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

Thank you, Adrianne. Good afternoon, and welcome to NETGEAR's First Quarter 2020 Financial Results Conference Call. Joining us from the company are Mr. Patrick Lo, Chairman and CEO; and Mr. Bryan Murray, CFO.

Format of the call will start with a review of the financials for the first 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've not received a copy of today's press release, please visit NETGEAR's Investor Relations website at www.netgear.com.

Before we begin the formal 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-K.

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. In addition, several non-GAAP financial metrics will be mentioned on this call.

A reconciliation of 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..

Thank you, Erik. And thank you, everyone, for joining today's call. We are very pleased with our first quarter 2020 results. Our team executed well in a rapidly changing market while working from home for the final few weeks of the quarter.

Despite the market demand and distribution logistics disruptions presented by the worldwide COVID-19 pandemic, our team adapted quickly and overachieved on the financial and operational targets we set at the beginning of the quarter for net revenue, operating margin, free cash flow, and channel inventory levels and product mix.

Net revenue for the first quarter ended March 29, 2020 was $230 million, above the top end of our guidance range, but down 7.7% year-over-year and down 9.1% on a sequential basis. The decline in revenue year-over-year is primarily due to a reduction in service provider revenue of approximately $11 million.

The Q1 '19 period benefited from a pull-forward from certain channel partners in the U.K., ahead of the originally planned Brexit deadline. Revenue came in above guidance, due to exceptionally strong market demand towards the end of the quarter, driven by the massive shift to work from home around the world.

This increase in end user demand helped us to adjust our channel inventory level and product mix to become more WiFi 6 centric on the CHP side and Power-over-Ethernet centric on the SMB side.

Our non-GAAP operating margin for the first quarter came in at 3.6%, also above the top end of our guidance range, driven largely by the leverage created by our revenue outperformance. For the first quarter of 2020, net revenue for the Americas was $158.2 million, which was up 6.9% year-over-year and down 6.5% on a sequential basis.

The seasonal decline in the Americas lessened from the prior year, benefiting from the increased demand created by the work-from-home requirements. EMEA net revenue was $42.1 million, which was down 26% year-over-year and down 16.5% quarter-over-quarter.

This was largely due to a difficult year-over-year comparison, as Q1 '19 benefited from increased shipments to our U.K. distribution partners in anticipation of the originally scheduled Brexit deadline. Additionally, service provider net revenue was lower on a year-over-year basis, as our partners awaited the launch of 5G products.

Our APAC net revenue was $29.6 million, which is down 32.8% from the prior-year comparable quarter and down 11.2% sequentially.

The decline on a year-over-year basis is largely driven by service provider revenue in Australia, as they also are awaiting the launch of 5G products, while sequentially, we faced challenges from COVID-19 in the Greater China region.

For the first quarter of 2020, we shipped a total of approximately 3.4 million units, including 2.4 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 1.3 million units for the first quarter of 2020.

The net revenue split between home and business products was about 72% and 28% respectively. The net revenue split between wireless and wired products was about 65% and 35% respectively.

Products introduced in the last 15 months constituted about 23% of our first quarter shipments, while products introduced in the last 12 months contributed about 21% of our first 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 our earnings release distributed earlier today. The non-GAAP gross margin in the first quarter of 2020 was 29.2%, which was down 410 basis points as compared to 33.3% in the prior-year comparable quarter, and up 130 basis points compared to 27.9% in the fourth quarter of 2019.

Gross margin improved as expected in Q1 '20 compared to Q4 '19, as the drag from Section 301 tariffs was largely eliminated. The year-on-year decline in gross margin is partially due to significantly lower shipments of SMB products compared to Q1 '19 when we shipped high volumes into the U.K.

market in anticipation of the previously expected Brexit deadline. Total Q1 non-GAAP operating expenses came in at $58.9 million, which is down 2.1% year-over-year and down 0.9% sequentially. As always, we manage our expenses prudently, while also ensuring that the growth portions of our business have the resources that they need to succeed.

Our headcount was 797 as of the end of the quarter, down by 12 from the prior quarter. As always, we manage our headcount very tightly, especially in times of economic uncertainty.

Our non-GAAP R&D expense for the first quarter was 8.1% of net revenue, as compared to 7.1% of net revenue in the prior-year comparable period and 7.2% of net revenue in the fourth quarter of 2019.

