What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-01 compared with 2024-08-02 · 166 added, 133 removed, 228 unchanged (57% of the section changed)

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NETGEAR's belief of the principal competitive factors in the consumer, business, and service provider markets for networking products;

expectations regarding more predictable performance that is aligned to the market;

expectations regarding more predictable performance that is aligned to the market, including as a result of our efforts to work with our channel partners to optimize their inventory carrying levels;

inventory levels and expectation to return to historically normal inventory costs after reaching target inventory levels;

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expectations regarding paid revenue from paid subscription service plans;

fluctuations in gross margin;

expectations regarding product mix and market demand for NETGEAR’s products and services, including NETGEAR for Business and Connected Home products and subscription services and NETGEAR’s ability to respond to this demand;

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We are a global company that turns ideas into innovative, high-performance, and premium networking products.

Our products connect people, power businesses and service providers.

Our products power businesses and service providers and connect people.

Our products are designed to simplify and improve people’s lives.

Our strategy for Connected Home segment is to develop products to serve a broader segment of the consumer networking market, to evolve our marketing messaging to highlight our points of differentiation, as well as to leverage our position and independence to forge value-added partnerships that drive innovation and improve the experience for our customers.

Our strategy for NETGEAR for Business segment is to innovate manufacturing partner integrations, to deploy our products in businesses of all sizes, as well as to capitalize on our product leadership position to pursue new and adjacent verticals, such as to expand our reach into the broadcast industry.

Our goal is to enable people and businesses to collaborate and connect to a world of information and entertainment in or outside of the home.

We are dedicated to delivering innovative and highly differentiated, connected solutions ranging from easy-to-use premium WiFi solutions, security and support services to protect and enhance home networks, to switching and wireless solutions to augment business networks and audio and video over Ethernet for Pro AV applications.

Our goal is to enable businesses and people to collaborate and connect to a world of information and entertainment in or outside of the home.

We are dedicated to delivering innovative and highly differentiated, connected solutions ranging from switching and wireless solutions to augment business networks and audio and video over Ethernet for Pro AV applications, to easy-to-use premium WiFi solutions, security and support services to protect and enhance home networks.

Our products and services are built on a variety of technologies such as wireless (WiFi and 4G/5G mobile), Ethernet and powerline, with a focus on reliability and ease-of-use.

Additionally, we continually invest in

research and development to create new technologies and services and to capitalize on technological inflection points and trends, such as multi-Gigabit internet service to homes, WiFi 7, audio and video over Ethernet, and future technologies.

research and development to create new technologies and services and to capitalize on technological inflection points and trends, such as audio and video over Ethernet, multi-Gigabit internet service to homes, WiFi 7, and future technologies.

Our product line consists of devices that create and extend wired and wireless networks, as well as services that complement and enhance our product line offerings.

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We operate and report in two segments:

Connected Home and NETGEAR for Business (formerly known as Small and Medium Business, or SMB).

NETGEAR for Business (formerly known as Small and Medium Business, or SMB) and Connected Home.

We believe that this structure reflects our current operational and financial management, and that it provides the best structure for us to focus on growth opportunities while maintaining financial discipline.

The leadership team of each segment is focused on serving customer needs through product and service development efforts, both from a product marketing and engineering standpoint.

The Connected Home segment focuses on consumers and provides high-performance, dependable, and easy-to-use premium WiFi internet networking solutions such as WiFi 6, WiFi 6E, and WiFi 7 Tri-band and Quad-band mesh systems, 4G/5G mobile products, and subscription services that provide consumers a range of value-added services focused on security, performance, privacy, and premium support.

The NETGEAR for Business segment focuses on businesses and provides solutions for business networking, wireless local area network (“LAN”), audio and video over Ethernet for Pro AV applications, security and remote management providing enterprise-class functionality at an affordable price.

We conduct business across three geographic regions:

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The markets in which our segments operate are intensely competitive and subject to rapid technological evolution.

We believe that the principal competitive factors in the consumer, business, and service provider markets for networking products include product breadth, price points, size and scope of the sales channel, brand name, timeliness of new product introductions, product availability, performance, features, functionality, reliability, ease-of-installation, maintenance and use, security, as well as customer service and support.

We believe that the principal competitive factors in the business, consumer, and service provider markets for networking products include product breadth, price points, size and scope of the sales channel, brand name, timeliness of new product introductions, product availability, performance, features, functionality, reliability, ease-of-installation, maintenance and use, security, as well as customer service and support.

To remain competitive, we believe we must continue to aggressively invest resources to develop new products and subscription services, enhance our current products, and expand our channels and direct-to-consumer capabilities, while increasing engagement and maintaining satisfaction with our customers.

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Financial Overview

During the three months ended June 30, 2024, our net revenue decreased by $29.5 million, compared to the prior year period, mainly driven by decreases of $15.1 million in our NETGEAR for Business segment and $14.4 million in our Connected Home segment.

