Netgear (NTGR) Q2 2020 Earnings Call Transcript

Netgear (NTGR 0.54%)
Q2 2020 Earnings Call
Jul 22, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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.

Erik Bylin -- Investor Relations

Thank you, Josh. Good afternoon, and welcome to NETGEAR's second quarter of 2020 fiscal results conference call. Joining us from the company are Mr. Patrick Lo, chairman and CEO; and Mr.

Bryan Murray, CFO. The format of the call will start with a review of the financials for the second quarter provided by Bryan, followed by details and commentary on the business provided by Patrick. We will then have time for any questions. If you have not received a copy of today's press release, please visit NETGEAR'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. Bryan, go ahead.

Bryan Murray -- Chief Financial Officer

Thank you, Erik, and thank you, everyone, for joining today's call. I'm pleased to share with you our second-quarter 2020 results today. Once again, our team overcame the challenges presented by a rapidly changing market due to the ongoing pandemic. Despite continued headwinds in certain areas of our business, overall, we were able to deliver strong top line and profitability growth.

Net revenue for the second quarter ended June 28, 2020, was $280.1 million, up 21.3% year over year and up 21.8% on a sequential basis. The increase in revenue from both the year over year and sequential basis is primarily due to exceptionally strong demand for CHP products in response to the work-from-home transitions taking place around the globe as individuals look to upgrade their network connections. We continue to win in the market with our leading-edge WiFi 6 offerings and strong online presence. Our non-GAAP operating margin for the second quarter came in at 7.5%, driven largely by the leverage created by our revenue growth.

For the second quarter of 2020, net revenue for the Americas was $202.2 million, which is up 28.7% year over year and up 27.8% on a sequential basis. The Americas continued to benefit from increased demand for CHP products in both the retail and service provider channels, generated by the shift to work-from-home environment. EMEA net revenue was $48.4 million, which is up 12.2% year over year and up 14.7% quarter over quarter. This was also driven by the demand for CHP products and response to work from home and seen in both the retail and service provider channels.

Our APAC net revenue was $29.4 million, which is down 3.7% from the prior year comparable quarter and down 0.6% sequentially. The decline in relation to both periods was driven by lower net revenue from sales to service providers. For the second quarter of 2020, we shipped a total of approximately 3.7 million units, including 2.7 million nodes of wireless products. Shipments of all wired and wireless routers and gateways combined were about 1.5 million units for the second quarter of 2020.

The net revenue split between home and business products was about 82% and 18%, respectively. The net revenue split between wireless and wired products was about 74% and 26%, respectively. Products introduced in the last 15 months constituted about 30% of our second-quarter shipments, while products introduced in the last 12 months contributed about 23% of our second-quarter shipment. From this point on, my discussion points will focus on non-GAAP numbers.

A reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today. The non-GAAP gross margin in the second quarter of 2020 was 29.6%, which is up 80 basis points as compared to 28.8% in the prior year comparable quarter and up 40 basis points compared to 29.2% in the first quarter of 2020. While the mix of our SMB business, which carries relatively higher gross margins, declined year over year, we were more than able to offset the gross-margin impact due primarily to lower contra revenue marketing spending in our CHP business. Total Q2 non-GAAP operating expenses came in at $62 million, which is up 10.1% year over year and up 5.2% sequentially.

This sequential increase was primarily due to higher sales and marketing spend associated with the increased top line. As always, we continue to manage our expenses prudently, while also ensuring that we are investing sufficiently in the growth portions of our business for future success. Our headcount was 788 as of the end of the quarter, down by nine from the prior quarter. We continue to manage our headcount very tightly, especially in times of economic uncertainty.

Our non-GAAP R&D expense for the quarter was 6.9% of net revenue. As compared to 7.6% of net revenue in the prior year comparable period and 8.1% of net revenue in the first quarter of 2020. To continue our technology and subscription service leadership, we are committed to continued investment in R&D. Our non-GAAP tax rate was 23.5% in the second quarter of 2020.

