Q4 net revenue of $188.7 million, at the high end of guidance
Q4 GAAP gross margin of 34.8%; non-GAAP gross margin of 35.0%
877,000 paid subscribers; Q4 service revenue growth of 27.7% year over year
Cash and short-term investments increased $55.6 million sequentially
SAN JOSE, Calif.--(BUSINESS WIRE)-- NETGEAR, Inc. (NASDAQ: NTGR), a global networking company that delivers innovative networking and Internet connected products to consumers and businesses, today reported financial results for the fourth quarter and full year ended December 31, 2023.
The accompanying schedules provide a reconciliation of financial measures computed on a GAAP basis to financial measures computed on a non-GAAP basis.
Bryan Murray, Chief Financial Officer of NETGEAR, commented, “I’m pleased with our fourth quarter results where NETGEAR delivered revenue and operating margin near the high end of our updated guidance. Thanks to the strong market reception of our leading WiFi 7 products, stabilization of our SMB business and our continued disciplined expense management, this quarter demonstrates the progress in our core long-term growth and profitability strategy. Despite a more promotional environment in the U.S. retail networking market, our premium CHP products remain resilient and once again outperformed the market, growing double digits sequentially and more than 30% year over year. Spurred by the success of our recently released Orbi 97x WiFi 7 mesh system, our premium products increased to approximately 25% of our CHP retail business. In addition to the solid performance of our products, we were able to exceed our paid subscriber target for the year, ending the fourth quarter with 877,000 paid subscribers and service revenue of over $11 million in Q4.”
Mr. Murray continued, “Although channel inventory compression constrained the topline across both our CHP and SMB businesses during the year, the strong contribution of our premium products powered us to equal our highest annual gross margin performance since 2007. As we progress through the WiFi 7 upgrade cycle, we believe our CHP product mix will continue to shift towards our higher-margin products. While channel inventory compression will continue to constrain SMB growth in the next few quarters, we are confident in the business’ ability to generate long-term revenue and margin expansion for NETGEAR.”
Mr. Murray added, “We continued to make progress in reducing our own inventory levels in the fourth quarter, which helped us generate meaningful cash once again. I’m pleased to report that we grew our cash and short-term investments by over $55 million during the quarter. We expect to continue to generate meaningful cash in the first quarter of 2024 as we continue to optimize our inventory levels.”
Business Outlook
Mr. Murray continued, “We expect the retail portion of our CHP business to experience a seasonal decline coming off the holiday period. Revenue from the service provider channel is expected to be approximately $25 million in the first quarter. As interest rates remain high, we will continue to work with our SMB channel partners to optimize their inventory carrying levels during the next few quarters. Accordingly, we expect first quarter net revenue to be in the range of $155 million to $170 million. As we continue to make meaningful progress in reducing our own inventory levels, we will be consuming higher cost inventory. We expect we will be back to our historically normal inventory costs in the second half of this year. Accordingly, we expect our first quarter GAAP operating margin to be in the range of (11.4)% to (8.4)%, and non-GAAP operating margin to be in the range of (8.5)% to (5.5)%. Our GAAP tax expense is expected to be in the range of $6.5 million to $7.5 million, and our non-GAAP tax benefit is expected to be in the range of $0.0 to $1.0 million for the first quarter of 2024. We expect to continue to generate meaningful cash in the first quarter of 2024.”
A reconciliation between the Business Outlook on a GAAP and non-GAAP basis is provided in the following table:
Three months ending
March 31, 2024
(In millions, except for percentage data)
Operating Margin Rate
Tax Expense (Benefit)
GAAP
(11.4)% - (8.4)%
$6.5 - $7.5
Estimated adjustments for1:
Stock-based compensation expense
2.9%
-
Non-GAAP tax adjustments
$(7.5)
Non-GAAP
(8.5)% - (5.5)%
$(1.0) - $0.0
1 Business outlook does not include estimates for any currently unknown income and expense items which, by their nature, could arise late in a quarter, including: litigation reserves, net; acquisition related charges; impairment charges; restructuring and other charges and discrete tax benefits or detriments that cannot be forecasted (e.g., windfalls or shortfalls from equity awards or items related to the resolution of uncertain tax positions). New material income and expense items such as these could have a significant effect on our guidance and future GAAP results.
