NETGEAR(NTGR) - 2024 Q1 - Quarterly Results

Q1 2024 Financial Performance and Management Commentary This section presents NETGEAR's Q1 2024 financial performance and management's strategic commentary on the quarter's results First Quarter 2024 Financial Highlights NETGEAR reported a 9.0% year-over-year revenue decrease in Q1 2024, alongside wider operating losses, despite strong service revenue growth and improved cash flow from operations Q1 2024 Key Financial Results (vs. Q1 2023) | Metric | Q1 2024 | Q1 2023 | Change | | :--- | :--- | :--- | :--- | | Net Revenue | $164.6M | $180.9M | -9.0% | | GAAP Operating Loss | $(21.6)M | $(12.0)M | -80.0% | | Non-GAAP Operating Loss | $(16.0)M | $(7.1)M | -125.4% | | GAAP Net Loss per Diluted Share | $(0.63) | $(0.33) | -90.9% | | Non-GAAP Net Loss per Diluted Share | $(0.28) | $(0.19) | -47.4% | - Service revenue grew 21.2% year over year, indicating strength in the company's subscription-based offerings[1] - Cash flow from operations was $17.2 million, an increase of 88.4% year over year, demonstrating improved working capital management[1] - The company repurchased approximately 783,000 shares of its common stock during the quarter[1] Management Commentary Management attributed Q1 challenges to macroeconomic pressures and channel destocking, outlining a plan to expedite destocking in Q2 while highlighting progress in inventory reduction and cash generation - Performance was pressured by a challenging macroeconomic environment, high inflation, and interest rates, leading channel partners to reduce inventory to historical lows[3] - A plan is in place to expedite remaining channel destocking in Q2, which is expected to create a near-term financial challenge but benefit the long-term health of the business[3] - The company is focused on aligning its revenue with channel sell-through to become more predictable and profitable in subsequent quarters[3] - NETGEAR's own inventory levels were reduced by $37.6 million in Q1, and the company generated strong cash from operations while repurchasing 783,000 shares[4] Business Outlook for Q2 2024 This section outlines NETGEAR's financial guidance for Q2 2024, including revenue and operating margin projections, and reconciles GAAP to non-GAAP outlook Q2 2024 Guidance The company projects Q2 2024 net revenue between $125 million and $140 million, anticipating deeply negative operating margins due to accelerated channel destocking and inventory actions Q2 2024 Financial Guidance | Metric | Guidance Range | | :--- | :--- | | Net Revenue | $125M - $140M | | GAAP Operating Margin | (30.9)% - (27.9)% | | Non-GAAP Operating Margin | (25.0)% - (22.0)% | | GAAP Tax Expense | $1.0M - $2.0M | | Non-GAAP Tax Benefit | $(8.0)M - $(7.0)M | - Accelerated destocking activities are expected to create a topline headwind of $25 million to $30 million in Q2[5] - Revenue from the service provider channel is expected to be approximately $15 million in Q2, pending the launch of next-generation 5G mobile hotspots in the second half of the year[5] GAAP to Non-GAAP Outlook Reconciliation This section reconciles NETGEAR's Q2 2024 forward-looking GAAP guidance to non-GAAP figures by adjusting for estimated stock-based compensation, restructuring charges, and tax-related items Q2 2024 GAAP to Non-GAAP Outlook Reconciliation | Metric | GAAP | Adjustments | Non-GAAP | | :--- | :--- | :--- | :--- | | Operating Margin | (30.9)% - (27.9)% | | (25.0)% - (22.0)% | | Stock-based compensation | | 4.0% | | | Restructuring and other charges | | 1.9% | | | Tax Expense (Benefit) | $1.0M - $2.0M | | $(8.0)M - $(7.0)M | | Non-GAAP tax adjustments | | $(9.0)M | | Use of Non-GAAP Financial Information This section explains the rationale and application of non-GAAP financial measures to provide a clearer understanding of the company's operational performance Explanation of Non-GAAP Measures The company utilizes non-GAAP financial measures to supplement GAAP results, excluding specific charges to enhance understanding of ongoing operational performance for internal evaluation and investor comparison - Non-GAAP measures exclude charges such as amortization of intangibles, stock-based compensation, restructuring charges, and litigation reserves to facilitate a review of comparable operating performance[11][12] - Management uses these non-GAAP measures internally to evaluate business performance, for strategic planning, and for benchmarking against competitors[12] - The company believes these measures help investors by enabling more meaningful period-to-period comparisons, identifying underlying business trends, and showing results 'through the eyes' of management[12][15] Financial Statements and GAAP to Non-GAAP Reconciliation This section provides NETGEAR's condensed consolidated financial statements, including balance sheets, statements of operations, and cash flows, alongside detailed GAAP to non-GAAP reconciliations Condensed Consolidated Balance Sheets As of March 31, 2024, total assets decreased