Q4 2019 Earnings Call
For 2019 results conference call.
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After the speakers presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your speaker today, Eric violent. Thank you. Please go ahead Sir.
Thank you David Good afternoon, and welcome to get gears fourth quarter.
Full year 2019 financial results conference call.
Joining us from the company or Mr., Patrick low chairman and CEO.
Mr., Brian Murray CFO.
So most of the cold the Starwood reviews, the financials for the fourth quarter and for your provided by Brian.
All the by de children commentary on the business provided by Patrick.
And finish with first quarter 2020 guidance provided by Brian.
Well then have time for any question.
If you've not received a copy of today's press release.
Please visit Netgears Investor Relations website.
You W. W gotten netgear dot com.
He crew before we begin to fund the remarks, we advise you that today's conference call contains forward looking statements.
Looking statements include statements regarding expected revenue.
Operating margin tax rates expenses and future business out.
Actual results or trends could differ materially from those contemplated by the forward looking statements.
For more information please refer to the risk factors disgusted nextshares periodic <unk> filings with the FCC.
Putting the most recent form 10-Q.
Any forward looking statements that we make on this call are based on assumptions as of today.
Netgear undertakes no obligation to fit these forward looking statements as result of new information for future events.
Addition, several non-GAAP financial measure metric measures will be mentioned on the call today.
A reconciliation of GAAP to non-GAAP measures can be found in today's press release on our Investor Relations website.
At this time I would now like to called it turn the call over to Mr., Brian Marie.
Thank you Eric and thank you everyone for joining todays call.
Net revenue for the fourth quarter ended December 31, 2019 was $253 million.
He is a top endeavor guidance range, but down 12.4% year over year.
Pinned down 4.8% on a sequential basis.
As anticipated, we sold visible quarter over quarter decline in the greater China region.
Well all other regions enjoyed the seasonal holiday boost from an end user demand perspective.
We were able to take the initial steps of adjusting channel inventory worldwide to prepare for the strong push too wide by six in 2020.
For the full year 2019, Nick your net revenues were $998.8 million.
Which is down 5.7 per cent compared to the year ended December 31 2018.
I was presented at our analyst day this past November.
We're committed to growing our top and bottom lines going forward with our strategy of delivering leading products during technology inflections.
Expanding into new adjacent markets.
Developing a robust subscription revenue stream.
We saw only success in Q4 in white by six.
Probably V.
And subscriber growth and we will continue to push and these directions and 2020.
We remain confident our strategy will pay off in the years to come.
Our non-GAAP operating margin for the fourth quarter came in at 4.4%.
Just below the low into for guidance range.
It was a very competitive holiday season due to the level of a new competitor in the U.S.
We are prepared for this and we took advantage of additional opportunities to promote products to increase our market share and generate revenue.
We feel confident then 2020, we will improve our non-GAAP gross and operating margins throughout the course of the year as we benefit from our production outside of China, reaching full efficiency.
Which will move the cost headwinds we felt in 2018 from tariffs.
And the inefficiencies related to moving and ramping or manufacturing operations.
Full year non-GAAP operating income was $64.5 million.
Resulting in a non-GAAP operating margin of 6.5%.
For the fourth quarter of 2019.
Net revenue for the Americas was $169.1 million.
Which is down 11.1% year over year.
Down 5.3% on a sequential basis.
Both the year over year end sequential downturn in revenue.
Primarily a result over plan channel inventory adjustment.
EMEA net revenue was $50.5 million.
Which is down 14.1% year over year and up 1.9% quarter over quarter.
Or you pack net revenue was $33.4 million.
Which is down 16.2% from the prior year comparable quarter.
And down 11.4% sequentially, primarily as a result of the continued geopolitical challenges into greater China region.
For the fourth quarter 2019, we shipped a total of approximately 3.8 million units.
Moving to 0.8 2.9 million knows the wireless products.
Shipments of all wired and wireless routers and gateways combine.
About 1.5 million units for the fourth quarter 2019.
The net revenue split between home and business products was about 73% and 27% respectively.
The net revenue split between wireless and wired products was about 67% and 33% respectively.