The decrease in NETGEAR for Business net revenue was primarily due to our continuous work with our channel partners to optimize their inventory carrying levels.

The decrease in Connected Home net revenue was primarily due to market contraction, leading to a year-over-year decline in the retail channel.

Despite the decline in net revenue during the three months ended June 30, 2024, our premium portfolio of products continued to outperform the market.

During the three months ended September 29, 2024, our net revenue decreased by $15.0 million, compared to the prior year period, mainly driven by a decrease of $23.0 million in our Connected Home segment, partially offset by an increase of $8.0 million in our NETGEAR for Business segment.

The decrease in Connected Home net revenue was in part due to market contraction, leading to a year-over-year decline in the retail channel, and a decline in net revenue in service provider channel.

The increase in NETGEAR for Business net revenue was primarily due to the completion of our work with our channel partners to optimize their inventory levels and starting to see more predictable performance aligned to the market, led by the higher net revenue from the Pro AV product line of managed switches.

Despite the decline in net revenue during the three months ended September 29, 2024, our premium portfolio of products continued to outperform the market.

We also experienced continued strong demand for the Pro AV product line of managed switches, and growth in our services revenue.

Our gross margin percentage decreased 920 basis points during the three months ended June 30, 2024, compared to the prior year period, primarily attributable to higher cost of inventory, higher excess and obsolete inventory expense as we accelerated the depletion of our slower moving inventory, lower mix of NETGEAR for Business products, which generally carry higher gross margin, and higher promotional marketing spending in the retail market.

Loss from operations increased by $29.1 million during the three months ended June 30, 2024, compared to the prior year period, primarily attributable to lower net revenue, a $8.2 million litigation reserve relating to a contingent liability tied to a successful outcome of the International Trade Commission (ITC)

suit against TP-Link, and $6.0 million cash received relating to a favorable litigation settlement in the prior year period but not in the current year.

Geographically, net revenue decreased from Connected Home and NETGEAR for Business in Americas and EMEA during the three and six months ended June 30, 2024, as well as from Connected Home in APAC during the three months ended June 30, 2024, compared to the prior year periods, respectively.

Net revenue from Connected Home and NETGEAR for Business in APAC increased, during the six months ended June 30, 2024, compared to the prior year period.

Our gross margin percentage decreased 390 basis points during the three months ended September 29, 2024, compared to the prior year period, primarily attributable to higher freight costs, and cost of inventory, partially offset by higher mix of NETGEAR for Business products, which generally carry higher gross margin.

Income from operations increased by $96.5 million during the three months ended September 29, 2024, compared to the prior year period, primarily attributable to the payment received from the litigation settlement with TP-Link, leading to a contra-expense of $92.7 million in the litigation reserves, the reversal of an

$8.2 million contingent fee recorded in litigation reserves in the prior quarter, and a reduction of $10.9 million in general and administrative expenses to offset the related legal fees incurred to date.

The increase of income from operations was partially offset by lower net revenue.

Geographically, net revenue increased from NETGEAR for Business in Americas and APAC but decreased in EMEA, whereas net revenue decreased from Connected Home in all three regions, during the three months ended September 29, 2024, compared to the prior year period, respectively.

Global Events Affecting our Business and Operations

Macroeconomic and geopolitical trends created uncertainty in the global economic environment since 2022.

These include conditions such as the potential for a recession, fluctuations in inflation, elevated interest rates, and the related negative impact on the global economy, foreign exchange rate fluctuations, particularly changes of the U.S.

These include conditions such as the potential for a recession, fluctuations in inflation, interest rate changes, and the related negative impact on the global economy, foreign exchange rate fluctuations, particularly changes of the U.S.

dollar, and ongoing worldwide tensions, including the Russia-Ukraine conflict, Israel-Hamas conflict, and Red Sea crisis.

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Refer to Item 1A, Risk Factors of Part II of this Quarterly Report on Form 10-Q for various risks and uncertainties associated with the macroeconomic trends and uncertainty.

During the three months ended June 30, 2024, we completed efforts to work with our channel partners to optimize their inventory carrying levels for both the NETGEAR for Business and Connected Home businesses and expect to see more predictable performance that is aligned to the market in the periods ahead.

Looking forward, while the macro-economic environment remains challenged and higher than expected inflation and interest rates persist, we will continue to reduce our slower moving inventory levels and expect to return to our historically normal inventory costs after we reach our target inventory levels of three months, and when transportation costs return to normal from their heightened levels as a result of the Red Sea crisis.

Despite these challenges, we expect to continue to experience strong underlying demand in the premium portion of our Connected Home product portfolio powered by our premium WiFi mesh systems, along with growth in the Pro AV market.

We expect the net revenue in the third fiscal quarter of 2024 to be in the range of $160 million to $175 million, including $15 million from the service provider channels.

