NTGR earnings call transcript, November 4, 2026

consumer business, and Brian will then walk through our financial results and fourth quarter outlook in greater detail. Enterprise generated approximately $90.7 million of revenue, representing 54% I'll see you next time. of consolidated revenue and approximately 70% of non-GAAP gross profit and customer sell through increased approximately 6% year over year globally, led by strong double digit growth from our managed switch. products with even more positive trends in the Americas and Europe. At the same time, misproduction commitments from our manufacturing partner combined with our ongoing impact transformation led us to flat year over year growth. for reported revenue. Enterprise backlog exited Q3 more than 2.5 times higher than the end of Q2, which was already at an elevated level due to product shortages in the prior quarter. as well. Enterprise non-GAAP gross margin was 53.2%, up 220 basis points year rear, and contribution margin was 24.5%. While both measures moderated sequentially due to regional mix, increased use of airfreight to bring supply, and our planned investments in the enterprise business, they continue to demonstrate the attractive economics of our growing enterprise portfolio. and the importance of the mix shift to enterprise underway across Netgear. I next want to elaborate on the cause of our supply chain challenge and what we're doing to resolve the issue.

As we noted last quarter, a key manufacturing partner delivered less supply than anticipated in Q2, and that led to slower growth and an increase in our backlog for the quarter. The root cause of the challenge was a poorly executed factory transition by our partner. The executive team, including the staff, CEO of this partner, assured us that their production slowdown was temporary. ...partner of NETGEAR with a strong track record for delivering on commitments over the last 20-plus years. Our work with their team on the ground suggests... ...that they would be successful in turning things around in Q3. They committed to our minimum Q3 production volumes, but once again, fell short of these minimum requirements. Our checks with other customers of this partner have confirmed that... ...other companies are experiencing similar challenges. This is not a Nikkei-specific issue. This is also not an issue of component availability. We've taken proactive steps to secure the critical materials needed to support... ...our production plans. Rather, the challenge has been converting those materials into finished products... ...at the expected pace following our partners' transition to a new factory. Obviously, this production challenge is unacceptable. And resolving it is my highest operational priority. We continue to have NICU personnel working on-site with our partners... ...to troubleshoot production bottlenecks, improve throughput... ...and prioritize the products most urgently needed by our customers.

In parallel, we're discussing appropriate commercial remedies and transitioning some products to other manufacturing partners that are executing more reliably. We're encouraged by the partners' remediation plan and are seeing early signs of improvement... but we expect it will take another quarter to return to normalized supply and our fourth quarter outlook reflects this recovery timeline. We believe we'll be back to normal production levels with this partner in the first quarter of 2027. As it relates to our enterprise transformation, we remain encouraged by the strength of our portfolio, the robust demand we're seeing from customers, our growing backlog, and our long-term strategic operations. Our strategy remains to build a differentiated enterprise networking business that combines high-performance hardware with differentiated software, including AI-enabled experiences that simplify workflows. Deployments, network management, and security for our customers. Our in-house software engineering investments are accelerating innovation, increasing control of our roadmap, and expanding the opportunity for higher-margin, non-device. In Pro-AV, we've expanded our industry-leading solutions with the award-winning Align platform that was announced at Infocom and launched in Q3. Align is our first AV hardware platform that consolidates AV services to make our... ...based solutions even more valuable to our end customers. The reception for this new product has been fantastic, and we've quickly sold out of our initial quantities. Align is a live platform where we can expand the software and services...

...offered over time. We've launched an initial wave of first-party and third-party software solutions on Align, and we have over 70 AV ecosystem partners in the pipeline who would like to add their software to the Align app. ...demonstrating the value of our platform in the AV ecosystem. More broadly, our Pro-AV partner ecosystem continues to expand with the addition of more than 25 new partners, bringing us to a total... of over 625 as of the end of the quarter. Many of these new partnerships are designed to accelerate our entry into the broadcast vertical, and in this regard, sell-through of our SEMPY-enabled switches more than doubled year-over. More broadly, we continue to support mission-critical and customer deployments and are now powering AV for one of the top AI Frontier Labs, NATO, several critical U.S. federal agencies, the Olympics. and major churches and museums around the world. We also just deployed our solution to power the full entertainment system on our second Norwegian Cruise Line vessel. In Enterprise Networking and Security, the transformation that is beginning to take hold. From a product perspective, we've revamped Insight, our cloud management platform, and it's been well received by partners and customers. This transformation enabled us to initiate an Insight price increase that helped drive a doubling of Insight billings year over year this quarter. We're also leveraging AI to further simplify the design, deployment, management, and security of networks and our beta test.

