Q2 net revenue of $143.9 million, above the high end of guidance
Completed destocking of channel, with approximately $30 million reduction
Fourth consecutive quarter of FCF generation
New Board member appointed and President of B2B business unit hired
SAN JOSE, Calif.--(BUSINESS WIRE)-- NETGEAR, Inc. (NASDAQ: NTGR), a global networking company that delivers innovative products to global consumers and businesses, today reported financial results for the second quarter ended June 30, 2024. As expected, second quarter results reflect the impact of destocking approximately $30 million of channel inventory, and the costs associated with an aggressive reduction of legacy inventory.
The accompanying schedules provide a reconciliation of financial measures computed on a GAAP basis to financial measures computed on a non-GAAP basis.
CJ Prober, Chief Executive Officer of NETGEAR, commented, “Last quarter we outlined a plan for transforming NETGEAR with a focus on creating long term value for shareholders. I’m very happy to report that our team demonstrated stellar execution in the second quarter and delivered on our goals, including the achievement of an accelerated destocking plan of approximately $30 million and a significant decrease in our finished goods inventory. With revenue and non-GAAP operating margin above the high end of our guidance, a fourth consecutive quarter of free cash flow generation and our strategic internal reorganization completed, we have positioned NETGEAR well for long term success.”
“In our NFB business, we delivered a record quarter of end market sales for our ProAV managed switch products and the sell-through for this business grew in each of our three global regions. This progress is enabled by our broadening base of manufacturing partners and early momentum in our expansion into the broadcast vertical. Although we remain challenged in the traditional IT and WIFI Lan markets, the long-term potential of NFB is very exciting and we have hired a seasoned leader to help us unlock profitable growth for this business. Pramod Badjate has joined us as the President and GM of NFB. Pramod is a networking veteran with a strong track record at Cisco, Ruckus and, most recently, Arista. Pramod and I have a shared belief that we can unlock significant value from our B2B segment and the opportunity ahead is why we are able to attract such an accomplished leader for NFB.”
“In our CHP business, we continue to drive growth in our premium products while executing on the strategy of delivering industry leading products for the broader market. Our recently launched, lower priced WIFI 7 products and cable modems are outperforming our expectations, and we are beginning to see signs of recovery in the US consumer networking market. Our subscription business continues to grow and we exited the quarter with over 958,000 subscribers, of which 544,000 were recurring subscribers that drove 30% growth in our recurring subscriber revenue year over year. Innovation remains a key imperative and we have a slate of products across a range of price points planned for release over the next 12 months, which we anticipate will further expand our market presence and broaden our subscription funnel to drive continued recurring revenue growth.”
Mr. Prober continued, “Finally, I’m delighted to welcome Laura Orvidas to the team as our newest board member, along with Pramod and the many new leaders who have recently joined NETGEAR as part of our internal reorganization. The wealth of industry expertise and operational acumen this team collectively possesses will be invaluable as we bring NETGEAR into its next phase of growth, return to profitability and deliver long-term value creation for our shareholders.”
Bryan Murray, Chief Financial Officer of NETGEAR, added, “We continued to make progress in reducing our inventory, which declined by $22.3 million sequentially and drove a fourth consecutive quarter of free cash flow generation. Converting our working capital into cash remains a key focus, with our cash, cash equivalents and short-term investments increasing by $4.9 million sequentially. We repurchased approximately 799,800 shares of NETGEAR common stock and in addition, our Board of Directors has authorized the repurchase of up to an incremental 3,000,000 shares of the Company’s common stock, bringing our repurchase program total to 3,875,000 shares, or approximately $62 million based on this week’s opening share price. We plan to continue to be opportunistic on repurchases.”
Business Outlook
Mr. Murray continued, “We have completed our destocking actions for both the NFB and CHP businesses in the second quarter and expect to see more predictable performance that is aligned to the market. However, while we anticipate less volatility from shifting channel inventory levels, participating more significantly in the broader CHP market and growing our NFB business momentum will take time to execute fully. We anticipate revenue from the service provider channel to be approximately $15 million in the third quarter as our partners prepare to launch our next generation 5G mobile hotspots early in the fourth quarter. Accordingly, we expect third quarter net revenue to be in the range of $160 million to $175 million, up 16% sequentially at the midpoint. We expect gross margins and operating margins to continue to be impacted by our inventory reduction efforts and higher than expected transportation costs due to a variety of factors, including the Red Sea shipping crisis. Accordingly, we expect our third quarter GAAP operating margin to be in the range of (15.3)% to (12.3)%, and non-GAAP operating margin to be in the range of (11.0)% to (8.0)%. Our GAAP tax expense is expected to be in the range of $1.0 million to $2.0 million, and our non-GAAP tax benefit is expected to be in the range of $1.5 million to $2.5 million for the third 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
September 29, 2024
(In millions, except for percentage data)
Operating Margin Rate
Tax Expense (Benefit)
GAAP
(15.3)% - (12.3)%
$1.0 - $2.0
Estimated adjustments for 1 :
Stock-based compensation expense
3.4%
-
Restructuring and other charges
0.9%
Non-GAAP tax adjustments
$(3.5)
Non-GAAP
(11.0)% - (8.0)%
$(2.5) - $(1.5)
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 second quarter results and discuss management's expectations for the third quarter of 2024 today, Wednesday, July 31, 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.
