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Netgear Inc (NASDAQ:NTGR)
Q3 2019 Earnings Call
Oct 24, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. At this time, all participants are on 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.

Eric Bylin -- Investor Relations

Thank you, Angela. Good afternoon and welcome to NETGEAR's Third Quarter of 2019 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 third quarter provided by Bryan followed by details and commentary on the business provided by Patrick and finish with fourth quarter of 2019 guidance provided by Bryan. We'll then have time for questions.

If you have not received a copy of today's press release, please visit NETGEAR's Investor Relations website at investor.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 the 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 non-GAAP to GAAP measures can be found in today's press release on our Investor Relations website.

At this time, I would now like to turn the call over to Mr. Bryan Murray.

Bryan Murray -- Chief Financial Officer

Thank you Eric and thank you everyone for joining today's call. The third quarter presented us with some unexpected challenges. Entering September when we typically see increased demand in Europe after the normal summer recess, we instead saw heightened uncertainty due to Brexit and the possible start of a German recession. Because of this September sales in Europe came in below our expectations.

In addition, APAC was hampered by a sudden economic downturn in the China Hong Kong region due to the escalating trade war and the unstable socio political situation in Hong Kong. However, on the domestic front, the home WiFi market in North America appears to have stabilized with indications that the market was down year-over-year, about the same level we saw in Q2 were 4.5%. At the same time, we continue to execute on our robust pipeline of new products to extend our market leadership in introducing WiFi 6 technologies in Q3.

Entering the quarter we had three products continue WiFi 6 technology. We ended the quarter with seven, including the all important WiFi 6 Orbi Mesh, the world's only WiFi 6 mesh system. Overall, Netgear net revenue for the third quarter ended September 2019 was $265.9 million, which came in at the low end of our guidance range and is down 1.3% on a year-over-year basis and up 15.2% on a sequential basis.

With revenue coming in at the low end of our guidance, our non-GAAP operating margin came in at 7.8%, below our guidance range. However, as a result of one-time beneficial revisions to prior period domestic and international tax liabilities we were able to deliver non-GAAP net income of $0.65 per diluted share in earnings.

Net revenue for the Americas was $178.7 million, which is up 1.6% year-over-year and up 13.7% on a sequential basis. EMEA net revenue was $49.6 million, which is down 6.8% year-over-year and up 15% quarter-over-quarter. Our APAC net revenue was $37.6 million for the third quarter of 2019, which is down 6.7% from the prior-year comparable quarter and up 23% sequentially. For the third quarter of 2019, we shipped a total of approximately 3.8 million units, including 2.7 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 1.6 million units for the third quarter of 2019.

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 68% and 32%, respectively. Products introduced in the last 15 months constituted about 26% of our third quarter shipments, while products introduced in the last 12 months contributed about 23% 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 our earnings release distributed earlier today. The non-GAAP gross margin in the third quarter of 2019 was 29.4%, which is down 590 basis points as compared to 35.3% in the prior-year comparable quarter and up 60 basis points compared to 28.8% in the second quarter of 2019. Total non-GAAP operating expenses came in at $57.3 million, which is down 14.4% year-over-year and up 1.7% sequentially.

As always, we manage our expenses prudently, while also making sure that the growth portions of our business have the resources that they need to succeed. Our headcount decreased by a net of 22 people, to 802 heads, as of the end of the quarter. Our non-GAAP R&D expense for the third quarter was 6.8% of net revenue as compared to 7.1% of net revenue in the prior-year comparable period and 7.6% of net revenue in the second quarter of 2019.

R&D investment remains critical to the future success of our business and we will continue to invest here in the quarters to come. Our non-GAAP tax rate was 2.3% in the third quarter of 2019. In the quarter, we benefited from favorable one-time adjustments to both domestic and foreign tax liabilities. This contributed approximately $0.13 toward non-GAAP diluted EPS. Looking at the bottom line for Q3, we reported non-GAAP net income of $20.7 million and non-GAAP diluted EPS of $0.65 a share.