to $801.3 million, primarily due to a $37.6 million reduction in inventories, with corresponding decreases in total liabilities and stockholders' equity Selected Balance Sheet Items (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $172,656 | $176,717 | | Short-term investments | $116,765 | $106,931 | | Inventories | $211,270 | $248,851 | | Total assets | $801,279 | $847,142 | | Total liabilities | $289,917 | $311,647 | | Total stockholders' equity | $511,362 | $535,495 | Condensed Consolidated Statements of Operations In Q1 2024, NETGEAR reported a net loss of $18.7 million on $164.6 million net revenue, with gross margin declining to 29.3% and operating loss widening to $21.6 million Statement of Operations Highlights (in thousands, except per share data) | Metric | Q1 2024 | Q4 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | | Net revenue | $164,586 | $188,674 | $180,908 | | Gross profit | $48,237 | $65,636 | $60,382 | | Gross margin | 29.3% | 34.8% | 33.4% | | Loss from operations | $(21,648) | $(2,874) | $(11,975) | | Net loss | $(18,650) | $(1,669) | $(9,712) | | Diluted net loss per share | $(0.63) | $(0.06) | $(0.33) | Condensed Consolidated Statements of Cash Flows In Q1 2024, the company generated $17.2 million in cash from operating activities, primarily due to a $36.4 million inventory reduction, while using $9.9 million in financing activities for share repurchases Cash Flow Summary (in thousands) | Activity | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $17,190 | $9,122 | | Net cash used in investing activities | $(11,339) | $(14,597) | | Net cash provided by (used in) financing activities | $(9,912) | $2,166 | | Net decrease in cash and cash equivalents | $(4,061) | $(3,309) | Reconciliations of GAAP to Non-GAAP Measures This section provides detailed reconciliations of Q1 2024 GAAP results to non-GAAP metrics, adjusting for items such as stock-based compensation and restructuring charges to derive non-GAAP operating and net losses Q1 2024 GAAP to Non-GAAP Operating Loss Reconciliation (in thousands) | Description | Amount | | :--- | :--- | | GAAP operating loss | $(21,648) | | Stock-based compensation expense | $4,544 | | Restructuring and other charges | $1,032 | | Litigation reserves, net | $30 | | Non-GAAP operating loss | $(16,042) | Q1 2024 GAAP to Non-GAAP Net Loss Reconciliation (in thousands) | Description | Amount | | :--- | :--- | | GAAP net loss | $(18,650) | | Stock-based compensation expense | $4,544 | | Restructuring and other charges | $1,032 | | Litigation reserves, net | $30 | | Gain/loss on investments, net | $101 | | Non-GAAP tax adjustments | $4,588 | | Non-GAAP net loss | $(8,355) | Supplemental Financial Information This section provides additional financial details, including key operating metrics, net revenue breakdown by geography, and segment performance Key Operating Metrics Key operating metrics indicate continued inventory reduction to $211.3 million, improved inventory turns to 2.2, reduced headcount to 628, and decreased channel inventory weeks across several regions Key Metrics Trend | Metric | Q1 2024 | Q4 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | | Inventories | $211,270K | $248,851K | $337,187K | | Ending inventory turns | 2.2 | 2.0 | 1.4 | | Headcount | 628 | 635 | 702 | Weeks of Channel Inventory | Channel | Q1 2024 | Q4 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | | U.S. retail | 11.2 | 10.8 | 12.7 | | U.S. distribution | 4.0 | 7.9 | 4.4 | | EMEA distribution | 5.9 | 6.4 | 8.5 | | APAC distribution | 8.0 | 10.0 | 14.0 | Net Revenue by Geography In Q1 2024, the Americas remained the largest market at 67% of net revenue, while EMEA's contribution decreased to 19% and APAC's share grew to 14% Net Revenue by Geography (in thousands) | Region | Q1 2024 Revenue | Q1 2024 % | Q1 2023 Revenue | Q1 2023 % | | :--- | :--- | :--- | :--- | :--- | | Americas | $109,928 | 67% | $121,922 | 67% | | EMEA | $31,187 | 19% | $39,178 | 22% | | APAC | $23,471 | 14% | $19,808 | 11% | | Total | $164,586 | 100% | $180,908 | 100% | Net Revenue by Segment In Q1 2024, Connected Home segment revenue was $96.0 million, while NETGEAR for Business segment revenue was $68.6 million, both showing year-over-year declines Net Revenue by Segment (in thousands) | Segment | Q1 2024 | Q4 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | | Connected Home | $95,963 | $118,378 | $102,746 | | NETGEAR for Business | $68,623 | $70,296 | $78,162 | | Total net revenue | $164,586 | $188,674 | $180,908 | Service Provider Net Revenue Total service provider net revenue nearly doubled year-over-year to $27.8 million in Q1 2024, primarily driven by the Connected Home segment's growth to $27.6 million Service Provider Net Revenue (in thousands) | Segment | Q1 2024 | Q4 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | | Connected Home | $27,553 | $27,313 | $14,027 | | NETGEAR for Business | $243 | $152 | $190 | | Total service provider net revenue | $27,796 | $27,465 | $14,217 |