NETGEAR® (NASDAQ: NTGR) has pioneered advanced networking technologies for homes, businesses, and service providers around the world since 1996 and leads the industry with a broad range of award-winning products designed to simplify and improve people's lives. By enabling people to collaborate and connect to a world of information and entertainment, NETGEAR is dedicated to delivering innovative and advanced connected solutions ranging from mobile and cloud-based services for enhanced control and security, to smart networking products, video over Ethernet for Pro AV applications, easy-to-use WIFI solutions and performance gaming routers to enhance online game play. The company is headquartered out of San Jose, Calif. with offices located around the globe. More information is available from the NETGEAR Press Room or by calling (408) 907-8000. Connect with NETGEAR: Facebook , Instagram 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; creating long-term value for shareholders; positioning NETGEAR for long term success; long-term potential and profitable growth of NFB; growth in premium products and delivering industry leading products for the broader market; recovery in the US consumer networking market; NETGEAR’s upcoming product releases and its impact to market presence, broadening subscription funnel and recurring revenue growth; NETGEAR’s next phase of growth, return to profitability and long-term value creation for shareholders; NETGEAR’s focus on converting working capital into cash; expectations regarding more predictable performance that is aligned to the market; expectations regarding volatility from shifting channel inventory levels; expectations regarding gross margins and operating margins being impacted by inventory reduction efforts and transportation costs; revenue from service provider channel; timing of the launch of next generation 5G mobile hotspots; expectations regarding continuing market demand for the NETGEAR’s products and services; expectations regarding expected tax benefits or tax expenses; unlocking significant value from the B2B segment; participating more significantly in the broader CHP market and growing NFB business momentum; and plans to repurchase shares of NETGEAR common stock. 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 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 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; loss of services of key personnel may affect NETGEAR’s ability to executive on business strategy effectively; 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 March 31, 2024, filed with the Securities and Exchange Commission on May 1, 2024. 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, 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: restructuring and other charges, litigation reserves, net, 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.
Source: NETGEAR-F
-Financial Tables Attached-
NETGEAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, 2024
December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents
$
177,104
176,717
Short-term investments
117,235
106,931
Accounts receivable, net
147,069
185,059
Inventories
188,936
248,851
Prepaid expenses and other current assets
27,228
30,421
Total current assets
657,572
747,979
Property and equipment, net
11,041
8,273
Operating lease right-of-use assets
33,394
37,285
Goodwill
36,279
Other non-current assets
15,800
17,326
Total assets
754,086
847,142
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
40,129
46,850
Accrued employee compensation
23,966
21,286
Other accrued liabilities
159,586
168,084
Deferred revenue
28,682
27,091
Income taxes payable
665
1,037
Total current liabilities
253,028
264,348
Non-current income taxes payable
8,076
12,695
Non-current operating lease liabilities
24,748
29,698
Other non-current liabilities
8,835
4,906
Total liabilities
294,687
311,647
Stockholders’ equity:
Common stock
29
30
Additional paid-in capital
980,069
967,651
Accumulated other comprehensive income (loss)
(104
)
136
Accumulated deficit
(520,595
(432,322
Total stockholders’ equity
459,399
535,495
Total liabilities and stockholders’ equity
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and percentage data)
Three Months Ended
Six Months Ended
March 31, 2024
July 2, 2023
Net revenue
143,900
164,586
173,413
308,486
354,321
Cost of revenue
112,077
116,349
119,113
228,426
239,639
Gross profit
31,823
48,237
54,300
80,060
114,682
Gross margin
22.1
%
29.3
31.3
26.0
32.4
Operating expenses:
Research and development
19,851
20,227
20,831
40,078
42,965
Sales and marketing
29,757
30,529
32,482
60,286
66,361
General and administrative
19,186
18,067
16,536
37,253
32,772
Other operating expenses, net
9,888
1,062
2,229
10,950
2,337
Total operating expenses
78,682
69,885
72,078
148,567
144,435
Loss from operations
