SMB business delivers record quarterly and annual revenue; Q4 surpasses $100 million for 29.9% year over year growth contributing to 18.8% growth for the full year
747,000 paid subscribers for 27.9% growth year over year
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, 2022.
The accompanying schedules provide a reconciliation of financial measures computed on a GAAP basis to financial measures computed on a non-GAAP basis.
Patrick Lo, Chairman and Chief Executive Officer of NETGEAR, commented, “In the fourth quarter, we delivered revenue of $249.1 million, near the high end of our guidance, enabled by our team’s strong execution in securing supply in a challenging environment and continuing strong demand for our SMB products. Our SMB business achieved record revenue for the third quarter in a row, contributing to a record level of annual revenue for that business as well. The nearly 30% year-on-year growth in the quarter was propelled by continued strong momentum in our ProAV managed switches as the transition of Audio Visual from analog to digital IP-based over ethernet connections progresses.”
Mr. Lo continued, “On the CHP side, while the overall U.S. consumer retail market contracted approximately 20% year on year in the fourth quarter, our premium, high end WiFi mesh systems and 5G mobile hotspots continued to grow and considerably outperformed the market, further validating our core long-term strategy of focusing primarily on the premium, higher-margin segments of the market. These affluent consumers are also more likely to subscribe to our value-added services and appear resilient in the face of a worsening macroeconomic environment. We added 81,000 paid subscribers in the fourth quarter, bringing our total paid subscriber count to 747,000, for 27.9% growth year-on-year. As we further expand the premium segment of the market, we anticipate our subscriber base growing in tandem and are confident in our ability to reach 875,000 paid subscribers by the end of 2023.”
Business Outlook
Bryan Murray, Chief Financial Officer of NETGEAR, added, “We expect to continue to experience strong underlying demand in the SMB business and the premium portion of our CHP product portfolio. However, on the retail portion of CHP we expect a normal seasonal decline coming off the holiday period, and we will continue to work with our retail channel partners to optimize their inventory levels. This should lead to improving results in CHP retail as we progress through the year. Given the strong performance in the fourth quarter, which allowed our service provider customers to improve their supply positions, we expect first quarter revenue from the service provider channel to decrease to approximately $25 million. Given these factors we expect our first quarter net revenue to be in the range of $185 million to $200 million. We expect the SMB business to continue to see improving supply which should allow us to lower our reliance on higher-cost air freight spend. This will offset the impact of reduced topline leverage relative to our recently completed fourth quarter. Accordingly, our GAAP operating margin for the first quarter is expected to be in the range of (4.7)% to (3.7)%, and non-GAAP operating margin is expected to be in the range of (2.0)% to (1.0)%. Our GAAP tax rate is expected to be approximately 30.0%, and our non-GAAP tax rate is expected to be 5.0% for the first quarter of 2023.
While we are confident in our ability to provide guidance at this time, we do so with the caveat that considerable uncertainty remains in the market due to the COVID-19 pandemic and supply chain conditions continuing to remain challenged and, should unforeseen events occur, in particular challenges related to closures affecting our manufacturing partners’ operations, increased transportation delays into any of our regional distribution or manufacturing centers, greater than expected freight or component costs, or lower than expected end market demand, our actual results could differ from the foregoing guidance.”
A reconciliation between the Business Outlook on a GAAP and non-GAAP basis is provided in the following table:
Three months ending
April 2, 2023
Operating Margin Rate
Tax Rate
GAAP
(4.7)% - (3.7)%
30.0%
Estimated adjustments for1:
Stock-based compensation expense
2.6%
-
Amortization of intangibles
0.1%
Non-GAAP tax adjustments
(25.0)%
Non-GAAP
(2.0)% - (1.0)%
5.0%
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 2023 today, Wednesday, February 1, 2023 at 5 p.m. ET (2 p.m. PT). The toll-free dial-in number for the live audio call is (888) 660-6468. The international dial-in number for the live audio call is (929) 201-5709. 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.
