Wi Fi six rollouts.
Were far ahead of our competition or top three competitors.
Do not have wife Isix products out there.
Effectively in the US we sold the routers for us or end user sales and routers grow there. So it's giving us the confidence that our strategy is working.
All these things combined are really kind of whats, giving us a confidence as we head into 2020 again.
What transpired in 2019 is behind US we do think that we can get back to mid single digit growth.
In 2020.
Yes, I think because there are you on will go ahead.
Yeah, just to add to what.
Brian has said I think.
In 2020, there were significant differences versus 2019 number one we set out our baseline. So we would not assume that China, Hong Kong or Europe .
We'll perform at all so that's going to be resetting into our baseline and as such we deploying those resources into.
Mark as did have shown robustness such as in Japan, and also in North America into Wi Fi six segment.
Also we see is that.
We kept getting surprises on the on the terrorists and trade war front in terms of the percentage of terrorists.
So and this speed that the terry's being being assessed.
Some of the products, we believe that we're not in the terrorists territory that we were slow to move them out of China autos and become terrorists.
So that really put.
A lot of dent in that and secondly.
Our our productions.
In outside of China is.
In testing phase in the 30 of the year. So thats why we had to buffer a lot of inventory.
Just in case the factory production Didnt go Wow, we still have inventory and now those buffer inventory, even though is produced.
Long before that Terry was applied.
It is generally higher cost because as time goes on those though I mean, we like in the in the indices with industry right. When the inventory is older is relatively more expensive.
Relative to the current selling price.
And then the factories in outside of China would take time to get to the same efficiency as the factories in China.
Now we believe in 2020, all those negative factors will be gone well unless of course, we cannot predict with Terry will be applied to other countries.
As well as let's say the Terry is not going to apply that to countries that we move into a number one our our higher cost inventory will be worked down.
To the production.
In those new factories will be getting in line with the cost base of the old Chinese factories. So that's also the advantage of 2020 now one thing more importantly in that based on that assessment of what we saw a Wi Fi six in Q3, and what we saw in U.S.
As Japan versus China, Europe , we're doing adjustment, we are going to buy celebrate more of our mix of revenue into Wi Fi six as well as into Japan, and the use various as still keeping some eliminate see at a higher proportion and still hoping that Europe and China will come.
Matt. So so those are the few factors, which we are working on.
To ensure that we would be able to hit our single digit revenue growth and double digit operating margin growth.
This is this year.
In here any by looking at the margin profile of Wi Fi six and looking at the production the latest production cost from the factories in in Vietnam in Thailand, and Indonesia with few that we are absolutely the right track, but in order to get into this new reality.
We have to do some real adjustment in terms of channel inventories around well in order to prepay for this.
And and see as we were going to debut a lot of Wi Fi six products.
Which we unlike last year, we announced the progress we didnt ship to Q3. This year, what we would like to do we is to announce some products and ship that the week after I see us into the channel.
That would believe will create the biggest momentum for us not only to generate revenue, but as Wes to take market share. However, we do not know how fast that transition will be in 2019.
So we would like to keep the channel inventory very lean so that we could it just really rapidly accordingly.
Because we only we sell not only routers, but we also sell mashed systems. We also sell cable gateways. We also fell mobile hotspot. We also expanders, we don't know how to Wi Fi six technology will shift in any one of these categories, we want to be able to be nimble we want to be.
The capitalize on the fastest move and ship ship date, the channel inventory Accordingly, and that's why we're taking all of these actions in Q4, and we feel like that we at least have about three to four quarters lead of the Wi Fi six technology over all our major competitors and that gives us a car.
Confidence 2028 will be a year that we could really get ourselves into a really good position of our long term deliverable nanopore as in 2021 and beyond that we believe that our service revenue was started kick in to half the positive impact and for that how are we going to do that.
What do we have done and we're going to get more granularity on the analyst day for that serves revenue part.
Okay.
