Earnings Call Transcript - NTGR Q2 2020

Operator, Operator

Thank you, Josh. Good afternoon, and welcome to NETGEAR's Second Quarter of 2020 Fiscal Results Conference Call. Joining us from the company are Mr. Patrick Lo, Chairman and CEO; and Mr. Bryan Murray, CFO. The format of the call will start with a review of the financials for the second quarter provided by Bryan, followed by details and commentary on the business provided by Patrick. We will then have time for any questions. If you have not received a copy of today's press release, please visit NETGEAR Investor Relations website at www.netgear.com. Before we begin with the remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, operating margins, tax rates, expenses, and future business outlook. Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in NETGEAR's periodic filings with the SEC, including the most recent Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and NETGEAR undertakes no obligation to update these statements as a result of new information or future events. Additionally, several non-GAAP financial measures will be mentioned on this call. A reconciliation of the non-GAAP to GAAP measures can be found in today's press release on our Investor Relations website. At this time, I would now like to turn the call over to Mr. Bryan Murray. Bryan, go ahead.

Bryan Murray, CFO

Thank you, Erik. And thank you everyone for joining today's call. I'm pleased to share with you our second quarter 2020 results. Once again, our team overcame the challenges presented by a rapidly changing market due to the ongoing pandemic. Despite continued headwinds in certain areas of our business, overall, we were able to deliver strong top-line and profitability growth. Net revenue for the second quarter ended June 28, 2020 was $280.1 million, up 21.3% year-over-year, and up 21.8% on a sequential basis. The increase in revenue on both a year-over-year and sequential basis is primarily due to exceptionally strong demand for CHP products in response to the work-from-home transition taking place around the globe, as individuals look to upgrade their network connections. We continue to win in the market with our leading-edge Wi-Fi 6 offerings and strong online presence. Our non-GAAP operating margin for the second quarter came in at 7.5%, driven largely by the leverage created by our revenue growth. For the second quarter of 2020, net revenue for the Americas was $202.2 million, which is up 28.7% year-over-year and up 27.8% on a sequential basis. The Americas continued to benefit from increased demand for CHP products in both the retail and service provider channels generated by the shift to work-from-home environment. EMEA net revenue was $48.4 million, which is up 12.2% year-over-year, and up 14.7% quarter-over-quarter. This was also driven by the demand for CHP products in response to work from home, and seen in both the retail and service provider channels. Our APAC net revenue was $29.4 million, which is down 3.7% from the prior year comparable quarter, and down 0.6% sequentially. The decline in relation to both periods was driven by lower net revenue from sales to service providers. For the second quarter of 2020, we shipped a total of approximately 3.7 million units, including 2.7 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 1.5 million units for the second quarter of 2020. The net revenue split between home and business products was about 82% and 18% respectively. In net revenue split between wireless and wired products was about 74% and 26% respectively. Products introduced in the last 15 months constituted about 30% of our second quarter shipments, while products introduced in the last 12 months contributed about 23% of our second quarter shipment. From this point on, my discussion points will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today. The non-GAAP gross margin in the second quarter of 2020 was 29.6%, which is up 80 basis points as compared to 28.8% in the prior year comparable quarter, and up 40 basis points compared to 29.2% in the first quarter of 2020. While the mix of our SMB business, which carries relatively higher gross margins, declined year-over-year, we were more than able to offset the gross margin impact due primarily to lower contra revenue marketing spending in our CHP business. Total Q2 non-GAAP operating expenses came in at $62 million, which is up 10.1% year-over-year and up 5.2% sequentially. This sequential increase was primarily due to higher sales and marketing spend associated with the increased top line. As always, we continue to manage our expenses prudently, while also ensuring that we are investing sufficiently in the growth portions of our business for future success. Our headcount was 788 as of the end of the quarter, down by nine from the prior quarter. We continue to manage our headcount very tightly, especially in times of economic uncertainty. Non-GAAP R&D expense for the quarter was 6.9% of net revenue, as compared to 7.6% of net revenue in the prior year comparable period, and 8.1% of net revenue in the first quarter of 2020. To continue our technology and subscription service leadership, we are committed to continue investment in R&D. Our non-GAAP tax rate was 23.5% in the second quarter of 2020. Looking at the bottom line for Q2, we reported non-GAAP net income of $16.3 million and non-GAAP diluted EPS of $0.54. Turning into the balance sheet, we ended the second quarter of 2020 with $258.6 million in cash and short-term investments, up $48.8 million from the prior quarter. Additionally, our inventory decreased by $30 million in the quarter, as we continued to deliver on strong demand in the Americas and EMEA, and continued to successfully reduce our mix of inventory in older Wi-Fi technologies. In Q2, we generated $63.2 million in cash flow from operations, which brings our total cash provided from operations over the trailing 12 months to $115.6 million. We used $2.4 million in purchases of property and equipment during the quarter, which brings our total cash use for capital expenditures over the trailing 12 months to $8.4 million. We remain confident in our ability to continue to generate cash, and expect we will be able to further increase our cash position in the second half of 2020. In Q2, we spent $7.5 million to repurchase approximately 315,000 shares of NETGEAR common stock at an average price of $23.78 per share. Since the start of our repurchase activity in Q4 2013, we have spent $551.2 million to repurchase 15.7 million shares. Our fully diluted share count is approximately 30.1 million shares as of the end of the second quarter. Especially in times of uncertainty like these, we continue to recognize the importance of maintaining a strong cash position, and we will balance our practice of repurchasing shares with our desire to maintain a strong balance sheet. Now, turning to the results of our product segments. The connected home segment, which includes the industry-leading Nighthawk, Orbi, Nighthawk Pro Gaming, and Meural brands, generated net revenue of $230 million during the quarter, which is up 37.3% on a year-over-year basis, and up 39.7% sequentially. The year-over-year and sequential increase was attributable to increased demand in both service provider and retail channels. In the second quarter of 2020, service provider revenue was the highest it has been since the second quarter of 2018, while non-service provider revenue achieved its best results since the fourth quarter of 2018 and its highest fiscal Q2 on record. In the second quarter, we again held a strong leadership position in U.S. market share in consumer Wi-Fi, coming in at 49%. The SMB segment generated net revenue of $50 million for the second quarter of 2020, which is down 21% on a year-over-year basis, and down 23.4% sequentially. As we expected, our SMB business experienced declines with the onset of the pandemic in corresponding business closures. On the product front, our PoE Plus and ProAV switching lines continued to perform well in the market. Our market share in switches sold through U.S. retail channel came in at 49% in Q2. I'll now turn the call over to Patrick for his commentary.