© 2023 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, continued profitability and cash generation; expectations regarding continuing market demand for the Company’s products, including SMB and premium CHP products, and the Company’s ability to respond to this demand; the Company’s strategic shift to focusing on the premium, higher-margin segments of the market and targeting affluent consumers and consumers with the highest propensity to subscribe to NETGEAR’s service offerings; the timing, distribution, sales momentum and market acceptance of recent and anticipated new product introductions that position the Company for growth and market share gain; expectations regarding supply constraints and inventory management; expectations regarding the ability to participate in promotional activities leading to further market share gains; expectations regarding expected tax rates; expectations regarding the impact of higher transportation and component costs and corresponding price increases; expectations regarding spending in transportation costs to maximize revenue; expectations regarding repurchases of the Company’s common stock; expectations regarding the Company’s small and medium business and service provider channels; expectations regarding price increases on NETGEAR’s products; expectations regarding retail channel partners’ inventory levels; expectations regarding seasonal shifts in market demand; expectations regarding revenue from the service provider channel; and expectations regarding NETGEAR's paid subscriber base growth. These statements are based on management's current expectations and are subject to certain risks and uncertainties, including the following: uncertainty surrounding the duration and impact of the global COVID-19 pandemic, including with respect to the Company’s supply chain, closures affecting the operations of the Company’s manufacturing partners and potential disruptions in the Company’s transportation network, including with respect to the Company’s distribution centers; future demand for the Company's products may be lower than anticipated; the Company’s shift in focus to premium products at the expense of lower end products may not prove to be successful; the Company may be unsuccessful, or experience delays, in manufacturing and distributing its new and existing products; consumers may choose not to adopt the Company's new product offerings or adopt competing products; the Company may be unable to continue to grow its number of registered users, its number of registered app users and/or its paid subscriber base; product performance may be adversely affected by real world operating conditions; the Company 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; the Company may fail to successfully manage channel inventory levels; the Company may fail to successfully continue to effect operating expense savings; changes in the level of NETGEAR's cash resources and the Company's planned usage of such resources, including potential repurchases of the Company’s common stock; changes in the Company's stock price and developments in the business that could increase the Company's cash needs; fluctuations in foreign exchange rates; and the actions and financial health of the Company's customers, including the Company’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 the Company'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 the Company's quarterly report on Form 10-Q for the fiscal quarter ended October 2, 2022, filed with the Securities and Exchange Commission on November 4, 2022. 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, change in fair value of contingent consideration, goodwill impairment, restructuring and other charges, litigation reserves, net, gain/loss on investments, net, 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: change in fair value of contingent consideration, goodwill impairment, 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 provides our management and users of the financial statements with better clarity regarding 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. 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, 2022 are adjustments to tax expense (benefit) related to differences between our prior forecasts and actual results for the twelve months ended.
