Ladies and gentlemen, thank you for standing by. [Operator Instructions] I would now like to turn the conference over to Erik Bylin. Please go ahead, sir..

Thank you, Rachel. Good afternoon and welcome to NETGEAR’s second quarter of 2021 financial 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, and finish with third quarter of 2021 guidance provided by Bryan. We will then have time for any questions.

If you have 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-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.

In addition, 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..

Thank you, Erik and thank you everyone for joining today’s call. Net revenue for the quarter ended June 27, 2021 was $308.8 million, up 10.3% year-over-year, driven primarily by strong SMB growth and growth in the retail portion of CHP, with offset coming from the expected decline in service provider revenue relative to last year.

While our team managed to deliver double-digit year-over-year growth with net revenue within our guidance range, our top line results came in below our expectations as worldwide supply chain constraints limited what could have been an even better performance, in particular on the SMB side of the business.

As we continue to navigate through a dynamic environment, we remain confident in our long-term strategy of providing premium WiFi products to drive the growth of the consumer networking market and our paid subscriber base.

Even with employees returning to the office, the need for pervasive, high-speed wireless connectivity in the home remains strong, as hybrid and remote work models become the norm. And we now see the U.S. consumer networking market settling in at about 20% higher than where it was in 2019.

With our improved supply position of CHP products in the channel entering the quarter and performance led by our premium mesh portfolio, we added another 3 points to our U.S. consumer WiFi market share in the quarter, a clear validation of our strategy.

This translated into mid single-digit growth year-over-year in the retail portion of the CHP business. While our service provider business performed to our expectation, declining from a year ago when we experienced opportunistic demand brought about by the pandemic.

Meanwhile, our SMB business is riding the wave of businesses reopening worldwide, growing 58% year-over-year and bearing the fruit of investments made over the last couple of years in areas such as ProAV and our leadership in moving SMB wireless products to WiFi 6, despite being held in check by the aforementioned supply constraints.

While we have to navigate some top line challenges for the rest of 2021, we do expect to achieve the full year non-GAAP operating margin guidance that we provided at last year’s Analyst Day. In the second quarter, we generated non-GAAP operating income of $26.5 million.

This translated into non-GAAP operating margin of 8.6%, slightly below our guidance range, which was an improvement of 110 basis points over the second quarter of 2020.

Component shortages, elongated delivery times and unforeseen factory closures due to COVID-19, all of which we have navigated successfully at varying times over the past year, came together in a way that we could not overcome, thus hindering our ability to drive our SMB top line higher, and correspondingly, improve our margin performance.

We delivered year-over-year revenue growth in all geographies with meaningful SMB growth globally. For the second quarter of 2021, net revenue for the Americas was $212.6 million, which is up 5.1% year-over-year and down 3% on a sequential basis. EMEA net revenue was $61.8 million, which is up 27.7% year-over-year and up 1.1% quarter-over-quarter.

Our APAC net revenue was $34.4 million, which is up 16.8% from the prior year comparable quarter and down 8.7% sequentially. For the second quarter of 2021, we shipped a total of approximately 3.9 million units, including 2.6 million nodes of wireless products.

Shipments of all wired and wireless routers and gateways combined were about 1.4 million units for the second quarter of 2021. The net revenue split between home and business products was about 74% and 26% 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 32% of our second quarter shipments, while products introduced in the last 12 months contributed about 27% of our second 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 second quarter of 2021 was 30.4%, which is up 80 basis points as compared to 29.6% in the prior year comparable quarter and down 480 basis points compared to 35.2% in the first quarter of 2021, primarily a result of our planned increased promotional activity.

Total Q2 non-GAAP operating expenses came in at $67.4 million, which is up 8.7% year-over-year and down 3.2% sequentially. Our headcount was 769 as of the end of the quarter, down from 775 in Q1. We continue to manage our headcount, but we will continue to add resources and invest in areas that we believe will deliver future growth.

Our non-GAAP R&D expense for the second quarter was 6.9% of net revenue as compared to 6.9% of net revenue in the prior year comparable period and 7.1% of net revenue in the first quarter of 2021. To continue our technology and subscription service leadership, we are committed to continued investment in R&D.

Our non-GAAP tax rate was 23.4% in the second quarter of 2021. Looking at the bottom line for Q2, we reported non-GAAP net income of $20.8 million and non-GAAP diluted EPS of $0.66, each more than 20% higher than the prior year comparable period.