Patrick Lo, CEO

Thank you, Bryan. First, I want to thank the NETGEAR team for executing well and delivering a great product. We continue to meet the challenges of working from home, even as it lasts longer than originally anticipated. While we hope for the swiftest possible end to the pandemic, this new reality of working and learning from home has ushered in a new era, where everyone needs not just an internet connection, but one that is always on, secure, and delivers high connection speeds to every corner of their homes for this new world, where every aspect of our daily lives is conducted online, from work to entertainment, from schooling to socializing, from shopping to ordering food, and from working out to getting medical advice. With unprecedented demand across a multitude of connected devices, battling for bandwidth by multiple members of a household, all at the same time, products built on Wi-Fi 6 technology with unmatched speed and connectivity are the ideal solution. Not only will we continue to benefit from our leadership in Wi-Fi 6 products, but we also hold the technological advantage of Tri-Band, which provides unprecedented speed and coverage. It's both the new market dynamics as well as our technology advantage that leads us to believe that CHP revenues, excluding sales to service providers, in the second half of the year, can mirror the year-over-year growth rate that we experienced in the second quarter. For families unable to secure wired internet to their homes, or those looking to work from anywhere, we have been working diligently to meet the unprecedented demand for our mobile hotspots, which saw 110% sequential growth in shipments in the second quarter. Notably, we gained strong traction with our 5G hotspots in EMEA, where we shipped in volume. Domestically, we are excited for the 5G versions to ramp in the second half of the year. As we currently stand, we expect this channel to grow 50% in revenue in the second half of the year, as compared to the first half. I am pleased to share that remote work has not impeded our ability to innovate. As a leader in mesh and Wi-Fi, we recently released our newest Orbi mesh system, the Wi-Fi 6 AX4200 Tri-Band mesh system, offered at an attractive price point of just under $500 for a three-pack. This is a very attractive Wi-Fi 6 mesh system for large homes with lots of devices, but not quite at the scale of our top-of-the-line AX6000 Wi-Fi 6 Tri-Band mesh system. Continued strong product demand allowed us to gain traction with new subscribers and deliver record progress in growing our recurring revenue stream. Beginning the quarter with 228,000 paid subscribers, we increased our new paid subscribers by 28%, adding 65,000 in the quarter to end with 293,000 paid subscribers. It is clear that we are on a trajectory to surpass our goal of more than doubling our subscriber count from the end of last year by the end of 2020. Our SMP team performed well during the quarter and delivered to our initial expectations. As we shared in the last quarter, to offset the dramatic drop in corporate sales through the wide channel, we are focusing on sales of sophisticated home office solutions via our traditional channels, as well as pushing hard on closing pro-AV projects. As economies slowly recover around the world, we are expecting corporate sales to improve in the second half, thereby slightly lessening the year-over-year decline of our SMB business. Now, we expect our home office networking sales and pro-AV project wins to continue to grow compared to the first half. Our most popular home office networking solutions are based on our industry-leading unmanaged and plus switches, driving our Orbi Pro and managed access points or mesh access points. Together, they can provide multiple SSIDs, VLANs, and reduce wiring via mesh for a sophisticated home network, consisting of multiple access points. Our pro-AV solutions are still anchored in our preconfigured fully managed switches. We will continue to roll out new products in these two areas in the second half. We believe that the new normal of home networks serving an increasingly critical part of people's lives from videoconferencing to virtual happy hours, from remote learning to online fitness classes, from ordering clothes to ordering food, from streaming TV, movies, and Broadway shows to playing online games, and from going to the museum to going to your doctor is going to last beyond the current pandemic. For NETGEAR, this resets the value of our addressable market to a higher level, enables us to continue to grow our overall top line for the rest of the year, and empowers us to accelerate the growth of a stable paid service subscriber base. And with that, I'll turn it over to Bryan Murray to comment on opportunities and obstacles in the coming quarters.

