• Revenue: $164.6 million, down 12.8% sequentially and 9% year-over-year.

• Net Income: Non-GAAP net loss of $8.4 million.

• Earnings Per Share (EPS): Non-GAAP diluted loss per share of $0.28.

• Free Cash Flow: Cash provided by operations $17.2 million; cash used for capital expenditures $2.5 million.

• Gross Margin: Non-GAAP gross margin was 29.5%, down from 33.6% year-over-year.

• Operating Margin: Non-GAAP operating margin of negative 9.7%.

• Service Revenue: $11.7 million, a year-over-year increase of 21.2%.

• Inventory Levels: Targeting a reduction to three months of supply.

• Subscriber Count: 928,000 paying subscribers.

• Warning! GuruFocus has detected 6 Warning Signs with NTGR.

Release Date: May 01, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Netgear Inc (NASDAQ:NTGR) has a strong balance sheet and generated over $17 million of cash from operations in Q1.

• The company is taking decisive actions for the long-term health of the business, including accelerating destocking to align channel inventory with sell-through.

• Netgear Inc (NASDAQ:NTGR) is focusing on creating long-term value for shareholders, aligning executive compensation with shareholder value creation.

• The company is innovating with new product launches, such as WiFi seven products, despite current inventory challenges.

• Netgear Inc (NASDAQ:NTGR) is expanding into new markets and securing partnerships, enhancing its total addressable market and strengthening its position in the managed switch business.

Negative Points

• Netgear Inc (NASDAQ:NTGR) experienced a revenue decline in Q1, with revenue down 12.8% sequentially and 9% year-over-year.

• Higher than expected inflation and interest rates are persisting, impacting the macroeconomic environment and channel partners' inventory posture.

• The company missed its non-GAAP operating margin target for Q1 due to destocking and excess channel inventory costs.

• Netgear Inc (NASDAQ:NTGR) is withdrawing its full-year guidance due to ongoing market challenges and the inability to meet previous expectations.

• The company faces increased competition in the high-end market segment, impacting its ability to attract customers to premium products.

Q & A Highlights

Q: What prompted the sudden need for strategic changes at Netgear? A: Charles Prober, CEO, explained that a combination of unexpected market conditions and ongoing challenges necessitated a strategic shift. The consumer home products (CHP) market did not recover as anticipated, and despite being a leader in premium products, the company was not attracting enough customers to these products. Additionally, higher-than-expected destocking costs and suboptimal product performance in Q2 led to the decision to accelerate strategic changes.

Q: Can you clarify what you mean by "accelerating destocking"? A: Charles Prober, CEO, stated that accelerating destocking involves closely working with channel partners to reduce inventory more rapidly than planned, primarily by not shipping products that aren't needed. This strategy is tailored to each channel partner's specific situation, aiming to optimize inventory levels and improve future demand fulfillment.

Q: Are consumers trading down from premium products in the current market? A: Charles Prober, CEO, indicated that the issue is not consumers trading down but rather the company's inability to attract more customers to its premium products. This challenge is partly due to not having a presence across all market segments, especially on platforms like Amazon where visibility across various price points is crucial.

Q: What product segments are experiencing excess inventory buildup? A: Bryan Murray, CFO, mentioned that excess inventory has been an issue in niche product areas like combined mesh and cable offerings and specific segments of the WiFi 6 products. The company is also addressing slower-moving inventory in its wireless LAN business on the SMB side.

Q: How significant is the expected cash generation in Q2 and the rest of the year? A: Charles Prober, CEO, projected that cash generation in Q2 would be significant, primarily due to ongoing efforts to reduce inventory levels. The magnitude of cash generation could be about half of what was seen in Q1 or potentially higher, depending on various factors including income and inventory reduction progress.

Q: What is Netgear's approach to share repurchases in the current market? A: Bryan Murray, CFO, stated that Netgear resumed share repurchases in Q1 after nearly two years, reflecting a strategic decision to buy back shares opportunistically. The company views its stock as undervalued and plans to continue repurchasing shares as conditions warrant.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.