Turning to the balance sheet, we ended the third quarter of 2019 with $171.9 million in cash. During the quarter, we used $26.1 million in cash flow from continuing operations, which brings our total cash used in continuing operations over the trailing 12 months to $93.8 million. We used $2.4 million in purchase of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $15.1 million. Nevertheless, we remain confident in our ability to generate meaningful levels of cash.

With the move of our manufacturing sites out of China behind us, we will be able to work down our buffered inventory levels, and we expect to generate positive cash flow going forward. In Q3, we spent $22 million to repurchase approximately 679,000 shares of NETGEAR common stock at an average price of $32.34 per share. Since the start of our repurchase activity in Q4 2013, we have spent approximately $506.7 million to repurchase approximately 14 million shares. Our fully diluted share count is approximately 31.8 million shares as of the end of the third quarter. We plan to continue to opportunistically repurchase our stock in the quarters to come.

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 $190.7 million during the quarter, which is down 2.1% on a year-over-year basis and up 13.8% sequentially. The year-over-year decline is primarily due to reduced revenue in the EMEA, and APAC regions as a result of the aforementioned factors. We also continue to see the US WiFi market declining year-over-year. However, we believe the decline has stabilized in part due to our introduction of WiFi 6 router products.

Our US market share in consumer WiFi remained strong at 51% for the third quarter. The SMB segment generated net revenue of $75.2 million for the third quarter of 2019, which is up 0.6% on a year-over-year basis and up 18.7% sequentially. Our PoE+ and ProAV switching lines continue to perform well. Our market share in switches sold through the retail channel was also strong at 53% for the third quarter.

I'll now turn the call over to Patrick for his commentary, after which I will provide guidance for the fourth quarter of 2019.

Patrick Lo -- Chairman and Chief Executive Officer

Thank you, Bryan, and hello everyone. While the third quarter of 2019 was challenging on both the top and bottom lines, we are confident in our strategy of capitalizing on technology inflections, doing recurring service revenue and expanding into new adjacent markets.

We are also excited by the execution of our WiFi 6 program where we have a substantial need over our competition. During the quarter, we announced multiple new WiFi 6 products for the Connected Home, including the Orbi WiFi 6 Mesh system, the $600 Nighthawk 12-stream WiFi 6 AX11000 router and the Nighthawk WiFi 6 Mesh Extender. We now have seven products with WiFi 6 technology, while our top three competitors still have not released a single WiFi 6 product. Additionally, we have the product introduction pipeline to more than double the count of our WiFi 6 products over the next six months. While the year-over-year decline of North America retail WiFi market in Q3 remained constant relative to Q2 at about 4.5%, the product composition is very different.

With our strong WiFi 6 router lineup, our router end market sales actually grew strongly in Q3. However, we saw an overall decline in mesh WiFi sales in North America due to the absence of WiFi 6 mesh products. However, we believe the September release of the iPhone 11 embedded with WiFi 6 will spur consumers to take advantage of this increased speed by connecting with WiFi 6 routers and mesh products. We will aggressively we introduce more WiFi 6 mesh products in the coming quarters and we believe that will enable the North America WiFi retail market to return to growth in 2020.

As for adjacent markets, we believe with the introduction of Meural Canvas II. We're expanding the reach of our digital art canvas market to our wider audience with the smaller form factor of 21.5 inches and the retail price starting at just $399. We will also adding exciting new content from HBO's incredibly popular Game of Thrones series to our Meural streaming art and subscription membership as well as for purchase through the marketplace with more to come.

Turning to the SMB segment. During Q3, we announced the industry's first cloud configurable commercial grade mesh network. The latest updates to the Netgear Insight solution enabled the deployment of fully configurable mesh networks to support wireless port extenders, VLAN mapping across the mesh, instant discovery and many other feature enhancements.

