Conference Transcript - NTGR 2025-12-09

Adam Tindall, Analyst — Raymond James

We'll go ahead and get going. Thank you so much and thanks everybody for joining. I'm Adam Tindall and this is part of my connected devices coverage here at Raymond James. Very happy to have the team from Netgear here today. We're going to do a fireside chat. Just try to keep it fairly light and open. If you do have questions, please feel free to raise your hand and keep it as interactive as possible. But with me today is C.J. Prober, CEO and Brian Murray, CFO. So we'll just go ahead and dive right in guys. Thanks for thanks for being here. Many of us are familiar with Netgear from a customer standpoint. I'm a happy customer. But for those not as familiar, maybe just give us a little bit of background on the company and how it's evolved over time.

C.J. Prober, CEO

Yeah, good question. So we're actually approaching Netgear's 30-year anniversary. So we've been around for a while. It was a spin-out from Bay Networks. I guess that means back in 1996. And if you were to ask nine people or 10 people on the street, you know, Nick here, you'd get, you know, nine or 10 of them would say, absolutely. You know, I've used the products, love the products. But with, you know, we've had a prior to me joining, we had a single CEO for a 28 year period and have been a very consumer centric company. And so I think the big news of late is we're driving a very significant transformation of the business. And a big part of that is elevating the enterprise part of our business. So if you look at our business today, about half of our revenue is from the enterprise side of things. last quarter, that business did about 50% gross margin, 25-ish percent contribution margin, and grew 16% year over year. So it's something that we're really excited about elevating at least to equal footing to our legacy consumer business, which we're also very proud of and have big expectations for over the long term. And so we just had, since the transformation kicked off about 20 months ago, we just had our first investor day a few weeks ago and really outlined a lot about the markets we play in, our strategies for winning in those markets, and some mid- and long-range targets. So I encourage folks to go and check that out if they haven't yet.

Adam Tindall, Analyst — Raymond James

Anything, Brian, that you want to highlight from the investor day? just kind of clip notes or what was what stood out to you you've done a number of

Bryan Murray, CFO

these over the years so yeah well first off I would say it was great participation probably the biggest audience that we've had in quite some time and people coming in with different perspectives on net care and where we're at in our journey selfishly I think the you know the ability to portray midterm and long-term targets margin financial profiles of both the businesses and the combined performance it was a good step for us like we've been in this foundational groundwork to level set things for the within the transformational effort thus far but being able to say where we're going I

Adam Tindall, Analyst — Raymond James

think was a big big step forward. Agreed. CJ how would you describe Netgear's competitive advantage and how has the competitive environment changed over the recent years especially in the enterprise side I think yes maybe not as

C.J. Prober, CEO

well understood yeah great question so thinking the best way to approach the approach answering that I would say when you think about what's made Nick you're successful up until today I think the assets that we bring to the table are underappreciated when you think about our supply chain our global distribution footprint people love Netgear because we build incredible devices that perform incredibly well last forever I just had a friend of mine text me yesterday saying hey I've had my ready to upgrade my Netgear product that I've had for you know ten years so that legacy capability is something that we value and that we're not moving away from it however to compete and be more contemporary and both consumer and enterprise, we really need to differentiate via software. That's probably the biggest part of the transformation, aside from elevating enterprise, is we're insourcing our software development capability. Historically, that's been outsourced to many, many different vendors, and we're doing that at a time when with AI, it's easy to onboard the source code, it's easy to get significant productivity. So it's a cost neutral move, but we get more efficient, better delivery, and so we're differentiating via software. I think that's the biggest change in our competitive differentiation. And if you think about, we have several different business categories, and Pro AV is a great example where we have delivered on that differentiation via software. And what we've done is we've used our software to integrate the AV endpoints of over 500 manufacturing partners so that when a system integrator goes to deploy an AV network, we've done all the hard work for them, and as you see from the investor day, one of our partners has said that it's 90% less time to deploy Netgear in an AV network than it is some of our legacy providers. So it's all about software and like I said, we're not leaving behind what's gotten us here.

