Q3 2020 NETGEAR Inc Earnings Call
[music], ladies and gentlemen, thank you for standing by at this time all participants are in a listen only mode. Later, we will conduct a question and answer session at that time. If you have a question you want to.
The press Star one on your push button phone I would now like to turn the conference over to Eric filing. Please go ahead Sir.
Thank you Christine good.
Afternoon, I'd walk into next year's third quarter.
2020 financial results conference call joined.
Joining us from the company are Mr., Patrick Lo Chairman and CEO Mr. Bryan Murray CFO.
Oh the call, let's start with a review of the financials for the third quarter provided by Brian.
Followed by details and commentary on the business provided by Patrick will then have time for any questions.
You're not received a copy of today's press release.
'cause it next year's Investor relation website at Www Dot net dot com.
Before we begin the formal remarks, we advise you that todays 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 more.
For more information please refer to the risk factors discussed in duck years periodic filings with the FCC.
Including the most recent form 10-Q.
Forward looking statements that we make on this call are based on assumptions as of today.
Nick Your undertakes no obligation to update these statements as a result of new information.
Sure.
In addition, several non-GAAP financial measures will be mentioned on the phone.
Conciliation 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. Brian.
Thank you Eric and thank you everyone for joining todays call.
I'm very pleased to share with you our third quarter 2020 results.
What continuing robust demand for leading edge products.
Her team once again delivered a strong quarter with exceptional growth in revenue and profit.
We were again constraint on the supply side for CHP business.
So modest recovery in our SMB business.
Yet still delivered strong revenue growth and record non-GAAP operating profit.
Net revenue for the third quarter ended September 27 2020.
With $378.1 million.
[laughter], 42.2% year over year.
35% on a sequential basis.
The strong increase in revenue was primarily due to remarkably robust robust demand for CHP profit.
However by unprecedented bandwidth consumption in the home.
Where people have transitioned to conduct the majority of their daily lives.
This included products sold to temperature binders.
With the associated revenue, reaching $74.1 million.
Our highest level since the first quarter of 2016.
We continue to win with our leading edge wide by six offerings and strength in both online and retail.
Our supply chain and our supply chain team did an outstanding job in the quarter getting product to our retail and service provider partners.
Outperforming our expectations.
The team is raw materials.
It's actually schedules and transportation.
Optimizing with air freight in particular to me.
To meet more consumer demand than we had previously forecasted.
With that said.
We expect to remain supply constrained to the first quarter of 2021.
Primarily due to a worldwide shortage of advanced chips, which is why five six.
Our non-GAAP operating income at $41.4 million was a quarterly record.
What's reported non-GAAP operating margin of 10.9%.
And Nick your showed our ability to leverage our shredding revenue growth.
For the third quarter of 2020.
Revenue for the Americas was $277.9 million.
Which is up 55.5% year over year.
37.4% on a sequential basis.
The Americans continued to benefit from increased demand for CHP products.
In both the retail answers your better channels.
Generated by the shift to work from home environment.
EMEA net revenue was $63.7 million.
Which is up 28.6% year over year.
31.7% quarter over quarter.
Also driven by demand for CHP products in response to work from home.
And seen across both the retail and service provider channels.
Oh APAC net revenue was $36.5 million, which is down 2.9% thing to prior year comparable quarter.
And up 24% sequentially.
Okay, largely driven by our service provider business in the region.
For the third quarter of 2020, we shipped a total of approximately 4.7 million units.
Including 3.5 million, though the wireless products.
Shipments of all wired and wireless routers and gateways combined were about 2 million units in the third quarter of 2020.
The net revenue split between home and business products was about 84% and 16% respectively.
The net revenue split between wireless and wired products was about 75% and 25% respectively.
Products introduced in the last 15 months constituted about 27% of our third quarter shipments.
While products introduced in the last 12 months contributed about 25% of our third quarter shipments.
At this point on my discussion points will focus on non-GAAP numbers.
A reconciliation from GAAP to non-GAAP is detailed in the earnings release distributed earlier today.
The non-GAAP gross margin in the third quarter of 2020 was 30.3%.
Which is up 90 basis points as compared to 29.4% in the prior year comparable quarter.
And 70 basis points compared to 29.6% in the second quarter of 2020.
Well the mix of our SMB business, which historically carries a relatively higher gross margin.