The Netgear cloud management solution, now in its third year, has proven to be a powerful tool for small businesses to manage their networks remotely offer managed service providers to better keep tab on the health of the clients networks. The Insight platform office support for 22 different switches, access points, mesh satellite and security devices managed by way of a mobile application accessible on both iOS and Android as well as browser-based desktop solutions, popular among IT network managers and managed service providers. We believe we are at the forefront in the industries technology pivot to mesh wireless LAN and cloud management via mobile devices. As another example of expanding into adjacent markets, we're extremely excited about the inroads we are making into the Pro AV switching market. We introduced three new groundbreaking models ideal for deployment of AV over IP solutions. The compact 16 port all copper with PoE and a 24 port and 48 port fiber modules, for the M-4300 series of our modular switch.

Furthermore, we just announced a strategic three way joint marketing initiative with Broad Data, a leading Pro AV equipment manufacturer, and AVI, one of the top five Pro AV integrators in North America. With AVI systems as the integrator, this partnership will provide next generation Pro AV systems, based on IP technology with unprecedented levels of performance, scale and cost efficiency for customers looking to deploy IP based audio visual systems.

Finally, we continue to make progress with our initiative to build recurring revenue stream. This is especially important as we expect that it will have a significant impact on both our bottom line and the stability of NETGEAR's earnings in the future. As of the end the third quarter, we have approximately 12 million registered users. Our registered app user count has grown to 3.6 million, which represents approximately 29% sequential user growth over Q2 2019. We remain very excited about the transformative value creation opportunity of this initiative.

At the start of October, we also started a very strategic service offering with Best Buy's Geek Squad. So about $400 a year, customers will receive an Orbi mesh network with two nodes, full technical insulation and support services from Geek Squad and a variety of value-added subscription services including NETGEAR Armor and parental controls.

During Q3, we also experimented with a 30-day free trial for NETGEAR Armor services and are seeing up to a 9% conversion rate from free trial to paid subscription on some of our customer engagement campaign. We are learning as we go and are confident we will continue to improve our ability to grow our service customer revenue.

Last but not least, I would like to invite our investors and analysts to join us on November 20 at the NASDAQ MarketSite in New York for the 2019 Netgear Financial Analyst Day, during which we will provide more detail around our WiFi 6 product rollout plan, Pro AV market penetration progress, success in acquiring service subscribers and our margin improvement plan for 2020 and beyond. I hope that all of you can join us. If you would like to attend, please reach out the Netgear Investor Relation at investors@netgear.com or visit our Investor Relations website for more details.

In summary, while geopolitical headwinds presented near=term setbacks to our progress toward double-digit operating margin and mid single-digit annual revenue growth, we remain confident in our strategy heading into the fourth quarter and 2020.

I will now turn the call back to Bryan for fourth quarter guidance.

Bryan Murray -- Chief Financial Officer

Thank you, Patrick. Our fourth quarter revenues will be impacted by the trends we have seen in core markets within EMEA, and APAC. While we expect to see softer end user demand, there will be an additional effect on our revenue as the channel reduces inventories for these new conditions. in North America, we are also taking proactive steps to reduce channel inventories to prepare for an accelerated shift toward WiFi 6 within the US in 2020 after CES in early January.

In response to our lower top line expectations in Europe and China, we are taking actions to further resize our cost base in those regions to enable us to redeploy resources where we see greater opportunities such as North America and Japan. We are going to shrink sales headcount in China and Europe where appropriate and reduce our office footprint in those markets.

In consideration of the foregoing, our net revenue for the fourth quarter is expected to be in the range of $240 million to $255 million. GAAP operating margin is expected to be in the range of 0.1% to 1.1% and our non-GAAP operating margin is expected to be in the range of 4.5% to 5.5%. Our GAAP tax rate is expected to be approximately 33.5% and our non-GAAP tax rate is expected to be 23% for the fourth quarter of 2019.

Operator, that concludes our comments and we can now take questions.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of Adam Tindle with Raymond James. Please go ahead.

Adam Tindle -- Raymond James -- Analyst

Okay, thanks and good afternoon. I just wanted to start on the inventory, you talked about the initiative to reduce channel inventory, the weeks didn't look significantly out of line. I think you call it proactive. So kind of two part, I was hoping that you can help us size the adjustment that needed, how much of this is going to hit contract revenue. And secondly, help us with the timing of this, does this continue into 2020 or is it all in Q4 guidance and then thereafter into 2020 we can look forward to WiFi 6 and the uplift with that?

