Q2 2022 NETGEAR Inc Earnings Call
Ladies and gentlemen, thank you for standing by at this time all participants are in a listen only mode. Later, we will conduct a question and answer session at that time. If you have a question you will need to press star one on your push button phone I would now like to turn the conference over to Eric Violet. Please go ahead Sir.
Thank you David Good afternoon, and welcome to Netgear second quarter 2022 financial results Conference call.
Joining us from the company are Mr. Patrick Lo Chairman and CEO and Mr. Bryan Murray CFO .
The format of the call will start with a review of the financials for the second quarter provided by Bryan.
Followed by details and commentary on the business provided by Patrick.
And finish with third quarter of 2022 guidance provided by Bryan.
So they have time for any questions.
If you have not received the copy of todays release, please visit <unk> Investor Relations website at Www Dot net dot com.
Before we begin the formal remarks, we advise you that todays conference call contains forward looking statements.
We're looking statements include statements regarding expected revenue.
Operating margins tax rates.
Spencers and future business outlook.
Results or trends could differ materially from those contemplated by these forward looking statements.
For more information please refer to the risk factors discussed in next year's periodic filings with the SEC, including the most recent Form 10-Q.
Any forward looking statements that we make on this call.
On assumptions as of today.
And neck your undertakes no obligation to update these statements as a result of new information or future events.
In addition, several non-GAAP financial measures will be much not this call a reconciliation of the non-GAAP to GAAP measures can be found in today's press release on our Investor Relations website.
At this time I would now like to turn the call over to Mr. Bryan Murray.
Okay.
Thank you Eric and thank you everyone for joining today's call.
Net revenue for the quarter ended July <unk> 2022.
It's $223 $2 million.
Which was above the high end of our guidance range up 6% sequentially.
Down 27, 7% year over year.
Strong operational execution by the team unlocked incremental supply.
Which drove the higher than expected performance.
This includes the incremental supply of our pro 80 managed switch products.
Rich powder SMB business to a record quarterly topline.
And our CHP business, we continue to see double digit growth in our Super premium Wi Fi mesh products.
As well as our <unk> mobile hotspots.
Both of which were aided by improved supply in the quarter.
The <unk> mobile hotspot supply improvement in particular.
Hold us to deliver higher revenue from our service provider customers than initially expected.
We ended the second quarter with a non-GAAP operating loss of $4 $2 million.
non-GAAP operating margin of negative one 9%.
Also above the top end of our guidance, primarily as a result of the incremental top line leverage.
We began our efforts to optimize spend on the CHP side of the business in the second quarter.
By deemphasizing investments in areas that are declining.
And in conjunction with stronger F&B performance, we were able to improve non-GAAP operating margin by 250 basis points as compared to the prior quarter.
For the second quarter of 2022 net revenue for the Americas was $144 million.
A 32, 3% year over year.
And relatively flat on a sequential basis.
EMEA net revenue was $45 million, which is down 27, 2% year over year and up 21, 9% quarter over quarter.
Our APAC net revenue was $34 2 million, which is down a half a percent from the prior year comparable period.
17, 9% sequentially.
Year over year revenue declines were principally driven by the retail for the CHP business.
These declines were partially offset by strong performance in SMB, where.
Where we saw double digit growth in all three regions.
For the second quarter of 2022, we shipped a total of approximately $2 2 million units.
One 3 million nodes of wireless products.
Shipments of all wired and wireless routers and gateways combined were about 700 in 2000 units for the second quarter of 2022.
The net revenue split between home and business products was about 58% and 42% respectively.
The net revenue split between wireless and wired products was about 58% and 42% respectively.
Products introduced in the last 15 months constituted about 28% of our second quarter shipments.
While products introduced in the last 12 months contributed about 22% of our second quarter shipments.
Okay.
From this point on my discussion points will focus on non-GAAP numbers.
The reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today.
non-GAAP gross margin in the second quarter of 2022 was 27, 7%.
Which is down 270 basis points as compared to 34% in the prior year comparable period.
And down 50 basis points compared to 28, 2% in the first quarter of 2022.
Yeah.