Turning to the balance sheet, we ended the second quarter of 2021 with $335.3 million in cash and short-term investments, down $35.3 million from the prior quarter. We have made substantial progress replenishing our inventory on the CHP side of the business in recent quarters, but expect supply to remain constrained on SMB products.

During the quarter, $5.2 million of cash was used by operations, which brings our total cash provided from operations over the trailing 12 months to $97.5 million. We used $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 $11.2 million.

In Q2, we spent $25 million to repurchase approximately 654,000 shares of NETGEAR common stock at an average price of $38.21 per share. Since the start of our repurchase activity in Q4 2013, we have spent $577.5 million to repurchase 16.3 million shares.

Our fully diluted share count was approximately 31.5 million shares as of the end of the second quarter. With a meaningful portion of our targeted inventory position established, we plan to continue to opportunistically repurchase shares in the future quarters.

Now, turning to the second quarter results for the product segment, the Connected Home segment, which includes the industry leading Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenue of $229.9 million during the quarter, which is flat on a year-over-year basis and down 12.6% sequentially.

The year-over-year performance was driven by growth in the retail business being offset by service provider returning to anticipated levels. With our premium mesh segment leading the way, our leadership position in the U.S. consumer WiFi market improved again, up 3 percentage points to 46%.

With the progress we have made in replenishing CHP inventory, we fully expect we can grow our share further in Q3. The SMB segment executed well against supply-constrained environment and generated net revenue of $78.9 million for the second quarter of 2021, which is up 57.8% on a year-over-year basis and up 2.5% sequentially.

This is the highest quarterly revenue level for our SMB business in 2 years. The growth was driven primarily by exceptionally strong demand buoyed by new business formations, businesses reopening and demand for flexible working environments. We continue to see our SMB wireless solutions and low port count switches performing very well.

We also continue to gain traction in our ProAV business, which experienced meaningful year-over-year growth, as we see activities resuming across venues such as those focused on sports and entertainment. Our market share in switches sold through the U.S. retail channel grew 5 percentage points to 61% in Q2.

I will now turn the call over to Patrick for his commentary, after which I will provide guidance for the third quarter of 2021..

Thank you, Bryan. As we entered the second half of 2021, albeit with the spectre of the Delta variant now raising its head, we are seeing the signs of a return to normal, as portions of the world begin to reopen.

Businesses, small and large, are opening their doors to the public once again and new businesses are being created at a higher pace than before the pandemic. Both offices and homes continue their transition to flexible working environments, embracing a new hybrid work-from-everywhere model. They carry some multitude of benefits.

Offices are reopening to accommodate varying levels of capacity, while employees continue to outfit their homes to function as workspaces for the days they work from home in the new normal.

This means that for employees joining a videoconference call from home, their bandwidth must be able to handle the capacity at least as well as if they were in the office.

This home office requirement, together with an increase in a myriad of activities being performed virtually, cements the need for higher speed, more pervasive mesh networks, as these are the solutions capable of offering greater bandwidth capacity, faster Internet speed and wider coverage.

This continues to drive unprecedented bandwidth demands in the home. And to accommodate this, we are the only company focused on delivering premium WiFi solutions to the market, defined by WiFi 6 mesh with tri-band architecture.

NETGEAR’s premium mesh products are the cornerstone of this rapidly growing segment of the market and we continue to draw more consumers into this segment, as it grew from 30% of the mesh market in Q1 to 34% in Q2 compared to only 8% a year ago. Clearly, this is where the market is headed.

So, our strategy of expanding the market with premium tri-band WiFi, together with strong attach of our value-added subscription services is sound.

Additionally, our Nighthawk RAXE500 tri-band WiFi 6E router that was introduced last quarter has won a claim from tech experts at Gizmodo, Tom’s Guide, Android Central, Digital Trends, [indiscernible], who have referred to the RAXE500 as the fastest WiFi 6E router, best performing WiFi 6E router and the fastest router on the planet.

We are honored by this outstanding reception and believe this is incredible validation of the superior design and best-in-class experience offered by this leading-edge product. This $599 router is part of a premium WiFi 6 router segment, which provides the technical features that Nighthawk followers crave.

These high-end offerings will fuel the continued expansion of our recurring revenue business as we are more likely to see those purchasing premium WiFi products also buying services accompanying them.

I am pleased to share that our Smart Parental Controls service that Gartner accolades at CES earlier this year is now available on select Nighthawk WiFi routers and with availability on WiFi 6E Orbi mesh WiFi systems coming this month.

This rollout enables us to make continued progress in paid subscriber acquisition as we drive towards our goal of 650,000 subscribers by year-end. We reached a significant milestone in this journey in Q2 as we surpassed 0.5 million subscribers, ending the second quarter with 514,000 paid subscribers.

We remain excited about the long-term profitability impact that this will have on our business. We also plan to bring the features of our gaming router lineup to the market through a service offering later this year for the online game-loving customers of a premium WiFi 6 driving Orbi systems.

Turning to an update on our SMB business, demand is surging and has surpassed pre-pandemic levels in our more traditional channels as businesses reopen and new business start at the fastest pace in recent years.

Again, this is validating our strategy of providing premium business WiFi solutions for home and small offices as the hybrid working model is becoming the norm. Also, our focus on ProAV, meaning audio video over IP is paying dividends as the AV industry is reopening and accelerating the transition from analog to digital AV over IP.

We are limited by what we can supply, though, as component shortages and COVID-induced limitations in certain factories compounded by transportation delays have all conspired to constrain revenue growth.

Despite these challenges, the team executed well to deliver strong 58% year-over-year growth, driven by acceleration in our WiFi 6 access points, and our low port count switches for small and home offices and continued progress in ProAV. In Q2, we further expanded our SMB WiFi 6 product portfolio with several new additions.

First, we released both dual-band and tri-band Insight-managed WiFi 6 multi-gig access points, the WAX620 and WAX630, respectively, optimized for businesses and home offices that have a growing need to offer faster, more reliable Internet while supporting a multitude of devices over greater coverage areas and secured their VLANs.

These are available now for just $229 and $329, respectively, attractive price points for the industry’s highest-performing dual- and tri-band WiFi 6 access points. We also announced the WiFi 6 Mini Dual-band mesh system model, SXK30 another WiFi 6 addition to our Orbi Pro ecosystem.

This latest mesh system is available now for $299 and is well suited for users who want to upgrade to the latest WiFi technology with ease. We continue to see our investments in ProAV paying dividends with growth continuing to accelerate.

Our efforts to certify our associated products to the most important audio and video standards in the industry, including SDVoE, HDBaseT, AVB, Dante, [indiscernible] and MDI continues to pave the way for the transition that is underway to upgrade the way audio and video are played.

Accordingly, we’re now doing business with over half of the top 50 professional AV integrators in North America. Before I hand it back to Bryan, I would also like to take a moment to welcome David Henry to the NETGEAR Board of Directors and congratulate him on his promotion to President and General Manager of Connected Home Products and Services.

David’s impressive tenure at NETGEAR has proven him to be extraordinary strategist and leader. His continuous focus on driving service revenue will be amplified by closer collaboration with the full Board. I would also like to thank Gregory Rossmann, who will transition off our Board in December after nearly 20 years of service on the Board.

He has been an instrumental part of our leadership for a very long time, and we wish him the best. And with that, I’ll turn it over to Bryan Murray to comment on our opportunities and obstacles in the coming quarter..

Thank you, Patrick. We expect SMB to continue to be limited by supply in the third quarter. In hindsight, the first half of 2021 saw the U.S. consumer networking market grow 40% over the same period in 2019. While a very strong showing, this turned out to be 10% lower expectations.

As such, we plan to proactively work with our channel partners to optimize their inventory levels in the third quarter. Looking ahead to the second half of 2021, we see market growth moderating further to approximately 20% above second half of 2019 levels.

Accordingly, our net revenue for the third quarter is expected to be in the range of $285 million to $300 million. Primarily as a result of this lost leverage from the top line, GAAP operating margin is expected to be in the range of 2.1% to 3.1%. And non-GAAP operating margin is expected to be in the range of 5% to 6%.

Our GAAP tax rate is expected to be approximately 27.5%, and our non-GAAP tax rate is expected to be 24.5% for the third quarter of 2021.

While we now believe our second half revenue performance will be roughly flat relative to the first half of the year, we do believe our full year non-GAAP operating margin guidance of 9% to 10% for the full year provided at last year’s Analyst Day remains intact.

While we are confident in our ability to provide guidance at this time, we do so with a caveat, the considerable uncertainty remains in the market due to the COVID-19 pandemic.

And should unforeseen events occur and particular challenges related to closure of our manufacturing partners’ operations or transportation delays into any of our regional distribution centers, our actual results could differ from the foregoing guidance. We would now like to answer any questions from the audience..

Thank you. [Operator Instructions] Our first question comes from the line of Adam Tindle from Raymond James. Your line is open..

Good afternoon. I just want to start, Patrick, on the inventory clear out in CHP in the coming quarter.

Could you maybe just give us some more color on what’s being cleared out? Because I think previously, you said you were focused on WiFi 6, while others were focused on WiFi 5 and that’s why you were losing share, but that would come around as the market shifts to WiFi 6. So I presume CHP inventory is WiFi 6 heavy.

And why would you need to optimize that versus just waiting for it to sell through? Is there any ASP degradation in WiFi 6 or just a little bit more color on what’s going on there? Thanks..

Yes. So every channel partner has their own financial metrics and open-to-buy is based on their financial metrics. Even on WiFi 6, we have new products coming online very soon in the second half, involving some WiFi 6E products and involving some more new cable products.

So we need to make way for these new products that come into the channel so that we could continue to improve on our margin profile. As you probably know, that – I mean component cost has been going up. So this continuous renewal of product lineup is very important for us to improve on our margin profile.

So that’s why we prepare for these new products coming into the channel. Especially for the very important Christmas season, we intend to adjust the channel inventory of our partners so they will have a better open-to-buy for the Christmas season for these new products..

Okay. And I guess maybe as a follow-up, if Bryan wants to take it. You talked about expecting to achieve the Analyst Day operating margin for the fiscal year, and that’s going to imply a big uptick in Q4.

What gives you the confidence to go out that far right now, given what you’re unexpectedly experiencing here in Q3? And maybe you can unpack the key drivers to that uptick. I’d imagine this channel inventory optimization is a big part of that. So if you could help us quantify that? That would be helpful. Thanks..

Yes. You got it right there. I mean at this point, we said supply is still going to be limited for SMB. So we’re expecting very modest uptick from what you saw in Q2. And we still reiterate that we will deliver the full $140 million of service provider revenue for the full year. So it’s down to CHP.

And as Patrick just kind of walked through the logic of why the channel needs to be optimized from an inventory standpoint in Q3, we think that’s a Q3 phenomenon. And as I said earlier, it’s going to certainly put some top line leverage pressure on the Q3 result.

With that being corrected in the Q3 period, moving on to Q4, we expect that we will regain some of that top line leverage. So that’s why we believe that we will hit that full year 9% to 10% operating margin guidance..

Okay. And just to clarify on capital allocation, I mean, it looks like you’re clearing out inventory that typically generates cash. You already have over $10 a share in cash. I’d imagine there is going to be pretty significant downside volatility in the stock, given the forecast here.

You had quarters in the past where you did like $50 million of buyback. Would you consider that sort of super-size type of buyback level to just defend the stock down here? Thanks..

Well, we’re going to continue to be opportunistic buyers of our stock, and we will factor in a number of things in. I think from this point for the balance of this year, we will probably be free cash flow neutral, given the timing of revenue and the implied move from Q3 to Q4 and some of our seasonal dating programs that occur in that fourth quarter.

So I think we will be free cash flow neutral, more or less be about where we’re at today. But yes, we’re going to continue to evaluate all these factors in terms of how we allocate our cash..

Okay, thank you..

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

Hi, thanks for taking the question. It seems like the demand environment on the consumer side has changed a lot in the past quarter.

Can you give us some insight on what you think changes and what gives you the confidence that there wasn’t a lot of demand pull in during kind of the main part of the pandemic?.

Yes. What we saw in the first half, especially in the second quarter when we had practically huge supply of the CHP products into the channel was the real market demand. So in the first half, the market grew about 40% over the pre-pandemic level.

Now as we know, in the first half, there were still quite a few COVID restrictions and people could not travel. So in our planning, we were planning that it would be a 50% growth over 2019 first half. So that is certainly, I mean, because of the vaccine and all that, so a lower than our 50%, it turns out to be 40%.

So the gap becomes extra channel inventory that we need to help our partners to optimize. Now going forward, we see the vaccine in operation has significant good positive effect on the reopening. And originally, we anticipated in the second half of this year the growth will moderate, because we factored into the reopening trade.

We were thinking that in the second half, the market will grow about 35% to 40% over 2019 pre-pandemic level. Now a few weeks into the second half, the market seems to be pointing to roughly about 20% over the pre-pandemic level. Now clearly, we see a lot of people in the developed world, especially in the UK as well as in the U.S. getting vaccinated.

