NETGEAR(NTGR) - 2024 Q1 - Earnings Call Transcript

Financial Data and Key Metrics - Non-GAAP gross margin in Q1 2024 was 29.5%, down 410 basis points YoY and 550 basis points QoQ [17] - Non-GAAP operating expenses in Q1 were $64.6 million, down 4.8% YoY and up 2.1% sequentially [19] - Non-GAAP net loss in Q1 was$ 8.4 million, with a diluted loss per share of $0.28 [21] - Cash and short-term investments at the end of Q1 were$ 289.4 million, up $5.8 million from the prior quarter [103] - Inventory reduction efforts are ongoing, with a target of reaching three months of supply by the end of the year [23][71] Business Line Performance - Connected Home Products (CHP) segment revenue was$ 96 million in Q1, down 6.6% YoY and 18.9% sequentially [41] - NETGEAR for Business (NFB) segment revenue was $68.6 million in Q1, down 2.4% sequentially, with strong demand in pro AV managed switches [42] - Service provider channel revenue was$ 28 million in Q1, partially offsetting retail challenges [95] - Premium products accounted for over 25% of CHP retail sales, up 500 basis points YoY [106] Market Performance - Americas revenue in Q1 was $109.9 million, down 9.8% YoY and 11.9% sequentially [97] - EMEA revenue was$ 31.2 million, down 20.4% YoY and 17.7% sequentially [97] - APAC revenue was $23.5 million, up 18.5% YoY but down 9.6% sequentially [97] Strategy and Industry Competition - The company is shifting away from product bundles to improve margins and recurring revenue [6][87] - New partnerships with home security providers and professional audio companies aim to enhance customer experience and expand market reach [5][8] - The company is focusing on a "good, better, best" product strategy to compete more effectively, especially on Amazon [86] - Efforts are being made to streamline operations and improve organizational efficiency [11][118] Management Commentary on Operating Environment and Future Outlook - The macroeconomic environment remains challenging, with higher-than-expected inflation and interest rates impacting channel inventory levels [62][120] - The company expects to generate cash in Q2 and the rest of the year, driven by inventory reductions [23][38] - Long-term growth opportunities are seen in pro AV managed switches, premium Wi-Fi mesh systems, 5G mobile hotspots, and subscription services [101] - The company is accelerating destocking efforts, expecting a$ 25 million to $30 million revenue headwind in Q2 [83][108] Other Important Information - The company exited the Meural business, writing off$ 500,000 of non-finished goods inventory in Q1 [74] - Share repurchases totaled $11.4 million in Q1, with 783,000 shares bought at an average price of$ 14.62 [105] - The company is implementing AI transformation efforts to enhance operations and product development [118] Q&A Session Summary Question: Why the hard reset in strategy? - The company is acting quickly to address COVID-related market conditions and set up for long-term success, pulling forward challenges to improve the second half of the year [29] Question: State of the consumer and inventory build-up? - The company is not seeing trade-down activity but is struggling to pull customers up to premium products [32] - Slower-moving inventory includes wireless LAN products on the SMB side, with efforts to transition to Wi-Fi 7 [33][34] Question: Cash generation and share repurchases? - Cash generation in Q2 is expected to be around half of Q1 levels, with inventory reduction being a key driver [38] - The company remains committed to opportunistic share repurchases [56]