We aim to execute on our strategy of capitalizing on the technological inflection points of WiFi 7, WiFi 6E, WiFi 6, 5G, audio and video over Ethernet, to develop products that serve a broader segment of the market with a good, better, best product strategy, and to simplify, develop and roll out service offerings that build recurring service revenue streams.

During the first half of 2024, we completed efforts to work with our channel partners to optimize their inventory carrying levels for both the NETGEAR for Business and Connected Home businesses and started to see more predictable performance aligned to the market in the three months ended September 29, 2024, which we expect to continue to see in the periods ahead.

Looking forward, we will continue to reduce our slower moving inventory levels and expect to return to our historically normal inventory costs after we reach our target inventory levels of three months, and when transportation costs return to normal from their heightened levels partially as a result of the Red Sea crisis.

We expect to experience continued net revenue growth in our NETGEAR For Business segment, led by our ProAV line of managed switches, and while we are seeing the signs of market recovery, we expect increased promotional activity in the Connected Home retail business due in part to the holiday promotional period.

Accordingly, we expect the net revenue in the fourth fiscal quarter of 2024 to be in the range of $160 million to $175 million, including $20 million from the service provider channels.

We aim to execute on our strategy of capitalizing on the technological inflection points of audio and video over Ethernet, WiFi 7, WiFi 6E, WiFi 6, and 5G, to develop products that serve a broader segment of the market with a good, better, best product strategy, and to simplify, develop and roll out service offerings that build recurring service revenue streams.

Critical Accounting Estimates

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Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands, except percentage data)

June 30, 2024

September 29, 2024

October 1, 2023

September 29, 2024

October 1, 2023

Cost of revenue

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Restructuring and other charges

Intangibles impairment

Total operating expenses

Loss from operations

Income (loss) from operations

Other income, net

Loss before income taxes

Provision for (benefit from) income taxes

Income (loss) before income taxes

Provision for income taxes

Net income (loss)

Net Revenue by Geographic Region

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Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands, except percentage data)

June 30, 2024

September 29, 2024

October 1, 2023

September 29, 2024

October 1, 2023

Percentage of net revenue

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Total net revenue

Net revenue in Americas decreased in the three and six months ended June 30, 2024, driven by declines in Connected Home segment’s net revenue of 14.7% and 10.8%, and in NETGEAR for Business segment’s net revenue of 24.9% and 20.4%, respectively, compared to the prior year periods.

The declines in Connected Home net revenue were primarily due to market contraction, leading to year-over-year declines in the retail channel, compared to the prior year periods.

The decline in Connected Home net revenue in the six months ended June 30, 2024 was partially offset by higher net revenue from the service provider channel, compared to the prior year period.

The declines in NETGEAR for Business net revenue were mainly due to our continuous work with our channel partners to optimize their inventory carrying levels.

Net revenue in EMEA decreased in the three and six months ended June 30, 2024, compared to the prior year periods,

driven by declines in NETGEAR for Business segment’s net revenue of 26.0% and 20.0%, and in Connected Home segment’s net revenue of 20.8% and 27.4%, respectively.

The net revenue declines in NETGEAR for Business segment were mainly driven by our continuous work with our channel partners to optimize their inventory carrying levels.

The net revenue declines in Connected Home segment were mainly due to market contraction, leading to year-over-year declines in the retail channel in the three and six months ended June 30, 2024.

Net revenue in APAC was flat in the three months ended June 30, 2024, compared to the prior year.

Net revenue in APAC increased in the six months ended June 30, 2024, compared to the prior year period, mainly driven by a net revenue increase from the service provider channel in our Connected Home segment.

For further discussions specific to our Connected Home and NETGEAR for Business, refer to the " Segment Information " section below.

Net revenue in Americas decreased in the three and nine months ended September 29, 2024, driven by declines in Connected Home segment’s net revenue of 18.1% and 13.7%, respectively, and in NETGEAR for Business segment’s net revenue of 8.8% in the nine months ended September 29, 2024, compared to the prior year periods.

The declines in Connected Home net revenue were primarily due to market contraction, leading to year-over-year declines in the retail channel in both the three and nine months ended September 29, 2024, and a decline in the service provider channel in the nine months ended September 29, 2024, compared to the prior year periods, respectively.

The decline in NETGEAR for Business net revenue in the nine months ended September 29, 2024 was mainly due to our work with our channel partners in the first half of 2024 to optimize their inventory carrying levels.

The decline in net revenue in Americas in the three months ended September 29, 2024 was partially offset by an increase in NETGEAR for Business segment’s net revenue of 15.7%, mainly driven by higher demand

for the Pro AV product line of managed switches, compared to the prior year period.

Net revenue in EMEA decreased in the three and nine months ended September 29, 2024, compared to the prior year periods, driven by declines in NETGEAR for Business segment’s net revenue of 7.3% and 15.9%, respectively, and in Connected Home segment’s net revenue of 9.9% and 21.8%, respectively.