Looking at the bottom line for Q2, we reported non-GAAP net income of $16.3 million and non-GAAP diluted EPS of $0.54. Turning to the balance sheet. We ended the second quarter of 2020 with $258.6 million in cash and short-term investments, up $48.8 million from the prior quarter. Additionally, our inventory decreased by $30 million in the quarter as we continued to deliver on strong demand in the Americas and EMEA.

And continued to successfully reduce our mix of inventory in older WiFi technologies. In Q2, we generated $63.2 million in cash flow from operations, which brings our total cash provided from operations over the trailing 12 months to $115.6 million. We used $2.4 million in purchases of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $8.4 million. We remain confident in our ability to continue to generate cash, and expect we will be able to further increase our cash position in the second half of 2020.

In Q2, we spent $7.5 million to repurchase approximately 315,000 shares of NETGEAR common stock at an average price of $23.78 per share. Since the start of our repurchase activity in Q4 2013, we have spent $551.2 million to repurchase 15.7 million shares. Our fully diluted share count is approximately 30.1 million shares as of the end of the second quarter. Especially in times of uncertainty like these, we continue to recognize the importance of maintaining a strong cash position.

And we will balance our practice of repurchasing shares with our desire to maintain a strong balance sheet. Now turning to the results of our product segments. The connected home segment, which includes the industry-leading Nighthawk, Orbi, Nighthawk Pro Gaming and Meural brands, generated net revenue of $230 million during the quarter, which is up 37.3% on a year over year basis and up 39.7% sequentially. The year over year and sequential increase was attributable to increased demand in both service provider and retail channels.

In the second quarter of 2020, service provider revenue was the highest it had business since the second quarter of 2018, while nonservice provider revenue achieved its best results since the fourth quarter of 2018 and its highest fiscal Q2 on record. In the second quarter, we again held a strong leadership position in U.S. market share in consumer WiFi, coming in at 49%. The SMB segment generated net revenue of $50 million for the second quarter of 2020, which is down 21% on a year-over-year basis and down 23.4% sequentially.

As we expected, our SMB business experienced declines with the onset of the pandemic and corresponding business closures. On the product front, our PoE plus and ProAV switching lines continue to perform well in the market. Our market share in switches sold through U.S. retail channel came in at 49% in Q2.

I'll now turn the call over to Patrick for his commentary.

Patrick Lo -- Chairman and Chief Executive Officer

Thank you, Bryan. First, I want to thank the NETGEAR team for executing well and delivering a great quarter. We continue to meet the challenges of working from home, even as it lasts longer than originally anticipated. While we hope for the swiftest possible end to the pandemic, this new reality of working and learning from home has ushered in a new era where everyone needs not just an internet connection, but one that is always on, secure and delivers high-connection speed to every corner of their homes for this new world, where every aspect of our daily lives is conducted online, from work to entertainment, from schooling to socializing, from shopping to ordering food and from working out to getting medical advice.

With unprecedented demand across a multitude of connected devices battling for bandwidth by multiple members of a household all at the same time. Products built on WiFi 6 technology with unmatched speed and connectivity of an ideal solution. Not only will we continue to benefit from our leadership in WiFi 6 products, but we also hold the added technology advantage of tri-band, which provides unprecedented speed and coverage. It's both the new market dynamics, as well as our technology advantage that leads us to believe that CHP revenues excluding sales to service providers in the second half of the year can mirror the year-over-year growth rate that we experienced in the second quarter.

For families unable to secure wired internet to their homes, all those looking to work from anywhere, we have been working diligently to meet the unprecedented demand for our mobile hotspots, which saw 110% sequential growth in shipments in the second quarter. Notably, we gained strong traction with our 5G hotspots in EMEA where we shipped in volume. Domestically, we are excited for the 5G versions to ramp in the second half of the year. As we currently stand, we expect this channel to grow 50% in revenue in the second half of the year as compared to the first half.