Points year over year, and although we spent dramatically more on airfreight in Q3.
And more than able to offset the gross margin headwinds through lower promotion promotional activities on our CHP products.
Tell me Q3, non-GAAP operating expenses came in at $73.2 million, which is up 27.8% year over year and up 18.
18.1% sequentially.
The team did a great job with revenue growth far outstripping opex growth.
To deliver strong leverage on our topline and produced record quarterly operating profit.
As always.
We will continue to manage our expenses prudently.
Well also ensuring that we are investing sufficiently in the grade portions of our business for future success.
Our headcount was 803 I think the end of the quarter.
The place 15 from the previous quarter.
We continue to manage your headcount.
It will add resources to invest in areas that we believe will deliver future growth.
Our non-GAAP R&D expenses for the third quarter was 6.2% of net revenue.
As compared to 6.8% net revenue in the prior year comparable period.
And 6.9% of net revenue for the second quarter 2020.
Continuing to continue our technology and subscription service leadership, we're committed to continued investment in R&D.
Our non-GAAP tax rate was 17% in the third quarter 2020.
In the quarter, we benefited from favorable onetime adjustments to pet domestic tax liabilities.
This contributed about eight cents to our non-GAAP diluted EPS.
Looking at the bottom line for Q3, we reported non-GAAP net income of $34.7 million and record non-GAAP diluted EPS of $1.13.
Turning to the balance sheet we.
We ended the third quarter 2020, <unk> $306.8 million in cash and short term investments.
Okay $48.3 million from the prior quarter.
Additionally, our inventory decreased by $6.3 million in the quarter as we continued to deliver on strong demand in the Americas and EMEA.
While remaining supply constrain, which left us unable to increase our own inventory holdings.
We hope to reverse this trend in the first half of 2021, and we weren't inventory position closer to historical norms.
In Q3, we generated $42.9 million in cash flow from operations.
This brings our total cash provided from operations over the trailing 12 months to $184.6 million.
We used $2.5 million and purchases of property and equipment during the quarter.
Springs are total cash used from capital expenditures over the trailing 12 months $8.5 million.
We remain confident in our ability to just continue to generate cash and expect to further increase our cash position again in the fourth quarter.
In Q3, we chose not to repurchase any shares under open buyback program.
And our fully diluted share count was approximately 30.7 million shares.
Especially in times of uncertainty like these we recognize the importance of maintaining a strong cash position.
Since our practice of repurchases repurchasing shares with our desire to maintain a strong balance sheet.
As I previously mentioned, we will need to replenish our own inventory levels. Thus, we would expect to consume some more cash in the first half 2021 as a result.
Now turning to the results were product segments.
The connected home.
He is the industry, leading nighthawk Orbi NATO.
NATO Pro gaming mural brands generate.
Generated net revenue of $316.7 million during the quarter.
Which is up 66.1% on a year over year basis.
And up 37.7% sequentially.
The year over year and sequentially increase was attributable to heightened demand across both service provider and retail channels.
In the third quarter 2020 service provider revenue was the highest that defense is the first quarter 2016.
Well known service provider revenue grew an impressive 56.8% as compared to the comparable prior year period.
In the third quarter, despite the play headwind in our white by six products. We again held a strong leadership position in U.S. market share in consumer wildfire.
Coming in at 44%.
And we fully expect we can grow our share once again.
Once we overcome the wife I took supply constraints in the second quarter of next year.
The SMB segment generated net revenue of $61.4 million for the third quarter of 2020.
Which is down 18.4% on a year over year basis, but up 22.7% sequentially.
As we expected our SMB business recovered slightly and.
As evidenced by the strong sequential growth.
The year over year decline stems from the pandemic and corresponding business closures.
On the product front or wireless Lan and Peter we close and probably be switching lines continued to perform well in the market.
Our market share in switching sold three the U.S. retail channel came in at 49% in Q3.
I'll now turn the call over to Patrick for his commentary.
Thank you Brian.
The pandemic continuing around the world many adjustments that seemed to temporary how cementing that equation allies.
People and companies have been forced to adapt.
At work some companies are embracing work.
I'm home on a permanent basis.
And those are moving to a hybrid model are working from home and every office in roughly equivalent.
In addition.
Flexibility to work from anywhere has led to a massive migration away I'm crowded high cost areas to zoom in more isolated less urban areas leading.
Leading to an increase in new or upgraded network connections.
Regardless of when the pandemic hands, what's clear is that the future work has ever changed and that means working from home at least part of the time is here to stay.
And what counts is home maybe to find by multiple locations.
At home people adapting to the new environment by learning how to pursue bolt on a daily activities virtually somehow.
Eight months in the making this more from home transition goes well beyond work and school.
Families are pursuing a myriad of activities virtually.
And we came from watching movie premieres like music concerts.
Shopping for groceries virtual galas to doctors' visits to fitness classes and checking in on family and friends across the country.
Well even across continents.
These activities are taking place so their laptops tablets and phones and so.
And his family so recognizing the need for fast and reliable wife high connection that spans the entire home to support the increased bandwidth consumption and multitude of connected devices utilized across their home.
Whereas previously these activities might have been optional people have been forced to try them virtually and are now discovering they actually enjoy it.
And even sometimes prefer them to the traditional way of doing things accelerating adoption and making these virtual activities and increasingly permanent part of our lifestyle.
The next year team is working around the clock across the globe to serve this need.
As you can see from our results the aforementioned changes continue to drive strong growth in demand for our CHP products as people upgrade that we find networks and discover new uses for mobile.
In Q3, we make a dramatic adjustments within our supply chain and what.
And work closely with our channel partners to ramp production and delivery.
I'm proud to say that the team at Netgear continued to execute at the highest level and exceed it.
My expectations on what we can deliver for our CHP business.
Yes, even with these efforts we remain supply constrained on CHP products as we are more dependent on advanced chips to power by five to six and all competitors, who remain stuck on why fight fight.
Similarly in our SMB product portfolio as well.
Well were caught off guard by the surprisingly strong demand for low and PMG switches and why fixed wireless mesh access points for home office and home based business users.
[noise], we expect supply constraints to continue to limit and on carrier side up CHP in Q4, but.
Many of our supply chain team Kindred peaks that Q3 performance. We believe we can deliver to roughly the same revenue level, we saw in Q3.
On the service provider side in Q3.
Well, we're able to satisfy the demand for mobile hotspot needed to fight the pandemics in the U.S. well the start of the new school year and for our first responders.
We expect our Q4 service provider revenues to return to roughly Q2 level.
Much has been made all the technology transitions that have enough celebrated by more from home.
With these transitions we believe many of the activities that I know virtual will remain virtual NFV.
And as such this represents a significant change in the way people conduct their lives the need for robust and pervasive Wi Fi connectivity constitute a fundamental need.
And we believe this past week cash our total addressable market on what basis going forward.
Naturally has a unique set of attributes that give us a defensible vantage.
A long standing trusted brand with loyal followers.
Well deserved reputation for high performance by high products that are based on our leading edge Tri band technology.
Best in class channel relationships, and a growing portfolio of body and subscription services.
This is why we are confident that Nat gas will remain the weichai and networking vendor of choice for both consumers and small businesses as more of our lives transition.
Bush fumble all told the long term.
And why we will continue to grow with the market.
And it is more evident now than ever that our early investment to be a leader in next generation technologies, namely Tri band Wi Fi systems, and millimeter wave Fiveg Hot spots, we'll continue to pay dividends in Q.
In Q3, we saw strong demand for our Tri band why Fivesix Orbi and all of the pro.
Why why Sweetie Peck configuration stop at $499 and can.
And can exceed a thousand dollars win or be pro we cannot keep them in stock across all the markets that we participate.
From Tokyo to Hong Kong to Paris, and Munich to Toronto, and especially right here in the U.S.
Customers are telling us.
Even with that older why five five smartphones and devices that they are seeing a significant performance boost from my wife, I six will be systems due to out innovative radio circuits antenna designs.
We are ramping production of our why five six or beat as quickly as we can but.
But at this point, we don't believe will catch up to demand into Q2 next year at the earliest due to the wife I six chip supply shortage.
Moving to the SMB business. The team continued to drive forward with a focus on products geared towards home offices and home businesses and.
And delivered sequential growth of 23%.
Quarter over quarter.
We faced the same headwinds as last quarter with channels that rely on personal interaction like al.
Like all of our partners, who do installations.
During the quarter, we introduced the well I guess why five six mashed access points with App based remote management.
Just like it's a CHP or be counterpart, we could not keep them in stock.
[noise], we've seen strong demand for our low and power over Ethernet switches for home office set ups as remote workforce is used them to connect to IP phones desktops printers and access points. We believe this demand will persist as workforces increasingly become.
More distributed posed endemic.
We're making progress without <unk> AG business as well, but.
The team also delivered marquee wins, such as with the P.T.A. tour in the U.S.
And the 2021 Americas in New Zealand.
In Q3, we announced a brand new line of Avi switches that support the audio over Ethernet protocol HBV.
This new M 40 to 50 lock 50 line of AG switches was well received by AB integrate is around the world.
We expect to ship them in volume in Q4, we.
We look forward to continued improvement in our SMB revenue in Q4 with a year over year decline continuing to use from what was experienced in Q3.
The increased importance of ipi in People's homes and the.
And the need to connect manage and secure more devices to that why fun is also translating into more subscribers to our premium paid services we.
We again delivered record progress in growing our recurring revenue stream.
Beginning the quarter with 293000 paid subscribers, we increased our new paid subscribers by 26% sequentially.
Adding 76000 in the quarter ended with 369000 paid subscribers.
In only three quarters we.
We have exceeded our goal for all of 2020 of doubling our subscribers a notable achievements and positive sign for our ability to grow in the used to call.
I would also like to take a moment to welcome Sarah but a fast to the Netgear Board, having led product development at top software first consumer facing brands, such as coupon and all this and now chief product Officer, Fanduel, Sarah will add valuable assets in service.
This product strategy and consumer engagement expertise to our board.
I look forward to working with her as we grow our subscription business.
And with that I will turn it over to Brian married to comment on our opportunities and obstacles in the coming quarters.
Thank you Patrick.
Well, we are confident in the ongoing strength of end market demand for home networks. There is still considerable uncertainty around the effects of COVID-19 on the global economy.
And our supply chain.
This makes our outlook difficult to forecast.
And such.
Not in a comfortable enough position to provide financial guidance for the fourth quarter.
We would now like to answer any questions from the audience.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question. Please press the pound or Heskey. Please standby, we compiled queuing era.
[laughter].
Your first question comes from the line of Adam Tindle from Raymond James Your line is open.
Okay. Thanks, good afternoon, and congrats on a very strong quarter, Patrick I'd say.
Patrick I just wanted to start with a question on the CHP segment ex the service provider piece. It was obviously very strong I think you mentioned going forward that you were expecting you know kind of Q4 to look at sort of the same level as Q3, we would typically expect it up sequentially just from seasonal patterns. So maybe just some.
Color on why it would be flat. This year was there any pull forward that you talked about Q4 any comments on expectations for holiday season, and promotional activity based on Prime day, and what you've seen so far thanks.
Well basically as we mentioned that we would depend on our supply team to make products available and its all supply bound we do believe that the market has a much bigger appetite to absorb what ever gets shipped to the market for life.
Six but unfortunately, we just don't have enough chips to provide to the market. So yes, we expect that you know it would be a seasonally strong Christmas all right, but we are limited by supply now Q3 was the first quarter.
That people are we experiencing this newfound virtual experiences. So clearly the market's series was high in Q3, we expect the market search would come down a little bit in Q4, but then it will be offset by the Christmas seasonality. However.
Unfortunately, yes.
We all supply Bell.
Okay. I mean is there a way that you could potentially help us quantify how supply about bound you are at this point. So we have an idea of what the tailwind that you're likely going to have a supply catches up to demand would look like over the next few quarters.
[noise] Oh, I mean, the easiest way to look at it is that I mean, we used to own 50% market share in North America all right.
All right and I'm actually in Q3 was a little bit depressed to 44% and that 6% is clearly was a you know a supply shortage plus because we had the with the market leader. We believe that if we had more more inventory one the market will go.
Well, even faster and secondly, you know we believe that will actually gain share. So so that's the easiest no quantification.
Quantification of how much we limiting ourselves as well as the market.
Okay, and maybe just a follow up for Brian I mean margins were obviously on a bright spot as well just wanted to see if you could dig into a little bit more of the puts and takes on a go forward basis for gross margin. In particular, you have some air freight some supply chain, you've got a promotional activity of upcoming just a.
Different buckets that impact gross margin and how we can think about that line on a go forward basis.
Yeah, I think if you're talking about Q3 to start I mean, I think clearly a couple of things with the driving forces one our overall product profitability is increased snort or mixed the wife I.
Our mix of wife Isix products is certainly contributing to that.
And the the elevated topline is certainly helping from a from a topline leverage standpoint. So those two factors are really driving the Q3 performance. We certainly didn't spend a fair amount more in terms of air freight as we suggested we would do in July.
But we were able to pull back in terms of promotional activities on CHP products to more or less offset that.
If we look out to Q4 Ah I think from an operating margin standpoint, which is what we're primarily focused on either a couple of headwinds. So I think overall, probably take the step down from Q3 levels by about 100 basis points or one it just topline leverage we mentioned that the.
For two listed demand that we saw in service provider that we expect in the back half of the year, we're able to capitalize and a lot of that in the third quarter. So we're not taking the step down to about 45 million in Q4, and no and even though we're still gonna be supply constrained in Q4 promotions will certainly continue to be limited do you think they'll pick up.
Just a bit as we.
Pre planned activity around the holidays.
So that said I think the net of all that is it's probably about a 100 basis points step down in Q4 from Q3.
Got it that's helpful. Thanks, and congrats again.
Your next question comes from the line of habit of course fab.
<unk> financial your line is open.
Hi, Thanks for taking the questions just first off.
Patrick could you elaborate on your commentary during your statement that you were talking about the.
CHP side being I'm, saying, if you could.
A source enough chips, you drew down inventory. So you would actually have to bump up the amount of chips to purchase to reach that.
Reach the same kind of revenues are.
The right way of thinking or are you are you, saying that on a regular basis without the draw down inventory.
No I mean, what we're saying is that even if we draw down the inventory on our own even we draw down the inventory in the channel even as we ramp up the production quantity dump.
The market demand still exceeded all of that combined.
And there's just not enough supply of chips that we want to really feed the market. That's all we are we talking about.
Understood. So how would you be able to achieve a flattish kind of performance for Q4.
Given that you've <unk>, you've been drawing down your own inventory in Q3.
Exactly so that means we're depending on an increased supply of the chips in Q4 versus Q3, which which you know is not surprising because you know we placed the orders thirtyth. The chips lead time is now six months. So that means in Q4 is basically the result of our plays.
Single Chip orders back in April may.
And then do you think this this is a huge amount of chips that you're able to Alex <unk> generators that allocation from the producers that you might be losing out from competitors or is this just not an induction.
Well number one as you probably know there is limited capacity of 14 nanometer semiconductors, there are not that many foundries into well that can produce that and.
And secondly, you know already inclined devices now support life I six so we are in the market competing for substrate.
Paying for 14 nanometer production volume against the same kind of my Fivesix chips that people want for their cell phones with the Apple.
I phone cloud why why before he right in Samsung you know no.
New sold to the new as Tom.
As 12.
Clearly I mean, among the networking vendors, we have because allocation, but in the overall scheme thing there.
There are just so many competitors in the electronic industry that meet these 14 nanometer chips.
Are you going to put a greater emphasis on lot of five five in Q4.
No there's no going back I mean, as you probably knew all along in the past three quarters, we have been telling everybody that we are we are balancing out in oh inventory both in the channel. It's what they do ourselves to wean ourselves off of why Phi Phi.
And as you can see is pretty clear right because we the only one that we have and have supply ample supply by five or six.
We don't have to do promotions so as a direct result, you know.
Our operating margin improved significantly while everybody else has fewer.
Fuel, even fewer wife, I think supply than we do and they need trashed the white high high prices. So there's just no money to be made there and we're pretty confident once we got into it every quarter basis, we'll get most allocation of wife Isix ships.
And then once we balance demand and supply then we'll be on our way to gain a lot of shares.
Okay, great. Thank you.
Sure.
Your next question comes from line of Jeffrey ran from Deutsche Bank. Your line is open.
Hi, Congrats on another great quarter of the year over year declines in your SMB business moderated as you expected and is there more untapped potential with the at home office in this business and do you think there's the SMB business can really returned to growth before we get a vaccine.
We we believe that we'll we'll we'll get pretty close to previous level, even slight gross.
As we continue to Wow December to get more.
To be able to get my wife, Isix products, even in the SMB channel as I mentioned just now in prior discussion we would totally caught off guard by the strong demand of out why Fivesix Nash access points.
The ball cramming for it.
These days is probably we are impossible to find the availability of our SMB wireless access point mashed access points on on any website every day. So we do believe that once we get more of the allocation chips. Then yes. That's taught me we'll grow the other thing you see is very interesting also.
No.
With a lot of costs and his staff being distributed back to home work from home, there's a tremendous demand of our pure use which is at the low end, especially the five port and the port.
Yes, they are using them in their home offices for the costs and the people to connect to the IP phones into their wireless access points. So I I think there's tremendous opportunity and then on the pro AB side, we still see a lot of uptake and the transition from.
From from the from traditional AB into the AG over Ethernet, we recently outfit a quite a few railway network solving the U.S. as well as in in Europe with the terminal is display and in train display would probably be so I think the <unk>.
Avi business will continue to give us the opportunity to grow so in 2022, we we we are pretty optimistic for SMB business.
Great and then just a follow up I think Amazon released its first wife by six mess network recently can you talk about how this impacts your business does it start to put pricing pressure on your wife by six products when supply constraints and or does it help the general acceptance and credibility are quite nicely.
Oh I see so sometimes it's huge as we mentioned in our discussion just about 15 minutes ago that we've seen tremendous demand not only in the U.S. where people appreciate technology, we seeing tremendous demand on my wife Isix Orbi.
In around the World you know even in India and the the fact is that people find now at least through word of mouth that when when they buy the wife I fix orbi not only that you could enjoy the bumped up speed. If you have a wife I think sounds on tablets, all Oh laptops, you actually were better.
Even if yes why.
Hi, five.
Speaker is all our design Bonnie's Tri band two is our design of the radio circuits and the antenna, which really those appointments in March.
So anyway, Oh, yes, you're right I mean euro on Amazon and you use their wife I see a product, but primarily is dual band we have only one model all thought so called Tri band is not but it's not comparable to outperform its actually a little bit more.
Actually a little bit more expensive in house as well they introduced their tri band about $500, but the bulk of that focuses on the dual band, which we don't really play I mean, we play in the Tri band area. So most of the demand that we see right now for my wife, Isix products for Mashes it'd be about $500 price point so.
It's like we were in two different well I mean, they are more in the Volkswagen well and we'll move into BMW well.
Great. Thank you.
Sure.
Your next question comes from line of Paul Silverstein from Cowen Your line is open.
Brian I hate to ask you to repeat yourself. There was a question asked about your margin structure right before my line went silent.
So I do apologize to others on the call, but I'm, hoping that you know whatever it is you said a true all Joe's.
No problem, Paul that's what I was saying is for Q4, we would expect operating margins to take it step down of about a 100 basis points off of Q3.
Largely due to the losing because of the topline leverage we talked about pulling forward a lot of the second half opportunity in service provider and getting into Q3, and then stepping that down into Q4 at 45 million willing to lose some top line leverage.
And then additionally, while we will still hold back and a lot of promotions until we get supply and healthier state there were some pretty plan commitments around the holiday promotional period that will obviously be.
Obviously be going forward with so those two things would probably about a 100 basis point step down sequentially.
Yeah, but if you're doing it but just as in past, we assume expedites are costing or something on the order of 100 or so.
Sure so business points to gross more junior bought offered in mortgage in Baltimore.
I would say, it's more but I would say, we're offsetting that entirely with the reduced promotional efforts that we typically would have on our CHP products.
So are you.
Or your costing that.
I mean, but your guidance, it's important where you can shop where supply constraints.
Oh, you can probably be viewed it should we not assume 400 plus basis points benefits of mortgage structure at that point.
Whenever that is.
So I mean, I think there's certainly an opportunity for 100 basis points margin expansion as we move into 2021, I think Patrick kind of outline some of the opportunities on the SMB side, where you know we may look to see something in the neighborhood of 10% growth in 21.
We'll return to kind of more of an average 35 million a quarter run rate on service provider. Once were behind this Q4 remaining opportunistic the managed service provider, but we'll think we'll offset that entirely with continued growth in the T.H.B. non carrier portion of our business. So.
With that kind of performance, we think that Theres, a 100 basis point margin expansion opportunity for 21.
Or a question for both of you other than the obvious <unk> supply constraint.
What are you most worried about.
Well I think these they these days, but the big concern is getting supply caught up let's capitalize on this opportunity and getting supply caught up which we said it's going to take us to Q2 to to do so.