As compared to the prior year, we experienced an increase in material costs.
Overhead costs and transportation costs.
Total Q2, non-GAAP operating expenses came in at $66 $1 million, which is down one 9% year over year and down three 7% sequentially.
Our head Count was 740 as we ended the quarter down from 766 in Q1.
We expect our head count to remain at this approximate level, but we will rebalance our head count deployment to focus resources and invest in areas that we believe will deliver future growth and profitability.
Such as <unk>.
It will be eight nine Wi Fi systems.
<unk> mobile products and subscription services.
Our non-GAAP R&D expense for the second quarter was nine 5% of net revenue as.
As compared to six 9% of net revenue in the prior year comparable period.
At 10, 8% of net revenue in the first quarter of 2022.
To continue our technology and subscription service leadership, we are committed to continued investment in R&D.
Our non-GAAP tax rate was negative four 1% in the second quarter of 2022.
Looking at the bottom line for Q2, we reported non-GAAP net loss of $5 5 million and non-GAAP diluted net loss per share of <unk> 19.
Turning to the balance sheet.
We ended the second quarter of 2022 with $251 million in cash and short term investments.
Down $13 $7 million from the prior quarter.
During the quarter $5 $2 million of cash was provided by operations were.
The Springs are total cash used by operations over the trailing 12 months $6 $6 million.
We used $1 $1 million in purchases of property and equipment during the quarter.
Which brings our total cash used for capital expenditures over the trailing 12 months seven $3 million.
In Q2, we spent $15 million to repurchase approximately 678000 shares of netgear common stock at.
And an average price of $22 13 per share.
Since the start of our repurchase activity in Q4, 2013, we have spent $651 $9 million to repurchase $18 9 million shares.
We are committed to returning value to our shareholders.
We plan to continue to upper distinctly repurchase shares in future periods.
Our fully diluted share count is approximately 29 million shares exiting the second quarter.
Now turning to the second quarter results for our product segments.
The connected home segment, which includes our industry leading orby.
Nighthawk.
Nighthawk Pro gaming and neuro brands generated net revenue of $128 $9 million during the quarter.
Which was down 43, 9% on a year over year basis, and down one 1% sequentially.
We experienced a year over year decline in both the retail and service provider channels.
As a reminder, the prior year comparative period for the retail portion of the business was boosted by heightened consumer demand in response to the pandemic.
Along with stocking of depleted channel to meet the heightened demand.
Our service provider business rebounded well in Q2 with a strong sequential increase enabled by improved supply of <unk> mobile hotspots.
And the strength is expected to continue in the second half of the year.
We were better able to navigate the supply chain challenges facing our F&B business in the quarter.
And I'm excited to share that the F&B generated record net revenue of $94 4 million for the second quarter of 2022.
Is up 19, 5% on a year over year basis, and up 17, 6% sequentially.
Once again, thanks to our strategic investments in <unk>.
Our men and switch products led the way with 69% growth as compared to the prior year.
Additionally, we see increasing traction with our portfolio of Wi Fi six cloud managed mesh wireless access points.
Furthermore, we once again spent heavily in airfreight to compensate for shipping and production delays.
Offsetting the higher margin contributions from this business.
I'll now turn the call over to Patrick for his commentary after which I will provide guidance for the third quarter of 2022.
Thank you Brian .
Hello substantial supply chain disruption brought on by the pandemic is continuing to attract companies across many industries.
Our team's excellent execution in navigating these challenges in the second quarter.
Across a number of strategic product categories.
Enabling us to overachieve relative to our guidance.
I'll, probably be managed switch line of products.
The first of these strategic product categories.
And it helped drive our SMB top moving to our record results in Q2.
These switches enable the EV industry to make the transition from analog HDMI solutions to intelligence digital Avi over IP Ethernet solutions.
Net year delivers differentiation on three different levels.
Which allows us to continue to expand and lead this newly created market.
First.
The pro software built into wired switches.
Sam compatible with all major AG equipment manufacturers and system integrators.
Enabling trouble free and <unk>.
Time saving installation.
Our video conference rooms streaming video production studios.