The net revenue decline in NETGEAR for Business segment in the three months ended September 29, 2024 was primarily due to the lower net revenue from our traditional transactional switches, whereas the decline in the nine months ended September 29, 2024 was mainly driven by our work with our channel partners to optimize their inventory carrying levels in the first half of 2024.

The net revenue declines in Connected Home segment were mainly due to market contraction, leading to year-over-year declines in the retail channel in the three and nine months ended September 29, 2024, compared to the prior year periods.

Net revenue in APAC increased in the three and nine months ended September 29, 2024, compared to the prior year periods, mainly driven by increases in NETGEAR for Business segment’s net revenue of 43.9% and 16.3%, respectively, primarily attributable to the higher demand for the Pro AV product line of managed switches.

For further discussions specific to our NETGEAR for Business and Connected Home segments, refer to the " Segment Information " section below.

Cost of Revenue and Gross Margin

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Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands, except percentage data)

June 30, 2024

September 29, 2024

October 1, 2023

September 29, 2024

October 1, 2023

Cost of revenue

Gross margin percentage

Our gross margin percentage decreased for the three and six months ended June 30, 2024, compared to the prior year periods, primarily attributable to higher cost of inventory, higher excess and obsolete inventory expense as we accelerated the depletion of our slower moving inventory, lower mix of NETGEAR for Business products, which generally carry higher gross margin, and higher promotional marketing spending in the retail market.

We expect our gross margin in the third fiscal quarter to start improving as the mix of NETGEAR for Business products increases with our channel partners having optimized their inventory carrying levels in the second fiscal quarter of 2024, and the impact from efforts to accelerate the depletion of our slower moving inventory is reduced.

Our gross margin percentage decreased for the three and nine months ended September 29, 2024, compared to the prior year periods, primarily attributable to higher cost of inventory and freight costs, partially offset by higher mix of NETGEAR for Business products, which generally carry higher gross margin.

Our gross margin percentage for the nine months ended September 29, 2024 was also negatively impacted by higher excess and obsolete inventory expense as we accelerated the depletion of our slower moving inventory.

We expect our gross margin in the fourth fiscal quarter to be in line with or decrease slightly from the third fiscal quarter of 2024 level.

Forecasting gross margin percentages is difficult, and there are a number of risks related to our ability to maintain or improve our current gross margin levels.

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royalties to third parties;

fluctuations in freight costs;

in freight costs;

manufacturing and purchase price variances;

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Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands, except percentage data)

June 30, 2024

September 29, 2024

October 1, 2023

September 29, 2024

October 1, 2023

Research and development

Research and development expenses decreased for the three and six months ended June 30, 2024, compared to the prior year periods, primarily driven by decreases in personnel-related expenditures of $0.7 million and $1.2 million, mainly due to lower headcount, decreases in professional service fees of $0.1 million and $1.2 million, and decreases in IT and facility allocation of $0.1 million and $0.5 million, respectively.

Research and development expenses remained relatively flat for the three months ended September 29, 2024, compared to the prior year period, with the increase of $1.2 million in personnel related expenditures, mainly attributable to higher variable compensation, primarily offset by the decreases of $0.7 million in IT and facility allocation and $0.4 million in engineering projects and outside professional services.

Research and development expenses declined for the nine months ended September 29, 2024, compared to the prior year period, primarily driven by decreases in engineering projects and outside professional services of $1.6 million, and in IT and facility allocations of $1.1 million.

We believe that innovation and technological leadership is critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products and services.

We expect research and development expenses in absolute dollar amount in the third fiscal quarter of 2024 to be in line with the prior quarter level.

We continue to invest in research and development to grow our cloud platform capabilities, our services and mobile applications and to create and expand our hardware product offerings focused on premium WiFi 7, and WiFi 6/6E, Advanced 4G/5G mobile and 5G coverage solutions, audio and video over Ethernet, web-managed, AV over IP managed switches and NETGEAR for Business wireless products.

We expect research and development expenses in absolute dollar amount in the fourth fiscal quarter of 2024 to be in line with the third fiscal quarter of 2024 level.

We continue to invest in research and development to grow audio and video over Ethernet, web-managed, AV over IP managed switches, NETGEAR for Business wireless products, our cloud platform capabilities, our recurring services and mobile applications and to create and expand our hardware product offerings focused on premium WiFi 7, and WiFi 6/6E, Advanced 4G/5G mobile and 5G coverage solutions.

Research and development expenses may fluctuate depending on the timing and number of development activities and could vary significantly as a percentage of net revenue, depending on actual revenues achieved in any given quarter.