R&D is one area where we will continue to commit resources because our leading-edge product introductions are the engine of our future growth and empower us to gain share. Our non-GAAP tax rate was 24.2% in the first quarter of 2020. Looking at the bottom line for Q1, we reported non-GAAP net income of $6.4 million and non-GAAP diluted EPS of $0.21.

Turning to the balance sheet, we ended the first quarter of 2020 with $209.7 million in cash and short-term investments, up $14 million from the prior quarter. We successfully reduced our inventory by $54.9 million in the quarter, as we delivered on strong domestic demand and continued to shift the mix towards WiFi 6.

In Q1, we generated $29 million in cash flow from operations, which brings our total cash provided from operations over the trailing 12 months to $79.7 million. We used $1.3 million in purchases of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $9.5 million.

We remain confident in our ability to continue to generate cash, and expect we will be able to further increase our cash position during the remainder of 2020. In Q1, we spent $15 million to repurchase approximately 584,000 shares of NETGEAR common stock at an average price of $25.71 per share.

Since the start of our repurchase activity in Q4 2013, we have spent $543.7 million to repurchase 15.3 million shares. Our fully diluted share count is approximately 30 million shares as of the end of the first quarter.

We recognize the importance of maintaining a strong cash position in a time of uncertainty, and we'll 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 $164.7 million for the quarter, which is down 2.8% on the year-over-year basis, and down 10.4% sequentially.

The year-over-year decline was attributable to lower service provider revenue, mainly in EPAC, which was down approximately $10 million as compared to Q1 '19. This decline offset strong growth in the Americas, where we saw increased demand in both service provider and retail channels compared to the prior year. We again held more than half of the U.S.

market share and consumer WiFi, coming in at 51% for the first quarter. The SMB segment generated net revenue of $65.3 million for the first quarter of 2020, which is down 18.1% on a year-over-year basis, and down 5.5% sequentially.

As previously mentioned, the European region benefited in Q1 '19 from increased demand and anticipation of the originally scheduled Brexit deadline, while in Q1 '20, the Americas experienced declines with the onset of the pandemic. On the product front, our PoE Plus and Pro AV switching lines continue to perform well in the market.

Our market share in switches sold through U.S. retail channel remained at 53% in Q1. As noted in the press release, given the uncertainty in the global economy brought about by the shutdowns due to the COVID-19 pandemic and its corresponding unpredictable effect on market demand, we feel it is prudent to suspend our practice of giving guidance.

Consequently, we are withdrawing the prior revenue and operating margin targets for the full year of 2020 that we gave in November of last year at our Analyst Day. I will now turn the call over to Patrick for his commentary..

Thank you, Bryan. First, I would like to start by saying that I'm very proud of and grateful to our team for the adjustment in a difficult environment and how we delivered in the first quarter.

We faced considerable execution challenges, such as shift in channel demand from retail e-comm, our accelerated EXP [ph] product demand, and slower SMB sales, and disruptions to inbound and outbound supply, all while pivoting our workforce to work from home starting in Asia in February, and then on a global basis since early March.

Despite these hurdles, I am extremely pleased that the team navigated through this difficult environment to come through for our customers at this enormously disruptive moment, while keeping themselves in the family's faith.

By pivoting our broad set of products to the right channels and mix in an uncertain environment, NETGEAR outperformed a number of key financial metrics, while strengthening our balance sheet. Our connected home business saw double-digit growth in end market demand worldwide, towards the end of Q1, as people mobilized for work from home mandates.

The work from home and school from home requirements put unprecedented demands on home networks. Families recognized that strong WiFi performance at home is now a necessity, and responded by upgrading their WiFi connections at various price points, according to their financial ability.

Also, across both connected home and SMB [indiscernible] and our three geographies, we saw strong ecommerce growth due to the shuttering of many physical retail stores. The March search of home WiFi market demand drove out performance on the CP side of the business.

But, given the shutdown of non-essential businesses in most markets from mid-March, SMB results came in line, but faced increased headwinds as we exited the quarter.

Even in this significantly disrupted market, we saw further signs that each component of our strategy, from capitalizing on technology inflections, to expanding into adjacent markets, to building recurring revenue, helped to propel NETGEAR to advanced share gain, revenue growth, and double-digit operating margin in the long run.

Currently, our early involvement in WiFi 6 product leadership is paying dividend; it propelled the North America retail networking market back to growth in January and February, and a growth significantly accelerated in March.