One quick quick one for Brian you talked about being confident and generating meaningful levels of cash can you just help us quantify what that means and then remind us how much is left on the buyback and whether M&A would make sense to help the business or is buyback still about use of cash. Thanks.
Yes, I think.
Going into Q4, we think things will turn around you may recall that we typically have some seasonal dating programs with some key accounts of ours, which usually go the other direction from a cash standpoint, but we do believe that we're in a position to work down some of these inventory levels.
My guess is it's probably north of 150% of non-GAAP net income.
Generate in terms of free cash flow in Q4.
It likely will take us two to three quarters to to work the inventory.
We down to levels that we'd like to carry forward and we'll try and do that as fast as we can but that's that's my best estimate of where Q4 would be turns of use of cash yes, we still think that using cash for for buyback is inappropriate use of cash balance that still carries an excess of what we think.
Operating cash needs or.
And as I, just said, we expect to generate additional cash in the quarter and also I mean, we will not stop looking at some tuck in technology acquisitions that will benefit our growth area.
Yes.
Wavy space, such as the wife Isix space, So just a content space service revenues space yet.
Your next question comes from the line of Robert Gunmen with Guggenheim. Please go ahead.
Thanks for taking my question.
Given all the uncertainties that you cited in the sort of moving parts that we've seen now sprint.
I was just wondering the impact on promotional spending and contra revenue.
Is there a change in allocation, they're all dollar amounts.
Relative to the second quarter.
Youre welcome to your prior plan.
How you're spending that money.
Yes, I would say that maybe a slight tweak to original plan I mean coming into the quarter. There was certainly anticipation of prime day being extended to a to a two day event this year.
As opposed to one day in the past.
And certainly.
It was successful on on one account, but that typically comes with some additional promotional dollars. So thats certainly had.
Some impact.
Sure.
But I think going into Q4, we think it will be normal Q4 promotional.
Spending levels searches certainly in the back of Black Friday.
Cyber Monday.
And do you see the need to spend more than in the coming quarters, given that I think we were looking for more of a flattish type development has brought to us why five markets third quarter.
Obviously, it's a little disappointing but.
Do you think you could move that or is that just.
One of a wait and see.
Hi, yes.
I am hoping that that we'll get some momentum here I think we mentioned that we launched the will be Wi Fi six mesh.
Late in the quarter.
That's now getting out ceded into the market as we speak.
And so we think thats a key component.
He said earlier, we sold a success on the router side because of our wise what by six product introductions now that we're touching on mesh which is about a third of the market.
We think that will be a contributing factor and we're hopeful that we'll get closer to a flat market in Q4 and user standpoint.
From a from a.
Contra revenue marketing perspective, we don't see that we are going to spend more than what we traditionally spend into Q4 in prior years.
Okay. That's helpful. Thank you.
And your next question comes from the line of Liz paid with Cowen and company. Please go ahead.
Hi, Thanks for taking my question just how the comment that you think you get that.
Closer to flat market growth and the fourth quarter.
Just in terms of of looking out into calendar 20, when do you think you'll get back to topline growth you have a lot of channel reduction inventory reduction to do.
Just wondering in terms of timing of.
Turn to topline growth. Thanks.
They have given all the factors constant that means there is no surprises.
Do political headwinds, we expect that we should be able to get to know.
Topline revenue growth probably from second quarter onwards, so thats, how we look at because we believe that a channel inventory adjustment should be done by Q4 and.
Not be later in Q1.
Okay great.
And just.
So you double digit operating margin still reasonable target.
On kind of low single digits, 3%.
Revenue growth for 20.
That is that what you're saying, yes in a normal economic.
Situation that is still to plan for 2020.
Okay.
And then lastly.
Service provider revenue look like that held up a.
Rebounded nicely in Threeq Q.
We still see that kind of in the $35 million to $36 million range moving forward.
It is roughly in that 35 million range, yes, plus or minus.
So Q3 was plus.
Q1 was a big plus.
Q2, as a big minus.
Right.
I'm sorry, just one other question on operating expenses and for Q.
