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.
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.
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 US Trade Representative has subjected a large list of goods imported from China to trade tariffs of 10-25%. We identify that SD-WAN routers (included in routers under HS code 8517) are subject to a 10% tariff starting from 24 September 2018. On 1 January 2019, the tariffs will rise to 25%
Plover Bay Technologies has solely used contract manufacturers from Taiwan in the past. In 2016, we began to allocate the production of low to mid-end SD-WAN routers to a PRC factory owned by a Taiwanese manufacturer for cost reduction and diversification against risk of supply chain disruptions in Taiwan. The proposed tariff will affect US-bound products manufactured in this PRC factory. However, we believe the financial impact from the proposed tariff will be insignificant.
First, since 2017, we began parallel production in both PRC and Taiwan for some of our products. Therefore, we have the ability to shift the manufacturing of US-specific models from the PRC factory to other Taiwanese contract manufacturers, while shifting non-US models to the PRC factory.
Second, as part of our ongoing efforts to improve our competitiveness, we have been expanding our purchasing team in Taiwan to leverage their expertise in supplier sourcing and cost reduction. We are seeing steady progress in this regard, and this will also help mitigate any impact from any tariff-driven cost increases.
In conclusion, the financial impact from this 10% tariff will be negligible to us. We will continue to monitor any further development from the trade war and take appropriate measures to minimize any impact. Our long term fundamentals remain sound and we will 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.