Investor Conference Call / Webcast Details
NETGEAR will review the fourth quarter and full year results and discuss management's expectations for the first quarter of 2024 today, Wednesday, February 7, 2024 at 5 p.m. ET (2 p.m. PT). The toll-free dial-in number for the live audio call is (888) 660-6392. The international dial-in number for the live audio call is (929) 203-0899. The conference ID for the call is 1030183. A live webcast of the conference call will be available on NETGEAR's Investor Relations website at http://investor.netgear.com. A replay of the call will be available via the web at http://investor.netgear.com.
About NETGEAR, Inc.
For more than 25 years, NETGEAR® (NASDAQ: NTGR) has been the innovative leader in connecting the world to the internet with advanced networking technologies for homes, businesses and service providers around the world. As staying connected has become more important than ever, NETGEAR delivers award-winning network solutions for remote work, distance learning, ultra high def streaming, online game play and more. To enable people to collaborate and connect to a world of information and entertainment, NETGEAR is dedicated to providing a range of connected solutions. From ultra-premium Orbi Mesh WiFi systems and high performance Nighthawk routers, to high-speed cable modems and 5G mobile wireless products to cloud-based subscription services for network management and security, to smart networking products and Video over Ethernet for Pro AV applications, NETGEAR keeps you connected. NETGEAR is headquartered in San Jose, California. Learn more on the NETGEAR Investor Page or by calling (408) 907-8000. Connect with NETGEAR: Twitter, Facebook, Instagram, LinkedIn and the NETGEAR blog at NETGEAR.com.
© 2024 NETGEAR, Inc. NETGEAR and the NETGEAR logo are trademarks or registered trademarks of NETGEAR, Inc. and its affiliates in the United States and/or other countries. Other brand and product names are trademarks or registered trademarks of their respective holders. The information contained herein is subject to change without notice. NETGEAR shall not be liable for technical or editorial errors or omissions contained herein. All rights reserved.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 for NETGEAR, Inc .:
This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. The words “anticipate,” “expect,” “believe,” “will,” “may,” “should,” “estimate,” “project,” “outlook,” “forecast” or other similar words are used to identify such forward-looking statements. However, the absence of these words does not mean that the statements are not forward-looking. The forward-looking statements represent NETGEAR, Inc.’s expectations or beliefs concerning future events based on information available at the time such statements were made and include statements regarding: NETGEAR’s future operating performance and financial condition, including expectations regarding growth, revenue, operating margin, gross margin, continued profitability and cash generation; expectations regarding continuing market demand for the NETGEAR’s products and services, including SMB and premium CHP products and subscription services, and NETGEAR’s ability to respond to this demand; NETGEAR’s strategic shift to focusing on the premium, higher-margin segments of the market and growing service revenue; expectations regarding the mix of NETGEAR’s premium, higher margin products and services; expectations regarding inventory management, inventory levels and inventory costs and its impact to long term revenue, margin expansion and cash generation; expectations regarding expected tax rates or tax expenses; expectations regarding seasonal shifts in market demand; and expectations regarding NETGEAR's subscription services, paid subscriber base growth and service revenue. These statements are based on management's current expectations and are subject to certain risks and uncertainties, including the following: future demand for NETGEAR’s products and services may be lower than anticipated; NETGEAR’s shift in focus to premium products at the expense of lower end products may not prove to be successful; NETGEAR may be unsuccessful, or experience delays, in manufacturing and distributing its new and existing products and services; consumers may choose not to adopt NETGEAR’s new product and services offerings or adopt competing products and services; NETGEAR may be unable to continue to grow its number of registered users, its number of registered app users and/or its paid subscriber base and service revenue; product performance may be adversely affected by real world operating conditions; NETGEAR may fail to manage costs, including the cost of key components, the cost of air freight and ocean freight, and the cost of developing new products and manufacturing and distribution of its existing offerings; NETGEAR may fail to successfully manage channel inventory levels; NETGEAR may fail to successfully continue to effect operating expense savings; changes in the level of NETGEAR's cash resources and NETGEAR’s planned usage of such resources, including potential repurchases of NETGEAR’s common stock; changes in NETGEAR’s stock price and developments in the business that could increase NETGEAR’s cash needs; fluctuations in foreign exchange rates; and the actions and financial health of NETGEAR’s customers, including NETGEAR’s ability to collect receivables as they become due. Further, certain forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Further information on potential risk factors that could affect NETGEAR and its business are detailed in NETGEAR’s periodic filings with the Securities and Exchange Commission, including, but not limited to, those risks and uncertainties listed in the section entitled "Part II - Item 1A. Risk Factors" in NETGEAR’s quarterly report on Form 10-Q for the fiscal quarter ended October 1, 2023, filed with the Securities and Exchange Commission on November 3, 2023. Given these circumstances, you should not place undue reliance on these forward-looking statements. NETGEAR undertakes no obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.