Do you have some levers to pull there do you expect opex to be flat down a little bit.
It's probably closer to flat.
We did talk about some of the actions that we're taking.
Right size some of these markets that we see a bit challenged.
We will be reallocating those resources to the areas, we see opportunity, yes, we definitely ramping up investment in head counts.
And resources in North America for the permitting the market and in Japan overall.
Great. Okay. Thank you very much.
Your next question comes the line of high Mad course data with VW ask financials. Please go ahead.
Hi, I just want to the go to follow up here on the commentary about why Fysixteen.
Beginning the year you were.
Somewhat be wilderness to decline the market in New York guess thought it was why five six related.
Now you're saying that's why Fysixteen, just slow, but you have more products on them.
On the market is I mean is is that really the case of what's going on in the home Wi Fi market or are you just losing share to the carriers.
No I would say clearly the Wi Fi six is the reason because it's pretty simple in Q1, when there was absolutely no Wi Fi six products to market declined by 8% in.
In Q2, when we had Wi Fi six products for about one and a half skews for the full quarter.
We saw that the market.
Improved to negative 4.5% in Q3, when we have three we doubled the Wi Fi six router product.
The market should have improved from 4.5% to whatever unfortunately, what we saw in the market is the match market for the very first time in history actually declined.
All right year over year, Alright, so that clearly tells you.
It's like in in a drug test one is a painful and the other one is the drug right. So when there is why fivesix on the route aside the market demand holding up but on the mashed site well, there's absolutely no Wi Fi six the market actually declined for the very first time in history. So that tells us very likely wife I said.
It's going to be the key driver and Thats why in Q4 is the very first time that we would have Wi Fi is exposed on the router side with some with.
Five skews and then with Mash also Wi Fi six and expanded with one skewing Wi Fi six we should see the improvement of the market might not be totally flat, but at least with improved from 4.5% now come Q1, as we said pose CES, we have Wi Fi six products in all categories.
Cable expanders.
And managed router that when we see there is a high likelihood the market will be flat or even return.
Okay, I see as far as inventories concerned how much of that inventory is not wife I 60, your concerns that you need to liquidate it faster.
No. We don't believe that we would liquidate because as you can see I'll inventory Baltimore maximum about one or two quarters, alright, and one point 11 AC as much as we think will handle the push the market over to 11 ex wife, I think it probably will still take two or three years before that.
Transitions completely over so we are absolutely in no hurry to liquidate the 11 AC inventory at all and as a matter of fact, I mean, we hold at 51% market share. So we still have a lot of what wherewithal to really move 11 AC products.
And.
If you think that's the that's why five six that's providing the catalyst here for the year well I haven't your competitors made the move is it's really just the cost driven consumers not wanting to spend this much for life I starts router.
No. It's multiple reasons, if you look at it I mean it seriously there are only three competitors in the market today all right.
One is I mean to Amazon and Google.
And for them they have not had because their development process, a little bit different alright, the hardware and software is completely developed in house. They don't use the audio model all right. They write their software from this back all the we have they don't even use some of the driver software from the chip vendors. So it is very difficult.
For them to expand that Wi Fi six offerings, and Furthermore, I think that focus right now as you just saw that recent introduction of that product is really focus on lowering costs in collecting more data are hit so Ted now why if I thinks is not the priority and then for the other compare.
It is as such as links it.
We just don't have the financial wherewithal to engage in Wi Fi six product developments in all those many areas. So I think we're in a very unique position that where we are happy enough financial as well as the audio model to introduce that many Wi Fi six product and we absolutely are going to capital.
Lies on disadvantage.
Thank you.
And your and your final question comes in the line of through Jan Ho with Bloomberg Intelligence. Please go ahead.
Great. Thank you for taking my question.
A couple of quick ones, how big is your Hong Kong and try to exposure today My understanding was that it has been small so.
Kind of scratching my head and why that would be such a big revenue impact going into the fourth quarter and possibly the 2020.
We clearly as you can see right I mean, we usually we love to be at the height of.