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Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands, except percentage data)

June 30, 2024

September 29, 2024

October 1, 2023

September 29, 2024

October 1, 2023

Sales and marketing

The declines in sales and marketing expenses for the three and six months ended June 30, 2024, compared to the prior year periods, were primarily attributable to decreases in brand marketing expenditures of $1.3 million and $3.3 million, and decreases in personnel-related expenditures of $1.0 million and $2.1 million, mainly due to lower headcount, respectively.

We expect sales and marketing expenses in absolute dollar amount in the third fiscal quarter of 2024 to be slightly up from the prior quarter level as we look to make some investments in sales resources in support of our NETGEAR for Business segment.

Sales and marketing expenses increased slightly for the three months ended September 29, 2024, compared to the prior year period, with an increase in variable personal compensation of $1.2 million primarily offset by a decrease in brand marketing expenditures of $1.1 million.

Sales and marketing expenses declined for the nine months ended September 29, 2024, compared to the prior year period, mainly attributable to decreases in brand marketing expenditures of $4.4 million, and in personnel-related expenditures of $1.2 million, primarily due to lower headcount and partially offset by higher variable compensation.

We expect sales and marketing expenses in absolute dollar amount in the fourth fiscal quarter of 2024 to be slightly up from the third fiscal quarter of 2024 level as we look to make some investments in sales resources in support of our NETGEAR for Business segment.

Expenses may fluctuate depending on revenue levels achieved as certain expenses, such as commissions, are determined based upon the revenues achieved.

Forecasting sales and marketing expenses is highly dependent on expected revenue levels and could vary significantly depending on actual revenue achieved in any given quarter.

Forecasting sales and marketing expenses is highly dependent on expected

revenue levels and could vary significantly depending on actual revenue achieved in any given quarter.

Marketing expenses may also fluctuate depending upon the timing, extent and nature of marketing programs.

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Three Months Ended

Six Months Ended

Nine Months Ended

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September 29, 2024

October 1, 2023

September 29, 2024

October 1, 2023

General and administrative

The increases in general and administrative expenses for the three and six months ended June 30, 2024, compared to the prior year periods, were primarily driven by increases in personnel-related expenditures of $3.0 million and $4.5 million, respectively, mainly due to higher variable compensation and expenses associated with CEO transition.

The increase in general and administrative expenses for the three months ended June 30, 2024, compared to the prior year period, was partially offset by a decrease in legal and professional service fees of $0.6 million, mainly associated with litigation matters.

We expect general and administration expenses in absolute dollar amount in the third fiscal quarter of 2024 to be up from the prior quarter level, primarily due to higher litigation defense costs.

The decreases in general and administrative expenses for the three and nine months ended September 29, 2024, compared to the prior year periods, were primarily attributable to a $10.9 million reduction in expenses to offset the legal fees incurred to date associated with the litigation settlement payment from TP-Link.

The decreases in the three and nine months ended September 29, 2024 were partially offset by increases in personnel-related expenditures of $3.3 million and $7.7 million, respectively, mainly due to higher variable compensation, and stock-based compensation associated with executives’ transition.

We expect general and administration expenses in absolute dollar amount in the fourth fiscal quarter of 2024 to be in line with or slightly lower than the second fiscal quarter of 2024, primarily due to lower litigation defense costs.

General and administrative expenses could fluctuate depending on a number of factors, including the level and timing of expenditures associated with litigation defense costs in connection with the litigation matters described in Note 8, Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

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Three Months Ended

Six Months Ended

Nine Months Ended

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June 30, 2024

September 29, 2024

October 1, 2023

September 29, 2024

October 1, 2023

Litigation reserves, net

** Percentage change not meaningful.

The increases in litigation reserves, net for the three and six months ended June 30, 2024, compared to the prior year periods, were attributable to $8.2 million litigation reserve relating to a contingent liability tied to a successful outcome of the International Trade Commission (ITC ) suit against TP-Link.

The decreases in litigation reserves, net for the three and nine months ended September 29, 2024, compared to the prior year periods, were mainly attributable to a contra-expense of $92.7 million associated with the litigation settlement payment from TP-Link, and the reversal of an $8.2 million contingent fee recorded in the second fiscal quarter of 2024.

Restructuring and Other Charges

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Nine Months Ended

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June 30, 2024

September 29, 2024

October 1, 2023

September 29, 2024

October 1, 2023

Restructuring and other charges

The changes in restructuring and other charges for the three and six months ended June 30, 2024, compared to the prior year periods, were immaterial.

Restructuring and other charges for the three and nine months ended September 29, 2024 increased, compared to the prior year periods, primarily due to our reorganization to better align the cost structure of the business with the areas to deliver long-term growth and expanding profitability.

For a detailed discussion of restructuring and other charges, refer to Note 13, Restructuring and Other Charges , in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

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Nine Months Ended

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June 30, 2024

September 29, 2024

October 1, 2023

September 29, 2024

October 1, 2023

Other income, net

** Percentage change not meaningful.

The decreases in other income, net for the three and six months ended June 30, 2024, compared to the prior year periods, were primarily due to $6.0 million cash received relating to a favorable litigation settlement in the prior year but not in the current year, partially offset by higher interest income resulting from higher interest rates and higher cash and short-term investment balances.

