Earnings Call Transcript - NTGR Q3 2020

Operator, Operator

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. I would now like to turn the conference over to Erik Bylin. Please go ahead, sir.

Bryan Murray, CFO

Thank you, Erik, and thank you, everyone for joining today's call. I'm very pleased to share with you our third quarter 2020 results. With continuing robust demand for our leading edge products, our team once again delivered a strong quarter with exceptional growth in revenue and profit. We were again constrained on the supply side for our CHP business, for 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 was $378.1 million, up 42.2% year-over-year and up 35% on a sequential basis. This strong increase in revenue was primarily due to a remarkably robust demand for our CHP products, powered by unprecedented bandwidth consumption in the home, where people have transitioned to conduct the majority of their daily lives. This included products sold to service providers, with associated revenue reaching $74.1 million, our highest level since the first quarter of 2016. We continue to win with our leading-edge WiFi 6 offering, and strong presence in both online and retail. Our supply chain team did an outstanding job in the quarter giving product to retail and service provider partners, outperforming our expectations. The team managed raw materials, manufacturing schedules, and transportation, optimizing with their freight in particular to meet more consumer demand than we had previously forecasted. With that said, we expect to remain supply constrained through the first quarter of 2021, primarily due to a worldwide shortage of advanced chips such as WiFi 6. Our non-GAAP operating income at $41.4 million was a quarterly record, with reported non-GAAP operating margin of 10.9%, as NETGEAR demonstrated our ability to leverage our strong revenue growth. For the third quarter of 2020, net revenue for the Americas was $277.9 million, which is up 55.5% year-over-year and up 37.4% 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 $63.7 million, which is up 28.6% year-over-year, then up 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. Our APAC net revenue was $36.5 million, which is down 2.9% from the prior year comparable quarter, and up 24% sequentially, both 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 nodes of 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. From this point on, my discussion points will focus on non-GAAP numbers. The 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 up 70 basis points compared to 29.6% in the second quarter of 2020. While the mix of our SMB business, which historically carries a relatively higher gross margin, declined year-over-year. And although we spent dramatically more on-air freight in Q3, we were more than able to offset these gross margin headwinds to lower promotional activities on our CHP products. Total Q3 non-GAAP operating expenses came in at $73.2 million, which is up 27.8% year-over-year and up 18.1% sequentially. The team did a great job with revenue growth far outstripping OpEx growth to deliver strong leverage on our topline and produce record quarterly operating profit. As always, we will 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 803 as of the end of the quarter, up by 15 from the previous quarter. We continue to manage our headcount, but we will add resources to invest in areas that we believe will deliver future growth. Our non-GAAP R&D expense for the third quarter was 6.2% of net revenue, as compared to 6.8% of net revenue in the prior year comparable period, and 6.9% of net revenue in the second quarter of 2020. To continue our technology and subscription service leadership, we are committed to continued investment in R&D. Our non-GAAP tax rate was 17% in the third quarter of 2020. In the quarter, we benefited from favorable one-time adjustments to domestic tax liabilities. This contributed about $0.08 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 ended the third quarter of 2020 with $306.8 million in cash and short-term investments, up $48.3 million from the prior quarter. Additionally, our inventory decreased by $6.3 million in the quarter, as we continue to deliver on strong demand in the Americas and EMEA, while remaining supply constrained, which left us unable to increase our own inventory holdings. We hope to reverse this trend in the first half of 2021 and move our inventory position closer to historical norms. In Q3, we generated $42.9 million in cash flow from operations, which brings our total cash provided from operations over the trailing 12 months to $184.6 million. We used $2.5 million in purchase of property and equipment during the quarter. This brings our total cash use from capital expenditures over the trailing 12 months to $8.5 million. We remain confident in our ability to 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 our open buyback program. And our fully diluted share count is approximately 30.7 million shares. Especially in times of uncertainty like these, we recognize the importance of maintaining a strong cash position, and we'll balance our practice of 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 of our cash in the first half of 2021 as a result. Now turning to the results of our product segments. The Connected Home, which includes the industry-leading Nighthawk, Orbi, Nighthawk Pro Gaming, and Meural brands, 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 sequential increase was attributable to heightened demand across both service provider and retail channels. In the third quarter of 2020, service provider revenue was the highest it's been since the first quarter of 2016, while non-service provider revenue grew an impressive 56.8%, as compared to the comparable prior year period. In the third quarter, despite supply headwinds in our WiFi 6 products, we again held a strong leadership position in the U.S. market share in consumer WiFi, coming in at 44%. And we fully expect we can grow our share once again, once we overcome the WiFi 6 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, as evidenced by the strong sequential growth; the year-over-year decline stems from the pandemic and corresponding business closures. On the product fronts, our wireless LAN, PoE Plus, and ProAV switching lines continue to perform well in the market. Our market share in switches sold through the U.S. retail channel came in at 49% in Q3.