(46,859
(21,648
(17,778
(68,507
(29,753
Operating margin
(32.6
)%
(13.2
(10.3
(22.2
(8.4
Other income, net
2,713
2,850
7,999
5,563
9,405
Loss before income taxes
(44,146
(18,798
(9,779
(62,944
(20,348
Provision for (benefit from) income taxes
1,029
(148
(1,192
881
(2,049
Net loss
(45,175
(18,650
(8,587
(63,825
(18,299
Net loss per share:
Basic
(1.56
(0.63
(0.29
(2.19
Diluted
Weighted average shares used to compute net loss per share:
28,883
29,395
29,319
29,136
29,170
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
3,048
3,866
Stock-based compensation
10,432
9,352
Gain on investments, net
(1,985
(1,464
Deferred income taxes
542
(7,839
Provision for excess and obsolete inventory
2,954
1,531
Changes in assets and liabilities:
37,991
97,989
56,961
(26,401
Prepaid expenses and other assets
962
(6,620
(49,747
2,680
(1,870
(7,641
(37,200
2,222
2,664
(4,990
988
Net cash provided by (used in) operating activities
35,635
(25,468
Cash flows from investing activities:
Purchases of short-term investments
(67,998
(68,042
Proceeds from maturities of short-term investments
60,000
55,006
Purchases of property and equipment
(4,817
(1,599
Purchases of long-term investments
(90
(225
Net cash used in investing activities
(12,905
(14,860
Cash flows from financing activities:
Repurchases of common stock
(21,444
—
Restricted stock unit withholdings
(2,885
(2,105
Proceeds from issuance of common stock under employee stock purchase plan
1,986
2,286
Net cash provided by (used in) financing activities
(22,343
181
Net increase (decrease) in cash and cash equivalents
387
(40,147
Cash and cash equivalents, at beginning of period
146,500
Cash and cash equivalents, at end of period
106,353
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
413
365
342
778
693
Non-GAAP gross profit
32,236
48,602
54,770
80,838
115,632
Non-GAAP gross margin
22.4
29.5
31.6
26.2
32.6
GAAP research and development
(844
(698
(1,144
(1,542
(2,209
Non-GAAP research and development
19,007
19,529
19,687
38,536
40,756
GAAP sales and marketing
(1,235
(1,237
(1,397
(2,472
(2,828
Non-GAAP sales and marketing
28,522
29,292
31,085
57,814
63,533
GAAP general and administrative
(3,396
(2,244
(1,804
(5,640
(3,622
Non-GAAP general and administrative
15,790
15,823
14,732
31,613
29,150
GAAP other operating expenses, net
(1,688
(1,032
(2,229
(2,720
(2,337
Litigation reserves, net
(8,200
(30
(8,230
Non-GAAP other operating expenses, net
RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED)
STATEMENT OF OPERATIONS DATA (CONTINUED):
GAAP total operating expenses
(5,475
(4,179
(4,345
(9,654
(8,659
Non-GAAP total operating expenses
63,319
64,644
65,504
127,963
133,439
GAAP operating loss
GAAP operating margin
5,888
4,544
4,687
1,688
1,032
2,720
8,200
8,230
Non-GAAP operating loss
(31,083
(16,042
(10,734
(47,125
(17,807
Non-GAAP operating margin
(21.6
(9.7
(6.2
(15.3
(5.0
GAAP other income, net
Gain/loss on investments, net
(69
101
19
32
Gain on litigation settlements
(6,000
Non-GAAP other income, net
2,644
2,951
2,018
5,595
3,435
(In thousands, except per share data)
GAAP net loss
8,025
4,588
2,781
12,613
1,943
Non-GAAP net loss
(21,443
(8,355
(4,743
(29,798
(10,380
NET LOSS PER DILUTED SHARE:
GAAP net loss per diluted share
0.01
0.20
0.15
0.16
0.36
0.32
0.06
0.04
0.08
0.09
0.28
(0.20
(0.21
0.44
0.07
Non-GAAP net loss per diluted share
(0.74
(0.28
(0.16
(1.02
(0.36
SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands, except per share data, DSO, inventory turns, weeks of channel inventory, headcount and percentage data)
October 1, 2023
Cash, cash equivalents and short-term investments
294,339
289,421
283,648
228,045
202,836
Cash, cash equivalents and short-term investments per diluted share
10.19
9.85
9.56
7.71
6.92
172,771
200,900
179,496
Days sales outstanding (DSO)
93
96
89
92
94
211,270
280,918
324,483
Ending inventory turns
2.4
2.2
2.0
1.8
1.5
Weeks of channel inventory:
U.S. retail channel
9.5
11.2
10.8
11.8
12.0
U.S. distribution channel
2.8
4.0
7.9
5.8
5.1
EMEA distribution channel
5.2
5.9
6.4
7.4
6.9
APAC distribution channel
8.3
8.0
10.0
13.1
12.4
Deferred revenue (current and non-current)
34,216
33,714
31,994
29,796
27,689
Headcount
622
628
635
644
653
Non-GAAP diluted shares
29,683
29,581
NET REVENUE BY GEOGRAPHY
Americas
95,503
66
109,928
67
116,611
205,431
238,533
68
EMEA
27,355
31,187
36,161
21
58,542
75,339
APAC
21,042
15
23,471
14
20,641
12
44,513
40,449
11
Total
100
SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
NET REVENUE BY SEGMENT
Connected Home
84,033
95,963
98,406
179,996
201,152
NETGEAR for Business
59,867
68,623
75,007
128,490
153,169
Total net revenue
SERVICE PROVIDER NET REVENUE
19,732
27,553
24,916
47,285
38,943
202
243
18
445
208
Total service provider net revenue
19,934
27,796
24,934
47,730
39,151
NETGEAR Investor Relations Erik Bylin investors@netgear.com