Products introduced in the last 15 months constituted about 29% over fourth quarter shipments well products introduced in the last 12 months contributed about 26% of our fourth quarter shipments.
From this point on my discussion points will focus on non-GAAP numbers.
A reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today.
Non-GAAP gross margin in the fourth quarter 2019 was 27.9%.
Which is down 380 basis points as compared to 31.7% in the prior year comparable quarter.
Down 150 basis points compared to 29.4% in the third quarter 2019.
On a year over year basis in Q4, we were still burdened by the additional cost from the production transfer from China to Southeast Asia <unk>.
Incremental tariffs included in September 29 team.
And the effect of the previous tariffs on some reduced residual inventory.
We expect to see the adverse effects of the terror and.
And manufacturing inefficiencies feet entirely during the first half of this year.
Total Q4, non-GAAP operating expenses came in at $59.4 million.
Which is down 7.8% year over year.
And up 3.8% sequentially.
As always we manager expenses prudently, while also making sure that the growth portions of our business have the resources that they need to succeed.
Our headcount was 809 as as we ended the quarter.
We intend to expand our workforce specifically in the area of R&D and 2020 to enhance our service offerings.
Non-GAAP R&D expense for the fourth quarter was 7.2% of net revenue.
As compared to 6.2% of net revenue in the prior year comparable period.
And 6.8% of net revenues in the third quarter of 2019.
R&D investment for me, it's critical to the future success of our business.
We will continue to invest here in the quarters to come.
Especially in the growth areas, such as services and probably be.
Our non-GAAP tax rate was 12.7% in the fourth quarter 2019.
In the quarter, we've been from from favorable revisions to estimate some both domestic and foreign tax liabilities for the full year.
Looking at the bottom line for Q4, we reported non-GAAP net income of $10.4 million and non-GAAP diluted EPS of 34 cents.
Non-GAAP diluted earnings per share for the full year 2019 was $1.87 cents.
Turning to the balance sheet, we ended the fourth quarter of 2019 with $195.7 million in cash and short term investments.
We successfully reduced our inventory by $40 million in the quarter as the heavy lift of the production migration away from China is behind us.
We expect to continue inventory reductions, which will further benefit our cash position in 2020.
During the quarter, we generated $49.6 million and cash flow from continuing operations, which brings our total cash provided from continuing operations over the trailing 12 months to $13.5 million.
We used $2.4 million and purchases of property and equipment during the quarter.
Which brings our total cash used for capital expenditures over the trailing 12 months to $14.2 million.
We remain confident in our ability to generate cash going forward.
In Q4, we spent $22 million to repurchase approximately 721000 shares of make your common stock.
At an average price of $30.49 per share.
[noise] since the start of a repurchase activity in Q4 2013, we have spent $528.7 million to repurchase 14.8 million shares.
Our fully diluted share count is approximately 30.8 million shares as it ended the fourth quarter.
We plan to continue to Opportunistically repurchase our stock in the quarters to come.
Now turning to the results for our product segments.
The connected home segment, which includes the industry, leading Nighthawk orbi.
<unk> pro gaming and mural brands.
Generated net revenue of $183.9 million during the quarter.
Which is down 14.7% on a year over year basis.
3.6% sequentially.
The year over year decline was due to a number of factors Firstly in North America, we took proactive steps to reduce channel inventories to prepare for an accelerated shift towards white by six anticipated to occur in the first half of 2020.
Secondly, we sold reduced revenue in the fast declining greater China region due to geopolitical issues.
And lastly, we experienced declines in our service provider business as carriers are waiting rollouts of Fiveg product offerings.
Our U.S. market share in consumer Wi Fi ticked up to 52% for the fourth quarter in the face of the increased competitive environment.
Yes, and be segment generated net revenue of $69.1 million for the fourth quarter of 2018, which is down 5.7% on a year over year basis down 8.1% sequentially.
The decline both year on year end sequential were driven by the market declined in the UK due to Brexit and the geopolitical situation seen in greater China region.
[laughter].
On the product front, our pure we plus and probably be switching lines continue to perform well in the market.
Our market share in switches sold through us retail channels remain strong at 53% for the fourth quarter.
I'll now turn the call over to Patrick for his commentary after which I will provide guidance for the first quarter 2020.