Patrick Lo, CEO

Thank you, Bryan. With the pandemic continuing around the world, many adjustments that seemed temporary are cementing their place in our lives. People and companies have been forced to adapt. At work, some companies are embracing work from home on a permanent basis, while others are moving to a hybrid model of working from home and at the office in roughly equivalent amounts. In addition, the flexibility to work from anywhere has led to a massive migration away from the crowded, high-cost areas to less urban areas, leading to an increase in new or upgraded network connections. Regardless of when the pandemic ends, what's clear is that the future of work has changed forever, and that means working from home at least part of the time is here to stay, with challenges of home connectivity likely defined by multiple locations. At home, people are adapting to the new environment by learning how to pursue more of their daily activities virtually. Eight months in the making, this transition goes well beyond work and school. Families are engaging in myriad activities virtually, everything from watching movie premieres and live music concerts, to shopping for groceries, to virtual gatherings, doctor’s visits, fitness classes, and checking in on family and friends across the country or even continents. These activities are taking place through their laptops, tablets, and phones, and families recognize the need for a fast and reliable WiFi connection that spans their entire home to support the increased bandwidth consumption and multitude of connected devices. Previously, these activities might have been optional; now people enjoy and even sometimes prefer them, accelerating adoption and making these virtual activities an increasingly permanent part of our lifestyle. The NETGEAR team is working tirelessly 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 their WiFi networks and discover new uses for mobile hotspots. In Q3, we made dramatic adjustments within our supply chain and worked closely with our channel partners to ramp production and delivery. I'm proud to say our team at NETGEAR continued to execute at the highest level and exceeded my expectations regarding what we could deliver for our CHP business. Yet, even with these efforts, we've remained supply constrained on CHP products, as we are more dependent on advanced chips to power WiFi 6 than our competitors, who remain stuck on WiFi 5. Similarly, in our SMB product portfolio, we were caught off guard by the surprisingly strong demand for low-end PoE switches and WiFi 6 wireless mesh access points for home office and home-based business users. We expect supply constraints to continue to limit the non-carrier side of CHP in Q4. However, if our supply chain team can repeat the Q3 performance, we believe we can deliver roughly the same revenue level we saw in Q3. On the service provider side in Q3, where we were able to set aside the demand for mobile hotspots needed to combat the pandemic in the U.S. for the start of the new school year and for our first responders, we expect Q4 service provider revenues to return to roughly Q2 levels. Much has been made of the technology transitions accelerated by the pandemic. With these transitions, we believe many of the activities that are now virtual will remain virtual. As such, this represents significant change in how people conduct their lives, and a fundamental need for robust and pervasive WiFi connectivity recasts our total addressable market on an upward basis going forward. NETGEAR possesses unique attributes that provide us a defensible advantage, including a longstanding trusted brand with loyal followers, a well-deserved reputation for high-performance WiFi products based on our leading-edge Tri-Band technology, best-in-class channel relationships, and a growing portfolio of value-added subscription services. This is why we are confident that NETGEAR will remain the WiFi and networking vendor of choice for both consumers and small businesses, as more of our lives transition to virtual for the long term, and why we will continue to grow with the market. It is more evident now than ever that our early investment to lead in next-generation technologies, namely Tri-Band WiFi systems and millimeter wave 5G hotspots, will continue to pay dividends. In Q3, we saw strong demand for our Tri-Band Wi-Fi 6 Orbi and Orbi Pro. Our three-pack configuration starts at $499 and can exceed $1000 with Orbi Pro. We cannot keep them in stock across all markets we participate in from Tokyo to Hong Kong to Paris to Munich to Toronto and especially right here in the U.S. Customers have told us that, even with older WiFi 5 smartphones and devices, they feel a significant performance boost from our WiFi 6 Orbi systems due to our innovative radio circuits and antenna designs. We are ramping production of our WiFi 6 Orbi as quickly as we can, but at this point, we don't believe we will catch up to demand until Q2 next year at the earliest, due to the WiFi 6 chip supply shortage. Moving to the SMB business, the team continued to drive forward with a focus on products geared toward home offices and home businesses, and delivered sequential growth of 23% quarter-over-quarter. We faced the same headwinds as last quarter with channels that rely on personal interaction, such as our VAR partners to do IT installations. During the quarter, we introduced the world's first WiFi 6 mesh access points with app-based remote management. Just like our CHP Orbi counterpart, we could not keep them in stock. We have seen strong demand for our low-end Power-over-Ethernet switches for home office setups, as remote workforces use them to connect to IP phones, desktops, printers, and access points. We believe this demand will persist as workforces increasingly become more distributed post-pandemic. We're also making progress with our ProAV business. The team delivered marquee wins, such as with the PGA Tour in the U.S., and the 2021 Americas Cup in New Zealand. In Q3, we announced a brand new line of AV switches that support the Audio Video Bridging protocol. This new M4250 line of AV switches was well-received by AV integrators around the world. We expect to ship them in volume in Q4. We look forward to continued improvement in our SMB revenue in Q4, with the year-over-year decline continuing to reduce from what was experienced in Q3. The increased importance of WiFi in people's homes and the need to connect, manage, and secure more devices to that WiFi is also translating into more subscribers to our premium paid services. We again delivered record progress in growing our recurring revenue stream. Beginning the quarter with 298,000 paid subscribers, we grew our number of paid subscribers by 26% sequentially, adding 76,000 in the quarter to end with 369,000 paid subscribers. In just three quarters, we have exceeded our goal for all of 2020 of doubling our subscribers, which is a notable achievement and a positive sign for our profitability growth in the years to come. I would also like to take a moment to welcome Sarah Butterfass to the NETGEAR board. Having led Product Development at Top Software, first, and consumer-facing brands such as Groupon and others, and now Chief Product Officer at FanDuel, Sarah will add valuable apps and services 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'll turn it over to Bryan Murray to comment on our opportunities and obstacles in the coming quarter.

