Q3 2021 NETGEAR Inc Earnings Call
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Persist at homes.
Netgear as the leader of the premium Wi Fi retail market continues to lead the industry in bringing cutting edge high performance products.
Market.
Im excited announce that in the fourth quarter just in time for the holidays next year is introducing the next generation of Smart home Wi Fi mesh systems.
The most powerful or <unk> to date, the Ob Quad band mesh Wi Fi six <unk>.
System mixed.
Mixed a newly available six gigahertz Wi Fi bands Assessable homeowners.
This unique first of its kind mesh system.
Utilizes point band technology to deliver a pertain gigabit internet speeds to more devices simultaneously and with less interference and land.
This remarkable importantly, thanks to the four six gigahertz band.
Along with upgraded five gigahertz, Wi Fi radio and antenna designs.
Here is the first company to bring the quad band solution to market.
To enable unprecedented Wi Fi performance consumers.
Furthermore, this new system supports up to obtain gigabit internet speed input.
<unk> additional two five gigabit Ethernet output ports for wired connections.
In support of new more secure W. P. A three encryption standards.
Finally, the quad band or the Wi Fi six <unk> includes a free 30 day trial of the newly enhanced net year AMA service.
Which we expect will further add to our paid subscriber base.
This exclusive product is not available for preorder in the U S and soon will be in the UK as well.
For roughly $1500.
In colors of light and.
And limited edition.
And will add to the portfolio of our products at the Super premium portion of the market.
<unk> systems exceed the 1000 Omar.
Which is experiencing tremendous year over year and quarter over quarter.
Without a doubt we continue to lead in innovation and the premium Wi Fi systems market.
Anchored by Tri band Wifi six mesh.
Premium segment continued its growth within the market and was up sequentially to 36% of the total market.
Which is significant growth from a year ago.
We continue to believe that the super premium portion of the market.
Man's and compromised experience.
And that is higher ASP will expand the market.
Moreover, biased in this segment of the market much more likely to subscribe to one of our value added services such as Ahmad network security.
Especially when purchasing directly from our net gearing dotcom store, where we can curate a premium experience.
Our negative outcome stores worldwide and growing rapidly.
And we intend to make it a 10% of our worldwide DXP retail sales channel sometime next year, focusing on the new products at the Super premium end of the market.
Additionally, I'm excited about the strong reception to the unlocked version of the Nighthawk M. Five five <unk> Wi Fi six mobile banking.
This is a compact device capable of delivering gigabit internet speed similar to that of the home Wifi network, but in a mobile environment.
With the remote work and mobile lifestyle, becoming more prevalent than ever.
The Nighthawk <unk>.
<unk> enables users to ditch the mobile phone hotspots for a significant improvement in speed coverage and security.
Further the <unk> enables those in phases with unreliable broadband options to remain connected.
As it is the only device and has plans to offer one gigabit per second Ethernet port for connection to a home Wi Fi mesh system.
This device is now available exclusively in North America on net comp for about $700.
Our focus on innovation is a key driver.
In the acquisition of our paid subscribers.
The value proposition of our offerings continues to resonate with customers, especially with our highest end products in.
In the quarter, we added new capabilities to our enhanced netgear armor offering.
Which provides a protective shield with connected devices in the home network.
This upgrade at new protection to our already award winning feature set.
For ease of use the enhanced netgear armor is built into most obi and nighthawk routers to protect the entire net Inc.
Including those Iot devices, such as IP cameras, IP light switches and Wi Fi loans.
This is in Stark contrast to traditional endpoint antivirus products that can only be installed on computing devices and charge a security a subscription fee for each device, while still not protecting Iot devices.
Net gear armour is complementary for a 30 day trial period.
And upon exploration the yearly subscription starting at 90 999.
Although we are currently projecting to end the year at 575000 subscribers below our original goal set at the start of the year.
We remain positive about the long term profitability impact on our business and our ability to achieve 1 million subscribers in the next three years.
Turning to our SMB business I'm proud of our team's execution this quarter and once again delivering strong double digit year over year growth for the third consecutive quarter.
Undeniably the momentum in SMB remains strong.
As businesses continue to reopen and new business from and we saw further adoption of our Wi Fi six wireless offerings and with Wifi <unk> and Wifi seven to follow we expect this to continue to be a growth pillar.
Additionally, we saw continued momentum in our <unk> business, which has been a key area of focus and will continue to serve as a strategic growth area in the future.
The industry transition from analog to digital AAV over IP is clearly accelerating.
With disruptive new applications such as digital.