Large scale ultra high definition displays and.
And just you don't finish this nice just to name a few applications.
Second the breadth of our portfolio on pro <unk> managed switches.
Desk top eight ports.
Mount 48 ports from one gig to 10 gig to 100 gig switches is unique in the industry.
And allows us maximum flexibility depending on the application.
Finally, we differentiate our solution with a pro Avi design consulting team.
Spans all three geographic regions in all major markets.
This combination of capabilities and knowledge.
IP switching and Avi systems forms that defensive moats that is difficult for others to build and replicate.
This pro Avi line, what's the driving force, which kept our SMB revenue momentum on our fashion jewelry.
With double digit year over year growth in all three geographies.
As we aim to make further progress in minimizing supply constrained over the remainder of 2022.
We expect even stronger performance from this would be in the back half of the year.
Yeah.
Yes.
On the <unk> side.
Our super premium or the eight and nine Wi Fi mesh products.
Administrative double digit growth in end market sales and we continue to progress with our strategy of shifting more of our consumer CHP product revenue mix towards satisfying the top game of the residential segment.
How all the eighth and ninth Wi Fi mesh systems, which are powered by <unk>.
Hi, Dan and Quad band antenna design and.
Enable the very best Wi Fi speed.
Pasadena and coverage and various residential footprint.
All these superior performance is consistently validated by industry accolades and awards, including the latest in Tom's Guide.
In an article highlighting the 2022 best devices working from home.
<unk> took top honors the best match system.
Now we did for outstanding performance as well as ease of setup.
RB has even wanted to hearts and minds of journalist my intent for themselves.
Ms Joanna Stern Fenian personal technology journalist from the Wall Street Journal.
Recently treated the results the speed test.
Hmm.
Personal all the system.
Spiking, a tide of netgear customers to response with the impressive speeds of their own systems.
Our antenna designs on the combination of net years 25 years of radio frequency design and test.
Areas and different residential conditions.
Ranging from Tokyo, and Sydney in Munich, and London, New York, Texas and in California.
Additionally, these systems are equipped with.
Which protects all connected devices from incoming.
And outgoing possible anomaly these.
These products, which are priced at $1000.
A sought after by those who want only the best and most secure Wi Fi experience.
We're also quite pleased to have improved supply in the second quarter for our <unk> mobile hotspots, which benefited from sales to both our service provider and retail customers.
In the July edition of computer Bill.
One of Europe's most influential publications in Germany.
Our Nighthawk <unk> five and M. One recently topped the list of best mobile hotspots, taking the number one and number two positions.
In the second quarter, we launched the new <unk>, six and <unk> Pro mobile hotspots in AT&T and dish in the U S.
As well as Telstra in Australia.
The only devices on the market with the latest <unk> technology from Qualcomm.
Providing multi gig download and Wi Fi six <unk> on the go.
We are working feverishly to improve supply to catch up with the demand as we have signed up new service providers in Australia, and EMEA as well as retail channel for the unlock.
Unlocked version of these clinics.
We see tremendous sales opportunities among first responders traveling professionals worked for many way employees and rural customers.
We believe we can continue to build on the success of these three categories.
OAD Super premium or be eight to nine Wi Fi mesh and <unk> mobile hotspots.
We will ride their success and grow both SMB and CHP revenue and margin.
The declines at the lower the middle portion of the consumer Wifi market.
But we'll continue to build our intellectual property and ecosystems around these three product lines to raise the barrier to entry for our competitors.
These three areas remain our core focus.
Integral to returning our company to profitability in the second half of the year and growth in boat and bottom lines in the years ahead.
Last but not least on the services side revenue was $8 million for the second quarter up 4% sequentially and up 26% year over year.
Affluent residential customers about all the eight or nine are more likely to adopt our value added subscription services.
<unk> snapped parental controls and pro support for the Army.
We are also seeing more of our SMB channel partners, including those pro <unk> system integrators.
Wireless Lan bars, and even large scale commercial mobile hotspot deployment enterprises, adopting our insight remote management of subscription services.
We ended the quarter with 654000 paid subscribers with.