Bryan Murray, CFO

Thank you, Patrick. While 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. As such, we're 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.

Operator, Operator

Thank you. The first question comes from the line of Adam Tindle from Raymond James. Your line is open.

Adam Tindle, Analyst

Okay, thanks. Good afternoon, and congrats on a very strong quarter. Patrick, I just wanted to start with a question on the CHP segment, excluding the service provider piece. It was obviously very strong. I think you mentioned going forward that you were expecting kind of Q4 to look at sort of the same level as Q3. We would typically expect it to be up sequentially just from seasonal patterns. So maybe just some color on why it would be flat this year? Was there any pull forward? And as you talked about Q4, any comments on expectations for the holiday season and promotional activity based on Prime Day and what you've seen so far? Thanks.

Patrick Lo, CEO

Well, basically, as we mentioned, we would depend on our supply team to make products available, and it's all supply bound. We do believe that the market has a much bigger appetite to absorb whatever we could ship to the market for WiFi 6. But, unfortunately, we just don't have enough chips to provide to the market. So yes, we expect that it would be a seasonally strong Christmas, but we are limited by supply. Now Q3 was the first quarter that people are really experiencing this newfound virtual experience. So clearly, the market surge was high in Q3. We expect the market surge would come down a little bit in Q4, but then it would be offset by the Christmas seasonality. However, unfortunately, it's all supply bound.

Adam Tindle, Analyst

Okay. I mean, is there a way that you could potentially help us quantify how supply-bound you are at this point? So we have an idea of what this tailwind that you're likely going to have as supply catches up to demand would look like over the next few quarters?

Patrick Lo, CEO

I mean, the easiest way to look at it is that we used to own 50% market share in North America. And market share in Q3 was a little bit depressed to 44%. That 6% is clearly due to our supply shortage. Plus, because we are the market leader, we believe that we will have more inventory when the market grows even faster. And secondly, we believe that we'll actually gain share. So that's the easiest quantification of how much we are limiting ourselves as well as the market.