Digital studios wireless digital speaker systems from loss of Andrew's remote classrooms in church senses green or blue screens replacement with ultra high definition LCD screens.
Digital theater backdrops and remote robotic surgeries.
New applications are being adopted all the time.
Traditional AAV infrastructure via HDMI cables get replaced with Ethernet.
Our pro <unk>, which is a uniquely embedded with many industry.
Avi protocols to enable these applications to be deployed easily at EV integrators.
We sit at the heart of this condition and along with it.
Expanding worldwide network.
Lars.
Integrators and <unk> equipment vendors.
We're also making progress in expanding our service offerings for the SMB segment.
In the fourth quarter, we are introducing insight business VPN.
New add on service offering for our all the serious business mesh systems.
An integral part of every company needs is managing the security and integrity of the business network and this service enables expansion of corporate networks, the branch offices and home offices and employees, while ensuring each node on the network secured and <unk>.
Centrally managed with minimal administrative complexity.
Before I turn it back over to Brian I'd like to take a moment to welcome <unk> to the Netgear Board of directors.
Arnie, serving as <unk>, Chief product officer, and head of consumer revenue Chairman brings to net here and over 20 year track record of developing and scaling SaaS and subscription based companies and offerings.
With experience in executive leadership roles at companies, including Coursera Dictionary Dot Com Yahoo, and Microsoft I am excited to collaborate with <unk> as we continue to build out net years software and value added services business to complement our industry leading hardware.
And with that I'll turn it back over to Bryan to comment on our opportunities and obstacles in the coming quarters.
Thank you Patrick.
And it's widely publicized that the rapidly changing macroeconomic environment is causing disruption to global supply chains for companies of all sizes and industries.
<unk> is not immune to this.
Despite the progress and the reopening of economies worldwide.
Third quarter of 2021 sulfur continuation of numerous headwinds, including component shortages associated price increases and even longer transit times with dramatically increased costs.
All exacerbated that exacerbated by flare ups of the Delta variant.
These worldwide supply chain constraints combined with lower than expected end user demand of retail CHP business.
Presents a significant challenge to meeting our previous topline growth projections for the fourth quarter.
We expect SMB to continue seeing strong demand in Wifi, six access points and probably be switches.
Only to be limited by supply in the fourth quarter and into 2022.
On the CHP business looking ahead to the fourth quarter of 2021.
We see market growth moderated to approximately 15% above the same period in 2019.
Our previous Destocking efforts to optimize inventory levels of the third quarter made progress.
But we plan for these efforts to continue into the fourth quarter.
We also expect our service provider revenue to decline sequentially due to supply constraints.
Accordingly, our expectations for net revenue in the fourth quarter is in the range of $250 million to $100 million to $265 million.
As a result of loss of leverage from our top line and.
And in combination with the significant freight and component cost increases.
We will see in the next quarter and beyond we expect fourth quarter GAAP operating margin to be in the range of <unk>.
Negative 5% to 5%.
And non-GAAP operating margin is expected to be in the range of 2%.
3%.
Our GAAP tax rate is expected to be approximately 80% and our non-GAAP tax rate is expected to be 26, 5% for the fourth quarter of 2021.
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 COVID-19, pandemic and deteriorating supply chain conditions.
And should unforeseen events occur and particular challenges related to closure of our manufacturing partners operations.
Kris transportation delays into any of our regional distribution centers.
Greater than expected freight or component costs, our actual results could differ from the foregoing guidance.
We would now like to answer any questions from the audience.
At this time I would like to remind everyone.
In order to ask a question press Star then the number one on your telephone keypad.
Pause for just a moment to compile the Q&A roster.
Your first question comes from Adam Tindle with Raymond James Your line is open.
Okay. Thanks, Good afternoon, I, just wanted to start maybe Brian and Patrick could potentially comment a little bit, but obviously understand that very difficult supply environment with supply constraints going on right now but at the same time you are talking about the need to destock, meaning you have excess supply or excess inventory and I'm trying to square those.
Two dynamics, a supply constrained environment, but the need to destock why is it the case where is it concentrated and how much destocking is left.
Well, let me talk about Ms shortages shortages on primarily on the SMB side.
And while the Destocking is mostly on the CHP side.
And Brian we could add more color to it.
Yes, it kind of just building on what Patrick was saying their SMB is certainly facing shortages across a number of the product categories for that business and.
And we expect that to continue on until.
At least the second half of next year at this point, we're hopeful that we will start to see improvement in the back half of 2022.
On the CHP side, the one area I would say that we are facing supply constraints would be.
For those products that we're selling to our service provider customers.