With the seasonally stronger second half ahead of US we remain confident that we will reach our target of 750000 paid subscribers by the end of 2022.
We still believe subscription services revenue, both CHP and SMB will be a key driver of our margin and top line expansion effort in the medium and long term horizons.
And with that I will turn it back to Brian to comment on our opportunities and obstacles in the coming quarter and year.
Thank you Patrick.
With solid demand and improving supply, we expect SMB and the CHP ex service provider channel to continue to gain momentum in the back half of the year.
We expect third quarter revenue from the service provider channel will be approximately $40 million.
In SMB revenue to grow sequentially.
With some of our you see U S retail customers intending to shrink their inventory positions. Further we expect to continue working with them in the coming quarter to optimize their inventory levels.
Together these factors lead us to expect our third quarter net revenue to be in the range of $240 million to $255 million.
While the supply picture continues to improve we still expect to spend on airfreight to maximize our F&B revenue.
As a result of these factors our GAAP operating margin for the third quarter is expected to be in the range of negative 1% to zero percent.
And non-GAAP operating margin is expected to be in the range of one 5% to two 5%.
Our GAAP tax rate is expected to be approximately 22% and our non-GAAP tax rate is expected to be 15% for the third quarter of 2022.
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 closure of our manufacturing partners operations.
Increased transportation delays into any of our regional distribution centers.
Greater than expected freight or component costs.
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 well pause for just a moment to compile the Q&A roster.
Our first question comes from Adam Tindle with Raymond James Your line is now open.
Okay. Thanks, good afternoon.
I just wanted to start maybe with Brian .
On this call 90 days ago, we talked about the back half being up about 25% from the first half on a revenue basis. Obviously, we now have three guidance and I'm looking for maybe an update there, particularly given you talked about further channel inventory reductions from U S. Retail I'm wondering if that's going to be done in Q3, where Q4 might be.
Significantly up.
From a seasonality standpoint, or maybe just how to think about the back half of the year from a revenue standpoint.
Sure.
Obviously, we can contemplate our guidance the level of channel optimization into Q3, we do believe the majority of that should take place in the third quarter.
I would expect that in the fourth quarter, we would see a mid to high single digit sequential revenue increase.
Obviously, that's dependent on supply availability, but based on the picture that we see today, that's where I would steer.
The back half of the year from a revenue standpoint, obviously youre seeing some margin expansion in the third quarter because of the topline leverage that we're gaining with the with a higher revenue.
Again with the sequential increase going into Q4, I would expect further margin expansion probably in the neighborhood of 200 basis points, but again thats all dependent on supply availability and based on the information we have today, that's where I would steer you.
Okay. Yeah, that's very helpful and maybe on that margin expansion point, you had talked about.
Taking some cost actions last quarter, maybe just remind us where you stand on those are those kind of fully reflected in the Q2 results how to think about opex on a go forward basis, where we stand on the cost actions piece of this.
Yes, we do believe that we've taken the actions that were necessary to right size for the CHP business. Those are materially reflected in the Q2 results and I would expect opex to kind of maintain at that level.
Okay, and just one last one to clarify for cash flow for the rest of the year is there a way for us to kind of think about full year cash flow given all the moving parts in clearing out channel inventory.
Yes, I do expect cash flow will continue to improve from this point forward.
We came into this year wanting to compress and rightsize our own existing inventory. We've made some progress in the second quarter I expect that to continue in the back half of the year. So I do think that we'll we'll see an improvement in free cash flow.
Probably in that neighborhood of 50% to 75% of non-GAAP net income.
Perfect. It sounds like a lot of positives ahead. Thank you so much.
Thanks, Adam.
Next we'll go to Hum Ed Corson with Bwl's financial your line is now open.
Hi, I was just wanted to ask about.
How are you managing inventory at the retail level given the.
Conversations Youre, having with your partners are you investing more in the SMB line are you shifting inventory.
Away from the retailer or retailers to your online platform.
And just and how are you managing the inventory you have on hand, given the pushback you're getting from retail partners.
So so basically we work with individual channel partners is and the aim of optimizing all in house.
Prospect maximizing our in market sales.