Adam Tindall, Analyst — Raymond James

Yep, one of the other competitors more on the consumer side of the house is TP-Link, and it's obviously become very topical with investors. Maybe just talk about the different cases against TP-Link, where we're sitting in that process, and the amount of incremental investment you'd expect if perhaps that company gets banned.

C.J. Prober, CEO

Yeah, we get a lot of questions about TP-Link, and our approach in responding to that has really been to quote the very reputable press sources, because we're reading the same stuff that others are reading, but we pay close attention to it. So if you look at, I'm not sure the cases you might be referring to, but in the end of October, Washington Post published an article that noted that the Commerce Department was finalizing an initial determination that would have the implications of banning TP-Link, and that initial determination work was supported by six federal agencies. More recently, in fact, last week, Bloomberg published an article that said the FTC was investigating TP-Link, and in the early stages of doing that for potentially misleading customers, and so what we see is the media coverage and the momentum on this gaining, And so we just think it's a matter of time before something happens there.

Adam Tindall, Analyst — Raymond James

We'll stay tuned. On the enterprise side, and I just want to maybe spend a little bit of time over there because it's become a key part of the investment thesis, I think. You've made a lot of changes to the business since joining. I know you talked about some of the software stuff you did, but just talk about some of the personnel changes that you've brought in and how you might expect that to impact future performance.

C.J. Prober, CEO

Yeah, great question. So we've had a significant evolution of the leadership team. So I think when I joined, there was about 13 exec team members. Two of those remained. So a lot of the team has been brought in from the outside a mix of people I've worked with in the past and new folks. And then we've elevated some really high potential leaders from within the company. And I guess the most significant DNA injection that's occurred as part of the transformation is bringing in true enterprise networking expertise. So Pramod Bajadi, who presented our investor day, he is a long-term enterprise networking leader. He led Ruckus, he led campus Wi-Fi for Arista, he was a long time Cisco engineering leader. He's built out a team of similarly experienced, very capable leaders eric law is our commercial leader he was the former head of sales globally for ruckus and so by creating this bu structure that has consumer led by jonathan oaks who's actually one of the newer members of the exec team also incredibly capable coming from fitbit and google and amazon but we've got the bu structure that allows us to bring in the right talent to focus on you know building and scaling each of these businesses and on the enterprise

Adam Tindall, Analyst — Raymond James

side um you know maybe just talk about the key competitors and the various uh aspects in netgears differentiation and i think when you answer this sometimes you talk about um you know the health of the the financial profile of the business so if you want to maybe tie it tie that in the gross

C.J. Prober, CEO

margins uh out there in enterprise yeah great great question so we really have two main business segments uh in enterprise we've got pro av and we've got enterprise networking and security on the pro av side we've really this is like a three billion dollar market for you know ip-based switching equipment that's growing it's estimated to be about 14 over the next five years so it's a smallish market for the big players but it's a really interesting market for us our growth has been outpacing that you know that that market kigger and so when you look at the competition there it's much bigger kind of traditional networking players that have massive businesses that are squarely focused on the data center opportunity the security opportunity and so by having made this early investment and really leaning into the AV community and building out the ecosystem that I described, that's allowed us to be ultra-competitive, and it's not just about the affordability of our device and software solutions, it's the point I made about it's 90% less time to deploy Netgear, so it's a huge savings for our customers. And then on the enterprise networking and security side of things, we see the small to medium enterprises as being underserved, because what they're having to do is deploy very expensive solutions from bigger enterprise networking and security companies that have significant margins relative to ours. And so that margin we view as our opportunity. Now, of course, there's an opportunity for us to introduce more recurring revenue and support and professional services along the way, but we still see a big gap in the market in terms of providing affordable reliable and like purpose-built solutions for that SME customer in the education retail and hospitality and MDU vertical and so the competitive set there is is pretty obvious but they also similarly are focused on the big enterprise customers where we can come in and command and really solve a customer's problem in a purpose-built way this might be one for

Adam Tindall, Analyst — Raymond James

Brian. I know ProAV in particular, but broadly speaking, the business has faced some supply constraints and component issues that are obviously not within your control per se, but just maybe summarize what's going on for supply constraints and how that maybe resolves

Bryan Murray, CFO

itself going forward. Sure. I'll start with the AV product line, which we've been talking most of this year about supply availability and chasing supply. Demand is outpacing, and part of that was self-inflicted. We had gotten a little conservative with our forecast there at the end of 2023, and with lead times, this is our longest lead time product, it's over a year for the main chip set, and so to catch up has taken us quite some time, and all along, the demand continues to outpace our expectations, so we're continuing to chase. The good news is we made progress in the third quarter in building up some supply there. We're not all the way there. We're gonna make some additional progress in Q4 and we think by Q1 timeframe, we should be in a place where we have not only the level of supply needed for that quarter, but we'll enter second quarter with some buffer stock to really capture the full market opportunity there. There are other things going on within the supply chain. I'm sure everybody in here has been hearing a lot about memory pricing in the market, something that we're now facing. We know that in our Q4 guidance, it's about 150 basis point headwind to our gross margins. This has been an issue that's been going on most of this year and we've been able to mitigate it up until Q4 timeframe. We ask our supply chain to kind of manage that and absorb those costs, but we're now in the place where we are participating in some of that increase. The good news are other things that are going on. We talked about our investor day that we are insourcing the managed switch OS and so we're bringing that in house. We'll have to invest some R&D resources to help develop features and maintain that code, but it is gonna be a benefit to our gross margins in that 100 to 150 basis point range. So we're kind of offsetting some of those things. I would say on the memory side of things, we're investing a lot of time looking skew by skew to optimize our products and redesign in some cases to use portions of the memory market, a one gig memory component that is a little more accessible and not seeing the surge pricing that other areas would be seeing so where we can optimize we're doing that right now do you think

Adam Tindall, Analyst — Raymond James

the 150 bips and q4 is kind of reflective of the current environment or would there be additional that would potentially spill into uh 2026. i think as of right now the 150 is about the

Bryan Murray, CFO

the impact to our gross margins with the current market environment hopefully as we get into later the next year obviously with the big players in the ddr4 space exiting there is opportunity for other people to pick up capacity but how quickly that ramps is to be seen yep okay that's helpful

Adam Tindall, Analyst — Raymond James

i want to shift gears in into the consumer side of the house cj um we're here in new york almost christmas time uh you know probably a festive question to ask how consumer behavior is this

C.J. Prober, CEO

holiday season versus last yeah it's interesting you know you read a lot about consumer confidence challenges and inflationary impacts we haven't seen that we've we've to date had a had a really good holiday period you know we're meeting expectations maybe surpassing them a little bit and you know one one thing that i would attribute that to right you recall when we were here last year we talked about moving back into good better best for our routing category for a mesh category that allows us to participate in like the key buying events much more fully and aggressively and when you do that there's a halo effect outside of like you know the Cyber Monday the Black Friday and the weeks around that and so we are execution there is improved but but we're seeing pretty resilient consumer behavior and then any changes from the way that the

Adam Tindall, Analyst — Raymond James

channel is managing I mean there's been periods of time where they want to own more or less inventory and stock and weeks of channel inventory you know how would you describe maybe your interactions with your big go-to-market

C.J. Prober, CEO

partners yeah we haven't seen a big shift of late in terms of that was a big push coming out of covet right everybody had a lot of inventory that led to the big reset we did in q2 of 2024 that allowed our partners to aggressively move down their inventory position whenever you have that excess it's a very costly endeavor so we're we're living by our philosophy of matching sell-in to sell through whenever we can and we just haven't seen yeah we haven't seen a big behavior change from partners and in either direction yeah okay great um and we've got a new

Adam Tindall, Analyst — Raymond James

wi-fi standard wi-fi eight um i think we've you know gone through these various cycles and maybe become a little bit numb to you know what what they mean going forward maybe just kind of summarize what wi-fi eight is versus seven with the opportunity that might bring yeah so it has

C.J. Prober, CEO

both an industry and technology impact and then it's super relevant to net gear and i'll explain why from an industry technology perspective right the days of incrementing wi-fi by improving throughput are largely behind us right like we wi-fi seven has incredible throughput wi-fi eight is much more about lower latency higher reliability like a step change function And so we're actually, when you think about, you know, Jonathan shared a lot more on this at the Investor Day, but when you think about connectivity in the home and the problems that persist there, it's not a throughput problem. It's about reliability. It's about latency. And so we're excited about the potential that Wi-Fi 8, along with AI, bring to the table to truly take us forward in solving connectivity in the home. And as we shared, similar to the way we think about ProAV, it's very important for us, for our in-home partners, for us to work together with them to solve connectivity in the home. Together, we announced the Google partnership at Investor Day. from a nickier perspective it's relevant because when i joined um you know jonathan hadn't started wi-fi seven products were uh coming to market we quickly changed the nature of our roadmap to good better best as i said before wi-fi it's really our first opportunity to change um our product portfolio to align with jonathan's vision for how we're going to solve connectivity in the home So it's very relevant to us from that perspective as well. So we're really excited about it.

Adam Tindall, Analyst — Raymond James

And maybe talk about the subscription opportunity on the consumer side. You know, we've heard about that for years for Netgear and things like Armor made some sense. But you also spent some time at Analyst Day talking about this and just would be helpful to recap how you're thinking about consumer subscription.

C.J. Prober, CEO

Yeah. So long term, we see a real opportunity to scale that part of our business. There's a top of funnel challenge that we're addressing by moving away from just the premium segment. Then there's a number of subscription fundamentals that we're in the process of addressing. I've talked about, you know, this ties into Wi-Fi 8 as well, like de-bundling our subscription offer from our device offerings because we've largely connected the two, and that makes it harder to drive new subscribers and true recurring revenue. But at the foundation of our subscription today, it's really cybersecurity, which makes a ton of sense because, you know, our networking in the home is kind of your digital front door. and by upgrading with our subscription product which we call armor today it really enhances that peace of mind that you get as a household it also comes with we partner with Bitdefender and offering that so the value that Bitdefender provides on a standalone basis is bundled so you get all of the routing mesh endpoint in the home protection and then you get the you know the protection you would otherwise get with Bitdefender so it's a really great value and over time again as we truly solve connectivity in the home we see opportunities to add value for consumers and grow that so we've got about 36 million of ARR on the consumer side of the business today and what we're

Adam Tindall, Analyst — Raymond James

excited about growing that just rounding out this this side the service provider piece has undergone some changes and I think you're you know doing some things to make that business make more sense going forward and optimize it. Maybe just recap some of the changes that you've made and kind of the outlook for that piece of the business going forward.

C.J. Prober, CEO

I think it's important to, I think people tend to sometimes confuse a few different things there. So we have service provider where today we largely sell our mobile hotspots into carrier partners like AT&T. We have our cable products that are sold at retail, But those only work if you're, you know, connected to a cable ISP like a Comcast or a Spectrum. And then we have just 5G products more generally. On the first, that's been a challenge business. And we said at Analyst Day, that's declined year to date at about 20%. We're still going to make great products for our service provider customers so that we can leverage that technology investments in other parts of the business. But we have said that we don't expect that to be a growth business. And in fact, we've said the opposite. We think that's going to continue to decline, and we're going to carve it out so investors can see that business going forward. The cable products is in a similar boat, right? It's more and more ISPs are making it difficult to attach a third-party cable product like ours to their networks. So that's been a declining market, and we're going to continue to harvest that consumers value our products we're going to continue to support them but we don't expect that to be a gross business our 5g products are very strategic on both the consumer and enterprise side because if you think about promote's portfolio of enterprise networking and security a lot of those customers today are using our mobile hotspots for primary connectivity for enterprise failover and we don't make that easy like we don't have the right level of integration. We don't have the right form factor. On the consumer side, people use our mobile hotspots for failover at home. Similarly, it's not properly integrated to our Orbi mesh systems or our Nighthawk platforms. So we see the 5G technology and development capabilities we have are strategic and something that we plan to continue to invest in, specifically to solve problems for consumers in each of those segments.

Adam Tindall, Analyst — Raymond James

So we've so far talked about, you know, we started with the enterprise side. We've talked about the consumer side. How do you think about the synergy between consumer and enterprise, and, you know, when would it potentially make sense to, you know, keep them together or, you know, let them operate separately? Have you thought about those things?

C.J. Prober, CEO

Yeah, they're definitely different businesses, different end customers. We get a lot of synergies from the investments we make and operations, like our supply chain, G&A, central marketing. So there is value in having the businesses together because we get leverage from those parts of the business. If you think about the transformation roadmap we outlined at Investor Day, we're largely exiting phase one, which is getting the foundation set. Phase two, which we described as like a 2026 to 2028 effort, that's really about strengthening the core businesses because, you know, today that gives us optionality, whether it's to grow more aggressively on an inorganic basis. Once we build value back into NIC here, we have optionality for where we take both businesses. But today we have a lot of low-hanging fruit in terms of improving the performance of the businesses and they're both subscale. So, you know, our focus is on growth and enhancing the P&L for each of them and then the rest will take care of itself.

Adam Tindall, Analyst — Raymond James

Got it. Brian, I wanted to ask a couple balance sheet and cash flow questions. Maybe just starting out with cash flow, you obviously had some healthy free cash generation. You've got a very clean balance sheet. Maybe just recap where you're at from a cash position and how you're thinking about sort of sustainable levels of free cash flow going forward. Yeah. So if I look back

Bryan Murray, CFO

to the start of 2024, we were sitting about $285 million in cash, and today we have $326 million, which is net of some healthy level of stock repurchase that we've been doing. So we've repurchased $69 million over that time frame. We've also completed a couple of acquisitions. So we've been able to deploy capital strategically and return capital to shareholders at that time and still sitting on a pretty healthy cash balance. We continue to believe we need about $125 to $150 million to operate, so we have some extra cash there. And in terms of free cash flow generation, we aren't very capital intensive. We would expect to convert cash at a rate of 85% to 100% of non-GAAP net income.

Adam Tindall, Analyst — Raymond James

And you talked about having excess cash. Maybe talk about capital allocation priorities with the right mix of the various options that you have.

Bryan Murray, CFO

Yeah. We continue to talk about it's a three-pronged approach. We're obviously going to fund the investments in the organic business. We've talked at length about that. On the enterprise side, we have go-to-market gaps that we're filling. We're insourcing software development. There's other things with regards to R&D. So we'll fund those investments to drive long-term value creation. We also will look at M&A opportunities, things that are product adjacencies or capability gaps. And then lastly is return of capital shareholders. We've been, as I said earlier, active repurchases of our stock, you know, 3.4 million shares over that seven-quarter timeframe at an average cost of $19.99. So we deploy capital in all three of those phases.

Adam Tindall, Analyst — Raymond James

Time for one question before we wrap. Any pressing out there?

Operator

Yeah.

C.J. Prober, CEO

Yeah, we can only really comment on what we've read. And I would say it's hard to read between the lines of how that would manifest itself in a specific action. There's a very broad range of things that could happen there, everything from scope of products that are included, and then the speed and timing of an action. So it's a little bit ambiguous at the moment.

Adam Tindall, Analyst — Raymond James

But you've also talked about the state of the market, and I think they're currently number one market share. Is that right?

C.J. Prober, CEO

Yeah, on the retail side, from a unit perspective, the data that we look at shows them as a significant market leader, and also they lead from a market share perspective on a revenue basis.

Adam Tindall, Analyst — Raymond James

Well, let's wrap it up. I guess what's the key message, if you wanted to kind of boil down the story to an investor who's maybe revisiting the story or are newer to it? What would you like them to walk away with today as they think about Netgear?

C.J. Prober, CEO

Yeah, so we are executing on a very bold and significant transformation. You know, the first couple of years or so have gone really great, but we're actually even more excited about what's to come. And so we'd really, for those who think they understand what Netgear is about, I would encourage them to go and watch our investor day because we really outline in a lot of detail where we're playing, how we're going to win what the size of those markets are what do we think the financial profile of the business looks like in the mid and the long term and uh and we're fired up about it sounds great cj brian thank you so much thanks thank you