While we can't be confident how long the home WiFi demand search will last, we're still seeing double-digit growth at this point in Q2. WiFi 6 is about 25% of our North America router and Mesh system and market demand in Q1. With more new products and supply, we believe this proportion will increase in Q2 and beyond.

We now have three different WiFi 6 Mesh products in the market, with two-pack pricings at $229, $449, and $699 to suit homes of different sizes. Our two major competitors in the market have yet to introduce a single competitive product.

We now have six models of WiFi 6 routers, with pricing, ranging from $149 to $599, spanning different performance levels. We're excited to ship our first batch of WiFi 6 5G mobile hotspots into the EMEA market towards the end of the quarter.

We expect this category to ramp up in the quarters to come and be a meaningful component to our service provider revenue in the rest of the year. We anticipate our service provider revenue will grow 50% sequentially in Q2, due to increased mobile hotspot sales worldwide.

Mobile hotspots are now being used by people working from home when they are not able to get high-speed wired Internet access. Hotspots are also now extensively used by first responders during this pandemic.

In addition, the NETGEAR team is doing what they can to help the community by donating hundreds of mobile hotspots to various San Francisco Bay Area school districts for students' use. We are thankful for our partner, AT&T, for providing free data plans to those in need to help their school from home efforts.

Furthermore, we have record progress on driving out recurring revenue stream. We began the quarter with 177,000 paid subscribers, and added a record 51,000 to end with 228,000 paid subscribers. We are off to a great start towards attaining our goal of more than doubling our subscriber base during 2020.

In the SMB market, we continue to excel in Power over Ethernet switching, and saw strong growth in unmanaged and Pro AV switches. Clearly, when more home offices are being set up by engineers, designers, architects, and other professionals, the demand for our unmanaged switches increases.

In February, at the Integrated Systems Europe Conference and events similar to CES but focused on audio visual, we demonstrated how we could accelerate the AV over IP transition, while making installations easier for the integrator. Furthermore, our integrated certified solutions can easily expand from small to very large installations.

Our pre-configured switches enable AV over IP networks to be plug-and-play, a welcome feature to the AV integrators around the world. In March, we announced that Crestron certified our Series M4300. switches for out-of-box deployment of AV over IP by Crestron worldwide.

A dominant player in the growing transition to AV over IP, Crestron provides a rigorous certification program to ensure AV components work together seamlessly and deliver high reliability. This is another data point validating our ability to accelerate the Pro AV market.

While we are currently seeing a 50% decline in our SMB product demand in the traditional IT world as a result of the fallout from the pandemic, we are encouraged by the uptick in work from home Ethernet setups and Pro AV switches, which together mitigate the SMB decline by half.

Overall, we expect our SMB revenue to decline 25% sequentially, if IT demand does not revive in Q2. The COVID-19 pandemic has brought about a considerable shift in our business in short order. We are seeing a surge in demand that bolsters the outlook for connected home in both the service provider and retail channels, countered by softness in SMB.

The resulting mixed shift, coupled with higher freight costs as we quickly respond to the increased demand on the CHP side, will likely constrain operating margins to Q1 levels in the current quarter.

Despite the airfreight rate increasing by 2.5 times recently, we are committed to helping our customers to upgrade their home WiFi performance by expediting availability of our products across the whole lineup, from WiFi 5 to WiFi 6, from routers to expanders, from cable to 4G, 5G.

We believe by serving our customers well, they will reward us in the future by upgrading their home WiFi to WiFi 6 with us and be more likely to subscribe to our value-added services. We cannot predict how long the surge in demand for WiFi products will last for the work from home upgrades or what the demand will look like after it subsides.

However, we remain hopeful that a higher bar will have been set. In the next few quarters, we have finite volumes we can deliver to the channels worldwide, as we are limited by supply capacity that is constrained by material availability, factory uptime, and freight capacity.

With the shift in demand from retail to online, we expect channel inventory to decline, as channel partners move to more efficient operating structures, which, while healthy for the long term, would further constraint our revenue growth in Q2.

While we cannot predict how long the business shut down will depress the IT demand of our SMB products in Q2, and possibly beyond, we are confident our leadership in WiFi 6, 5G, Power over Ethernet, and Pro AV will position us to be the biggest benefactor after the pandemic subsides, with so many customers experiencing the superior performance and availability of our products worldwide during these difficult times.

