Netgear Q2 Gets Premium Push, Inventory Stabilization Seen in Q3

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Netgear Q2 Gets Premium Push, Inventory Stabilization Seen in Q3

Aug 2, 2023

Netgear’s Q2 2023 revenue declined 22.3% YoY to $173.4 million.
Inventory correction in H1 2023 totaled $66 million.
Orbi, Nighthawk, 5G mobile hotspots and Pro AV will drive revenues in Q3 2023.
Netgear expects the Q3 2023 revenues to be in the range of $175-$190 million.

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Netgear’s revenue declined 22.3% YoY in Q2 2023 to $173.4 million, coming at the higher end of the guidance primarily due to an increase in orders from the service provider channel. The company experienced an inventory correction worth $29 million in Q2 2023, taking the H1 2023 inventory corrections to $66 million. As the inventory levels begin to stabilize, we expect the inventory spills will be 20% lower in H2 2023 compared to H1 2023.

Premium offerings, Pro AV switches shine amid revenue declines in both segments

Connected home and SMB (small and medium business) segments suffered declines of 24% and 21% YoY, respectively, in Q2 2023 primarily due to inventory corrections at channel partners.
Gross margin continued to be above 30% in the second quarter as premium product sales grew and freight costs went down.
However, the operating margin continued to be in the negative region as inventory correction amounted to over $29 million. It is expected to improve in Q3 with an improved mix of higher-ASP products in the connected home and SMB segments.
The retail market is starting to stabilize with consumer demand increasing toward premium networking equipment as the number of Wi-Fi-enabled devices continues to increase. As home networks become more crowded with bandwidth-hungry devices, the demand for Mesh routing devices will increase with time to ease out home networks.

Netgear Revenue by Segment, Q1 2020 - Q2 2023

The end consumer devices have become more feature-rich, especially with AI (artificial intelligence) which now requires more bandwidth, low latency and more reliable Wi-Fi connection. This has led to strong consumer demand for premium routers offering such features.
The Orbi and Nighthawk series of routers continued to perform well for Netgear along with 5G mobile hotspots and experienced a YoY increase in shipments in Q2 2023.
Pro AV-managed switches continued to outperform other end devices in the SMB segment to deliver a growth of more than 40% YoY in Q2 2023. Netgear is significantly committed to building leadership in IP-over-AV switches and continues to invest more to grow this segment.
Other SMB products experienced a major drop in sales due to macroeconomic headwinds affecting enterprise spending in the past couple of quarters, delaying the upgrades to newer Wi-Fi technologies.

Netgear Revenue by Region, Q1 2020V- Q2 2023

Revenues from service providers, in APAC and Europe decline significantly

Though service provider revenue increased sequentially in Q2 2023 to $25 million, it suffered a decline of 30% YoY. Revenues were at the higher end of the guidance due to an increase in orders from a major service provider.
Netgear shipped around 6 million units of wired and wireless networking devices, compared to 2.2 million in the same period last year. It shipped around 426,000 units of all types of routers and gateways.
Sales in APAC and Europe declined 20% and 40% YoY, respectively, due to an economic slowdown in these regions, especially Greater China and South Korea.

Paid subscribers to reach 875,000 by year-end, inventory corrections to stabilize

Netgear is on the path to achieve a paid subscriber base of 875,000 by the end of 2023 as it touched 800,000 in Q2 2023. Revenue from subscriptions grew 8% YoY in Q2 2023 to end at $10.3 million.
With concerns about internet security on the rise, especially with a growing number of smart devices, online internet security software is expected to gain momentum in the second half of this year.

Netgear expects the revenue to be in the range of $175 million to $190 million in Q3 2023, as inventory correction is expected to ease out. However, it will still take two more quarters for Netgear to bring down inventory-carrying levels to less than 10 weeks.

Netgear paid subscibers

Key takeaways

Counterpoint expects an increase in shipments for 5G mobile hotspots in H2 2023 as the consumer demand for such products is on the rise. Netgear is expected to launch a couple of Wi-Fi 7 Orbi Mesh routers and quadband Nighthawk routers in Q3 2023.
However, Wi-Fi 7 upgrade cycle is expected to begin sometime in mid-2024, as IEEE is yet to announce the schedule of the certification program for Wi-Fi 7. Therefore, Wi-Fi 6/6E is expected to form more than 50% of the market in the next two years.
Netgear is expected to open more company-owned premium retail outlets which will help it to provide a better customer experience and a competitive edge in the market.
Consumer awareness around online internet security remains low. Netgear can play a part in increasing consumer awareness through its D2C (direct-to-consumer) communication channels.
Macroeconomic headwinds have slowed down enterprise spending, thus delaying the Wi-Fi upgrade cycle toward Wi-Fi 6/6E.
5G FWA market has been performing well across most of the regions. With more regions opting to reduce the digital divide through FWA, the market promises to offer further growth and become a challenger to fixed broadband technologies.

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Counterpoint research is a young and fast growing research firm covering analysis of the tech industry. Coverage areas are connected devices, digital consumer goods, software & applications and other adjacent topics. We provide syndicated research reports as well as tailored. Our seminars and workshops for companies and institutions are popular and available on demand. Consulting and customized work on the above topics is provided for high precision projects.