Certainly in the LTE and <unk> mobile hotspots, we are facing challenges there.
We expect for Q3, sorry, Q4 that will probably be in that 30% to $35 million range, which is below what we were expecting coming into the second half of this year.
From a channel inventory standpoint on CHP.
You may recall back in July where we had.
<unk> set out to to reduce channel inventory levels, given the market was at that time steering towards a 20% growth over 2019.
And really kind of.
Right sizing the channel footprint based on the levels that we had stocking in the first half of the year to that level, but as I said earlier with the market actually delivering about 15% growth. So below our expectation. There is further further room to deliberate in terms of destocking in the channel, we expect to deliver most of that.
In the fourth quarter.
Okay. That's helpful color I appreciate it and maybe just a higher level one for Patrick I'm talking about competitive dynamics recently some of the cyber security firms.
We have been partnering with Wifi companies or creating their own products and I kind of think of this as an opportunity or a potential threat from an opportunity standpoint. For example, fortinet invested I think just under $100 million and linksys.
I'm, a threat standpoint, Palo altos organically pursuing this market.
Consumer Wifi market via their own organic product. So maybe you could bucket both the opportunity would you consider partnering the way that links US did for example, and what would the terms you'd be looking for and then the threat how to defend against new incumbents like like Palo Alto.
Yes, I think.
Customers are different.
As I mentioned in the discussion that we're introducing our own version.
Similar services on our <unk> Pro series.
For the SMB side, so we would be able to manage it.
Manager of centrally managed one of the <unk> and the home offices, who our insight central management as well as the new insight VPN services.
So we are ahead of them because we just announced.
Alright, and then we are already shipping but of course, our target customers are different there is primarily fortune 5000 hours up primarily.
What we call micro businesses.
The other thing is I have stressed for many quarters as well as just now in our discussion.
We are focusing more and more on the premium.
The Super premium Wi Fi segment, where people would not tolerate any lag.
Not tolerate any.
Uncovered areas in their houses.
So we find a lot of our customers as a matter of fact these satisfied with Wi Fi provided by their own company all by the service providers, but pluck our high end mesh systems into that particular provided piece of equipment.
Looking at the spec.
But what Palo Alto networks, <unk> I'm talking about.
They had two generations behind what we are going to offer.
And with more and more off of one point.
So two and tank EBIT coming into the house.
I think for so very uncompromised customers, we can continue to sell this super high end.
So all in all we believe that is not really in the same space that we're competing for.
A cooperation standpoint.
We're always open for telco operations for example.
The partners that we use to provide our VPN.
Insight VPN services have been providing similar fortune 5000.
Companies It department for really really big companies and the software and the services. They provide a really rock solid and now we are partnering with them to provide similar services to IV departments of small and micro businesses.
Understood. That's helpful. Thank you very much.
Sure.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Question comes from Matt <unk> with BW U S financial your line is open.
First off did I hear you right you said units shipped was $3 4 million.
That's right.
That unit count is quite low compared to 2019 Q3.
I'm just.
Im wondering if.
Youre just missing the market or have you exited markets since then where it was.
$3 8 million last quarter, and now you're at $3 4 million units shipped.
Yeah.
Well I'll just point out that back in 2019.
Same quarter, we were at 52% of market share.
And right now we had 46% I think that is the major difference.
Okay.
Just a moment.
And so the more and that time, we have more minutes towards the low end right now have more dollars towards the higher ASP.
Thanks.
Okay that was where I was going to my follow up Okay, and then as far as.
The superpremium Youre looking at.
One of them what kind of trends have you seen so far this quarter, especially through the destocking that kind of gives you confidence that you could.
Continuing to expand this market.
Well I mean as I discussed in the India.
Previous.
Time that we are only selling the super premium.
On our own Netgear dotcom stores direct so.
So we can see the orders coming in everyday.
Okay, but what are the super premium customers also be more inclined to use middle person or someone to install it.
Do it themselves.
We provide that services model.
Okay.
Alright Thats it from me. Thank you alright, great. Thanks.
Okay.
Your next question comes from the line of Paul Silverstein with Cowen Your line is open.
Alright grocery Krishna taking my questions.
Brian with respect to the revenue roughly 75% of revenue derived from connected home from consumer.
It sounds like.
Vascular arguments question it sounds like.
You're both attacking opportunity in the high end, but it's.
Well, let me ask what's different.
How much of your pursuit of premium and Super premium is a function of seeing a robust market opportunity measured by revenue and by margins and bottom line and how much of it is really driven out of necessity.
You are with some refurbishing revenue coming from consumer.