And finally, on behalf of the entire NETGEAR team, I would like to show our deepest gratitude to all the medical, first responder, and the essential business teams on the frontlines fighting for us and keeping us safe. And with that, I'll open the call up for Q&A..

[Operator Instructions] The first question comes from the line of Adam Tindle from Raymond James..

Okay, thanks. Good afternoon. I just wanted to maybe start on the CHP segment. Understand not providing guidance, but it does seem like you highlighted a lot of positives in the segment moving forward. Just a two-parter, first on channel inventory, and second on sell through.

In channel inventory, your biggest market in North America, retail, is showing essentially the lowest level in the past decade. I think it's four weeks below that normal 10-week to 12-week range.

I guess, maybe first, how are you thinking about channel inventory right now? Is there a certain number of weeks that you're targeting to get this up to? Is that 10 to 12 range permanently changed? Just comments on channel inventory.

And then secondly, it also seems like demand indicators like search trends remain very favorable, and sell through should be very strong in Q2.

What do current sell-through indicators look like for you, and how have they trended? Do you think you're past the peak?.

Well, first, on the channel inventory side, we do believe that this pandemic and the shelter in place, work from home scenario have altered the channel landscape permanently. We're seeing more and more of our channel partners moving to online, which requires less inventory.

And also, some physical stores are successfully transitioning to online as well as online order, curbside pickup, which enable them to manage their inventory significantly in a more efficient manner. So we do believe that overall, the channel inventory for retail is going to trend downwards.

And in Q2 in particular, related to the second product -- good question. As we just mentioned, up to now, which is the third week -- in the fourth week of the quarter, we're still seeing the demand side, the sell-through side, on the consumer WiFi home network around the world, double digits.

And that helps to really continue to work the channel inventory down. And as we discussed, we have a limit on how much volume we could produce that we could move them around in Q2. We believe that our EAV [ph], the search in this demand and market demand to sell through continued to last all the way until the end of the quarter.

We still would be depleting channel inventory because we just cannot immediately produce that many and shipped down to the end locations that we want. So we do believe that the retail channel inventory will continue to trend down. But I do believe that it will come back up once the stores are opened again, but it not be to the prior level.

So to what level are they going to come back up in Q3 depends on a few factors. Number one is easy with a mix of online versus in-store sales of most of our channel partners. Secondly is how much we can we can produce in Q3, and how the freight, the logistics of the world is opening up. And you probably have heard that.

I mean, less than 10% of the planes that used to fly are flying. So that really doesn't help and so are the sales; so I think there are multiple factors that kind of basically foster the depletion of channel inventory for the next three quarters..

Okay, that's helpful. Thanks, Patrick. And maybe this is a follow up, just hoping that you can maybe update some of the variables to operating margin improvement throughout the year. I think you had about 240 basis points from the fading of tariffs that were supposed to happen entirely during the first half of the year.

It was 140 basis points or so from promotional activity that was supposed to improve. And it sounds like the ASPs look pretty strong in the CHP segment. But we're now guiding to sizable declines year-over-year in the Q2 timeframe. I'd imagine that the delta is probably the SMB segment.

But maybe just update the walk in terms of the operating margin, so that we can -- when we decide when SMB is going to improve, know how much that upswing is going to be. Thanks..

I think Patrick touched on a little bit of this. Certainly, the headwinds that we're seeing within the SMB business, we know that's a very profitable business for us. You can look at the differential and contribution margins between the two businesses, and it certainly highlights that.

So with the headwinds there, and even though we're seeing upside on the CHP side, the mix is having a significant impact on our overall gross margin, at least as far as we can see today. In terms of the year-over-year gross margin improvement, we did deliver I think about 130 basis points improvements.

We'd aimed to do that with the tariffs relenting, based on our manufacturing location move. It would have been stronger, but certainly, as we exited the quarter with the surge in demand and our need to airfreight, we were seeing airfreight rates that were about 2.5X what we would normally see, given what Patrick said in terms of airspace capacity.

So I think those are the bigger variables as we move forward. And certainly, the sooner things can return to something remotely close to what we were used to in terms of normal, and businesses come back, and we can build that SMB business back up, we'll start to see the margin expansion that we were aiming to deliver for the year..

Okay, thank you..

The next question comes from the line of Hamed Khorsand with BWS Financial..

So first off, I just want to ask, how are you managing your receivables and the cash receipts? Are you on top of that as customers are extending payment terms right now?.