Provision for (Benefit from) Income Taxes

The increase in other income, net for the three months ended September 29, 2024, compared to the prior year period was primarily due to higher interest income resulting from higher interest rates and higher cash and short-term investment balances.

The decrease in other income, net for the nine months ended September 29, 2024, compared to the prior year period, was primarily due to $6.0 million cash received relating to a favorable litigation settlement for false product marketing in the prior year but not in the current year, partially offset by higher interest income resulting from higher interest rates and higher cash and short-term investment balances.

Provision for Income Taxes

Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands, except percentage data)

June 30, 2024

Provision for (benefit from) income taxes

September 29, 2024

October 1, 2023

September 29, 2024

October 1, 2023

Provision for income taxes

Effective tax rate

The changes in taxes for the three and six months ended June 30, 2024, compared to the prior year periods, were primarily due to the continued full valuation allowance on deferred tax assets for U.S.

** Percentage change not meaningful.

The changes in taxes for the three and nine months ended September 29, 2024, compared to the prior year periods, were primarily due to the full valuation allowance on deferred tax assets for U.S.

federal and state purposes that was established during the period ended October 1, 2023.

We evaluated the current results as of the period ended June 30, 2024, coupled with the expectations for the remainder of the year, and determined that it continues to not be more likely than not that the deferred tax assets would be realized, and accordingly, did not record any benefits for the forecasted tax loss in for the three and six months ended June 30, 2024.

By comparison, for the three and six months ended July 2, 2023, tax benefits were recorded on the pre-tax loss since the valuation allowance on deferred tax assets had not yet been established.

We evaluated the current results as of the period ended September 29, 2024, coupled with the expectations for the remainder of the year, and determined that it continues to not be more likely than not that the deferred tax assets would be realized, and accordingly, did not record any benefits for the forecasted tax loss in for the three and nine months ended September 29, 2024.

We are subject to income taxes in the U.S.

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Additional information on the change, a description of our products and services, as well as segment financial data, for each segment and a reconciliation of segment contribution income (loss) to income (loss) before income taxes can be found in Note 11, Segment Information , and information on net revenue by sales channels can be found in Disaggregation of Revenue in Note 3, Revenue , in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Connected Home Segment

NETGEAR for Business Segment

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September 29, 2024

October 1, 2023

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October 1, 2023

Percentage of net revenue

Contribution income (loss)

Contribution income

Contribution margin

** Percentage change not meaningful.

Connected Home net revenue decreased in the three and six months ended June 30, 2024, compared to the prior year periods, primarily due to market contraction, leading to year-over-year declines in the retail channel.

The decrease in Connected Home net revenue in the six months ended June 30, 2024 was partially offset by higher net revenue from the service provider channel in the Americas and APAC regions, compared to the prior year period.

Despite the declines in the overall consumer networking market during the three and six months ended June 30, 2024, our premium portfolio of products continued to outperform the market, and we saw growth in our services revenue, as compared to the prior year periods.

Geographically, Connected Home net revenue decreased in Americas and EMEA regions in the three and six months ended June 30, 2024, whereas net revenue in APAC decreased in the three months ended June 30, 2024 but increased in the six months ended June 30, 2024, compared to the prior year periods.

Connected Home contribution loss increased in the three and six months ended June 30, 2024, compared to the prior year periods, mainly attributable to lower net revenue, and lower gross margin achievement due to higher promotional marketing spending in the retail market, higher cost of inventory, higher excess and obsolete inventory expense as we accelerated the depletion of our slower moving inventory.

NETGEAR for Business Segment

NETGEAR for Business net revenue increased, in the three months ended September 29, 2024, primarily due to the completion of our work with our channel partners to optimize their inventory levels and starting to see more predictable performance aligned to the market, led by the higher net revenue from the Pro AV product line of managed switches.

NETGEAR for Business net revenue decreased, in the nine months ended September 29, 2024, primarily due to our work with our channel partners to optimize their inventory carrying levels in the first half of 2024, compared to the prior year period.

We continued to experience strong demand for the Pro AV product line of managed switches.

Geographically, NETGEAR for Business net revenue increased in Americas and APAC but decreased in EMEA, in the three months ended September 29, 2024, whereas net revenue decreased in EMEA and Americas but increased in APAC, in the nine months ended September 29, 2024, compared to the prior year periods, respectively.

NETGEAR for Business contribution income increased in the three months ended September 29, 2024, compared to the prior year period, primarily due to higher net revenue.