Thank you, Brian and Hello, everyone.
We're excited about the progress we've made in the fourth quarter, along the three pillars of our growth strategy.
We were the first debut why five six Nash, which garnered a strong reception.
And we accelerated the growth and market shift to power over Ethernet plus technology in switching.
We also debuted in the new 21 inch mineral digital off campus worldwide and we won the first pro Avi project.
The 2020 Olympics during the quarter.
On the paid service subscribe aside we increased our subscriber total to 177000 with strong sequential and year over year growth.
And we are in a race now to double that count in 2020.
We kicked off the holiday selling season without top of the line why five six tri band or be matched at $699 for two notes.
It was well received worldwide by both the hi crush in consumers.
Many review as commented that it is the fastest and best Wi Fi money can buy.
We are proud to quickly follow that offering up with the Nighthawk why five six dual band matched at $229 could two notes in early January so consumers with smaller homes that desire fast wildfire in every corner of the house.
Oh industry first why five six DOCSIS 3.1 cable gateway one that CES innovation on the we award in Las Vegas in January.
I was strong mine up on leading edge technology, and well executed promotions in Q4.
Allowed us to continued to gain share in the all important North America retail margin.
We had a very successful CES in Las Vegas in January.
Beyond showcasing the products that I just mentioned, we also introduced a new why fivesix extending the second in all lineup.
That's a new second generation Fiveg mobile router that will include why five six.
We now have a comprehensive lining up my five six offerings in routers mash cable gateways extenders and mobile routers.
No competitor can rival our broad portfolio why fivesix offerings.
Allowing us to expand average selling price and thats grow the markets.
The strong adoption of wife, Isix smart phones around the well we are excited about the market opportunities in front of us in Twentytwenty.
Turning to our SMB business, where we also had a busy Q4.
We introduced four new power over Ethernet plus switches in Q4.
The distancing ourselves from our competition.
These new switches plus the new pro Avi switches introduced in Q3 last year continue the power our year over year end quarter over quarter growth in end market sales of switches worldwide.
See I was 2020 was equally exciting <unk> SMB business.
Well, we held a joint press event with Semtech, leading chip provide us a pro Avi.
We also debuted at two new out trial power over Ethernet switches.
Which gave users the ability to simultaneously connect and power IP cameras access points Avi displays speakers and lighting.
The new algebra P.O. He models are now available worldwide.
And enable deployment of Pos reports that one gigabit Ethernet speed, while providing up to 60 watt purport.
400, what Oh switch in power.
Yeah price performance is unparalleled in the industry and will enable us to continue to gain share against all competitors in the power over Ethernet states.
We continue to make progress without initiative to build recurring revenue streams.
All the end of the fourth quarter, we have approximately 12.8 million registered users.
Oh registered and uses count has grown to 4.4 million, which represents approximately 22% sequential use of gross over Q3 2019.
Most importantly, we had 177000 paid subscribers at the end of 29 team.
During the quarter, we announced several additions to our leadership team.
I'm excited to welcome Mickey Markel and Laura due to net gears board of directors.
Mickey that successful teams that Adobe and Shutterfly.
Brings more than 20 years of business marketing and strategic planning expertise to my board.
Lora join support with the background in finance and strategy across meetings Silicon Valley technology companies and what's most recently, he VP and Chief Financial Officer hobby.
I'm also pleased to ask Dr. Mark in West tent to our team has CTO of software.
Mopping comes to us from Goodbye and will be responsible for strengthening our overall clal, an app software technology powers.
Mark in will be a critical member of the team as we continue the bill product apps and service offerings to complement our extensive lineup of networking solutions.
In Q1, we will continue to capitalize on the technology inflections in Wi Fi six fiveg power over Ethernet.
Well, we continue to expand our channel reach in pro Avi and digital Kansas.
We believe our subscriber growth will accelerate every quarter.
Also but we're working diligently to continue to adjust our channel inventory mix towards wife high six and to work through the logistics and marketing market challenges presented by the grown a virus outbreak in China.
Region of importance to our component supply chain and I'll end market sales.
I went out trying to call back to Brian fall.
First quarter guidance.
Thank you Patrick.