I am pleased to share that remote work has not impeded our ability to innovate. As a leader in mesh and WiFi, we recently released our newest Orbi mesh system, the WiFi 6 AX4200 tri-band mesh system, offered at an attractive price point of just under $500 for a three pack. This is a very attractive WiFi 6 mesh system for large homes with lots of devices, but not quite at a scale of our top-of-line AX6000 WiFi 6 tri-band mesh system. Continued strong product demand allowed us to gain traction with new subscribers and deliver record progress in growing our recurring revenue stream.

Beginning the quarter with 228,000 paid subscribers, we increased our new paid subscribers by 28%, adding 65,000 in the quarter to end with 293,000 paid subscribers. It is clear that we are on a trajectory to surpass our goal of more than doubling our subscriber count from the end of last year by the end of 2020. Our SMB team performed well during the quarter and delivered to our initial expectations. As we shared last quarter, to offset the dramatic drop in corporate sales through the VAR channel, we are focusing on sales of sophisticated home office solutions via our transactional channels, as well as pushing hard on closing ProAV projects.

As economies slowly recover around the world, we are expecting corporate sales to improve in the second half. Thereby, slightly lessening the year-over-year decline of our SMB business. As of now, we expect our home office networking sales and ProAV projects wins to continue to grow compared to the first half. Our most popular home office networking solutions are based on our industry leading, unmanaged and Plus Switches, driving our Orbi Pro on managed access points or instant mesh access points.

Together, they can provide multiple SSIDs, VLANs and reduce wiring, via mesh for a sophisticated home network consisting of multiple access points. Our ProAV solutions are still anchored in our preconfigured, fully managed switches. We will continue to roll out new products in these two areas in the second half. We believe that the new normal of home networks, serving an increasingly critical part of people's lives from video conferencing to virtual happy hours from remote learning to online fitness classes, from ordering clothes to ordering food, from streaming TV, movies and Broadway shows to playing online games, and from going to the museum to going to your doctor is going to last beyond the current pandemic.

For NETGEAR, this resets the value of our addressable market to a higher level, enables us to continue to grow our overall top line for the rest of the year, and empowers us to accelerate the growth of a stable paid service subscriber base. And with that, I'll turn it over to Bryan Murray to comment on opportunities and obstacles in the coming quarters.

Bryan Murray -- Chief Financial Officer

Thank you, Patrick. While we are confident in the ongoing strength of end market demand for home networks, there is still considerable uncertainty around the slowing or reversals of reopenings, new waves of COVID-19 and by extension, the speed of the economic recovery worldwide in the second half of 2020. This makes our most profitable business, SMB, difficult to forecast. Furthermore, our supply chain and supporting our CHP business has been and may continue to be disrupted by outbreaks of COVID-19 in our suppliers' factories and warehouses.

If such disruptions become widespread or greater in scope, they could significantly hamper our ability to fulfill the heightened demand for our CHP products. As such, we are not in a comfortable enough position to provide financial guidance for the third quarter and the second half of the year. We would now like to answer any questions from the audience.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Adam Tindle with Raymond James. Please go ahead.

Adam Tindle -- Raymond James -- Analyst

OK. Thanks. Good afternoon and congrats on the strong results. Patrick, I wanted to start with the comment that you made on CHP.

I know you talked about expecting to continue to fuel growth. I think you said you're expecting it to mirror 2Q growth rates. Was that comment on CHP ex service provider, which I think was up just over 30% in Q2 and should be up this level in Q3 and Q4? And if so, I guess why do you have the confidence that there's a longer tail to the burst that you're seeing there? How would you think about that subsiding versus having this kind of longer tail and what's giving you the confidence to go out and talk about that?

Patrick Lo -- Chairman and Chief Executive Officer

Yes. We're just seeing the trends continue into the early part of Q3. And when we look at the ASPs that people are buying, it is clearly higher than what it was before. So as I mentioned, because people are now doing a lot of things virtually, online, at home, they need to have uniform high-speed coverage around every corners of the houses.

So the various members could perform their own things online without interfering with each other. So as such, the setup of the Wi-Fi network today at home will be significantly more sophisticated and of a higher band. So meaning the ASP of a home Wi-Fi network is actually high. So that alone reset our addressable market into a higher level.