Yes, we've always been very vigilant in monitoring the credit worthiness of our customers. We do businesses globally with very well established distribution partners, so we continuously monitor news and information, and in right-sized credit, the capacity.

But historically speaking, we have not faced any material write-offs of any sorts, and we've dealt with these kind of downturns, starting in 2001, and then again in 2008. So we think we're well prepared to monitor the situation..

Okay, and then as far as just the product categories go, are there any specific products that are seeing the growth, or is it across the spectrum?.

Yes, as we just discussed, it's pretty much across the spectrum because it has become apparent to us upgrading WiFi performance at home is across the board in all strata of the economic spectrum. So for those with significant financial needs, clearly they're chasing after WiFi 6, Tri-Band, 12-Stream, Orbi, paying up to $999 for it. We know.

But you also have families that, with limited financials headroom, they would just opt for a simple upgrade, or for maybe a $20 extender so that they expand the WiFi signals through the bedrooms. So it's across the spectrum. It's equal..

Okay. And then, lastly is you were talking about not having enough product to meet demand.

Is that purely from an airfreight standpoint? Or are you still facing component charges?.

Both. Number one, that even if we're willing to pay for the airfreight, we just can't find a plane to fly sometimes. And secondly, the components availability is unpredictable because of the pandemic.

For example, Mexico is just on the rising curve of the pandemic situation, and they're putting in shelter in place, they shuttered some factories, in which some of the RF components is manufactured. It just happened in the last few weeks.

And then a few weeks back in Malaysia, which was doing the final packaging of some chips, memory chips, they also had this pandemic hit, and they shut down the factories that interrupted supply for a few weeks. So we're constantly fighting these supply challenges.

Now, the good thing is our main final assembly factory in Vietnam, Indonesia, and in Thailand has been humming along 100%, and then the factories that supply the components from China are back to 100%.

So now, it's about the pandemic starting to hit all the other different places that we are still trying to be navigating around, and we have no way to predict what's going to happen next..

Are you able to track as far as the customer turnover is concerned with routers, as far as the refresh rate is concerned? Are you able to do that at all?.

Not until they sign up to what we call the single sign-on registration service and download our apps. Today, we have increased that to about 25% of our install base. We believe we have 25 million install base, and about 5.5 million of them have downloaded the apps. Other than that, we have very little exposure of that data for the rest..

Okay. All right, thank you..

Sure..

The next question comes from the line of Paul Silverstein with Cowen..

Thanks, guys.

Before I ask my real questions, Patrick, can you tell us what were the WiFi 6 units shipments during Q1, and what are the total unit shipments to date? Because I recognize Q1's going to be the big chunk of that, but what were the numbers?.

Traditionally, we do not break out by the specific shipment. But on the whole, the share of WiFi 6 sells out demand of our products in the end market has grown from 15% towards the later part of last year to 25% in Q1 for our routers and mesh systems. So we're very encouraged by that trend..

Okay, now for the questions. I've got a handful, so my apologies. But first thinking longer term, if we break down the business first with SMB, obviously small businesses throughout the world have been eviscerated. The impact in COVID's been particularly severe.

When we look coming out of the worst of the crisis, that particular segment of the enterprise market I would think is unlikely to rebound quickly. It's certainly got to get better from current levels, but it's going to be hurting for some time to come, and presumably with limited resources in terms of availability to spend on any type of IT.

What are your thoughts as you look -- once businesses start resuming, you look beyond the worst part of the crisis, what are you expecting in terms of SMB demand from a long-term perspective? And then with respect to your consumer home business, as you pointed out, your primary competitors weren't in the market today.

But if we imagine a scenario in which they did have products in the market, I assume it goes without saying that you dominate shelf space in bricks and mortar, and by definition, your market share in bricks and mortar is dramatic.

On the other hand and online, if your competitors in WiFi 6 products do shift, your market share, I would think, still strong, but be relatively far less dominant than it is in bricks and mortar.

So the question is there, when do you expect to see product from your primary competitors? Do you have any visibility for that? If in fact, bricks and mortars stay closed or people don't want to return to shop in the bricks and mortar even when it reopens, would that change your competitive products room on the market? Would that meaningfully impact your revenue for the worse through those competitive dynamics? And then I've got a another set of questions..

So do you have more questions, or that's it?.

I'll wait for others [ph]. I'll let you respond to those, and then I've got a couple more..