And they are getting on the road to travel and to see their families as well as the occasions. As a result, the demand for the home networking is not as high as what we originally thought at 40% over the pre-pandemic level. So, that’s why we are also adjusting the ongoing CHP in-market sales expectation as well. But then the reverse is true.

The reverse is because of the reopening is in the big wave that we originally thought, so the SMB business side gave us a positive surprise on the streaming, as we are probably surprised by the pace of new business startup opening. I mean we read in many news reports that the business startups in the U.S.

is the fastest in many, many years in the history. And they all set up WiFi as well as networking and they are buying our products and units.

And same thing when the reopening trade starts growing, we are seeing a lot of the sports as well as entertainment venues are revolutionizing their audio video systems with IP technology rather than the old analog technology. So, for example, a lot of the sports events like ones of tens like NFL are now using our ProAV solutions to do umpiring.

So these on the positive upside of SMB, is actually offsetting some of the downside of the growth rate of the CHP. So overall, so we got push and take, and that’s how we see the second half is shaping up..

Great. Thank you.

And just as my follow-up, as you try to optimize your inventory levels in the channel, how do you think about the increasing promotional activity and how that will impact your margins?.

Yes. We are going to continue to be promotional. We talked about this heading into Q2. We see this as an opportunity to continue to gain back share, which is important in terms of keeping that mind share with our channel partners.

But more importantly, for now and in the long run, it’s our means for acquiring subscribers and aggressively pursuing that first major milestone, being end of this year, hitting 650,000 quickly after chasing that 1 million mark and then like follow on to the 2 million long-term target that we put out there..

Great. Thank you..

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

Hi. So first off, I just wanted to ask about inventory, just given that you have increased it so much and the demand has dropped off more than you had thought.

What kind of obligations do you have as far as the components that you were preordering earlier on this year or last year? And does that cause any kind of bloating as to WiFi 6 when the market is going to WiFi 6E?.

Well, we believe that WiFi 6 is going to last for a long time, at least for another 3 years, 4 years. And WiFi 6E is at the very high end of that. So, we don’t believe that our booking of components will be wasted. So, we are pretty confident. So we– that’s why we were the first to get rid of the WiFi 5 products.

And we do believe that WiFi 6 will continue to have a pretty long life from here on out..

Okay.

And then if the market was slowing down so much, why weren’t you more aggressive with promotions in Q2? Are you going to be a little bit more proactive of promotions in Q3 to just clear out some inventory?.

We actually did. I mean, as you probably know, still today, about 75% to 80% of products are sold in physical venues, brick-and-mortar stores. And those promotion plans were planned way ahead. You just could not turn on the dime and make it happen. So, I mean we executed our plan in Q2 as far as promotion is concerned.

And then in Q3, of course, as you heard from Bryan, we continue to aggressively promote in order to acquire more users that will attach services and when they purchase hardware..

Are you seeing any competitive pressures, given the slowdown in demand?.

Well, I mean we don’t see particularly any change of behavior from any of our competitors. As a matter of fact, throughout the pandemic, our competitors have been promoting WiFi 5 products heavily.

And that’s why we have been losing share until just the last two quarters that we will be gaining share and when we have better supply and in a better position to promote as well. So on the reverse, you could argue that our competitors are seeing our behavior change, and we stopped promoting for a while now we are back into the game..

And last question on the SMB side, are you a beneficiary of some of your larger competitors not having stock or is this a clear-cut better product, you are seeing natural transition to the NETGEAR brand in SMB?.

So, there are two big growth areas on the SMB side. One is the work-from-home solutions. So, we are not really directly competing with American vendors because they are more focused on enterprise. So, in this work-from-home environment, the only competitors are Asian vendors.

But when you try to run a business at home or you do your corporate work at home, I think our brand is big. So, that’s why our 5-port, 8-port switches, 16-port switches, our wireless access point, our VLAN-based home-network is far superior than Asian suppliers.

And certainly, it’s unique in the market, because none of the competitors own that kind of solution. So, that’s one area. The other areas for AV basically, is AV over IP. A lot of our major competitors have that pathway. So, we are in a very unique position to capitalize on this industry transition from analog to IP video..

Okay, pretty clear..

[Operator Instructions] Your next question comes from the line of Paul Silverstein of Cowen. Your line is open..

Thanks guys. I appreciate taking the question. To the extent the quarter doesn’t offer strong affinity support for the overall market thesis, let me ask you the obvious question.