Non-GAAP Financial Information:
To supplement our unaudited selected financial data presented on a basis consistent with Generally Accepted Accounting Principles (“GAAP”), we disclose certain non-GAAP financial measures that exclude certain charges, including non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development, non-GAAP sales and marketing, non-GAAP general and administrative, non-GAAP other operating expenses, net, non-GAAP total operating expenses, non-GAAP operating income (loss), non-GAAP operating margin, non-GAAP other income (expenses), net, non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share. These supplemental measures exclude adjustments for amortization of intangibles, stock-based compensation expense, goodwill impairment, intangibles impairment, restructuring and other charges, litigation reserves, net, gain/loss on investments, net, gain on litigation settlements, and adjust for effects related to non-GAAP tax adjustments. These non-GAAP measures are not in accordance with or an alternative for GAAP, and may be different from non-GAAP measures used by other companies. We believe that these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. We compensate for the limitations of non-GAAP financial measures by relying upon GAAP results to gain a complete picture of our performance.
In calculating non-GAAP financial measures, we exclude certain items to facilitate a review of the comparability of our operating performance on a period-to-period basis because such items are not, in our view, related to our ongoing operational performance. We use non-GAAP measures to evaluate the operating performance of our business, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors. In addition, management’s incentive compensation is determined using certain non-GAAP measures. Since we find these measures to be useful, we believe that investors benefit from seeing results “through the eyes” of management in addition to seeing GAAP results. We believe that these non-GAAP measures, when read in conjunction with our GAAP financials, provide useful information to investors by offering:
The following are explanations of the adjustments that we incorporate into non-GAAP measures, as well as the reasons for excluding them in the reconciliations of these non-GAAP financial measures:
Amortization of intangibles consists primarily of non-cash charges that can be impacted by, among other things, the timing and magnitude of acquisitions. We consider our operating results without these charges when evaluating our ongoing performance and forecasting our earnings trends, and therefore exclude such charges when presenting non-GAAP financial measures. We believe that the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of our competitors.
Stock-based compensation expense consists of non-cash charges for the estimated fair value of stock options, restricted stock units, performance shares and shares under the employee stock purchase plan granted to employees. We believe that the exclusion of these charges provides for more accurate comparisons of our operating results to peer companies due to the varying available valuation methodologies, subjective assumptions and the variety of award types. In addition, we believe it is useful to investors to understand the specific impact stock-based compensation expense has on our operating results.
Other items consist of certain items that are the result of either unique or unplanned events, including, when applicable: goodwill impairment, intangibles impairment, restructuring and other charges, litigation reserves, net, gain on litigation settlements, and gain/loss on investments, net. It is difficult to predict the occurrence or estimate the amount or timing of these items in advance. Although these events are reflected in our GAAP financial statements, these unique transactions may limit the comparability of our on-going operations with prior and future periods. The amounts result from events that often arise from unforeseen circumstances, which often occur outside of the ordinary course of continuing operations. Therefore, the amounts do not accurately reflect the underlying performance of our continuing business operations for the period in which they are incurred.
Non-GAAP tax adjustments consist of adjustments that we incorporate into non-GAAP measures in order to provide a more meaningful measure on non-GAAP net income (loss). We believe providing financial information with and without the income tax effects relating to our non-GAAP financial measures, as well as adjustments for valuation allowances on deferred tax assets, provides our management and users of the financial statements with better clarity regarding both current period performance and the on-going performance of our business. Non-GAAP income tax expense (benefit) is computed on a current and deferred basis with non-GAAP income (loss) consistent with use of non-GAAP income (loss) as a performance measure. The Non-GAAP tax provision (benefit) is calculated by adjusting the GAAP tax provision (benefit) for the impact of the non-GAAP adjustments, with specific tax provisions such as state income tax and Base-erosion and Anti-Abuse Tax recomputed on a non-GAAP basis, as well as adjustments for valuation allowances on deferred tax assets. The tax valuation allowance is a non-cash adjustment primarily reflecting our expectations of, and assumptions as to, future operating results and applicable tax laws, that are not directly attributable to the current quarter’s operating performance. For interim periods, the non-GAAP income tax provision (benefit) is calculated based on the forecasted annual non-GAAP tax rate before discrete items and adjusted for interim discrete items. Included in the non-GAAP tax adjustments for the three and twelve months ended December 31, 2023 are adjustments to tax expense (benefit) related to differences between our prior forecasts and actual results for the twelve months ended. In addition, included in the non-GAAP tax adjustments for the twelve months ended December 31, 2023 are adjustments to tax expenses (benefit) related to the effects of a valuation allowance computed in accordance with GAAP.