Our net revenue for the first quarter is expected to be in the range of $205 million to $220 million.
We currently believe that are service provider revenue will be approximately $25 million on average per quarter for the first half of 2020.
We would expect it to return to $35 million per quarter on average in the second half of the year when Fiveg deployments came more momentum.
In addition, we expect to continue our efforts to rebalance the channel inventory mix towards what by six in the first quarter of 2020.
Yeah operating margin is expected to be in the range of negative 1.8% to negative 0.8%.
Non-GAAP operating margin is expected to be in the range at 2% to 3%.
The GAAP tax rate is expected to be approximately 16%.
And our non-GAAP tax rate is expected to be 25% for the first quarter 2020.
Operator that concludes our comments and we can now take questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q and a roster.
Your first question comes from the line of Adam Tindle with Raymond James Your line is open.
Good afternoon, and this is Madison on for Adam and Thanks for taking my questions.
Patrick there are only a few competitors out there with why five six products in the market and most notably the larger players have yet to introduce this new standard into their product, but have chosen to be more aggressive on pricing of legacy technology. So as you think about this upgrade cycle versus prior ones do you think this heavy discounting of legacy products is affecting the cadence of the.
Great cycle versus prior years, and maybe if you could add any more details kinda comparing and contrasting the cycle versus prior ones.
Oh, we don't believe so I think is pretty typical back in the first six to 12 month of the upgrade cycle. It will be primarily the early adopters.
The technology leaders as well as though the those consumers will absolutely be meet the fastest speed up the Wi Fi. So that's why you know we introduced our products do you know mainly in the high end on the router side, most popular Oh, my Fivesix routers $300 in about.
Similarly for the wife Isix mesh. So those are not really can tested by he about competitors and we're really pleased with the adoption of those why fivesix products as a matter of fact, I mean, we looked at the why Fivesix, Oh, Wow, what a Marquette abhi.
Cost of the introduction of our wife, Isix routers, even though very serious competition, especially in price and a lower and we were able to see I love router market share as well, it's a router.
End market demand to be growing so would believe that the discounting in the legacy product.
He is out of desperation from out of some of our competitors.
Actually it would not that did her or the early adopters and the technology need us to adopt by five six now as we progress.
Of course, we would have more wife Isix products that will span lower price points and then the mass market will be able to look at with a little delta premium they would be going to wife, Isix as more and more of the phones and tablets and Pcs around the well switching over the wife I six I think.
This transition will actually be faster.
Than before.
From multiple angles, because the b cell phone the tablets and the PC providers like to see the upgrade cycle.
And.
Yes of course, it would like to see the upgrade cycle or the channel partners. All also what I can see to upgrade cycle. So I estimate, yes, there's probably would be one of the fastest transition and we believe that by questions. This year wife, Isix products in the market will constitute more than 50% of yours.
Okay. Thanks for all the color there and then just a follow up for Brian at the Analyst day, you laid out a target to get to 8% to 9% operating margin in 2020, it looks like based on guidance that it seems like that's going to need to be reset here. So can you just help us with how we can think about the progression of improving operating margin from here and your start.
And you know obviously had a much lower point this year in Q1 than last year. So do you think its plausible that you can actually see operating margin expansion year over year. Thanks.
Yeah, we definitely believe we'll see margin expansion this year and it's really not ER in November a lot of that will come from the removal of the tariffs in the inefficiencies that came with mining or supply chain.
The tune of about 240 basis points. So we expect to see that margin expansion.
And we still think that we can see the growth of the low to mid single digits on the topline and the operating margin targets, we put out there.
Clearly in the first quarter, yeah, with the reduced service rider revenues, which are kind of coming down a call. It 10 million or so off of the most recent run rate of $35 million an average per quarter.
Coupled with our need to continue to shift the channel inventory mix towards white by six we're losing some topline leverage in the first quarter, which is a the culprit. The reason the operating margin is that the 2% to 3% range.
But we do expect to see margin expansion as we move through the year and you know as.
As we take these efforts in the first quarter two to ship continue to shift the mix towards what by six I expect that we'll see.
A little bit of lifting Q2 rental revenues were normal seasonality for service CHP, excluding servicemaster would be flat Ah I do expect that we'll see a mid to high single digit growth there.