These experiences with end customers now. We also just launched our PR30 router that provides security integrated with networking which is becoming increasingly important given the heightened security vulnerabilities. in the current environment. From a go-to-market perspective our new partner program has seen strong engagement. We increased active partners in Q3 by 12% sequentially while the number of APEX partners grew to 31% over Q2. Our presence in Enterprise Networks continues to expand with deployments in Q3 such as a large industrial factory in Poland, a large national convention center in Africa, a large U.S. government department, a hospital. And in Europe and a major global semiconductor equipment manufacturer. Diverse deployments were done in India such as the Maharashtra Public Service Commission and the Brooklyn Resort. Most notably the transformational progress. On our product and go-to-market model have put our enterprise networking security business on a growth trajectory in the Americas for the first time in several years. A great milestone and an attractive growing opportunity even though we're the very early aims of building this business and capturing the market opportunity. Similarly, our APAC transformation is taking hold and while sell-through for the region is down year over year, we're seeing double-digit sequential growth as anticipated. So the recovery in that region is on track. For our enterprise business, we continue to pass on the increasing cost of components, giving our pricing leverage in this segment. During the quarter, we announced in a prior

approximately 10% further price increase on our managed switch portfolio and more modest price increases on other products, and these will take effect in November. Our long-term thesis for enterprise remains strong and on track. Momentum is building, customer demand is strong, and we are tracking well to the medium and long-term targets we outlined at our investor day last year. For consumer, our near-term focus is on protecting gross profit and managing expenses with discipline, while maintaining the strength of the market. our brands and innovating for the future. Revenue for the quarter was down year over year as we intentionally harvest our legacy service provider business, navigate misproduction commitments from our manufacturing partners, and optimize this business. for gross profit. The same manufacturing partner impacting supply for enterprise is responsible for production of a portion of our consumer wireless router portfolio. Despite the revenue declines, both non-GAAP gross and operating margins and consumer were relatively flat sequentially and the contribution profit was limited to a 1.4 million dollar loss. This is a testament to the team's focus on optimizing the bottom line for this business. While the strategy results in reported revenue deceleration, it also allows us to focus resources on the more attractive portion of our consumer portfolio, including our core retail networking products and higher margin recurring services.

Our recurring services delivered double-digit growth in the quarter despite the intentional constraints on unit volume. In Q3, we implemented a restructuring for due spend on this business, which impacted approximately 8% of it. employees and resulted in the closure of our office in Canada, where the team was focused on our consumer service provider products. The annualized savings of approximately $6 million from this restructuring will not impact our P&L until 2027, given the timing of the exits and office closure. We're also in the process of implementing a set of price increases that will take effect in January to further mitigate the incremental cost. We believe our consumer business retains value, supported by our established brands, broad product portfolio, long-standing customer relationships, and positive U.S. regulatory tailwinds. Continue to monitor developments in the U.S. regulatory environment that could positively influence the competitive landscape for consumer networking products. As we've discussed previously, the SDC's evolving requirements for networking equipment to create opportunities for trusted U.S.-based companies like Netgear, particularly as the industry transitions to future generations of networking technology and we're well positioned if this were to happen. Stepping back, Q3 reinforced our confidence in the underlying enterprise opportunity while also highlighting the supply chain challenges that are preventing us from fully capitalizing on that growing demand.

We continue to make progress in building a more differentiated business through our expanding software capabilities, growing service offerings, and leadership in ProAV. However, we recognize that these strategic advances also need to translate into more consistent revenue growth and finance. performance and we're taking the actions that will make this happen. Positive Q3 non-GAAP operating profit that was also above the high end of guidance demonstrates the ongoing progress of our transformation. We remain committed. We are committed to the strategic direction and medium and long-term financial objectives outlined at our investor day. Our focus is on maintaining financial discipline and making decisions that position that gear for sustainable profitable growth and long-term shareholders. With that, I'll turn the call over to Brian for a review of our financial results and fourth quarter outlook.

...and 4% in Europe. Demand for our managed switch products remain particularly encouraging and continue to grow double digits despite impact from supply delays. As CJ outlined, the challenge has been manufacturing throughput and availability of product required to fulfill customer orders. for our pro-AB managed switch products within our enterprise business and certain routers within our consumer business rather than a broad shortage of components. These constraints also contributed to a sequential decrease in our ending inventory of 5.5 million dollars. Despite an increase of procured components increasing approximately 24 million dollars and limited our ability to replenish channel inventory. While we continue to work with our manufacturing partner toward improved production output, the timing and mix of shipments remain important variables in our near-charge revenue outlook, which I will cover further later. Turning to consumer, third quarter revenue was $76.6 million, down 18.2% year-over-year and 3.7% sequentially. This business continues to operate in a challenging environment characterized by aggressive competitive pricing, despite rising component costs. While we continue to see benefits of shared gains in the U.S. cable category, with our previous competitor decreasing their channel presence, the service provider and related product portfolio decreased approximately 23% year of a year, as we harvest the profits from these lower priority businesses.

Within this business, our focus remains on protecting gross profit and managing the business with financial discipline. We expect these pressures to remain significant as we move into 2027, particularly as higher memory and other components. I'll slow through. Turning to recurring services, annual recurring revenue reached $42.5 million in the third quarter, an increase of approximately 12% year-over-year and 2% sequentially. The growth in this area was limited during the quarter as we facilitated a technical platform migration that will improve our ability to market and sell our services over the long term. This limited our ability to sell these services on our direct-to-consumer website for much of the period. where we typically see our highest conversion rate. However, the long-term benefits of the new platform are well worth the trade-off. Also worth noting, we are making great strides with our non-device revenue initiatives in the enterprise segment. With the successful launch of our learning insight solution, continuing to receive positive feedback. We are quite pleased to buy the ramp in the billings for this service, which nearly doubled the levels in the prior quarter, albeit off of relatively small base. Our modest but growing recurring services business is an increasingly important driver of next year's transformation. Providing attractive, higher margin revenue streams while deepening customer relationships and strengthening our competitive differentiation. As we expand our software and service

offerings, we see meaningful opportunities to increase recurring revenue, improve revenue visibility, and drive greater operating leverage and profitability as the business scales. From this point forward, my discussion of profitability will focus on non-GAAP results, unless otherwise indicated. Reconciliation between GAAP and non-GAAP results are included in today's earnings release. Consolidated non-GAAP gross margin was 41.3%, approximately flat sequentially, and of 100% and 70 basis points from 39.6% in the prior year quarter. The year-over-year improvement reflects the increasing contribution of our higher-margin enterprise business, including the structural benefits of the operating system license inquiry. early last year. We had anticipated using a higher level of air freight spend to bring in supply that was supposed to ramp in the second half of the quarter, but due to the production delays that turned out not to be the case. The team responded and was able to drive revenues within our guidance range, utilizing the inventory we had, which had the added benefit of slightly lower component costs. Looking at the individual segments, enterprise non-GAAP gross margin was 50% of 53.2% compared to 51% in the prior year quarter and 54.1% in the second quarter. This represents a year-over-year improvement of approximately 220 basis points and reflects the continued strength of our managed switch

portfolio and the benefits of our software-related initiatives. The gross profit reached a record high in dollar terms for this business, narrowly exceeding the previous high set in the prior quarter. Enterprise contribution margin was approximately 24.5%, demonstrating the attractive profitability of the business, even as manufacturing constraints limited revenue growth. Consumer non-gap gross margin was 27.2%, down a hundred. 20 basis points year-over-year, and relatively flat sequentially, reflecting continued competitive pricing pressures and rising component costs. While our mitigation efforts have helped offset some of these pressures, we expect elevated memory costs to continue weighing on consumer profitability in the coming quarters. We are planning for a price increase on selected product categories in the early part of 2027. Consumer recorded a contribution loss of approximately $1.4 million in key... Reinforcing the importance of our ongoing focus on gross profit optimization and expense discipline. Third quarter non-GAAP operating expenses were approximately $65.7 million. Down 5% year-over-year and relatively flat sequentially. Reflecting continued expense discipline while supporting our strategic priorities in enterprise software development, product innovation, and go-to-market capabilities. This came in lighter than initially expected, primarily due to the timing of onboarding of hires to support the ongoing enterprise business trend.