Bryan Murray, CFO

Thank you, Patrick. While we are confident in the ongoing strength of in-market demand for home networks, there is still considerable uncertainty around the slowing or reversals of reopenings, new waves of COVID-19, and by extension, the speed of the economic recovery worldwide in the second half of 2020. This makes our most profitable business, SMB, difficult to forecast. Furthermore, our supply chain supporting our CHP business has been and may continue to be disrupted by outbreaks of COVID-19 and at our suppliers' factories and warehouses. If such disruptions become widespread or greater in scope, they could significantly hamper our ability to fulfill the heightened demand for our CHP products. As such, we are not in a comfortable enough position to provide financial guidance for the third quarter and the second half of the year.

Operator, Operator

Your first question comes from Adam Tindle with Raymond James. Please go ahead.

Adam Tindle, Analyst

Okay, thanks. Good afternoon, and congrats on the strong results. Patrick, I wanted to start with a comment that you made on CHP. I know you talked about expecting to continue to fuel growth. I think you said that you're expecting it to mirror Q2 growth rates. Was that comment on CHP ex-service provider, which I think was up just over 30% in Q2, and should be up to this level in Q3 and Q4? And if so, I guess why do you have the confidence that there's a longer tail to the burst that you're seeing there? How would you think about that subsiding versus having this kind of longer tail, and what's giving you the confidence to go out and talk about that?

Patrick Lo, CEO

Yes. We're just seeing the trends continue into the early part of Q3, and when we look at the ASPs that people are buying, it's clearly higher than what it was before. As I mentioned, because people are now doing a lot of things virtually online at home, they need to have uniform high-speed coverage around every corner of their houses so the various members can perform their own tasks online without interfering with each other. So as such, the setup of the Wi-Fi network today at home will be significantly more sophisticated and of a higher depth, meaning the ASP of a home Wi-Fi network is actually higher. That amounts to resetting our addressable market to a higher level. As long as we continue to maintain our market share, then we should be able to enjoy the higher level of revenue going forward. And then, of course, I mean, once we get into Q2 next year, then it will be a different calm, right? That's why we feel confident that for the rest of the year, that the non-service provider growth of roughly about 30% will continue for the rest of the year. And on the service provider side, we're confident of the 50% growth in the second half versus the first half is because all the orders are received. We're just delivering. I mean, that's generally a longer lead time for the service provider business. And that’s why we made those comments.

Adam Tindle, Analyst

Okay. Are there any major differences in the growth rates in Q3 and Q4, stuff for us to think about where there's kind of a bigger weighting towards Q3 or Q4? Is it pretty similar in terms of the growth rates expected?

Patrick Lo, CEO

With the non-service provider piece, I would believe that the normal seasonality will continue, which is back to school and then Christmas, Black Friday. Overall, you could say with that, then it should mimic the same growth rate of Q2 for each of the quarters in the second half for non-service providers. On the service provider side, I mean, the overall second half will be 50% bigger than the first half. What's the split between Q3 and Q4 really depends on how much we can ship.