As we execute the majority of this channel shift in Q1.
Okay. Thanks again for the details guys.
Your next question comes from the line of the hid coarse sand with VW S. financial your line is open.
Hi, Thanks for taking my call I'm just.
Yes, I understand what why it's so important to drive.
Revenue gains when operating margins seem to be going.
The one direction.
Oh, well I think it's important that we continue to move to market to Wi Fi six and as we do that we naturally gainshare.
And also gaining shelf space and also gained and gain the number of customers were acquiring which formed the basis of our service subscription revenue driver.
So we believe that this is a short term, saying as we work through the costs overhead as strong as by the tray wall and the tablet.
But we do believe that we would be quickly get back onto the operating margin growth. So in a short time it seems like the passat diverging, but actually if you look beyond according to the path will be conversion again, we're very confident.
Okay [laughter].
Related to that help me understand on the wife I find it it seems like that inventory level.
Its remaining pretty much the same or is it going down as as but your your focus is still on why fysixteen.
Are you moving the while five products.
Well the wife I five inventory in the channel as well as in our own inventory is definitely going down, but it's not going down as fast as we originally anticipated in Q4.
Because as we've mentioned, we actually get some open additional promotional slots for wife Eyeq five in Q4 is from some of our channel partners.
And then we took advantage of that I, nor do that we shipped more of fly Fi five products into the channel. So that's why are we going to continue to do that adjustment in Q1, and you know we saw positive ticked up in our market share in the U.S. So right now so we're in a very good position.
To really occupying more shelf space and that's the able to display more off my wife, Isix products, which will lay the groundwork for us to continue to improve our operating margin as well as a market share in top line as we progressed through 2020.
And you talked a little bit or Oh, and prepared comments about competitiveness and in Q4, <unk> where are you seeing that competitiveness in how is it translating into your product offering in your price.
Well it the compared to competition, primarily come from two areas right. One is from shell space.
And needless to say everybody knows who that competitor is that's Amazon stash Euro the dijkum competition on shelf space is both on his own Amazon Web site.
As well as and best buy and or the competitive compensation in in price is naturally because you know the pretty aggressive as we've seen in a in all the other hot with products that a put out.
From the from the you'd be fire TV to two main cameras to echo dot.
Every time be coming to the market did come in but really aggressive pricing and we had anticipated.
So for US it's important that we hold our share.
And so that we can hold our shelf space and better yet we can expand our shelf space then we'll be able to bring now both by five to compete with them as well as my five six additional shelf space a wife Isix off from the market share gain perspective, the strategy work in Q4, and we do believe that.
It would pay off.
Hi, good progress.
Your next question comes from the line of Brian Young with Deutsche Bank. Your line is open.
Hi, Thanks for taking my question I apologize for any background noise, but I think this is the first quarter, where are you actually provide provided paid service subscribers in your presentation. At 177000. So I was just wondering if there's any additional quantitative metrics that you might be able to share their whether that's ARPU.
You know general growth rate expectations, maybe subscriber churn any any color there what would be helpful.
Yeah actually is our second time, I mean, we disclose the subscriber number I on our analysts day back in November last year at that time. There was mid November it was 150000 subscribers.
Between them and end of December we added another 27000.
And we just in our prepared remarks, we said that our aim is going to double that number that 177000, we want to double that this year that of course include the returns of the existing hundreds and say about it.
We have a good plan and we believe we can execute on that.
Right now we do not to have break out further details because I still add or even at 370 said that even at 350000, plus I think the revenue impact and the and the bottom line impact.
I would not be very material.
But I think once we reach close to half a million subscribers that it will be meaningful and was stopped east biology.
More numbers in terms of ARPU trend right.
Okay, Great and then just on the weakness that you saw in China can you expand and give us a little bit more information there and just how how long do you kind of anticipate these headwinds.
Well I mean, I'm, so first and foremost is to tray wall and the tray wall basically put a lot of damper.
And Chinese stayed directed economy to purchase American.
Enterprise networking goods, so that our SMB products, which used to sell into a lot of a Chinese state entities, such as schools universities manufacturing.
Have declined pretty significantly.
Secondly from the.
From the consume a basis.