NETGEAR for Business contribution income decreased in the nine months ended September 29, 2024, compared to the prior year period, primarily due to lower net revenue, and lower gross margin achievement mainly attributable to higher excess and obsolete inventory expense as we accelerated the depletion of our slower moving inventory, and higher cost of inventory and freight costs.

Connected Home Segment

Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands, except percentage data)

June 30, 2024

September 29, 2024

October 1, 2023

September 29, 2024

October 1, 2023

Percentage of net revenue

Contribution income

Contribution income (loss)

Contribution margin

NETGEAR for Business net revenue decreased for the three and six months ended June 30, 2024, compared to the prior year periods, primarily due to our continuous work with our channel partners to optimize their inventory carrying levels.

We continued to experience strong demand for the Pro AV product line of managed switches.

Geographically, in the three and six months ended June 30, 2024, NETGEAR for Business net revenue decreased in Americas and EMEA regions, whereas net revenue in APAC region increased, respectively, compared to the prior year periods.

NETGEAR for Business contribution income decreased in the three and six months ended June 30, 2024, compared to the prior year periods, primarily due to lower net revenue, and lower gross margin achievement mainly attributable to higher excess and obsolete inventory expense as we accelerated the depletion of our slower moving inventory, and higher cost of inventory.

** Percentage change not meaningful.

Connected Home net revenue decreased in the three and nine months ended September 29, 2024, compared to the prior year periods, in part due to market contraction, leading to year-over-year declines in the retail channel, and a decline in net revenue in service provider channel.

Despite the declines in the overall consumer networking market during the three and nine months ended September 29, 2024, our premium portfolio of products continued to outperform the market, and we saw growth in our service revenue, as compared to the prior year periods.

Geographically, Connected Home net revenue decreased in all three regions in the three and nine months ended September 29, 2024, compared to the prior year periods.

Connected Home contribution loss increased in the three and nine months ended September 29, 2024, compared to the prior year periods, mainly attributable to lower net revenue, and lower gross margin achievements due to higher freight costs, higher cost of inventory, and higher excess and obsolete inventory expense as we accelerated the depletion of our slower moving inventory.

Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents, short-term investments and cash generated from operations.

As of June 30, 2024, we had cash, cash equivalents and short-term investment of $294.3 million, an increase of $10.7 million from December 31, 2023.

As of June 30, 2024, approximately 27% of our cash and cash equivalents and short-term investments were outside of the U.S., which are subject to fluctuation based on the settlement of intercompany balances.

As of September 29, 2024, we had cash, cash equivalents and short-term investment of $395.7 million, an increase of $112.1 million from December 31, 2023.

As of September 29, 2024, approximately 22% of our cash and cash equivalents and short-term investments were outside of the U.S., which are subject to fluctuation based on the settlement of intercompany balances.

As we repatriate these funds in accordance with our designation of funds not permanently reinvested outside of the U.S., we will be required to pay income taxes in certain U.S.

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The following table presents our cash flows for the periods presented.

Six Months Ended

Nine Months Ended

(In thousands)

June 30, 2024

Cash provided by (used in) operating activities

September 29, 2024

October 1, 2023

Cash provided by operating activities

Cash used in investing activities

Cash provided by (used in) financing activities

Cash (used in) provided by financing activities

Net cash increase (decrease)

Operating activities

Net cash provided by operating activities was $35.6 million in the six months ended June 30, 2024, as compared to net cash used of $25.5 million in the prior year period, primarily due to favorable working capital movements.

Our accounts payable (excluding payables related to property and equipment) decreased from $46.4 million as of December 31, 2023 to $39.2 million as of June 30, 2024, primarily due to the reduction and timing of inventory receipts and supplier payments.

Accounts receivable decreased from $185.1 million as of December 31, 2023 to $147.1 million as of June 30, 2024, primarily due to the timing of cash collections and lower revenue.

Inventory decreased from $248.9 million as of December 31, 2023 to $188.9 million as of June 30, 2024.

We expect to continue generating cash from operating activities in the second half of fiscal 2024 as we continue to reduce our slower moving inventory levels.

Net cash provided by operating activities increased by $142.7 million in the nine months ended September 29, 2024, compared to the prior year period, primarily due to a net proceed before tax of $103.6 million resulting from the litigation settlement payment from TP-Link and other favorable working capital movements.

Our accounts payable (excluding payables related to property and equipment) increased from $46.4 million as of December 31, 2023 to $50.9 million as of September 29, 2024, primarily due to the timing of inventory receipts and supplier payments.

Accounts receivable decreased from $185.1 million as of December 31, 2023 to $177.3 million as of September 29, 2024, primarily due to the timing of cash collections and lower revenue.

Inventory decreased from $248.9 million as of December 31, 2023 to $162.0 million as of September 29, 2024.

We expect to continue generating cash from operating activities in the fourth quarter of fiscal 2024 as we continue to reduce our slower moving inventory levels.