Adam Tindle, Analyst

Okay. And maybe just a follow-up for Bryan. I mean, margins were obviously a bright spot as well. Just wanted to see if we could dig into a little bit more of the puts and takes on a go forward basis for gross margin in particular. And you have some air freight, some supply chain, you've got promotional activity upcoming. Just the different buckets that impact gross margin and how we can think about that line on a go forward basis?

Bryan Murray, CFO

Yes. 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 has increased. Our mix of WiFi 6 products is certainly contributing to that. The elevated top line is certainly helping from the top line leverage standpoint. So those two factors are really driving the Q3 performance. We certainly spent 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 you look out to Q4, I think from an operating margin standpoint, which is what we're primarily focused on, these are a couple of headwinds, I think overall probably take the step down from Q3 levels by about 100 basis points. One is just top line leverage. We mentioned the opportunistic demand that we saw in service provider which we expected in the back half of the year, we're able to capitalize on a lot of that in the third quarter. So they're naturally going to step down to about $45 million in Q4. And even though we're still going to be supply constrained in Q4, promotions will certainly continue to be limited. I do think they'll take up just a bit as we have preplanned activities around the holidays. So I think the demand of all that this is probably about a 100 basis points step down in Q4 from Q3.

Adam Tindle, Analyst

Got it. That's helpful. Thanks and congrats again.

Operator, Operator

Your next question comes from the line of Hamed Khorsand from BWS Financial. Your line is open.

Hamed Khorsand, Analyst

Hi, thanks for taking the questions. First off, Patrick, could you elaborate on your commentary during your statement about the CHP side being constrained if you could source enough chips? As you guys drew down inventory, so you would actually have to bump up the amount of chips that you purchase to reach the same kind of revenue. Is that the right way of thinking? Or are you just saying that on a regular basis without the drawdown on inventory?

Patrick Lo, CEO

No, I mean, when we say that, even if we draw down the inventory on our own, even if we draw down the inventory in the channel, even if we ramp up the production quantities, the market demand still exceeded all of that combined. And this is not enough supply of chips that we want to really feed the market. That's all we are talking about.

Hamed Khorsand, Analyst

Understood. So how would you be able to achieve a flattish kind of performance for Q4 given that you've been drawing down your own inventory in Q3?

Patrick Lo, CEO

Exactly. So that means we're depending on an increased supply of the chips in Q4 versus Q3, which is not surprising, because we placed the orders earlier. The chips lead time is now six months. So that means in Q4 is basically a result of our placing chip orders back in April, May.

Hamed Khorsand, Analyst

And then, do you think this is the amount of chips that you're able to generate? Is that allocation from the producers that you might be losing out from competitors? Or is this just not enough production out there?

Patrick Lo, CEO

Well, number one, as you probably know, there's limited capacity of 14-nanometer semiconductors. There are not that many foundries in the world that can produce that. And secondly, all the client devices now support WiFi 6. So, we're in the market competing for substrate, competing for 14-nanometer production volume against the same kind of WiFi 6 chips that people want for their cell phones. With the Apple, iPhone 12, Huawei, P40 and Samsung new models, and clearly, I mean, among the networking vendors, we had the biggest allocation. But in the overall scheme of things, there are just so many competitors in the electronics industry that need these 14-nanometer chips.

Hamed Khorsand, Analyst

Are you going to put a greater emphasis on WiFi 5 in Q4?

Patrick Lo, CEO

No, there's no going back. I mean, as you probably may know, in the past three quarters we have been telling everybody that we are rebalancing our inventory, both in the channel as well as within ourselves to lean our sales off of WiFi 5. And as you can see, it's pretty clear, because we're the only one that has ample supply of WiFi 6. We don't have to do promotions. So as a direct result, our operating margin improved significantly, while everybody has even fewer Wi-Fi 6 supplies than we do, and then we trash WiFi 5 prices. So there's just no money to be made there. And we're pretty confident every quarter we'll get more allocation on WiFi 6 chips. Then once we balance demand and supply, we'll be on our way to gaining a lot of share.

Hamed Khorsand, Analyst

Okay, great. Thank you.

Patrick Lo, CEO

Sure.

Operator, Operator

Your next question comes from the line of Jeffrey Rand from Deutsche Bank. Your line is open.

Jeffrey Rand, Analyst

Hi, congrats on another great quarter. The year-over-year declines in your SMB business moderated as you expected. Is there more untapped potential with the at-home office in this business? And do you think the SMB business can really return to growth before we get a vaccine?