Non-GAAP operating income was $3.3 million, representing 2% of non-GAAP operating margin. Despite the increasing challenges of component cost increases, primarily impacting the consumer business, this represents the fifth consecutive quarter of non-GAAP profitability. This was above our guidance range of negative 3% to breakeven, supported by stronger-than-anticipated gross margin performance and controlled operating fitting. Our non-GAAP tax expense was approximately $800,000 in the third quarter of 2026. Looking at the bottom line for Q3, we reported non-GAAP net income of approximately $3.7 million, resulting in non-GAAP... ...to lose earnings per share of $0.13. During the quarter, $3.8 million of cash was used by operations, which brings our total cash provided by operations over the trail in 12 months to $7.2 million. We used one point... ...in purchase of property equipment during the quarter, which brings our total cash used for capital expenditures over the trail in 12 months to $12.6 million. Turning to the balance sheet, we ended the third quarter with $242.1 million... ...in cash and short-term investments, compared to $267.9 million at the end of the second quarter. Sequential reduction primarily reflected stocked purchases of $15 million at a weighted average price of $21.86... ...pens per share, as well as changes in working capital. Working capital continues to reflect the manufacturing disruption. Finished goods inventory declined as production constraints limited replenishment, while raw materials and inventory increased as we proactively secured...

...particle components, particularly memory, to support our manufacturing plans. This distinction is important. We have invested in component availability, but our ability to convert those materials into finished product remains constrained by manufacturing... ...manufacturing execution with one of our manufacturing partners. Overall, while our third quarter revenue performance was constrained by the manufacturing challenge we've discussed, we are encouraged by the continued strength in underlying enterprise demand and our ability to deliver non-GAAP operating... ...about our guidance range. This reflects the improving economics of our enterprise business, the benefits of our ongoing transformation, and continued expense discipline. Priorities remain clear. Restoring product availability... ...driving profitable growth in enterprise, and managing consumers with a continued focus on gross profit and contribution margin. We remain confident in our long-term strategy while recognizing that the near-term operating environment presents challenges. That will require continued focus and discipline. With that, I'll turn to our outlook for the fourth quarter of 2026. Within the enterprise, we continue to see encouraging underlying demand, particularly for our pro-AB management. Switches. However, our near-term revenue outlook remains constrained by manufacturing output and the timing of product availability, which we expect to persist into the first quarter of 2027. Our guidance reflects the uncertainty surrounding improvement and

execution will still fall short of customer demand in the fourth quarter. With a consumer, we expect to continue to optimize this business for gross profit with increasing impact from component costs. Additional impact from supply constraints. For service provider and related products, we expect revenue of approximately $17 million. And while it reflects our focus on optimizing for contribution profits, this would represent an approximate $20 million. 8% year-over-year decline for this category. Taking these factors into account, we expect fourth quarter net revenue of $160 million to $175 million. Turning to profitability, we anticipate approximately $100 million. 150 basis points of consolidated gross margin pressure in the fourth quarter compared to the prior quarter, primarily driven by rising memory costs and increasing transportation costs associated with our production recovery efforts. While our pricing actions and cost mitigation efforts have offset the impact of rising component cost headwinds within the enterprise business, we expect elevated component costs to continue weighing on margins within the consumer business in the fourth quarter. Taking these factors into account, we expect fourth quarter gap operating margin to be in the range of negative 8.7% to negative 5.7% and non-gap operating margin to be in the range of 0.5%. 0% to 3%. Our gap tax expense is expected to be in the range of a benefit of a half a million dollars to an expense of a half a million dollars. And our non-gap tax expense is expected to be in the range of zero to one million dollars for the-

in the fourth quarter of 2026. To sum up, our financial priorities are clear. Capitalize on the momentum and scale our higher margin enterprise business. Resolve the manufacturing constraints so we can convert demand- and into the full revenue potential. In managing consumer profitability while maintaining the financial flexibility to invest in our strategic priorities, drive sustainable long-term value creation. With that, we can-

Your first question comes from the line of Logan Katzman with Raymond James. Please go ahead.

Your line is now open. Yeah.

Please go ahead.

Your line is now open. Hi.

Thank you all for attending. You may now disconnect. Goodbye.