The current US tariff proposal proposes to impose 25% tariff on items including power supply units and adapters of networking equipment, the impact of which is minimal to our business. We will continue to monitor further impact to our business if new tariffs are implemented.
Our company is highly focused in products development. We design a range of practical but yet innovative networking products under the brand names of Peplink and Pepwave. We work with a network of over 500 third party distributors, resellers and system integrators worldwide who provide sales and support to end customers. We also work with world-class contract manufacturers to manufacture our products.
The SD-WAN market is now taking off just like Enterprise Wi-Fi market back in 15 years ago. We see that end customers are beginning to see the value proposition of the technology. Larger incumbent networking players like Cisco has completed a number of acquisitions of SD-WAN startups, further validating that SD-WAN is indeed not another technology hype but a real technology trend.
Our SpeedFusion technology enables new use cases that were financially or technically infeasible in the past. These applications include live HD livestreaming and surveillance. Further down the road, Internet of Things will drive an increase in the need for reliable and mission critical connectivity. Our SpeedFusion technology embedded in every Peplink and Pepwave product is ideal in solving connectivity problem as users are able to combine any links (DSL, fiber, 3G/4G, satellite, and more) to form unbreakable connections anywhere. We are also developing new products with practical uses in IoT applications. All our products are easily managed through the cloud. These will be our growth drivers over the next five years.
While most SD-WAN startups are focus in Enterprise SD-WAN market where the market size is large but application is rather homogenous, we place our focus in the Industrial SD-WAN market which includes Transportation, Maritime, Public Safety, Broadcasting and Unmanned Systems. The Industrial SD-WAN market is very fragmented with a long tail. We like this market because of the longer product life cycle and higher entry barrier due to certification requirements (such as shock vibration, electromagnetic interference and environmental factors) and industry specific know-how. We also have a loyal customer group earned from the reliable connectivity provided by our products. In many industrial applications, we do not see any major competitor yet.
Our primary focus is in industrial SD-WAN but that doesn’t mean we do not address the Enterprise SD-WAN market. We address the Enterprise market by positioning ourselves as a value play. In additional to price, our products are extremely user friendly and do not require technical savvy IT professionals to install and maintain.
Our patent strategy is to defend our technology as well as visualizing our R&D capability. Currently we have been awarded 33 patents and we have filed another 100+ applications.
Communication technologies are constantly evolving. Not long ago, our networks transformed from 2G to 3G, then from 3G to 4G. Each major network upgrade brings opportunities in product refresh. Moreover, the need for bandwidth continues to grow as internet users increasingly rely on cloud for productivity and the standard of video and pictures move up to higher resolutions and this in turn drive upgrades for high-throughput routers.
In additional to product revenue, we have a strategic focus in growing the product warranty revenue and cloud service subscriptions. Another key area of growth would be software licenses to enable new features on our installation base.
Key risks to our company include:
1). Inability to attract and retain talented employees – Our business is R&D focused and in order to attract and retain talents we have implemented a share option program.
2). Failing in catching up the product upgrade cycle. If we are slow in developing next generation products, we might not be leading the market and become a “me too” commodity player. We run our own SD-WAN products entirely in our headquarters as well as our global VPN networks. Our VADs and global technology partners also provide valuable product feedback and feature requests. Through these, we learn where we are leading and what we are lagging
iii. Patent Trolls. We understand in the technology business, patent trolls would be difficult to avoid. However, being a non-US entity should allow us to be less risky as our US peers.
iv. Severe natural disaster in Taiwan. Three out of four of our key contract manufacturers are based in Taiwan. Only one contract manufacturer is manufactured in mainland China.
Shortage of key components. We have our platforms based on Intel, Qualcomm, Broadcom. But if there is a shortage of key components, we might not be able to meet the market demand and lose business to competitors.
Since we have an asset light business model, our major investment would be R&D, engineering resources and stocking of key components and parts for a stable supply. We do not expect any material capital investment requirements in the foreseeable future. We will continue to return capital to shareholders via our dividend payment arrangement.