And as you probably know the SMB channel is quite different from <unk> channel.
So there is not much you can do about shifting inventory from retail.
To do that.
Reseller channel different product sets.
Pro Avi.
In best buy.
So so that is irrelevant.
And also on the other hand.
The online channel generally keeps so much less stock in the.
Retail physical stores, so theres not much channel inventory reduction over there.
So as you watch all the retailers report in the last few weeks.
I think that they need to reduce the inventory one way or the other and they all see that demand continued to be weakened so when demand when the forecast it means to be weakened and of course, even further stream channel inventory now given the fact that there are 13 weeks.
In the quarter, so, let's say if they decided they wanted to ship to maintain a weeks of inventory, but currently they are sitting on a 13 week. So naturally we would have to share every.
Every week lessen what they sell out until we get there. So that's how we manage the inventory across the board in the channel.
Okay, Great and then on the <unk> side, you've talked about.
Tim actually being larger than your.
Initial estimate.
Fast do you think you get to that.
Restful Tam.
Given the growth Youre seeing recently.
Is limited buyout chip suppliers.
[laughter], we all know how big is big and we shouldn't read anything we got so we don't know how big it is and new applications.
Being created.
Every day for example, we've seen some.
Television broadcast linear TV broadcast being now contemplated switch into more.
Intelligent AI based injection.
So rather than the media is actually two dimensional even three dimensional Mercer completely new we're also seeing some new applications such as integrating industrial Iot.
With AAV.
So so when these land customers walking in they can immediately react on what display signage.
Produce and things like that so but anyway.
We can't supply enough. So we don't know so we are working with our suppliers to try to expand.
The availability of our products as much as possible.
And my last question was could you just talk about what your marketing plan is given that you are.
Units shipped count is declining is there any fear that you might lose a brand awareness with the consumer and how are you adjusting for that.
What we're trying to do is really create a premium brand.
Means we are targeting for customers, who really value.
Gary.
Performance and quality that our products could you use so in other words, we are.
Focusing more on the quality of the sales rather than quantity of the sales and eventually I think at the end of the day the channel partners care more balanced dollar revenue sales rather than unit volume of Sands are classic examples in your offering.
An opportunity to be an authorized dealer Rolex nurses.
So what do you think.
Patrick I understand that.
How do you make sure that the consumer realizes that you or your other Rolex routers as you.
Shelf size starts to shrink.
Well.
I mentioned, if you have the technical press my Tom Sky hardware.
That we are the best in the industry you get Wall Street Journal Joanne is staring to say look at how great. My Obs and you get computed Bill and Frankfurt, telling you that if you wanted to buy mobile hotspot. The best is.
And the second best is all net gear I think that that plays into it.
Right and just like <unk> getting Roger Roger I was aware that Washington played tennis and Rory Mcilroy as aware as well extra play golf and that helps you want you'd want to add spokesperson.
Great appreciate it thank you.
Sure.
Okay next we'll go to Jared Young Joanne with Cowen and company. Your line is now open.
Patrick and Brian This is Jared on for Paul Silverstein.
Just curious what's driving the quarter over quarter strength in the EMEA and APAC region, I'm, especially curious about the EMEA region, considering some of the macro headwinds coming on thank you.
It's just a matter of math alright.
Alright, our CHP business is 70% domestic U S.
That mean Wow Wow.
<unk> business is pretty evenly distributed around the three regions. So the decline in consumer demand on the <unk> side is much less effect on international market. So thats why APAC is doing better than Europe , Europe's doing better than the U S.
Okay. Thank you very much.
Sure.
There are no further questions at this time, Patrick Lou I'll turn the call back over to you.
I apologize if you have another.
Are we do have another question from Paul Silverstein with Cowen Your line is open.
Hey, guys. So I apologize in multiple calls Tonight, so if you've already answered it alright, I do apologize.
But given the given prospective macro challenges.
Currency translation and the fact that any vendors use visitors equivalent is going to be more expensive abroad.
Apologize I assume Bryan this every quarter.