Bryan Murray -- Chief Financial Officer

It's all implied in our guidance for Q4. In terms of the sizing, I would say if you looked at normal seasonality, you would typically see us lift on the non-service rate of portion of CHP in that 12% range. So I would say probably two-thirds of this correction is coming from the Americas to anticipate the WiFi 6 rollout and the remaining one-third is really being weighed down by the international headwinds that we're facing.

Patrick Lo -- Chairman and Chief Executive Officer

And we don't expect further channel inventory reduction going forward.

Adam Tindle -- Raymond James -- Analyst

Does it continue into Q1?

Patrick Lo -- Chairman and Chief Executive Officer

That's right.

Adam Tindle -- Raymond James -- Analyst

Okay. And then maybe just a big picture operational question at the Analyst Day last year, you made a point to show how margin fundamentals were intact ex Arlo with double-digit, you were targeting the 10% to 11% non-GAAP operating margin for 2019, based on the mid-single digit revenue growth. Now that we're looking at a full picture 2019, I understand revenue is going to be down mid-single digits, instead of growing, but operating profit dollars are going to be down like more than 30% and you're going to be finishing the year at half of the original operating margin target based on what we learned today.

I think we're just all surprised at the amount of negative leverage that we're seeing here, so can you maybe just touch on a little bit deeper, what you're doing operationally in-house to start reversing this trend and where do you think operating margins can sustain with just the internal initiatives and no assumption for market growth is the kind of 6% or 7% that we're looking at for the year, the right way to think about this business.

Bryan Murray -- Chief Financial Officer

Yeah, I mean there is no doubt that we faced a number of challenges this year, starting with the US WiFi market. We see it has stabilized in Q3, but it's still down year-over-year 4.5% and started the year off down 8% in Q1. So certainly that's provided some challenges. These factors I mentioned both in EMEA and Asia Pacific, specifically China Hong Kong really accelerated in the September timeframe. So it certainly came late and not much time to course correct there. We don't see those things necessarily correcting themselves in the short term, but we do think that our strategies here, specifically on the WiFi 6 rollouts were far ahead of our competition, top three competitors do not have WiFi 6 products out there. In fact we in the US, we saw the routers for us or end user sales and routers grow there so it's giving us the confidence that our strategy is working. So all these things combined really kind of what's giving us the confidence as we head into 2020 again what's transpired in 2019 is behind us. We do think that we can get back to mid-single digit growth in 2020.

Patrick Lo -- Chairman and Chief Executive Officer

Yes, just to add to what Bryan has said, I think in 2020, there are significant differences versus 2019. Number one, we reset out our baseline so we would not assume that China, Hong Kong or Europe will perform at all. So that's going to be resetting into our baseline, and as such we are redeploying those resources into markets that have shown robustness such as in Japan and also in North America in the WiFi 6 segment.

What also we see is that we kept getting surprises on the -- on the tariff and trade war front in terms of the percentage of tariff. So -- and the speed that the tariff is being being assessed some of the products, we believe that we're not in the tariff territory that we were slow to move them out of China, all of sudden become tariff. So that really put a lot of dent in it and secondly our productions in outside of China is in testing phase in the early of the year so that's why we had to buffer, a lot of inventory, just in case the factory production didn't go well, we still have inventory now.

Those buffered inventory even though is produced long before the tariff was applied, it is generally higher cost because as time goes on, though, I mean we are like in the sea food industry, right. When the inventory is older is relatively more expensive, relative to the current selling price. And then the factories in outside of China would take time to get to the same efficiency as the factories in China. Now we believe in 2020 all of those negative factors will be gone, but unless, of course, we cannot predict whether tariff will be applied to other countries.

But as you has, let's say the tariffs is not going to apply that countries that will move into -- number one, our higher cost inventory will be worked down. Number two, the production in those new factories will be getting in line with the cost base of the old Chinese factories. So that's also the advantage of 2020. Now one thing more importantly in that based on that assessment of what we saw of WiFi 6 in Q3 and what we saw in US, Japan, versus China, Europe, we are doing adjustment. We are going to accelerate more of our mix of revenue into WiFi 6 as well as into Japan and the US versus still keeping some 11ac at a higher proportion and still hoping that Europe and China will come back. So those are the few factors where we are working on to ensure that we would be able to hit our single-digit revenue growth and double-digit operating margin growth versus this year.

Inherently by looking at the margin profile of WiFi 6, and looking at the latest production costs from the factories in Vietnam, in Thailand and in Indonesia, we feel that we are absolutely on the right track. But in order to get into this new reality, we have to do some real adjustment in terms of channel inventories around the world in order to prepare for this and yes, we are going to debut a lot of WiFi 6 products which we -- unlike last year, we announced the product, we didn't ship until Q3. This year, what we would like to do is to announce the products and ship that the week after CES into the channel that we believe will create the biggest momentum for us not only to generate revenue, but as well as to take market share.

However, we do not know how fast that transition will be in 2019. So we would like to keep the channel inventory very lean so that we can adjust really rapidly accordingly, because we only, we sell not only routers, but we also sell Mesh systems. We also sell cable gateways. We also sell mobile hotspots. We also sell extenders. We don't know how the WiFi 6 technology will shift in any one of these categories. We want to be able to be nimble, we want to be able to capitalize on the fastest move and ship the channel inventory accordingly, and that's why we are taking all of these actions in Q4.

And we feel like that we at least have about three to four quarters lead of the WiFi 6 technology over all our major competitors and that gives us the confidence 2020 will be a year that we could really get ourselves into a really good position of our long-term deliverable. And then of course in 2021 and beyond that we believe that our service revenue will start to kick in to have the positive impact. And for that how are we going to do that, what we have done and will to get more granularity on the Analyst Day for that service revenue part.

Adam Tindle -- Raymond James -- Analyst

Okay. Maybe just one quick one for Bryan, you talked about being confident in generating meaningful levels of cash. Can you just help us quantify what that means. And then, remind us how much is left on the buyback and whether M&A would make sense to help the business or is buyback still the right use of cash.

Thanks.

Bryan Murray -- Chief Financial Officer

Yes I think going into Q4 we think things will turn around you may recall that we typically have some seasonal dating programs with some key accounts of ours, which usually go the other direction from a cash standpoint, but we do believe we're in a position to work down some of these inventory levels.

My guess is, it's probably north of 150% of non-GAAP net income that will generate in terms of free cash flow in Q4. It likely will take us two quarters to three quarters to work the inventory completely down to the levels that we'd like to carry forward and we'll try and do that as fast as we can, but that's my best estimate of what Q4 would be in terms of use of cash.

Yes, we still think that using cash for buyback is -- is an appropriate use of our cash balance that still carries in excess of what we think our operating cash needs or and as I just said, we expect to generate additional cash in the quarter.

And also, I mean when we were not stop looking at some tuck-in technology acquisitions that will benefit our growth area such as the Pro AV space, such as the WiFi 6 space, just the content space, service revenue space. yes.

Operator

And your next question comes from the line of Robert Gutman with Guggenheim. Please go ahead.

Robert Gutman -- Guggenheim -- Analyst

Thanks for taking the question given all the uncertainties that you cited in the sort of moving parts that we've seen now in the sprint, I was just wondering the impact on promotional spending and counter revenue. Is there a change in allocation there or overall dollar amount?

Bryan Murray -- Chief Financial Officer

Relative to to the second quarter?

Robert Gutman -- Guggenheim -- Analyst

Yes. Relative to your prior plan. how you're spending that money.

Bryan Murray -- Chief Financial Officer

Yes, I would say that maybe a slight tweak to our original plan I mean, coming into the quarter there was certainly anticipation of Prime Day being extended to a two day event this year as opposed to one day in the past and certainly it was successful on one account but that typically comes with some additional promotional dollars. So that certainly had some impact on the quarter. But I think going into Q4, we think it will be at normal Q4 promotional spending levels, certainly on the back of Black Friday and Cyber Monday .

Robert Gutman -- Guggenheim -- Analyst

And do you see the need to spend more there in the coming quarters given that -- I think we were looking for more of a flattish type of development for the broader US WiFi market with third quarter and obviously it's a little disappointing, but do you think you could move that or is that just sort of a wait and see type --

Bryan Murray -- Chief Financial Officer

Yeah, I'm hoping that that will get to get momentum here. I think we mentioned that we've launched the Orbi WiFi 6 Mesh late in the quarter. That is now getting out ceded into the market as we speak and so we think that's the key component. We said earlier, we saw the success on the router side because of our WiFi 6 product introductions. Now that we're touching on Mesh, which is about a third of the market, we think that will be a contributing factor and we're hopeful that we'll get closer to a flat market in Q4 from an end-user standpoint.

Patrick Lo -- Chairman and Chief Executive Officer

From a contra-revenue marketing perspective, we don't see that we are going to spend more than what we traditionally spend in the Q4 in prior years.

Robert Gutman -- Guggenheim -- Analyst

Okay, that's helpful. Thank you.

Operator

And your next question comes from the line of Liz Pate with Cowen and Company. Please go ahead.

Liz Pate -- Cowen & Co -- Analyst

Hi, thanks for taking my question. You just had the comment that you think you get that closer to flat market growth in the fourth quarter. Just in terms of looking out into calendar '20, when do you think you'll get back to top line growth? You have a lot of channel reduction, inventory reductions to do. I'm just wondering in terms of timing of return to top line growth. Thanks.

Patrick Lo -- Chairman and Chief Executive Officer

We have given all the factors constant that means there is no more surprises and no more geopolitical headwinds. We expect that we should be able to get to know top line revenue growth, probably from second quarter onwards. So that's how we look at, because we believe that the channel inventory adjustment should be done by Q4. And not be later than Q1, yeah.

Liz Pate -- Cowen & Co -- Analyst

Okay, great, and just -- so double-digit operating margin still a reasonable target -- kind of low-single digit 3% revenue growth for '20 that, is that what you're saying?

Bryan Murray -- Chief Financial Officer

Yes, in a normal economic situation, that is still the plan for 2020.

Liz Pate -- Cowen & Co -- Analyst

Okay and then lastly, service provider revenue look like that held up rebounded nicely in 3Q, do you still see that kind of in that $35 million to $36 million range moving forward?

Bryan Murray -- Chief Financial Officer

Yeah, it's roughtly in the $35 million range, plus or minus. So Q3 was plus, one was a -- big Q2 as a big minus.

Liz Pate -- Cowen & Co -- Analyst

Great OK. I'm sorry I just one other question on operating expenses in 4Q, do you have some levers to pull there, do you expect OpEx to be flat down a little bit?

Bryan Murray -- Chief Financial Officer

It's probably closer to flat we did talk about some of the actions that we're taking to right size some of these markets that we see a bit challenged, but we will be reallocating those resources to the areas we see opportunity.

Patrick Lo -- Chairman and Chief Executive Officer

Yeah, we are definitely ramping up our investment in headcounts and resources in North America for the ProAV the market and in Japan overall.

Liz Pate -- Cowen & Co -- Analyst

Great. Okay, thank you very much.

Operator

And your next question comes from the line of Hamed Khorsand with BWS Financial. Please go ahead.

Hamed Khorsand -- BWS Financial -- Analyst

Hi, I just get a follow-up here on the commentary about the WiFi 6. Beginning of the year, you were somewhat be will the rest of the decline in the market and guests that it was WiFi 6 related. Now you're saying that's WiFi 6 is just slow, but you have more products on -- on the market. I mean is that really the case what's going on in the home WiFi market or are you just losing share to the carriers?