Adam Tindle, Analyst

Okay. And then quickly on SMB, I think you've mentioned you're expecting that the year-over-year declines would be slightly lessening as the year progresses, if I heard that correctly. I just want to confirm that. And if so, I guess why would that be the case if you had an initial tailwind from the work from home helped to impact that segment? Why are you expecting the declines to lessen as the year goes?

Patrick Lo, CEO

Our SMB business declined year-over-year about 21% in Q2. As we see more and more businesses reopen, the normal corporate sales will actually grow from a Q2 basis. Based on that particular observation and projection, we believe the Q3 decline versus last year will be less than 21%, the rate of decline of Q2. And then Q4, hopefully, the smooth reopening of the economy is getting better. The same thing. On the second front, as we said, we'll continue to push into the new areas that we started back in early Q2. Actually, ProAV has been around for a little while, but we're just getting some more momentum. The sophisticated home office wireless LAN network, using our commercial grade Wi-Fi access points and PoE switches, we're starting to push it really hard in Q2. We believe that we'll continue to make progress in Q3 and Q4. When you add all those together, we believe that the year-over-year decline of the SMB business will be less in Q3 and even less in Q4.

Operator, Operator

Your next question comes from Jeffrey Vance with Deutsche Bank. Please go ahead.

Unidentified Analyst, Analyst

Hi, congratulations on the nice quarter. Were you guys able to meet all the demand in the quarter? And are there any supply constraints that you're still seeing?

Patrick Lo, CEO

No, I don't think that we could claim that we can meet 100% of the demand. I mean, as you can see, our channel inventory depleted quite a bit. Our channel is helping us to buffer that difference. It is very difficult when you try to up the demand immediately. And usually, our lead time is anywhere between 13 weeks to 20 weeks, so many other components. The ops team have done a fantastic job to do the best they can. But I wouldn't say that we are doing 100% now. How much more can we do? We don't know because we pretty much sold out whatever we could produce.

Unidentified Analyst, Analyst

Great, thank you. And just as a follow-up, how are you thinking about gross margins going forward? Are there still increased costs that you're seeing related to COVID? And how do you think about the mix related to gross margin too?

Bryan Murray, CFO

As we look forward, I think there are two challenges that we see on the gross margin side. One is, as you can kind of model out with the two businesses that we have, the positive trends we see on the CHP side and the headwinds we still face on the SMB side, I think the mix of SMB will lessen even further than it was in Q2, which has certainly put some pressure on the gross margins. And I think as Patrick just touched on, we are chasing supply. We're trying to maximize every bit that we can get, which comes with some costs related to air freight, and we aren't seeing the weights relent at all, and capacity still is a challenge. Those two things will put some compression on the gross margin. That said, with the top line lift that we can see, we'll get some additional leverage. I think the net of those two things probably gives us an addition of 50 basis points to operating margin off of the Q2 levels that we saw.

Unidentified Analyst, Analyst

Great, thank you.

Operator, Operator

Your next question comes from Paul Silverstein with Cowen. Please go ahead.

Paul Silverstein, Analyst

Thanks, guys. Bryan, first off, did I hear you correctly that 5G hotspots are expecting 50% growth? And if so, that's all for what space of revenue?

Bryan Murray, CFO

The 50% growth is across all of service providers. That would include LTE hotspots. And that's 50% off of what we saw in total for the first half coming in the back half. I would say 5G mobile hotspots in Europe, we started to ship in material volume in the quarter. But we do not kind of break out the specific revenues at that level.

Paul Silverstein, Analyst

More generically, if I did the math right, it sounds like Wi-Fi 6 enabled products is still well less than a million units. Is that correct? Of what you sold in a quarter?

Patrick Lo, CEO

The Wi-Fi 6 products are actually pretty well received in the quarter. And as we see it in the end market, it is probably representing a little bit north of 25% of the market demand. But then, as we said, we haven't really checked it out because there is a limit on supply.

Paul Silverstein, Analyst

I'm asking a specific question. I appreciate your qualitative response, but my simple question is what are the quantitative units of Wi-Fi 6 that you shipped? If I heard the numbers right, 3.6 million, with 2.7 million being the product in the last 12 months, I assume most of that is Wi-Fi 6 from the last year. You mentioned that 23% of units were new products in the last 12 months; that means the quantitative amount for Wi-Fi 6 is well less than a million. I just want to confirm that it's in the ballpark of being less than a million units.