If I look at the Dell’Oro market numbers, they are projecting a market $200 million of growth over the 5-year period from 2020 to 2025 for SOHO WiFi coming from $8.0 billion to $8.2 billion. That’s with a 5 million unit decline over the 5-year period. And I recognize it’s still early, and I recognize each iteration of WiFi is different.

And perhaps with the different integrations of WiFi 6, this will be truly different in terms of more expansive duration and in magnitude. But that’s certainly not what a prominent industry analyst seems to believe when you look at Dell’Oro numbers. Now the question, Patrick, you are in the trenches.

Given what you are seeing, why do you believe – I mean, one would think, to the extent this quarter was a disappointment when we are still in the pandemic – I understand things are improving. I understand there has been some return to work.

But one would think that if, in fact, the number is going to be meaningfully better than what Dell’Oro is projecting, you should have seen better growth than what you saw.

What informs your view that the market, putting aside competitive factors, Google, Amazon, etcetera, but that the market is going to be stronger than what it appears to be and, to be clear, over a longer duration?.

Yes. I mean the major difference is that we are really putting a lot of our effort in a segment that is created by us, which is what we call the premium Wi-Fi.

So, if you look at the home network, either going down the traditional consumer route, which is the easy setup and just purely mesh or you go for the more serious business route, which is a switch, a router plus a bunch of access points. So, there are two paths. But in either way, we are providing systems that are $500 plus to even $1,000 plus.

And that is a very unique space. And then we are basically targeting to a very unique segment, which is away from the Google and from the Amazon or the Asian vendors, who are all focusing on the $200 to $300 ordinary market. So, our growth is giving the confidence – our confidence of the growth is basically seeing how that segment is expanding.

And that’s why it is interesting, a year ago, that segment of $500 plus – mesh system was only 8% of the market, but now it’s become 34% of the market. So, that gives us a unique position.

It’s just like on the SMB side, as I mentioned just now, going after a home office with switch and access points, mesh access points is not anything our American competitors do. And going after ProAV is none of our competitors do. So, we are kind of in a different segment that is very unique to our position..

Patrick, let me play devil’s advocate. The mesh market goes from 8% to 34% year-over-year. It goes up 4 percentage points sequentially. To your point and recognizing that there is always the risk of a significant mis-extrapolation from one quarter’s results.

But in a vacuum, logically, why shouldn’t this quarter have been – not that it was bad, but why shouldn’t it have been that much better for you, given your focus on premium, given that while you continue to expand your product set, you already have a rich offering of premium products, given the fact that there is limited competition at the premium end of the market and the percentage of the total market continues to shift towards premium.

Why shouldn’t the numbers have been better if what you say is an accurate view?.

Well, first, let me clarify, that 34% is not of the total market. That 34% represents the premium segment of the total mesh market..

That’s the same..

Yes. So, that’s the same. So 34% of a smaller pie is still less than 34% of a bigger pie. I mean that’s basically what kind of the difference that we are seeing.

And as Bryan mentioned in Q2 actually – and if our supply was not constrained on the SMB side, we would definitely have a much better results, both on the top line and from the bottom line perspective. So, we think that on the CHP side, we definitely are off the mark from the overall big market sizing.

But then within that market, our smaller market size, however, the shift towards the high end, towards the premium end is on track..

Alright. And just to clarify, there is – beat a dead horse here, you had a supply constraint, which restrained – your SMB revenue would have been that much stronger, but for supply constraint. But on the other hand, with respect to the 75% of your revenue from consumer, that wasn’t a supply-constrained issue.

All of the disappointment is simply demand not being as strong as you expected in the quarter and as you look forward to the second half of the year..

That is correct. No. So again, I mean one thing I would like to point out is we have a pretty lofty expectation. 40% growth over 2019 and still a year-on-year growth on a very big first half of 2020 is still respectable, alright. So of course, it’s not as high as we would have liked, it is still a very strong growth of the market.

And it’s all driven by this premium segment, because the premium segment is driving the only [indiscernible] is the growth of the ASP of the average selling price and we see that trend continue..

Okay. Thank you..

Sure..

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

Thank you for joining us today everybody. I am confident that the team will definitely navigate the ongoing market challenges. And then NETGEAR remains well positioned to steadily capture market share, thanks to our strong brand presence and innovative award-winning product lineup.

With flex home-work environments now there on, the total addressable market opportunity of our high-performance, high-speed premium products remain at elevated levels, and we are confident that we will continue to add to our leading market position in both the CHP and the SMB market segments. So, thank you so much. Talk to you. Thanks..

Thank you. This concludes today’s conference call. You may now disconnect..