Patrick Lo -- Chairman and Chief Executive Officer

No, we think, clearly the WiFi 6 is the reason because it's pretty simple in Q1 when there was absolutely no WiFi 6 products, the market declined by 8%. in Q2, when we had WiFi 6 products for about 1.5 SKUs, and for the full quarter, we saw that the market improved to negative 4.5%. in Q3, when we have three we doubled the WiFi 6 router product, the market should have improved from 4.5%, to whatever. Unfortunately what we saw in the market is the mesh market for the very first time in history actually declined year-over-year.

So that clearly tells you it's like in a drug test one is the platefull and the other one is the drug. So when there is WiFi 6 on the router side, the market demand holding up but on the mesh side well, there is absolutely no WiFi 6, the market actually declined for the very first time in history.

So that tells us very likely WiFi 6 is going to be the key driver and that's why in Q4 is the very first time that we would have WiFi 6 both on the router side with the 5 SKUs. And then with mesh also WiFi 6 and extender with one SKU in WiFi 6, we should see the improvement of the market might not be totally flat. But at least will improve 4.5%, now come Q1 as we set, we have WiFi 6 products in all categories, cable, extenders, and mesh and router that when we see there is a high likelihood with the market will be flat or even return to growth.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. And as far as inventory is concerned, how much of that inventory is not WiFi 6 that you're concerned that you need to liquidate it faster?

Patrick Lo -- Chairman and Chief Executive Officer

No, we don't believe that we would liquidate, because as you could see our inventory buffer is maximum about one or two quarters., on 11ac as much as we single handedly push the market over to 11ax WiFi 6. It probably would still take two three years before the transition is completely over.

So we have absolutely no hurry to liquidate the 11ac inventory at all. And as a matter of fact, I mean, we hold a 51% market share. So we still have a lot of wherewithal to really move 11ac products.

Hamed Khorsand -- BWS Financial -- Analyst

And if you think it's that WiFi 6 that's providing the catalyst here for the year, why haven't your competitors made the move? Is it really just the cost driven consumers not wanting to spend this much for WiFi 6 router?

Patrick Lo -- Chairman and Chief Executive Officer

No, it's multiple reasons. If you look at it, I mean, seriously there are only three competitors in the market today. One is, I mean two are Amazon and Google and for them, they have not had because, their development process is a little bit different. Their hardware and software is completely developed in-house. They don't use the ODM model. They ride their software from the stack, all that we have, they don't even use some of the driver software from the chip vendors.

So it is very difficult for them to expand their WiFi 6 offerings and furthermore, I think their focus right now as you just saw the recent introduction of their product is really focused on lowering costs and collecting more data. So, to them, WiFi 6 is not the priority. And then for the other competitors such as Linksys, they just don't have the financial wherewithal to engage in WiFi 6 product development in all those many areas.

So I think we are in a very unique position that we have the enough financial as well as the ODM model to introduce that many WiFi 6 products and we absolutely are going to capitalize on this advantage.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. Thank you.

Patrick Lo -- Chairman and Chief Executive Officer

Sure.

Operator

And your final question comes from the line of Woo Jin Ho with Bloomberg Intelligence. Please go ahead.

Woo Jin Ho -- Bloomberg Intelligence -- Analyst

Great, thank you for taking my question. A couple of quick ones. How big is your Hong Kong and China exposure today, my understanding was that it has been small, so kind of scratching my head why there would be such a big revenue impact going into the fourth quarter and approximately 2020 ?

Patrick Lo -- Chairman and Chief Executive Officer

Clearly as you can see why I mean we usually we -- love to be at the high end of our guidance. and we did the low end so that's a swing of at least $10 million and you know is Europe and China, Hong Kong, you can easily do the calculation and see how big the impact is now remember Hong Kong China is the number two economy in the world.

So basically we are number two market. So it is pretty significant. And clearly, if you look at the other economies there is Japan, there is Germany which also be for us so that's why we've got to quickly shift as fast as possible from China into Japan which is an absolute growth area for us and we are under indexing in Japan, which we feel good that we'll be able to make strides over there.

Woo Jin Ho -- Bloomberg Intelligence -- Analyst

And just to be clear, you're not exiting the China -- the China, Hong Kong market you just reducing your exposure there and shifting over the resources to Japan is that, is that the right way of thinking of it.

