Plover Bay Technologies develops software-defined wide area network (SD-WAN) routers for businesses. Our products are marketed under the brand names of Peplink (Wired SD-WAN routers) and Pepwave (Wireless SD-WAN routers) to value-added distributors, resellers, integrators and network service providers, who in turn provide turnkey solutions and support to end customers. Production of our network equipment is fully outsourced to third party manufacturers based in Taiwan.
Our SD-WAN routers are fully integrated with our self-developed cloud management tool allowing end users to easily manage network policies for multiple network branches. These functionalities are available to end users for free upon purchase of our SD-WAN routers and continue to be available
Most SD-WAN vendors focus on the Wired SD-WAN market, where the addressable market includes network infrastructures of enterprises and organizations. This market is fast growing as companies are quickly replacing traditional WAN equipment with SD-WAN equipment, but is highly competitive with global leaders such as Cisco on one spectrum, and numerous new entrants such as firewall players and WAN optimization vendors trying to incorporating SD-WAN into their products.
We instead pioneer in Wireless SD-WAN technologies that enable new applications in Transportation, Maritime, Public Safety, Retail, Broadcasting, Unmanned Systems and other specialized applications. These verticals represent new markets in their early stages and are expected to grow as companies seek to increase mobility and productivity (e.g. on demand mobile connectivity with enterprise resources and security for a temporary event) and “smartify” mobile assets (e.g. vehicles, broadcast cameras, with wireless connectivity in order to gather data for analytics, asset tracking, save cost, enhance security, and so on.)
Compared to Wired SD-WAN, the Wireless SD-WAN market also has a higher entry barrier due to certification requirements with various telecom operators located in different countries. Different market verticals also have unique product requirements such as vibration resistance and ignition-sensing capabilities in Transport and waterproofing in Maritime. While these markets tend to be quite fragmented, but still require considerable investments in R&D and time. Therefore, there are currently only a few small to medium sized players in this market.
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.
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.
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.
Key risks to our company include:
Since April 2018, the U.S. Trade Representative has subjected a large list of goods imported from China to trade tariffs. We identify that SD-WAN routers (included in Routers under HS code 8517) were subject to trade tariffs of 10% starting from 24 September 2018. The tariffs were scheduled to rise to 25% from 1 January 2019 onwards, but its implementation was postponed until 10 May 2019 due to negotiations between China and the U.S.
Plover Bay Technologies has solely used contract manufacturers from Taiwan in the past. In 2016, we began to allocate a portion of our production (mainly low to mid-end SD-WAN routers) to a PRC manufacturer owned by a Taiwanese company for cost reduction and diversification against supply chain risks and disruptions in Taiwan.
Since 2017, we began parallel production in both the PRC and Taiwan for some of our products. Therefore, we have the flexibility to shift the manufacturing of US-specific models from the PRC manufacturer to other Taiwanese counterparts, while shifting non-US models to the PRC manufacturer.
As a result of our internal assessment of the PRC manufacturer as well as the increasing trade tension between China and the U.S. at the prevailing time, we made the decision to reallocate a majority of our manufacturing and sourcing back to Taiwan in 2Q2018 with small specialized orders and sample production remaining in the PRC. The reallocation has been successful and largely concluded by 1Q2019, and the Company foresees minimal financial impact due to rising tariffs going forward.
We will continue to monitor the ongoing development of the trade war and take appropriate measures to minimize any impact. Our long term fundamentals remain sound and we strive to turn every challenge into an opportunity to improve our operations.
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.