Sounds like that market is.
Already disappointing.
Relatively low prospect.
Meaningful improving anytime soon independent of supply chain constraints independent of Covid economic impact in the related question would be when you talked about 15% down from 20%.
<unk> outlook relative to 19, which I assume youre trying to get to a normalized bids.
Is that the rate base.
What is the growth outlook for consumer Wi Fi.
May.
Maybe again, maybe 19 is not the right place to look maybe it's for lower than that but let me let you respond.
No I mean.
We can only look at what the market is as of today in.
In dollar terms.
And let me, let me be clear clear about that compared to 2019.
As a matter of fact, most of the growth of that 15% is from ASP increase.
And the ASP increase is primarily driven by us.
By moving more into the Super premium.
And as Brian mentioned in the discussion that premium segment of Tri band and broadband has grown double.
Year over year, and remember Q3 last year was a crazy core the demand has gone through the roof everybody Russia.
Wi Fi and even against a huge quarter was skewed double.
The premium segment of the market.
But that clearly is a green deal is a new segment that we account abating.
And you said it Ryan is a more profitable.
More profitable segment.
Both from a percentage and a dollar standpoint.
As much as we could win 52% market share in the below $100 routers.
You guys all 15 of them.
Arrival, one of Super premium.
And so that in of itself is very lucrative from a dollar profit standards.
Now more importantly is.
There is very little.
Our competitor could do in chasing us in the technology required.
The offer broadband let alone try band.
So we believe that and we will continue to enjoy a much higher market share in that particular segment.
So when you sum it up.
It's more profitable.
Absolutely a growth segment irrespective of what the rest of the market demands.
And we have a technological leadership.
That our competitors would take years to just to Chase US led by then we will move on to to help to ban on Wi Fi seven so it would lead that will continue to maintain our leadership position and that's why we're going after that.
So patchy to those comments can I ask you can you remind us.
The super premium into the market for the premium and superpremium.
What percentage of revenues are for you today, what does this growth rate for you what cannot be at.
What point Kennedy.
Where can it be in the next two to three years as a percentage of your total revenue.
Now, we do not and with traditional do not break down product.
<unk> revenues, but the only thing we can say is as I just mentioned.
That.
Premium in a market that is tri band and broadband is 36% of the total mass market is doubling more than doubling year over year. So that is how fast the market is growing.
So.
We believe our growth on that will limit that in the next couple of years and we're trying to push it.
As big as possibly and an hour.
Our our one hour.
Our target is to make that premium and more than 50%, 60% of our revenue charter plus HB.
By when.
Probably two years to no later than three years.
Cash was that.
While the premium Super premium rents growing at over 100% year over year whats the growth rates for the rest of the consumer market.
Paul.
So you could argue man in probably the strength in the rest of the market.
Because of ASB declined by all competitors.
Gives you an idea.
<unk> Wi Fi <unk> used to sell for 299 is now selling for 149.
And is that is that that insurers for serious because youre seeing ASP erosion of 40 plus percent.
For ASE.
Your asp's or the lower end of the market, that's the type of erosion or Sir.
No I'm, just saying that at the low end, yes, we definitely see ASP erosion.
For the market participants.
But we stay above the fray, we basically do not participate in that kind of price erosion.
So for example from the same feedback that we compete against the Google and the Amazon, We're still at $2 49 to $2 99.
Perhaps you could third bedroom returned to the question wall Youre enjoying 100 plus percent growth.
Assuming you are growing with marketer or better than market given your dominant position, while youre enjoying their growth in the premium in the market.
What type of decline are you seeing in the rest of the market.
No.
Just like Tesla is growing like crazy.
Risks of the gasoline car industry is shrinking.
<unk> is a completely new fee.
Alright, I'll take it offline I understand what you're saying, but theres still math involved over the next several years as the premium Super premium grows dramatically before you get to that portion of the market being the dominant portion of the revenue but ultra.
I'll take it offline thats fine I appreciate the responses.
There are no further questions at this time I will turn the call back over to Chris centers.
Yeah.
Thank you for joining us today at the current macro economic environment is definitely challenging logistics supply and component standpoint.
I'm confident in our team's ability to navigate through these headwinds and continued to march towards our goal of dominating in the.
Premium in the consumer market and in the Poe Avs side of the SMB.
Our commitment to innovation and Brian set us apart in the market and we remain poised to enable the work from everywhere and learning and are excited at the forefront of this transition to explain further on our product portfolio technology and strategy. We plan to have our analyst day annual analyst day early December.
And we're going to send invitations shortly and look forward to seeing you all of them over them.
Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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