Okay. So for the first half of your question about the SMB business post-pandemic, I mean, clearly, there is no way to estimate what that's going to look like. Typically, we saw in the small businesses that our major businesses customers are on the IT side, primarily manufacturing, and school, and local government.

Those are our typical customers, as well as engineering departments of startups or major companies. So our experience is that when the activities resume, they should come back, all right? Now, it may not be 100% the previous level. It will still be pretty close. Schools have to be run.

Engineering departments have to continue to develop products, and government still has to be run. Manufacturing is going to resume. So that's that, and that's why I'm mentioned, on the other hand, we are also benefiting from two new trends that is completely new.

I mean, one, we've developed it, which is the Pro AV trend, which is completely adjacent market, which is completely incremental. Because the world is moving more and more to digital video, and the digital video is getting more and more high-res, and we [Technical Difficulty] from 1080K to 4K and from 4K to 8K. All that requires AV to be done over IT.

And now, as people tasted work from home, so even software developers, or UX designers, or architects kind of figure out, you know what, I don't need to go to the office and all the time, and I could actually work from home. And for most of them, when they work from home, they use very sophisticated PCs, such as the Mac Pro, which is multi-gig.

And so, they set up actually Ethernet networks at home to outfit their home offices. So we do believe that, as is indicated right now, the Pro AV and the home office setup is mitigating part of the IT demand decline. And I think when the pandemic is over, the IT demand will resume for our typical customers.

And hopefully, they can return to the prior level. If not, and it will take longer time to return to a prior level, we believe that our Pro AV, which is completely new and incremental, and the home office, which is not going to go away, is going to more than compensate for that scenario. So that's the first part.

The second part, as you mentioned, as the world moves to online, you're right. I mean, we clearly dominate the physical store shelf space, and that's why we have significant higher share in the physical stores. But to everybody's surprise, actually, the move to online business over the last two, three months or not the one that you all think about.

It's actually moving online to all the physical stores because the one that you're thinking about is having significant logistical difficulty in stocking and delivering. So a lot of the online business is actually going to our traditional partners such as Costco, Walmart, Best Buy, and where we still dominate from a market share perspective.

That's from a U.S. perspective. From an international perspective, we have actually over the last four or five years moved aggressively online. And as a matter of fact, internationally, we have the reverse.

We actually have very little market share in retail stores because we just cannot afford the margin requirement of them and the stock levels that they demand. So we had moved online 100% internationally. And now, with the shift online, it's definitely a benefit of it, because the only way for us is to gain share.

So I think this move to online is actually beneficial to us. We strengthen our hands. And also, as you mentioned, online is all about choice.

If you go even to the traditional online channel of our choice, with our leadership in WiFi 6, while we have three different performance level of WiFi 6 nationally, six different performance levels of WiFi 6 routers, and just starting a WiFi 6 mobile hotspot, plus the WiFi 6 expanders.

And there'll be more to come like adapters, like cable gateways and all that. I think we'll continue to advance our share online versus our competitors with typically a single product offering. So that's how I look at it..

I appreciate that response. One last set of questions, if I may. With respect to the 5G hotspot business, that sounds like a new, exciting opportunity.

Can you provide some color? How big is the business at present? What do you expect to do to extend your visibility in that business this year? What did the ASPs look like to the service providers? What's the gross margin associated with it? Any other insight you'd care to provide? That'd be appreciated..

Well, clearly, 5G is the way to go. So the operators from around the world is quickly moving their subscriber base to 5G for a variety of reasons. I think the most important reason is 5G is a significantly more efficient way of delivering data over airwaves.

Secondly, it's significantly cheaper to maintain and to upgrade because 5G is more software-oriented than hardware-oriented from the base station from the data routing perspective; so there is an inherent incentive for the operators to move over to 5G. And then for the end user, the advantage of 5G clearly is about latency and about speed.

So the world is moving that way. There's no turning back. And from a data speed perspective, definitely, initially 5G will be significantly more expensive from an ASP standpoint. However, over time, I think it would decline back into the 4G well so that it will become super popular, available to everybody.

To give you an idea right now, if you go online to amazon.com or our own store, you will see that the highest performing a 4G mobile hotspot is selling at about $329. But the new 5G WiFi 6 mobile hotspot is probably double that. So that's the ASPs. But over time, the two will converge.

And our strategy, of course, is continue to sell whatever the operators want.

As I just mentioned during this work from home time, there are different people with different financial means, and there is basic demand for both the latest, greatest and most expensive, but it's also -- there is quite a good demand for the good value, older technology items. And we'll continue to capitalize on this trend.