Source: NETGEAR-F
NETGEAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
December 31, 2023
December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents
$
176,717
146,500
Short-term investments
106,931
80,925
Accounts receivable, net
185,059
277,485
Inventories
248,851
299,614
Prepaid expenses and other current assets
30,421
29,767
Total current assets
747,979
834,291
Property and equipment, net
8,273
9,225
Operating lease right-of-use assets
37,285
40,868
Intangibles, net
—
1,329
Goodwill
36,279
Other non-current assets
17,326
97,793
Total assets
847,142
1,019,785
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
46,850
85,550
Accrued employee compensation
21,286
24,132
Other accrued liabilities
168,084
213,476
Deferred revenue
27,091
21,128
Income taxes payable
1,037
1,685
Total current liabilities
264,348
345,971
Non-current income taxes payable
12,695
14,972
Non-current operating lease liabilities
29,698
34,085
Other non-current liabilities
4,906
3,902
Total liabilities
311,647
398,930
Stockholders’ equity:
Common stock
30
29
Additional paid-in capital
967,651
946,123
Accumulated other comprehensive income (loss)
136
(535
)
Accumulated deficit
(432,322
(324,762
Total stockholders’ equity
535,495
620,855
Total liabilities and stockholders’ equity
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and percentage data)
Three Months Ended
Twelve Months Ended
October 1, 2023
Net revenue
188,674
197,845
249,103
740,840
932,472
Cost of revenue
123,038
128,911
187,407
491,588
681,923
Gross profit
65,636
68,934
61,696
249,252
250,549
Gross margin
34.8
%
24.8
33.6
26.9
Operating expenses:
Research and development
19,592
20,738
20,250
83,295
88,443
Sales and marketing
30,552
30,865
35,340
127,778
139,675
General and administrative
17,107
16,364
14,618
66,243
56,316
Goodwill impairment
44,442
Intangibles impairment
1,071
Other operating expenses, net
1,259
544
3,666
4,140
4,597
Total operating expenses
68,510
69,582
73,874
282,527
333,473
Loss from operations
(2,874
(648
(12,178
(33,275
(82,924
Operating margin
(1.5
)%
(0.3
(4.9
(4.5
(8.9
Other income (expenses), net
2,454
2,280
2,066
14,139
902
Income (loss) before income taxes
(420
1,632
(10,112
(19,136
(82,022
Provision for (benefit from) income taxes
1,249
86,431
(4,068
85,631
(13,035
Net loss
(1,669
(84,799
(6,044
(104,767
(68,987
Net loss per share:
Basic
(0.06
(2.87
(0.21
(3.57
(2.38
Diluted
Weighted average shares used to compute net income (loss) per share:
29,623
29,524
28,959
29,355
29,007
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
7,161
10,070
Stock-based compensation
17,938
17,734
Gain/loss on investments, net
(3,226
(87
Deferred income taxes
82,319
(21,842
Provision for excess and obsolete inventory
3,168
3,657
Changes in assets and liabilities:
92,425
(16,327
47,595
12,396
Prepaid expenses and other assets
(3,189
5,696
(38,947
11,857
(2,846
(572
(45,893
(13,332
6,969
5,425
(2,925
(3,862
Net cash provided by (used in) operating activities
56,853
(13,732
Cash flows from investing activities:
Purchases of short-term investments
(135,920
(153,577
Proceeds from maturities of short-term investments
115,006
80,417
Purchases of property and equipment
(5,799
(5,757
Purchases of long-term investments
(720
(600
Net cash used in investing activities
(27,433
(79,517
Cash flows from financing activities:
Repurchases of common stock
(24,377
Restricted stock unit withholdings
(2,793
(4,807
Proceeds from exercise of stock options
743
Proceeds from issuance of common stock under employee stock purchase plan
3,590
4,418