Source: NETGEAR-F
NETGEAR, INC. C ONDENSED CONSOLIDATED BALANCE SHEETS ( In thousands) (Unaudited)
December 31, 2022
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents
$
146,500
263,772
Short-term investments
80,925
7,744
Accounts receivable, net
277,485
261,158
Inventories
299,614
315,667
Prepaid expenses and other current assets
29,767
34,752
Total current assets
834,291
883,093
Property and equipment, net
9,225
13,335
Operating lease right-of-use assets
40,868
23,176
Intangibles, net
1,329
1,856
Goodwill
36,279
80,721
Other non-current assets
97,793
76,350
Total assets
1,019,785
1,078,531
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
85,550
73,729
Accrued employee compensation
24,132
24,704
Other accrued liabilities
213,476
224,584
Deferred revenue
21,128
16,500
Income taxes payable
1,685
1,528
Total current liabilities
345,971
341,045
Non-current income taxes payable
14,972
18,990
Non-current operating lease liabilities
34,085
18,569
Other non-current liabilities
3,902
3,112
Total liabilities
398,930
381,716
Stockholders’ equity:
Common stock
29
Additional paid-in capital
946,123
923,228
Accumulated other comprehensive income (loss)
(535
)
149
Accumulated deficit
(324,762
(226,591
Total stockholders’ equity
620,855
696,815
Total liabilities and stockholders’ equity
NETGEAR, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share and percentage data) (Unaudited)
Three Months Ended
Twelve Months Ended
October 2, 2022
Net revenue
249,103
249,587
251,187
932,472
1,168,073
Cost of revenue
187,407
181,058
176,488
681,923
802,236
Gross profit
61,696
68,529
74,699
250,549
365,837
Gross margin
24.8
%
27.5
29.7
26.9
31.3
Operating expenses:
Research and development
20,250
22,167
23,080
88,443
92,967
Sales and marketing
35,340
34,203
36,230
139,675
145,961
General and administrative
14,618
13,949
14,575
56,316
59,659
Goodwill impairment
—
44,442
Other operating expenses (income), net
3,666
361
(37
4,597
653
Total operating expenses
73,874
70,680
73,848
333,473
299,240
Income (loss) from operations
(12,178
(2,151
851
(82,924
66,597
Operating margin
(4.9
)%
(0.9
0.3
(8.9
5.7
Other income (expenses), net
2,066
638
(1,108
902
(1,093
Income (loss) before income taxes
(10,112
(1,513
(257
(82,022
65,504
Provision for (benefit from) income taxes
(4,068
(4,314
734
(13,035
16,117
Net income (loss)
(6,044
2,801
(991
(68,987
49,387
Net income (loss) per share:
Basic
(0.21
0.10
(0.03
(2.38
1.63
Diluted
1.59
Weighted average shares used to compute net income (loss) per share:
28,959
28,891
29,456
29,007
30,241
29,029
31,002
NETGEAR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
10,070
13,906
Stock-based compensation
17,734
25,995
Gain/loss on investments, net
(87
1,362
Change in fair value of contingent consideration
(3,003
Deferred income taxes
(21,842
4,498
Provision for excess and obsolete inventory
3,657
3,877
Changes in assets and liabilities:
(16,327
75,894
12,396
(147,432
Prepaid expenses and other assets
5,696
(4,127
11,857
(16,493
(572
(10,316
(13,333
4,869
5,425
2,978
(3,862
(5,974
Net cash used in operating activities
(13,733
(4,579
Cash flows from investing activities:
Purchases of short-term investments
(153,577
(146
Proceeds from maturities of short-term investments
80,417
710
Purchases of property and equipment
(5,757
(9,864
Purchases of long-term investments
(600
(685
Net cash used in investing activities
(79,517
(9,985
Cash flows from financing activities:
Repurchases of common stock
(24,377
(75,000
Restricted stock unit withholdings
(4,806
(7,660
Proceeds from exercise of stock options
743
9,620
Proceeds from issuance of common stock under employee stock purchase plan
4,418
4,916
Net cash used in financing activities
(24,022
(68,124
Net decrease in cash and cash equivalents
(117,272
(82,688
Cash and cash equivalents, at beginning of period