Of our guidance right and we hit the low and so that's a swing at least $10 million and you know is Europe and China. All call you could easily do the calculation see how big the impact is now remember.
Hong Kong, China is the number two economy in the world. So they should be our number two market right [laughter]. So is pretty significant alright, and and clearly you know if you look at the other economies is Japan is Germany, which also big for US. So that's why we've got to quickly shift you know as fast as Pos.
So you know from China into a into Japan, which is an absolute growth area for us and we under under indexing in Japan, which we feel good that we'll be able to make strides over there.
And just typically youre not exiting the China, China, Hong Kong markets, you, just reducing your exposure there and shifting over the resources, Japan is that is that the by way of thinking of it correct will not exiting at all but we are definitely is shrinking the footprint. For example, I mean, just give you the how important it as we have three sales offices in China.
We have Beijing, Shanghai, we have gone gel and Blue plus Hong Kong get four.
Clearly you know with this new reality, we probably don't meet for field offices.
And.
In in your today commentary it sounds like you're targeting single digit growth.
Revenues in 2020 sounds like a preview to the analyst day.
Given your.
Focus on Wi Fi six is is this going to be an A.S.P. driven growth.
For a unit driven growth given.
All the puts and takes on what you're doing with the inventory and then on the product portfolio.
For our planning horizon, it would be mostly at the growth. However, I will take any unit growth all right I think the unit growth has become from share gain.
So but for now a baseline planning is for ASV growth, but the growth is not only coming from the CHP side. We're very excited also on the SMB side on the pro Amy space as well I think we've laid a pretty good foundation.
As I just talked about.
We just announced a first marketing alliance initiative with broad data in avionics and you'll see more of that coming and we are excited about that opportunity as we have described it many times that this opportunity.
Represented $150 million to $200 million Pam.
And even a 50 present market share, which will be pretty lucrative as incremental business to the to the SMB side.
In conclusion to refer back to something Patrick said earlier with respect to the growth.
We see that is starting in Q2.
You know normally see seasonality in Q1 can we have the holiday season were CHP non service letter drops about 20%. That's certainly will be muted with some of the actions that we're taking in the U.S., but.
But I still think that we'll see we'll see that seasonal drop maybe in the tend to low teen percentage wise.
Okay, and then one last part of portfolio question for me.
Patrick you guys have done a great job and mastering the good better best.
Strategy and the wife by market, whereas a Google and Amazon have.
Focused on the good.
Given your focus on wildfire six and the higher end of the public spectrum or is there any risk that you might be giving up a large share of the base of up a permit.
On to Amazon and Google with a lower priced.
Mesh products.
Really alright, we on the high end all the good better best [laughter]. So we compete on every single level. So for example, if you look at Wi Fi fixed router right. We just introduced a Wi Fi fixed route at $179, Alright, So which is you know the high end.
All of the good and we also just introduced.
Few a new a dual band or B.
The one X series.
Which is priced at around $249 and so we continue to do that so we compete in every single price level.
But in every single price level with always the highest priced.
Which is basically I'll I'll offer on day and he has been very successful because channel partners. One that all rifle every single price level, they want to higher priced products that we just introduced now a $249 expander alright, but we'll continue to expand the line awful Wi Fi six will not.
Leave any price point.
Open and empty.
Understood. Thank you sure.
Oh.
And I will now turn the call back to patch flow for closing remarks.
Thank you everybody for joining today's call clearly I mean, we would like to have better financial results for Q3 in Q4, but with the political headwinds going out as.
We are quickly we adjusting and we're very optimistic about our prospects across the business.
We close out the year and into 2020.
We have clear leadership in Wi Fi six in pro Avi and listing partners in both areas.
We're very encouraged by our progress in acquiring subscription service customers and making good initial steps towards our goal of a million paid subscribers in a few years I look forward to updating all of you at our analyst day on all those fronts in November and look forward to seeing ought to view on November .
Yes in Europe at the NASDAQ site. Thank you.
And this concludes today's conference call you may now disconnect.