Patrick Lo, CEO

Well, actually, as a matter of fact, I think it could be. But then it's not really a lot meaningful because this work from home basically drives a lot of people to upgrade their home's Wi-Fi reach, and not everybody could afford Wi-Fi 6. And the cheapest and fastest way for a lot of people is to buy one or two 11AC expanders. Today, you can still buy an 11AC expanders at about $50, and you would buy two of them to spend $100. And those units are going very, very high. If you just purely look at a unit basis, it's not very meaningful in this Q2 because there's so many people buying the $50 extenders. And of course, those volumes just completely overwhelm everything else.

Paul Silverstein, Analyst

Now, Patrick, I could challenge your argument. Many people not only can't afford Wi-Fi 6, but correct me if I'm wrong. Unless you've purchased a new iPhone, a new Droid, or a new computer, you won't benefit from Wi-Fi 6 even if you buy it, as you need Wi-Fi 6 chipsets in your devices. Therefore, not only can most people not afford Wi-Fi 6 today, but they also won't gain any advantages from it even if they make the purchase. Now, I have my real question. Is that correct?

Patrick Lo, CEO

Well, I mean, generally speaking, yes. But there's quite a bit of people already upgraded to iPhone 11 and Galaxy S10, S20, Galaxy Fold, and a lot of new laptops. I personally think there are more Wi-Fi 6 client devices out there than the number of Wi-Fi 6 current networks. We haven't seen everybody going there yet. And I think we have a difficulty just to give all Wi-Fi 6 home networks to all those people who are owning iPhone 11, Galaxy S10, S20, and Galaxy Fold.

Paul Silverstein, Analyst

My main question concerns how much demand has been pulled forward and taken from future quarters. I'm curious about how much of this is actually the case, and I hope it's minimal. Given that there are 129 million homes in the United States, most of which likely have some form of Wi-Fi, whether it's G or AC, and with significantly less than a million units of Wi-Fi 6 being shipped, it suggests that only a small fraction of the potential market has adopted Wi-Fi 6 at this point. This implies that the price points are still too high for many customers. Regarding future opportunities, it appears that there is still a large portion of the market, around 95% to 98%, available for Wi-Fi 6 upgrades. We can discuss the timeline for when price points will reach a level conducive to mass market adoption, which is my primary concern: how much potential market remains versus what has been extracted from next year and beyond?

Patrick Lo, CEO

I’ll just use your logic to do a little bit of math. We mentioned that we shipped about 1.5 million routers and gateways combined. I see about 25% of that on a dollar basis as Wi-Fi 6, which is naturally more expensive. If we estimate, about 20% of the 1.5 million units are Wi-Fi 6, that gives us around 300,000 units in 115 million homes in the U.S. You're right; we have a significant runway to grow. My estimate is reasonable because we are currently the only provider of Wi-Fi 6, so there’s no competition to consider. The upgrade cycle is still quite far off. In Q2, our supply was limited, and many customers are constrained by affordability since the lowest entry price for Wi-Fi 6 is still about $200. Comparatively, two Wi-Fi 5 expanders can be purchased for under $100, making it difficult for everyone to afford $200, leading some to choose cheaper options. However, I believe this is beneficial because once Wi-Fi 6 products drop to $100, those who opted for the $100 expanders will likely upgrade to Wi-Fi 6. There's a long journey ahead.

Operator, Operator

Your next question comes from Woo Jin Ho with Bloomberg Intelligence. Please go ahead.

Woo Jin Ho, Analyst

Hey, great. Thank you for taking my question. Patrick and Bryan, I think there was an 8-K talking about David Henry taking flights out on airfreight on your fulfill demand. What about the timing of those airfreight shipments in the second quarter? And when do you think shipping and logistics should normalize into the third quarter?

Bryan Murray, CFO

I mean, for Q2, airfreight spend was pretty much consistent throughout the quarter. I'd say we came into the quarter probably a little better positioned, as well as the channel, given where they exit in Q1 in terms of channel inventory levels, and maybe a little bit backend loaded. As I said earlier, it's certainly going to be a fair investment for us in Q3. I think we're hopeful that as we kind of get to the earlier part of the holiday season that we can get caught up and have our supply pipeline matching what we see in demand.

Woo Jin Ho, Analyst

Okay. And then in terms of the second half, you mentioned in the second quarter it didn't seem that there was much discounting going on. But as we look at the second half, we have Prime Day, Black Friday, and some of the holiday season. Do you think some of the commercial activity is going to increase a little bit?