So as long as we continue to maintain our market share, then we should be able to enjoy the higher level of revenue going forward. And then, of course, I mean, once we get into Q2 next year, then it will be a different comp, right? So that's why we feel confident that for the rest of the year that the nonservice provider growth of roughly about 30% would continue for the rest of the year. And on the service provider side, we're confident of the 50% growth in the second half versus the first half is because all the orders are received. We're just delivering.

I mean, there's generally a longer lead time for service provider business and that's why we make those comments.

Adam Tindle -- Raymond James -- Analyst

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

Patrick Lo -- Chairman and Chief Executive Officer

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

Adam Tindle -- Raymond James -- Analyst

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

Patrick Lo -- Chairman and Chief Executive Officer

Yes. So our SMB business declined year over year about 21% in Q2. So as we see more and more business reopen so the normal corporate sales will actually grow from Q2 basis. So based on that particular observation and projection, we believe the Q3 decline versus last year will be less than 21%, the rate of decline of Q2.

And then Q4, hopefully, the smooth reopening of the economy is getting better, the same thing. On the second front, as we said, we'll continue to push into the new areas that we started back in the early Q2. Actually, ProAV has been around for a little while, but we're just getting some more momentum. The sophisticated home office wireless LAN network using our commercial grade Wi-Fi access points and PoE switches.

We're starting to push it really hard. In Q2, we believe that we'll continue to make progress in Q3 and Q4. So when you add all those together, we believe that the year-over-year decline of the SMB business will be less in Q3 and then even less in Q4.

Operator

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

Jeffrey Rand -- Deutsche Bank -- Analyst

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

Patrick Lo -- Chairman and Chief Executive Officer

No. I don't think that we could claim that we can meet 100% of the demand. I mean, as you can see, our channel inventory depleted quite a bit. So our channel is helping us to buffer that difference.

It is very difficult when you try to up the demand immediately. I mean, usually, our chip lead time is anywhere between 13 to 20 weeks, so are many other components. The ops team have done a fantastic job to do the best they can. But I will say that we are doing 100%.

Now how much more can we do? We don't know, all right? Because we pretty much sold out whatever we could produce.

Jeffrey Rand -- Deutsche Bank -- Analyst

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

Bryan Murray -- Chief Financial Officer

Yes. I think as we look forward, I think there's two challenges that we see on the gross margin side. One is, as you can kind of model out with the two businesses that we have, the positive trends we see on the CHP side, and the headwinds we still face on the SMB side. I think the mix of SMB will lessen even further than it was in Q2, which certainly puts some pressure on the gross margins.

And I think as Patrick just touched on, we are chasing supply. We're trying to maximize every bit that we can get, which comes with some costs related to airfreight. And we aren't seeing the rates relent at all, capacity still is a challenge. So those two things will put some compression on the gross margin.

That said, with the top line lift that we can see, we'll get some additional leverage. So I think the net of those two things probably gives us an addition of 50 basis points to operating margin off of the Q2 levels that we saw.

Jeffrey Rand -- Deutsche Bank -- Analyst

Great. Thank you.

Operator

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

Paul Silverstein -- Cowen and Company -- Analyst

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

Bryan Murray -- Chief Financial Officer

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

Paul Silverstein -- Cowen and Company -- Analyst

Got it. All right. More generically, if I did the math right, it sounds like WiFi 6-enabled product is still well less than one million units. Is that correct of what you sold in the quarter?

Patrick Lo -- Chairman and Chief Executive Officer

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

Paul Silverstein -- Cowen and Company -- Analyst

Well, Patrick, bear with me, I'm asking a specific question, I appreciate your quality and response. But my simple question is, what part is the quantitative units of Wi-Fi 6 that you shipped, if you shipped, if I heard the numbers right, 3.6 million, 2.7 million of which were probably in the last 12 months, I assume Wi-Fi 6, most of that's from the last 12 months. So I assume I think you said 23% of units were from new products in the last 12 months, that would suggest that WiFi 6 quantitatively in units is well less than one million. In a second you'll see where I'm going with this.

I just want to confirm that, that's in the ballpark, that it was less than one million units.

