• Netgear’s Q1 2023 revenue declined 27.4% YoY to $180.9 million.
• SMB segment revenue declined 2.6%, the first drop in eight quarters.
• Connected home product (CHP) segment revenue declined by over 27% YoY.
• Netgear expects the Q1 2023 revenues to be in the range of $150-$165 million.

Netgear’s revenue declined 27.4% YoY in Q1 2023 to $180.9 million, which was below the guided level mainly due to inventory corrections in the consumer and SMB segments. These corrections are expected to continue in Q2 2023, thus requiring lower production for Netgear. However, gross margins improved in Q1 on the good performance of premium products such as Orbi mesh gateways, 5G mobile hotspots, and Pro AV switches. Supply chain issues have improved for most of the product lines which helped reduce the use of air freight, thereby helping gross margins.

SMB declines for the first time in eight quarters

• The SMB segment ended Q1 2022 at $78.2 million, a decline of 3% YoY from Q1 2022. The revenue drop was mainly caused by inventory corrections at Netgear’s largest e-commerce account.
• Pro AV switches, a major revenue driver in the SMB business line, grew more than 50% YoY in Q1 2023.
• The broadcasting and studio industry is transitioning from analog to high-resolution digital over IP solutions, which is fueling demand for IP switches and creating a market opportunity for Netgear.
• Netgear has partnered with over 200 manufacturers to increase and stabilise its supply of Pro AV switches. It is focused on developing budget and high-speed ports such as 25 Gbps or above to cover future demand.
• Netgear expects channel inventory to stabilise for SMB by the second half of the year. Revenue from SMB is expected to overtake the connected home product segment later this year, which will boost the company’s overall gross and operating margins.

Connected home segment transition to premium continues

• The connected home segment contracted by 21% in Q1 2023, as channel inventories were reduced sharply for major products among key service provider accounts.
• The macroeconomic headwinds and declining demand hit the retail consumer networking market, resulting in poor sales in the low- and mid-price segments.
• Channel partners are expected to further reduce inventory levels, which is leading to production cuts at several of Netgear’s manufacturing partners.
• However, the Orbi premium mesh Wi-Fi access points continue to beat expectations along with 5G mobile hotspots, resulting in higher shipments.
• Netgear remains committed to delivering the latest technology for consumers. It has launched a Wi-Fi 7-based router with a maximum download speed of 19,000 Mbps across three bands.

Service provider revenue declines by a quarter

• Service provider revenues declined to $14 million as customers focused on burning inventory rather than restocking.
• To offset this decline, Netgear pushed the unlocked version of M6 5G mobile hotspots in various countries across Europe. Netgear plans to offer it in the US in Q2.
• 5G mobile hotspots have been performing well for Netgear in the past couple of quarters, showing a sharp YoY growth. The higher ASP of these products has helped Netgear improve its margin coupled with better performance and reliability.

Shipments decline by 25% YoY, COVID hits APAC revenues

• Netgear shipped around 1.8 million units of wired and wireless networking devices, compared to 2.4 million in the same period last year.
• It shipped around 485,000 units of all types of routers and gateways. Wired devices overtook wireless devices for the first time, driving the revenues with a 56% share.
• Revenue from Europe grew 6% while that from the Americas declined 16%. The APAC region performed poorly, declining 32% mainly due to the COVID-19 surge in China in the early part of Q1 2023, resulting in a slowdown in China, Hong Kong, and South Korea.

Losses continue, but improvements visible

• Even though the gross margin improved and exceeded 30%, the lower top line weighed on the overall financials, meaning the operating margins remained negative but were improving.
• The supply chain improved a lot in Q1 2023 for most products, reducing the reliance on costly air freight.
• Netgear is committed to improving margins by offering more premium products and aligning the marketing spends accordingly.

Strong growth in paid subscribers

• Netgear concluded Q1 2023 with 775,000 paid subscribers, a 23% increase over Q1 2022. Software subscription services such as Pro Support, Armour, and smart parental controls have done well in terms of increasing service revenue.
• Netgear’s services revenue increased by 7.9% YoY in Q1 to $9.6 million.

Inventory correction to continue in Q2 2023

• Netgear expects strong demand for its SMB products, especially Pro AV switches, and premium consumer products such as Orbi 8 and 9 mesh gateways and 5G mobile routers in the coming quarters.
• However, it is expected that its channel partners will continue to focus on inventory reduction in a similar manner as in the first quarter, which will result in an expected revenue of $150-$165 million.
• In the third quarter, Netgear will debut a Wi-Fi 7 Orbi mesh device to benefit from the technological tipping point. It anticipates that consumers will begin upgrading to Wi-Fi 7 later this year.
• Netgear has set a target of 875,000 paid subscribers by the end of this year and expects the revenue from services to grow strongly. It aims to onboard around 2 million subscribers in the next couple of years.
• Cybersecurity across home networks has been a rising concern, but there is a lack of consumer awareness of the threat for regular internet users. Netgear is looking to launch awareness campaigns around home network security and push its Netgear Armor service.

Key takeaways

• Netgear has been working on creating a premium brand experience through its direct channels such as Netgear.com. It has also introduced concierge services for its current and prospective customers.
• Netgear has invested significantly in highly targeted performance marketing to communicate with premium customers through various channels. Such customers usually opt in more for subscription services compared to non-premium consumers, thereby creating additional recurring revenue for Netgear.
• Cybersecurity is an opportunity that Netgear can address with its Armor service. It will also aim to raise awareness of both the problem and its solutions.
• 5G networks are being rolled out at a fast pace in the US and more developed European countries, which is likely to drive increased demand for 5G mobile hotspots as they compete with public Wi-Fi hotspots that are plagued with poor online security.
• Fixed broadband services have slowed in the past couple of quarters in the US, but fixed wireless access (FWA) has been on the rise. It offers a good alternative to wired services in some situations. We have seen many traditional Wi-Fi networking companies offering 5G FWA devices. Netgear can also tap this market.
• Due to the COVID-19 upgrade gap, enterprises are expected to upgrade to Wi-Fi 7, skipping Wi-Fi 6/6E. However, because of the macroeconomic difficulties, this upgrade cycle is not expected to become a significant driver until 2024.

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