So that's that's number one.
And then number two.
Got it yes.
I was going to say what the second most worried about.
Well the second thing is having I mean that we cannot control Oh.
All the geopolitical so.
Situations, a possibility of a third or fourth wave of coated I mean, all of you Cincinnati yeah. So.
But [noise].
I assume that is not going out [laughter] right.
Core message today is that.
Got more than a man relative <unk> supply.
That's not an issue for the foreseeable future that's not last month.
No demand is not an issue.
I will pass it on thank you Joe.
Sure.
Your next question comes from the line of whole foods in whole from Bloomberg. Your line is open.
Oh, great. Thank you for taking my question.
Good progress on the subscriber revenue numbers.
In terms of the supply constraints, Patrick how should we think about balancing out the go to market portfolio as it relates to volume versus a his team and then that I mean, you know Oh, you're going to go for the 999, you know whatever it is the the six three part.
Correct versus a single access point product.
No need to Mark yes.
No I mean, we would do whatever the customers want wouldn't believe that there's a wide spectrum of applications no everybody could afford.
To begin with so.
So for those customers, we see them buying extenders all right. So just a man a single router. So we also changed in the marketplace as well and and we do have one six.
Urs that costs only about 129.
So so were going to do.
Do the whole spectrum of things, but clearly.
As you probably know I mean is that the biggest margin on the higher price products generally true you buy cars you know Mercedes makes more a lot more money on the S class same thing Tesla. It makes a lot more money on D.S. model S and model X. So it's the same thing no denial I mean for those products it up.
And in our stuff on money.
Right.
And somewhat of an intermediate term strategy question for you Patrick It sounds as if you're looking at the the high.
The the hybrid work from home opportunity as a a more permanent type of opportunity is there anything other public development front that you're doing that may help enhance your positioning to take advantage of that opportunity.
Yeah. We mentioned it is out of discussion already right. If you are just in ordinary consumer and you're going to completely configure your own home networks to do this more from home than very likely either galvanized tours, a router plus one or two extenders, which is a cheaper solution all right.
And your goals <unk> unmatched network and you you're thinking off a mesh network for Uncompromised performance, then you got to pay $500 plus the by Nick your product, but if you're thinking of just paying about 150 to $300 and of course in market you get free to choose from we get Netgear you've got Amazon.
Did you get a Google doesn't for my wife, I said, yes, alright. So so that we will still have a pretty significant following him would have a fair share that 350 to 300 on the market. So so so so that's the consumer side of thing, but on the other side of thing is that you are oh.
Your company to work from home such as distributed call Center people or you have a loud all right by the company to work you know at least half of the time all the bulk of your time frame from Palm anywhere and maybe your company would get you know gives you you know money to buy equipment in those cases, the a mall.
On the commercial grade than than bad debt, most likely to buy you know commercial grade router posses Swift pure switch plus some mashed access point instead of our consumers, but we're doing it. So so so you got two different solutions and we've seen both very strong legs going into htwo.
The 21.
Got it.
Lastly, Brian.
I believe you said that it wasn't a demand issue going into a 2021 and I'm going to get a little greedy here.
Any preliminary thoughts on seasonality going into the first quarter and second quarter, typically it's down 15% sequentially awful for Q and a flattish to up on to Q any any ah guidance come to any preliminary guidance kind of a contrarian CHP business.
So I would say stay tuned we're gonna be announcing our analyst day here at the first half of December and becoming.
In the coming weeks, and we're certainly going to dive into that but as we said earlier with supply constraints lasting through Q1.
Certainly certainly supply will be dictating, what we what we delivered in the first part of the year.
Got it it was worth a shot thank you [laughter].
[laughter].
Thank you so no further questions at this time I'll turn the call back over to Patrick Lo.
Sure. Thank you Christine I would like to once again, thank you listening to the call and thank our team members and partners for their hard work and flexibility during this time I without.
Oh without them, we would not be able to deliver that many products that our customers really need and launch I will look forward to serving a new to expand the market and one in which we have a clear and defensible leadership position.
Aim to deliver continued growth in the coming quarters, and we remain confident that.
Components of our strategy will be strong contributors to our success this year and beyond and I look forward to sharing all with you on our progress throughout the next few months first at the analyst day.
Early part of December and then in our next earnings call in February.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.