There was a time that there was some.
Intention the by China, rather than buying American I, Unfortunately that that that their face has passed by unfortunately that now we we.
Confronted with this krona virus. So those are the two headwinds we are facing in mainland China and then in Hong Kong, everybody knows that Hong Kong machines.
July of last year has been and a significant social.
Unrest and it's just not many people out in the street and shopping.
So that really affects both our SMB and consumer business. So we see we at first we thought that with the first phase of trade agreements signed.
With di di they blow over of by local for the consumer just kind of passing away things will get better.
But now with the new outbreak of Corona virus in both places you made in China and Hong Kong.
Then we cannot count on that upswing.
Okay. Thank you.
Okay. If he would like to ask a question press star one on your telephone.
Your next question comes from the line of Paul Silverstein with Cowen Your line is open.
Well, it's perfect Braun person sorghum question.
CIBIL literally just minutes or first of all production correctly that you're expecting to go back to your growth run BODYGUARDS Oh, the order was 10% for movie on this for but some so.
Oh, yeah. When it was referenced is actually sequential growth talking about the seasonality of.
Our consumer business when you exclude service Red revenues.
Typical seasonality you would see Q2 flat to Q1.
But as we said we're taking some efforts in Q1, two further shift the mix in the channel to white by six ER and that's we actually think that we'll see sequential growth in that portion of the business to the tune of mid to high single digits.
Got it personally because the when do you think you'll see returns in your your growth.
That's it has your thinking insurance and others.
We definitely expect to see year over year growth. This year I think it could be as early as Q2, but certainly as we go into to the back half of the are you will see it.
Okay, then SPRIX your commentary about market share.
And I think your answer the question Andrew last response and response before but when we're talking about enterprise focused company. Obviously mortgage are critical in terms of tree, including future revenue.
When we're talking about retail customers were the ones followed by until the next iteration of the technology.
Well there <unk> is seemingly exits that draw is the answer that.
Bill space, that's what markets are so important you've got to have sufficient sure. That's the person so space in order to be in front of consumers going forward and their blood drug <unk>, otherwise I trust the mortgage or argument so.
It's not there.
You're exactly right you know in the retail space I shelf space Phasings have very important and more market share will give you more shelf space and facing.
And as much as we think that everything is on line.
Bob there's 275% of the sales happened in physical stores and when people walk into the stores you know whatever is presented to them.
Clearly you had a has a lot of influence on sales and maybe you walk into Costco stores.
You have presented with whatever they present Jew Allen and that is the number one number two brands that they're going to sell and that influenced a lot of off of your future prop topline and bottom line. So in the retail space is very important to have market share.
Got it one last question from is today with respect to Amazon Euro.
Yeah I Trust.
They're not going away their permanent active life.
And I Trust, there's the limited impact.
On price and thereby margins is critical for you to cost reduce in order to enhance margin profile going forward, but that can go to prefer.
It's it's not it's a constant battle renewed a bad thing or cells, thereby drug <unk> Morgan structural I mean, that's sitting in the office, though.
Oh, you absolutely [laughter] and that's why for US is so important to develop the subscription service revenue alright. So in the worst case scenario, we have to compete with them on all the what we'd call why five systems and on told a toe in terms of cost right now we.
You have a lot of other categories that they don't compete with us.
The unique such as in mobile such as in cable gateways and cable modems, such is and why Anders.
Those category they do not compete however in the wife I loudest Slash mess systems space. We definitely are prepared to continue to compete pretty aggressive league admittedly with them told a toll on cost and then you know two rudy and reach allocate the but did you make money.
It's basically on the subscription revenue that we derived from our loyal customer base.
Sure No I appreciate the responses or I'll go back in material to us off one thing.
Sure.
Your next question comes from the line of Robert Gutman with Guggenheim Securities. Your line is open.
Thanks for taking the question.
Of all the I'm not sure I heard.
Well the numbers a recap in first quarter, what do you expect.
The sequential growth to be in CHP X service provider because that was.
Decline of about 12% to 15% before and I don't I'm not sure with all the changes where that number is now.
Yes, you're right so normal seasonality would be a decline of 20% for CHP excluding service provider.