Patrick Lo, CEO

We believe that we will get pretty close to previous level even slight growth, as we continue to ship more WiFi 6 products even in the SMB channel. As I mentioned, we were totally caught off guard by the strong demand for our WiFi 6 mesh access points. People are cramming for it, and it's pretty impossible to find availability of our SMB wireless access point mesh on any website every day. So we do believe that once we get more of an allocation of the chips, then yes, definitely we will grow. The other thing you see is that with a lot of costs and staff being distributed back to home, work from home, there's a tremendous demand for our PoE switches at the low end, especially the 5-port and 8-port, because they are using them in their home offices and in call centers to connect to IP phones and their wireless access points. So, I think there's tremendous opportunity. And then on the ProAV side, we still see a lot of uptake in the transition from traditional AV into AV over Ethernet. We recently outfitted quite a few railway networks, both in the U.S. and Europe, with terminal displays and in-train displays with ProAV. So I think the ProAV business will continue to provide us with growth opportunities. Therefore, in 2022, we are pretty optimistic for our SMB business.

Jeffrey Rand, Analyst

Great. And then just as a follow-up. I think Amazon released its first WiFi 6 mesh network recently. Can you talk about how this impacts your business? Does it start to put pricing pressure on your WiFi 6 products when supply is constrained? And does it help the general acceptance and credibility of WiFi 6?

Patrick Lo, CEO

WiFi 6 acceptance is huge, as we mentioned in our discussion just about 15 minutes ago. We've seen tremendous demand not only in the U.S. where people appreciate technology, but we've also seen demand for our Wi-Fi 6 Orbi around the world, even in India. The fact is that people find out through word of mouth that when they buy the WiFi 6 Orbi, not only can they enjoy the speed bump if they have WiFi 6 phones, tablets, or laptops, but they actually benefit even if they have WiFi 5 devices because of our design: one, it's Tri-Band; two, our design of the radio circuits and antennas boost performance and coverage. So, yes, you're right. Amazon introduced their WiFi 6 product, but primarily it's dual-band. They have only one model that is so-called Tri-Band; however, it's not comparable to our performance and is actually a little bit more expensive than ours as well. Their Tri-Band starts at about $500, while most of their focus is on dual-band, which we don't really play in. We play in the Tri-Band area, so most of the demand that we're seeing for our WiFi 6 products for mesh would be around the $500 price point. So it's like we're in two different worlds. I mean, we're at a Volkswagen level; they're at a BMW level.

Jeffrey Rand, Analyst

Great, thank you.

Operator, Operator

Your next question comes from the line of Paul Silverstein from Cowen. Your line is open.

Paul Silverstein, Analyst

Bryan, I hate to ask you to repeat yourself. There was a question asked about the margin structure right before my line was silent. So I do apologize to you and others on the call, but I'm hoping you can repeat whatever you said. I do apologize.

Bryan Murray, CFO

No problem, Paul. So what I was saying for Q4, we would expect operating margins to take a step down of about 100 basis points off of Q3, largely due to leaving from the top line 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. We're going to lose some top line leverage. Additionally, while we'll still hold back a lot of promotions until we get to play in a healthier state, there were some preplanned commitments around the holiday promotional period that we will obviously have to go forward with. Those two items would impact the 100 basis points step down sequentially.

Paul Silverstein, Analyst

And Bryan, I forget whether you've addressed this in the past, but I assume expedites are costing you something on the order of 100 or so basis points to gross margin and by the operating margin bottom line?

Bryan Murray, CFO

I'd say it's more, but I'd also say we're offsetting that entirely with the reduced promotional efforts that we typically would have on our CHP products.

Paul Silverstein, Analyst

So, are you costing that assuming that you eventually, which you will get to a point where you catch up with where supply constraints have become totally alleviated? Should we not assume a full 100 plus basis points benefit to the margin structure at that point whenever that is?

Bryan Murray, CFO

So I mean, I think there's certainly an opportunity for 100 basis point margin expansion. As we move into 2021, Patrick kind of outlined some opportunities on the SMB side, where we may look to see something in the neighborhood of 10% growth in 2021. We'll return to kind of more than average $35 million a quarter run rate on service provider once we're behind this remaining opportunistic demand in Q4. But we think, we'll offset that entirely with the continued growth in the non-carrier portion of our business. So if that kind of performance continues, we think there's a 100 basis point margin expansion opportunity by 2021.