Patrick Lo -- Chairman and Chief Executive Officer

Correct, we are not exiting at all but we are definitely shrinking the footprint. For example I mean, just give you how important it is we have three sales offices in China, we have Beijing, we have Shanghai we have Guangzhou and plus Hong Kong get four. Clearly with this new reality we probably don't need for sales offices.

Woo Jin Ho -- Bloomberg Intelligence -- Analyst

In your Q&A commentary, it sounds like you're targeting single-digit growth revenues in 2020 it sounds like a preview to the Analyst Day. Given your focus on WiFi 6 is this going to be an ASP driven growth or a unit driven growth given all the puts and takes on what you're doing with the inventory and on the product portfolio?

Patrick Lo -- Chairman and Chief Executive Officer

For our planning horizon it would be mostly ASP growth. However, we'll will take any unit growth. I think the unit growth has to come from share gain . do , but for now our our baseline planning is for ASP growth. But the growth is not only coming from the [Imdeso side, we are very excited. Also on the SMB side on the Pro AV space as well.

I think we've laid a pretty good foundation as I just talked about we just announced a first marketing alliance initiative with Broad Data and AVI/ph] and you will see more of that coming and we are excited about that opportunity as we have described, many times that this opportunity represents a $150 million to $200 million TAM and even a 50% market share, which will be pretty lucrative as incremental business to the SMB side.

Bryan Murray -- Chief Financial Officer

The inclusion just to refer back to something Patrick said earlier with respect to the growth. We see those starting in Q2 normally see seasonality in Q1 coming out of the holiday season where CHP non service provider drops about 20%. That certainly will be muted with some of the actions that we're taking in the US, but I still think that we'll see, that seasonal drop maybe in the -- to low teen percentage wise.

Woo Jin Ho -- Bloomberg Intelligence -- Analyst

Okay. And then one last product portfolio question for me. Patrick, you guys have done a great job in mastering the good, better, best strategy in the WiFi market whereas Google and Amazon have focused on the good. Given your focus on WiFi 6 and the higher end of the product spectrum is there any risk that you might be giving up a large share of the base of that pyramid on to Amazon and Google with the lower priced mesh products?

Patrick Lo -- Chairman and Chief Executive Officer

Not really. We are high-end or the good, better, best. So we compete on every single level. So for example if you look at WiFi 6 router, we just introduce a WiFi 6 router at $179. So, which is the high end of the good and we also just introduced a still a new dual-band Orbi the 1X-Series, which is priced at around $249. So we continue to do that. So we compete in every single price level, but in every single price level, we always the highest priced, which is basically our more upper on day and he has been very successful because channel partners won that. For every single price level they want to higher priced product. We just introduced a $249 extemder. But we will continue to expand line for WiFi 6. We're not going to leave any price point open and empty.

Woo Jin Ho -- Bloomberg Intelligence -- Analyst

Understood. Thank you.

Patrick Lo -- Chairman and Chief Executive Officer

Sure.

Operator

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

Patrick Lo -- Chairman and Chief Executive Officer

Thank you everybody for joining today's call. Clearly, I mean, we would like to have better financial results for Q3 and Q4 but with the political headwinds strong at us we are quickly readjusting and we are very optimistic about our prospects across the business as we close the year and into 2020. We have clear leadership in WiFi 6, in Pro AV and listing partners in both areas. We are very encouraged by our progress in acquiring subscription service customers and making good initial steps toward our goal of a 1 million paid subscribers in the few years. I look forward to updating all of you at our Analyst Day on all those fronts in November and look forward to seeing all of you on November 20th in New York at the NASDAQ site. Thank you.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Eric Bylin -- Investor Relations

Bryan Murray -- Chief Financial Officer

Patrick Lo -- Chairman and Chief Executive Officer

Adam Tindle -- Raymond James -- Analyst

Robert Gutman -- Guggenheim -- Analyst

Liz Pate -- Cowen & Co -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

Woo Jin Ho -- Bloomberg Intelligence -- Analyst

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