Investing activities

Net cash used in investing activities decreased by $2.0 million in the six months ended June 30, 2024, compared to the prior year period, mainly driven by lower net purchases of short-term investments, partially offset by higher purchases of property and equipment.

Net cash used in investing activities increased by $7.4 million in the nine months ended September 29, 2024, compared to the prior year period, mainly driven by higher net purchases of short-term investments and higher purchases of property and equipment.

Financing activities

Net cash used in financing activities was $22.3 million in the six months ended June 30, 2024, compared to net cash provided by financing activities of $0.2 million in the prior year period, primarily due to repurchases of our common stock in the current year period.

Net cash used in financing activities was $22.4 million in the nine months ended September 29, 2024, compared to net cash provided by financing activities of $0.8 million in the prior year period, primarily due to repurchases of our common stock in the current year period.

Based on our current plans and market conditions, we believe that our existing cash, cash equivalents and short-term investments, together with cash generated from operations, will be sufficient to satisfy our anticipated cash requirements in the short-term and long-term.

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Under the authorizations, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, such as levels of cash generation from operations, cash requirements for acquisitions and the price of our common stock.

During the six months ended June 30, 2024, we repurchased and retired, reported based on trade date, approximately 1.6 million shares of common stock, at a cost of approximately $21.4 million under the repurchase authorization.

We did not repurchase any shares of common stock during the six months ended July 2, 2023.

As of June 30, 2024, approximately 0.9 million shares remained authorized for repurchase under the repurchase program.

During the nine months ended September 29, 2024, we repurchased and retired, reported based on trade date, approximately 1.7 million shares of common stock, at a cost of approximately $22.9 million under the repurchase authorization.

We did not repurchase any shares of common stock during the nine months ended October 1, 2023.

On July 16, 2024, the Board of Directors authorized management to repurchase up to 3.0 million shares of our outstanding common stock, incremental to the remaining shares under our previous repurchase program.

We also repurchased and retired, reported based on trade date, approximately 197,000 and 147,000 shares of common stock, at a cost of approximately $2.9 million and $2.1 million during the six months ended June 30, 2024 and July 2, 2023, respectively, to administratively facilitate the withholding and subsequent remittance of personal income and payroll taxes for individuals receiving Restricted Stock Units.

For a detailed discussion of our common stock repurchases, refer to Note 9, Stockholders’ Equity , in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

We remain confident in our ability to generate meaningful levels of cash, and plan to continue to opportunistically repurchase shares in future periods.

As of September 29, 2024, approximately 3.8 million shares remained authorized for repurchase under the repurchase program.

We also repurchased and retired, reported based on trade date, approximately 222,000 shares and 194,000 shares of common stock, at a cost of approximately $3.3 million and $2.7 million during the nine months ended September 29, 2024 and October 1, 2023, respectively, to administratively facilitate the withholding and subsequent remittance of personal income and payroll taxes for individuals receiving Restricted Stock Units.

For a detailed discussion of our common stock repurchases, refer to Note 9,

Stockholders’ Equity , in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

We plan to resume to opportunistically repurchase share in the fourth fiscal quarter of 2024.

Contractual and Other Obligations

Except as follows, there were no material changes outside of the ordinary course of business in our contractual obligations as of June 30, 2024, from those as of December 31, 2023, disclosed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

As of June 30, 2024, we had $71.7 million of purchase obligations which represented short-term non-cancellable inventory-related purchase agreements with suppliers, as compared to $42.6 million as of December 31, 2023.

Except as follows, there were no material changes outside of the ordinary course of business in our contractual obligations as of September 29, 2024, from those as of December 31, 2023, disclosed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

As of September 29, 2024, we had $84.9 million of purchase obligations which represented short-term non-cancellable inventory-related purchase agreements with suppliers, as compared to $42.6 million as of December 31, 2023.

Due to an elongation of the time from order placement to production that occurred several years ago, we issued purchase orders to supply chain partners beyond contractual termination periods.

As of June 30, 2024, $257.7 million of purchase orders beyond contractual termination periods remained outstanding.

As of September 29, 2024, $204.1 million of purchase orders beyond contractual termination periods remained outstanding.

These purchase orders may be cancelled by either party, however we may incur expenses for materials and components, such as chipsets purchased by the supplier to fulfill the purchase order, in the event of cancellation.

Expenses incurred in respect of cancelled purchase orders have historically not been significant relative to the original order value.

As of September 29, 2024, we entered into an office lease that has not yet commenced with short-term and long-term future lease payments of $0.3 million and $43.0 million, respectively, that are not yet recorded on our unaudited Consolidated Balance Sheets.

This lease will commence in 2025 with a non-cancelable lease term of 11 years.

For a detailed discussion, refer to Note 8, Commitments and Contingencies , in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

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Quantitative and Qualitative Disclosures About Market Risk

During the six months ended June 30, 2024, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report.

During the nine months ended September 29, 2024, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis