NETGEAR, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Statements This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements. The forward-looking statements represent NETGEAR, Inc.’s expectations or beliefs concerning future events based on information available at the time such statements were made and include statements regarding: NETGEAR’s future operating performance and financial condition, including expectations regarding growth, revenue, expenses, operating margin, gross margin, continued profitability and cash generation; NETGEAR's reporting structure; 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, 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; expectations regarding transportation costs; expectations regarding demand in the premium portion of NETGEAR's Connected Home product portfolio; NETGEAR’s strategy of capitalizing on technological inflection points, developing products that serve a broader segment and simplifying and developing service offerings that build recurring service revenue streams; expectations regarding paid revenue from paid subscription service plans; 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; expectations regarding the timing, distribution, sales momentum and market acceptance of recent and anticipated new product and services introductions that position NETGEAR for growth and market share gain; expectations regarding competition, competitive factors, consumer price sensitivity and demand for NETGEAR’s products and services; expectations regarding sales channels, direct online store and in-app offerings; expectations regarding macroeconomic conditions and impacts to NETGEAR’s operational and financial performance and business strategies; expectations regarding the consumer retail networking market; expectations regarding existing cash, cash equivalents and short-term investments and anticipated cash requirements; expectations regarding inventory management and inventory costs; expectations regarding transportation costs; expectations regarding research and development expenses, sales and marketing expenses and general and administration expenses; expectations regarding cash generation; expectations regarding expected tax rates or tax expenses; and expectations regarding NETGEAR’s subscription services, service revenue and gross margin. These statements are based on management’s current expectations and are subject to a number of risks and uncertainties, including but not limited to those described in “Part II—Item 1A—Risk Factors” and “Liquidity and Capital Resources” below and in our other SEC filings, including our Annual Report. Further, certain forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Therefore, our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements except as required by law. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this quarterly report. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “NETGEAR” refer to NETGEAR, Inc. and its subsidiaries. Business and Executive Overview We are a global company that turns ideas into innovative, high-performance, and premium networking products. Our products power businesses and service providers and connect people. Our products are designed to simplify and improve people’s lives. 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 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 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 27 Table of Contents 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. These products are available in multiple configurations to address the changing needs of our customers in each geographic region. We operate and report in two segments: 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 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. 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. We conduct business across three geographic regions: Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific (“APAC”). Business Overview 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 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. Our investments reflect our steadfast focus on cybersecurity of our products and systems, as the rising threat of cyber-attacks and exploitation of security vulnerabilities in our industry is a significant consumer concern. We sell our products through multiple sales channels worldwide, including traditional and online retailers, wholesale distributors, direct market resellers (“DMRs”), value-added resellers (“VARs”), broadband service providers, and through our direct online store at www.netgear.com . Our retail channel includes traditional and online retail locations both domestically and internationally, such as Amazon.com (worldwide), Best Buy, Wal-Mart, Costco, Staples, Office Depot, Target, Electra (Sweden), Fnac Darty (Europe), JB HiFi (Australia), Elkjop (Norway), and Boulanger (France). Our DMRs include CDW Corporation, Insight Corporation, and PC Connection in domestic markets. Our main wholesale distributors include Ingram Micro, TD Synnex, and D&H Distribution Company. In addition, we also sell our products through broadband service providers, such as multiple system operators, xDSL, mobile, and other broadband technology operators domestically and internationally. Some of these retailers and broadband service providers purchase directly from us, while others are fulfilled through wholesale distributors around the world. A substantial portion of our net revenue is derived from a limited number of wholesale distributors, service providers and retailers. While we expect these channels to continue to be a significant part of our sales strategy, increasingly, customers are choosing to purchase products and services directly from us. We expect revenue through our direct online store or in-app offerings to continue to increase as a percentage of overall revenue for the foreseeable future. Financial Overview 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 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 28 Table of Contents $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, 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. The extent of impacts from these macroeconomic and geopolitical trends on our ongoing operational and financial performance, including our ability to execute our business strategies in the expected time frame, will depend on future developments. The broader implications of the macroeconomic uncertainty, and any related disruptions to channel partners and freight are unpredictable. 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 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 In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income, and net income, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheets. We base these estimates on historical and anticipated results, trends and various other assumptions that we believe are reasonable under the circumstances. As of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ materially from those estimates under different assumptions and conditions. For a complete description of what we believe to be the critical accounting estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. 29 Table of Contents Results of Operations The following table sets forth the unaudited condensed consolidated statements of operations for the periods presented. Three Months Ended Nine Months Ended (In thousands, except percentage data) September 29, 2024 October 1, 2023 September 29, 2024 October 1, 2023 Net revenue $182,854 100.0 % $197,845 100.0 % $491,340 100.0% $552,166 100.0% Cost of revenue 126,371 69.1 % 128,911 65.2 % 354,797 72.2% 368,550 66.7% Gross profit 56,483 30.9 % 68,934 34.8 % 136,543 27.8% 183,616 33.3% Operating expenses: Research and development 20,905 11.4 % 20,738 10.5 % 60,983 12.4% 63,703 11.5% Sales and marketing 31,196 17.1 % 30,865 15.4 % 91,482 18.6% 97,226 17.7% General and administrative 8,357 4.6 % 16,364 8.3 % 45,610 9.3% 49,136 8.9% Litigation reserves, net (100,855) (55.2)% 178 0.1 % (92,625) (18.9%) 178 —% Restructuring and other charges 1,072 0.6 % 366 0.3 % 3,792 0.8% 2,703 0.5% Intangibles impairment — —% 1,071 0.5 % — —% 1,071 0.2 % Total operating expenses (39,325) (21.5)% 69,582 35.1 % 109,242 22.2% 214,017 38.8% Income (loss) from operations 95,808 52.4 % (648) (0.3)% 27,301 5.6 % (30,401) (5.5)% Other income, net 3,485 1.9 % 2,280 1.1 % 9,048 1.8 % 11,685 2.1 % Income (loss) before income taxes 99,293 54.3 % 1,632 0.8 % 36,349 7.4% (18,716) (3.4)% Provision for income taxes 14,219 7.8 % 86,431 43.7 % 15,100 3.1 % 84,382 15.3 % Net income (loss) $85,074 46.5 % $(84,799) (42.9)% $21,249 4.3% $(103,098) (18.7)% Net Revenue by Geographic Region Our net revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, and net changes in deferred revenue. For reporting purposes, revenue is generally attributed to each geographic region based upon the location of the customer. Three Months Ended Nine Months Ended (In thousands, except percentage data) September 29, 2024 % Change October 1, 2023 September 29, 2024 % Change October 1, 2023 Americas $ 127,752 (9.4 )% $ 141,018 $ 333,183 (12.2 )% $ 379,551 Percentage of net revenue 69.9 % 71.3 % 67.8 % 68.7 % EMEA $ 32,798 (8.1 )% $ 35,684 $ 91,340 (17.7 )% $ 111,023 Percentage of net revenue 17.9 % 18.0 % 18.6 % 20.1 % APAC $ 22,304 5.5 % $ 21,143 $ 66,817 8.5 % $ 61,592 Percentage of net revenue 12.2 % 10.7 % 13.6 % 11.2 % Total net revenue $ 182,854 (7.6 )% $ 197,845 $ 491,340 (11.0 )% $ 552,166 Americas 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 30 Table of Contents for the Pro AV product line of managed switches, compared to the prior year period. EMEA 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. APAC 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 Cost of revenue consists primarily of the following: the cost of finished products from our third party manufacturers; overhead costs, including purchasing, product planning, inventory control, warehousing and distribution logistics; third-party software licensing fees; inbound freight; import duties/tariffs; warranty costs associated with returned goods; write-downs for excess and obsolete inventory; amortization of certain acquired intangibles and software development costs; and costs attributable to the provision of service offerings. We outsource our manufacturing, warehousing and distribution logistics. We believe this outsourcing strategy allows us to better manage our product costs and gross margin. Our gross margin can be affected by a number of factors, including fluctuation in foreign exchange rates, sales returns, changes in average selling prices, end-user customer rebates and other channel sales incentives, changes in our cost of goods sold due to fluctuations and increases in prices paid for components, net of vendor rebates, royalty and licensing fees, warranty and overhead costs, inbound freight and duty/tariffs, conversion costs, charges for excess or obsolete inventory, amortization of acquired intangibles and capitalized software development costs. The following table presents costs of revenue and gross margin, for the periods indicated: Three Months Ended Nine Months Ended (In thousands, except percentage data) September 29, 2024 % Change October 1, 2023 September 29, 2024 % Change October 1, 2023 Cost of revenue $126,371 (2.0)% $128,911 $354,797 (3.7)% $368,550 Gross margin percentage 30.9% 34.8% 27.8% 33.3% 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. Our cost of revenue as a percentage of net revenue can vary significantly based upon factors such as: uncertainties surrounding revenue levels, broad-based inflationary pressures and the uncertain macroeconomic environment, future pricing and/or potential discounts as a result of the economy or in response to the strengthening of the U.S. dollar in our international markets, competition, the timing of sales, and related production level variances; import customs duties and imposed tariffs; changes in technology; changes in product mix; expenses associated with writing off excessive or obsolete inventory; variability of stock-based compensation costs; royalties to third parties; fluctuations 31 Table of Contents in freight costs; manufacturing and purchase price variances; changes in prices on commodity components; and warranty costs. We expect that revenue derived from paid subscription service plans will continue to increase in the future, which may have a positive impact on our gross margin. However, we will continue to experience fluctuations in our gross margin due to the factors discussed above. Operating Expenses Research and Development Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, safety and regulatory testing, product certification expenditures to qualify our products for sale into specific markets, prototypes, IT and facility allocations, and other consulting fees. Research and development expenses are recognized as they are incurred. Our research and development organization is focused on enhancing our ability to introduce innovative and easy-to-use products and services. The following table presents research and development expenses, for the periods indicated: Three Months Ended Nine Months Ended (In thousands, except percentage data) September 29, 2024 % Change October 1, 2023 September 29, 2024 % Change October 1, 2023 Research and development $ 20,905 0.8 % $ 20,738 $ 60,983 (4.3 )% $ 63,703 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 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. Sales and Marketing Sales and marketing expenses consist primarily of advertising, trade shows, corporate communications and other marketing expenses, product marketing expenses, outbound freight costs, amortization of certain intangibles, personnel expenses for sales and marketing staff, technical support expenses, and IT and facility allocations. The following table presents sales and marketing expenses, for the periods indicated: Three Months Ended Nine Months Ended (In thousands, except percentage data) September 29, 2024 % Change October 1, 2023 September 29, 2024 % Change October 1, 2023 Sales and marketing $ 31,196 1.1 % $ 30,865 $ 91,482 (5.9 )% $ 97,226 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 32 Table of Contents 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. Marketing expenditure committed with a customer is generally recorded as a reduction of revenue per authoritative guidance. General and Administrative General and administrative expenses consist of salaries and related expenses for executives, finance and accounting, human resources, information technology, professional fees, including legal costs associated with defending claims against us, allowance for doubtful accounts, IT and facility allocations, and other general corporate expenses. The following table presents general and administrative expenses, for the periods indicated: Three Months Ended Nine Months Ended (In thousands, except percentage data) September 29, 2024 % Change October 1, 2023 September 29, 2024 % Change October 1, 2023 General and administrative $ 8,357 (48.9 )% $ 16,364 $ 45,610 (7.2 )% $ 49,136 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. Future general and administrative expense increases or decreases in absolute dollars are difficult to predict due to the lack of visibility of certain costs, including legal costs associated with defending claims against us, as well as legal costs associated with asserting and enforcing our intellectual property portfolio and other factors. Litigation Reserves, Net Three Months Ended Nine Months Ended (In thousands, except percentage data) September 29, 2024 % Change October 1, 2023 September 29, 2024 % Change October 1, 2023 Litigation reserves, net $ (100,855 ) ** $ 178 $ (92,625 ) ** $ 178 ** Percentage change not meaningful. 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 Three Months Ended Nine Months Ended (In thousands, except percentage data) September 29, 2024 % Change October 1, 2023 September 29, 2024 % Change October 1, 2023 Restructuring and other charges $ 1,072 ** $ 366 $ 3,792 40.3 % $ 2,703 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. 33 Table of Contents Other Income, Net Other income, net consists of interest income, which represents amounts earned and incurred on our cash, cash equivalents and short-term investments, and other income and expenses, which primarily represents gains and losses on transactions denominated in foreign currencies, gains and losses on investments, and other non-operating income and expenses, including gain on litigation settlements. The following table presents other income (expenses), net for the periods indicated: Three Months Ended Nine Months Ended (In thousands, except percentage data) September 29, 2024 % Change October 1, 2023 September 29, 2024 % Change October 1, 2023 Other income, net $ 3,485 52.9 % $ 2,280 $ 9,048 (22.6 )% $ 11,685 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 Nine Months Ended (In thousands, except percentage data) September 29, 2024 % Change October 1, 2023 September 29, 2024 % Change October 1, 2023 Provision for income taxes $14,219 (83.5%) $86,431 $15,100 (82.1%) $84,382 Effective tax rate 14.3 % ** 41.5 % ** ** 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 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. and numerous foreign jurisdictions. Our future foreign tax rate could be affected by changes in the composition in earnings in countries with tax rates differing from the U.S. federal rate. We are under examination in various U.S. and foreign jurisdictions. Segment Information In the first fiscal quarter of 2024, resulting from certain segment structure changes, we revised our allocation method by allocating certain historically unallocated operating expenses to our individual operating segments. The prior-year segment financial information has been recast to conform to the current-year presentation. 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. NETGEAR for Business Segment Three Months Ended Nine Months Ended (In thousands, except percentage data) September 29, 2024 % Change October 1, 2023 September 29, 2024 % Change October 1, 2023 Net revenue $78,530 11.4% $70,510 $207,020 (7.4)% $223,679 Percentage of net revenue 42.9% 35.6% 42.1% 40.5% Contribution income $16,133 10.9% $14,547 $28,098 (33.5)% $42,254 Contribution margin 20.5% 20.6% 13.6% 18.9% 34 Table of Contents 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 Nine Months Ended (In thousands, except percentage data) September 29, 2024 % Change October 1, 2023 September 29, 2024 % Change October 1, 2023 Net revenue $104,324 (18.1)% $127,335 $284,320 (13.4)% $328,487 Percentage of net revenue 57.1% 64.4% 57.9% 59.5% Contribution income (loss) $(4,780) ** $9,465 $(24,714) ** $2,336 Contribution margin (4.6)% 7.4% (8.7)% 0.7% ** 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 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. states and applicable foreign withholding taxes during the period when such repatriation occurs. We have recorded deferred taxes for the tax effect of repatriating the funds to the U.S. 35 Table of Contents Cash Flows The following table presents our cash flows for the periods presented. Nine Months Ended (In thousands) September 29, 2024 October 1, 2023 Cash provided by operating activities $ 143,315 $ 582 Cash used in investing activities (23,891 ) (16,471 ) Cash (used in) provided by financing activities (22,374 ) 848 Net cash increase (decrease) $ 97,050 $ (15,041 ) Operating activities 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 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 $22.4 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. However, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity financing or from other sources. We cannot assure you that additional financing will be available at all or that, if available, such financing would be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products and potential acquisitions of related businesses or technology. Stock Repurchase Program From time to time, our Board of Directors has authorized programs under which we may repurchase shares of our common stock. 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 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. 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, 36 Table of Contents 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 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 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. Recent Accounting Pronouncements Information with respect to this item may be found in Note 2, Summary of Significant Accounting Policies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, which are hereby incorporated by reference. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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.