Can you provide any delineation between your ultra high end in terms of how much revenue is coming from that and what I would suspect would be more price elasticity driven the newsroom of Martin and the nature of the customers relative to what youre seeing in terms of macro impact on the mass market.
Two related questions whats whats the breakdown between the two sides of the businesses and revenue.
What are you seeing in those two different markets.
Well, let me answer the question is kind of funny.
I think I've said it for the last 20 years.
It's interesting when when.
Products with nearly introduced with the latest leading edge technology, especially is very differentiated it's very high margin.
And your competitors change you to go into that space is suppressed and margin, but if you survive the attack towards the in the margin is actually putting good because you can survive.
So yes, we have the super premium products, which is unique to us of course very high margin.
But then we also have some really old products, which have been in the industry for a long time, we have basic.
Basically chase, how everybody such as power lines at just the depth such as say extend as we have really significant market share even if a cable gateway those are pretty high margin as well so it's only in the.
Middle part, which is the very commoditized mid range like routers low and manage that that's really some question of margin.
Our situation is for the premium products, which includes all the eight and nine as well as the <unk> mobile hotspot.
Our ultimate aim is for these two.
Strategic product lines will it be as big as 50% of the total revenue, we're not there yet, but we're making good progress.
Can you give us any sense for how forward your pleasure when you expect to hit that 50%.
I think we'll get there in maybe two to three years.
And remind you of the other 50% are not low margin products some of them really high margin too.
Okay.
Back to your response to my question, where you addressed the margin piece of it for.
From a demand revenue standpoint are you seeing consumers start to.
The way pulled back in that either below or the mid into the market as opposed to volume and assuming the high end youre not seeing that.
Absolutely question hopefully.
You're definitely right.
It is clearly on the low end of the market people are considering everything right inflation and on that I mean, clearly we're seeing delay in upgrade lengthening of the lifecycle. So that's why that market is shrinking, but then on the other hand, if we look at NPD data.
So those that is about.
$650 is continuing expanding at a rapid clip.
So so and then we looked at a phenomenon and we went out and do our own user survey on our customers who bought our albeit in Nuomi night.
Over time, we actually see that quickly the upgrade cycle. So a lot of the older benign customers were actually or the eight customers in or be it hasnt been in the market for more than two and a half years. So clearly they are responding to this newest technology and upgrading faster.
Got it Patrick with respect to those customers that are deploying in the lower end.
Do you look to respond by cutting price or to hold price and just took the hit in terms of volume.
As we said right there are certain categories that practically very few competitors.
Alright light in cable, we frankly have only one competitor adaptive same expanded same. So there is no need to cut prices and as a matter of fact, we raised prices.
And and then of course in the more commodity POC competitive mid and low range routers and mesh.
Yeah, I mean, we have to do promotions every now and then to keep to be competitive in that range yes.
Patrick.
I appreciate your response to the question is a little bit the thrust of the question is a little bit different in the way Youre audit, which is even where you don't have competition.
Challenged macro, especially you go into and out of recessions, where suggests even where you were the only supplier maybe folks to luck.
And purchasing once they have to have it if you don't have an adaption in adapter for those folks who.
Half.
Low end routers, even if you had no competition.
Choose to cut prices in order to stimulate demand driven.
Kevin.
So that would I just answered the question by saying, we actually raised prices.
Okay, Alright, I appreciate the responses. Thank you.
Yeah.
Patrick I'll turn it back over to you for closing remarks.
Alright, great. Thanks.
Thank you everybody for joining us today, we're really excited about our future for both SMB and CHP in terms of top and bottom line expansion opportunities.
Well as Bryan has said we are expecting the channel inventory reduction for <unk>.
To be complete by the end of the coming quarter.
That will put us back on track towards growth after that riding a highly differentiated or be eight or nine.
<unk> mobile hotspots.
The pro avian market continues to be very exciting expanding at a rapid rate and with it. So it is our market share in this newly fast growing space.
Finally in the path to 2 million paid service subscriber slide straight ahead of us in the long term.
I look forward to sharing updates on all these fronts with all of you in three months. Thank you for joining us today.
This concludes today's conference call you may now disconnect.
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Yeah.
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