Netgear’s Q3 2022 revenue came in at the high end of its guidance at $249.2 million, with strong growth recorded in the SMB segment. The overall revenue shrank by 14% YoY, due to a decrease in demand for consumer and home products. The constraints on the supply side continue to detract from Netgear’s growth, especially in the premium consumer product segment and SMB device segments. However, it has experienced strong demand for its Orbi Mesh Wi-Fi, 5G hotspot, and latest SMB solutions.

SMB continues to lead growth for Netgear

• The SMB segment once again exceeded its previous quarter’s revenue for the segment and setting a new all-time quarterly benchmark, growing 21% YoY and ending at $99 million.
• While most businesses are returning to normal working patterns, the need to upgrade older networking systems is a challenge. Netgear has been one of the first to deploy the latest technology in its enterprise offerings and hence has been experiencing strong demand for its Orbi Pro Mesh Networking solutions and Managed Wi-Fi access points.
• The Pro AV switches have been performing well in recent quarters, Netgear has emphasized customer support by offering specialized design teams to work with clients to understand requirements.

The Connected Home segment continues to struggle, declining 28% YoY

• Netgear continues to offer a more premium range of products with the launch of the Orbi 850/860 Mesh router and M6 5G hotspot router.
• The high-end mesh router market has been growing consistently in contrast to the declining overall market and Netgear has been at the forefront in this particular segment with growing demand for Orbi routers.

Service Provider revenue remained stable

• Revenue from service provider channels was $42 million, similar to Q3 2021. The demand for 5G routers has been increasing as more operators are starting to offer 5G in more regions worldwide. Netgear has introduced M6 and M6 Pro 5G routers with Sub-6 and mmWave capabilities to offer high speeds a small footprint. Netgear has been engaged in signing up more operators across Europe, Oceania, and Asia for its hotspot routers.

Shipments decline by 29% YoY, and business in all regions declined YoY

• Netgear shipped around 2.4 million units of wired and wireless networking devices. It shipped around 786,000 units of all types of routers and gateways. Wireless remains the dominant segment, driving the revenues with a 61% share.
• Regionally, Americas declined by 13.2% YoY, EMEA declined by 21.3% YoY and APAC declined by 7.1% YoY mostly due to weakened demand in the consumer segment and currency fluctuations markets with the strengthening of the dollar against major currencies.

Margins show a sign of improvement but remain below the guidance level

• The quarter saw better performance from the SMB segment as the supply chain continues to improve allowing fulfilment of pending orders, however it remains below normal levels as further orders pile up.
• The operating margin improved to a negative -0.9% from -27.5% in Q2 2022 primarily due to improving supply chain and increased demand for the premium routers such as Orbi Mesh Wi-Fi and 5G hotspot routers, all of which have higher margins.
• To improve the supply, Netgear continues to use air transport to offset delivery delays, but the higher costs hurt margins.

Paid Service Subscribers grow but remain below target

• Services revenue was up by 14.7% annually in Q3 2022 reaching $8.5 million, Netgear has been experiencing decent demand for its service subscriptions.
• Netgear is focused on increasing its services revenue by offering a multitude of services for consumers and business users such as Armor, Parental Controls, Meural, Pro Support, and Insight Pro services. Overall, Netgear crossed 22.2 million users with 15.5 million app users.

Netgear to carry momentum into Q4 2022

• Netgear expects Q4 revenues in the range $235-$250 million as the supply chain will remain constrained in Q4, which would mean Netgear could finish below 2019’s annual revenue. As the brand focuses on reducing retail inventory the guidance level seems apt and it is set to cut orders for lower and mid-range consumer networking devices.
• It expects the service provider revenue to reach around $50 million amid strong demand for 5G hotspot routers. Due to macroeconomic headwinds, it will continue to operate on lower margins for the next quarter.
• Netgear has been consistently trying to offer more premium products to the consumer market with the latest Wi-Fi 6E technologies. It has been focusing on Pro AV switches, Orbi Mesh Routers, and Nighthawk 5G hotspot routers.

Key Takeaways:

• Netgear is looking to pivot its business model with SMB taking the forefront in the coming years, potentially growing to around 50% of its total revenue by next year-end. The focus on premium-end routers is paying dividends in terms of good demand and will likely continue to do so in future.
• The brand is expected to introduce products with the latest technologies such as Wi-Fi 7 and more products with 5G capabilities. For improving margins, it is focused on higher ASP products and is also offering a unique premium experience to consumers.
• The average price for networking devices in the consumer market is going up, as more consumers are opting for higher-speed data services and are adding more connected devices in the home. The growing consumer awareness around internet security and threats will lead them to acquire better devices with additional software security.
• Netgear will benefit from the enterprise segment as more companies will look to upgrade their existing legacy systems to Wi-Fi 6/6E/7. It also tends to push its Netgear subscription services to add more value to its products.

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