Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Successful channel destocking at the high end of the $25 million to $30 million target, improving business linearity.
- Inventory position reduced by $22 million, down 24% since the beginning of the year.
- Generated $16 million in free cash flow and executed $10 million in share repurchases.
- Record quarter of sell-through for Pro AV managed switch business, now back on a growth trajectory.
- Recurring subscription revenue grew over 30% year-over-year, with 958,000 subscribers.
Negative Points
- Revenue down 12.6% sequentially and 17% year-over-year, impacted by destocking and inventory reduction efforts.
- Non-GAAP gross margin decreased to 22.4%, down 920 basis points year-over-year.
- Non-GAAP operating loss of $31.1 million, with an operating margin of negative 21.6%.
- Higher cost of inventory and transportation costs due to the Red Sea shipping crisis.
- Service provider revenue expected to be lower in Q3, impacting overall revenue.
Q & A Highlights
Q: On operating results, you mentioned that the channel destocking is done, but Q3 guidance still implies an operating loss. What are the drivers still weighing on the operating loss, and what is the trajectory beyond Q3?
A: Bryan Murray, CFO: The biggest headwinds are the higher cost of inventory and higher freight costs due to the Red Sea shipping crisis. Additionally, the top-line leverage is impacted by lower service provider revenue as we await the launch of new products. We are also investing about $2 million in our NETGEAR for Business go-to-market efforts, which will take time to generate revenue and ROI.
Q: Regarding restructuring the organization, is there a new expected run rate for quarterly OpEx?
A: Bryan Murray, CFO: It's too early to say definitively as we are still refining our long-term strategy. In the near term, we expect a mid- to high single-digit increase in OpEx in the back half of the year, partly due to increased revenues and incremental legal expenses related to the TP-Link case.
Q: Can you provide more details on the potential market share opportunity if the TP-Link case outcome is favorable?
A: Charles Prober, CEO: TP-Link holds a market share roughly equivalent to ours in key product categories. A favorable outcome could significantly impact our market share positively. We are building plans to capitalize on this opportunity when it materializes.
Q: How are you thinking about destocking levels and your ability to capture more real-time sales if the TP-Link outcome is favorable?
A: Charles Prober, CEO: We feel we are at a good aggregate level for destocking. Some channels may need to stock up due to low levels, while others could be lower. We aim to match sell-in with sell-through to maintain better linearity and working capital efficiencies.
Q: Can you explain the decision behind the additional share repurchase authorization?
A: Bryan Murray, CFO: This is consistent with our historical approach to capital allocation. We believe stock repurchase is a healthy way to allocate capital at this point, and it was an appropriate time to increase the authorization.
Q: Could you elaborate on the changes to the subscription strategy and the new metrics you will be using?
A: Charles Prober, CEO: We are moving away from product bundles and focusing on converting purchasers into recurring subscribers. We have two classes of subscribers: those who discover and subscribe through the app and those acquired through product bundles. We will focus on the former, as they provide better retention and recurring revenue.
Q: What are the main challenges and opportunities for NETGEAR's ProAV and WiFi Land businesses?
A: Charles Prober, CEO: We see significant growth opportunities in both ProAV and WiFi Land markets. We are building the team and capabilities to compete effectively. The addition of Pramod Vajani as President and GM will help drive growth and profitability in these segments.
Q: How is the US consumer networking market performing, and what are your expectations?
A: Charles Prober, CEO: The US consumer networking market showed signs of recovery with a smaller year-over-year decline than expected. We believe the market dynamics will improve significantly as the upgrade cycle driven by WiFi 7 accelerates.
Q: What are the key financial highlights for Q2 2024?
A: Bryan Murray, CFO: Revenue was $143.9 million, down 12.6% sequentially and 17% year-over-year. We generated $16 million in free cash flow and executed $10 million in share repurchases. We ended the quarter with $294.3 million in cash and short-term investments.
Q: What is the outlook for Q3 2024?
A: Bryan Murray, CFO: We expect net revenue to be in the range of $160 million to $175 million, up 16.4% sequentially at the midpoint. Gross margins and operating margins will continue to be impacted by inventory reduction efforts and higher transportation costs. Non-GAAP operating margin is expected to be in the range of negative 11% to negative 8%.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