Bryan Murray, CFO

I think we'll see normal promotional activity as we enter the holiday season. I think there's still a question out there as to what Amazon does, and if they reinstitute some form of Prime Day, and when that occurs. But I think, aside from that, we would expect normal promotional activities to occur around the holiday season. And we're certainly going to be managing and growing the top line with the bottom line.

Woo Jin Ho, Analyst

And one more question, if I may, in terms of competition. Patrick, one of your bigger brick and mortar retailers it seems as if you're doing a fair amount of business with, it looks like they brought in a smaller competitor on their online channel as well that has Wi-Fi 6 and has attractive pricing. I mean, do you view them as a threat? And I'm not talking about Google or Amazon. Are they a potential threat, given that they are going into this one particular brick-and-mortar channel?

Patrick Lo, CEO

No, we don't believe so. I mean, the thing is on Wi-Fi 6, we basically have the broadest portfolio. Our unique Tri-Band technology, but we also have Dual Band as well. As I said, we're pretty much the only game in town as far as Wi-Fi 6 is concerned. It doesn't matter whether it's routers, or gateways, or expanders, or mesh. I think we're not concerned about small competitors out there. As we continue to maintain our U.S. market share, the real competition is still from Amazon, Euro, and Google Nest. Neither of them have Wi-Fi 6 yet.

Woo Jin Ho, Analyst

Understood. Thank you.

Operator, Operator

Your next question comes from Hamed Khorsand with BWS Financial. Please go ahead.

Hamed Khorsand, Analyst

Hi. First off, I just want to ask you how much of the reduction in channel inventory is because of inventory spending changes with your partners, and how much of it is actual sell-through?

Patrick Lo, CEO

Well, I mean, clearly, it is sell-through. And then also, our channel partner's mode of sales is changing as well. More and more sales are being done online. For example, Best Buy is limiting the traffic into the stores at some point in time to actually close the stores and do curbside pickup. In that case, they don't need that much inventory inside the stores. And more and more of the business is shifting online. There's not just Best Buy, but Walmart, Costco. And the online sites are really, really successful. And when you shift the sales to online, you certainly need less inventory overall in the channel. That's what we're seeing. And of course, as I said, we have not been able to ship as much as we would have liked because it's ramping up so fast. Some of the in-store inventory has been helping to buffer the demand. It depletes the in-store inventory as well.

Hamed Khorsand, Analyst

The amount of supply that you're able to ship, and the inability to fully meet demand, is that solely due to shipping capacity, or is it related to a supply chain issue with components?

Patrick Lo, CEO

Oh, yes, certainly. I mean, as I mentioned just now, the component supply lead time is anywhere from 13 weeks to 26 weeks. So if you go talk to the chip suppliers such as Qualcomm, Broadcom, and others, they all tell you they're quoting anywhere between 13 weeks to 26 weeks of lead time for chips. And we all saw this coming towards the end of March. And when we pressed the button to order more chips in early April, I mean, you could see that the chips won't arrive until right about end of June and go into production in July.

Hamed Khorsand, Analyst

Okay. And then my last question is just on the ARPU that you achieved in Q2, was up by something like 12% from Q1. Is that purely because of lack of supplies forcing people to buy Wi-Fi 6 routers? Or is it just you're not doing as much promos?

Patrick Lo, CEO

Well, as I just mentioned, just more people having iPhone 11, Galaxy S10, Galaxy S20, and more and more of those people are grouped up at homes. They want the best, and that's why they opt for Wi-Fi 6 products. And also, you have some more advanced retailers like Costco basically completely get rid of 11AC and moved entirely over to Wi-Fi 6. That helps to increase the quarter-over-quarter ARPU as well.

Hamed Khorsand, Analyst

Do you have capacity to grow revenue from here from a production standpoint?

Patrick Lo, CEO

Yes, definitely. No doubt about it. As I just mentioned, the chips are starting to arrive.

Hamed Khorsand, Analyst

Okay, I appreciate it. Thank you.

Patrick Lo, CEO

Thank you so much. I would like to once again thank our employees and partners for their hard work and flexibility during this time. And with a strong half of 2020 behind us, we look forward to delivering growth in the coming quarters, and we remain confident the components of our strategy will be strong contributors to our success this year and beyond. And I look forward to sharing more with you on our next earnings call in October. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for joining. You may now disconnect.