Net cash provided by (used in) financing activities
797
(24,023
Net increase (decrease) in cash and cash equivalents
30,217
(117,272
Cash and cash equivalents, at beginning of period
263,772
Cash and cash equivalents, at end of period
RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES
(In thousands, except percentage data)
STATEMENT OF OPERATIONS DATA:
GAAP gross profit
GAAP gross margin
Amortization of intangibles
128
257
514
358
354
326
1,405
1,353
Non-GAAP gross profit
65,994
69,288
62,150
250,914
252,416
Non-GAAP gross margin
35.0
24.9
33.9
27.1
GAAP research and development
(885
(841
(1,027
(3,935
(4,177
Non-GAAP research and development
18,707
19,897
19,223
79,360
84,266
GAAP sales and marketing
(1,237
(1,271
(1,328
(5,336
(5,603
Non-GAAP sales and marketing
29,315
29,594
34,012
122,442
134,072
GAAP general and administrative
(1,821
(1,819
(1,787
(7,262
(6,601
Non-GAAP general and administrative
15,286
14,545
12,831
58,981
49,715
GAAP other operating expenses, net
Restructuring and other charges
(1,259
(366
(3,666
(3,962
(4,577
Litigation reserves, net
(178
(20
Non-GAAP other operating expenses, net
RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED)
STATEMENT OF OPERATIONS DATA (CONTINUED):
GAAP total operating expenses
(3,943
(3,931
(4,142
(16,533
(16,381
(44,442
(1,071
Non-GAAP total operating expenses
63,308
64,036
66,066
260,783
268,053
GAAP operating loss
GAAP operating margin
4,301
4,285
4,468
366
3,962
4,577
178
20
Non-GAAP operating income (loss)
2,686
5,252
(3,916
(9,869
(15,637
Non-GAAP operating margin
1.4
2.7
(1.6
(1.3
(1.7
GAAP other income (expenses), net
(8
(14
8
271
Gain on litigation settlements
(6,000
Non-GAAP other income (expenses), net
2,446
2,266
2,086
8,147
1,173
(In thousands, except per share data)
GAAP net loss
(1,138
85,781
(3,109
86,586
(7,085
Non-GAAP net income (loss)
2,745
6,868
(871
(767
(8,514
NET INCOME (LOSS) PER DILUTED SHARE:
GAAP net loss per diluted share
0.01
0.02
0.14
0.15
0.61
1.53
0.04
0.13
0.16
(0.20
(0.03
2.90
(0.10
2.94
(0.24
Non-GAAP net income (loss) per diluted share
0.09
0.23
(0.29
29,683
29,581
SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands, except per share data, DSO, inventory turns, weeks of channel inventory, headcount and percentage data)
July 2, 2023
April 2, 2023
Cash, cash equivalents and short-term investments
283,648
228,045
202,836
239,210
227,425
Cash, cash equivalents and short-term investments per diluted share
9.56
7.71
6.92
8.24
7.85
200,900
179,496
192,540
Days sales outstanding (DSO)
89
92
94
98
100
280,918
324,483
337,187
Ending inventory turns
2.0
1.8
1.5
2.5
Weeks of channel inventory:
U.S. retail channel
10.8
11.8
12.0
12.7
10.4
U.S. distribution channel
7.9
5.8
5.1
4.4
5.2
EMEA distribution channel
6.4
7.4
6.9
8.5
8.7
APAC distribution channel
10.0
13.1
12.4
14.0
18.5
Deferred revenue (current and non-current)
31,994
29,796
27,689
26,634
25,025
Headcount
635
644
653
702
691
Non-GAAP diluted shares
29,319
29,040
NET REVENUE BY GEOGRAPHY
Americas
124,798
66
141,018
71
159,175
64
504,349
68
617,211
EMEA
37,899
35,684
18
52,715
21
148,922
179,358
19
APAC
25,977
14
21,143
11
37,213
15
87,569
12
135,903
Total
SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
NET REVENUE BY SEGMENT
Connected Home
118,378
127,335
149,036
446,865
558,823
SMB
70,296
70,510
100,067
293,975
373,649
Total net revenue
SERVICE PROVIDER NET REVENUE
27,313
32,403
55,787
98,659
148,331
152
219
719
579
4,234
Total service provider net revenue
27,465
32,622
56,506
99,238
152,565
NETGEAR Investor Relations Erik Bylin investors@netgear.com