What we had said back in November is that we thought it would be a bit muted given the efforts. If we were taking in Q4.
To to shift the mix in the channel and we thought at the time it would be low to mid single digit decline.
But as Patrick said earlier, we saw an opportunity in the channel to increase some promotions.
Hi products that we shipped in which allowed us to gain some share. So we still have some work to do on the channel inventory mix, So <unk>, probably looking somewhere between.
15% to 20% kinda back into the normal seasonality range.
Okay and that compares to 12 15 to 20 that capacity out there. Thanks for that nobody should 12 to 15 correct.
Okay, but then that implies I think with 25 million or so and service provider I think that implies a.
Like a mid teens year over year growth or mid teens year over year decline on the SMB side.
It to get to the overall the midpoint of your guidance for revenue.
So yes that <unk> in the coded does that what would be the reason.
That's right. So if you recall you one of a of 19 was an exceptional quarter for SMB, we had a fairly large poland because the original Brexit deadline with ended March.
Time, we'd said some of our channel partners in the UK hold in inventory into Q1, and we saw that correction occur in Q O Q2. So.
I think it's probably more appropriate for comparative standpoint to look at the average between Q1 Q2 was last year.
Got it okay and I'm sorry, one other thing if I may just be I know, you're talking about the cadence of margin through the year, but I just want to make sure I heard it right. So the guidance for one Q is threed is 2% to 3% a small uplift in the second quarter, but that would imply to get to the same guidance for your guys have it Tonight Pursat significant much higher margin then.
Last of course to the year so.
I know, there's the 240 basis points for the tariffs.
But as it is it.
Is that right is there any more way to qualify that are.
Yes, that's correct right and that's a normal seasonal pattern that we would see where we see Q3 lift from back to school in Q4, the holiday promotions, we get more topline leverage so we typically experience or.
Higher or non-GAAP operating margins in the back half of the year.
Okay got it thanks for taking the questions.
Your next question comes from the line of Paul Silverstein with Cowen Your line is open.
Those were more Brian I might've missed the for did I apologize, but can you quantify what the trend that impact was.
Yes, so I'd say.
The bulk of the 16% decline in the APAC region would be attributable to that region. We did have.
Some service provider declines there is well Ah, but the bulk of that decline would be attributable to the greater China region.
And then perhaps you could broaden your cost Oh, I'm, sorry, the coming back.
But for the Corona viruses too.
The thought rise that left.
The Subaru Drexel University and others.
Through through the rest of institutions that they will buy from view us as part of on.
Geopolitical refers Monty will before was that those institutions there may be happy enough.
Oh, I'm, sorry news there there may be less impact.
On the trade, it's like in terms of buying American, which doesn't say they may never come back you or any other Americans or what underlies Your conference a book for Corona borrowers would be coming back.
Oh, let me make it a little bit Clara I was referring to the consumer side and referring to the SMB on the Hong Kong side.
You're right I mean on the R&D Smbs I in mainland China in my never come back for the SMB purchase but on the consumer side that as you have seen it well iPhone 11 after the women's flowing over I did pretty well [laughter]. So so we what we would you know.
You know righting itself dovetail, what the successor with if on the consumer side, that's the original hope.
And then for the Hong Kong, we I assume you know just about that the business is coming back is back to normal because the unrest is kind of finally calming down.
In January and that's what I was referring to.
Alright, and pass it to be clear brine are not expecting a return of trying to me when SMB business.
No we're not.
And how that met that is factored into our full year view.
All right you put it begs the question how much of the sign a decline was up to be as opposed to consume.
Well I mean, both a declining very rapidly you know so far.
But were the 250 50 through your charter business, well, yes pretty much more just got pretty much.
He much 50, so far.
I appreciate that thank you.
Sure.
There are no further questions at this time I will turn the call back over to Patrick low.
Thank you for joining today's call we're excited about how opportunities in 2020.
Because it further position ourselves as the premium technology leader in consumer and SMB networking and they did well and it also offer you know new opportunities for us in the new markets improve gravy and digital cameras market.
Most importantly, it will be a significant step towards building a robust service revenue stream.
And I will update you on all those angles and every earnings call going forward and I would talk to you all in two months in April Bank.
Ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.
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