Patrick Lo -- Chairman and Chief Executive Officer

Well, actually, as a matter of fact, I think, yes, it could be, but then it's not really a lot meaningful because this work from home basically drives a lot of people to upgrade their home's Wi-Fi reach and not everybody could afford WiFi 6 and the cheapest and fastest way for a lot of people is to buy one or two, 11ac extenders. Today, you can still buy an 11Ac extender at about $50, and you would buy two of them, you just spent $100. And those units are going very, very high. So if you just purely look at a unit basis, it becomes very meaningful in this Q2 because there are so many people buying the $50 extenders.

And of course, those volumes has completely overwhelmed everything else.

Paul Silverstein -- Cowen and Company -- Analyst

Patrick, one could actually push your argument, not only cannot many -- can many people not afford WiFi 6, but correct me if I'm wrong, unless you've bought a new iPhone or a new droid or a new computer, you would not get -- even if you bought WiFi 6, you won't get the benefit of WiFi 6 unless you've got WiFi 6 chipsets in your endpoint. And so not only can those people not afford WiFi 6 today but they won't get the benefit of WiFi 6 even if they bought WiFi 6. And then I'll give you my real question, but I want to make sure, is that correct?

Patrick Lo -- Chairman and Chief Executive Officer

Well, so generally speaking, yes, but there's quite a bit of people already upgraded to iPhone 11 and Galaxy S10, S20 Galaxy Pro and a lot of new laptops. So I personally think there are more WiFi 6 client devices out there, than the number of WiFi 6 core network. So we haven't seen everybody going there yet. And I think we have a difficultly just to give all WiFi 6 home networks to all those people who are owning iPhone 11, Galaxy S10, S20 and Galaxy Pro.

Paul Silverstein -- Cowen and Company -- Analyst

All right. Patrick, now let me give you my real question, what I'm really driving toward. The basic question of how much demand has been pulled forward and essentially stolen from future quarters and how much of this is just -- and I trust the answer is very little because if there are 129 million homes in the United States. And I assume most, but not all, have some iteration of Wi-Fi, whether gn, ac? And if you're shipping well less than one million units of WiFi 6, a preciously small percent of that potential full end market has adopted Wi-Fi 6 today, which would suggest that the price points are still too high for most or for many.

But in terms of what the ultimate opportunity is ahead, it sounds like you still have 98% of the market opportunity, 95% of the market opportunity in terms of Wi-Fi 6 upgrades ahead of you. We could debate the pacing of that, when do the price points get to the point where there's true mass market adoption. That's the real question I'm driving at, how much of the market is still ahead versus has been sucked out of next year and future years?

Patrick Lo -- Chairman and Chief Executive Officer

Well, I mean, I'll just use your logic maybe to do a little bit of math. I mean, I think we said that combined, we shipped about 1.5 million routers, gateways, so on and so forth. And I said that I see about 25% on a dollar basis is WiFi 6, all right? So naturally, WiFi 6 is more expensive. So you take a rough cut, OK, only 20% of that, of 1.5 million, is Wi-Fi 6.

That's only about 300,000. 300,000 into 115 million homes in the U.S., you're right, we have a use long runway to drive. And you could argue, my number is pretty good because we're the only WiFi 6 game in town. So there is no competition anyway.

So the upgrade cycle is still a long way off. And as I said, in Q2, we're limited by supply, as well as a lot of people are limited by affordability because WiFi 6 today, the lowest entry point is still about $200. But you could buy two Wi-Fi. I mean, WiFi 5 extenders for less than $100, so not everybody could afford $200, so some people would go for a cheaper solution.

But I like that because in the future, when the WiFi 6 products finally come to $100, those people who buy the $100 extenders will upgrade to WiFi 6. So I think there's a long way to go.

Operator

Our next question comes from Woo Jin Ho with Bloomberg Intelligence.

Woo Jin Ho -- Bloomberg Intelligence -- Analyst

So Patrick and Bryan, I think there was an 8-K talking about David Henry taking flights out on airfreight on your inudible about the timing of the airfreight shipments in the second quarter? And when do you think shipping and logistics should normalize in the third quarter?