346,460
Cash and cash equivalents, at end of period
NETGEAR, INC. RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (In thousands, except percentage data) (Unaudited)
STATEMENT OF OPERATIONS DATA:
GAAP gross profit
GAAP gross margin
128
129
514
631
326
283
477
1,353
2,103
Non-GAAP gross profit
62,150
68,941
75,305
252,416
368,571
Non-GAAP gross margin
24.9
27.6
30.0
27.1
31.6
GAAP research and development
(1,027
(968
(1,329
(4,177
(5,161
Non-GAAP research and development
19,223
21,199
21,751
84,266
87,806
GAAP sales and marketing
(1,266
(1,328
(1,249
(1,887
(5,603
(7,628
Non-GAAP sales and marketing
34,012
32,954
34,343
134,072
137,067
GAAP general and administrative
(1,787
(940
(2,230
(6,601
(11,103
Non-GAAP general and administrative
12,831
13,009
12,345
49,715
48,556
GAAP other operating expenses (income), net
3,003
Restructuring and other charges
(3,666
(361
37
(4,577
(3,341
Litigation reserves, net
(20
(315
Non-GAAP other operating expenses, net
NETGEAR, INC. RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED) (In thousands, except percentage data) (Unaudited)
STATEMENT OF OPERATIONS DATA (CONTINUED):
GAAP total operating expenses
(4,142
(3,157
(5,446
(16,381
(23,892
(44,442
Non-GAAP total operating expenses
66,066
67,162
68,439
268,053
273,429
GAAP operating income (loss)
GAAP operating margin
1,897
4,468
3,440
5,923
4,577
3,341
20
315
Non-GAAP operating income (loss)
(3,916
1,779
6,866
(15,637
95,142
Non-GAAP operating margin
(1.6
0.7
2.7
(1.7
8.1
GAAP other income (expenses), net
(52
1,188
271
Non-GAAP other income (expenses), net
2,086
586
80
1,173
269
NETGEAR, INC. RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES (CONTINUED) (In thousands, except per share data) (Unaudited)
GAAP net income (loss)
(3,109
(715
1,908
(7,085
(3,505
Non-GAAP net income (loss)
(871
5,964
8,120
(8,514
75,789
NET INCOME (LOSS) PER DILUTED SHARE:
GAAP net income (loss) per diluted share
0.00
0.02
0.06
0.15
0.12
0.20
0.61
0.84
(0.10
1.53
0.13
0.01
(0.00)
0.16
0.11
0.04
(0.02
(0.24
(0.11
Non-GAAP net income (loss) per diluted share1
0.21
0.27
(0.29
2.44
Shares used in computing GAAP net income (loss) per diluted share
Shares used in computing non-GAAP net income (loss) per diluted share
29,822
1 The per share reconciliation of GAAP to non-GAAP may not aggregate due to both calculations utilizing a different share basis. The GAAP net loss per diluted share calculation uses a lower share count as it excludes potentially dilutive shares included in the non-GAAP net income per diluted share calculation.
NETGEAR, INC. SUPPLEMENTAL FINANCIAL INFORMATION (In thousands, except per share data, DSO, inventory turns, weeks of channel inventory, headcount and percentage data) (Unaudited)
July 3, 2022
April 3, 2022
Cash, cash equivalents and short-term investments
227,425
233,197
250,137
263,788
271,516
Cash, cash equivalents and short-term investments per diluted share
7.85
8.03
8.66
8.99
9.10
259,908
217,873
219,911
Days sales outstanding (DSO)
100
95
89
97
93
298,090
300,796
327,309
Ending inventory turns
2.5
2.4
2.2
1.9
Weeks of channel inventory:
U.S. retail channel
10.4
13.5
18.2
19.6
12.7
U.S. distribution channel
5.2
3.6
3.8
4.1
3.0
EMEA distribution channel
8.7
5.3
6.2
6.6
6.8
APAC distribution channel
18.5
16.0
14.0
14.4
13.4
Deferred revenue (current and non-current)
25,025
22,868
21,593
21,305
19,600
Headcount
691
731
740
766
771
Non-GAAP diluted shares
29,350
NET REVENUE BY GEOGRAPHY
Americas
159,175
64
169,360
68
159,419
63
617,211
66
786,326
67
EMEA
52,715
21
44,827
18
50,027
179,358
19
229,829
APAC
37,213
15
35,400
14
41,741
17
135,903
151,918
13
Total
NETGEAR, INC. SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED) (In thousands) (Unaudited)
NET REVENUE BY SEGMENT
Connected Home
149,036
150,581
174,152
558,823
853,472
SMB
100,067
99,006
77,035
373,649
314,601
Total net revenue
SERVICE PROVIDER NET REVENUE
55,787
40,448
29,697
148,331
129,052
719
1,171
711
4,234
2,481
Total service provider net revenue
56,506
41,619
30,408
152,565
131,533
NETGEAR Investor Relations Erik Bylin investors@netgear.com