On the mobile hotspots perspective, nobody has a broad portfolio that we do. And that's why we talk about that our second quarter, we'll be seeing a 50% sequential growth in terms of our service provider revenue, which is now pretty much dominated by mobile hotspots and with a significant boost of the 5G shift.

And we are pretty confident that this sequential growth will continue in the third quarter as well..

Fantastic.

What does the gross margin look like for that business relative to corporate average?.

We said previously in many occasions the contribution margin of the service provider business is pretty similar to the other channel business of the CHP segment..

Okay. I appreciate it. I'll pass it on. Thank you..

Sure..

Next question comes from the line of Woo Jin Ho with Bloomberg Intelligence..

Yes, hi. It's Woo Jin and not Wuhan. Hey, Bryan.

Could you give us that wireless node number again, please, if you don't mind?.

Wireless nodes. I think it was about 2.4 million..

So, Patrick, I mean, given the strength that you had in 1Q, and given what you said about what you're thinking about the demand or the pent-up demand for wireless products, is there any concern that you may have frontloaded the year in terms of your wireless sales, and may have had a weakened second half as a result, if we do have a normalized second half?.

I mean, it's very difficult to predict. The encouraging things is that the demand far we see has been across the board. That means there are people buying the latest technology, upgrading to WiFi 6. But there are also a lot of people buying the older technology or the 11 AC low-end expander and adapter as well.

So I think people are doing whatever they could afford to upgrade their WiFi performance at home, which leaves us a really bigger space for us to upgrade them to WiFi 6 later on.

And now, with people getting a taste of what it is like to be at home, doing your movie watching, doing your gaming, doing your work, getting your home school and all that, I think people have realized that, you know what, WiFi should not be an afterthought. WiFi should be as important as your cell phone.

So people are upgrading cell phones every year or every other year whenever there is a new iPhone out there. And for them, they tend to upgrade their WiFi three years, four years, sometimes even five years. Now, I hope our WiFi upgrade frequency, we're going to be able to match their cell phones very quickly. And that's how I look at it..

Okay. And then in terms of a service provider, I don't know how much visibility you have on the service provider side going into the second half. You had said in prior calls that you expect to be back to the $36 million-ish as it relates to the 5G rollout.

Are we still at the $36 million-ish per quarter range there?.

Yes. And as I mentioned, I mean, we finished the first quarter with roughly about $26 million of service provider revenue, which we expect a 50% sequential growth in Q2. And then we believe that the second half will be a double-digit growth over the first half..

Got it. Okay. Got it. And then let's end this on a on a high note. Subscriber numbers were very good in terms of your application.

So could you talk a little bit more about it, please? How are you able to convert application users to paid subs?.

We're still learning. We're still doing trial and error. There are a few ways to do it. I mean, the most obvious way everybody's doing it, we're doing it also, is giving you a free trial. So we try to give everybody a free trial for 30 days.

And during the free trials, we'll give you all the goodies, highlight all the advantages, and make sure that after the 30 days or even before that, you would turn into a paid subscriber. So of course, we'll dangle promotions, coupons and all that to entice them if they sign up for a longer period. So that's the standard classes that we do.

And the second thing we find out also is that, at the point of sales, that's the easiest way to catch them to buy the subscription services. So for whatever products they buy, on our own website, we'll entice them to buy a subscription service at the same time because they've already given us a credit card for buying all the hardware.

So that's pretty successful too. And then on the other hand, at the point of sales, for example, in Costco, we have a skew that is including a year of subscription. So people seem to be pretty happy with that too. They're buying that too. So I think those are the two avenues that we are trying.

But we're still trying many other ways of trying to entice people. So basically, for now, is one, get as many people onto free trial as possible. Two is trying to get those hardware purchases at the point of purchase to buy into the subscription. We're still looking at other ways of avenues of getting subscribers on board..

Thank you..

Sure..

And I will now turn the call back over to Patrick Lo for closing remarks..

Okay, thank you, everybody, for today and joining me. And once again, I would like to thank our employees and our partners for the hard work and flexibility during this time. We have delivered a strong start at 2020, and we remain confident that the components of our strategy will be strong contributors to our success this year and beyond.

And I look forward to updating more on the progress of our strategy with you in the next quarter and beyond. Talk to you soon. Bye-bye..

This concludes today's call. You may now disconnect..