Bryan Murray -- Chief Financial Officer

I mean, so the Q2 airfreight spend was pretty much consistent throughout the quarter. I would say we came into the quarter probably a little better positioned, as well as the channel given where we exited Q1 in terms of channel inventory levels. So maybe a little bit back-end loaded. And as I said earlier, it's certainly going to be a fair investment for us in Q3.

I think we're hopeful that as we kind of get to the earlier part of the holiday season that we can get caught up and have our supply pipeline matching what we see as demand.

Woo Jin Ho -- Bloomberg Intelligence -- Analyst

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

Bryan Murray -- Chief Financial Officer

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

And we're certainly going to balance managing and growing top line with our bottom line.

Woo Jin Ho -- Bloomberg Intelligence -- Analyst

Got it. And one more question, if I may, in terms of competition. So Patrick, one of your bigger brick-and-mortar retailers with -- it seems as if you're doing a fair amount of business with. It looks like they brought in a smaller competitor on their online channel as well that has WiFi 6 and has attractive pricing.

I mean, do you view them as a threat? And I'm not talking about Google or Amazon, are they a potential threat given that they are going into this one particular brick-and-mortar channel?

Patrick Lo -- Chairman and Chief Executive Officer

No. We don't believe so. I mean, the thing is on WiFi 6, right? We basically have the broadest portfolio, our unique tri-band technology, but we also have dual band as well. As I said, right, we're pretty much the only game in town as far as WiFi 6 is concerned, it doesn't matter whether there's routers or is it cable gateways, or is it extenders, or is it a mesh? I think we're not concerned about small competitors out there.

As we continue to maintain in the U.S. market, the real competition is still Amazon, Euro and Google Nest. And neither of them have WiFi 6, yes.

Woo Jin Ho -- Bloomberg Intelligence -- Analyst

Understood. Thank you.

Operator

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

Hamed Khorsand -- BWS Financial -- Analyst

Hi. So first off, I just wanted to ask you how much of the reduction in channel inventory is because of inventory spending changes with your partners? And how much of it is actual sell through?

Patrick Lo -- Chairman and Chief Executive Officer

Well, I mean, clearly, it's sell-through, all right? And then also, our channel partners' mode of sales is changing as well. More and more sales are being done online. And for example, Best Buy is limiting the traffic into the stores at certain point in time to actually close the stores and do curbside pickup. So in that case, they don't need that much inventory inside the stores.

And more and more of the business is shifting online. It's not just Best Buy, but Walmart, Costco and the online sites are really, really successful. When you shift the sales to online, you certainly need less inventory overall in the channel. That's what we're seeing, and of course, as I said, right, we have not been able to ship as much as we would have liked because it's ramping up so fast.

So some of the in-store inventory has been helping to buffer the demand, so it depletes the in-store inventory as well.

Hamed Khorsand -- BWS Financial -- Analyst

The amount of supply that you're able to ship in and you're not able to meet demand in entirety, is that purely from a shipping capacity standpoint? Or is that a supply chain issue with components?

Patrick Lo -- Chairman and Chief Executive Officer

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

Hamed Khorsand -- BWS Financial -- Analyst

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

Patrick Lo -- Chairman and Chief Executive Officer

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

Hamed Khorsand -- BWS Financial -- Analyst

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

Patrick Lo -- Chairman and Chief Executive Officer

Definitely. Yes, definitely. No doubt about it. As I just mentioned, the chips studying it, all right.

Operator

There are no further questions at this time. I'll turn the call back to Patrick for closing remarks.

Patrick Lo -- Chairman and Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 42 minutes

Call participants:

Erik Bylin -- Investor Relations

Bryan Murray -- Chief Financial Officer

Patrick Lo -- Chairman and Chief Executive Officer

Adam Tindle -- Raymond James -- Analyst

Jeffrey Rand -- Deutsche Bank -- Analyst

Paul Silverstein -- Cowen and Company -- Analyst

Woo Jin Ho -- Bloomberg Intelligence -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

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