Paul Silverstein, Analyst

And a question for both of you. Other than the obvious major issue with supply constraints, what are you most worried about? Hello?

Bryan Murray, CFO

I think these days, the big concern is getting supply caught up to capitalize on this opportunity and getting supply caught up, which we said is going to take us to Q2 to do so. So that's number one. And then number two...

Paul Silverstein, Analyst

Go ahead.

Bryan Murray, CFO

Yes.

Paul Silverstein, Analyst

I was going to say what's the second thing you're most worried about?

Patrick Lo, CEO

Well, the second thing is anything that we cannot control, like geopolitical situations and the possibility of a third or fourth wave of COVID. I mean, all these uncertainties. Yes. But we'll assume that is not going to happen.

Paul Silverstein, Analyst

Yes. But the clear message today is that you've got more than enough demand relative to your supply that demand is not an issue for the foreseeable future. That's not an issue.

Patrick Lo, CEO

No, demand is not an issue.

Operator, Operator

Your next question comes from the line of Woo Jin Ho from Bloomberg. Your line is open.

Woo Jin Ho, Analyst

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 ASP? And in that, I mean, are you going to go for the $999 product versus a single access point product?

Patrick Lo, CEO

No. I mean, what we'd do, whatever the customers want; we believe that there's a wide spectrum of applications. Not everybody could afford an expensive product to begin with. So, for those customers, we've seen them buy extenders to supplement a single router. So we also change in that particular marketplace, as well. And we do have WiFi 6 routers that cost only about $129 and $149. So, we're going to provide the full spectrum of themes. And clearly, as you probably know, I mean, the biggest margin on the higher-priced products is generally true. If you buy cars, Mercedes makes a lot more money on the S-Class. Same thing, Tesla makes a lot more money on the S-Model and Model X. So it's the same thing; no denial. I mean, for those products that are above $500, we definitely make more money on.

Woo Jin Ho, Analyst

Okay. And somewhat of an intermediate-term strategy question for you, Patrick. It sounded like you're looking at the hybrid work-from-home opportunity as a more permanent type of opportunity. Is there anything on the product development front that you're doing that may help enhance your positioning to take advantage of that opportunity?

Patrick Lo, CEO

Yes, we mentioned it in our discussion already. If you are just an ordinary consumer and you're going to configure your own home networks for this work-from-home scenario, then very likely you either gravitate towards a router plus one or two extenders, which is a cheaper solution, or you go for a mesh network. If you're thinking of a mesh network for uncompromised performance, then you're going to pay $500 plus for a NETGEAR product. But if you're aiming for a price range of about $150 to $300, in this market, you can find many products to choose from, including NETGEAR, Amazon, and others. We still have a fair share in the market between $150 and $300. On the other side, companies may tell their staff to work from home, such as call center employees, or allow them to work at least half of the time from home anywhere. In those cases, they'll likely purchase commercial-grade equipment such as routers and switches. We're accommodating for both consumers and commercial clients, and we've seen strong demand in both areas heading into 2021.

Woo Jin Ho, Analyst

Got it. And, lastly, Bryan, I believe you said that it wasn't a demand issue going into 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 50% sequentially from 4Q and then flattish off in 2Q. Any guidance on preliminary expectations in the CHP business?

Bryan Murray, CFO

I would say stay tuned. We're going to announce our Analyst Day here in the first half of December in the coming weeks. We're certainly going to dive into that. But as we said earlier, with the supply constraints last year through Q1, certainly supply will dictate what we will be delivering in the first part of the year.

Woo Jin Ho, Analyst

Got it. That is worth a shot. Thank you.

Operator, Operator

Thank you. There are no further questions at this time, I will turn the call back over to Patrick Lo.

Patrick Lo, CEO

Sure. Thank you, Christine. I would like to once again thank you for listening to the call and thank our team members and partners for the hard work and flexibility during this time. Without them, we would not have been able to deliver as many products as our customers really need and want. We look forward to serving a newly expanded market in which we have a clear and defensible leadership position. We aim to deliver continued growth in the coming quarters, and we remain confident that the components of our strategy will be strong contributors to our success this year and beyond. I look forward to sharing more on our progress over the next few months, first with the Analyst Day in early December, and then in our next earnings call in February. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.